CHAPTER 1 8.

Independent auditing can best be describe as a

a. Professional activity that measures and communicates financial accounting data
1. Broadly defined, the subject matter of any audit consist of b. subset accounting
a. Financial statements c. Professional activity that attest to the fair presentation of financial statement
b. Economic data d. Regulatory activity that prevents the issuance of improper financial information
c. Assertions
d. Operating data 9. Which of the following statements is not a distinction between independent auditors and internal
auditors?
2. An audit of financial statements is conducted to determine if the a. Independent auditors represent third party users external to the auditee entity, whereas
a. Organization is operating efficiency and effectively internal auditors report directly to management.
b. Auditee is following specific procedures or rules set down by some higher authority b. Although independent auditors strive for both validity and relevance of evidence, internal
c. Overall financial statement statements are stated in accordance with the applicable auditors are concerned almost exclusively with validity.
financial reporting framework c. Internal auditors are employees of the auditee, whereas independent auditors are
d. Client’s internal control is functioning as intended independent contractors.
d. The internal auditor’s span of coverage goes beyond financial auditing to encompass
3. Most of the independent auditor’s work in formulating an opinion on financial statement consist of operational and performance auditing.
a. Studying and evaluating internal control
b. Obtaining and examining evidential matter 10. Which of the following has the primary responsibility for the fairness of the representations made in the
c. Examining cash transaction financial statements?
d. Comparing recorded accountability with assets a. Client’s management
b. Audit Committee
4. In financial statement audits, the audit process should be conducted in accordance with c. Independent auditor
a. The audit program d. Board of Accountancy
b. Philippine standard on auditing
c. Philippine accounting standards 11. An audit of the financial statements of KIA Corporation is being conducted by an external auditor. The
d. Philippine Financial Reporting Standards external auditor is expected to
a. express an opinion as to the fairness of KIA’s financial statements.
5. Which of the following best describe the operational audit? b. express an opinion as to the attractiveness of KIA for investment purposes.
a. It requires the constant review by internal auditors of the administrative controls as they c. certify the correctness of KIA’s Financial Statements.
relate to operations of the company. d. examine all evidence supporting KIA’s financial statements.
b. It concentrates on implementing financial and accounting control in a newly organized
company. 12. Which of the following statements about independent financial statements audit is correct?
c. In attempts and is designed to verify the fair presentation of a company’s results of a. The audit of financial statements relieves management of its responsibilities for the
operations. financial statement
d. It concentrates on seeking out aspects of operations in which waste would be reduced by b. An audit is designed to provide limited assurance that the financial statements taken as a
the introduction of controls. whole are free from material misstatement
c. The procedures required to conduct an audit in accordance with PSAs should be
6. The auditor communicates the results of his or her work through the medium if the determined by the client who engaged the services of the auditor.
a. Engagement letter d. The auditor’s opinion is not an assurance as to the future viability of the entity as well as
b. Audit report the effectiveness and efficiency with which management has conducted the affairs of the
c. Management letter entity.
d. Financial statement
13. The reason an independent auditor gathers evidence is to
7. Which of the following types of auditing is performed most commonly by CPA’s on a contractual basis? a. Form an opinion on the financial statements
a. Internal Auditing b. Detect fraud
b. Income tax auditing c. Evaluate management
c. Government auditing d. Evaluate internal controls
d. External auditing
14. An attitude that includes a questioning mind and critical assessment of audit evidence is referred to as CHAPTER 2
a. Due professional care
b. Professional skepticism 1. An intentional act by one more individuals among management, employees, or third parties which
c. Reasonable assurance results in misrepresentation of financial statement refers to
d. Supervision a. Error
b. Noncompliance
15. Jack has been retained as auditor of EVC Company. The function of Jack’s opinion on financial c. Fraud
statements of EVC Company is to d. Illegal acts
a. Improve financial decisions of company management
b. Lend Credibility to management’s representation 2. The responsibility for the detection and prevention of errors, fraud and noncompliance with laws and
c. Detect fraud and abuse in management operations regulations rests with
d. Serve requirements of BIR, SEC, or Central Bank a. Auditor
b. Client’s legal counsel
16. Which of the following is not one of the limitations of an audit? c. Fraud
a. The use of testing d. Illegal acts
b. Limitations imposed by client 3. The auditor’s best defense when material misstatements in the financial statements are not uncovered
c. Human error in the audit is that
d. Nature of evidence that the auditor obtains a. The audit was conducted in accordance with generally accepted accounting principles
b. Client is guilty of contributory negligence
17. Which of the following statements does not properly describe a limitation of an audit? c. The audit was conducted in accordance with PSAs
a. Many audit conclusions are made on the basis of examining a sample of evidence. d. Issuing a representation letter to the auditor
b. Some evidence supporting peso representation in the financial statement must be obtained
by oral or written representation of management. 4. The following statements relate to the auditor’s responsibility for the detection of errors and fraud.
c. Fatigue can cause auditors to overlook pertinent evidence. Identify the correct statements.
d. Many financial statement assertions cannot be audited. I. Due to the inherent limitation of the audit, there is a possibility that material misstatements
in the financial statements may not be detected.
