Saint Paul School of Business and Law

Campetic, Palo, Leyte

Review Materials for Auditing Theory

MULTIPLE CHOICE QUESTIONS
1. Communications between the auditor and the audit committee should include all of the following
except
A. A summary of specific audit procedures used.
B. Significant audit adjustments.
C. Consultations with other accountants.
D. Major issues discussed with management before the auditor was retained.
2. Which of the following is not one of the primary approaches auditors use when evaluating the
reasonableness of accounting estimates?
A. Review and test management's process of developing estimates
B. Confirm estimates directly with outsiders.
C. Independently develop an estimate of the amount to compare to management's estimate
D. Review subsequent events or transactions bearing on the estimate.
3. A CPA firm is doing an audit of the Patel Corporation. Two members of the engagement team are
working on the companys Inventory account. One person is doing a test based on sampling for
attributes and the other is doing a test based on sampling for variables. Which of the following is
most likely to be true?
A. The person doing the sampling for attributes is making the assessment of control risk.
B. The person doing the sampling for variables is making the assessment of inherent risk.
The person doing the sampling for attributes is attempting to substantiate the Inventory account
C.
balance.
The person doing the sampling for variables is attempting to determine the error rate in a significant
D.
internal control procedure.
4. Which of the following statements describes an auditor's obligation to identify deficiencies in the
design or operation of internal control?
A. The auditor should design and apply tests of controls to discover reportable conditions that
could result in material misstatements.
B. The auditor need not search for reportable conditions unless management requests an
attestation that "no reportable conditions were noted in the audit."
C. The auditor should search for reportable conditions if the auditor expects to assess control risk
at below the maximum.
D. The auditor need not search for reportable conditions but should document and communicate
any reportable conditions that are discovered.
5. Which of the following audit techniques ordinarily would provide an auditor with the least assurance
about the operating effectiveness of an internal control activity?
A. Observation of client personnel
B. Inspection of documents and reports.
C. Inquiry of client personnel
D. Preparation of system flowcharts
6. Which of the following should be the first step in reviewing the financial statements of a nonpublic
entity?
A. Comparing the financial statements with statements for comparable prior periods and with
anticipated results.
B. Completing a series of inquiries concerning the entity's procedures for recording, classifying,
and summarizing transactions.
C. Obtaining a general understanding of the entity's organization, its operating characteristics, and
its products or services.
D. Applying analytical procedures designed to identify relationships and individual items that
appear to be unusual.
7. The auditor looked at a bank statement received and held by the client. This would be considered
what kind of audit procedure?
A. Recalculation. C. Physical observation.
B. Confirmation. D. Examination of documents.
8. The function of internal control, from the viewpoint of the auditor is to:

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 A. provide some measure of assurance that errors and irregularities may be discovered with
reasonable promptness.
B. assure that all records have been cross-checked and warranted as correct.
C. indicate that accounts have been checked and verified before certifying the agency's financial
position.
D. assure that accounts may be accepted upon oral presentation.
9. An auditor's engagement letter most likely would include a statement regarding:
A. Management's responsibility to provide certain written representations to the auditor.
B. Conditions under which the auditor may modify the preliminary judgment about
materiality
C. Internal control activities that would reduce the auditor's assessment of control risk
D. Materiality matters that could modify the auditor's preliminary assessment of fraud risk
10. In an environment that is highly automated, an auditor determines that it is not possible to reduce
detection risk solely by substantive tests of transactions. Under these circumstances, the auditor
most likely would:
A. Perform tests of controls to support a lower level of assessed control risk.
B. Increase the sample size to reduce sampling risk and detection risk.
C. Adjust the materiality level and consider the effect on inherent risk.
D. Apply analytical procedures and consider the effect on control risk.
11. When determining the inherent risk related to an account balance, an auditor theoretically does not
explicitly consider the
A. liquidity of the account.
B. degree of management estimation involved in determining the proper account balance.
C. related internal control policies and procedures.
D. complexity of calculations involved.
12. Analytical procedures are audit methods of evaluating financial statement accounts by studying and
comparing relationships among financial and nonfinancial data. The primary purpose of analytical
procedures is to
A. Identify the appropriate schedules to be prepared by the client.
B. Identify the types of errors or frauds that can occur in transactions.
C. Identify unusual conditions that deserve additional audit effort.
D. Determine the existence of unrecorded liabilities or overstated assets
13. Which of the following most likely would not be considered an inherent limitation of the potential
effectiveness of an entity's internal controls?
A. Incompatible duties. C. Management override.
B. Mistakes in judgment. D. Collusion among employees.
14. An independent auditor must be without bias with respect to the financial statements of a client in
order to
A. Comply with the laws established by governmental agencies.
B. Maintain the appearance of separate interests on the part of the auditor and the client.
C. Protect against criticism and possible litigation from stockholders and creditors.
D. Ensure the impartiality necessary for an expression of the auditor's opinion.
15. Which of the following most completely describes how independence has been defined by the CPA
profession?
A. Performing an audit from the viewpoint of the public.
B. Avoiding the appearance of significant interests in the affairs of an audit client.
C. Possessing the ability to act with integrity and objectivity.
D. Accepting responsibility to act professionally and in accordance with a professional code of
conduct.
16. All of the following are inherent risk factors that are pervasive to the financial statements except
A. Highly complex significant transactions.
B. Non-routine transactions.
C. Classes of transactions are not processed systematically.
D. Supplies inventory is difficult to count.
17. The auditor's report may be addressed to the company whose financial statements are being
examined or to that company's
A. Chief operating officer. C. President.
B. Board of Directors. D. Chief financial officer.
18. Which of the following is not a misstatement of the financial statements?
A. The client uses different inventory accounting methods for internal and external reporting.
B. A departure from GAAP.
C. The footnote for pensions is omitted.
D. A clerk incorrectly based the allowance for doubtful accounts on 31% of sales as opposed to
13% of sales as determined by the controller.
