Auditing Theory

Comprehensive
EXERCISES - AUT

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

a. The pronouncements of the ASPC on auditing standards, practices and procedures shall be in the form of PSA,
Interpretations and IAPS.
b. An auditor may judge it necessary to depart from a PSA in order to more effectively achieve the objective of an audit.
c. The Interpretations will have the same authority as the PSAs.
d. PAPS are not intended to have the authority of the Interpretations.

2. The auditor who audited and reported on the prior period's financial statements and continues as the auditor for the
current period.
a. Existing auditor c. Incoming auditor
b. Continuing auditor d. Predecessor auditor

3. Which of the following best describes high level of assurance?

a. It refers to the professional accountant having obtained sufficient external and internal appropriate evidence to be
satisfied that the subject matter is plausible in the circumstances.
b. It refers to the professional accountant having obtained sufficient appropriate evidence to conclude that the subject
matter conforms in all material respects with identified suitable criteria.
c. It refers to the professional accountant having obtained sufficient evidence to conclude that he has no knowledge of
any required modifications to be made in the financial statements in order for them to conform of prescribed criteria.
d. It refers to the professional accountant having obtained evidence based on procedures agreed upon between the
practitioner and the intended users to be satisfied that findings be reported to the intended users.

4. Which statement is incorrect regarding assurance engagement risk?

a. Engagement risk is the risk that the practitioner will express an inappropriate conclusion that the subject matter
conforms in all material respects with suitable criteria.
b. Not all components of the engagement risk model will be significant for all assurance engagements.
c. The extent to which the practitioner considers the relevant components of engagement risk will be affected by the
engagement circumstances.
d. Business risk is a part of engagement risk and affects the application of Philippine Standard on Assurance
Engagements.

5. In which of the following situations can third parties assume responsibility of the auditor regarding association with
financial information?
a. When the auditor was engaged to report on that information.
b. When the auditor refuses to the use of the auditor's name in a professional connection.
c. Either a or b.
d. Neither a nor b.

6. Which of the following is least likely an application of maintaining an attitude of professional skepticism?
a. The auditor makes a critical assessment, with a questioning mind, of the validity of audit evidence obtained.
b. The auditor is alert to audit evidence that contradicts or brings into question the reliability of documents or
management representations.
c. In planning and performing an audit, the auditor assumes that management is dishonest.
d. 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.

7. The audit engagement letter would least likely include reference to:
a. Unrestricted access to whatever records, documentation and other information requested in connection with the
audit.
b. The scope of the audit, including reference to applicable legislation, regulations, or pronouncements of professional
bodies to which the auditor adheres.
c. Any further agreements between the auditor and the client.
d. The form of any reports or other communication of results of the engagement.

8. Which of the following is least likely a factor that affects the extent of quality control procedures?
a. The size of the firm. c. The number of practice offices.
b. The type of clients that the firm serves. d. The nature of the practice.

9. Working papers least likely

a. Assist in the planning and performance of the audit.
b. Assist in the supervision and review of the audit work.
c. Prevent misunderstandings with respect to the engagement.
d. Record the audit evidence resulting from the audit work performed to support the auditors opinion.

10. Which statement is incorrect regarding the auditors responsibility to consider fraud and error in the audit of financial
statements?
a. The auditor should consider the risk of material misstatements in the financial statements resulting from fraud or
error.
b. The auditor is not and cannot be held responsible for the prevention of fraud and error.
c. The risk of not detecting a material misstatement resulting from error is lower than the risk of not detecting a material
misstatement resulting from fraud.
d. The auditor is not entitled to accept records and documents as genuine.

11. Which of the following is least likely a fraud risk factor?

a. There is a high turnover of management, counsel or board members.
b. Management displays a significant disregard for regulatory authorities.
c. Management continues to employ ineffective accounting, information technology or internal auditing staff.
d. Management continues to employ effective accounting, information technology or internal auditing staff.

12. Which of the following circumstances least likely indicate the possibility of fraud or error?
a. Management engages in frank communication with appropriate third parties, such as regulators and bankers.
b. Evidence of an unduly lavish lifestyle by officers or employees.
c. Aggressive application of accounting principles.
d. Significant differences from expectations disclosed by analytical procedures.

