AUDITING THEORY PREWEEK MCQs

1. Which of the following is not a basic element of an audit report?

a. Title of the report. c. Clients address.

b. Introductory paragraph. d. Auditors address.

2. A measure of uniformity in the form and content of the auditors report is

desirable because

a. it helps the auditors avoid legal liability.

b. it helps the readers understand the report.

c. it helps the auditor identify the usual circumstances that are expected to
occur.

d. it makes the auditors more informed of their responsibilities with respect to

audit report.

3. Which of the following is not explicitly included in the opening paragraph of

an audit report?

a. Identification of the financial statements that have been audited.

b. Statement that the financial statements are the responsibility of the

entitys management.

c. Statement that the responsibility of the auditor is to express an opinion on

the financial statements based on his audit.

d. A statement by the auditor that the audit provides a reasonable basis for
the opinion.

4. Where do you find the following sentence? Those standards require that
we plan and perform the audit to obtain a reasonable assurance about
whether the financial statements are free of material misstatements.

a. Introductory paragraph of the auditors report.

b. Scope paragraph of the auditors report.

c. Managements representation letter.

d. Audit program.

5. Whenever an auditor issues an adverse opinion, the implication is that the

auditor a. does not know if the statements are presented fairly. b. does not
believe the statements are presented fairly. c. is satisfied that the statements
are presented fairly except for a specific aspect of them. d. is satisfied that
the statements are presented fairly. 6. When there are multiple uncertainties
that are significant to the financial statements, the auditor may consider it
appropriate to a. withdraw from the engagement. c. disclaim an opinion. b.
issue an adverse opinion. d. issue a qualified opinion. 7. When an auditor
expresses an opinion other than unqualified opinion, a clear description of all
substantive reasons for the modification of the opinion should be included in
the report. This explanation should be presented a. as a separate paragraph
that precedes the opinion paragraph of the audit report. b. as a separate
paragraph, preferably after the opinion paragraph of the audit report. c. in
the opinion paragraph. d. as a separate paragraph in the notes to financial
statements. 8. Which of the following does not warrant a modification of an
unqualified opinion? a. A significant doubt about the ability of the company to
continue as a going concern; such concern is adequately disclosed by the
entity in the notes to financial statements. b. A limitation of the scope of the
audit, the possible effect of which is material to the financial statements. c.
The auditor has disagreement with management regarding the acceptability
of the accounting policies, the effect of which is material. d. The omission of
significant information in the financial statement. 9. An auditors report on
financial statements prepared in accordance with another comprehensive
basis of accounting should include all of the following except a. an opinion as
to whether the basis of accounting used is appropriate under the
circumstances. b. an opinion as to whether the financial statements are
presented fairly in conformity with the comprehensive basis of accounting. c.
reference to the note to the financial statements that describes the basis of
presentation. d. a statement that the basis of presentation is a
comprehensive basis of accounting other than generally accepted accounting
principles. 10. When additional language is added to the auditors report
without modifying the opinion, the additional language should be included in
a. the introductory paragraph. c. the opinion paragraph. b. the scope
paragraph. d. one or more additional paragraphs that follow the opinion
paragraph. 11. When the principal auditor decides to refer to another auditor
in his/her report, the report should always include a. a qualified or adverse
opinion. b. a disclaimer of opinion regarding the financial statements audited
by the other auditor.
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c. the percentage and monetary amounts of the portion of the financial
statements examined by the other auditor. d. reference to a footnote where
the division of responsibility between the principal auditor and the other
auditor is described in detail. 12. Hernandez, CPA, concludes that there is
substantial doubt about JKL Co.s ability to continue as a going concern. If
JKLs financial statements adequately disclose its financial difficulties,
Hernandezs auditors report should Include an explanatory Specifically use
Specifically use paragraph following the words the words the opinion
paragraph Going concern substantial doubt a. Yes Yes Yes b. Yes Yes No c. Yes
No Yes d. No Yes Yes 13. Davis, CPA, believes there is substantial doubt about
the ability of Hill Co. to continue as a going concern for a reasonable period of
time. In evaluating Hills plans for dealing with the adverse effects of future
conditions and events, Davis most likely would consider, as a mitigating
factor, Hills plan to a. accelerate research and development projects related
to future products. b. accumulate treasury stock at prices favorable to Hills
historic price range. c. purchase equipment and production facilities currently
being leased. d. negotiate reductions is required dividends being paid on
preferred stock. 14. A limitation on the scope of an audit sufficient to
preclude an unqualified opinion will usually result when management a. is
unable to obtain audited financial statements supporting the entitys
investment in a foreign subsidiary. b. refuses to disclose in the notes to the
financial statements related-party transactions authorized by the board of
directors. c. does not sign an engagement letter specifying the
responsibilities of both the entity and the auditor. d. fails to correct a
reportable condition committed after the prior years audit. 15. The existence
of audit risk is recognized by the statement in the auditors standard report
that the auditor a. obtains reasonable assurance about whether the financial
statements are free of material misstatement. b. assesses the accounting
principle used and also evaluates the overall financial statement
presentation. c. realizes some matters, either individually or in the aggregate,
are important while other matters are not important. d. is responsible for
expressing an opinion on the financial statements that are the responsibility
of management. 16. An auditor was unable to obtain sufficient competent
evidential matter concerning certain transactions due to an inadequacy in the
entitys accounting records. The auditor would choose between issuing a(n) a.
qualified opinion and unqualified opinion with an explanatory paragraph. b.
unqualified opinion with explanatory paragraph and an adverse opinion. c.
adverse opinion and a disclaimer of opinion. d. disclaimer of opinion and a
qualified opinion. 17. If the auditor believes that the entity will not be able to
continue as a going concern and the financial statements are prepared on a
going concern basis, the auditors report should include a. unqualified opinion
with explanatory paragraph. c. adverse opinion. b. qualified opinion. d.
disclaimer of opinion. 18. 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, and results in a modification of the
auditors report regarding the current period figures a. the auditors report
should be unmodified regarding the corresponding figures. b. the auditors
report should also be modified regarding the corresponding figures. c. the
auditors report does not refer to the previous modification. d. the auditor
should omit the comparatives as corresponding figures. 19. In relation to
comparatives as corresponding figures, which of the following is incorrect? a.
When the prior period financial statements are not audited, the incoming
auditor should state in the auditors report that the corresponding figures are
unaudited. b. The incoming auditor must refer to the predecessor auditors
report on the corresponding figures in the incoming auditors report for the
current period. c. When the financial statements of the prior period were
audited by another auditor, the incoming auditors report should state that
the prior period was audited by another auditor. d. In situations where the
incoming auditor identified that the corresponding figures are materially
misstated, the auditor should request management to revise the
corresponding figures or if management refuses to do so, appropriately
modify the report. 20. If after performing procedures, the auditor is unable to
obtain sufficient, appropriate evidence concerning opening balances, the
auditor may express modified opinion on financial statements during and as
of year end of the current period
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a. b. c. d. either qualified or disclaimer for balance sheet and income
statement. qualified or disclaimer of opinion for balance sheet only. qualified
or disclaimer of opinion for income statement only. no modification.