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19. After obtaining an understanding of a client's financial reporting controls, the auditor would next
A. test the client's control activities. C. assess the control risk.
B. document the understanding. D. plan the remainder of the audit work.
20. The objectives of the engagement partner's communication with the audit team include
A. Turning the audit team against management.
B. Complying with SEC rules.
C. Complying with FRSC rules.
D. Emphasizing the importance of professional skepticism.
21. Auditors are most likely to use focused audit procedures to examine
A. Routine transactions.
B. Low risk assertions.
C. Only the rights and obligations assertion.
D. High risk assertions.
22. The auditor would most likely issue a disclaimer of opinion because of
A. The client's failure to present supplementary information required by the FRSC.
B. Inadequate disclosure of material information.
C. A client imposed scope limitation.
D. The qualification of an opinion by the auditor of a subsidiary where there is a division of
responsibility.
23. Preplanning includes:
A. Evaluating internal controls.
B. Assessing audit risk at the account balance level.
C. Setting materiality.
D. Determining engagement team requirements.
24. Which of the following eliminates voluminous details from the auditor's working trial balance by
classifying and summarizing similar or related items?
A. Account analyses. C. Supporting schedules.
B. Control accounts. D. Lead schedules
25. All of the following are typically in the current file except
A. Adjusting journal entries.
B. Copies of the audit report.
C. Chart of accounts.
D. Copies of minutes of important committee meetings.
26. Which of the following is the least persuasive documentation in support of an auditor's opinion?
A. Schedules of details of physical inventory counts conducted by the client.
B. Notation of inferences drawn from ratios and trends.
C. Notation of appraisers' conclusions documented in the auditor's working papers.
D. Lists of negative confirmation requests for which no response was received by the auditor.
27. Which of the following factors most likely would lead a CPA to conclude that a potential audit
engagement should be rejected?
A. The details of most recorded transactions are not available after a specified period of time.
B. Internal control activities requiring segregation of duties are subject to management override.
C. It is unlikely that sufficient competent evidence is available to support an opinion on the financial
statements.
D. Management has a reputation for consulting with several accounting firms about significant
accounting issues.
28. A well-prepared flowchart should make it easier for the auditor to
A. Prepare audit procedure manuals.
B. Prepare detailed job descriptions.
C. Trace the origin and disposition of documents.
D. Assess the degree of accuracy of financial data.
29. An auditor is about to commence a recurring annual audit engagement. The continuing auditor's
independence would ordinarily be considered to be impaired if the prior year's audit fee
A. Was only partially paid and the balance is being disputed.
B. Has not been paid and will not be paid for at least twelve months.
C. Has not been paid and the client has filed a voluntary petition for bankruptcy.
D. Was settled by litigation.
30. Which of the following audit tests would be regarded as a test of controls?
A. Tests of the specific items making up the balance in a given general ledger account.
B. Tests comparing inventory pricing to vendors' invoices.
C. Tests of the signatures on canceled checks to the board of director's authorizations.
D. Tests of the additions to property, plant, and equipment by physical inspections.

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31. To ascertain the exact name of the corporate client, the auditor relies primarily on
A. Corporate minutes. C. The bylaws.
B. The articles of incorporation. D. Tax returns.
32. The concept of reasonable assurance in the context of an entity's internal controls recognizes that
A. Auditors may fail to detect material misstatements.
B. Proper internal controls guarantee that material misstatements will not occur.
C. Proper internal controls preclude fraud.
D. Costs of internal controls should not exceed their benefits.
33. An effective control environment
A. Allows management to identify all relevant risks.
B. Creates a commitment to competence.
C. Guarantees that all controls are followed as prescribed.
D. Requires an internal audit department.
34. An organizational structure is important for all of the following reasons except
A. Ensuring proper monitoring.
B. Defining areas of authority.
C. Creating clear lines of reporting.
D. Ensuring a proper commitment to controls.
35. The risk assessment component of internal controls refers to
A. The auditor's assessment of control risk.
B. The auditor's assessment of auditee risk.
C. The entity's identification and analysis of risks relevant to achievement of its objectives.
D. The entity's monitoring of the potential for material misstatements.
36. After completing the preliminary phase of the review of internal accounting control, the auditor
decides not to rely on the system to restrict substantive tests. Documentation may be limited to the
auditor's
A. Understanding of the internal accounting control system.
B. Reasons for deciding not to extend the review.
C. Basis for concluding that errors and fraud will be prevented.
D. Completed internal accounting control questionnaire.
37. Long and Short, CPAs, were auditing Island Corporation for the year ended December 31, 2005. On
January 11, 2006, a major customer of Island Corporation declared bankruptcy as the result of an
uninsured loss due to a major fire in their warehouse on January 8, 2006. As a result, a material
accounts receivable from the customer was determined to be uncollectible. Long and Short, CPAs,
would expect the client to
A. Record the loss on uncollectible accounts as a routine transaction in the year 2006.
B. Treat the loss as a Type II event and provide a footnote about the loss in the 2005
financial statements.
C. Treat the loss as a Type I event and adjust the 2005 financial statements to record the
loss on uncollectible accounts.
D. File a lawsuit against the customer in hopes of collecting some of the money owed to the
client.
38. Why should the auditor be particularly concerned with "miscellaneous", "other", and "clearing"
accounts classified as revenues or expenses?
A. These accounts are likely to relate to going-concern matters.
B. These accounts are often more difficult to audit using normal substantive tests.
C. These accounts may represent attempts of "earnings management".
D. These accounts are likely to require the assistance of a specialist.
39. Why is it the client's decision to record adjustments to the financial statements?
A. Having the auditor adjust the financial statements would impair his or her independence with
respect to the client.
B. The financial statements are the responsibility of the client's management.
C. The auditor often does not have sufficient client-specific expertise to record adjustments to the
financials statements.
D. The client will ultimately suffer any losses related to misstated financial statements.
40. Which of the following events or activities normally occurs following the issuance of the auditor's
opinion on the client's financial statements?
A. Interim testing. C. "Roll-forward" work.
B. Subsequent events. D. Subsequent discovery of facts.
41. If management has the incentive to cover up current poor financial performance using inventory, it
might intentionally:
A. omit the disclosures relating to the cost flow assumptions used.
B. increase the allowance for LCM beyond what is reasonable.
C. use perpetual inventory instead of periodic.
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 D. add items to the inventory system after the auditors have observed the count.