13. Which statement is incorrect regarding the auditors consideration of laws and regulations in an audit of financial
statements?
a. 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.
b. When the auditor becomes aware of information concerning a possible instance of noncompliance, the auditor
should evaluate the possible effect on the financial statements.
c. 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.
d. 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.
14. Governance is the term used to describe the role of persons entrusted with the supervision, control and direction of an
entity. Which of the following is primarily responsible for corporate governance of corporations covered by the SEC
Code of Corporate Governance and banks?
a. Audit Committee c. Chief executive officer
b. Board of Directors d. Stockholders

15. Which of the following is not a component of audit planning?

a. Developing audit programs.
b. Observing the client's annual physical inventory taking and making test counts of selected items.
c. Making arrangements with the client concerning the timing of audit field work and use of the client's staff in
completing certain phases of the examination.
d. Obtaining an understanding of the business.

16. A knowledge of the business is a frame of reference within which the auditor exercises professional judgment. This
assists the auditor in carrying out the following objectives:
I. Assessing risks and identifying problems.

II. Evaluating audit evidence.

III. Providing better service to the client.

IV. Planning and performing the audit effectively and efficiently.

a. I, II, III and IV b. I, II and IV c. I and Iv d. I only

17. An understanding of the clients business and industry and knowledge about the companys operations are essential
for doing an adequate audit. For a new client, most of this information is obtained
a. From the predecessor auditor. c. From the permanent file.
b. From the SEC. d. At the clients premises.

18. 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
refers to
a. Business risk c. Information risk
b. Audit risk d. Risk assessment

19. Which statement is incorrect regarding the application of internal control components to small entities?
a. Those charged with governance in small entities may not include an independent or outside member.
b. Risk assessment process is likely to be less formal and less structured in small entities than in larger ones.
c. Information systems and related business processes relevant to financial reporting in small entities are likely to be
less formal than in larger entities, but their role is just as significant.
d. Ongoing monitoring activities of small entities are more likely to be formal and are typically performed as a part of the
overall management of the entitys operations.

20. Which of the following conditions and events least likely indicate the existence of risks of material misstatement?
a. Changes in the supply chain.
b. Expanding into new locations.
c. Inquiries into the entitys operations or financial results by regulatory or government bodies.
d. Consistency of the entitys IT strategy and its business strategies.

21. The auditor should perform which of the following as risk assessment procedure?
a. Analytical procedures c. Recalculation
b. Confirmation d. Reperformance
22. Which of the following statements about materiality is incorrect?
a. The assessment of what is material is a matter of professional judgment.
b. When planning the audit, the auditor should consider what would make the financial statements materially misstated.
c. The assessed level of materiality should not normally be revised by the auditor.
d. Materiality is addressed in the auditors report.

23. Which statement is correct regarding the nature, timing and extent of further audit procedures as a response to the
assessed risks of material misstatement at the assertion level?
a. The higher the auditors assessment of risk, the less reliable and relevant is the audit evidence sought by the auditor
from substantive procedures.
b. All audit procedures can be performed prior to period end.
c. The timing of the audit procedures is of most importance in responding to the assessed risks.
d. Increasing the extent of an audit procedure is effective only if the audit procedure itself is relevant to the specific risk.

24. Which of the following situations will normally result to increase in the extent of audit procedures?
a. Decrease in materiality level.
b. Decrease in the risk of material misstatement.
c. Decrease in the degree of assurance the auditor plans to obtain.
d. All of the above.

25. The auditor may omit test of controls

a. When testing the operating effectiveness of controls would be inefficient.
b. When the auditors risk assessment includes an expectation of the operating effectiveness of controls.
c. When substantive procedures alone do not provide sufficient appropriate audit evidence at the assertion level.
d. Under all circumstances.