21. How should generally accepted auditing standards and the Philippine
Standards on Auditing be looked on by CPA practitioners? a. They are
maximum standards that must be complied with. b. They are minimum
standards of performance. c. They are clearly defined guidelines for
determining the extent of evidence to be accumulated. d. They are minimum
specific audit procedures that the auditors are expected to perform. 22. What
is the overriding objective of the International Auditing Standards that are
issued by the International Auditing Practices Committee of the International
Federation of Accountants? a. To improve the uniformity of auditing practices
and related services throughout the world. b. To override a counts
regulations governing the audit of financial statements. c. To replace the
generally accepted auditing standards. d. To provide uniformity of specific
audit procedures that are acceptable worldwide. 23. 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. Reports involving other auditors. c. Emphasis of a matter. d. Auditor
agrees with change in generally accepted accounting principles. 24. Which of
the following requires a modified wording report? a. Substantial doubt about
going-concern problems of the entity. b. Reports involving other auditors. c.
Emphasis of a matter. d. All of the above. 25. Which of the following changes
would affect comparability but not consistency? a. Variations in format and
presentation of financial information. b. Change from FIFO to LIFO inventory
costing. c. Changes in reporting entity, such as the inclusion of a company in
consolidated financial statements. d. Correction of errors involving accounting
principles. 26. When a significant portion of the financial statements have
been audited by other auditors and the principal auditor is not willing to
assume the whole responsibility, the auditor report should include a. modified
wording in the introductory paragraph. b. a modified wording in the
introductory and opinion paragraphs but not on opinion paragraph. c.
modified wordings on the three paragraphs. d. separate paragraph to indicate
a divided responsibilities. 27. Which of the following types of report is mostly
uncommon? a. Adverse report. c. Standard unqualified report with modified
wordings. b. Qualified report. d. Unqualified report. 28. Which of the following
scope limitation that is beyond the auditor and the clients control may
mostly occur on a late engagement? a. Review of bank reconciliation
prepared by client personnel. b. Request for cutoff bank statement. c. Tests of
sales transactions. d. Observation of year-end inventory. 29. In which of the
following type of audit report would omission of scope paragraph is required?
a. An except for opinion due to possible significant effect of a client-imposed
limtation. b. A disclaimer of opinion due to possible significant effect of client-
imposed scope limitation. c. An audit report limited to income statement only.
d. A and B. 30. If the principal auditors report refers to the audit of another
auditor, he is required to disclose the a. name of another auditor. b. portion of
the financial statements audited by the other auditor. c. opinion expressed by
the other auditor and the reason if the opinion is other than unqualified. d.
reason for being unwilling to assume the responsibility for the other auditors
work. 31. Under which of the following circumstances would an unqualified
opinion be entirely appropriate? a. The principal auditor decides to make
reference to the qualified report of another auditor, who audited a subsidiary
b. There are significant uncertainties affecting the financial statements. c.
There has been material effect between periods of the change in the methods
of application of GAAP. d. There has been a material effect of a departure
from generally accepted accounting principle.
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32. Celia, CPA, is auditing Lyka Corporation for the first time. Lyka has been in
the business for several years but has never had an audit before. After the
audit is completed, Celia concludes that the current year balance sheet is
stated correctly in accordance with GAAP. The client did not authorize Celia to
do test work for any of the previous years. Reporting on the current years
financial statements, Celia most likely would express a. Qualified opinion on
the financial statements of Lyka Corporation. b. Unqualified opinion on the
balance sheet and qualified opinion on the income statement. c. Unqualified
opinion on the income statement and qualified opinion on the balance sheet.
d. Unqualified opinion on Lyka Corporations financial statements. 33. Millard,
CPA, is engaged in the audit of the financial statements of Alpha Company, a
manufacturing entity with branch offices in many widely separated cities.
Millard was not able to count the substantial undeposited cash receipts on
the last day of the fiscal year at all branch offices. As an alternative
procedures, Millard verified all the reported undeposited cash collections in
the cut-off bank statements and was satisfied as to cut-off of cash receipts.
How should Millard prepare his audit report? a. Issue an unqualified opinion
with an emphasis of matter paragraph that refers to the use of alternative
audit procedure. b. Issue a qualified opinion due to scope limitation. c. Issue
an unqualified opinion on income statement and a qualified opinion on the
balance sheet. d. Issue a standard unqualified opinion. 34. Trulav Company
has prepared financial statements but has decided to omit the statement of
cash flows. The management believes that the users of the financial
statements the statement of cash flows confusing and prefer not have it
included. The omission of the statement of cash flows would require the
auditor to a. Include an unqualified report on emphasis of matter paragraph
that explains the reasons for such an omission of the statement. b. Issue an
adverse opinion due to inadequate disclosure. c. Issue a qualified opinion due
to inadequate disclosure. d. Issue an unqualified opinion based on limited
reported objective. 35. Due to recurring operating losses and working capital
deficiencies, an auditor has substantial doubt about the ability of the entity to
continue as a going concern for a reasonable period of time. However, the
financial statement disclosures concerning these matters are adequate. The
auditor should issue his report that contains a. Disclaimer of opinion. c.
Standard unqualified opinion. b. Adverse opinion. d. Unqualified opinion with
an emphasis of matter paragraph. 36. A continuing auditor has just
completed the audit of the entity. The audit report for the past three years
included an emphasis of matter paragraph that referred to a substantial
doubt about the ability of the entity to continue as a going concern. At the
middle of the current audit year, the major stockholders infused substantial
capital that made the company stable. The continuing auditor should report
on the comparative financial statements by a. Updating the audit report by
issuing a standard three-paragraph audit report. b. Including an emphasis of
matter paragraph that refers to prior years going concern problem. c. Issue
an unqualified opinion with an emphasis of matter paragraph that describes
the steps the management did in solving its going concern problem. d.
Qualify the audit report due to questionable strategy of strengthening the
entitys financial stability. 37. An a. b. c. d. auditor assesses control risk to do
which of the following? Determine the tests of controls to perform Determine
the nature, timing, and extent of substantive tests to perform Ascertain
whether reportable conditions exists Ascertain whether there is an
appropriate segregation of duties among employees