42. The probability that an account balance might be misstated after processes are complete and
internal controls have been applied is:
A. residual risk. C. business risk.
B. audit risk. D. control risk.
43. Small and Tall, CPAs, completed the December 31, 2005 audit of Big Company on February 10,
2006. After the report was issued, it came to the attention of Small and Tall, CPAs, that an
outstanding lawsuit against Big Company was settled for materially more than recorded in the
December 31, 2005 financial statements. The amount recorded in the financial statements
represented the best estimate of management and the company's attorneys at the time the audit
was completed. Based on this new information, Small and Tall, CPAs should
A. Determine whether persons are currently relying on the audit report.
B. Advise the client to make appropriate changes in the financial statements and reissue them.
C. Notify each member of the board of directors of Big Company.
D. Take no action since the event took place after the audit report was issued.
44. Subsequent to the issuance of an auditor's report, the auditor became aware of facts existing at the
report date that would have affected the report had the auditor then been aware of such facts. After
determining that the information is reliable, the auditor should next
A. Determine whether there are persons relying or likely to rely on the financial statements who
would attach importance to the information.
B. Request that management disclose the newly discovered information by issuing revised
financial statements.
C. Issue revised pro forma financial statements taking into consideration the newly discovered
information.
D. Give public notice that the auditor is no longer associated with financial statements.
45. On March 15, 2006, Kent, CPA, issued an unqualified opinion on a client's audited financial
statements for the year ended December 31, 2005. On May 4, 2006, Kent's internal inspection
program disclosed that engagement personnel failed to observe the client's physical inventory.
Omission of this procedure impairs Kent's present ability to support the unqualified opinion. If the
stockholders are currently relying on the opinion, Kent should first
A. Advise management to disclose to the stockholders that Kent's unqualified opinion should not
be relied on.
B. Undertake to apply alternative procedures that would provide a satisfactory basis for the
unqualified opinion.
C. Reissue the auditor's report and add an explanatory paragraph describing the departure from
generally accepted auditing standards.
D. Compensate for the omitted procedure by performing tests of controls to reduce audit risk to a
sufficiently low level.
46. Please indicate the proper sequence of phases in planning an integrated audit:
1. Assess fraud risk.
2. Consider process used by management to assess internal control and address
deficiencies.
3. Determine the most efficient approach to evaluate and report on internal controls and
financial reporting.
4. Assess business risk.
5. Determine which controls must be tested.
A. 4, 2, 3, 5, 1 C. 1, 4, 5, 2, 3
B. 4, 1, 2, 5, 3 D. 1, 4, 2, 5, 3
47. Which of the following types of analysis provides useful evidence of multi-location clients?
A. Multi-processing analysis C. Cross-sectional analysis
B. Stratification analysis D. Common-sized analysis
48. When there is a subsequent discovery of omitted procedures, although the financial statements are
fairly presented, the auditor may not have met due diligence requirements. The auditor:
A. is under no obligation to perform addition audit procedures.
B. must contact the client and perform the omitted procedures.
C. must notify the SEC of the omitted procedures
D. immediately resign from the engagement.
49. An auditor expressed a qualified opinion on a company's prior year financial statements because of
a material departure from GAAP in the prior year. The company has properly restated last year's
financial statements and presents them in comparative form with the current year's financial
statements. The auditor's updated report on the prior year's financial statements should:
A. express an unqualified opinion on the restated financial statements of the prior year.
B. continue to express a qualified opinion on the prior year's financial statements.
C. include the auditor's qualified opinion from the prior year.
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 D. not mention the opinion on the prior year's financial statements.
50. The management representation letter to the auditor should include all of the following except:
A. a statement by management that no illegal activities by employees have occurred.
B. a statement by management that all evidence has been made available to the auditor.
C. a statement by management that the financial statements are presented in conformity with
GAAP.
D. a statement by management that all related-party transactions were for legitimate business
purposes.
51. Operational auditing is primarily oriented towards:
A. The accuracy of data reflected in managements financial records.
B. The verification that a companys financial statements are fairly presented.
C. Future improvements to accomplish the goals of management.
D. Past protection provided by existing internal control.
52. A CPA certificate is evidence of:
A. Recognition of independence in mind.
B. Basic competence at the time the certificate is granted.
C. Culmination of the educational process.
D. Membership in the PICPA.
53. One of the following is not a cause of information risk:
A. Voluminous data.
B. Remoteness of the information
C. Simplicity of exchange transactions.
D. Biases and motives of the provider of information.
54. In an assurance engagement, this refers to the information obtained by the practitioner in arriving at
the conclusions on which the conclusion is based.
A. Assertions C. Sufficient appropriate evidence
B. Suitable criteria D. Generally accepted auditing standards
55. An audit should be designed to achieve reasonable assurance of detecting material:
A. Errors.
B. Errors and irregularities.
C. Errors, irregularities and those illegal acts with a direct effect on financial statement amounts.
D. Errors, irregularities and those illegal acts, regardless of whether it has a direct or indirect effect
on financial statement amounts.
56. Evidence gathering in a scientific experiment is most similar to which phase of the audit.
A. Planning and supervising an engagement.
B. Hypothesizing that the financial statements are presented fairly.
C. Evaluating whether the financial statements are fairly presented.
D. Assessing the risks and designing audit procedures to address these risks.
57. The review of a companys financial statements by a CPA firm:
A. Culminates in issuance of a report expressing the CPAs opinion as to the fairness of the
statements.
B. Is substantial less in scope of procedures than an audit.
C. Is of similar scope as an audit and adds similar credibility to the statements.
D. Requires detailed analysis of the major accounts.
58. During planning, one of the auditors considerations is the presence of fraud risk factors. Which of
the following factors would most likely heighten an auditors concern about the risk of fraudulent
financial reporting?
A. Presence of large amounts of liquid assets that are readily convertible into cash.
B. Low growth and profitability ratios as compared to other entities within the same industry.
C. An overly complex organizational structure involving unusual lines of authority.
D. Top managements admission of responsibility for the establishment and maintenance of
internal controls.
59. Manny, CPA, discovered an illegal act during the audit of Margarito Corporation, a publicly held
company. Accordingly, which of the following would be the best response by Manny?
A. Manny shall notify the Securities and Exchange Commission regarding the illegal act.
B. Manny should determine who was responsible for the illegal act.
C. Manny shall report the act to the audit committee and high level personnel within Margarito
Corporation.
D. Manny shall intensify the examination to identify all illegal acts.
60. Conflict between financial statement users and auditors often arises because of:
A. High cost of performing an audit.
B. Extremely technical vocabulary which the auditor uses in the report.
C. Placement of the auditors report in the back of the clients annual report, where it is hard to
locate.
