Definition of Audit Evidence

Audit evidence is all information used by the auditor on which the audit opinion is based. The
gathering and evaluation of audit evidence is a cumulative and iterative process.

Types of Audit Evidence

The auditor obtains two types of audit evidence such as:

a. Underlying accounting records – The records of initial accounting entries and supporting
records, such as checks and records of electronic fund transfers; invoices; contracts; the
general and subsidiary ledgers, journal entries and other adjustments to the financial
statements that are not reflected in journal entries, and records such as work sheets and
spreadsheets supporting cost allocations, computations, reconciliations and disclosures.
b. Other information – all other evidence obtained by the auditor such as minutes of meetings,
confirmation from third parties and information obtained from such audit procedures as
inquiry, observation, and inspection.

The auditor must obtain the two types of audit evidence above, which must be consistent with
each other and not doubtful as to its reliability. Underlying accounting records alone cannot
constitute sufficient audit evidence.

Sources of Audit Evidence

The following are the list of sources of audit evidence:

 Performance of audit procedures. (Primary source)

 Previous audits.
 Firm’s quality control procedures for client acceptance and continuance
 Work of a management’s expert.
 Management representations.
 Other sources inside and outside the entity.

Primary Sources of Audit Evidence: Audit Procedures

Audit procedures as to purpose:
a. Risk assessment procedures (RAP) – are the audit procedures performed to obtain an
understanding of the entity and its environment including the entity’s internal control, to identify
and assess the risks of material misstatement, whether due to fraud or error, at the financial
statement and assertion levels, thereby providing a basis for designing and implementing
responses to the assessed risks of material misstatements; and
b. Further audit procedures (FAP) which comprise:
 Tests of controls (ToC) – an audit procedure designed to evaluate the operating
effectiveness of controls in preventing, or detecting and correcting, material misstatements
at the assertion level; and
 Substantive procedures (SP), comprising tests of details and substantive analytical
procedures – an audit procedure designed to detect material misstatements at the
assertion level.

Audit procedures as to type:

a. Inspection – involves examining records or documents, whether internal or external, in paper
form, electronic form, or other media, or a physical examination of an asset.
b. Observation – consists of looking at a process or procedure being performed by others, for
example, the auditor’s observation of inventory counting by the entity’s personnel, or of the
performance of control activities.
c. External Confirmation – a direct written response to the auditor from a third party (the
confirming party), in paper form, or by electronic or other medium.
d. Recalculation – consists of checking the mathematical accuracy of documents or records.
e. Reperformance – involves the auditor’s independent execution of procedures or controls that
were originally performed as part of the entity’s internal control.
f. Analytical Procedures – consists of evaluations of financial information made by a study of
plausible relationships among both financial non-financial data. Analytical procedures also
encompass the investigation of identified fluctuations and relationships that are inconsistent
with other relevant information or deviate significantly from predicted amounts.
g. Inquiry – consists of seeking information of knowledge persons, both financial and
nonfinancial, within the entity or outside the entity.

Types of Audit Procedures Linked According to Purpose

Purpose
Types FAP
RAP
ToC SP
Inspection   
Observation   
External Confirmation 
Recalculation 
Reperformance 
Analytical Procedures  
Inquiry   
Reliability and Cost of Audit Procedures
The most reliable evidence gathering techniques (audit procedures) should be used whenever
they are cost effective. The quality of internal controls has a significant effect on reliability.
Furthermore, a specific substantive audit procedure is rarely sufficient by itself to provide
competent evidence to satisfy the audit objective. However, assuming good internal controls and
the ability to choose a specific method, a list of the most reliable to the least reliable, evidence-
gathering techniques are in general

 Recalculation,
 Inspection,
 Reperformance,
 Observation,
 Confirmation,
 Analytical Procedures,
 Inquiry.

The evidence-gathering procedures in order of cost from most costly to least costly are in general:

 Confirmation (most costly),

 Inspection,
 Recalculation,
 Reperformance,
 Observation,
 Analytical Procedures,
 Inquiry (least costly).

Inquiry is the most extensively used audit procedures. Although inquiry may provide important
audit evidence, and may even produce evidence of a misstatement, inquiry alone ordinarily does
not provide sufficient audit evidence of the absence of a material misstatement at the assertion
level, nor of the operating effectiveness of controls.

Sufficiency and Appropriateness of Audit Evidence

The author shall design and perform audit procedures to enable the auditor to obtain sufficient
appropriate audit evidence (SAAE) to be able to draw reasonable conclusions on which to base
the auditor’s opinion. The sufficiency and appropriateness of audit evidence are interested.

Sufficiency
Sufficiency is the measure of the quantity of evidence. The quantity of audit evidence needed is
affected by the auditor’s assessment of the risks of misstatement (the higher the assessed risks,
the more audit evidence is likely to be required) and also by the quality of such audit evidence
(the higher the quality, the less may be required). Obtaining more audit evidence, however, may
not compensate for its poor quality.
Extent of Testing to Obtain Sufficient Evidence
An effective test provides appropriate audit evidence to an extent that, taken with other audit
evidence obtained or to be obtained, will be sufficient for the auditor’s purposes.

In selecting items for testing, the auditor determines the relevance and the reliability of information
to be used as audit evidence; the other aspect of effectiveness (sufficiency) is an important
consideration in selecting items to test. The means available to the auditor for selecting items for
testing are:

 All items (100% examination)

 Specific items
 Audit sampling
The application of any one or combination of these means may be appropriate depending on the
particular circumstances, for the example, the risks of material misstatement related to the
assertion being tested, and the practicality and efficiency of the different means.

Appropriateness
Appropriateness is the measure of the quality of audit evidence; that is, its relevance and its
reliability in providing support for the conclusions on which the auditor’s opinion is based.

When designing and performing audit procedures, the auditor shall consider the relevance and
reliability of the information to be used as audit evidence. The quality of all audit evidence is
affected by the relevance and reliability of the information upon which it is based.

Relevance
Relevance deals with the logical connection with, or bearing upon, the purpose of the audit
procedure, direction of testing and, where appropriate, the assertion under consideration.

Purpose of Audit Procedure

Audit procedures classified according to the purpose are risks assessment procedures (RAP),
test of controls (ToC) and substantive procedures (SP). These three procedures have different
purposes such as, to obtain understanding the entity and its environment, including internal
control and to detect material misstatements in the financial statements, respectively.

Assertion
Audit evidence, to be relevant, must link directly to relevant assertions. The auditor uses
assertions in considering different types of potential misstatements that may occur in the financial
statements. It is the reason why audit objectives follow and are closely related to assertions. In
other words, assertions guide the auditor in the performance of auditor procedures as to what
appropriate audit evidence to obtain.
A given set of audit procedures may provide audit evidence that is relevant to certain assertions,
but not others. For example, inspection of documents related to the collection of receivables after
the period end may provide audit evidence regarding existence and validation, but one
necessarily cutoff.

Directional Testing
The relevance of information to be used as audit evidence may be affected by the direction of
testing. For example, if the purpose of an audit procedure is to test for overstatement in the
existence or valuation of accounts payable may be a relevant audit procedure. On the other hand,
when testing for understatement in the existence or valuation of accounts payable, testing the
recorded accounts payable would not be relevant, but testing such information as subsequent
disbursements, unpaid invoices, supplier’s statements and unmatched receiving reports may be
relevant.

Reliability
The reliability of information to be used as audit evidence, and therefore of the audit evidence
itself is influenced by its source and its nature, and the circumstances under which it is obtained,
including the controls over its preparation and maintenance where relevant.

Evidence is general more reliable when:

a. Obtained from independent sources;

b. The related controls are effective;
c. Obtained directly then indirectly or by inference;
d. In documentary form then oral; and
e. In original state than by photocopies or facsimiles.

