2011 NATIONAL CPA MOCK BOARD EXAMINATION

In partnership with the Professional Review & Training Center, Inc. and Isla Lipana & Co.

AUDITING THEORY
INSTRUCTIONS: Select the best answer for each of the following questions. Mark only
one answer for each item on the answer sheet provided. AVOID ERASURES. Answers
with erasures may render your examination answer sheet INVALID. Use PENCIL
NO.2 only. GOODLUCK!

1. Which of the following is the least function of the b. Guarantee that there are no misstatements in the
Board of Accountancy? financial statements and ensure that any fraud
a. Determination of the minimum requirements will be discovered
leading to the admission of candidates to the c. Relieve management of responsibility for the
CPA examinations. financial statements
b. Regulation of the practice of accountancy. d. Provide increased assurance to users as to the
c. Supervision over the accredited professional fairness of the financial statements
organization of CPAs.
d. Preparation of the contents of the CPA licensure 9. The independent auditor lends credibility to clients
examinations and rating of the examination financial statements by
papers. a. Maintaining a clear-cut distinction between
managements representations and the auditors
2. No person shall serve the Professional Regulatory representation.
Board of Accountancy for more than b. Testifying under oath about clients financial
a. 3 years c. 9 years statements.
b. 6 years d. 12years c. Stating in the auditors management letter that
the examination was made in accordance with
3. Which of the following is not included in the seal used generally accepted auditing standards.
by a CPA? d. Attaching an auditors opinion to the clients
a. Professionaltaxreceiptnumber financial statements.
b. Name of the CPA
c. Registration number 10. Which of the following are elements of a CPA firms
d. The title CPA quality control that should be considered in
establishing its quality control policies and
4. Which of the following is required for a partnership for procedures?
public accountancy practice? Ethical Human Engagement
a. At least one of the partners must be a CPA. Requirements Resources Performance
b. All partners must be PICPA members. a. No Yes No
c. AllpartnersmustbeCPAs. b. Yes No No
d. Firm name must contain names of partners only. c. Yes Yes Yes
d. No No Yes
5. Below are names of four CPA firms and pertinent facts
relating to them. Unless otherwise indicated, the 11. This quality control element requires a CPA firm to
individuals named are CPAs and partners, and there establish policies and procedures to provide it with
are no other partners. Which firm name and related reasonable assurance that engagements are
facts indicate a violation of RA 9298 and its IRR? performed in accordance with professional standards
a. Dee, Lim and Sy, CPAs (Dee died about five years and regulatory and legal requirements, and that the
ago; Lim and Sy are continuing the firm). firm or the engagement partner issue reports that are
b. Cruz and Reyes, CPAs (The name of V. Valdes, appropriate in the circumstances.
CPA, a third partner, is omitted from the a. Ethical requirements
firm name). b. Engagementperformance
c. Gomez and Castro, CPAs (Gomez died about c. Monitoring
three years ago; Castro is continuing the firm as d. Human resources
a sole proprietorship).
d. P. Reyes and Co., CPAs (The firm has ten other 12. Who should take responsibility for the overall quality
partners who are all CPAs). on each audit engagement?
a. Engagement quality control review
6. Which of the following services would be most likely b. Engagementpartner
to be structured as an assurance engagement? c. Engagement team
a. Advocating a clients position in tax matter. d. CPA firm
b. A consulting engagement to develop a new data
base system for the revenue cycle. 13. Communication with a predecessor auditor is initiated
c. An engagement to issue a report addressing an by:
entitys compliance with requirements of specified a. Management
laws. b. Thesuccessorauditor
d. The compilation of a clients forecast information. c. The audit committee of the board of directors
d. The chair of the board of directors
7. According to PSA 120, which of the following is an
appropriate combination of procedures required in 14. In making a decision to accept or continue with
completing a review engagement? a client, the auditor should consider:
a. Inquiry and observation (a) (b) (c) (d)
b. Inquiryandanalyticalprocedures Its own independence Yes No Yes No
c. Analytical procedures and inspection Its ability to service a Yes Yes Yes No
d. Observation and analytical procedures client properly
The integrity of the clients Yes Yes No Yes
8. The primary reason for an audit by an independent, management
external audit firm is to
a. Satisfy government regulatory requirements 15. A partner, other person in the firm, suitably qualified
person, or a team made up of such individuals, with

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 sufficient and appropriate experience and authority to
objectively evaluate, before the report is issued, the
significant judgments the engagement team made,
and the conclusions they reached in formulating the
report;
a. Engagement Partner
b. Audit Partner
c. EngagementQualityControlReviewer
d. Managing Partner
16. An auditor is not required to plan the audit to cover
information that is indicative of:
a. Adverse relationships between the entity and
its employees.
