1. Misstatement in the financial statements can arise from fraud or error.

The distinguish factor

between fraud and error is whether underlying action that the results in the misstatement of
the financial statements is
I. Intentional or unintentional
II. Rational or irrational
a. I only
b. II only
c. Both I and II
d. Neither I nor II
2. Fraudulent financial reporting involves intentional misstatement including omissions of amounts
or disclosures in financial statements to deceive financial statements users. It may be
accomplished in a number of ways ,including
a. Embezzling of receipts
b. Stealing physical assets or intellectual property
c. Using an entity’s assets for personal use
d. Manipulation, falsification, or alteration of accounting records or supporting documentation
form which the financial statements are prepared
3. Which of the following statements best describe an auditor responsibility regarding
misstatement?
a. An auditor should obtain reasonable assurance that the financial statements taken as a
whole are free from material misstatement ,whether caused by fraud or error
b. An auditor should obtain absolute assurance the material misstatement in the financial
statement will be detected
c. An auditor is responsible to detect material errors but has no responsibility to detect
material fraud that is concealed through employee collusion or management override of
internal control
d. An auditor failure to detect a material misstatement result from fraud is an indication of
noncompliance with the requirements of the PSAs
4. The following are examples of fraud risk factors relating to misstatements arising from
misappropriation of assets except
a. Recurring negative cash flows from operating activities while reporting earnings from
earning growth
b. Inadequate physical safeguards over cash investments, inventory or fixed assets
c. Inadequate segregation of duties or independent checks
d. Adverse relationship between the entity and employees with access to cash or other assets
susceptible to theft created by recent changes made to employees compensation or benefit
plans
5. PSA230 requires the auditor to document matters which are important in providing evidence to
support the auditor opinion m and states that the working papers include the auditor’s
reasoning on all significant matters which require the auditor’s judgment , together with the
auditor’s conclusion thereon. Which of the following should be documented by the auditor?
a. Fraud risk factors identified as being present during the auditor’s risk assessment process
b. Auditor’s response to identified fraud risk factors
c. Both fraud risk from identified as being present during the auditor’s risk assessments
process and the auditor’s response to any such factors
d. The standard does not require documentation of the identified fraud risk factors and the
auditor’s response to them
6. In connection with the element of assignment , a CPA firm’s system of quality control should
ordinarily establish procedures that
a. Provide adequate supervision at all levels. Considering the training, ability and experience of
the personnel assigned
b. Encourage personnel to sue authoritative sources on complex or unusual matter
c. Require preparation of time budgets for audits to determine manpower requirements and
to schedule
d. Establish qualifications deemed necessary for various levels of responsibility within the firm
7. The primary purpose of establishing quality control policies and procedures for deciding
whether to accept new client is to
a. Enable the CPA firm to attest to the integrity of the client management
b. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients
c. Minimize the likelihood of association with clients whose management lacks integrity
d. Anticipate before performing any field work whether an unmodified opinion can be
expressed
8. Fraud involving one or more members of management or those with governance is referred to
as
a. Management fraud
b. Employee fraud
c. Fraudulent financial reporting
d. Misappropriation of assets
9. Which of the following conditions are generally present when misstatements due to fraud
occur?
I. Incentive or pressure
II. Perceived opportunity
III. Rationalization
a. I and II only
b. II and III only
c. I and III only
d. I,II,III
10. Which of the following conditions or events may create incentives/ pressures to commit fraud?
a. Inadequate system of authorization and approval of transactions
b. Lack of mandatory vacations for employee performing key control function
c. Excessive pressure on management or operating personal to meet financial targets
established by those charge with governance, including sales of profitability incentive goals
d. Inadequate access controls over automated records
11. Adequate planning of the audit work help to ensure that
I. Appropriate attention is devoted to important areas of audit
II. Potential problems are identified
III. The work is completed expeditiously
a. Yes,yes,no
b. No,yes,yes
c. Yes,yes,yes
d. No,no,no
12. The auditor should plan the audit work so that the audit will be performed in an effective
manner. The extent of planning will vary according to the
I. Size of the entity
II. Complexity of the audit
III. Auditor’s experience with the entity and knowledge of the business
a. Yes,yes,yes
b. Yes,no,yes
c. No,yes,yes
d. No,no,no
13. Statement 1: obtaining knowledge of the entity’s business is an important part of planning the
audit work
Statement 2: the auditor’s knowledge of the entity’s business assists in the identification of
events, transactions and practices which may have material effect on the financial statements
a. Both statements are true
b. Both statements are false
c. True,false
d. False,true
14. A measure of how willing the auditor is to accept that the financial statements may be
materially misstated after the audit is completed and an unmodified opinion has been is issued
is the
a. Inherent risk
b. Acceptable audit risk
c. Control risk
d. Detection risk
15. One of the conditions that give rise to a demand for an external audit of financial statements is
expertise. Which of the following best describes the meaning of expertise as used in this context
a. Auditors usually rely on work of an expert as a basis for evaluating some assertions
embodied in the financial statements
b. The readers of the financial statements must possess the necessary expertise to be able to
understand the financial statements
c. Users usually lack the necessary expertise to verify the reliability of the financial information
d. As experts, auditors are expected to detect all material misstatements in the financial
statements
16. Pronouncements issued by AASC may be in the form of
I. Philippine Standards on Auditing
II. Philippine Standards on Assurance Engagements
III. Philippine Standards in Review Engagements
IV. Philippine Standards on Related Services
a. Yes, yes,yes,yes
b. Yes,no,yes,no
c. No,yes,yes,no
d. No,yes,no,yes
17. Hill, CPA has been retained to audit the financial statements on Monday Co. Mondays
predecessor auditor was Post, CPA who has been notified by Monday that Post’s services have
been terminated. Under these circumstances, which party should initiate the communication
between Hill and Post ?
