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CEBU CPAR CENTER

Mandaue City, Cebu

AUDITING THEORY
FIRST PREBOARD EXAMINATION

INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING.

MARK THE LETTER OF YOUR CHOICE WITH A VERTICLE LINE ON THE ANSWER
SHEET PROVIDED. STRICTLY NO ERASURES ARE ALLOWED.

1. The current period’s auditor who did not audit the prior period’s financial statements.
a. Existing auditor c. Incoming auditor
b. Continuing auditor d. Predecessor auditor

2. They are not presented as complete financial statements capable of standing alone,
but are an integral part of the current period financial statements intended to be read
only in relationship to the current period figures.
a. Corresponding figures c. Prior period figures
b. Comparative financial statements d. Comparatives

3. Comprises officers and others who also perform senior managerial functions.
a. Management c. Audit committee
b. Governance d. Board of directors

4. It exists when other information, not related to matters appearing in the audited
financial statements, is incorrectly stated or presented.
a. Material inconsistency c. Material weaknesses
b. Material misstatement of fact d. Misstatement

5. A document, ordinarily issued by an entity on an annual basis, which includes its

financial statements together with the audit report thereon.
a. Environmental performance report c. Special purpose audit report
b. Annual report d. Prospectus

6. When the professional accountant has obtained sufficient appropriate evidence to be

satisfied that the subject matter is plausible in the circumstances, he or she can provide
what level of assurance?
a. None c. Moderate
b. High d. Absolute

7. Which statement is correct regarding assurance engagements?

a. The objective of an assurance engagement is for a professional accountant to
evaluate or measure a subject matter that is the responsibility of another party
against identified suitable criteria, and to express a conclusion that provides the
intended user with a level of assurance about that subject matter.
b. All engagements performed by professional accountants are assurance
engagements.
c. Whether a particular engagement is an assurance engagement will depend upon
whether it exhibits all the following elements - a three party relationship, a subject
matter, suitable criteria and a conclusion.
d. All engagements undertaken by an auditor that is similar to an agreed-upon
procedures engagement does not result in the expression of a conclusion that
provides a level of assurance.

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8. There are fundamental principles that the professional accountant has to observe when
performing assurance engagements. The requirement of which principle is of particular
importance in an assurance engagement in ensuring that the conclusion of the
professional accountant has value to the intended user?
a. Integrity c. Confidentiality
b. Professional competence d. Objectivity

9. According to PSA 120, which of the following is an appropriate combination of

procedures required in completing a review engagement?
a. Inquiry and observation
b. Inquiry and analytical procedures
c. Analytical procedures and inspection
d. Observation and analytical procedures

10. Which statement is correct regarding related services?

a. Related services comprise reviews, agreed-upon procedures and consultancy.
b. Audits and reviews are designed to enable the auditor to provide high level
assurance.
c. Engagement to undertake agreed-upon procedures is not intended to enable the
auditor to express assurance.
d. In a consultancy engagement, the accountant is engaged to use accounting
expertise as opposed to auditing expertise to collect, classify and summarize
financial information.

11. Which of the following is least likely an application of maintaining an attitude of

professional skepticism?
a. The auditor does not consider representations from management as substitute for
obtaining sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion.
b. In planning and performing an audit, the auditor assumes that management is
dishonest.
c. The auditor is alert to audit evidence that contradicts or brings into question the
reliability of documents or management representations.
d. The auditor makes a critical assessment, with a questioning mind, of the validity of
audit evidence obtained.

12. The auditor’s opinion

a. Guarantees the credibility of the financial statements.
b. Is an assurance as to the future viability of the entity.
c. Is not an assurance as to the efficiency with which management has conducted the
affairs of the entity.
d. Certifies the correctness of the financial statements.

13. Which of the following factors are essential to an effective internal auditing
organization?
I. Operating responsibility III. Objectivity
II. Organizational status IV. Authority over operations
a. I and II. c. II and III.
b. III and IV. d. I and IV.