18. Which of the following is not one of the general principles governing the audit of financial statements? II. The subsequent discovery of material misstatement of the financial information resulting
a. The auditor should plan and perform the audit with an attitude of professional skepticism. from fraud or error does not, in itself, indicate that the auditor failed to follow the basic
b. The auditor should obtain sufficient appropriate evidence primarily through inquiry and principles and essential procedures of an audit.
analytical procedure to be able to draw reasonable conclusions. a. I only
c. The auditor should conduct the audit in accordance with PSA. b. Both Statements are true
d. The auditor should comply with the Philippine Code of Professional Ethics. c. II only
d. Both statements are false
19. Which of the following statements does not describe a condition that creates a demand for auditing? 5. What primarily differentiates fraud from an error
a. Conflict between an information preparer and a user can result in biased information. a. Materiality
b. Information can have substantial economic consequence for a decision-maker. b. Effect on misstatements
c. Expertise is often required for information preparation and verification. c. Intent
d. Users can directly assess the quality of information. d. Frequency of occurrence
6. The term “error” refers to unintentional misrepresentation of financial information. Examples of errors
20. Which of the following statements does not properly describe an element of theoretical framework of
are when
auditing?
I. Assets have been misappropriated
a. The data to be audited can be verified.
II. Transactions without substance have been recorded
b. Short-term conflicts may exist between mangers who prepare the data and auditors who
III. Records and documents have been manipulated and falsified
examine the data.
IV. The effects of the transaction have been omitted from the records
c. Auditors act on behalf of the management.
a. all of the above statements are true
d. An audit benefits the public
b. only statements I and III are true
c. all of the above statements are false
d. only statement II and IV are true
7. Which of the following best identifies the two types of fraud? 13. Which of the following statements is incorrect?

a. Theft of assets and employee fraud. a. The responsibility for the prevention and detection of fraud and error rests with
b. Misappropriation of asset and defalcation. management.
c. Management fraud and employee fraud. b. The auditor is not and cannot be held responsible for the detection of fraud or
d. Fraudulent financial reporting and management fraud. error.
c. In planning an audit, the auditor should assess the risk that fraud or error may
cause the financial statements to contain material misstatement.
8. Which of the following statements best describe an auditor’s responsibility to detect errors and fraud? d. The risk of not detecting material fraud is higher than the risk of not detecting a
material misstatement arising from error.
a. An auditor should assess the risk that errors and fraud may cause the financial statements to
contain material misstatements and should design the audit to provide reasonable assurance of 14. Which of the following statement about fraud or error is incorrect?
detecting errors and fraud that are material to the financial statements.
b. An auditor is responsible to detect material errors, but has no responsibility to detect material a. The auditor is not and cannot be held responsible for the prevention of fraud and
fraud that are concealed through employee collusion or management override of the internal error.
control structure. b. The responsibility for the prevention and detection of fraud and error rests with
c. An auditor has no responsibility to detect errors and fraud unless analytical procedures or tests of management.
transactions identify conditions causing a reasonably prudent auditor to suspect that the financial c. The auditor should plan and perform the audit with an attitude of professional
statements were materially misstated. skepticism, recognizing that conditions or events may be found that fraud or
d. An auditor has no responsibility to detect errors and fraud because an auditor is not an insurer and error may exist.
an audit does not constitute a guarantee. d. The likelihood of detecting fraud is ordinarily higher than that of detecting error.

9. “The auditor would ordinarily expect to find evidence to support management representations and not 15. Which of the following is not an assurance that the auditors give to the parties who rely on
assume that they necessarily correct”. This is an example of the financial statements?

a. Unprofessional behavior a. Auditors know how the amounts and disclosures in the financial statements
b. An attitude of professional skepticism were produced.
c. Due diligence b. Auditor’s give assurance that the financial statements are accurate.
d. A rule in code of professional conduct. c. Auditors gathered enough evidence to provide a reasonable basis for forming an
opinion.