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 D. Expectation gap.
61. Which of the following situations best illustrates the application of professional skepticism on the
part of the CPA?
A. Arthur, CPA, is engaged in discussions with John, the clients controller. Arthur obtains several
oral representations from John, which the former readily accepts without further work or support
from other audit procedures.
B. Arthur, CPA, has decided to continue with the audit of ABC company .Throughout the course of
the audit, Arthur does not believe any of the representations made by John, the controller.
C. Arthur, CPA, is discussing several audit issues with John, a member of top management.
Throughout the meeting with John, Arthur neither assumes that John is dishonest, nor assumes
unquestioned honesty in Johns oral representations.
D. Arthur, CPA, is engaged in discussions with John, the clients controller, regarding several audit
issues. Throughout the meeting with John, John neither assumes that Arthur is dishonest, nor
assumes unquestioned honesty in Arthurs oral representations.
62. The auditor should be alert for particular trends and relationships that may indicate a risk of material
misstatements due to fraud, such as the following, except
A. Uncharacteristically large amount of income being reported in the last few weeks of the
reporting period.
B. Unusual transactions.
C. Application of conservatism or prudence in making accounting estimates.
D. Income that is unusually large as compared from the previous year.
63. Which situation would usually indicate material misstatement due to fraud?
A. Confirmation replies are significantly different from the clients records.
B. Several errors are detected and listed in computer generated exception reports.
C. Sale of equipment at a loss even if it is not yet fully depreciated.
D. Bank reconciliation items include those that are in transit.
64. Which of the following acts is an indication of a possible illegal act?
A. The client is a major contributor for a particular political candidates campaign.
B. Several checks with large amounts are made payable to cash.
C. The client is engaged in several related party transactions that are properly disclosed.
D. The client failed to correct a material weakness that was discovered by the auditor in the
previous audit.
65. Which of the following procedures would assist the auditor in identifying noncompliance with laws
and regulations?
A. Inquiring of clients lawyers.
B. Inspecting correspondence with relevant regulatory agencies.
C. Inquire management concerning entitys policies and procedures regarding compliance with
laws and regulations.
D. Discuss with the client management the policies or procedures adopted for identifying,
evaluating and accounting for litigation, claims and assessments.
66. According to PSA 250, the risk of not detecting material misstatement due to noncompliance is
high. This can be attributed to all of the following factors, except:
A. There are many laws and regulations, relating principally to the operating aspects of the entity
that typically do not have a material effect on the financial statements.
B. The detection and prevention of non-compliance rests with management.
C. The effectiveness of audit procedures may be affected by the limitations of the audit.
D. Noncompliance may involve conduct designed to conceal it.
67. During the course of an audit engagement, the CPA discovers specific circumstances that lead him
to the belief that employee fraud that has a material effect on the financial statements may have
occurred. In such a case the CPA should
A. Tactfully approach the suspected employee and attempt to resolve the matter with him.
B. Ascertain that the client understand that the ordinary examination is primarily designed to
disclose fraud or defalcations.
C. Perform appropriate modified or additional procedures to confirm or dispel the auditors
suspicion.
D. After advising the client of his findings, suggest that an investigation has to be made to discover
whether fraud has in fact occurred.
68. All of the following conditions are indicators of possible pressures on an entity except
A. The industry in which the entity operates is declining.
B. There is inadequate working capital due to declining profits or too rapid expansion.
C. The client is heavily dependent on one or a few products or customers.
D. There is significant and prolonged understaffing of the accounting department.
69. What are the two most common types of tax services?
A. Tax evasion and tax planning C. Tax computation and tax planning
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 B. Tax planning and tax compliance D. Tax compliance and tax shelter
70. Which of the following factors most likely is a reason why an auditor would not accept a prospective
audit engagement?
A. The auditor lacks adequate understanding of the entitys internal control.
B. The client is close to the end of its fiscal year.
C. The auditor concludes that the prospective management of the client lacks integrity.
D. The auditors inability to perform analytical procedures before assessing control risk.
71. When conducting an audit, errors that arouse suspicion of fraud should be given a greater attention
than other errors. This is an example of applying the criterion of
A. Reliability of evidence C. Risk
B. Materiality D. Dual-purpose testing
72. The objective of the consistency standard is to provide assurance that
A. There are no variations in the format and presentation of financial statements.
B. Substantially different transactions and events are not accounted for an identical basis.
C. The auditor is consulted before material changes are made in the application of accounting
principles.
D. The comparability of financial statements between periods is not materially affected by changes
in accounting principles without disclosure.
73. The objective of the quality control policies to be adopted by an audit firm will ordinarily incorporate
all of the following except:
A. Risk assessment C. Engagement performance
B. Leadership responsibilities D. Human resources
74. A firm of independent auditors must establish and follow quality control policies and procedures
because these standards
A. Are necessary meet increasing requirements of auditors liability as insurers.
B. Are required by the SEC for auditors of all firms.
C. Include formal filing of records of such policies and procedures to a regulatory agency.
D. Give reasonable assurance that the firm as a whole will comply with professional standards.
75. Which of the following least likely influence the auditors decision to send a separate engagement
letter to a component of parent entity client?
A. Legal requirements
B. Degree of ownership over a component entity by parent company
C. Location of the principal place of business of the component entity
D. Who appoints the auditor of the component
76. To exercise due professional care, an auditor should:
A. Attain the proper balance of professional experience and formal education.
B. Critically review the work performed and judgment exercised by those assisting in the audit.
C. Examine all available corroborating evidence supporting managements assertions.
D. Design the audit to detect all instances of illegal acts.
77. Assurance services differ from auditing services in that:
A. Assurance services are narrower in scope than audit services.
B. Assurance services may include a report about the relevance and timeliness, not just the
reliability, of the information.
C. Assurance services are limited to economic events or actions, and audit services are not
similarly limited.
D. Audit services do not improve the quality of information as do assurance services.
78. Which of the following statements best describes an auditor's responsibility to detect errors, fraud,
and illegal acts?
A. The auditor should study and evaluate the client's internal control system and design the audit
to provide reasonable assurance of detecting all errors and fraud.
B. The auditor should consider the types of errors and fraud that could occur and determine
whether the necessary internal controls are prescribed and are being followed.
C. The auditor should assess the risk that errors and fraud may cause the financial statements to
contain material misstatements and design the audit to provide reasonable assurance of
detecting material errors and fraud.