14. When an independent auditor decides that the work performed by internal auditors may
have a bearing on the nature, timing, and extent of contemplated audit procedures, the
independent auditor should plan to evaluate the objectivity of the internal auditors.
Relative to objectivity, the independent auditor should
a. Consider the qualifications of the internal audit staff.
b. Consider the organization level to which internal auditors report the results of their
work.
c. Review the quality control program in effect for the internal audit staff.
d. Examine the quality of the internal audit reports.

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15. The objective of the attest function is to

a. Ascertain the consistent application of GAAP.
b. Determine the validity of the transactions examined.
c. Express an opinion on the fairness of the financial statements.
d. Detect fraud.

16. Operational auditing is mainly concerned about:

a. Past protection provided by current internal control
b. Future improvements for management goals
c. Verification of fair presentation of financial data
d. Accuracy of data of financial records.

17. The independent auditor’s responsibility in a regular audit is to express an opinion on

the financial statements. The auditor’s opinion:
a. Helps the company adopt sound accounting policies.
b. Assists the company in maintaining an adequate and effective system of accounts.
c. Helps establish the credibility of the financial statements.
d. Helps management safeguard the company assets.

18. When a CPA expresses an opinion on the financial statements, his responsibilities
extend to
a. The underlying wisdom of the client’s management decision.
b. Active participation in the implementation of the advice given to the client.
c. An ongoing responsibility for the client’s solvency.
d. Whether the results of the client’s operating decisions are fairly presented in the
financial statements.

19. Usually in a publicly held company, this committee is tasked to see that both
management and outside auditor effectively discharge their responsibilities:
a. Executive committee. c. Management committee.
b. Internal audit committee. d. Audit committee.

20. Auditors of the Commission on Audit perform the role of

a. Internal auditors. c. Management accountants.
b. Independent auditors. d. Financial consultants.

21. Governmental effectiveness (program) auditing seeks to determine whether the desired
results are being achieved and objectives are being met. The first step in the
performance of such an audit would be:
a. Identify the legislative intent of the program being audited.
b. Evaluate the system used to measure results.
c. Determine the sampling frame to use in studying the system.
d. Collect and analyze quantifiable data.

22. Which statement is incorrect regarding the pronouncements of ASPC?

a. The exposure period allowed for each exposure draft of PSA and PAPS to be
considered by the organizations and persons to whom it is sent for comment is
generally three months.
b. Each final standard, interpretation and statement shall be submitted to the PRC
through the BOA for approval after which the pronouncements become operative 6
months from publication in the official gazette.
c. The Interpretations will have the same authority as the PSAs.
d. PSAs issued by ASPC are not the only authoritative source of auditing standards for
members of the accountancy profession in the Philippines.

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23. Which of the following is a correct statement?

a. ASPC should normally expose a proposed interpretation of statements.
b. ASPC should normally expose its opinion on specific queries from a practicing CPA.
c. When it is deemed necessary to expose for a comment on proposed interpretations
of statements, the exposure period is understandably shorter than those of the
regular drafts of standards.
d. To make the statements on Philippine Standards on Auditing operative, the final
statement shall be submitted to the Board of Accountancy for approval.

24. A CPA may practice under a firm name that include or indicates
a. Name(s) of past partner(s) in firm name of successor partnership.
b. Fictitious name.
c. Specialization.
d. Misleading as to the type of organization.

25. Emong and Bobads, CPAs, organized a partnership for the practice of public
accounting. Which of the following is the best name for the firm?
a. Emong and Bobads, CPAs.
b. Emong and Bobads, Inc.
c. Emong and Bobads, Auditors and Tax Consultants.
d. Emong and Bobads, Members, PICPA.

26. Under this mode of billing for audit services, the client actually does not know in advance
how much will be cost of audit engagement
a. Retainer basis. c. Flat sum basis.
b. Maximum fee basis. d. Per diem basis.

27. The objectives of the Philippine Accountancy Act of 2004 are the following, except:
a. Standardization and regulation of accounting education.
b. Integration of accountancy profession.
c. Examination for registration of certified public accountants.
d. Supervision, control and regulation of the practice of accountancy.

28. Which of the following is the least function of the Board of Accountancy?
a. Determination of the minimum requirements leading to the admission of candidates
to the CPA examinations.
b. Regulation of the practice of accountancy.
c. Supervision over the accredited professional organization of CPAs.
d. Preparation of the contents of the CPA licensure examinations and rating of the
examination papers.

