EASY

1. What does PSA stand for?

Philippine Standards on Auditing

2. The opinion expressed by the auditor when the auditor concludes that the financial statements
are prepared, in all material respects, in accordance with the applicable financial reporting
framework

a. Unmodified opinion

b. Qualified opinion

c. Adverse opinion

d. Disclaimer opinion

a. Assessing control risk too high

3.In sampling for test of controls, “error” refers to

b. Deviations

c. Misstatements

d. Difference

e. Variation

4. IDENTIFICATION. What is the objective of a financial statement audit?

To express an opinion

5. IDENTIFICATION. Who responsible for the design and implementation of internal controls?

Management
6. Tests of controls are used to test whether controls are
a. Operating effectively
b. Placed in operation or implemented
c. Properly incorporated in the financial statements
d. Properly documented by the client
a. controllable.
7. The relationship between acceptable level of detection risk and
the combined level of inherent and control risk is
a. Direct
b. Inverse
c. Parallel
d. Independent
8. IDENTIFICATION. These are events that provide evidence of
conditions that arose after the date of the financial statements

NON-ADJUSTING EVENTS

9. IDENTIFICATION. It is otherwise known as employee fraud

MISAPPROPRIATION OF ASSETS

10. IDENTIFICATION. It is the risk that the sample may not be a

representative of the sample

SAMPLING RISK
11. The decision as to whether the criteria are suitable involves considering whether the subject
matter is capable of reasonably consistent evaluation against or measurement using such
criteria. The characteristics for determining whether criteria are suitable include the following,
except

a. Relevance
b. Reliability
c. Understandability
d. Sufficiency
12. When the professional accountant has obtained sufficient appropriate evidence to conclude that
the subject matter conforms in all material respects with identified suitable criteria, he or she
can provide what level of assurance?

a. None
b. High
c. Moderate
d. Absolute
13. TRUE OR FALSE The distinguishing factor between fraud and error is whether the underlying action that
results in the misstatement of the financial statements is intentional or unintentional.

TRUE
14. IDENTIFICATION. The person(s) with executive responsibility for the conduct of the entity’s operations

MANAGEMENT
15. IDENTIFICATION. Involves intentional misstatements, including omissions of amounts or disclosures in
financial statements, to deceive financial statement users

MANAGEMENT FRAUD/ FRAUDULENT FINANCIAL REPORTING

MODERATE

1. outcome of the evaluation or measurement of a subject matter against criteria

SUBJECT MATTER INFORMATION

2. It refers to being straightforward and honest in all professional and business relationships
INTEGRITY
3. It requires a professional accountant to comply with laws and regulations and should not take
any action that discredits the profession
PROFESSIONAL BEHAVIOR

4. Accepting gifts and undue hospitality from an assurance client would most likely create

a. Familiarity threat

b. Self-review threat
c. Advocacy threat
d. Intimidation threat
5. 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 will most likely create
a. Self-interest threat
b. Self-review threat
c. Intimidation threat
d. Familiarity threat
6. A CPA-lawyer acting as a legal counsel to one of his audit
client, is an example of
a. Self-interest threat
b. Self-review threat
c. Advocacy threat
d. Familiarity threat
7. Assessing control risk too high affects

EFFICIENCY or EFFECTIVENESS

8. Which of the following statements is true?

a. If control risk is assessed at maximum, the nature of related substantive tests should be changed
from more to less effective.
b. If control risk is assessed at maximum, the nature of related substantive tests should be changed
from less to more effective.
c. If control risk is assessed at maximum, the timing of related substantive tests should be changed
from year-end to an interim date.
d. If control risk is assessed at maximum, the extent of related substantive tests should be changed
from a larger to a smaller sample.
9. PSA 315 requires
a. The auditor to obtain an understanding of the entity and its environment, including its internal
control.
b. Discussion among the engagement team about the susceptibility of the entity’s financial
statements to material misstatement.
c. The auditor to identify and assess the risks of material misstatement at the financial statement
and assertion levels.
d. All of the above.
10. Adequate planning of the audit work helps the auditor of accomplishing the following objectives,
except:
a. Gathering of all corroborating audit evidence.
b. Ensuring that appropriate attention is devoted to important areas of the audit.
c. Identifying the areas that need a service of an expert.
d. The audit work is completed efficiently.