38. Which of the following auditing procedures should not be considered a

test of control? a. Observing preparation of the bank reconciliation b.
Inquiring about the entitys organization structure c. Inspecting customer
order forms for the signature of the credit manager d. Confirming with the
customer the amount owed to the client 39. One of the companys internal
control structure procedures requires that shipping documents be matched
with customer invoices. To which of the following is that procedure relevant?
a. The completeness assertion for revenue b. The existence assertion for
inventory c. The occurrence assertion for purchases d. The presentation and
disclosure assertion for accounts receivable 40. Tests of controls are primarily
concerned with all but which of the following questions? a. How were policies
or procedures performed? b. Were the policies or procedures performed? c.
How were the policies or procedures designed? d. Do policies or procedures
exist?
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41. Which of the following is not a reason an auditor should obtain an
understanding of the elements of an entitys internal control structure when
planning an audit? a. To identify types of potential misstatements that can
occur, b. To design substantive tests c. To consider the operating
effectiveness of the internal control structure d. To consider factors that affect
the risk of material misstatements 42. The sequence of the steps in the
auditors consideration of the internal control structure is as follows: a. Obtain
an understanding, design substantive tests, perform tests of controls,
determine assessed level of control risk. b. Design substantive tests, obtain
an understanding, perform tests of control, determine assessed level of
control risk. c. Obtain an understanding, performs tests of controls, determine
assessed level of control risk, design substantive tests. d. Perform tests of
controls, obtain an understanding, determine assessed level of internal
control, design substantive tests 43. When documenting the assessed level of
control risk, the auditor should a. Express the assessed level of control risk in
either quantitative of qualitative terms for all assertions. b. State the basis for
the conclusion when the assessed level of control risk is below the maximum
level for an assertion c. State the basis for the conclusion when the assessed
level of control risk is at the maximum level for an assertion d. Describe how
the planned substantive test have been affected by the assessed level of
control risk 44. In a. b. c. d. determining the assessed level f control risk,
which of the following statements is correct? The knowledge obtained from
the understanding of the internal control structure cannot be used The
knowledge obtained about the internal control structure from the prior audits
can be used The auditor evaluates the design of a policy and whether it has
been placed in operation Observation provides more persuasive evidence
about the operating effectiveness of a policy or procedure than expecting
documentation