Inconsistency in, or Doubts over Reliability of, Audit Evidence

Obtaining audit evidence from different sources or of a different nature may indicate that an
individual item of audit evidence is not reliable, such as when audit evidence obtained from one
source is inconsistent with that obtained from another. This may be the case when, for example,
responses to inquires of management, internal audit and others are inconsistent, or when
responses to inquires of those charges with governance made to corroborate the responses to
inquires of management are inconsistent with the responses by management. Specific
documentation requirement if the auditor identified information that is inconsistent with the
auditor’s final conclusion regarding a significant matter.
Audit Documentation
Audit documentation (a.k.a. “working papers” or “workpapers”) is the record of audit procedures
performed, relevant audit evidence obtained, and conclusions the auditor reached.

The auditor shall prepare documentation to provide:

a. A sufficient and appropriate record of the basis for the auditor’s report; and
b. Evidence that the audit was planned and performed in accordance with PSAs and applicable
legal and regulatory requirements.

Audit documentation serves a number of additional purposes, including the following:

 Assisting the audit team to plan and perform the audit

 Assisting members of the audit team responsible for supervision to direct and supervise the
audit work, and to discharge their review responsibilities.
 Enabling the audit team to be accountable for its work.
 Retaining a record of matters of continuing significance to future audits.
 Enabling the conduct of quality control reviews and inspections.
 Enabling the conduct of external inspections in accordance with applicable legal, regulatory
or other requirements.

Auditor’s documentation is normally stored in an audit file. Audit file refers to one or more folders
or other storage media, ion physical or electronic form, containing the records that compromise
the audit documentation for specific engagement.

Timely Preparation of Audit Documentation

Preparing sufficient and appropriate audit documentation on a timely basis helps to enhance the
quality of the audit and facilitates the effective review and evaluation of the audit evidence
obtained and conclusions reached before the auditor’s report is finalized.

Form, Content and Extent of Audit Documentation

The auditor shall prepare audit documentation that is sufficient to enable an experiences auditor,
having no previous connection with the audit, to understand.

a. The nature, timing, and extent of the audit procedures performed to comply with the PSAs
and applicable legal and regulatory requirements;
b. The results if the audit procedures performed, and the audit evidence obtained; and
c. Significant matters arising during the audit, the conclusions judgements made in reaching
those conclusions.
In documenting the nature, timing and extent of audit procedures performed, the auditor shall
record:

a. The identifying characteristics of specific items or matters tested;

b. Who performed the audit work and the date such work was completed; and
c. Who reviewed the audit work performed and the date and the extent of such review.

Audit documentation, however, is not a substitute for the entity’s accounting records. Oral
explanations by the auditor, on their own, do not represent adequate support for the work the
audit.

Types of Audit Documentation

Auditors generally classify audit documentation into two types:

a. Current Files – Relate specifically to the current period’s audit. They often include
 Reconciliation of accounting records to FSs
 Lead schedules of major components of amounts in the FSs and supporting detailed
schedules
 Documentation of substantive procedures performed providing evidence corroborating or
contradicting management’s assertions
 The attorney’s letter and management’s representation letter
 Audit programs
b. Permanent (continuing) files – Relate to the company and contain information with long-term
significance. They are or ongoing interest in any period under audit and often include
 Debt agreements and pension contracts
 Articles on incorporation
 Flowcharts of internal control
 Bond indenture agreements and lease agreements
 Analyses of capital stock & owner’s equity accounts

Departure from a Relevant Requirement

If, in exceptional circumstances, the auditor judges it necessary to depart from a relevant
requirement in a PSA, the auditor shall document how the alternative audit procedures performed
achieve the aim of the requirement, and the reasons for the departure.

Assembly and Retention of the Final Audit File

The auditor shall assemble the audit documentation on a timely basis, ordinarily not more than
60 days after the date of the auditor’s report. After the assembly, the auditor shall not delete or
discard audit documentation before the end of its retention period, which ordinarily is no shorter
than seven years from auditor’s report date.
 REVIEW QUESTIONS
Definition and Types of Audit Evidence
1. The principal reason for an independent auditor to gather and evaluate audit evidence is to
A. Form an opinion on the financial statements.
B. Detect fraud.
C. Evaluate management.
D. Evaluate internal control.

2. Which statement is incorrect regarding audit evidence?

A. Audit evidence is all the information used by the auditor in arriving at the conclusions on
which the audit opinion is based.
B. Audit evidence includes the information contained in the accounting records underlying
the financial statements and other information.
C. Audit evidence is cumulative in nature.
D. Auditors are not expected to address all information that may exist.

3. Accounting records least likely include

A. The records of initial entries and supporting records.
B. The general and subsidiary ledgers.
C. Work sheets and spreadsheets supporting cost allocations.
D. Comparable data about competitors (benchmarking).

4. Other information that the auditor mas use as audit evidence least likely includes
A. Minutes of meetings.
B. Confirmations from third parties.
C. Information obtained by the auditor from such audit procedures as inquiry, observation,
and inspection.
D. Adjustments to the financial statements that are not reflected in formal journal entries.

5. Which of the following would not be considered audit evidence?

A. Invoices received by the company and retained on the company’s IT system in electronic
form.
B. The electronic work paper program package used by the auditor to produce the
electronic work papers.
C. Hard copy minutes of the Board of directors and audit Committee meetings.
D. Electronic images of the front and back of checks that the company has written.

Sources of Audit Evidence and Audit Procedures

6. Which of the following best describes the primary purpose of audit procedures?
A. To detect errors or irregularities
B. To comply with generally accepted accounting principles
C. To gather corroborative evidence
D. To verify the accuracy of account balances
7. The auditor obtains audit evidence to draw reasonable conclusions on which to base the
audit opinion by performing
A. Risk assessment procedures
B. Further audit procedures comprising test of controls and substantive procedures
C. Both A and B
D. Neither A nor B

8. External confirmation
A. Consists of seeking information of knowledgeable persons, both financial and non-
financial, throughout the entity or outside the party.
B. Is the process of obtaining a representation of information or of an existing condition
directly from a third party.
C. Is the auditor’s independent execution of procedures or controls that were originally
performed as part of the entity’s internal control.
D. Consists of checking the mathematical accuracy of documents or records.

9. Three common types of confirmations used by auditors are (1) negative confirmations, (2)
blank form positive confirmations, and (3) positive confirmations with information included.
Place the confirmations in order of reliability from highest to lowest.
A. 1, 2, 3. C. 2, 3, 1.
B. 3, 2, 1. D. 3, 1, 2.

10. This consists of looking at a process or procedure being performed by the others.
A. Reperformance C. Observation
B. Recalculation D. Inspection

11. The strongest criticism of the reliability of audit evidence that the auditor physically observes
is that
A. The client may conceal items from the auditor
B. The auditor may not be qualified to evaluate the items he is observing
C. Such evidence is too costly in relation to its reliability
D. The observation must occur at a specific time, which is often difficult to arrange

12. Generally, which of the following audit procedures is most costly

A. Inspection C. Inquiry
B. Observation D. Confirmation

13. Which of the following audit procedures is used extensively throughout the audit and often is
complementary to performing other audit procedures, yet the least reliable?
A. Inspection C. Inquiry
B. Observation D. Recalculation

14. Which of the following methods is considered the best combination in obtaining audit
evidence assuming documentary evidence is available to the auditor?
A. Inspection and Reperformance
B. Inquiry and Inspection
 C. Inquiry and Analytical procedure
D. Observation and Inquiry

15. Which of the following would be the most relevant form of evidence to evaluate the
reasonableness od account balances?
A. Analytical C. Physical
B. Documentary D. Hearsay

Sufficient Appropriate Audit Evidence (SAAE)

16. Which statement is incorrect regarding audit evidence?
A. The auditor should obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the audit opinion.
B. Accounting records alone do not provide sufficient audit evidence.
C. The auditor uses professional judgements and exercises professional skepticism in
evaluating the quantity and quality of audit evidence, and thus its sufficiency and
appropriateness, to support the audit opinion.
D. The matter of difficulty or expense involved is not a valid basis for omitting and audit
procedure which there is no alternative.