29. A CPA certificate is evidence of

a. Independence as a professional.
b. Basic competence at the time of certification.
c. Membership in the accredited association.
d. Completion of continuing professional education program.

30. The following statements relate to RA 9298. Which statement is true?

a. The Professional Regulation Commission has the authority to remove any member of
the Board of Accountancy for negligence, incompetence, or any other just cause.
b. Insanity is not a ground for proceeding against a CPA.
c. A person shall be considered to be in the professional practice of accounting if, as an
officer in a private enterprise, he makes decisions requiring professional accounting
knowledge.
d. After three years, subject to certain conditions, the Board of Accountancy may order
the reinstatement of a CPA whose certificate of registration has been revoked.

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31. Individual CPAs, Firms or Partnerships of CPAs, including partners and staff members
thereof shall register with the BOA and the PRC. If the application for registration of AB
and Co., CPAs was approved on August 30, 2005, the registration will expire on
a. Sept. 30, 2007 c. Dec. 31, 2007
b. Dec. 31, 2008 d. Aug. 30, 2007

32. No person shall serve the Professional Regulatory Board of Accountancy for more than
a. 3 years b. 6 years c. 9 years d. 12 years

33. The following are represented both to the Financial Reporting Standards Council
(FRSC) and Auditing and Assurance Standards Council (AASC), except
a. Bangko Sentral ng Pilipinas c. Securities and Exchange Commission
b. Bureau of Internal Revenue d. Board of Accountancy

34. Which of the following is not a requisite in applying for the CPA licensure
examinations?
a. Natural-born citizen of the Philippines.
b. Good moral character.
c. Holder of the degree of Bachelor of Science in Accountancy.
d. Has not been convicted of any criminal offense involving moral turpitude.

35. Are the following CPAs required to comply with the requirements on continuing
professional education?
a b c d
• CPAs in Public Accountancy Yes Yes Yes Yes
• CPAs in Commerce and Industry Yes Yes No No
• CPAs in Education/Academe Yes Yes Yes No
• CPAs in Government Yes No Yes No

36. In order to maintain PICPA’s recognition as the Accredited National Professional

Organization of CPAs, it must have a credible plan to enlist into active membership at
least a majority of the CPAs in the practice of accountancy within how many years?
a. 3 years b. 5 years c. 6 years d. 10 years

37. How many CPE credit units must be accumulated by a registered accounting
professional within the 3-year period?
a. 15 credit units b. 45 credit units c. 60 credit units d. 90 credit units

38. If the firm is involved in the preparation of accounting records or financial statements
and those financial statements are subsequently the subject matter of an audit
engagement of the firm, this will most likely create
a. Self-interest threat c. Intimidation threat
b. Self-review threat d. Familiarity threat

39. The provision of services by a firm or network firm to an audit client that involve the
design and implementation of financial information technology systems that are used to
generate information forming part of a client’s financial statements may most likely
create
a. Self-interest threat c. Intimidation threat
b. Self-review threat d. Familiarity threat

40. Jang, a CPA, has a law practice. Jang has recommended one of his clients to Geum, a
CPA. Geum has agreed to pay Jang 10% of the fee for services rendered by Geum to
Jang’s client. Who, if anyone, is in violation of the Code of Ethics?
a. Both Jang and Geum c. Neither Jang and Geum
b. Jang only d. Geum only

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41. Immediate family includes

a. Parent c. Non-dependent child
b. Sibling d. Spouse

42. The network firms are required to be independent of the client

a. For assurance engagements provided to an audit client.
b. For assurance engagements provided to clients that are not audit clients, when the
report is not expressly restricted for use by identified users.
c. For assurance engagements provided to clients that are not audit clients, when the
assurance report is expressly restricted for use by identified users.
d. All of the above.