D. The auditor should assess the risk that errors and fraud may cause the financial statements to
contain material misstatements and determine whether the necessary internal controls are
prescribed and are being followed satisfactorily.
79. Inherent risk and control risk differ from detection risk in that they
A. Arise from the misapplication of auditing procedures.
B. May be assessed in either quantitative or non-quantitative terms.
C. Exist independently of the financial statement audit.
D. Can be changed at the auditors discretion.

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80. Which of the following quality control policies and procedures does not relate to human resources
and assignment?
A. Emphasize independence of mental attitude in training programs and in supervision and review
of audits.
B. Monitor the effectiveness of recruiting programs.
C. Identify criteria which will be considered in evaluating individual performance and expected
proficiency.
D. Identify on a timely basis the staffing requirements of specific audits.
81. In pursuing a CPA firms quality control objectives, a CPA firm may maintain records indicating
which partners or employees of the CPA firm were previously employed by the CPA firms clients.
Which quality control element would this be most likely to satisfy?
A. Monitoring C. Independence
B. Assignment D. Skills and competence
82. Which of the following is correct statement?
A. The auditor should use professional judgment to assess audit risk and to design audit
procedures to ensure it is eliminated.
B. The auditor is an insurer, and his or her report constitutes a guarantee.
C. The subsequent discovery that a material misstatement exists in the financial statements is
evidence of inadequate planning, performance, or judgment on the part of the auditor.
D. The auditor should obtain an understanding of the accounting and internal control systems
sufficient to plan the audit and develop an effective audit approach.
83. Why would the auditor assess control risk?
A. Because it indicates where inherent risk may be the greatest.
B. Because it determines whether sampling risk is sufficiently low.
C. Because it affects the level of detection risk the auditor may accept.
D. Because it includes the aspects of non-sampling risk that are controllable.
84. The relationship between acceptable level of detection risk and the combined level of inherent and
control risk is
A. Direct B. Inverse C. Parallel D. Independent
85. An auditor decides to increase the assessed level of control risk from that originally planned on the
basis of audit evidence gathered and evaluated. To achieve an overall audit risk level that is
substantially the same as the planned audit risk level, the auditor would
A. Decrease substantive testing. C. Increase inherent risk.
B. Increase materiality levels. D. Decrease detection risk.
86. As the acceptable level of detection risk decreases, the assurance directly provided from
A. Substantive tests should increase. C. Substantive tests should decrease.
B. Tests of controls should increase. D. Tests of controls should decrease.
87. Which of the following statements is true?
A. If control risk is assessed at maximum, the nature of related substantive tests should be
changed from more to less effective.
B. If control risk is assessed at maximum, the nature of related substantive tests should be
changed from less to more effective.
C. If control risk is assessed at maximum, the timing of related substantive tests should be
changed from year-end to an interim date.
D. If control risk is assessed at maximum, the extent of related substantive tests should be
changed from a larger to a smaller sample.
88. Which of the following is not a distinguishing feature of risk-based auditing?
A. Identifying areas posing the highest risk of financial statement errors.
B. Analysis of internal control.
C. Collecting and evaluating evidence.
D. Concentrating audit resources in those areas presenting the highest risk of financial statement
errors.
89. Which of the following is incorrect regarding PSA 315?
A. The purpose of this PSA is to establish standards and to provide guidance on obtaining an
understanding of the entity and its environment, including its internal control, and on assessing
the risks of material misstatement in a financial statement audit.
B. This PSA requires the auditor to make risk assessments at the financial statement and assertion
levels based on an appropriate understanding of the entity and its environment, including its
internal control.
C. The requirements and guidance of this PSA are to be applied in conjunction with the
requirements and guidance provided in other PSAs.
D. This PSA discusses the auditors responsibility to determine overall responses and to design
and perform further audit procedures whose nature, timing, and extent are responsive to the risk
assessments.
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90. Which statement is incorrect regarding obtaining an understanding of the entity and its
environment?
A. Obtaining an understanding of the entity and its environment is an essential aspect of
performing an audit in accordance with PSAs.
B. That understanding establishes a frame of reference within which the auditor plans the audit
and exercises professional judgment about assessing risks of material misstatement of the
financial statements and responding to those risks throughout the audit.
C. The auditors primary consideration is whether the understanding that has been obtained is
sufficient to assess the risks of material misstatement of the financial statements and to design
and perform further audit procedures.
D. The depth of the overall understanding that is required by the auditor in performing the audit is
equal to that possessed by management in managing the entity.
91. A potential business risk created by industry developments may most likely include
A. Increased product liability
B. increased legal exposure
C. The entity does not have the personnel or expertise to deal with the changes in the industry.
D. Loss of financing due to the entitys inability to meet financing requirements.
92. Inquiries directed towards those charged with governance may most likely
A. Relate to their activities concerning the design and effectiveness of the entitys internal control
and whether management has satisfactorily responded to any findings from these activities.
B. Help the auditor understand the environment in which the financial statements are prepared.
C. Relate to changes in the entitys marketing strategies, sales trends, or contractual arrangements
with its customers.
D. Help the auditor in evaluating the appropriateness of the selection and application of certain
accounting policies.
93. Which statement is incorrect regarding analytical procedures?
A. Analytical procedures may be helpful in identifying the existence of unusual transactions or
events, and amounts, ratios, and trends that might indicate matters that have financial
statement and audit implications.
B. In performing analytical procedures as risk assessment procedures, the auditor develops
expectations about plausible relationships that are reasonably expected to exist.
C. When comparison of those expectations with recorded amounts or ratios developed from
recorded amounts yields unusual or unexpected relationships, the auditor considers those
results in identifying risks of material misstatement.
D. When such analytical procedures use data aggregated at a high level (which is often the
situation), the results of those analytical procedures provide a clear-cut indication about whether
a material misstatement may exist.
94. Which statement is incorrect regarding the discussion among the engagement team about the
susceptibility of the entitys financial statements to material misstatements?
A. The members of the engagement team should discuss the susceptibility of the entitys financial
statements to material misstatements.
B. The objective of this discussion is for members of the engagement team to gain a better
understanding of the potential for material misstatements of the financial statements resulting
from fraud or error in the specific areas assigned to them, and to understand how the results of
the audit procedures that they perform may affect other aspects of the audit.