17. Which statement is correct regarding the sufficiency and appropriateness of audit evidence?
A. Sufficiency is the measure if the quality of audit service.
B. Appropriateness is the measure of the quantity of audit evidence; that is, its relevance
and its reliability in providing support for or, detecting misstatements in, the classes of
transactions, account balances, and disclosures and related assertions.
C. Merely obtaining more audit evidence may compensate for its poor quality
D. The quantity of audit evidence needed is affected by the risks of misstatement (the
greater the risk, the more audit evidence is likely to be required) and also by the quality
of such audit evidence (the higher the quality, the less may be required).

18. Ultimately, what us sufficient appropriate audit evidence depends on:

A. Auditor’s professional judgement
B. User’s view
C. Management’s judgement
D. All of the above

Extent of Testing to Obtain Audit Evidence

19. Which if the following means available to the auditor foe selecting items for testing is
required under PSA 500?
A. All items or 100% examination
B. Specific items
C. Audit sampling
D. No particular means is required as appropriateness depends on the particular
circumstance, for example, the risks of material misstatement and the practicality and
efficiency of the different means.
Relevance of Audit Evidence
20. The following statements relate to relevance of audit evidence. Which is correct?
A. Relevance deals with the logical connection with or bearing or bearing upon, the
purpose of the audit procedure, direction of testing and where appropriate, the assertion
under consideration.
B. The auditor shall perform tests of control to obtain understanding the entity and its
environment including internal control.
C. The auditor shall perform substantive procedures to test the operating effectiveness of
entity’s internal control and
D. The auditor shall perform risks assessment procedures to detect material misstatements
in the financial statements.

21. Which statements is incorrect regarding the audit evidence relevance and assertion?
A. A given set of audit procedures may provide audit evidence that is relevant to certain
assertions, but not to others.
B. The auditor often obtains audit evidence from different sources or of a differential nature
that is relevant to the same assertion.
C. Obtaining audit evidence relating to a particular assertion is not a substitute for obtaining
audit evidence regarding another assertion.
D. None of the above

22. Which of the following statements about the existence (testing is from accounting records to
the supporting evidence) and completeness (testing is from supporting evidence to the
accounting records) assertions is not true?
A. The existence and completeness assertions emphasize different audit concerns.
B. The completeness assertion deals with unrecorded transactions.
C. Existence deals with overstatements and completeness deals with understatements.
D. Existence deals with understatements and completeness deals overstatements.

Relevance of Audit Evidence

23. Which if the following generalizations in assessing the reliability of audit evidence is
incorrect?
A. Audit evidence is more reliable when it is obtained from independent sources outside the
entity.
B. Audit evidence obtained directly by the auditors more reliable than audit evidence
obtained indirectly or by inference.
C. Audit evidence in more reliable when it exists in documentary form.
D. Audit evidence provide by photocopies is more reliable that that provide by facsimiles.

24. Which of the following statements concerning evidence is correct?

A. Appropriate evidence supporting management’s assertions should be convincing rather
than merely persuasive.
B. An effective internal control structure contributes none of little to the reliability if the
evidence created within the entity.
 C. The cost of obtaining evidence is not an important consideration to an auditor in deciding
what evidence should be obtained.
D. A client’s accounting records cannot be considered sufficient audit evidence to support
the financial statements.

25. Which one of the following would be the most persuasive type of evidence?
A. Check register
B. Bank statement
C. Observation of assets
D. Inquiry with the in-house attorney

Audit Documentation
26. Which one of the following is the primary reason for documenting the audit work?
A. To prevent litigation by other parties that question the audit work?
B. To provide a stand-alone medium that gives audit conclusions and supports the opinion.
C. To give the client a full reporting of all work performed on their behalf.
D. To supply a point of reference for all auditors performing the work subsequently.

27. Working papers least likely

A. Assist in the planning and performance of the audit.
B. Assist in the supervision and review of the audit work.
C. Prevent misunderstandings with respect to the engagement.
D. Record the evidence that the audit was planned and performed in accordance with PSAs
and applicable legal and regulatory requirements.

Types of Audit Documentation

28. Audit documentation may be recorded on paper or on electronic or other media. Examples
of audit documentation include the following, except.
A. Audit programs C. Control manuals
B. Analyses D. Issues memoranda

29. Which of the following pairs of accounts could an auditor most likely analyze on the same
working paper?
A. Notes receivable and interest income.
B. Accrued interest receivable and accrues interest payable.
C. Notes payable and notes receivable.
D. Interest income and interest expense.

30. An auditor ordinarily uses a working trial balance resembling the financial statements
without footnotes, but containing columns for
A. Cash flow increases and decreases.
B. Audit objectives and assertions.
C. Reclassifications and adjustments.
D. Reconciliations and tick marks.
31. The permanent (continuing) file of an auditor’s working papers most likely would indicate
copies of the
A. Bank statements C. Lead schedules
B. Debt agreements D. Attorney’s letters

32. The current file of the auditor’s working papers generally should include
A. A flowchart of the internal controls.
B. Organization charts.
C. A copy of the financial statements.
D. Copies of bond and note indentures.

Timely
33. Which of the following statements relating to preparation of documentation is incorrect?
A. Audit documentation prepared on a timely basis enhances the quality of the audit.
B. Audit documentation prepared on a timely basis facilitates the effective review and
evaluation of the audit evidence obtained and conclusions reached before the auditor’s
report is finalized.
C. The auditor shall as how the alternative audit procedures performed achieve the aim of
that requirement, and the reasons of departure.
D. The auditor shall document all departure from PSAs, even from those are not relevant to
particular circumstances of the audit.

Form, Content, and Extent of Audit Documentation

34. Which of the following characteristics are not normally included in good audit
documentation?
A. Initials of the person preparing and reviewing the document.
B. An index – to better organize the working papers.
C. A cross-reference, which provides a trail for the auditor and the reviewer.
D. All are included in good audit documentation.

35. Which of the following is least likely to be a factor in the auditor’s decision about the extent
of the documentation of a particular audit area?
A. The risk of material misstatement.
B. The extent of the judgement involved in performing the procedures.
C. The nature and extent of exceptions identified.
D. Whether or not the client has an internal audit function.

36. Audit documentation should be prepared in enough details so that:

A. An experienced auditor who has worked with the client in the past can understand the
procedures performed and the evidence obtained.
B. A reader of the financial statements who has no previous connection with the audit can
understand the procedures performed and the evidence obtained.
 C. A reader of the financial statements who has a background in financial analysis can
understand the procedures performed and the evidence obtained.
D. An experienced auditor who has no previous connection with the audit can understand
the procedures performed and the evidence obtained.

Assembly and retention of the Final Audit File

37. Completion of assembly of final audit files should be done
A. Within 60 days after the date of the auditor’s report
B. Not be more than 90 days after the date of the auditor’s report
C. No shorter than seven years from the date of the auditor’s report
D. Minimum of five years from the date of the auditor’s report

38. Ignoring any particular legal or regulatory requirement, audit documentation should be
retained
A. Minimum of five years
B. As long as lead schedules have relevance to forthcoming audits.
C. Until 3 years after the client selects another auditor.
D. Working papers must be maintained indefinitely.

39. Which statements is correct concerning the deletion of audit documentation?

A. Superseded audit documentation should always be deleted from the audit file.
B. After the audit file has been completed, the auditor should not delete or discard audit
documentation.
C. Auditors should use professional skepticism in determining which audit documentation
should be deleted.
D. Audit documentation should never be deleted from the audit file.

40. The following statements pertain to audit working papers:

I. Working papers are owned by the auditors; the rights of owner are subject to ethical
limitations relating to the confidential relationships with the client
II. Working papers serve as useful reference source for client and as a substitute for
client’s accounting records.
III. Working papers must be permanently kept or retained by the auditors.