43. The approach to a potential client for the purpose of offering professional services.
a. Advertising c. Promotion
b. Publicity d. Solicitation

44. Which of the following will least likely create a threat to independence?
a. A member of the assurance team, partner or former partner of the firm has joined
the assurance client.
b. Deposits made by, or brokerage accounts of, a firm or a member of the assurance
team with an assurance client that is a bank, broker or similar institution, provided
the deposit or account is held under normal commercial terms.
c. Arrangements to combine one or more services or products of the firm with one or
more services or products of the assurance client and to market the package with
reference to both parties.
d. Family and personal relationships between a member of the assurance team and a
director, an officer or certain employees.

45. The CPA profession deemed it necessary to establish a Code of Ethics and a
mechanism to its enforcement because
a. An ethical code that stresses the CPA's responsibility to clients and colleagues is a
prerequisite to success.
b. A requirement of law provides that CPAs establish a code of ethics.
c. Acceptance of responsibility to the public is a distinguishing mark of a profession.
d. The establishment of flexible ethical standards provides self-protection for CPAs.

46. Which of the following is prohibited by the Code of Professional Ethics for CPAs?
a. Use of a firm name which includes the name of a retired partner.
b. Announcement in a newspaper of the opening of a public accounting office.
c. Engaging in civic activities during business hours.
d. Accepting an engagement or employment which one cannot reasonably expect to
complete or discharge with professional competence.

47. The Code of Professional Ethics states, in part, that a CPA should maintain integrity and
objectivity. Objectivity refers to the CPA's ability to
a. Determine accounting practices that were consistently applied.
b. Maintain an impartial attitude on all matters which come under his review.
c. Determine the materiality of items.
d. Insist on all matters regarding audit procedures.

48. Which of the following is a violation of the code of professional ethics for certified public
accountants?
a. A CPA permits his/her name to be used in a client's advertising as having verified
financial data and/or statistical facts with respect to the client's products.
b. Based on information obtained in an audit, a CPA reports an illegal act of his client to
government authorities.
c. Three years after a partner has retired, the remaining partners continue to practice
under a firm name that includes the name of the retired partner. The retired partner
has severed all connections with the CPA firm.

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d. A CPA running for public office uses the professional designation "CPA" after his
name on posters employed in connection with his election campaign.

49. Which of the following will impair the independence of a CPA in public practice?
a. He has his name and address listed on a one-page section of the telephone book.
b. He obtained a loan from a bank under the normal lending procedures, terms and
requirements of that bank.
c. He holds one share of the client’s capital stock
d. He failed to disclose a client’s departure from GAAP.

50. The CPA should not undertake an engagement if his fee is to be based upon
a. A percentage of audited net income.
b. Per diem rates plus expenses.
c. The findings of a tax authority.
d. The complexity of the service rendered.

51. The work of each assistant needs to be reviewed by personnel of at least equal
competence. Which of the following is not one of the objectives of this requirement?
a. The conclusion expressed are consistent with the result of the work performed and
support the opinion.
b. The work performed and the results obtained have been adequately documented.
c. The objectives of the audit procedures have been achieved.
d. All available evidences have been obtained, evaluate and documented.

52. The following procedures relate to Skills and Competence, except

a. Identify criteria which will be considered in evaluating individual performance and
expected proficiency.
b. Provide procedures for maintaining the firm’s standards of quality for the work
performed.
c. Establish qualifications and guidelines for evaluating potential hirees at each
professional level.
d. Provide, to the extent necessary, programs to fill the firm’s needs for personnel with
expertise in specialized and industries.

53. The term “peer review” refers to:

a. The process of evaluating CPA staff members for promotion to partnership in the
firm.
b. The study and evaluation of a CPA firm’s quality control policies and procedures by
another CPA firm or a team of qualified CPAs.
c. The review of the audit working papers by the audit partner or principal to determine
whether the audit was adequately performed and to evaluate whether the results
are consistent with the conclusions to be presented in the auditor’s report.
d. A study or appraisal by the Board of Accountancy or the duly authorized
representatives of one or more aspects of the professional work of a firm or
partnership engaged in the practice of public accountancy.

54. Under generally accepted auditing standards, which of the following reflects application
of a general standard?
a. The initial planning of the audit engagement.
b. Confirmation of accounts receivable.
c. Completion of an internal control questionnaire.
d. Assignment of audit personnel to continuing professional education programs
conducted by the firm.