45. After considering a clients internal control system, an auditor has

concluded that it is well designed and is functioning as intended. Under these
circumstances the auditor would most likely a. Determine the control policies
and procedures that should prevent or detect errors and irregularities b.
Determine whether transactions are recorded to permit preparation of
financial statements in conformity with GAAP c. Not increase the extent of
predetermined substantive tests d. Perform tests of controls to the extent
outlined in the audit program 46. Ideally, tests of controls should be applied
to transactions and controls a. at each quarterly interim period c. at the
beginning of the fiscal year b. at the balance sheet date d. for the entire
period under audit 47. A procedure that would most likely be used by an
auditor in performing tests of control procedures that involve segregation of
functions and that leave no transaction trail is a. Inspection c. Reconciliation
b. Observation d. Reperformance 48. Each key control that the auditor
intends to rely on must be supported by sufficient a. analytical review
procedures c. tests of transactions b. tests of controls d. reperformance
procedures 49. When controls leave no documentary evidence or trail a. it is
impossible for the auditor to verify them so he/she will have to rely on
substantive tests b. it is important to audit that area of clients system c. the
auditor generally observes them being applied d. the only thing available as
verification of their effectiveness is inquiry of management 50. When the
compensating control exists, a weakness in the system a. could cause a
material loss, so it must be tested using substantive procedures b. is
magnified and must be removed from the sampling process and examined in
its entirety c. is no longer a concern because the potential for misstatements
has been sufficiently reduced d. is reduced but not removed; therefore, it is
still of concern to the auditor 51. One of the ways to eliminate nonsampling
risk is through a. control which ensure that the sample drawn is random and
representative b. proper supervision and instruction of the audit team c.
proper supervision and instruction of the clients employees d. the use of
attributes sampling rather than variables sampling 52. Sampling risk is an
inherent part of sampling that results from a. failure to recognize exceptions
c. testing less than the entire population b. inappropriate audit procedures d.
weaknesses in clients internal control system
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53. If the auditor decides to assess control risk at the maximum level, tests of
control are a. Increased in number c. Reduced in number b. Not performed d.
Unchanged from prior planned settings 54. An auditor selects a sample from
the file of shipping documents to determine whether invoices were prepared.
This test is performed to satisfy the audit objective of a. Accuracy b.
Existence c. Completeness d. Control 55. An auditor examining inventory may
appropriately apply sampling for attributes in order to estimate the a.
Average price of inventory items c. Percentage of slow-moving inventory
items b. Physical quantity of inventory items d. Peso value of inventory 56. A
principal advantage of statistical methods of attributes sampling over
nonstatistical method is that they provide a scientific basis for planning the a.
Expected population exception rate c. Sample price b. Risk of assessing
control risk too low d. Tolerable exception rate 57. A basic premise underlying
analytical procedure is that: a. These procedures cannot replace tests of
balances and transactions b. Statistical tests of financial information may
lead to the discovery of material misstatements in the financial statements c.
The study of financial ratios is an acceptable alternative to the investigation
of unusual fluctuations d. Plausible relationships among data may reasonably
be expected to exist and continue in the absence of known conditions to the
contrary 58. One reason why an auditor makes an analytical review of the
clients operations is to identify a. improper separation of accounting and
other financial duties b. weakness of a material nature in the system of
internal accounting control c. unusual transactions d. non-compliance with
prescribed control procedures 59. At a. b. c. d. what stage in the audit are the
analytical procedures performed? In planing stage In conjunction with tests of
transactions and tests of details of balances Near the end During all three
states