The above statements are respectively

A. True, True, True
B. True, True, False
C. True, False, False
D. False, False, False
1. Evidential matters supporting the financial statements consist of accounting records and
other information available to auditor. Other information can be found in:
A. The subsidiary ledgers
B. Worksheet supporting cost allocation
C. Minutes of direction of directors’ meetings
D. Adjusting entries

2. Which of the following elements ultimately determines the specific auditing procedures
that are necessary in the circumstances to afford a reasonable basis an opinion?
A. Auditor judgement C. Relative risk
B. Reasonable assurance D. Materiality

3. Which of the following is not a basic procedure used in an audit?

A. Risk assessment procedures
B. Substantive procedures
C. Test of controls
D. Tests of direct evidence

4. Observation
A. Consists of looking at a process or procedure being performed by others.
B. Consists of seeking information of knowledgeable persons throughout the entity or
outside the party
C. Is the process of obtaining a representation directly from a third party.
D. Is the auditor’s independent execution of procedures or controls that were originally
performed as part of the entity’s internal control.

5. Recalculations of the client’s computations would not include which of the following
types of evidence?
A. Cutoff C. Extension
B. Footing D. Cross-footing

6. The extent of procedures is affected mostly by which of the following factors?

A. The sheer volume of procedures to be applied by the auditor.
B. The time of year in which the client takes a physical inventory in the warehouse.
C. The auditor’s judgement that misstatements are probable in certain balances.
D. The availability of the client’s staff at or near the balance sheet date.

7. Inspection involves examining records or documents, whether internal or external, in

paper form, electronic form, or other media, physical examination of an asset. Evaluate
whether each of the following statements qualifies as inspection.
I. Test performed on 100% of the items within a population
II. Selecting items over a certain amount
III. Selecting items for the total population on the basis that was expected to be
representative
 A. I, II and III qualify
B. I and II qualify, III does not qualify
C. I and II do not qualify; II qualifies
D. I, II, II do not qualify

8. Theoretically, which of the following would not have an effect on the amount of audit
evidence gathered by the auditor?
A. The type of opinion to be issued
B. The auditor’s evaluation of internal control.
C. Types of audit evidence to the auditor.
D. Whether or not the client reports to the Securities and Exchange Commission.

9. “Physical examination” is the inspection or count by the auditor of items such as:
A. Cash, inventory, and payroll timecards.
B. Cash, inventory, sales documents.
C. Cash, inventory, canceled checks, and tangible fixed assets.
D. Cash, inventory, securities, notes receivable, and tangible fixed assets.

10. Which of the following statements concerning audit evidence is correct?

A. To be competent, audit evidence should be either persuasive or relevant, but need
not be both.
B. The measure of the validity of audit evidence lies in the auditor’s judgement
C. The difficulty and expense of obtaining audit evidence is valid basis for omitting the
test.
D. A client’s accounting data can be sufficient audit evidence to support the financial
statements.

11. Each of the following might by itself, form a valid basis for an auditor to decide to omit a
test, except for the
A. Relative risk involved
B. Degree of reliance on the relevant internal controls.
C. Difficulty and expense involved in testing a particular item.
D. Relationship between the cost of obtaining evidence and its usefulness.

12. Which of the following statements regarding the relevance of evidence is correct?
A. To be relevant, evidence must pertain to the audit objective of the evidence.
B. To be relevant, evidence must be persuasive.
C. To be relevant, evidence must relate to multiple audit objectives.
D. To be relevant, evidence must be derived from a system including effective internal
controls.

13. Which one of the following would be considered the most persuasive type of audit
evidence?
A. Purchase orders from vendors
B. Customer accounts receivable files
 C. Computerized general ledger
D. Confirmations from banks

14. Which of the following types of audit evidence is the most persuasive?
A. Prenumbered client purchase order forms
B. Client work sheets supporting cost allocations
C. Bank statements obtained from the client
D. Client representation

15. Which of the following statements is incorrect regarding the reliability of audit evidence?
A. Oral representation by the client management is not a valid evidence
B. Audit evidence obtained directly by the auditor is more reliable than that one
provided by the client.
C. The effectiveness of accounting and internal control adds to the reliability of internal
evidence.
D. While internal audit evidence is considered to be acceptable, the auditor usually
prefers audit evidence from external sources.

16. Which of the following types of audit evidence is the least reliable?
A. Evidence from the client’s organization
B. Evidence derived from a well-controlled system
C. Evidence from independence outside sources
D. Original documents

17. Audit evidence can come in different forms with different degrees of persuasiveness.
Which of the following is the least persuasive type of evidence?
A. Bank statement obtained from the client
B. Oral representations of client
C. Prenumbered client sales invoices
D. Vendor’s invoices

18. An auditor’s working papers, the record of audit procedures performed, relevant audit
evidence obtained and conclusions the auditor reached, serve mainly to
A. Provide the principal support for the auditor’s report.
B. Satisfy the auditor’s responsibilities.
C. Monitor the effectiveness of the CPA firm’s quality control procedures.
D. Document the level of independence maintained by the auditor.

19. Which of the following does not describe one of the functions of audit workpapers?
A. Facilities third-parties reviews.
B. Aids in the planning, performance, and review of audits.
C. Provides the principal evidential support for the auditor’s report.
D. Aids in the professional development of the operating staff.
20. Which of the following is not a factor affecting the independent auditor’s judgement
about the quantity, type, and content of audit working papers?
A. The needs for supervision and review of the work performed by assistants.
B. The nature and condition of the client’s records and internal controls.
C. The expertise of client personnel and then participation in preparing schedules.
D. The type of the financial statements, schedules, or other information on which the
auditor is reporting.

21. Audit documentation may be recorded on paper or on electronic or other media.

Examples of audit documentation include the following
A. Letters of confirmation and representation
B. Checklists
C. Correspondence (including e-mail) concerning significant matters
D. All of the above

22. The permanent file section of the working papers that is kept for each audit client most
likely contains
A. Review notes pertaining to questions and comments regarding the audit work
performed.
B. A schedule of time spent on the engagement by each individual auditor.
C. Correspondence with the client’s legal counsel concerning pending litigation.
D. Narrative descriptions of the client’s accounting procedures and internal accounting
controls.

23. Which of the following statements about working papers is correct?

A. Working papers are not permitted to be used as a reference source by the client.
B. The auditor should document the understanding of the client’s internal control
obtained to plan the audit.
C. Working papers may be regarded as a substitute for the client’s accounting records.
D. The independent auditor may discard working papers after two years.

24. A schedule set up to combine similar general ledger accounts, the total of which appears
on the working trial balance as a simple amount, is referred to as a:
A. Supporting schedule
B. Lead schedule
C. Corroborating schedule
D. Reconciling schedule

25. A schedule listing account balances for the current and previous years, and columns for
adjusting and reclassifying entries proposed by the auditors to arrive at the final amount
that will appear in the financial statement, is referred to as a:
A. Working trial balance
B. Lead schedule
C. Summarizing schedule
D. Supporting schedule
26. Which of the following workpapers would one normally expect to find in the permanent
file?
A. A copy of a long-term bond indenture.
B. The working trial balance.
C. An analysis of additions and disposals relating to marketable securities.
D. A workpaper analyzing customer replies to confirmation requests.

27. Which of the following items would most likely be found in an auditor’s permanent file
papers?
A. Excerpts of shareholders’ and directors’ meetings
B. Staff assignments for the current audit
C. Preliminary analytical procedure notes
D. Representation letter

28. No deletions of audit documentations are allowed after the

A. Client’s year – end
B. Documentation completion date
C. Last date of significant fieldwork
D. Report release date

29. Generally, which of the following audit procedures is most reliable?

A. Inspection C. Inquiry
B. Observation D. Recalculation

30. Working papers that record the procedures used by the auditor to gather evidence
should be:
A. Considered the primary support for the FSs being examined.
B. Viewed as the connecting link between the books of account and the financial
statements.
C. Designed to meet he circumstances of the particular engagement.
D. Destroyed when the audited entity ceases to be a client.
24. An audit client’s description that its financial statements are prepared in accordance with a
particular applicable financial reporting framework is appropriate only if
I. The financial statements comply with all the requirements of that framework that are
effective during the period covered by the financial statements.
II. The financial statements are in substantial compliance with the framework
III. The financial statements adequately disclose the significant accounting policies
selected and applied.
IV. The terminology used in the financial statements, including the title of each financial
statement, is appropriate.