10. Which of the following statement is true? d. If the evidence allows the auditors to do so, auditors give assurance in the form
of opinion, as to whether the financial statements as a whole are fairly presented
a. It is usually easier for the auditor to uncover fraud than errors.
in conformity with GAAP.
b. It is usually easier for the auditor to uncover errors than fraud.
c. It is usually equally difficult for the auditor to uncover errors or fraud. 16. Which of the following is most likely to be presumed to represent fraud risk on an audit?
d. Usually, the auditor does not design procedures to uncover fraud or errors.
a. Capitalization of repairs and maintenance into the property, plant and equipment
11. The most difficult type of misstatement to detect is fraud based on asset account.
b. Improper revenue recognition
a. The over recording of transaction
c. Improper interest expense accrual
b. The non-recording of transactions
d. Introduction of significant new products
c. Recorded transactions in subsidiaries
d. Related party receivable 17. Which of the following conditions or events would least likely increase risk of fraud or error?
12. If an auditor was engaged to discover errors or fraud and the auditor performed extensive detail work, a. Questions with respect to competence or integrity of management
which of the following could the auditor be expected to detect? b. Unusual pressures within the entity
c. Unusual transactions
a. Misposting if recorded transactions
d. Lack of transaction trail
b. Unrecorded transaction
c. Counterfeit signatures on paid checks
d. Collusive fraud
 18. Which of the following would be least likely to suggest to an auditor that the client’s financial 5. An act of two or more employee to steal assets and cover their theft by misstating the accounting records
statement are materially misstated? would be referred to as:
a. Collusion
a. There are numerous delays in preparing timely internal financial reports. b. A material weakness
b. Management does not correct internal control structure weaknesses that it c. A control deficiency
knows about. d. A significant deficiency
c. Differences are reflected in the customer’s confirmation replies.
d. There have nee two new controllers this year. 6. Which of the following is not one of the components of an entity’s internal control?
a. Control risk
19. Which of the following circumstances would least likely cause auditor to consider whether a b. Control activities
material misstatement exists? c. Information and communication
d. The control environment
a. The turnover of senior accounting personnel exceptionally low.
b. Management places substantial emphasis on meeting, earning projections. 7. The overall attitude and awareness of an entity’s board of director concerning the importance of the
c. There are significant unusual transactions near year-end. internal control usually is reflected in its
d. Operating and financing decisions are dominated by one person. a. Computer-based controls
b. System of segregation of duties
20. Which of the following conditions would not normally cause the auditor to question whether c. Control environment
material errors or possible fraud exists? d. Safeguard over access of assets
8. In evaluating the design of the entity’s internal control environment, the auditor considers the certain
a. The accounting department is overstaffed. subcomponents of control environment and how they have been incorporated into the entity’s
b. Differences exist between control accounts and supporting subsidiary records. processes. Subcomponents of control environment would include
c. Transactions are not supported by proper documentation.
a. Integrity and ethical values
d. There are frequent changes of auditors lawyers.
b. Commitment to competence
CHAPTER 3: c. Organizational structure
d. Information and communications systems
1. The primary responsibility for establishing and maintaining an internal control rests with
a. The external auditors 9. Which of the following components of an entity’s internal control structure includes the development of
b. The internal auditors employee promotion and training policies?
c. Management and those charged with governance a. Control activities
d. The controller or the treasurer
b. Control environment
2. The fundamental purpose of an internal control is to c. Information and communication
a. Safeguard the resources of the organization d. Quality control system
b. Provide reasonable assurance that the objectives of the organization are achieved
c. Encourage compliance with organization objectives 10. Which of the following subcomponents of the control environment define the existing lines of
d. Ensure the accuracy, reliability and timeliness of information responsibility and authority?
a. Organizational structure
3. Which of the following is not one of the three primary objectives of effective internal control?
b. Management philosophy and operating style
a. Reliability of financial reporting
b. Efficiency and effectiveness of operations c. Human resource policies and practices
c. Compliance with laws and regulations d. Management integrity and ethical values
d. Assurance of elimination of business risk.