C. The discussion provides an opportunity for more experienced engagement team members,
including the engagement partner, to share their insights based on their knowledge of the entity,
and for the team members to exchange information about the business risks.
D. All the team members should have a comprehensive knowledge of all aspects of the audit.
95. The auditors understanding of the entity and its environment consists of an understanding of the
following aspects:
I. Industry, regulatory, and other external factors, including the applicable financial reporting
framework.
II. Nature of the entity, including the entitys selection and application of accounting policies.
III. Objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements.
IV. Measurement and review of the entitys financial performance.
V. Internal control.
A. All of the above B. I, II, III and IV C. I, II and III D. I, II, III and V
96. The primary difference between an audit of the balance sheet and an audit of the income statement
lies in the fact that the audit of the income statement deals with the verification of
A. Transactions C. Costs
B. Authorization D. Cutoffs

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97. Which of the following conditions and events may most likely indicate the existence of risks of
material misstatement?
A. Having personnel with appropriate accounting and financial reporting skills.
B. Accounting measurements that involve simple processes.
C. Significant amount of routine or systematic transactions.
D. Constraints on the availability of capital and credit.
98. Nature of an entity refers to
A. The entitys operations, its ownership and governance, the types of investments that it is making
and plans to make, the way that the entity is structured and how it is financed.
B. The overall plans for the entity.
C. The operational approaches by which management intends to achieve its objectives.
D. The result of significant conditions, events, circumstances, actions or inactions that could
adversely affect the entitys ability to achieve its objectives and execute its strategies, or the
setting of inappropriate objectives and strategies.
99. Which statement is correct regarding business risks?
A. The risk of material misstatement of the financial statements is broader than business risk,
though it includes the latter.
B. The auditor should identify or assess all business risks.
C. All business risks give rise to risks of material misstatement.
D. A business risk may have an immediate consequence for the risk of misstatement for classes of
transactions, account balances, and disclosures at the assertion level or the financial
statements as a whole.
100. Which statement is incorrect regarding significant risks that require special audit consideration?
A. The auditor should determine which of the risks identified are in the auditors judgment, risks
that require special audit consideration.
B. The auditor excludes the effect of identified controls related to the risk to determine whether the
nature of the risk, the likely magnitude of the potential misstatement including the possibility that
the risk may give rise to multiple misstatements, and the likelihood of the risk occurring are such
that they require special audit consideration.
C. Routine, non-complex transactions that are subject to systematic processing are more likely to
give rise to significant risks because they have higher inherent risks.
D. Significant risks are often derived from business risks that may result in a material
misstatement.
101. The following are examples of conditions and events that may indicate the existence of risks of
material misstatement, except
A. Operations in regions that is economically stable.
B. Pending litigation and contingent liabilities.
C. Application of new accounting pronouncements.
D. Entities or business segments likely to be sold.
102. The auditor should consider the nature, extent, and timing of the work to be performed and
should prepare a written audit program for every audit. Which audit standard is most closely related
to this requirement?
A. The audit is to be performed by a person or persons having adequate technical training and
proficiency as an auditor.
B. In all matters relating to the assignment, an independent mental attitude is to be maintained by
the auditor(s).
C. Due professional care is to be exercised in the planning and performance of the audit and
preparation of the report.
D. The work is to be adequately planned and assistants, if any, are to be properly supervised.
103. Which of the following would a successor auditor normally perform after acceptance of an audit
client?
A. Inquiry of predecessor auditor regarding the client.
B. Review the SEC filings of the client.
C. Inquiry of bankers regarding the client.
D. Review of predecessor auditor working papers.
104. Which of the following procedures would an auditor most likely perform in planning a financial
statement audit?
A. Inquiring of the clients legal counsel concerning pending litigation.
B. Comparing the financial statements to anticipated results.
C. Examining computer generated exception reports to verify the effectiveness of internal controls.
D. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.
105. This is an independent appraisal activity established within an entity as a service to the entity:
A. External or independent auditing C. Government auditing
B. Internal auditing D. Compliance auditing
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106. The development of a general strategy and a detailed approach for the expected nature, timing,
and extent of audit refers to :
A. Supervision C. Audit procedures
B. Directing D. Planning
107. Analytical procedures used in planning an audit should focus on
A. Reducing the scope of tests of controls and substantive tests.
B. Providing assurance that potential material misstatements will be identified.
C. Enhancing the auditors understanding of the clients business.
D. Assessing the adequacy of the available evidential matter.
108. Which of the following statements is correct concerning analytical procedures?
A. Analytical procedures usually involve comparisons of ratios developed from recorded amounts
to assertions developed by management.
B. Analytical procedures used in planning an audit generally use data aggregated at a high level.
C. Analytical procedures can replace tests of controls in gathering evidence to support the
assessed level of control risk.
D. Analytical procedures are more efficient, but not more effective, than tests of details and
transactions.
109. Which of the following is an effective audit planning and control procedures that helps prevent
misunderstandings and inefficient use of audit personnel?
A. Make copies, for inclusion in the working papers, of those client supporting documents
examined by the auditor.
B. Provide the client with copies of the audit programs to be used during the audit.
C. Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and
other information.
D. Arrange to have the auditor prepare and post any necessary adjusting or reclassification entries
prior to final closing.
110. Which of the following is an engagement attribute for an audit of an entity that processes most
of its financial data in electronic form without any paper documentation?
A. Discrete phases of planning, interim, and year-end field work.
B. Increased effort to search for evidence of management fraud.
C. Performance of audit tests on a continuous basis.
D. Increased emphasis on the completeness assertion.
111.Which of the following is an aspect of scheduling and controlling the audit engagement?
A. Including in the audit program a column for estimated and actual time.
B. Performing audit work only after the clients books of account have been closed for the period
under examination.
C. Writing a conclusion in individual working papers indicating how the results of the audit will
affect the auditors report.
D. Including in the engagement letter an estimate of the minimum and maximum audit fee.
112. Which of the following statements is not correct about materiality?
A. The concept of materiality recognizes that some matters are important for fair presentation of
financial statements in conformity with GAAP, while other matters are not important.
B. An auditor considers materiality for planning purposes in terms of the largest aggregate level of
misstatements that could be material to any one of the financial statements.
C. Materiality judgments are made in light of surrounding circumstances and necessarily involve
both quantitative and qualitative judgments.