26. Which statement is incorrect regarding the nature, timing and extent of tests of controls?
a. The absence of misstatements detected by a substantive procedure does not provide audit evidence that controls
related to the assertion being tested are effective.
b. When there are a number of controls for which the auditor determines that it is appropriate to use audit evidence
obtained in prior audits, the auditor should test the operating effectiveness of those controls at least once in every
third audit.
c. The more the auditor relies on the operating effectiveness of controls in the assessment of risk, the greater is the
extent of the auditors tests of controls.
d. Testing the operating effectiveness of controls is different from obtaining audit evidence that controls have been
implemented.

27. Which of the following shows an inappropriate relationship between the acceptable level of detection risk and the
combined level of inherent and control risk?
Auditors Assessment of
Acceptable level of
Detection Risk__
Medium
1. Inherent Risk Control Risk

Low High
2. Low Medium Higher
3. High Low Lower
4. High Medium Lower

28. Which statement is incorrect regarding the auditors consideration of the entitys internal controls when auditing
financial statements?
a. Not all of the entitys objectives and controls are relevant to the auditors risk assessment.
b. Controls over the completeness and accuracy of information produced by the entity may be relevant to the audit if
the auditor intends to make use of the information in designing and performing further procedures.
c. Obtaining an understanding of an entitys controls is normally sufficient to serve as testing the operating
effectiveness of controls.
d. Obtaining an understanding of internal control involves evaluating the design of a control and determining whether it
has been implemented.

29. Which of the following is likely to be of least importance to an auditor in reviewing the internal control in a company
with a CIS?
a. The segregation of duties within the data processing center.
b. The control over source documents.
c. The cost/benefit ratio of data processing operations.
d. The documentation maintained for accounting applications.

30. A CIS environment least likely affects

a. The procedures followed by the auditor in obtaining a sufficient understanding of the accounting and internal control
systems.
b. The consideration of inherent risk and control risk through which the auditor arrives at the risk assessment.
c. The auditors design and performance of tests of control and substantive procedures appropriate to meet the audit
objective.
d. The overall objective and scope of an audit.

31. When a client auditor uses a report from the auditor of a service organization, the client auditor:
a. Should refer the matter in a separate emphasis of matter paragraph of his auditors report.
b. Should refer the matter by modifying the scope and opinion paragraphs of the auditors report.
c. Should attach the copy of the service organization auditors report to his audit report.
d. Makes no reference in his auditors report on the service organization.

32. The measure of the quantity of audit evidence refers to

a. Sufficiency c. Relevance
b. Appropriateness d. Reliability

33. Which statement is incorrect regarding the audit evidence?

a. The greater the risk, the more audit evidence is likely to be required.
b. The higher the quality, the more may be required
c. Merely obtaining more audit evidence may not compensate for its poor quality.
d. Obtaining audit evidence relating to a particular assertion is not a substitute for obtaining audit evidence regarding
another assertion.

34. An auditor is examining accounts receivable. What is the most competent type of evidence in this situation?
a. Verifying that postings to the receivable account from journals have been made.
b. Receipt by the auditor of a positive confirmation.
c. No response received for a request for a negative confirmation.
d. Interviewing the personnel who record accounts receivable.

35. Which of the following factors is most important in determining the appropriateness of audit evidence?
a. The independence of the source of evidence.
b. The reliability of the evidence in meeting the audit objective.
c. The objectivity of the auditor gathering the evidence.
d. The quantity of the evidence obtained.

36. Which statement is incorrect regarding the auditors attendance at physical inventory counting?
a. Where attendance is impracticable, due to factors such as the nature and location of the inventory, documentation of
the subsequent sale of specific inventory items acquired or purchased after the physical inventory count is an
alternative procedure that may provide sufficient appropriate audit evidence.
b. The auditor would ordinarily observe count procedures and perform test counts.
c. The physical inventory count may be conducted at a date other than period end.
d. The auditor would test the final inventory listing to assess whether it accurately reflects actual inventory counts.
37. The auditor should carry out procedures in order to become aware of any litigation and claims involving the entity
which may have a material effect on the financial statements. Such procedures most likely include examination of
a. Interest expense account c. Repairs and maintenance account
b. Legal expense account d. Other expense account

38. External confirmation of an account receivable least likely provides evidence regarding:
a. Existence b. Rights c. Cutoff d. Valuation

39. In relation to opening balances, which of the following may cause the auditor to disclaim his opinion?
a. The opening balances contain misstatements that could materially affect the current periods financial statements
and such misstatements have not been corrected.
b. The current periods accounting policies have not been consistently applied in relation to opening balances and the
effect of such change is not properly accounted for or disclosed.
c. The inability of the auditor to obtain sufficient appropriate audit evidence concerning opening balances.
d. The assessed substantial doubt about the entitys ability to continue as a going concern as indicated by consistent
negative cash flows.