60. Unusual fluctuations occur when a. significant differences are not

expected but do exist b. significant differences are expected but do not exist
c. there is a material accounting error or irregularity d. any one of the above
three situations may occur 61. To help plan the nature, timing and extent of
substantive auditing procedures, preliminary analytical procedures should
focus on: a. Enhancing the auditors understanding of the clients business
and events that have occurred since the last audit date b. Developing
plausible relationships that corroborate anticipated results with a measurable
amount of precision c. Applying ration analysis to externally generated data
such as published industry statistics or price indices d. Comparing recorded
financial information to the results of other tests of transactions and balances
62. Which of the following tends to be most predictable for purposes of
analytical procedures applied as substantive tests? a. Relationships involving
balance sheet accounts b. Transactions subject to management discretion c.
Relationships involving income statement accounts d. Data subject to audit
testing in the prior year 63. An auditor compares the 20x3 revenues and
expenses with those of the prior year and investigates all changes exceeding
10%. By this procedure the auditor would be most likely to learn that: a.
Fourth payroll taxes were not paid b. The client changed its capitalization
policy for small tools in 20x3 c. An increase in property tax rates has not been
recognized in the clients accrual d. The 20x3 provision for uncollectible
accounts were inadequate because of worsening economic conditions

64. For which of the following account balances are substantive tests of
details least likely to be performed unless analytical review procedures
indicate the need to extend details testing?

a. Payroll expense c. Research and development

b. Marketable securities d. Legal expense

65. Which of the following comparisons would be most useful to an auditor in

evaluating the results of an entitys operations?
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a. b. c. d. Prior year accounts payable to current year accounts payable Prior
year payroll expense to budgeted current year payroll expense Current year
revenue to budgeted current year revenue Current year warranty expense to
current year contingent liabilities

66. Where an unusual fluctuation is indicated by analytical procedures and

management is unable to provide a satisfactory explanation, the auditor must
assume that there is a high probability that an error or irregularity exists. In
this case, the auditor must:

a. Issue either a qualified or an adverse opinion

b. Issue a disclaimer

c. Issue either a qualified opinion or a disclaimer

d. Design other appropriate audit procedures to determine if such errors do

exist

67. The auditor notices significant fluctuations in key elements of the

companys financial statements. management is unable to provide an
acceptable explanation, the auditor should a. Consider the matter a scope
limitation b. Perform additional audit procedures to investigate the matter
further c. Intensify the examination with the expectation of detecting
management fraud d. Withdraw from the engagement If

68. Auditors sometimes use comparison of ratios as audit evidence. For

example, an unexplained decrease in the ratio of gross profit to sales may
suggest which of the following possibilities? a. unrecorded purchases b.
unrecorded sales c. merchandise purchases being charged to selling and
general expense d. fictitious sales 69. Sampling results could lead to the
auditor to believe erroneously that the account does not contain more
monetary error that can be tolerated. Which of the following corresponds to
the preceding statement? a. The risk of incorrect rejection c. Estimation
sampling b. The risk if incorrect acceptance d. Projected misstatement 70.
The auditor generally gives most emphasis to ratio and trend analysis in the
examination of the statement of? a. Retained earnings c. Financial position b.
Income d. Cash flows 71. Analytical procedures used in the overall review
stage of an audit generally include: a. Considering unusual or unexpected
account balances that were not previously identified. b. Performing tests of
transactions to corroborate managements financial statement assertions c.
Gathering evidence concerning account balances that have not changed from
the prior year d. Re-testing control procedures that appeared to be ineffective
during the assessment of control risk 72. An aging analysis of accounts
receivable would provide an indication as to the: a. Validity of the accounts c.
Integrity of the credit grantors b. Collectibility of the accounts d. Solvency of
the customers 73. Evidential matter supporting the financial statements
consists of underlying accounting data and all corroborating information
available to the auditor. An example of corroborating information is: a.
General and subsidiary ledgers b. Worksheets supporting cost allocation c.
Minutes of meetings d. Accounting manuals 74. Which of the following is an
accepted audit procedure that involves the analysis if two records
independent of one another? a. Observation c. Reconciliation b. Statistical
sampling d. Vouching 75. The primary difference between an audit of the
balance sheet and the audit of income statement is that the audit of the
balance sheet date more with the verification of a. Transactions c. Costs b.
Authorizations d. Balances 76. An auditor encounters the following four
accounts listed among the assets of a client. Most likely the auditor would
take exception to the asset recognition of: a. Excess cost over the book value
of a subsidiary b. Research and development costs incurred by an oil
exploration company c. Goodwill arising from appraisal d. Organization cost
77. One of this procedures is not deemed proper: a. Cash count should be
made at a time not known in advance to the custodians of cash. b. Cash
should be counted only in the presence of the custodian or responsible
representative of the client. If any of them were personally present, there is
no need for them to check the cash count.
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c. Cash fund at distant branch offices should be confirmed in writing with the
custodian, where it is not practicable for the auditor to visit the said office d.
The auditor should determine beforehand the appropriate amounts and
locations of company funds not recorded on the books which are in the
possession of the custodian of company funds. 78. The examination of
underlying documentary evidence in order to verify the entries which are
based upon the evidence a. Testing b. Auditing c. Tracing d. Vouching 79.
Several types of documentary evidence were received by the auditor, but of
these only one is considered most reliable: a. Working papers prepared by the
Chief Accountant and reviewed personally by the VP-Finance. b. A check
issued by the Treasurer, with the payees endorsement, included in the
statement mailed by the bank directly to the auditor. c. A delivery receipt
issued by the shipping department, signed by the customer, with an
accompanying copy of the sales invoice. d. Confirmation of the balance of an
accounts payable mailed by and returned directly to the auditor. 80. A written
request and acknowledgment requiring a letter reply only in the event of a
discrepancy. a. negative confirmation c. letter confirmation b. positive
confirmation d. Clients representation letter 81. By a cut-off review and close
examination of sales journal entries for several days before and after a
balance sheet date, and auditor might detect a. Kiting cash sales receipts c.
Inflating sales for the year b. Lapping sales receipts d. Misappropriation of
sales stocks 82. A positive account receivable confirmation returned without
exception attest to the a. collectibility of the receivable balance b. accuracy
of the receivable balance c. accuracy of the aging of the accounts receivable
balance d. accuracy of the allowance for bad debts 83. Which of the following
is the best audit procedure for determining the existence of unrecorded
liabilities? a. Examine confirmation requests returned by creditors whose
accounts appear on a subsidiary trial balance of accounts payable b. Examine
unusual relationships between monthly accounts payable balance and
recorded purchases c. Examine a sample of vendors invoices a few days
prior to and subsequent to year end to ascertain whether they have been
properly recorded d. Examine a sample of cash disbursements in the period
subsequent to the year end 84. The physical count of the inventory of a
retailer was higher than that shown by the perpetual records. Which of the
following could explain these differences? a. Inventory items had been
counted but the tags placed on the items had not been taken off the items
and added to the inventory compilation sheets. b. Credit memos for several
items returned by the customers had not been prepared. c. No journal entry
had been made on the retailers books for several items returned to the
suppliers. d. An item purchased FOB shipping point had not arrived at the
date of the inventory count and had not been reflected in the perpetual
records 85. Cut-off tests designed to detect credit sales made before the end
of the year that have been recorded in the subsequent year provide
assurance about managements assertion of a. Completeness b. Existence c.
Presentation d. Rights 86. In a. b. c. d. the context of an audit of financial
statements, substantive tests are audit procedures that may be either tests
of transactions, direct tests of financial balances or analytical tests may be
estimated under certain conditions are designed to discover significant
subsequent events will increase proportionately with increase in assessed
control risk