11. Which of the following is not one of the subcomponents of the control environment?
4. Which of the following internal control objectives would be most relevant to the audit? a. Management philosophy and operating style
a. Operational objective b. Organizational structure
b. Compliance objective
c. Adequate separation of duties
c. Financial reporting objective
d. Administrative control objective d. Commitment to competence
12. Which of the following deal with ongoing or periodic assessment of quality of internal control by 18. Which of the following is not a medium that can normally be used by an auditor to record information
management? concerning a client’s internal control policies and procedures?
a. Quality control activities a. Narrative memorandum
b. Monitoring activities b. Flowchart
c. Oversight activities c. Procedures manual
d. Management activities d. Questionnaire

13. The policies and procedures that help ensure that management directives are carried out are referred 19. An auditor uses the knowledge provided by the understanding of internal control and the final assessed
to as the: level of control risk primarily to determine the nature, timing and extent of the
a. Control environment a. Attribute tests
b. Control activities b. Tests of controls
c. Monitoring of controls c. Compliance tests
d. Information systems d. Substantive tests
20. Based on the requirement of PSA 3330, how frequently must an auditor test operating effectiveness of
controls that appear to functions as they have in past years and on which the auditor wishes to rely in
14. Which of the following is not one of the specific control activities that are relevant to financial statement the current year?
audit? a. Monthly
a. Performance reviews b. Each audit
b. Physical controls c. At least every second audit
c. Segregation of duties d. At least every third audit
d. Monitoring
CHAPTER 4:
15. Proper segregation of functional responsibilities in an effective structure of internal control calls for
separation of functions of 1. These are acts of omission or commission by the entity being audited, either intentional or unintentional,
a. Authorization, execution, and payment which are contrary to the prevailing laws and regulations.
a. Fraud
b. Authorization, recording, and custody
b. Misappropriation
c. Custody, execution, and reporting c. Noncompliance
d. Authorization, payment, and recording d. Defalcation

16. Which of the following best describes the purpose of the control activities? 2. In order to achieve the objectives of the accountancy profession, professional accountants have to
a. The actions, policies and procedures that reflect the overall attitudes of the management observe a number of prerequisites or fundamental principles. The fundamental principles include the
b. The identification and analysis of risks and relevant to the preparation of the financial following except
a. Objectivity
statements
b. Professional competence and due care
c. The policies and procedures that help ensure that necessary actions are taken in order to c. Technical standards
achieve the entity’s objectives d. Confidence
d. Activities that deal with the ongoing assessment of the quality of internal control by
management 3. The principle of professional competence and due care imposes certain obligations on professional
accountants. Which of the following is not one of those obligations required by this principle?
17. When the auditor attempts to understand the operation of the accounting system by tracing a few a. To act diligently in accordance with applicable technical and professional standards
b. To be fair, intellectually honest and free of conflict of interest
transactions through the accounting system, the auditor is said to be:
c. To become aware and understand relevant technical, professional and business
a. Tracing developments
b. Vouching d. To obtain professional knowledge and experience to enable them to fulfil their responsibilities
c. Performing a walk through
d. Testing controls
4. The phase of professional competence that requires a professional accountant to adopt a program 11. The principle of professional behaviour requires a professional accountant to
designed to ensure quality control in the performance of professional services consistent with technical a. Be straightforward and honest in performing professional services
and professional standards is: b. Be fair and should not allow prejudice or bias, conflict of interest or influence of others to
a. Attainment of professional competence override objectivity
b. Maintenance of professional competence c. Perform professional services with due care, competence and diligence
c. Application of professional competence d. Act in a manner consistent with the good reputation of the profession and refrain from any
d. Review of professional competence conduct which might bring discredit to profession

5. The essence of the due care principle is that the auditor should not be guilty of: 12. Which of the following most accurately states how objectivity has been defined by the Code of Ethics?
a. Bias a. Being honest and straight forward in all professional and business relationships.
b. Errors in judgement b. A state of mind that permits the provision of an opinion without being affected by influences
c. Fraud that compromise professional judgement
d. Negligence c. A combination of impartiality, intellectual honesty and a freedom from conflict of interest
d. Avoiding facts and circumstances that could reduce the public confidence in the professional
6. The principle of confidentiality applies to: accountant’s report
a. Professional accountants in public practice
b. Professional accountants in commerce and industry 13. Which fundamental principle is seriously threatened by an engagement that is compensated based on
c. Professional accountants in government the net proceeds on loans received by the client from a commercials bank?