D. An auditors consideration of materiality is influenced by the auditors perception of the needs of
a reasonable person who will rely on the financial statements.
113. Adequate planning of the audit work helps the auditor of accomplishing the following objectives,
except:
A. Gathering of all corroborating audit evidence.
B. Ensuring that appropriate attention is devoted to important areas of the audit.
C. Identifying the areas that need a service of an expert.
D. The audit work is completed efficiently.
114. The extent of planning will vary according to any of the following, except:
A. Size of the audit client.
B. Auditors experience with the entity and knowledge of the business.
C. The nature and complexity of the audit engagement
D. The assessed level of control risk.
115. Which of the following least likely affect the form and content of the overall audit plan?
A. Complexity of the audit engagement.
B. Methodology and technology used by the auditor.
C. The entitys form of business organization.
D. The size of the entity.
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116. Which of the following is least likely considered by the auditor in developing the overall audit
plan?
A. Understanding of the accounting and internal control systems.
B. Relevant risk and materiality.
C. The involvement of other auditors in the audit of major component of financial statements
D. The general level of competence of audit assistants.
117. Which of the following is not considered by the CPA when he makes an overall audit plan?
A. Identification of complex accounting areas including those involving accounting estimates.
B. The information technology used by the client.
C. The content of the representation letters.
D. The nature and timing of reports or other communication with the entity that are expected under
the engagement.
118. The auditor should have or obtain a knowledge of the clients business sufficient to:
A. Evaluate whether the financial statements are materially misstated.
B. Document material weaknesses in accounting and internal control systems.
C. Identify and understand events, transactions and practices that may have effect on financial
statements.
D. Have an overall evaluation of whether financial assertions are fairly presented in the financial
statements.
119. The auditor is not expected to have
A. A particular knowledge of the economy and the industry within which the entity operates.
B. A particular knowledge of how the entity operates.
C. A level of knowledge of business ordinarily less than that possessed by management.
D. Knowledge of business which is used in assessing inherent and control risk.
120. Which of the following is the ultimate concern of the knowledge about the business?
A. Consideration of how it affects the financial statements taken as a whole.
B. Assists the auditor in enforcing quality control procedures.
C. To assure that sufficient audit evidence is obtained.
D. It assists in determining the type of audit report to be issued.
121. When an independent auditor is approached to perform an audit for the first time, he or she
should make inquiries of the predecessor auditor. Inquiries are necessary because the predecessor
may be able to provide the successor with information that will assist the successor in determining
whether
A. The predecessors work should be used.
B. The company rotates auditors.
C. In the predecessors opinion, control risk is low.
D. The engagement should be accepted.
122. If permission from client to discuss its affairs with the proposed auditor is denied by the client,
the predecessor auditor should:
A. Keep silent of the denial.
B. Disclose the fact that the permission to disclose is denied by the client.
C. Disclose adequately to proposed auditor all noncompliance made by the client.
D. Seek legal advice before responding to the proposed auditor
123. Which of the following is appropriately included in an audit engagement letter?
I. Because of the test nature and other inherent limitations of an audit, together with the
inherent limitations of any accounting and internal control system, there is an unavoidable
risk that even some material misstatements may remain undiscovered.
II. The audit will be made with the objective of expressing an opinion on the financial
statements.
III. An audit also includes assessing the accounting procedures used and significant estimates
made by management.
A. I and II B. I and III C. II and III D. I, II and III
124. Which of the following is least likely included in an audit engagement letter?
A. The objective of financial reporting.
B. Management responsibility for the financial statements.
C. The form of any reports or other communication of the results of the engagement.
D. Arrangement concerning the involvement of other auditors or experts in some aspects of the
audit.
125. An audit engagement letter least likely includes
A. A reference to the inherent limitation of an audit that some material misstatements may remain
undiscovered.
B. Identification of specific audit procedures that the auditor needs to undertake.
C. Description of any letters or reports that the auditor expects to submit to the client.
D. Arrangements concerning the involvement of internal auditors and other clients staff.
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126. Which of the following least likely requires the auditor to send a new engagement letter?
A. An indication that the client misunderstands the objective and scope of the audit.
B. Any revised or special terms of the engagement.
C. A recent change in the audit firms management.
D. Legal requirements and other government agencies pronouncements.
127. Which of the following would be classified as an error?
A. Misinterpretation by management of facts that existed when the financial statements were
prepared.
B. Misappropriation of assets for the benefit of management.
C. Preparation of records by employees to cover a fraudulent scheme.
D. Intentional omission of the recording of a transaction to benefit a third party.
128. The study and practice of auditing is unlike other areas in accounting because it:
A. Requires the memorization of formulas and patterns.
B. Requires the knowledge of GAAP.
C. Requires common sense and some creativity.
D. Is required by law for all companies in the United States.
129. Which of the following factors is least likely to represent an opportunity to commit fraud?
A. The audit committee is ineffective.
B. Poor internal controls over cash transactions.
C. The existence of highly complex transactions.
D. Operating losses make a hostile takeover imminent.
130. An "integrated audit" includes:
A. A special audit related to management fraud.
B. A financial statement audit and an audit of internal control over financial reporting.
C. A financial statement audit and a special audit related to management fraud.
D. A special audit related to management fraud and an audit of internal control over financial
reporting.
131. Independent auditing can best be described as:
A. A branch of accounting.
B. A discipline that provides assurance regarding the results of accounting and other functional
operations and data.
C. A professional activity that measures and communicates financial and business data.
D. A regulatory function that prevents the issuance of improper financial information.
132. Which of the following best describes the primary reason an independent auditor reports on
financial statements?
A. To give stockholders some assurance that any fraudulent activities will be detected.
B. To identify a poorly designed internal control structure that may produce unreliable financial
statements.
C. To provide expertise to clients, which may not be totally knowledgeable of prevailing GAAP.
D. To add credibility where appropriate, since the client may not be perceived as objective with
respect to its own financial statements.
133. Audit evidence:
A. May only be gathered from parties external to the client to be reliable.
B. May only be gathered from the client to be reliable since the client is the most knowledgeable
source of information.
C. May only be gathered from computerized sources to avoid human error.
D. Can be gathered from many sources and is not limited to the underlying accounting data.
134. The fact that errors and/or omissions in certain relatively insignificant account balances would
not affect an auditor's decision when reporting on the financial statements as a whole relates most
closely to which major audit concept?