40. Which statement is incorrect regarding the extent of reliance that the auditor places on the results of analytical
procedures?
a. The auditor may rely solely on analytical procedures for certain income and expense items when they are not
individually material.
b. Other procedures performed by the auditor in reviewing the collectibility of accounts receivable, such as the review
of subsequent cash receipts, might confirm or dispel questions raised from the application of analytical procedures to
an aging of customers' accounts.
c. The auditor will ordinarily expect greater consistency in comparing discretionary expenses, such as research or
advertising, from one period to another than gross profit margins.
d. If control risk is high, more reliance on tests of details of transactions and balances than on analytical procedures in
drawing conclusions on receivables may be required.

41. When sampling for attributes, which of the following would increase sample size?
a b c d

Intended reliance internal controls Increase Increase Decrease Decrease

Tolerable deviation rate Decrease Increase Increase Increase
Expected deviation rate Increase Decrease Decrease Decrease
Risk of assessing control risk too low Decrease Increase Increase Decrease

42. In substantive testing, which of the following would decrease sample size?
a b c d

Assessment of inherent risk Decrease Increase Increase Decrease

Reliance on internal controls Increase Decrease Decrease Increase
Tolerable error Decrease Increase Decrease Increase
Expected error Increase Decrease Increase Decrease
Risk of incorrect acceptance Decrease Increase Decrease Increase

43. In evaluating the assumptions on which the estimate is based, the auditor would least likely pay particular attention to
assumptions which are
a. Reasonable in light of actual results in prior periods.
b. Sensitive to variations.
c. Subjective.
d. Susceptible to material misstatement.

44. Which statement is correct regarding auditing fair value measurements and disclosures?
a. Underlying the concept of fair value measurements is a presumption that the entity is a going concern.
b. Fair value is normally the amount that an entity would receive or pay in a forced transaction, involuntary liquidation,
or distress sale.
c. Discounted cash flow analysis ordinarily is the best evidence of fair value.
d. For items valued by the entity using a valuation model, the auditor is expected to substitute his or her judgment for
that of the entity's management.

45. The auditor needs to be aware of the existence of related parties and transactions between such parties. Which of the
following is the least likely reason?
a. GAAP in the Philippines require disclosure in the financial statements of certain related party relationships and
transactions.
b. Related parties and transactions between such parties are considered unusual features of business.
c. The source of audit evidence affects the auditor's assessment of its reliability.
d. A related party transaction may be motivated by other than ordinary business considerations.

46. When a fact, that existed before the date of the report is discovered and the management revises previously issued
audited financial statements, the following are appropriate except:
a. The new auditors report should contain the original date.
b. A new auditors report should include an emphasis of a matter paragraph that refers to a note to the financial
statements that discusses the reason for the revision of the financial statements and to the earlier report issued by
the auditor.
c. The performance of the procedures that are designed to obtain sufficient evidence as to subsequent events would
ordinarily be extended to the date the revised financial statements are approved by the entitys management.
d. The auditor is permitted to restrict the audit procedures regarding the financial statements to the effects of the
subsequent event that necessitated the revision.

47. Which of the following is not likely an element of management representation letter?
a. The letter is addressed to the auditor.
b. The letter would ordinarily be dated the same date as the auditor's report.
c. The letter would ordinarily be signed by the members of management who have primary responsibility for the entity
and its financial aspects.
d. The letter has opening, scope and opinion paragraphs.