b. Fraudulent financial reporting.
c. Misappropriation of assets.
d. Errors.
17. The most difficult type of misstatement to detect is
fraud based on
a. The overrecording of transactions
b. Thenonrecordingoftransactions
c. Recorded transactions in subsidiaries
d. Related party receivables
18. When the auditor believes a misstatement is or may
be the result of fraud but that the effect of the
misstatement is not material to the financial
statements, which of the following steps is required?
a. Consider the implications for other aspects of the
audit.
b. Resign from the audit.
c. Commence a fraud examination.
d. Contact regulatory authorities.
19. When performing a financial statement audit, auditors
are required to explicitly assess the risk of material
misstatement due to
a. Errors. c. Illegal acts.
b. Fraud. d. Business risk.
20. According to PSA 240 Revised, the auditor may
consider withdrawing from the engagement
a. When the entity does not take the remedial action
regarding fraud, even if it not material to the
financial statements.
b. If the fraud is perpetrated through the connivance
of some employees
c. When the fraudulent act affects the financial
statements, even if such effect is reflected in the
financial statements
d. When the auditor is unable to gather
evidence that will corroborate his suspicion that
possible occurrence of fraud may have materially
affected the financial statements
21. Assuming a recurring audit, in which of the
following situations would the auditor be unlikely to
send a new engagement letter to the client?
a. A recent change in partner and/or staff involved in
the audit engagement.
b. A change in the terms of engagement.
c. A recent change of client management.
d. A significant change in the nature or size of the
client's business.
22. Which of the following statements best describes why
the profession of CPAs has deemed it essential to
promulgate a code of ethics and to establish a
mechanism for enforcing observance 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 stresses primarily the
professionals responsibility to clients and
colleagues
c. A requirement of most state laws calls 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
23. A CPA, while performing an audit, strives to achieve
independence in appearance in order to
a. Reduce risk and liability
b. Maintainpublicconfidenceintheprofession c.
Become independent in fact
d. Comply with PSAs
24. In which of the following may confidential information
not be disclosed?
a. To comply with the quality review of a member
body or professional body
b. To submit evidence in the course of legal
proceedings
c. Acquiring information in the course performing
professional services and use that information for
personal advantages
d. When consent to disclose information is given by
the client
25. In planning the audit engagement, the auditor should
consider each of the following except
a. Matters relating to the entitys business and the
industry in which it operates
b. The entitys accounting policies and procedures
c. Anticipated levels of control risk and materiality
d. Thekindofopinionthatwilllikelybegiven
26. The term audit risk refers to the risk:
a. Of legal exposure and related costs should the
auditor be charged with negligence in conducting
an audit
b. That the auditor may unknowingly fail to
appropriately modify his opinion on financial
statements that are materially misstated
c. That errors or irregularities may cause financial
statements not to be fairly presented
d. That the auditor may fail to anticipate all
circumstances which will influence his judgment
in evaluating the audit findings upon completion
of the audit
27. Which statement is not correct
a. Control risk is the risk the auditor will not detect a
material misstatement that exists in an assertion
b. Sampling risk arises from the possibility that,
when a test of controls or a substantive test
is restricted to a sample, the auditors
conclusions may be different from the
conclusions he or she would reach if the test
were applied in the
c. Inherent risk is the susceptibility of an assertion
to a material misstatement, assuming that there
are no related internal control structure, policies
or procedures
d. Non-sampling risk includes only those aspects of
audit risk that are not due to sampling
28. Which of the following statements is not correct?
a. The principal purpose in conducting a study and
evaluation of the existing internal control system
is for the independent auditor to maintain a state
of independence in mental attitude in all matters
related to the audit.
b. Working papers can be destroyed after corporate
and statutory retention requirements are met.
c. The audit program contains the list of specific
tasks to be performed and estimated time
required.
d. An audit program would not contain the
documentation of system being reviewed.