d. All professional accountants a. Integrity
b. Objectivity
7. The principle of confidentiality imposes an obligation on professional accountants to refrain from: c. Confidentiality
a. Disclosing confidential information to another party even if client authorizes the disclosure d. Professional behaviour
b. Using confidential information acquired as a result of professional and business relationships
to their personal advantage or the advantage of the third parties 14. Independence is required whenever a professional accountant performs:
c. Disclosing information to defend themselves in case of litigation a. Professional services
d. Responding to an inquiry or investigation conducted by the Professional Regulatory Board b. Assurance services
of Accountancy c. Non-assurance services
d. Tax consultancy services
8. A CPA should not disclose confidential information obtained during an audit engagement in which one
of the following situations? 15. It refers to the avoidance of facts and circumstances that are so significant that a reasonable and
a. When the security of the state requires informed third party, having knowledge of all relevant information, including safeguards applied, would
b. With the consent of the client reasonably conclude a firm’s or a member of the assurance team’s integrity, objectivity or professional
c. In defense of himself when sued by his client scepticism had been compromised.
d. To a successor auditor without the client’s permission a. Independence in fact
b. Independence in appearance
9. Which of the following is considered a violation of rules on confidentiality? c. Independence in mind
a. The CPA discloses information to protect his own interest in the course of legal proceedings d. Inherent independence
b. The CPA discloses information to a successor auditor after obtaining the client’s permission
c. The CPA discloses information to another CPA in compliance with a quality control review 16. This occurs as a result of the financial or other interests of a professional accountant or of an immediate
conducted by the BOA or close family member.
d. The CPA divulges information disclosed to him by a prospective client. a. Self-interest threat
b. Self-review threat
10. In which of the following circumstances would a CPA be bound by the ethics to refrain from disclosing c. Advocacy threat
any confidential information obtained during course of a professional engagement? d. Familiarity threat
a. The CPA is issued summon enforceable by the court order which orders the CPA to present
confidential information 17. Acting for an audit client in the resolution of a dispute or litigation would most likely create
b. A major stockholder of a client company seeks accounting information from CPA after the a. Self-interest threat
management declined to disclose the requested information b. Intimidation threat
c. Confidential client information is made available with the client’s permission c. Advocacy threat
d. An inquiry by the PRC and the CPA needs the disclosure to defend himself d. Familiarity threat
18. The preparation of accounting records of financial statements for an audit client will most likely create 5. Which of the following is not normally performed in the preplanning or pre-engagement phase?
a. Self-interest threat a. Deciding whether to accept or reject an audit engagement
b. Self-review threat b. Inquiring from predecessor auditor
c. Intimidation threat
c. Preparing an engagement letter
d. Familiarity threat
d. Making a preliminary estimate of materiality
19. Accepting gift or undue hospitality from an assurance client would create most likely create
a. Familiarity threat 6. Before accepting an engagement to audit a new client, a CPA is required to obtain
b. Self-review threat a. A preliminary understanding of the prospective client’s industry and business
c. Advocacy threat b. The prospective client’s signature to the engagement letter
d. Intimidation threat c. An understanding of the prospective client’s control environment
d. A representation letter from the prospective client
20. Using the same senior personnel on an assurance engagement over a long period of time would most
likely create
a. Intimidation threat 7. Preliminary knowledge about the client’s business and industry must be obtained prior to the
b. Advocacy threat acceptance of the engagement primarily to
c. Familiarity threat a. Determine the degree of knowledge and expertise required by the engagement
d. Self-interest threat b. Determine the integrity of management
c. Determine whether the firm is independent with the client
d. Gather evidence about the fairness of the financial statements
CHAPTER 5

1. This consists of checking the mathematical accuracy of documents of records. 8. In an audit, communication between the predecessor and incoming auditor should be
a. Reperformance a. Authorized in an engagement letter
b. Confirmation b. Acknowledged in a representation letter
c. Recalculation c. Either written or oral
d. Inspection d. Written and included in the working papers

2. Which of the following assertions does not relate to balances at period end? 9. Arnel, CPA, is succeeding Von, CPA, on the audit engagement of Almar Corporation. Arnel plans to
a. Existence consult Von and to review Von’s prior year working papers. Arnel may do so if