A. Materiality C. Management assertions
B. Audit risk D. Reasonable assurance
135. Gaining an understanding of the client and its environment includes all of the following areas
except:
A. Regulatory issues unique to the industry.
B. The entity's application of accounting policies.
C. The audit fee and timeline for completion of the work.
D. The entity's business risks.
136. The responsibility for implementing sound accounting practices and principles, maintaining an
adequate internal control structure, and making fair representations in the financial statements rests
primarily with the:
A. Senior management C. External auditors
B. Internal audit department D. Shareholders
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137. Financial statement users' demand for assurance is similar to that of a potential home buyer
who hires a home inspector in that:
A. The buyer (or user) pays directly for this assurance in both situations.
B. There are often information asymmetry and conflicts of interest.
C. The cost of obtaining information is not relevant.
D. Independence is not relevant in either situation.
138. The disclosure of fraud to parties other than the client's senior management and its audit
committee ordinarily would be precluded by the auditor's ethical or legal obligations of
confidentiality. However, the auditor has a duty to disclose the information to parties outside the
entity in all of the following circumstances except:
A. A court subpoena in conjunction with a fraud investigation.
B. A successor auditor makes inquiries in determining whether to accept the client.
C. A Wall Street analyst inquiry regarding future profit projections.
D. To comply with legal or regulatory requirements.
139. Which of the following factors is least likely to represent an opportunity to commit fraud?
A. The audit committee is ineffective.
B. Poor internal controls over cash transactions.
C. The existence of highly complex transactions.
D. Operating losses make a hostile takeover imminent.
140. Which of the following is considered an example of a compliance audit?
A. The examination a company's claims that its product is superior to that of a competitor on
specific dimensions.
B. The examination of a school district networked computer system.
C. The examination of a company's adherence to government-mandated safety provisions.
D. The examination of a company's financial statements.
141. What is the essential meaning of the generally accepted auditing standard that requires that the
auditor be independent?
A. The auditor must be without bias with respect to the client under audit.
B. The auditor must adopt a critical attitude during the audit.
C. The auditor's sole obligation is to third parties.
D. The auditor may have a direct ownership interest in his client's business if it is not material.
142. Which of the following least likely indicates an objective of an assurance engagement?
A. It is intended to enhance credibility of information about a subject matter.
B. It is intended to prevent issuance of materially misleading information.
C. It is intended for a professional accountant to express a conclusion that provides the intended
users with a level of assurance about the subject matter.
D. It is intended to provide a level of assurance to be issued by a professional accountant about
the information of being in conformity, in all material respects, with suitable criteria.
143. In audit engagements wherein the auditor lacks the expertise of the industry being audited, he
should:
A. Acquire the services of a financial expert who is familiar with the nature of the business.
B. Decline the engagement.
C. Obtain sufficient knowledge about the industry.
D. Have another auditor who would serve as the principal auditor.
144. The work is to be properly planned and assistants, if any should be properly supervised that
A. Early appointment of auditor is advantageous.
B. Substantial part of the audit should be performed at interim dates.
C. The auditor should not accept an engagement after the close of the fiscal year.
D. The auditor should not accept an engagement subsequent to the physical count of inventories.
145. TIGASIN Corporation has engaged Jerry Mae, CPA, to issue a report on the accuracy of
product quality specifications included in trade sales agreements. This is an example of a(n):
A. Attestation service C. Compliance audit
B. Financial statement audit D. Operational audit
146. The report is required to state whether the financial statements are in accordance with GAAP or
not. How is this statement interpreted?
A. As an objective measure of compliance.
B. As a statement of fact.
C. As an implication that the financial statements are fairly presented.
D. As an opinion.
147. Philippine Standards on Auditing (PSAs) should be looked upon practitioners as:
A. Ideals to strive for, but which are not achievable.
B. Maximum standards which denote excellent work.
C. Benchmark to be used on all audits, reviews and compilations.
D. Minimum standards of performance which must be achieved on each audit engagement.
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148. S1: The attest function includes the preparation of a report of the CPAs findings:
S2: The essence of the attest function is to determine the accuracy of financial statements.
S3: A CPA should maintain objectivity and be free of conflicts of interest when performing any
professional service.
Which of the above statements is correct?
A. S2 only B. S2 and S3 only C. S1 and S3 D. S3 only
149. Which of the following may be used to reduce the risk of non sampling errors?
A. Increasing the size of audit samples C. Adequately planning audit samples
B. Stratifying audit samples D. Using statistical sampling techniques
150. Documentation is a form of evidence
A. Used in every financial statement audit
B. Used in most financial statement audit
C. Used on the rate occasions when it is both readily available ad less costly than other
procedures
D. Used when nothing is available that is more competent

151. In the audit of revenue and expense accounts, extensive tests of details rather than analytical
procedures are appropriate when:
A. control risk is below maximum. C. transaction volume is high.
B. analytical procedures reveal nothing unusual. D. an account requires special attention.
152. Which of the following circumstances would qualify as subsequent discovery of facts that
existed at the date of the auditor's report?
A. A material lawsuit against the client, properly accounted for in the financial statements,
concluded with a judgment in the client's favor ten days after the date of the auditor's report.
B. The client entered into negotiations to acquire another company five days after the date of
the auditor's report. The acquisition was completed 45 days later.
C. Related party transactions in the year under audit involving the client and a major customer
were discovered 15 days after the date of the auditor's report.
D. A tornado destroyed client's headquarters building two days after the date of the auditor's
report.
153. "As described in Note 5 to the financial statements, General Express changed its statistical
method of computing product warranty expense for the year ended December 31, 2007..." is an
illustration of a
A. consistency change requiring a qualified opinion.
B. scope limitation.
C. departure from GAAP.
D. report with a consistency modification.
154. If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a
material effect on the financial statements, the auditor would issue a(n)
A. "Except for" opinion. C. Adverse opinion.
B. Unqualified opinion. D. Disclaimer of opinion
155. When a question arises about an entity's continued existence, the auditor should consider
factors tending to mitigate the significance of contrary information concerning the entity's alternative
means for maintaining adequate cash flow. An example of such a factor is the
A. Possibility of purchasing certain assets rather than leasing them.
B. Capability of extending the due dates of existing loans.
C. Feasibility of operating at increased levels of production.
D. Marketability of property and equipment that management plans to keep.

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