29. A potential business risk created by regulatory
requirement may most likely include
a. Increased product liability
b. Increasedlegalexposure
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 c. The entity does not have the personnel or b. Contains misstatements that could be material to
expertise to deal with the changes in the industry. the financial statements when aggregated with
d. Loss of financing due to the entitys inability to misstatements in other account balances
meet financing requirements. or transactions classes.
c. Contains proportionately fewer monetary errors
30. Which of the following conditions and events may or deviations from prescribed internal control
most likely indicate the existence of risks of material structure policies or procedures than exist in the
misstatements? balance or class as a whole.
a. Having personnel with appropriate accounting and d. Does not support the tolerable error for some or
financial reporting skills. all of managements assertions.
b. Accounting measurements that involve simple
processes 38. Which of the following factors does an auditor
c. Significant amount of routine or systematic generally need to consider in planning a particular
transactions audit sample for a test of control?
d. Constraintsontheavailabilityofcapitalandcredit a. Number of items in the population.
b. Total peso amount of the items to be sampled.
31. The auditor should perform the following risk c. Acceptable level of risk of assessing control risk
assessment procedures to obtain an understanding of too low.
the entity and its environment, including its d. Tolerable misstatement.
internal control, except:
a. Inquiries of management and others within the 39. Which of the following sample planning factors would
entity. influence the sample size for a substantive test of
b. Reperformance details for a specific account?
c. Analytical procedures. Expected amount of Measure of tolerable
d. Observation and inspection. misstatements misstatement
a. No No
32. The auditor should determine overall responses to b. Yes Yes
address the risks of material misstatement at the c. No Yes
financial statement level. Such responses most likely d. Yes No
include
a. Assigning less experienced staff. 40. There are many kinds of statistical estimates that an
b. Emphasizing to the audit team the need to auditor may find useful, but basically every
maintain professional skepticism in gathering and accounting estimate is either of a quantity or of an
evaluating audit evidence. error rate. The statistical terms that roughly
c. Performing predictable further audit procedures. correspond to quantities and error rate,
d. Performing substantive procedures at an respectively, are
interim date instead of at period end. a. Attributes and variables
b. Variablesandattributes c.
33. Materiality should be considered by the auditor when Constant and attributes
a. Determining the nature, timing and extent of d. Constants and variables
auditors procedures
b. Evaluating the effect of misstatements 41. Which of the following is the best example of a
c. Bothaandb substantive test?
d. Neither a nor b a. Examining a sample of cash disbursements to test
whether expenses have been properly approved.
34. Example of other information b. Confirmationofbalancesofaccountsreceivable.
a. Books of original entry c. Comparison of signatures on checks to a list of
b. Reconciliation statement authorized signers.
c. Cost allocation work sheet d. Flowcharting of the clients cash receipts system.
d. Minutesofmeetings
42. If a lawyer refuses to furnish corroborating
35. Which of the following statements relating to the information regarding litigation, claims, and
appropriateness of evidence is always true? assessments, the auditor should
a. Evidence gathered by an auditor from outside an a. Honor the confidentiality of the client-lawyer
enterprise is reliable. relationship.
b. Accounting data developed under satisfactory b. Consider the refusal to be tantamount to a scope
conditions of internal control are more relevant limitation.
than data developed under unsatisfactory internal c. Seek to obtain the corroborating information from
control conditions. management.
c. Oral representations made by management are d. Disclose the fact in the notes to the financial
not valid evidence. statements.
d. Evidence gathered by auditors must be both
reliable and relevant to be considered 43. Which of the following is not a subsequent events
appropriate. procedure?
a. Review available interim financial information.