b. Occurrence a. Von and Almar consent
c. Valuation or allocation b. Almar consents
d. Rights and obligations c. Von consents
d. Von and Arnel consent
3. Which of the following assertions does not relate to classes of transactions and events for the period?
a. Completeness 10. An incoming auditor should request the new client to authorize the predecessor auditor to allow a
b. Valuation review of the predecessor’s
c. Cut-off Engagement letter Working Paper
d. Accuracy a. Yes Yes
b. Yes No
4. An assertion that transactions are recorded in the proper accounting period is: c. No Yes
a. Classification d. No No
b. Occurrence
c. Accuracy 11. Engagement letter that documents and confirms the auditor’s acceptance of the engagement would
d. Cut-off normally be sent to the client
a. Before the audit report is issued
b. After the audit report is issued
c. At the end of fieldwork
d. Before the commencement of the engagement
12. Which of the following is not one of the principal contents of an engagement letter? 19. Which of the following should an auditor obtain from the predecessor auditor prior to accepting an
a. Objective of the financial statements audit engagement
b. Unrestricted access to records and documents a. Analysis of balance short accounts
c. Limitations of the engagement b. Analysis of income statements accounts
d. Management’s responsibility for the financial statements c. All matters of continuing accounting significance
d. Facts that might bear on the integrity of management
13. Arrangements concerning which of the following are least likely to be included in engagement letter?
a. Auditor’s responsibilities 20. An incoming auditor most likely would make specific inquiries of the predecessor auditor regarding
b. Fees and billing a. Specialized accounting principles of the client’s industry
c. CPA investment in client securities b. The competency of the client’s internal audit staff
d. Other forms of reports to be issued in addition to the audit report c. The uncertainty inherent in applying sampling procedures
d. Disagreements with management as to auditing procedures
14. The audit engagement letter should generally include a reference to each of the following except
a. The expectation of receiving a written management representation letter CHAPTER 6:
b. A request for the client to confirm the terms of engagement
1. Which of the following statements is most correct regarding the primary purpose of audit procedures?
c. A description of the auditor’s method of sample selection
a. To detect all errors or fraudulent activities as well as illegal activities
d. The risk that material misstatements may remain undiscovered b. To comply with the SEC
c. To gather corroborative audit evidence about management’s assertions regarding the
15. Which of the following would be least likely to be included in the auditor’s engagement letter client’s financial statements
a. Forms of the report d. To determine the amount of errors in the balance sheet accounts in order to adjust the
b. Extent of his responsibilities accounts to actual
c. Objectives and scope of the audit
d. Type of opinion to be issued 2. A procedure designed to test for monetary misstatements directly affecting the validity of the financial
statement balances is a:
16. According to PSA 210, the auditor and the client should agree on the terms of engagement. The a. Test of controls
agreed terms would need to be recorded in a(n) b. Substantive test
a. Memorandum to be placed in the permanent section of the auditing working papers c. Test of attributes
b. Engagement letter d. Monetary-unit sampling test
c. Client representation letter
3. You are auditing the company’s purchasing process for goods and services. You are primarily
d. Comfort letter
concerned with the company not recording all purchase transactions. Which audit procedure below
would be the most effective audit procedure in this case?
17. Which of the following factors most likely would influence an auditor’s determination of the auditability
a. Vouching from the accounts payable account to the vendor invoices.
of the entity’s financial statements b. Tracing vendor invoices to recorded amounts in the accounts payable account.
a. The complexity of the accounting systems c. Confirmation of accounts payable recorded amounts.
b. The existence of related party transactions d. Reconciling the accounts payable subsidiary ledger to the accounts payable account.
c. The adequacy of the accounting records
d. The operating effectiveness of control procedures 4. The information obtained by the auditor in arriving at the conclusions on which the audit opinion is
based is called:
18. Which of the following factors most likely would cause an auditor not to accept a new audit a. Audit working papers
engagement? b. Audit assertions
a. An inadequate understanding of the entity’s interval control structure c. Audit evidence
b. The close proximity to the end of the entity’s fiscal year d. Audit standards
c. Concluding that the entity’s management probably lacks integrity
d. An inability to perform preliminary analytical procedures before assessing control risk
5. The major reason an independent auditor gathers evidence is to 13. An example of a document that the auditor receives from the client, but which was prepared by
a. form an opinion on the financial statements. someone outside the client’s organization, is a:
b. detect fraud. a. confirmation.
c. evaluate management. b. sales invoice.
d. evaluate internal control. c. vendor invoice.
d. bank reconciliation.
6. Which of the following is the best example of a corroborating evidence?
14. To be considered reliable evidence, confirmations must be controlled by:
a. General journal
a. a client employee responsible for accounts receivable.
b. Worksheet cost allocation
b. a financial statement auditor.
c. Vendor’s invoice
c. a client’s internal audit department.
d. Cash receipts journal
d. a client’s controller or CFO.