For each of the following types of misstatements (Questions 25-28), select the
control that should have prevented the misstatement.

25. A manufacturing company received a substantial sales return in the last month of the year,
but the credit memorandum for the return was not prepared until after the auditors had
completed their field work. The returned merchandise was included in the physical
inventory.
I. Aged trial balance of accounts receivable is prepared.
II. Credit memoranda are pre-numbered and all numbers are accounted for
III. A reconciliation of the trial balance of customer’s accounts with the general ledger
control is prepared periodically.
IV. Receiving reports are prepared for all the materials received and such reports are
accounted for on a regular basis.

26. The sales manager credited a salesman, Juniver, with sales that were actually “house
account” sales. Later, Juniver divided his excess sales commission with the sales manager.
I. The summary sales entries are checked periodically by persons independent of
sales functions.
II. Sales orders are reviewed and approved by persons independent of the sales
department.
III. The internal auditor compares the sales commission statements with the cash
disbursements records.
IV. Sales orders are pre-numbered, and all numbers are accounted for.

27. A sales invoice for the P52,000 was computed correctly but, by mistake was key entered as
P25,000 to the sales journal and to the accounts receivable master file. The customer
remitted only P25,000, to the amount on his monthly statement.
I. Prelistings and predetermined totals are used to control postings.
II. Sales invoice serial numbers, prices, discounts, extensions, and footings are
independently checked.
III. The customer’s monthly statements are verified and mailed by a responsible person
other that the bookkeeper who prepared them.
 IV. Unauthorized remittance deductions made by customers or other matters in dispute
are investigated promptly by a person independent of the accounts receivable
function.

28. Copies of sales invoices show different unit prices for apparently identical items.
I. All sales invoices are checked as to all details after their preparation.
II. Differences reported by customers are satisfactorily investigated.
III. Statistical sales data are compiled are reconciled with recorded sales.
IV. All sales invoices are compared with the customer’s purchase orders.

29. The auditor faces a risk that the audit will not detect material misstatements that occur in the
accounting process. In regard to the minimizing this risk, the auditor relies primarily on
I. Substantive tests III. Internal control
II. Tests of controls IV. Statistical analysis

30. An accountant may perform an agreed-upon procedures engagement regarding prospective

financial statements provided that
I. Use of the report is to be restricted to the specified users.
II. The prospective financial statements are also examined.
III. Responsibility for the sufficiency of the procedures performed is taken by the
accountant.
IV. Negative assurance is expressed on the prospective financial statements taken as a
whole.

31. An external auditor will use internal auditors to assist in the audit of accounts receivable. Of
the following procedures, the one that would be most appropriate for the internal auditors to
perform is the
I. Assessment of control risk for accounts receivable.
II. Determination of the number of positive confirmation requests to be mailed to
substantiate the existence of accounts receivable.
III. Preparation of an aged trial balance of accounts receivable.
IV. Establishment of the amount of accounts receivable that is considered material.

32. The AASC was established by

I. Professional Regular Commission (PRC) upon the recommendation of the Board of
Accountancy (BOA).
II. PICPA
III. PICPA and the Association of CPA’s in Public Practice (ACPAPP)
IV. International Federation of Accountants (IFAC)
33. Which of the following fraudulent activities most likely could perpetrated due to the lack of
effective internal controls in the revenue cycle?
I. Fictitious transactions may be recorded that cause an understatement of revenues
and overstatement of receivables.
II. Claims received from customers for goods returned may be intentionally recorded in
other customer’s accounts.
III. Authorization f credit memos by personnel who receive cash may permit the
misappropriation of cash.
IV. The failure to prepare shipping documents may cause an overstatement of inventory
balances.

34. When the financial statements contain material but not pervasive misstatements because
the accounting policies selected are not consistent with the applicable financial reporting
framework, the auditor should
I. Express a qualified opinion and describe the matter giving rise to the modification in
a separate paragraph.
II. Express a qualified opinion and describe the matter giving rise to the modification
within the opinion paragraph.
III. Disclaim an opinion and describe the matter giving rise to the modification in a
separate paragraph.
IV. Disclaim an opinion and describe the matter giving rise to the modification within the
opinion paragraph

35. A service organization’s internal control may interact with that of the client. The user auditor
I. Is not required to evaluate the service organization’s controls.
II. Should obtain absolute assurance that the service organization’s internal control will
prevent or detect errors or fraud.
III. Should not consider weaknesses in the service organization’s internal control id the
client has effective controls related to service organization processing.
IV. Need not be concerned with the service organization’s internal control if the client
has effective controls related to service organization processing.

36. A continuing accountant is one who has been engaged to audit, review, or compile and
report on the financial statements of the current period and one or more consecutives
periods immediately prior to the current period. A continuing accountant who performs the
same or a higher level of service with respect to the financial statements of the current
period should
I. Update his/her report on financial statements of a prior period.
II. Disclaim any assurance on the prior period’s statements.
III. Reissue the report on the financial statements of a prior period.
IV. Express an adverse opinion with respect to the prior period’s financial statements.
37. Which one of the following statements concerning sampling risk and non-sampling risk is
correct?
I. Neither sampling risk nor non-sampling risk can be reduced by the auditor.
II. Sampling risk, but not non-sampling risk, can be reduced by the auditor.
III. Non-sampling risk, but not sampling risk, can be reduced by the auditor.
IV. Both sampling risk and non-sampling risk can be reduced by the auditor.

38. The Philippine Standards on Assurance Engagements (PSAEs) are to be applied in

I. Assurance engagements dealing with subject matters other than historical financial
information.
II. Compilation engagements and agreements to apply agreed-upon procedures to
information.
III. The audit or review of historical financial information.
IV. Assurance engagements dealing with historical financial information.

39. The adverse effects of events causing an auditor to believe there is substantial doubt about
an entity’s ability to continue as a going concern would most likely be mitigated by evidence
relating to the
I. Ability to expand operations into new product lines in the future.
II. Feasibility of plans to purchase leased equipment at less than market value.
III. Marketability of assets that management plans to sell.
IV. Committed arrangements to convert preference shares to long-term debt.

40. Which of the following constitutes the most significant risk within the purchasing cycle?
I. Receiving department personnel sign receiving documents without inspecting or
counting the goods.
II. Large quantities of relatively inexpensive parts are stored in open areas near work
stations to reduce production slow-downs.
III. Poor records of transfers between warehouses often result in unnecessary
purchases and excess inventories.
IV. Warehouse personnel do not compare quantities received to quantities shown on
transfer tickets.

41. An auditor, who, before the completion of the engagement, is requested to change the
engagement to one which provides a lower level of assurance, should consider the
appropriateness of doing so. If the auditor concludes that there is reasonable justification to
change the engagement and if the audit work performed complies with the Philippine
Standards applicable to the changed engagement, the report issued would be the
appropriate for the revised terms of engagement and would include reference to:
I. The original engagement
II. Any procedures that may have been performed in the original engagement.
A. I only C. Both I and II
B. II only D. Neither I nor II
42. In performing an audit of financial statements, the auditor should obtain a sufficient
knowledge of a client’s business and industry to
I. Develop an attitude of professional skepticism concerning management’s financial
statement assertions.
II. Make constructive suggestions concerning improvements to the client’s internal
control.
III. Evaluate whether the aggregation of known misstatements causes the financial
statements taken as a whole to be materially misstated.
IV. Understand the events and transactions that may have an effect on the client’s
financial statements.