87. If the objective of a test of details is to detect overstatement of sales, the

auditor should vouch transactions from the a. Accounting records to the
source documents b. Cash receipts journal to the sales journal c. Sales journal
to the cash receipts journal d. Source documents to the accounting records
88. Which of the following combinations of procedures would an auditor most
likely perform to obtain about plant asset additions? a. Inspecting documents
and physically examining plant assets b. Recalculating and obtaining written
management representations c. Observing operating activities and
comparing balances to prior period balances d. Confirming ownerships and
corroborating transactions through inquiries of client personnel
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89. An auditor who selects a sample of items from the vouchers payable
register for the last month of the period under audit and traces these items to
underlying documents is gathering primarily in support of the assertion that
a. Cash disbursements were recorded as incurred obligations b. Incurred
obligations were recorded in the correct period c. Recorded obligations were
valid d. Recorded obligations were paid 90. Which of the following statements
is correct concerning the use of negative confirmation requests? a. Negative
confirmation requests are effective when detection risk is low b. Negative
confirmation requests are effective when understatements of account
balances are suspected c. Unreturned negative confirmation requests
indicate that alternative procedures are necessary d. Unreturned negative
confirmation requests rarely provide significant explicit evidence 91. In a. b.
c. d. the audit of inventories, an auditor would least likely verify that All
inventory owned by the client is on hand at the time of the count Damaged
goods and obsolete items of inventories have been properly accounted for
The client has used proper inventory pricing The financial statement
presentation of the inventories is appropriate