a. Hill, the incoming auditor
b. Post ,the predecessor auditor
c. Mondays controller of CFO
d. The chairman of Monday’s board of directors
18. The relationship between materiality and risk is ordinarily
a. Direct
b. Parallel
c. Inverse
d. None
19. In making a preliminary judgment about materiality, the auditor initially determine the
aggregate (overall) level of materiality for each statement. For planning purpose the auditor
should used the
a. Level separately
b. Average of these levels
c. Largest aggregate level
d. Smallest aggregate level
20. This consists of checking the mathematical accuracy of documentation or records
a. Reperformance
b. Confirmation
c. Recalculation
d. Inspection
21. The auditor may accept or continue an audit engagement only when the basis upon which it is
to be performed has been agreed, through
I. Establishing whether the precondition for an audit are present
II. Confirming that there is a common understanding between the auditor and
management , and where appropriate, those charged with governance of the terms of
the audit engagement
a. I only
b. II only
c. Both I and II
d. Neither I nor II
22. He auditor who at the request of the group engagement team, performs work on financial
information related to a component for the group audit is a
a. Group auditor
b. Component auditor
c. Component engagement team
d. Group engagement team
23. An audit is conducted on the premise the management and where appropriate, those charged
with governance , have acknowledge and understand that they have responsibilities that are
fundamental to the conduct of an audit in accordance with PSAs. Which of the following is not
one of those responsibilities?
a. The preparation of the financial statements in accordance with relevant pronouncements
issued by the AASC.
b. The establishment and maintenance of adequate internal control system that is necessary
to enable the preparation of financial statements that are free from material misstatements,
whether due to fraud or error
c. To provide the auditor with access to all information that is relevant to preparation of the
financial statements such as records, documentation, and other matters
d. To provide the auditor unrestricted access to persons within the entity from which the
auditor determine it necessary to obtain auditor audit evidence
24. Which of the following statements concerning group audit is incorrect?
a. The group engagement team has the responsibility to establish an overall group audit
strategy and audit plan
b. The group engagement team shall determine the materiality for the group of financial
statements as a whole when establishing the overall group audit strategy
c. The component engagement team partner shall review the overall audit strategy and group
audit plan
d. The group engagement partner shall agree on the terms of the group audit engagement on
accordance with PSA 210.
25. In the planning stage of an audit engagement the auditor is required to perform audit
procedures to obtain an understanding of the entity and its environment including its internal
control. These procedures are called
a. Risk assessment procedures
b. Substantive tests
c. Tests of control
d. Dual purpose test
26. Which of the following matters would an auditor most likely consider when establishing the
scope of the audit?
a. The expected audit coverage, including the number and locations of the entity components
to be included
b. The entity’s timetable for reporting such as at interim and final stages
c. The discussion with entity’s management concerning the expected communication on the
status of audit work throughout the engagement and the expected deliverables resulting
from the audit procedures
d. Audit areas where there is a higher risk of material misstatement
27. In performing an audit financial statements, the auditor should obtain a sufficient knowledge of
clients business and industry to
a. Develop an attitude of professional skepticism concerning managements financial
statements assertions
b. Make constructive suggestions concerning improvement to the clients internal control
c. Evaluate whether the aggregate of known misstatements causes the financial statements
taken as a whole to be materially misstated
d. Understand the events and transactions that may have an effect on the clients financial
statements
28. As defined in the standard, ______ means the amount or amounts set by the auditor at less
than materiality for the financial statements as a whole to reduce to an appropriately low level
the probability that the aggregate of uncorrected and detected misstatements exceeds
materiality for the financial statements as a whole
a. Performance materiality
b. Materiality
c. Low materiality
d. Lesser materiality
29. Which of the following would an auditor most likely use in determining a preliminary judgment
about materiality?
a. The contents of the managements representations letter
b. The anticipated sample size of the planes substantive tests
c. The entity’s annualized interim financial statements
d. The results of internal control questionnaire
30. In designing written audit programs, an auditor should establish specific audit objectives that
relate primarily to the
a. Selected audit technique
b. Cost benefit of gathering audit evidence
c. Timing of audit procedures
d. Financial statements assertions
31. Audit programs are modifies to suit the circumstances of particular engagements. A complete
audit program should be developed
a. When the engagement letter is prepared
b. After obtaining an understanding of the control environment and control activities
components of the entity’s internal control
c. After the auditor has obtained an understanding of the entity and its environment ,
including its internal control and assessed risk of material misstatement
d. Prior to beginning the actual audit work
32.