55. Which of the following should the auditor likely to do when the application of planned
audit procedures indicates the possible existence of fraud or error?
a. The auditor should resign in order to avoid legal responsibility.
b. He should discuss the matter with the person whom he believes is involved with the
irregularities.

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c. He should consider the potential effect on the financial statements.

d. He should refer the suspected fraud or error to the internal auditor.

56. Examples of risk factors relating to misstatements resulting from fraud least likely
include
a. There is mandatory vacation for employees performing key control functions.
b. A significant portion of management’s compensation is represented by bonuses the
value of which is contingent upon the entity achieving unduly aggressive targets for
operating results, financial position or cash flow.
c. A high degree of competition or market saturation, accompanied by declining
margins.
d. Inability to generate cash flows from operations while reporting earnings and
earnings growth.

57. Specific responses to the auditor’s assessment of the risk of material misstatement
resulting from fraud will vary depending upon the types or combinations of fraud risk
factors or conditions identified, and the account balances, classes of transactions and
assertions they may affect. Specific examples of such responses least likely include:
a. Visit locations or perform certain tests on a surprise or unannounced basis.
b. Request that inventories be counted at interim date.
c. Alter the audit approach in the current year.
d. Seeking additional audit evidence from sources outside of the entity being audited.

58. Which of the following circumstances least likely indicate the possibility of fraud or
error?
a. Unrealistic time deadlines for audit completion imposed by management.
b. Limitation in audit scope imposed by management.
c. Conservative application of accounting principles.
d. Significant difficult-to-audit figures in the accounts.

59. Which statement is incorrect regarding the auditor’s consideration of laws and
regulations in an audit of financial statements?
a. When the auditor becomes aware of information concerning a possible instance of
noncompliance, the auditor should evaluate the possible effect on the financial
statements.
b. If the auditor concludes that the noncompliance has a material effect on the
financial statements, and has not been properly reflected in the financial
statements, the auditor should express a qualified or an adverse opinion.
c. The auditor may withdraw from the engagement when the entity does not take the
remedial action that the auditor considers necessary in the circumstances, even
when the noncompliance is not material to the financial statements.
d. In order to plan the audit, the auditor should obtain a specific understanding of the
legal and regulatory framework applicable to the entity and the industry and how the
entity is complying with that framework.

60. In conducting a fraud investigation the auditor should first:

a. Identify the perpetrators
b. Obtain the facts
c. Obtain a confession
d. Notify a law enforcement agency

61. Generally, the decision to notify parties outside the client's organization regarding an
illegal act is the responsibility of the
a. Independent auditor. c. Outside legal counsel.
b. Management. d. Internal auditors.

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62. Oli Manufacturing, Inc. sought a P2,000,000 loan from Local Lending Corporation.
Local Lending insisted that audited financial statements be submitted before granting
credit. Oli agreed. An audit was performed by an independent auditor who submitted
an audit report to Oli that was to be used solely for the purpose of negotiating a loan
from Local. Local, upon reading the audited financial statements, decided in good faith
not to extend the credit desired. Certain ratios, used routinely by Local in reaching
credit decisions, were judged insufficient. Oli used copies of the audited financial
statements to obtain credit elsewhere. Despite complying with Philippine Standards on
Auditing, the independent auditor failed to discover a sophisticated embezzlement
scheme perpetrated by Oli's chief financial officer. The auditor is liable to
a. Third parties who relied on the audited financial statements to extend credit.
b. Oli to repay the audit fee because Local did not extend credit.
c. Oli for any losses Oli suffered as a result of failing to discover the embezzlement.
d. None of the parties.

63. A public accounting firm’s primary role in performing nonattest services is to:
a. Hedge against declines in the firm’s audit practice.
b. Establish the firm as a consultant.
c. Provide advice valuable to the client’s effectiveness.
d. Acclimate staff members to the client’s business and industry.

64. Prior to acceptance of the engagement, the successor auditor is required to

a. Obtain the prospective client’s signature on the engagement letter.
b. Prepare a memorandum setting forth the staffing requirements and documenting
the preliminary audit plan.
c. Make inquiries of the predecessor auditor after obtaining the consent of the
prospective client.
d. Discuss the management representation letter with the prospective client’s audit
committee.