36. Which is not one of the uses of audit working papers? b. Read available minutes of meetings of
a. To serve as the basis for the preparation of the stockholders and directors.
financial statements and the audit report c. Make inquiries with respect to the financial
b. To analyze and organize accounting information statements covered by the auditor's
so that it can be audited more easily previously issued report if new information
c. To provide evidence of the audit work performed has become available during the current
d. Toprovetheindependenceoftheauditor examination that might affect that report.
d. Discuss with officers the current status of items in
37. The likelihood of assessing control risk too high is the the financial statements that were accounted for
risk that the sample selected to test controls on the basis of tentative, preliminary, or
a. Does not support the auditors planned assessed inconclusive data.
level of control risk when the true operating
effectiveness of the control structure justifies 44. Select the procedures which an auditor would most
such an assessment. likely perform to obtain evidence about the
occurrence of subsequent events:

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 a. Investigating changes in stockholders equity
occurring after year end. 52. Which paragraph of an auditors standard report on
b. Recomputing a sample of large-peso transactions financial statements should refer to Philippine
occurring after year end for arithmetic accuracy. Financial Reporting Standards (PFRSs) and Philippine
c. Confirming bank accounts established after year Standards on Auditing (PSAs)?
end. PFRSs PSAs
d. Inquiring of the entitys legal counsel concerning a. Opinion AuditorsResponsibility
litigation, claims, and assessments arising after b. Opening Auditors Responsibility
year end. c. Managements Opinion
Responsibility
45. Which of the following is a valid purpose of a d. Opening Opinion
management representation letter?
a. to reduce the possibility of a misunderstanding 53. An auditor's report that refers to a departure from
concerning managements responsibility for the PFRSs includes the language, "In our opinion, with the
financial statements. foregoing explanation, the financial statements
b. to reduce an auditors responsibility to detect referred to above present fairly ..." This is a(n)
material misstatements only to the extent that a. Adverse opinion.
the letter is relied on. b. Qualified opinion.
c. to reduce the scope of an auditors procedures c. Unqualified opinion with an explanatory
concerning related party transactions and paragraph.
subsequent events. d. Exampleofinappropriatereporting.
d. to reduce audit risk to an aggregate level
of misstatement that could be considered material. 54. When an auditor expresses an adverse opinion he/she
should disclose the substantive reasons for such an
46. To which of the following matters would materiality opinion in an explanatory paragraph.
limits not apply in obtaining written a. Within the notes to the financial statements
management representations? b. Precedingtheopinionparagraph
a. The availability of minutes of stockholders and c. Following the opinion paragraph
directors meetings. d. Preceding the introductory paragraph
b. Losses from purchase commitments at prices in
excess of market value. 55. Which of the following procedures is not included in a
c. The disclosure of compensating balance review engagement on a nonpublic entity?
arrangements involving related parties. a. Inquiries of management.
d. Reductions of obsolete inventory to net realizable b. Inquiries regarding events subsequent to the
value. balance sheet date.
c. Any procedures designed to identify relationships
47. As part of an audit, a CPA often request a among data that appear to be unusual.
representation letter from the client. Which one of d. A study and evaluation of internal control
the following is not a valid purpose of such a letter? structure.
a. To provide as audit evidence.
b. To emphasize to the client his responsibility for 56. Which of the following should the auditor perform in a
the correctness of the financial statements. review engagement?
c. To satisfy himself by means of other auditing a. Understand matters that are relevant to the
procedures when certain customary auditing financial statements.
procedures are not performed. b. Understand the entitys internal control system.
d. To provide possible protection to the CPA against c. Observe the physical count of inventory.
a charge of knowledge in cases where fraud is d. Inquire of legal counsel of pending litigations.