7. Which of the following statements about audit evidence is correct? 15. Given the economic and time constraints in which auditors can collect evidence about management
a. Appropriateness is the measure of the quantity of audit evidence. assertions about the financial statements, the auditor normally gathers evidence that is:
b. Sufficiency is the measure of the quality of audit evidence and its relevance to a particular a. irrefutable.
assertion and its reliability. b. conclusive.
c. Audit evidence is more persuasive when items of evidence from different sources or of c. persuasive.
different nature are consistent. d. completely convincing.
d. There should be a one-to-one relationship between audit objective and audit procedure. 16. It refers to the material (working papers) prepared by and for, or obtained and retained by the auditor
in connection with the performance of the audit.
8. Evidence is generally considered appropriate when: a. Documentation
a. it has been obtained by random selection. b. Audit report
b. there is enough of it to afford a reasonable basis for an opinion on financial statements. c. Accounting data
c. it has the qualities of being relevant, objective, and free from known bias. d. Corroborative evidence
d. it consists of written statements made by managers of the enterprise under audit.
17. Which of the following best describes one of the primary objectives of audit documentation?
9. Evidence are generally considered sufficient when: a. Defend against claims of a deficient audit.
a. it is appropriate. b. Provide a principal support for the income taxation return.
b. there is enough of it to afford a reasonable basis for an opinion on financial statements. c. Provide documentation that the audit was conducted in accordance with auditing
c. it has the qualities of being relevant, objective and free from unknown bias. standards.
d. it has been obtained by random selection. d. Provide additional support or recorded amounts to the client.
18. Which of the following is not an expert upon whose work an auditor may relay?
10. Appropriateness of evidence is a measure of the: a. Actuary
a. quantity of evidence. b. Internal auditor
b. quality of evidence. c. Appraiser
c. sufficiency of evidence. d. Engineer
d. meaning of evidence.
19. An expert whose expertise is used by the entity in preparing financial statements is called a(n):
11. The sufficiency and appropriateness of evidential matter ultimately is based on the a. Financial expert
a. availability of corroborating data. b. Management expert
b. Philippine Standard on Auditing. c. Auditor’s expert
c. pertinence of the evidence. d. Specialist
d. judgment of the auditor.
20. External auditors must obtain evidence regarding what attributes of an internal audit department if the
12. An example of an external document that provides reliable information for the auditor is: external auditors intend to rely on internal auditor’s work?
a. employees time reports. a. Integrity
b. bank statements. b. Objectivity
c. purchase order for company purchases. c. Competence
d. carbon copies of checks. d. All of the above
CHAPTER 7 6. Which of the following statements is not correct about materiality?
a. The concept of materiality recognizes that some matters are important for fair
1. This involves developing an overall strategy for the expected conduct and scope of the examination;
presentation of financial statements in conformity with the applicable financial
the nature, extent, and timing of which vary with the size and complexity, and experience with and
reporting framework, while other matters are not important.
knowledge of the entity.
b. An auditor considers materiality for planning purposes in terms of the largest
a. Audit planning
aggregate level of misstatements that could be material to any one of the financial
b. Audit procedure
statements.
c. Audit program
c. Materiality judgments are made in light of surrounding circumstances and necessarily
d. Audit working papers
involve both quantitative and qualitative judgments
d. An auditor’s consideration of materiality is influenced by the auditor’s perception of
2. Initial planning involves four matters. Which of the following is not one of these?
the needs of a reasonable person who will rely on the financial statements.
a. Develop an overall audit strategy
b. Request that bank balances be confirmed
7. “Performance materiality” is the term used to indicate materiality at the:
c. Schedule engagement staff and audit specialists
a. balance sheet level
d. Identify the client’s reason for the audit
b. account balance level
c. income statement level
3. A CPA is conducting the first examination of a client’s financial statements. The CPA hopes to reduce
d. company-wide level
the audit work by consulting with the predecessor auditor and reviewing the predecessor’s working
papers. This procedure is 8. When comparing level of materiality used for planning purposes and the level of materiality used for
a. Acceptable if the client and the predecessor auditor agree to it. evaluating evidence, one would most likely expect
b. Acceptable if the CPA refers in the audit report to reliance upon the predecessor a. The level of materiality to be always similar.
auditor’s work. b. The level of materiality for planning purposes to be similar.
c. Required if the CPA is to render an unmodified opinion. c. The level of materiality for planning purposes to be higher.
d. Unacceptable because the CPA should bring an independent viewpoint to a new d. The level of materiality for planning purposes to be based on total assets while the
engagement. level of materiality for evaluating purposes to be based on net income.