92. A client company has not paid its 2002 audit fees. According to the Code
of Professional Conduct, for the auditor to be considered independent with
respect to the 20X3 audit, the 20X2 audit fees must be paid before the a.
20X2 report is issued c. 20X3 field work is started b. 20X3 report is issued d.
20X4 field work is started 93. Inclusion of which of the following in
promotional brochure published by a public accounting firm would be most
likely to result in a violation of the rules of conduct? a. Reprints of newspaper
articles that praise the firms expertise. b. Services offered and fees for such
services including hourly rates and fixed fees c. Educational and professional
attainments of partners d. Testimonial and endorsements 94. According to
the Code of Professional Conduct, a member who has a financial interest in a
partnership that invests in a potential client is considered to have a. An
indirect financial interest in the client c. No financial interest in the client b. A
direct financial interest in the client d. A partial financial interest in the client
95. The Rules of Conduct will ordinarily be considered to have been violated
when the member represents that specific consulting services will be
performed for a stated fee and it is apparent at the time of the representation
that the a. actual fee would be substantially higher b. actual fee would be
substantially lower than the fees charged by other members for comparable
services c. fee was a competitive bid d. member would not be independent
96. In which of the following instances would the independence of the CPA
not be considered to be impaired? The CPA has been retained as the auditor
of a brokerage firm a. Which owes the CPA audit fees for more than one year
b. In which the CPA has a large active margin account c. In which the CPAs
brother is the controller d. Which owes the CPA audit fees for services in the
current year and ha just filed a petition for bankruptcy 97. Which of the
following most completely describes how the profession has defined
independence? 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 ethics 98. The appearance of independence of a CPA, or
that CPAs firm, could be impaired if the CPA a. owns a unit in a cooperative
apartment house where each unit has a vote in the cooperative, and the CPA,
who does not participate in the management, has been retained as the
auditor for the cooperative b. joins a trade association that is a client and
serves in a non management capacity c. accepts a gift from a client d. none
of the above 99. The Code of Professional Conduct states that a CPA shall not
disclose any confidential information obtained in the course of a professional
engagement except with the consent of his or her client. In which of the
situations that follow would disclosure by a CPA be in violation of the Code? a.
Disclosing confidential information to property discharge the CPAs
responsibilities in accordance with the professions standards. b. Disclosing
confidential information in compliance with a subpoena issued by a court. c.
Disclosing confidential information to another accountant interested in
purchasing the CPAs practice d. Disclosing confidential information in a
review of the CPAs professional practice by a peer review team.
10
100. Which of the following fee arrangements is in violation of the Code of
Professional Conduct? a. A fee based on whether the CPAs report on the
clients financial statements results in the approval of a bank loan b. A fee
based on the outcome of a bankruptcy proceeding c. A fee based on the
nature of the service rendered and the CPAs particular expertise instead of
the actual time spent on the engagement. d. A fee based on the charged by
the prior auditor. 101. a. b. c. d. Which of the following describes most
completely how the profession defines independence? Performing an audit
from the publics point of view Avoiding the appearance of a significant
interest in an audit clients interest Resisting a clients reluctance to reveal
evidence Accepting responsibility to act professionally and in accordance with
a professional Code of Conduct

102. In which of the following circumstances would a CPA be bound to refrain

from disclosing confidential information obtained during a professional
engagement? a. The CPA is issued a summons enforceable by a court order
that orders the CPA to present confidential information b. A major stockholder
of a client company seeks accounting information from the CPA after
management declined to disclose the information c. Confidential client
information is made available as part of a quality review of the CPAs practice
by a review team authorized by the PICPA d. An inquiry by a disciplinary body
of a national CPA society requests confidential client information 103. The
Code of Professional Conduct would be violated if a member accepted a fee
for services and the fee was a. Fixed by a public authority b. Based on a price
quotation submitted in competitive bidding c. Based on the result of judicial
proceedings d. Payable after a specified finding was attained 104. a. b. c. d.
Independence is required of a CPA performing Audits, but not any other
professional services All attestations services, but not other professional
services All attestation and tax services, but not other professional services
All professional services

105. Which of the following statements best describes why the profession of
certified public accountants has deemed it essential to promulgate a code of
professional conduct and to establish a mechanism for enforcing observation
of the code? a. A distinguishing mark of a profession is its acceptance of
responsibility to the public. b. A prerequisite to success is the establishment
of an ethical code that primarily defines the professionals responsibility to
clients and colleagues. c. A requirement of most state laws for the profession
to establish a code of ethics. d. An essential means of self-protection for the
profession is the establishment of flexible ethical standards by the profession.
106. Which of the following attributes is more closely associated with
attestation services performed by a CPA firm than with other lines of
professional work? a. Integrity c. Independence b. Competence d. Keeping
informed in current professional developments 107. In which of the following
circumstances would a CPA be considered independent when performing the
audit of the financial statements of a new client for the year ended December
31, 2003? a. The CPA resigned on January 17, 2003 from the board of
directors of the client, prior to accepting the new audit engagement. b. The
CPA continues to hold an immaterial indirect financial interest in the client. c.
The CPA continues to serve as a trustee for the clients pension plan. d. The
CPAs spouse owns an immaterial amount of share of common stock in the
client. 108. In determining the scope and nature of services to be performed
in public practice, a CPA firm should a. Require independence for all services
performed b. Determine that the performance of all services is consistent
with the firms members role as professionals. c. Have in place internal
control procedures. d. Only perform accounting related services. 109. a. b. c.
d. 110. Independence of a CPA with respect to a client is not impaired if The
CPA has a loan to an officer of the client. The CPA has an immaterial direct
interest in the client. The CPA is trustee for the clients pension plan. The CPA
has an immaterial joint, closely held business investment with the client. A
CPA firm may not designate itself as members of the PICPA unless
11
a. b. c. d. All of its partners are members of the Institute. Its entire
professional staff is members of the Institute. A majority of its professional
staff are members of the Institute. At least one partner is a member of the
Institute.