48. Which statement is incorrect regarding management representation?

a. Written representations requested from management may be limited to matters that are considered either
individually or collectively material to the financial statements.
b. Representations by management cannot be a substitute for other audit evidence that the auditor could reasonably
expect to be available.
c. In certain instances, a representation by management may be the only audit evidence which can reasonably be
expected to be available.
d. If a representation by management is contradicted by other audit evidence, the auditor should express qualified
opinion or issue a disclaimer.

49. The auditor should consider whether the auditors own participation is sufficient to be able to act as the principal
auditor. For this purpose, which of the following would be least likely considered?
a. The materiality of the portion of the financial statements which the principal auditor audits.
b. The nature of business of the components.
c. The risk of material misstatements in the financial statements of the components audited by the other auditor.
d. The performance of additional procedures regarding the components audited by the other auditor resulting in the
principal auditor having significant participation in such audit.

50. Certain aspects of internal auditing may be useful to the external auditor in determining:
a b c d

Nature of audit procedures Yes Yes Yes No

Timing of audit procedures Yes No No No
Extent of audit procedures Yes No Yes No

51. When planning to use the work of an expert, the auditor should assess the professional competence of the expert.
This will involve considering the expert's:
I. Professional certification or licensing by, or membership in, an appropriate professional body.
II. Experience and reputation in the field in which the auditor is seeking audit evidence.
III. Relationship to the entity.
a. I, II, III b. I and II c. I and III d. I only

52. Generally, for the auditor to issue an unqualified audit opinion, does each of the following condition need to exist?
I. No significant scope restrictions.
II. All the segments of the financial statements are audited by the auditor.
III. Significant uncertainty about the financial statements does not exist.
IV. The financial statements, including the notes to financial statements, contain no material departure from GAAP.
a. I and II b. I and IV c. I, III and IV d. All of the above

53. Which of the following is least likely a description of audit contained in the scope paragraph of the auditors report?
a. Examining evidence to support the financial statement amounts and disclosures.
b. Assessing the accounting principles used in the preparation of the financial statements.
c. Assessing the significant estimates made by management in the preparation of the financial statements.
d. Evaluating the overall financial statement presentation.

54. When the financial statements of the prior period were not audited, the incoming auditor should:
a. Insist that an audit of prior years financial statements must be made.
b. Not allow the inclusion of the corresponding figures in the financial statements of the current period.
c. Disclaim his opinion and treat the unaudited corresponding figures as basis of scope limitation.
d. Obtain sufficient appropriate audit evidence that the corresponding figures meet the requirements of the relevant
financial reporting framework.

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

56. The auditors report on summarized financial statements should include

a. An opinion as to whether the information in the summarized financial statements is presented fairly, in all material
respects.
b. An opinion as to whether the information in the summarized financial statements is consistent with the audited
financial statements from which it was derived.
c. A statement of negative assurance.
d. A description of the auditors factual findings including sufficient details of errors and exceptions found.

57. The report by an auditor on an examination of prospective financial information least likely contain
a. A statement of negative assurance as to whether the assumptions provide a reasonable basis for the prospective
financial information.
b. An opinion as to whether the prospective financial information is properly prepared on the basis of the assumptions
and is presented in accordance with GAAP in the Philippines.
c. Appropriate caveats concerning the achievability of the results indicated by the prospective financial information.
d. Date of the report which is the date the report has been completed.

58. Which of the following is not a basis of the auditor in determining the specific nature, timing and extent of review
procedures?
a. The extent to which a particular item is affected by management judgment
b. The materiality of transactions and account balances
c. Assessed level of control risk
d. Any knowledge acquired by carrying out reviews of the financial statements for prior periods.

59. Pol, CPA, has significant indirect financial interest on Seral Corporation. Seral Corporation engaged Pol to apply
agreed-upon procedures on accounts receivable and thereafter submit a Report of Factual Findings to a finance
company. According to Philippine Standards on Auditing that applies to this engagement, Pol
 a. Should decline the engagement because of her lack of independence.
b. Should convince Seral Corporation to change the engagement to compilation due to her lack of independence.
c. Perform agreed-upon procedures and withhold the findings due to her lack of independence.
d. Can accept the engagement, issue the Report of Factual Finding and state in the report her lack of independence.