65. A well-established CPA firm establishes quality control policies and procedures for
deciding whether or not to accept or continue serving a client. The primary purpose for
establishing such quality control is
a. To enable the auditor to attest to the reliability of a client.
b. To minimize the likelihood of associating with clients whose management lacks
integrity.
c. To comply with standards established within the industry.
d. To lessen exposure to litigation for failure to detect fraud or embezzlement.

66. If a CPA was asked in March 2006 to audit a company’s financial statements for the
year ended December 31, 2005, the CPA:
a. Should not accept the engagement since he was not able to observe the inventory
taking as of December 31, 2005.
b. May accept the engagement provided he will be able to perform an adequate
examination and to express a possible qualified opinion, if necessary.
c. Should not accept the engagement because generally accepted auditing standards
require that a CPA be engaged before the client’s year end.
d. May accept the engagement provided the company assures him that he will be able
to give an unqualified opinion.

67. This statement is least likely to appear in an auditor’s engagement letter.

a. After performing our preliminary analytical procedures we will discuss with you the
other procedures we consider necessary to complete the engagement.
b. During the course of our audit we may observe opportunities for economy in, or
improved controls over your operations.
c. Our engagement is subject to the risk that material errors or irregularities, including
fraud and defalcations, if they exist, will not be detected.
d. Fees for our services are based on our regular per diem rates, plus travel and other
out-of-pocket expenses.

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68. Which of the following is incorrect about the standard audit report?
a. The opinion paragraph of an auditor’s report on financial statements refers to
generally accepted accounting principles.
b. The consistent application of accounting principles is implicitly represented in the
standard auditor’s report on comparative financial statements.
c. Examination of evidence on a test basis is explicitly represented in the standard
auditor’s report.
d. The auditor’s responsibility for the financial statements is explicitly represented in
the opening paragraph of the auditor’s standard audit report.

69. When financial statements are audited by an accounting firm, the partner-in-charge of
engagement ordinarily signs in the name of the firm because:
a. The partner-in-charge of engagement should be relieved of any responsibility
regarding the opinion issued.
b. It is required by reporting standards.
c. The firm assumes responsibility for the audit.
d. The opinion becomes more credible if signed in name of the firm.

70. An auditor completed fieldwork on February 10, 2006 for a December 31, 2005 year-
end client. A significant subsequent event occurred on February 22, 2006. In this
case, which of the following report dates would not be appropriate?
a. February 10, 2006.
b. February 10, except Note 1, February 22, 2006.
c. February 22, 2006.
d. December 31, 2005.

71. An auditor concludes that there is substantial doubt about an entity's ability to continue
as a going concern. If the entity's disclosures about continued existence are adequate,
the audit report should include
A disclaimer of opinion A qualified opinion
a. Yes Yes
b. No No
c. No Yes
d. Yes No

72. ABC Farms, Inc. a Manila-based company has a subsidiary at Zamboanga City. A CPA
has completed his examination of the consolidated financial statements prepared by the
client ABC Farms. Because of his prior commitments, the CPA did not examine the
financial statements of the Zamboanga subsidiary, but he did receive the unqualified
opinion of another CPA on the subsidiary's statements. The procedures used by ABC
Farms to prepare the consolidated statements have been reviewed and approved.
The principal CPA wishes to accept full responsibility for his opinion on consolidated
statements. He has made sufficient review of the work of the other accountant to justify
his accepting full responsibility for the work of the other CPA.
a. The principal CPA may express an unqualified opinion on the consolidated
statements where there has been utilization of the report of another CPA, provided
that the report of the other CPA is attached.
b. The principal CPA need make no reference to the other CPA in either the scope or
opinion paragraph of the report on the consolidated statements.
c. The principal CPA can issue an unqualified opinion as to the unconsolidated parent
whose examination he conducted, but must qualify his opinion on the consolidated
statements, as stated in the GAAS concerning the scope of the examination.
d. Under these circumstances, the principal CPA must refer to the other CPA in the
scope or middle paragraph and state that he assumes full responsibility for the work
of the other CPA. His opinion may then be unqualified.