43. All of the following are examples of substantive tests to verify the valuation of net accounts
receivable except the
I. Recomputation of the allowance for bad debts.
II. Inspection of accounts for current versus noncurrent status in the statement of
financial position.
III. Inspection of the accounts receivable aging schedule.
IV. Comparison of the allowance for bad debts with past periods.

44. As a result of sampling procedures applied as tests of controls, an auditor incorrectly

assesses control risk higher than appropriate. The most likely explanation for this situation is
that:
I. The deviation rate in the auditor’s sample is less than the tolerable rate, but the
deviation rate in the population exceeds the tolerable rate.
II. The deviation rate in the auditor’s sample exceeds the tolerable rate, but the
deviation rate in the population is less than the tolerable rate.
III. The deviation rate of both the auditor’s sample and the population exceed the
tolerable rate.
IV. The deviation rate of both the auditor’s sample and the population are less than the
tolerable rate.

45. Financial statements prepared in accordance with a financial reporting framework designed
to meet the financial information needs of specific users are referred to as
I. Special purpose financial statements
II. Special purpose framework
III. General purpose financial statements
IV. Special purpose financial statements

46. PSA 620 considers the following individuals as “experts”, except

I. An individual with expertise in applying methods of accounting for deferred income
tax
II. An expert in taxation law.
III. An individual with expertise in complex modeling for the purpose of valuing financial
instruments.
 IV. An individual with expertise in the valuation of assets acquired and liabilities
assumed in business combinations.

47. Which of the following audit procedures is best for identifying unrecorded trade accounts
payable?
I. Examining unusual relationships between monthly accounts payable balances and
recorded cash payments.
II. Reconciling vendor’s statements to the file of receiving reports to identify items
received just prior to the balance sheet date.
III. Reviewing cash disbursements recorded subsequent to the balance sheet date to
determine whether the related payables apply to the prior period.
IV. Investigating payables recorded just prior to and just subsequent to the balance
sheet date to determine whether they are supported by receiving reports.

48. Which of the following most completely describes how independence has been defined by
the accounting profession?
I. Possessing the ability to act with integrity, and exercise objectivity and professional
skepticism.
II. Accepting responsibility to act professionally and in accordance with laws and
regulations.
III. Avoiding the appearance of significant interests in the affairs of an assurance debt.
IV. Performing an assurance service from the viewpoint of the public.

49. A major customer of an audit client suffers a fire just prior to completion of year-end field
work. The audit client believes that this event could have a significant direct effect on the
financial statements. The auditor should
I. Advise management to disclose the event in notes to the financial statements.
II. Disclose the event in the auditor’s report.
III. Withhold submission of the auditor’s report until the extent of the direct effect on the
financial statements is known.
IV. Advise management to adjust the financial statements.

50. An entity installed antivirus software on all its personal computers. The software was
designed to prevent initial infections, stop replication attempts, detect infections after their
occurrence, mark affected system components, and remove viruses from infected
components. The major risk in relying on antivirus software is that it may
I. Consume too many system resources
II. Interfere with system operations
III. Not detect certain viruses
IV. Make software installation too complex.

51. The audited financial statements to be filled with the SEC shall be accompanied by a
I. Management Report
II. Registration Statement
 III. Statement of Management’s Responsibility for Financial Statements
IV. Statement of the Board of Director’s Responsibility for Financial Statements

52. If the objective of a test of details of transactions is to detect overstatements of sales, the
auditor’s direction of testing should be from the
I. Cash receipts journal to the sales journal
II. Accounting records to the source documents
III. Source documents to the accounting records.
IV. Sales journal to the cash receipts journal.

53. Which of the following statements is correct about the sample size in statistical sampling
when testing internal controls?
I. The auditor should consider the tolerable rate of deviation from the controls being
tested in determining sample size.
II. As the likely rate of deviation decreases, the auditor should increase the planned
sample size.
III. The allowable risk of assessing control risk too low has no effect on the planned
sample size
IV. Of all the factors to be considered, the population size has the greatest effect on the
sample size.

54. The report on an agreed-upon procedures engagement should contain

I. Identification of the purpose for which the agreed-upon procedures were performed
II. An expression of positive assurance based on the specific procedures performed.
III. A statement that the auditor is independent of the entity.
IV. A general description of the procedures performed.

55. On-line computer systems may be classified according to how information is entered into the
system, how it is processed and when the results are available to the user. Which of the
following relates to an on-line/memo update (and subsequent processing) system?
I. Individual transactions are entered at workstations validated and used to update
related computer files immediately.
II. Individual transactions are entered at a workstation, subjected to certain validation
checks and added to a transaction file that contains other transactions entered
during the period. Later, during a subsequent processing cycle, the transaction file
may be validated further and then used to update the relevant master file.
III. Also knowing as a shadow update, it combines on-line/real-time processing and on-
ling/batch processing.
IV. A communication system that enables computer users to share computer equipment,
application software, data and voice and video transmission.
56. In certain circumstances, an auditor’s report may be modified by adding a paragraph,
preferably after the opinion paragraph, to highlight a matter affecting the financial
statements which is included in a note to the financial statements that more extensively
discusses the matter. This paragraph is called a/an
I. Reference to the note paragraph.
II. Emphasis of matter paragraph.
III. Explanatory paragraph.
IV. Unmodified opinion explanatory paragraph

57. An examination of a financial forecast is a professional service that involves

I. Assuming responsibility to update management on key events for one year after the
report’s date.
II. Compiling or assembling a financial forecast that is based on management’s
assumptions.
III. Limiting the distribution of the accountant’s report to management and the board of
directors
IV. Evaluating the preparation of a financial forecast and the support underlying
management’s assumptions.

58. signals that can be sent over ordinary telephone lines is a/an
I. Intelligent terminal
II. Point-of-sale terminal
III. Terminal emulator
IV. Modem

59. The auditor is required to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to fraud or error. In all cases
when reasonable assurance cannot be obtained, the auditor’s report should contain a/an
I. Unqualified opinion
II. Qualified or adverse opinion
III. Qualified or disclaimer of opinion
IV. Disclaimer of opinion

60. Which of the following statement concerning the assessment of control risk in a client’s
computer environment is true?
I. The auditor’s objective with respect to the assessment of control risk are the same
as in a manual system.
II. The auditor must obtain an understanding of the internal control and test controls in
computer environments.
III. If the general controls are ineffective, the auditor ordinarily can assess control risk at
a low level if the application controls are effective.
IV. The auditor usually can ignore the computer system if (s)he can obtain an
understanding of the controls outside the computer system.
61. The following statements relate to the auditor’s consideration of the work of internal auditing.
Which is incorrect?
I. The role of internal auditing is determined by management, and its objectives differ
from those of the external auditor who is appointed to report independently on the
financial statements.
II. The external auditor should obtain a sufficient understanding of internal audit
activities to assist in planning the audit and developing an effective audit approach.
III. During the course of planning the audit, the external auditor should perform a
preliminary assessment of the internal audit function when it appears that internal
auditing is relevant to the external audit of the financial statements in specific audit
areas.
IV. Internal auditing activities do not include review of the economy, efficiency and
effectiveness of the entity’s operations.

62. The following statements relate to the auditor’s inquiry regarding litigation and claims. Which
is correct?
I. When litigation or claims have been identified or when the auditor believes they may
exist, the auditor should seek direct communication with entity’s lawyers.
II. The auditor should seek direct communication with entity’s lawyers.
III. If management refuses to give the auditor permission to communicate with the
entity’s lawyers, this would be a scope of limitation and should ordinarily lead to a
qualified or adverse opinion.
IV. The letter of audit inquiry, which should be prepared by the auditor and sent by
management, should respect the lawyer to communicate directly with the auditor.

63. Prior to commencing field work, an auditor usually discusses the general audit strategy with
client’s management. Which of the following details do management and the auditor usually
agree upon at this time?
I. The specific matters to be included in the communication with the audit committee.
II. The minimum amount f misstatements that may be considered to be reportable
conditions.
III. The schedules and analyses that the client’s staff should prepare.
IV. The effects that inadequate controls may have over safeguarding of assets.