111. A CPAs retention of client records as a means of enforcing payment of

an overdue audit fee is an action that is a. Considered acceptable by the
Code of Professional Conduct. b. III advised since it would impair the CPAs
independence with respect to the client. c. Considered discreditable to the
profession. d. A violation of generally accepted auditing standards. 112. The
Code of Professional Ethics for CPAs was promulgated by the: a. Philippine
Institute of CPAs c. Securities and Exchange Commission b. Bureau of internal
revenue d. Board of Accountancy 113. A CPA shall not disclose confidential
information obtained during an audit engagement in which one of the
following situations? a. When the security of the state so requires b. With the
consent of the client c. In defense of himself when sued by the client d. Under
the rule against disclosing confidential information 114. One of the following
refers to a generally accepted auditing standard: a. Confirm the cash
balances c. Join professional society b. Exercise due professional care d.
Preserve confidential relationship with client 115. Legacy Commercial Inc.
engages the services of Mr. C. Dimalanta, CPA, to make a project study on the
expanded foot vending operations of the corporation with the corresponding
staffing and compensation package for its executive staff. Dimalanta,
however, has primarily auditing expertise and only in general merchandising
operations. Mr. Dimalanta may properly: a. Accept the engagement and carry
it out consistent with generally accepted auditing standards. b. Accept the
engagement but exercise due professional care. c. Accept the engagement
and acquire the necessary competence or consult with established
authorities. d. Decline the engagement for lack of experience or competence
in an entirely new line of specialization. 116. Under the provisions of the Code
of the Professional Ethics for CPAs, a partner surviving the death or
withdrawal of all other partners may continue to practice under the
partnership name: a. For five years after becoming a sole practitioner. b. For
three years after becoming a sole practitioner. c. For two years after
becoming a sole practitioner. d. For one year after becoming a sole
practitioner. 117. A CPA will not offer or render services under an agreement
whereby the fee is contingent upon the findings. One of these is deemed not
permissible under the ethics of the profession: a. Fees granted by the courts
b. Fees determined in tax matters by judicial proceedings. c. Fees fixed by
government agency findings. d. Fees determined as a percentage of the total
amount of authorized bond issues. 118. a. b. c. d. The CPA in public practice
violates the Code of Professional Ethics for CPAs if he accepts a fee which
was: Fixed by public authority Based on a price quotation submitted in
competitive bidding. Determined, based on the results of judicial
proceedings. Payable after a specified finding was obtained.

119. Upon discovery of irregularities in the clients tax return that the client
refuses to correct, a CPA withdraws from the engagement. How should the
withdrawing CPA respond if asked by the successor of CPA why the
relationship was terminated? a. It was a misunderstanding. b. I suggest
you get the clients permission for us to discuss all matters freely. c. I
suggest you ask the client. d. I found irregularities in the tax return which
the client would not correct. 120. a. b. c. d. A CPAs opinion on financial
statements is of little value to those who relied on him unless he: Issues an
unqualified opinion. Maintains a program of continuing education. Serves his
clients with professional concern for their best interests Maintains his
independence.

121. The code of Professional Ethics for CPAs states, in part, that a CPA
should maintain a high degree of integrity and objectivity in all his actuations.
Objectivity in said Code refers to a CPAs ability: a. To maintain an impartial
attitude on all matters which come under the CPAs review b. To
independently distinguish between accounting practices that are acceptable
and those that are not. c. To be unyielding in all matters dealing with auditing
procedures
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d. To independently choose between alternate accounting principles and
auditing standards. 122. In the absence of pronouncements issued by the
ASPC and the PICPA, published statements and guidelines by other
authoritative bodies, like AICPA, IAPC and AFA are the basis of determining
generally accepted auditing standards. What affect do these pronouncements
provide in determining the generally accepted auditing standards? a.
Authoritative b. Persuasive c. Alternative d. Parallel 123. Specifically, the
board of accountancy is officially represented in the ASPC by: a. Secretary of
the BOA c. Chair, PRC b. Chair, BOA d. BOA member who handles Auditing
theory subject 124. How many members of ASPC are needed to approve the
exposed draft or Philippine standards in Auditing as Philippine Standards on
Auditing? a. Majority of the regular members c. At least ten b. At least eight
d. At least twelve 125. a. b. c. Which of the following is the correct
statement? AASC should normally expose a proposed interpretation of
statements. AASC should normally exposed its opinion on specific queries
from a practicing CPA To make the statements on Philippine Standards on
auditing operative, the final statement shall be submitted to the board of
accountancy for approval. d. When it is deemed necessary to expose for a
comment on proposed interpretation of statements, the exposure period is
understandably shorter than those of the regular drafts of standards.

126. Which of the following is not presented by the signatories to the joint
memorandum of support to the creation and operation of the auditing
standards and practices council? a. Board of Accountancy. b. Philippine
Institute of Certified Public Accountants (PICPA) c. Association of Certified
Accountants in Public Practices (ACPAPP) d. Philippine Institute of Certified
Public Accountants Foundation, Inc.
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END

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