60. The accountant should withdraw from the compilation engagement when
I. The accountant becomes aware that information supplied by management is incorrect, incomplete, or otherwise
unsatisfactory, and management refuses to provide additional information.
II. The accountant becomes aware of material misstatements and appropriate amendments are not made by the
entity and the financial information is considered to be misleading.
a. I and II b. I only c. II only d. Neither I nor II

61. The requirement for bank confirmation arises from the need of the bank's management and its auditors to confirm the
financial and business relationships between the following:
I. The bank and other banks within the same country.
II. The bank and other banks in different countries.
III. the bank and its non-bank customers.
a. I, II and III b. I and III c. I and II d. I only

62. Which of the following is least likely a control that may be built into the application software in order to limit access to
programs and data to authorized personnel?
a. The use of passwords.
b. A written policy of segregation of functions.
c. The use of hidden files and secret file names.
d. The use of cryptography.

63. Special Purpose Terminal used to initiate, validate, record, transmit and complete various banking transactions
a. Automated teller machines c. Intelligent terminal
b. Point of sale devices d. Personal computers

64. Audit procedures in a database environment will be affected principally by

a. The type and significance of financial transactions being processed.
b. The nature of the database, the DBMS, the database administration tasks and the applications.
c. The general CIS controls which are particularly important in a database environment.
d. The extent to which the data in the database are used by the accounting system.

65. Which of the following Philippine Standards on Auditing does not apply to small entities?
a. PSA 220 b. PSA 530 c. PSA 320 d. None of these

66. Which of the following fraud risk factors usually applies to small entities?
a. Management displays a significant disregard for regulatory authorities.
b. There is a strained relationship between management and the current or predecessor auditor.
c. Management is dominated by a single person or a small group without compensating controls such as effective
oversight by those charged with governance.
d. There is a history of securities law violations, or claims against the entity or its management alleging fraud or
violations of securities laws.

67. General CIS controls generally include:

I. Controls over processing and computer data files
II. Organization and management controls
III. Development and maintenance controls
IV. Delivery and support controls
V. Monitoring controls
VI. Controls over input
VII. Controls over output
a. All of the above c. I, II, III, IV and V
b. II, III, IV and V d. II, III and V

68. The applications of auditing procedures using the computer as an audit tool refer to
a. Integrated test facility c. Auditing through the computer
b. Data-based management system d. Computer assisted audit techniques

69. The auditors doing things which management ought to do may most likely create
a. Self-interest threat c. Advocacy threat
b. Self-review threat d. Familiarity threat

70. Which of the following is the most likely reason that prevent management from preparing the auditors requirements?
a. Lack of manpower
b. Adequate financial resources.
c. Highly trained accounting personnel.
d. Failure to attend PICPA seminars.

71. The inability of the client to prepare certain audit requirements may most likely lead the auditor to
a. Withdraw from the engagement.
b. Express qualified opinion or a disclaimer.
c. Express qualified or adverse opinion.
d. Express unqualified opinion with explanatory paragraph.

72. Professional codes of ethics:

a. Are uncommon in professions other than public accounting.
b. Mandate ideal standards of behavior.
c. Are enforceable if based on standards of ideal behavior.
d. Mandate minimum standards of behavior.

73. According to the professions Rules of Conduct, an auditor would be considered independent in which of the following
instances?
a. The auditors checking account is held at a client financial institution.
b. The auditor, an attorney, serves as a clients general counsel.
c. An employee of the auditor serves as the unpaid treasurer of a charitable organization that is an audit client.
d. The client owes the auditor fees for two consecutive years.

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

75. Immediate family includes

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

76. The members of the assurance team 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.

77. Which of the following will least likely create a threat to independence?
a. 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.
b. 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.
c. Family and personal relationships between a member of the assurance team and a director, an officer or certain
employees.
d. A member of the assurance team, partner or former partner of the firm has joined the assurance client.