11. The extent of planning will vary according to any of the following, except:
a. Size of the audit client.
b. Auditor’s experience with the entity and knowledge of the business.
c. The nature and complexity of the audit engagement
d. The assessed level of control risk.
12. Which of the following is least likely considered by the auditor in developing the overall audit
plan?
a. Understanding of the accounting and internal control systems.
b. Relevant risk and materiality.
c. The involvement of other auditors in the audit of major component of financial
statements
d. The general level of competence of audit assistants.
13. Which of the following is not considered by the CPA when he makes an overall audit plan?
a. Identification of complex accounting areas including those involving accounting
estimates.
b. The information technology used by the client.
c. The content of the representation letters.
d. The nature and timing of reports or other communication with the entity that are
expected under the engagement.
14. Which of the following will most likely help the auditor to identify and understand the events,
transactions and practices of his audit client?
a. Obtaining a sufficient knowledge of the business of his client.
b. Understanding of accounting and internal control.
c. Testing control policies and procedures.
d. Obtaining a representation letter from the client management.
15. The auditor should have or obtain a knowledge of the client’s business sufficient to:
a. Evaluate whether the financial statements are materially misstated.
b. Document material weaknesses in accounting and internal control systems.
c. Identify and understand events, transactions and practices that may have effect on financial
statements.
d. Have an overall evaluation of whether financial assertions are fairly presented in the financial
statements.
 DIFFICULT

1. M, Inc. is preparing the financial statements for the period December 31, 2018. On January 7, 2019,
its sales representative crashed his company car, writing it off. Unfortunately, the vehicle was
uninsured at the time of the crash. M Inc.’s CFO would like to write off the value of the vehicle in the
financial statements for December 31, 2018. May he do this?

YES or NO

2. A customer issues legal proceeding against S Inc. shortly after the end of its financial reporting
period. Is this an adjusting event?

YES or NO

3. Evidence of a permanent deterioration of property value prior to year-end is a non-adjusting event.

TRUE or FALSE

4. Sean Company’s beginning inventory at January 1, 20x4 was

understated by P45,500, and its ending inventory was overstated by
P91,000. As a result, Sean Company’s cost of goods sold for 20x4
was:
a. Understated by P45,500
b. Overstated by P45,500
c. Understated by P136,500
d. Overstated by P136,500
5. On January 1, 20x2, Breton Company purchased for P420,000 a machine
with a useful life of 10 years and no salvage value. The machine
was depreciated by the double declining balance method and the
carrying amount of the machine was P268,800 on December 31, 20x3.
Breton Company changed to the straight line method on January 01,
20x4. What would be the depreciation expense on this machine for
the year ended December 31, 20x4?
a. P 26,880
b. P 33,600
c. P 42,000
d. P 53,760
6. Brandy Corp. reports on a calendar-year basis. Its 20x4 and 20x5
financial statements contained the following errors:
20x4 20x5
Over (under) statement of ending inventory P10,000 P 4,000
Understatement of depreciation 4,000 6,000
Failure to accrue salaries at year end 8,000 12,000

As a result of the above errors, 20x5 income would be:

a. overstated by P4,000
b. overstated by P24,000
c. overstated by P22,000
d. overstated by P16,000
7. On January 01, 20x1, Rodney Company purchased a machine for P396,000
and depreciated it using the straight line method using an estimated
useful life of 8 years with no salvage value. On January 1, 20x4,
Rodney Company determined that the machine had a useful life of six
years from the date of acquisition and will have a salvage value of
P36,000. An accounting change was made in 20x1 to reflect this
additional data. The accumulated depreciation for this machine
should have a balance at December 31, 20x4 of:
a. P 219,000
b. P 231,000
c. P 240,000
d. P 264,000
8. Bart, Inc. receives subscription payments for annual (one year)
subscriptions to its magazine. Payments are recorded as revenue
when received. Amounts received but unearned at the end of each
of the last three years are shown below:
20x3 20x4 20x5
Unearned revenues P120,000 P150,000 P176,000