subsequently discovered to have existed in the
accounts. 57. The objective of an agreed-upon procedures
engagement
48. Examples of events or conditions, which individually a. Is to enable the auditor to express an
or collectively, may cast significant doubt about the opinion whether the financial statements are
going concern assumption include the following prepared in all material respects, in
except: accordance with an identified financial reporting
a. Net liability or net current liability position. framework
b. Change from credit to cash-on-delivery b. Is to enable the auditor to state whether, on the
transactions with suppliers. basis of procedures which do not provide all the
c. Labor difficulties or shortages of important evidence that would be required in an audit,
supplies. anything has come to the auditors attention that
d. Compliance with capital or other statutory causes the auditor to believe that the financial
requirements. statements are not prepared in all material
respects, in accordance with an identified financial
49. The standard audit report includes all of the following reporting framework.
except a (an) c. Is to carry out those procedures of an audit
a. opinion paragraph c.explanatoryparagraph nature to which the auditor and the entity and
b. scope paragraph d. opening paragraph any appropriate third parties have agreed and to
report on factual findings.
50. The auditors report should be titled, and the title d. Is to use accounting expertise as opposed to
should include the word auditing expertise to collect, classify and
summarize financial information.
a. standard c. audit
b. opinion d. independent
58. Which of the following is incorrect about agreed-upon
procedures engagement?
51. The audit report is normally addressed to the
a. An engagement to perform agreed-upon
Board of President of the procedures may involve the auditor in performing
entity certain procedures concerning individual items of
Directors Shareholders
a. Yes Yes Yes financial data.
b. Users of the agreed-upon procedures report
b. No Yes Yes
assess for themselves the procedures and
c. Yes Yes No
findings reported by the auditor and draw their
d. Yes No No
conclusion from the auditors work.

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 c. The auditor should be independent of the financial d. Dual-purpose tests to evaluate both the risk of
data or financial statements where agreed monetary misstatement and preliminary
procedures have to be applied. control risk.
d. The report is restricted to those parties that have
agreed to the procedures to be preformed. 66. A written request and acknowledgement requiring a
letter reply only in the event of a discrepancy
59. A CPA has been engaged to compile financial a. negativeconfirmation
statements for a nonpublic client. Which of the b. positive confirmation
following statements best describes this engagement? c. letter of confirmation
a. The CPA must perform the PSAs necessary to d. clients representation letter
determine that the statements are in conformity
with PFRSs. 67. Which of the following combinations of
b. The CPA is performing an accounting procedures would an auditor most likely
service rather than an examination perform to obtain evidence about fixed asset
of financial statements. additions?
c. The financial statements are representations of a. Inspecting documents and physically examining
both management and the CPA. assets
d. The CPA may prepare the statements from the b. Recomputing calculations and obtaining written
books but may not assist in adjusting and closing management representations
the books. c. Observing operating activities and comparing
balances to prior period balances
60. Which of the following engagements do not require d. Confirming ownership and corroborating
independence? transactions through inquiries of client personnel
I. Agreed-upon procedures
II. Compilation 68. Opening balances means those account balances
III. Audit which exist at the beginning of the period. These are
IV. Review based upon the closing balances of the prior
a. I and IV c. I, II and IV period and reflect the effects of:
b. IandII d. I, II, III and IV I. Current transactions (e.g. stock dividends) that
will be given retroactive effect recognition.
61. A report issued in connection with the II. Transactions of prior periods.
independent audit of financial information other than III. Accounting policies applied in the prior period.
an auditor's report on financial statements. a. All of these c. I only
a. Specialpurposeauditor'sreport b. b. I and II only d. IIandIIIonly
Compilation report
c. Annual report 69. The auditor should adopt one or a combination of the
d. Modified auditors report following approaches in the audit of an accounting
estimate:
62. The auditors report on summarized financial I. Review and test the process used by
statements should include management to develop the estimate.
a. An opinion as to whether the information in the II. Use an independent estimate for comparison with
summarized financial statements is presented that prepared by management.
fairly, in all material respects. III. Review subsequent events which confirm the
b. An opinion as to whether the information in the estimate made.