78. The provision of accounting and bookkeeping services of a routine or mechanical nature to divisions or subsidiaries of
listed audit clients would not be seen as impairing independence with respect to the audit client provided that the
following conditions are met, except
a. The services involve the exercise of judgment.
b. The divisions or subsidiaries for which the service is provided are collectively immaterial to the audit client.
c. The services provided are collectively immaterial to the division or subsidiary.
d. The fees to the firm, or network firm, from such services are collectively insignificant.

79. Which statement is correct regarding the term of office of the chairman and the members of the Board of Accountancy
(BOA)?
a. The Chairman and members of the Board shall hold office for a term of six years.
b. No person who has served two (2) successive complete terms shall be eligible for reappointment until the lapse of
two (2) years.
c. A person may serve the BOA for not more than twelve years.
d. A member of the BOA may continuously serve office for more than nine years.

80. 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

81. Which statement is incorrect regarding CPE requirements for renewal of professional license?
a. The total CPE credit units required for CPAs shall be sixty (60) units for three (3) years, provided that a minimum of
fifteen (15) credit units shall be earned in each year.
b. A registered professional shall be permanently exempted from CPE requirements upon reaching the age of 65 years
old.
c. A registered professional who is working abroad shall be temporarily exempted from compliance with CPE
requirement during his/her stay abroad, provided that he/she is has been out of the country for at least one year
immediately prior to the date of renewal.
d. Those who failed to renew professional licenses for a period of five (5) continuous years from initial registration, or
from last renewal shall be declared delinquent.

82. The APO shall submit its nominations with complete documentation to the Commission not later than _____ prior to
the expiry of the term of an incumbent chairman or member.
a. 30 days b. 60 days c. 90 days d. 120 days

83. Which of the following is not represented in the Auditing and Assurance Standards Council?
a. Board of Accountancy c. Bureau of Internal Revenue
b. Bangko Sentral ng Pilipinas d. Securities and Exchange Commission

84. Which of the following concepts is most useful in assessing the scope of an auditor's program relating to various
accounts?
a. Attribute sampling. c. Materiality.
b. The reliability of information. d. Management fraud.

85. In applying analytical procedures, the auditor discovered that gross profit as a percent of sales declined sharply during
the current year. A possible cause might be
a. A significant quantity of finished goods located in a distant warehouse was inadvertently omitted from the ending
inventory.
b. The client has significant amounts of obsolete inventory carried at full cost.
c. Recorded sales included goods that were shipped the following year.
d. Depreciation of office equipment was overstated.

86. Which of the following is an indicator of possible fraudulent financial reporting for the purpose of inflating earnings?
a. A ratio analysis discloses: (1) sales of P50 million and (2) cost of goods sold of P25 million.
b. A cross-sectional analysis of common size statements discloses: (1) the firm's ratio of cost of goods sold to sales is .
4 and (2) the industry average ratio of cost of goods sold to sales is .5.
c. A cross-sectional analysis of common size statements discloses: (1) the firm's ratio of cost of goods sold to sales is .
5 and (2) the industry average ratio of cost of goods sold to sales is .4.
d. A trend analysis discloses: (1) sales increases of 50 percent and (2) cost of goods sold increases of 25 percent.

87. The element of the audit planning process most likely to be agreed upon with the client before implementation of the
audit strategy is the determination of the
a. Methods of statistical sampling to be used in confirming accounts receivable.
b. Pending legal matters to be included in the inquiry of the client's attorney.
c. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.
d. Schedules and analyses to be prepared by the client's staff.

88. Which of the following models expresses the general relationship of risks associated with the auditor's evaluation of
internal control (CR), study of the business and application of analytical procedures (IR), and overall audit risk (AR),
that would lead the auditor to conclude that additional substantive tests of details of an account balance are not
necessary?
IR CR AR

a. 20% 60% 5%
b. 10% 70% 4.5%
20% 40% 10%
d. 30% 40% 5.5%

89. A letter to the auditor in response to an inquiry is an example of

a. Physical evidence. c. Confirmation evidence.
b. Documentary evidence. d. Analytical evidence.

90. Which of the following would be least likely to be included in an auditors tests of controls?
a. Documentation. c. Confirmation
b. Observation. d. Inquiry.