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73. Wowie, CPA, was about to issue an unqualified opinion on the financial statements of
Stampede Company when a letter was received from Stampede's independent
counsel. The letter stated that the NTC has notified Stampede that its broadcasting
license will not be renewed because of alleged irregularities in its broadcasting
practices. Stampede cannot continue to operate without the license. Wowie has also
learned that Stampede and its independent counsel plan to take all necessary legal
action to retain the license. The letter from independent counsel, however, states that
a favorable outcome of any legal action is highly uncertain. On the basis of this
information, what action should Wowie take?
a. Issue an unqualified opinion, with an explanatory paragraph that describes the
matter giving rise to the uncertainty.
b. Issue an adverse opinion and disclose all reasons why.
c. Issue a piecemeal opinion with full disclosure made of the license dispute in a note
to the financial statements.
d. Issue an unqualified opinion if full disclosure is made of the matter in a note to the
financial statements.

74. Identify the appropriate type of opinion to issue when the auditor is satisfied that there
is a remote likelihood of a loss resulting from the resolution of an uncertainty.
a. Unqualified opinion.
b. Unqualified opinion with a separate explanatory paragraph.
c. Qualified opinion or disclaimer of opinion, depending on whether the uncertainty is
adequately disclosed.
d. Qualified opinion or disclaimer of opinion, depending upon the materiality of the
loss.

75. Circumstances which make it impracticable to apply the necessary audit procedures:
a. Does not have to be addressed in the standard audit report provided this is agreed
upon
b. Requires changes in the audit report
c. Will not permit the auditor to issue any audit report
d. Requires that the financial statements items not examined be included in
management’s representation letter.

76. Under which of the following circumstances may a CPA agree with a departure from a
Philippine Financial Reporting Standard?
a. When the Standard was one formulated by the Accounting Standards Council
(ASC) inasmuch as the ASC is no longer the standard-setting body.
b. When the CPA can demonstrate that application of the principle in question would
make the financial statements materially misleading.
c. When the disputed principle is contrary to industry practice.
d. When adoption of the principle would cause the financial statements to be
inconsistent with prior years.

77. When a new audit report is issued on financial statements because of subsequent
discovery of material misstatements on previously issued financial statements, the
audit report should include
a. No modification.
b. Qualified opinion because of scope limitation.
c. Qualified opinion because of inadequate disclosure.
d. Emphasis of a matter paragraph referring to a note to the financial statements that
more extensively discusses the reason for the revision of the previously issued
financial statements.

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78. Which of the following is least considered a scope limitation in an audit engagement?
a. The auditor is unable to carry out an audit procedure believed to be desirable.
b. The timing of auditor’s appointment is too late which results to inability of the auditor
to perform prescribed procedures.
c. The audit engagement requires an audit of balance sheet only.
d. The entity’s accounting records are inadequate.

79. The auditor’s report would have to note an inconsistency of a client’s accounting
principles in which of the following situations?
a. During the client’s first year of operations, it began using weighted average, but
changed to FIFO after six months, and finished their first year with their financial
statements using FIFO.
b. Client’s previous year’s financial statements valued inventory using weighted
average, while the current statements used FIFO.
c. During the previous year the client, a privately-held company which did not publish
its financial statements and was not audited, valued inventory using weighted
average. This year it changed to FIFO. The amount of the inventory was
immaterial in both years using either method.
d. All of the foregoing situations would require the auditor’s report to note the
inconsistency.

80. A CPA engaged to examine financial statements observes that the accounting for a
certain material item is not in conformity with generally accepted accounting principles,
and that this fact is prominently disclosed in a footnote to the financial statements. The
CPA does not agree with this departure from GAAP and should
a. Not allow the accounting treatment for this item to affect the type of opinion because
the deviation from generally accepted accounting principles was disclosed.
b. Express an unqualified opinion and add an explanatory paragraph emphasizing the
matter by reference to the footnote.
c. Qualify the opinion because of the deviation from generally accepted accounting
principles.
d. Disclaim an opinion.

- end of examination-
Good Luck!

AT-3rdBatch-1stPB