9. Qualitative factors can affect an auditor’s assessment of materiality. Which of the following qualitative
4. The preliminary judgment about materiality and the amount of audit evidence accumulated are factors could influence the assessment of materiality?
related. I. Misstatements that are otherwise immaterial may be material if affect earnings trends.
a. directly II. Minor misstatements resulting from the consequences of contractual obligations.
b. indirectly a. I only
c. not b. II only
d. inversely c. I and II
d. neither I or II
5. According to PSA 320, materiality should be considered by the auditor when:
10. Auditors frequently refer to the terms audit assurance, overall assurance, ad level of assurance to
Determining the nature, timing Evaluating the effects refer to .
and extent of audit procedures. of misstatements a. detection risk
b. audit report risk
a. YES YES c. acceptable audit risk
b. YES NO d. inherent risk
c. NO NO
d. NO YES 11. The risk that financial statements are likely to be misstated materially without regard to the
effectiveness of internal control is the;
a. Inherent risk
b. Audit risk
c. Client risk
d. Control risk
12. When planning a financial statement audit, the auditor should assess inherent risk at the
18. In developing the overall audit plan and audit program, the auditor should assess inherent risk at the:
Financial statement level Account balance or transaction class level
Audit plan Audit program
a. YES YES
b. YES NO a. Financial statement level Accounting balance level
c. NO NO b. Account balance level Financial statement level
d. NO YES c. Account balance level Account balance level
d. Financial statement level Financial statement level
13. Which of the following is an incorrect statement?
a. Detection risk cannot be changed at the auditor’s discretion. 19. An auditor should design the written audit program so that
b. If individual audit risk remains the same, detection risk bears an inverse relationship a. All material transactions will be selected for substantive testing
to inherent and control risk. b. Substantive tests prior to the balance sheet date will be minimized.
c. The greater the inherent and control risk the auditor believes exist, the less detection c. The audit procedures selected will achieve specific audit objectives.
risk that can be accepted. d. Each account balance will be tested under either tests of controls or tests of
d. The auditor might make separate or combines assessments of inherent risk and transactions.
control risk.
20. Which of the following matters would least likely appear in the audit program?
14. Relationship between control risk and detection risk is ordinarily a. Specific procedures that will be performed.
a. Parallel b. Specific audit objectives.
b. Direct c. Estimated time that will be spent in performing certain procedures.
c. Inverse d. Documentation of the accounting and internal control systems being reviewed.
d. Equal
Answer Key
15. Which of the following is not correct regarding an auditor’s decision that a lower acceptable audit risk Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7
is appropriate?
1. C 1. C 1. C 1. B 1. C 1. C 1. A
a. More evidence is accumulated
2. C 2. C 2. B 2. D 2. B 2. B 2. B
b. Less evidence is accumulated
3. B 3. C 3. D 3. B 3. B 3. B 3. A
c. Special care is required in assigning experienced staff 4. B 4. B 4. C 4. B 4. D 4. C 4. D
d. Review of audit documentation is performed by personnel not assigned to the 5. D 5. C 5. A 5. D 5. D 5. A 5. A
engagement 6. B 6. C 6. A 6. D 6. A 6. C 6. B
7. D 7. C 7. C 7. B 7. A 7. C 7. B
16. These consist of the analysis of significant ratios and trends including the resulting investigation of 8. C 8. A 8. D 8. D 8. C 8. C 8. B
fluctuations and relationship that are inconsistent with other relevant information or deviate from 9. B 9. B 9. D 9. D 9. A 9. B 9. C
predictable amount. 10. A 10. B 10. A 10. B 10. C 10. B 10. C
a. Financial statement analysis 11. A 11. A 11. C 11. D 11. D 11. D 11. A
b. Variance analysis 12. D 12. B 12. B 12. C 12. A 12. B 12. A
c. Analytical procedures 13. A 13. D 13. B 13. B 13. C 13. C 13. A
d. Regression analysis 14. B 14. B 14. D 14. B 14. C 14. B 14. C
15. B 15. B 15. B 15. B 15. D 15. C 15. B
17. Which of the following statements about analytical procedures is incorrect? 16. B 16. B 16. C 16. D 16. B 16. A 16. C
a. Analytical procedures are required to be performed in the planning phase of the audit. 17. D 17. D 17. C 17. C 17. C 17. C 17. B
b. Analytical procedures are required to be done during the testing phase of the audit. 18. B 18. B 18. C 18. B 18. C 18. B 18. A
19. D 19. A 19. D 19. A 19. D 19. B 19. C
c. Analytical procedures are required to be done during the completion phase of the
20. C 20. A 20. D 20. C 20. D 20. D 20. D
audit.
d. Analytical procedures may be performed in the planning, testing and completion
phases of the audit.