64. An auditor may report on summarized financial statements that are derived from complete
audited financial statements if the
I. Auditor indicates whether the information in the summarized financial statements is
consistent with the audited financial statements from which it was derived.
II. Summarized financial statements are distributed only to management and the board
of directors.
III. Auditor describes the additional review procedures performed on the summarized
financial statements.
IV. summarized financial statements are presented in comparative form with the prior
year’s summarized financial statements.
65. A continuing accountant id one who has been engaged to audit, review, or compile and
report on the financial statements of the current period and one or more consecutive periods
immediately prior to the current period. A continuing accountant who performs the same or a
higher level of service with respect to the financial statements of the current period should
I. Update his/her report on the financial statements of a prior period.
II. Disclaim any assurance on the prior period’s statements.
III. Reissue the report on the financial statements of a prior period
IV. Express an adverse opinion with respect to the prior period’s financial statements.

66. 66. An auditor refers to significant related party transactions in a separate paragraph of the
report. If the ensuing opinion paragraph contains the words “with the foregoing explanation”,
the auditor is considered to have
I. Expressed an unmodified opinion with appropriate reference to the separate
paragraph.
II. expressed an adverse opinion.
III. Expressed a negative assurance opinion.
IV. Reported inappropriately.

67. 67. The other information in a published report containing audited financial statements may
be relevant to an independent auditor. With respect to other information
I. The auditor’s responsibility does not extend beyond the financial information
identified in the report.
II. The auditor is obligated to perform auditing procedures to corroborate other
information contained in a document.
III. The auditor need not be concerned with other information.
IV. The auditor must include the other information in the report.

68. Modern computer technology makes it possible to perform paperless audits. For example, in
an audit of computer-processed customer accounts receivable balances, an auditor might
use a personal computer to access the accounts receivable files directly and copy selected
customer records into the computer for audit analysis. Which of the following is an
advantage of this type of paperless audit of accounts receivable balances?
I. It reduces the amount of substantive testing required.
II. It allows immediate processing of audit date on a spreadsheet working paper.
III. It increases the amount of technical skill required of the auditor.
IV. It allows direct confirmation of customer account balances.

69. The size of a sample designed for dual-purpose testing should be

I. The larger of the samples that would otherwise have been designed for the two
separate purposes.
II. The smaller of the samples that would otherwise have been designed for the two
separate purpose.
 III. The combined total of the samples that would otherwise have been designed for the
two separate purposes.
IV. More than the larger of the samples that would otherwise have been designed for the
two separate purposes, but less than the combined total of the samples that would
otherwise have been designed for the two separate purposes.

70. Assistants to whom work is delegated need appropriate direction. Direction involves
I. Informing assistants of their responsibilities and the objectives of the procedures they
are to perform.
II. Informing assistants of matters, such as the nature of the entity’s business and
possible accounting or auditing problems that may affect the nature, timing and
extend of audit procedures with which they are involved.
III. Both A and B
IV. Neither A nor B

71. Documentary evidence is one of the principal types of corroborating information used by an
auditor to substantiate an opinion. Which one of the following examples of documentary
evidence would be the most reliable?
I. Time tickets.
II. Material requisition slips.
III. Copies of sales invoice.
IV. Bank statements.

72. A “proof of cash” used by an auditor

I. Proves that the client’s year-end balance of cash is fairly stated.
II. Confirms that the client has properly separated the custody function from the
recording function with respect to cash.
III. Validates that the client’s bank did not make an error during the period being
examined.
IV. Determines if there were any unauthorized disbursements or unrecorded deposits for
the given period.

73. When the auditor performs substantive test of balances, the primary concern is
I. Assessing control risk too high
II. Assessing control risk too low
III. Incorrect rejection of an account balance
IV. Incorrect acceptance of an account balance

74. An auditor would use variables sampling to

I. Determine the total estimated value of ending merchandise inventory
II. Determine the number of inventory items improperly costed
III. Determine how often credit sales of a certain magnitude were not approved
IV. Estimate how often sales invoice were not verified for mathematical accuracy.
75. The following statements relate to the fundamental principles of professional ethics:
A B C D
Integrity implies fair dealing and True True False False
truthfulness.
The principle of objectivity imposes an
obligation on all professional
accountants to maintain professional
knowledge and skill at the level True False True False
required.
The Principle of professional behavior
requires all professional accountants to
act diligently in accordance with
applicable technical and professional
standards when rendering professional
services. False False True True

76. An entity’s accounting records generally include the records of initial entries and supporting
records including
I. Confirmations from third parties.
II. Information obtained by the auditor from such audit procedures as inquiry,
observation, and inspection.
III. Worksheets and spreadsheets supporting cos allocations.
IV. Other information developed by, or available to, the auditor to permit him/her to
reach conclusions through valid reasoning.

77. The auditor is required by the standard to consider the CIS environment in designing audit
procedures to reduce risk to an acceptably low level. Which of the following statements is
incorrect?
I. The auditor’s specific audit objectives do not change whether financial information
processed manually or by computer.
II. The methods of applying audit procedure to gather audit evidence are not influenced
by the methods of computer processing.
III. The auditor may use either manual audit procedures, computer-assisted audit
techniques (CAAT’s), or a combination of both to obtain sufficient appropriate audit
evidence
IV. In some CIS environments, it may be difficult or impossible for the auditor to obtain
certain data for inspection, inquiry, or confirmation without the aid of a computer.

78. An auditor’s report on financial statements prepared in accordance with the financial
reporting provisions of a contract (that is, a special purpose framework) to comply with the
provisions of that contract should include all of the following except
I. An opinion as to whether the financial statements are presented fairly, in all material
respects, in accordance with the financial reporting provisions of the contract.
II. A statement that indicates the basis of accounting used.
 III. An opinion as to whether the basis of accounting used is appropriate under the
circumstances
IV. Reference to the note to the financial statements that describe the basis of
presentation.

79. Which if the following procedures should an auditor ordinarily perform regarding subsequent
events?
I. Review cutoff bank statements for several months after the year-end.
II. Compare the latest available interim financial statements with the financial
statements being audited.
III. Send second request to the client’s customers who failed to respond to initial
accounts receivable confirmation request.
IV. Communicate material weaknesses in internal control to the client’s audit committee.

80. The following statements are ordinarily included in a management representation letter,
except
I. The completeness and availability of minutes of stockholder’s and director’s
meetings.
II. Sufficient appropriate audit evidence has been made available to permit the
expression of unqualified opinion.
III. There have been no irregularities involving management or employees who have a
significant role in internal control or that could have a material effect on the financial
statements.
IV. The financial statements are free of material misstatements, including omissions.

81. The standard states that the auditor may decide to select specific items from population
based on such factors as the auditor’s understanding of the entity, the assessed risk of
material misstatement, and the characteristics of the population being tested. Specific items
that may be selected for testing usually include the following, except
I. Items that are of high value.
II. Items that are suspicious, unusual, risk-prone, or have a history of error.
III. All items whose values do not exceed a certain amount so as to verify only a small
proportion of the total amount of class of transactions or account balance.
IV. Items that provide information about matters such as the nature of the entity, the
nature of transactions, and internal control.

82. Which of the following is the greatest advantage of a database system?

I. Data redundancy can be reduced.
II. Backup and recovery procedures are minimized.
III. Multiple occurrences of data items are useful for consistency checking
IV. Conversion to a database system is inexpensive and can be accomplished quickly.
83. The auditor is required to complete the administrative process of assembling the final audit
file on a timely basis after the date of the auditor’s report. The time limit which to complete
the assembly of the audit file is ordinarily
I. Not more than 30 days after the date of the auditor’s report.
II. Not more than 60 days after the date of the auditor’s report.
III. Not more than 90 days after the end of the entity’s reporting period.
IV. Not more than 60 days after the date the entity’s financial statements are authorized
for issue.