91. The following are few of the audit procedures taken from an audit program:
A. Confirm accounts payable directly with vendors.
B. Examine vendors invoices and other documentation.
C. Examine the internal auditors initials on monthly bank reconciliations as an indication of whether they have been
reviewed.
D. Compare the balance in payroll tax expense with previous years. The comparison takes the increase in payroll tax
rates into account.

The foregoing audit procedures are classified as Tests of Controls (TOC), Substantive Tests of Transactions (STT),
Analytical Procedures (AP), Tests of Details of Balances (TDB):
a. STT, TDB, AP, TOC. c. STT, STT, TOC, TOC.
b. TDB, STT, TOC, AP. d. STT, STT, TOC, AP.

92. Which of the following is a true statement?

 a. When the financial statements of the prior period have been audited by another auditor, the current auditor must
insist that there would be division of responsibility with respect to audit.
b. When the financial statements of the prior period have been audited by another auditor, the successor auditor must
insist of the financial statements of the prior periods.
c. The extent of audit procedures performed on the corresponding figures is significantly less than for the audit of the
current figures.
d. When the comparatives are presented as corresponding figures, the auditor must specifically refer to the
predecessor in the introductory paragraph of the auditors report.

93. What circumstance(s) would the auditors report make specific reference to the corresponding figures?
I. When the auditors report on the prior period, as previously issued, included a modified opinion and the matter
which gave rise to the modification is unresolved.
II. If the prior period financial statements have not been revised and reissued, and the corresponding figures have
not been properly restated and/or appropriate disclosures have not been made.
III. When the financial statements of prior period were unaudited and the incoming auditor identifies that the
corresponding figures are materially misstated but the management refuses to revise them.
IV. In all cases where the corresponding figures are material to the current financial statements.
a. All the above b. I, II and III c. I, II, V d. II, III and IV

94. Which of the following least likely requires an additional explanatory paragraph in a standard unqualified report?
a. Substantial doubt about going-concern ability of the entity.
b. Emphasis of a matter.
c. Reports involving other auditors.
d. Auditor agrees with change in generally accepted accounting principles.

95. Subsequent to the date of the financial statements as part of his post-balance-sheet date audit procedures, Eddie,
CPA, learned that a recent fire caused heavy damage to one of a clients two plants; the loss will not be reimbursed
by insurance. The newspapers described the event in detail. The client did not disclose the event in the notes to
financial statements. Eddie most likely would express
a. Either a qualified or disclaimer of opinion.
b. Either a qualified or adverse opinion.
c. A disclaimer of opinion.
d. An unqualified opinion because disclosure in the financial statements is no longer necessary since the event was
reported in detail in the newspapers.

96. The 1136 Tenants case was chiefly important because of its emphasis on the legal liability of the CPA when
a. Performing a review of financial statements.

b. An audit results in a disclaimer of opinion.

c. Preparing letters for underwriters.

d. An engagement letter is not obtained.

97. In a common law action against an accountant, the lack of privity is a viable defense if the plaintiff
a. Bases his action upon fraud.
b. Is the accountant's client.
c. Is a creditor of the client who sues the accountant for negligence.
d. Can prove the presence of gross negligence which amounts to a reckless disregard for the truth.

98. Which of the following conditions suggests auditor negligence?

a. Failure to detect errors occurring outside the internal control structure.
b. Failure to detect material errors under conditions of weak internal control.
c. Failure to detect collusive fraud perpetrated by members of middle management.
d. Failure to detect collusive fraud perpetrated by members of top management.
99. Which of the following statements is not true regarding the competence of audit evidence?
a. Relevance is enhanced by an effective information system.
b. To be competent, evidence must be both valid and relevant.
c. Validity is related to the quality of the clients information system.
d. Relevance must always relate to audit objectives.

100. An auditor's report that refers to a departure from generally accepted accounting principles includes the
language, In our opinion, with the foregoing explanation, the financial statements referred to above present fairly ...
This is a/an
a. Adverse opinion.

b. Qualified opinion.

c. Unqualified opinion with an explanatory paragraph.

d. Example of inappropriate reporting.

- end of examination-
Good Luck!