summarized financial statements is consistent a. Anyoftheabovec. Either I or II
with the audited financial statements from b. None of the above d. I only
which it was derived.
c. A statement of negative assurance. 70. Which of the following events most likely indicates the
d. A description of the auditors factual existence of related parties?
findings including sufficient details of a. Borrowing a large sum of money at a variable
errors and exceptions found. rate of interest
b. Selling real estate at a price that
63. Given one or more hypothetical assumptions, a differs significantly from its book value
responsible party may prepare, to the best of c. Making a loan without scheduled terms of
its knowledge and belief, an entitys expected repayment of the funds
financial position, results of operations, and cash d. Discussing merger terms with a company that is a
flows. Such prospective financial statements are major competitor
known as
a. Pro forma financial statements 71. Tolerable error means
b. Financial projections a. An error that arises from an isolated event that
c. Partial presentations has not recurred other than on specifically
d. Financial forecasts identifiable occasions and is therefore not
representative of errors in the population.
64. Which of the following is a prospective financial b. An error that the auditor expects to be present in
statement for general use upon which an accountant the population.
may appropriately report? c. The maximum error in a population that the
a. Financial projection auditor is willing to accept.
b. Partial presentation d. The possibility that the auditor's conclusion,
c. Pro forma financial statements based on a sample may be different from
d. Financialforecasts the conclusion reached if the entire population
were subjected to the same audit procedure.
65. Regardless of the assessed level of control risk, an
auditor would perform some 72. Proper authorization of write-offs of uncollectible
a. Tests of controls to determine the effectiveness of accounts should be approved in which of the
internal control policies. following departments?
b. Analytical procedures to verify the design of a. Accounts receivable. c. Accounts payable.
internal control. b. Credit. d. Treasurer.
c. Substantive tests to restrict detection risk for
significant transaction classes. 73. CPAs in public practice are required to register with
the QAR Program under the prescribed category. CPA
practitioners handling clients that use the IFRS for

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 SMEs or their Philippine equivalents should register 77. Which of the following is a characteristic of an
under integrated system for data processing?
a. Category A c. Category C a. An integrated system is a real-time system where
b. CategoryB d. Category D files for different functions with similar
information are separated.
74. The principle of objectivity imposes which of the b. A single input record describing a
following obligations on professional accountants? transaction initiates the updating of all files
a. To maintain professional knowledge and skill at associated with the transaction.
the level required to ensure that clients or c. Parallel operations strengthen internal control
employers receive competent professional advice over the computer processing function.
b. To refrain from disclosing confidential information d. Files are maintained according to organizational
obtained as a result of professional and business functions such as purchasing, accounts payable,
relationships sales, etc.
c. To comply with relevant laws and regulations and
avoid any situation that may bring discredit to the 78. In auditing around the computer the auditor
profession a. Processes test data on the clients computer
d. Not to compromise professional or business system as part of the check of internal controls.
judgment because of bias, conflict of interest or b. Processes test data on a separate computer
undue influence of others system as part of the check of internal controls.
c. Tests transactions and performs account
75. Examples of circumstances that may create advocacy verification procedures as in non-EDP systems.
threat include d. Uses the clients computer program rerun on
a. Undue dependence on total fees from an clients EDP facilities.
assurance client.
b. Concern about the possibility of losing the 79. Which of the following methods of testing application
engagement. controls utilizes a generalized audit software package
c. a and b prepared by the auditors?
d. neitheranorb a. Parallelsimulation.
b. Integrated testing facility approach.
76. Examples of circumstances that may create familiarity c. Test data approach.
threat include d. Exception report tests.
a. Contingent fees relating to assurance
engagements 80. The grandfather-father-son approach to providing
b. A member of the assurance team giving an protection for important computer files is a
immediate family member or close family concept that is most often found in
member who is a director or officer of a. On-line, real-time systems
the assurance client. b. Punched-card systems
c. a and b c. Magnetictapesystems d.
d. neither a nor b Magnetic drum systems

End of Examination
Thank you for participating in the 2011 National Mock CPA Board Examinations!

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