84. If the free quoted for a professional service is so low. It may be difficult for the CPA to
perform the engagement in accordance with applicable technical and professional standards
for that price. This situation may create a self-interest threat to
I. Professional competence and due care
II. Objectivity
III. Integrity
IV. Professional behavior

85. Which statement is incorrect regarding the evaluation of general CIS controls and CIS
application controls?
I. The general CIS controls may have a pervasive effect on the processing of
transactions in application systems.
II. If general CIS controls are not effective, there may be a risk that misstatements
might occur and go undetected in the application systems.
III. Manual procedures exercised by users may provide effective control at the
application level.
IV. Weaknesses in general CIS controls cannot preclude testing certain CIS application
controls.

86. Which statement is incorrect regarding external confirmation?

I. External confirmation is the process of obtaining an evaluating audit evidence
through a direct communication from a third party in response to a request for
information about a particular item affecting assertions made by management in the
financial statements.
II. External confirmation of an account receivable provides strong evidence regarding
the valuation of the account as at a certain date.
III. The auditor should tailor external confirmation request to the specific audit objective.
IV. The auditor may use positive or negative external confirmation request or a
combination of both.

87. Analytical procedures enable the auditor to predict the balance or quantity of an item under
audit. Information to develop this estimate can be obtained from all of the following, except
I. Comparison of financial data with data for comparable prior periods, anticipated
results (e.g., budgets and forecasts), and similar data for the industry in which the
entity operates.
 II. Study of the relationships of elements of financial data that would be expected to
conform to a predictable pattern based upon the entity’s experience.
III. Study of relationships of financial data with relevant nonfinancial data.
IV. Tracing transactions through the system to determine whether procedures are being
applied as prescribed.

88. The following are correct statements concerning the audit of fair value measurements and
disclosures, except
I. The auditor is responsible for predicting future conditions, transactions or events,
which had they been known at the time of the audit, may have had a significant effect
on management’s actions or management’s assumptions underlying the fair value
measurements and disclosures.
II. The auditor should obtain sufficient appropriate audit evidence that fair value
measurements and disclosures are in accordance with PFRS
III. Many measurements based on estimates, including fair value measurements, are
inherently imprecise.
IV. The auditor’s consideration of the assumptions used in based on information
available to the auditor at the time of the audit.

89. The report on an agreed-upon procedures engagement needs to describe the purpose and
the agreed-upon procedures of the engagement in sufficient detail to enable the reader to
understand the nature and the extent of the work performed. The report of factual findings
should not contain
I. Addressee (ordinarily the client who engaged the auditor to perform the agreed-upon
procedures).
II. Identification of the purpose for which the agreed-upon procedures were performed.
III. A description of the auditor’s factual findings including sufficient details of errors and
exceptions found.
IV. Statement that the procedures performed constitute an audit and, as such, an
opinion is expressed.

Question 90-92 are based on the following information:

The following sales procedures were encountered during the annual audit of Barbell
Wholesale Distributing Company.

Customer orders are received by the sales order department. A clerk computes the
approximate peso amount of the order and sends it to the credit department for
approval. Credit approval is stamped on the order and sent to the accounting
department. A computer is then used to generate two copies of sales invoice. The order
is filed in the customer order file.

The customer copy of the sales invoice is held in a pending file awaiting notification that
the order was shipped. The shipping copy of the sales invoice is routed through the
 warehouse, and the shipping department has authority for the respective departments to
release and ship the merchandise. Shipping department personnel pack the order and
manually prepare a three-copy bill of lading: the original copy is mailed to the customer,
the second copy is sent with the shipment, and the other is filed in sequence in the bill of
lading file. The sales invoice shipping copy is sent to the accounting department with any
changes resulting from lack of available merchandise.

A clerk in accounting matches the received sales invoice shipping copy with the sales
invoice customer copy from the pending fil. Quantities on the two invoices are compared
and prices are compared on an approved price list. The customer copy is then mailed to
the customer, and the shipping copy is sent to the data processing department.

The data processing clerk in accounting enters the sales invoice date onto the computer,
which is used to prepare the sales journal and update the accounts receivable master
file. She files the shipping copy in the sales invoice file in numerical sequence.

90. In order to determine whether the internal controls operated effectively to minimize
instances of failure to post invoices to customer’s accounts receivable master file, the
auditor would select a sample of transactions from the population represented by the
I. Customer order file
II. Bill of lading file
III. Customer’s accounts receivable master file
IV. Sales invoice file

91. In order to determine whether the internal controls operated effectively to minimize
instances of failure to invoice a shipment, the auditor would select a sample of transactions
from the population represented by the
I. Customer order file
II. Bill of lading file
III. Customer’s accounts receivable master file
IV. Sales invoice file

92. In order to gather evidence that uncollected items in customer’s accounts represented
existing trade receivables, the auditor would select a sample of items from the population
represented by
I. Customer order file
II. Bill of lading file
III. Customer’s accounts receivable master file
IV. Sales invoice file

93. A CPA has been engaged to perform review services for a client. Identify which of the
following is a correct statement
I. The CPA must perform the basic audit procedures necessary to determine that the
statements are in conformity with the applicable financial reporting framework.
 II. The financial statements are primarily representations of the CPA
III. The CPA may prepare the statements from the books but may not assist in adjusting
and closing the books.
IV. The CPA is performing an assurance engagement other than an audit of the financial
statement.

94. Which of the following best describes a CPA’s engagement to report on an entity’s internal
control?
I. An assurance engagement to examine and report on management’s written
assertions about the effectiveness of its internal control.
II. An audit engagement benefits of the entity’s internal control.
III. A prospective engagement to project, for a period of time not to exceed one year,
and report on the expected benefits of the entity’s internal control.
IV. A consulting engagement to provide constructive advice to the entity on its internal
control.

95. When an auditor modifies an opinion of inadequate disclosure, the auditor should describe
the nature of the omission in a separate “Basis for Modification” paragraph and modify the

Auditor’s
Introductory Responsibility Opinion
Paragraph Paragraph Paragraph
A. Yes No No
B. Yes Yes No
C. No Yes Yes
D. No No Yes

96. The following are examples of circumstances that may create familiarity threats, except
A. Promoting shares in a listed entity when that entity is a financial statement audit
client.
B. Long association of senior personnel with the assurance client
C. A member of the engagement team having a close or immediate family relationship
with a director or officer of the client.
D. A former partner of the firm being a director or officer of the client or an employees in
a position to exert direct and significant influence over the subject matter of the
engagement.

97. Comparative financial statements include the prior year’s statements that were audited by a
predecessor auditor whose report is not presented. If the predecessor’s report was
unmodified, the incoming auditor should
A. Express an opinion on the current year’s statements alone and make no reference to
the prior year’s statements.
B. Indicate in the auditor’s report that the predecessor auditor expressed an unmodified
opinion
 C. Obtain a letter of representations from the predecessor auditor concerning any
matters that might affect the incoming auditor’s opinion.
D. Request the predecessor auditor to reissue the prior year’s report.
98. When the total fees generated by an assurance client represent a large proportion of a firm’s
total fees, the dependence on that client or client group and concern about the possibility of
losing the client may create a/an
A. Self-interest threat
B. Self-review threat
C. Intimidation threat
D. Advocacy threat

99.
I. The preliminary assessment of control risk is the process of evaluating the efficiency
of an entity’s accounting and internal control systems in preventing or detecting and
correcting material misstatements.
II. The auditor should document in the audit working papers the understanding obtained
of the entity’s accounting and internal controls systems and the assessment of
control risk.
III. There will always be some control risk because of the inherent limitations of any
accounting and internal control systems.
A. False; True; True C. False; False; True
B. True; True; False D. True; False; True

100. The date of the CPA’s opinion on the financial statements of his or her client should be
the date of the
A. Closing of the client’s books
B. Receipt of the client’s letter of representation
C. Completion of all important audit procedures
D. Submission of the report to the client.