Bart failed to record the unearned revenues in each of the

three years. As a result of the omission, 20x5 income was:
a. overstated by P146,000
b. understated by P146,000
c. understated by P26,000
d. overstated by P26,000

9. An insurance premium of P3,600 was prepaid in 20x4 covering the

years 20x4, 20x5, and 20x6. The entire amount was charged to expense
in 20x4. In addition, on December 31, 20x5, fully depreciated
machinery was sold for P6,400 cash, but the sale was not recorded
until 20x6. There were no other errors during 20x4 or 20x5, and no
corrections have been made for any of the errors. Ignore income tax
considerations. What is the total effect of the errors on 20x5 net
income?
a. Net income is understated by P12,800
b. Net income is overstated by P3,600
c. Net income is understated by P1,600
d. Net income is overstated by P2,400
10. Adger Corporation purchased a machine for P150,000 on January 1,
20x4. Adger will depreciate the machine using the straight-line
method using a five-year period with no residual value. As a result
of an error in its purchasing records, Badger did not recognize any
depreciation for the machine in its 20x4 financial statements. Adger
discovered the problem during the preparation of its 20x5 financial
statements. What amount should Adger record for depreciation expense
on this machine for 20x5?
a. P 0
b. P 30,000
c. P 37,500
d. P 60,000
11. On January 1, 20x2, Gray Company purchased for P240,000 a machine
with a useful life of ten years and no salvage value. The machine
was depreciated by the double-declining-balance method, and the
carrying amount of the machine was P153,600 on December 31, 20x3.
Gray changed retroactively to the straight-line method on January 1,
20x4. Gray can justify the change. What should be the depreciation
expense on this machine for the year ended December 31, 20x5?
a. P 15,360
b. P 19,200
c. P 24,000
d. P 30,720
12. Lain Company reported net income of P375,000 in 20x4. Your audit
disclosed the following errors:

Income received in advance in 20x4 of P18,750 was credited to a

revenue account when received. Of the total P3,750 was earned
in 20x4, P9,000 will be earned in 20x5 and the remainder in 20x6.
P11,250 loss on sale of equipment in 20x4 was erroneously debited
to retained earnings.
What is the correct net income for 20x4?
a. P 348,750
b. P 363,750
c. P 369,750
d. P 345,000
13. Jerry Company reported a net income of P525,000 in 20x4. Your
audit disclosed the following:
20x4 20x5
Overstatement of ending inventory 21,750 24,750
Omission of depreciation 11,250 11,250
Understatement of commission receivable 16,500 13,500
Purchase of mdse not recorded but
included in the year-end inventory 45,000

Adjusted net income for 20x4 is:

a. P 525,000
b. P 507,750
c. P 531,000
d. P 552,750
14. Kentucky Enterprises purchased a machine on January 2, 20x4, at a
cost of P120,000. An additional P50,000 was spent for installation,
but this amount was charged erroneously to repairs expense. The
machine has a useful life of five years and a salvage value of
P20,000. As a result of the error,
a. Retained earnings at December 31, 20x5 was understated by
P30,000 and 20x5 income was overstated by P6,000.
b. Retained earnings at December 31, 20x5 was understated by
P38,000 and 20x5 income was overstated by P6,000.
c. Retained earnings at December 31, 20x5 was understated by
P30,000 and 20x5 income was overstated by P10,000.
d. 20x4 income was understated by P50,000.
15. On December 30, 20x4, Saugie Corporation sold merchandise for
P56,250 to Steve Company. The terms of the sale were net 30 days,
DOB Shipping point. The merchandise was shipped on December 31,
20x4 and arrived at Steve Company on |January 05, 20x5. Due to
clerical error, the sale was not recorded until January 20x5 and the
merchandise, skid at a 25% markup on cost was included in Saugie’s
inventory at December 31, 20x4. As a result, Saugie’s cost of goods
sold for the year ended December 31, 20x4 was:
a. Understated by P56,250
b. Understated by P45,000
c. Understated by P11,250
d. Correctly stated