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Auditing Theory: Review of Audit Process

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Introduction to Assurance and Non-assurance Engagements


1. Which of the following Philippine Standards are to be applied to compilation engagements, agreed-upon procedures and
other related standards as specified by the AASC?
a. PSAs b. PSREs c. PSAEs d. PSRSs

2. These are issued to provide interpretative guidance and practical assistance to professional accountants in implementing
PSAs and to promote good practice.
a. Practice statements b. PREPSs, and PRSPSs c. PAPSs and PREPSs d. PAPSs

3. Assurance engagement
a. Is an engagement in which a practitioner is engaged to issue, or does issue, a written communication that expresses
a conclusion about the reliability of a written assertion that is the responsibility of another party.
b. Is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic
actions and events to ascertain the degree of correspondence between those assertions and established criteria and
communicating the results to interested users.
c. Is an engagement in which the auditor provides a moderate level of assurance that the information subject to the
engagement is free of material misstatement.
d. Is an engagement intended to enhance the credibility of information about a subject matter by evaluating whether the
subject matter conforms in all material respects with suitable criteria, thereby improving the likelihood that the
information will meet the needs of an intended user.

4. The single feature that most clearly distinguishes auditing, attestation, and assurance is
a. Type of service. c. Training required to perform the service
b. Scope of services. d. CPA's approach to the service

5. It refers to the auditor's satisfaction as to the reliability of an assertion being made by one party for use by another party.
a. Confidence b. Reasonableness c. Assurance d. Tolerable

6. The three types of attestation services are:


a. Audits, review, and compilations
b. Audits, compilations, and other attestation services
c. Reviews, compilations, and other attestation services
d. Audits, reviews, and other attestation services

7. Assurance engagement include the following, except


a. An engagement conducted to provide a high level of assurance that the subject matter conforms in all material
respects with identified suitable criteria.
b. An engagement conducted to provide a moderate level of assurance that the subject matter is plausible in the
circumstances.
c. An engagement in accordance with the Philippine Standard on Assurance Engagement(s) issued by the Auditing and
Assurance Standard Council as approved by the Board of Accountancy/Professional Regulation Commission.
d. An engagement to perform agreed-upon procedures.

8. Which of the following is an objective of a review engagement?


a. Expressing a positive opinion that the financial information is presented in conformity with generally accepted
accounting principles.
b. Expressing a limited assurance to users who have agreed as to procedures that will be performed by the CPA.
c. Reporting whether material modifications should be made to such financial statements to make them conform with
generally accepted accounting principles.
d. Reporting that the financial statements, in all materials respects, fairly present the financial position and operating
results of the client.

9. Not all engagements performed by professional accountants are assurance engagements. Other engagements
frequently performed by professional accountants that are not assurance engagements include the following, except
a. Agreed-upon procedures c. Management consulting
b. Compilation of financial or other information d. Examination of prospective financial information

10. Unlike consulting services, assurance services:


a. Make recommendations to management c. Report on quality information
b. Report on how to use information d. Are two-party contracts

11. The primary goal of the CPA in performing the attest function is to
a. Detect fraud
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Auditing Theory: Review of Audit Process
b. Examine individual transactions so that the auditor may certify as to their validity
c. Determine whether the client's assertions are fairly stated
d. Assure the consistent application of correct accounting procedures

12. Which of the following criteria is unique to the independent practitioner's attest function?
a. General competence c. Independence
b. Due professional care d. Familiarity with the particular industry of each client

13. Ultimately, the decision about whether or not an practitioner is independent must be made by
a. Practitioner b. Public c. Client d. Reguators

14. With regard to independence, which of the following statements is correct?


a. In case of audits of financial statements, the Code of Ethics requires member of the assurance team, the firm but not
network firms to be independent of the client.
b. Only the engagement partner is required by the Code of Ethics to be independent from their assurance clients.
c. Audit engagements provide assurance to a wide range of potential users; consequently, both independence in mind
and independence in appearance are of particular importance.
d. In case of audits of financial statements, the Code of Ethics requires the auditor to be independent from their
assurance team from the start of performing procedures required by the engagement up to the issuance of the report.

15. Which of the following statements least likely a characteristic to be possessed by responsible party?
a. may or may not be the only intended user
b. may nor may not be the engaging party to the practitioner
c. may or may not be from the same organization with the intended users
d. may be responsible to both or either the subject matter or the subject matter information

16. According to Preface on Assurance Engagements, these are the standards or benchmarks used to evaluate or measure
the subject matter of an assurance engagement:
a. Criteria c. Assertions
b. Engagement process d. Generally accepted auditing standards

17. The criteria for evaluating quantitative information vary. For example, in the audit of historical financial statements by CPA
firms, the criteria are usually
a. International accounting standards c. Regulations of the BIR
b. Generally accepted accounting principles d. Regulations of the SEC

18. The decision of whether the criteria are suitable involves considering whether the subject matter of the assurance
engagement is capable of reasonably consistent evaluation or measurement using such criteria. Which of the following
characteristics is not considered necessary in determining whether the criteria are suitable?
a. Relevance b. Sufficiency c. Neutrality d. Reliability

19. Which of the following statements is/are correct?


Statement 1: The practitioner considers the relationship between the cost of obtaining evidence and the usefulness of the
information obtained.

Statement 2: The difficulty and the expense involved are valid basis for omitting an procedure for which there is no
alternative.

Statement 3: The practitioner relies on evidence that is persuasive rather than conclusive.

Statement 4: The practitioner uses professional judgment and exercise professional skepticism to determine the
sufficiency and appropriateness of evidence.
a. Only one statement is correct c. Only three statements are correct
b. Only two statements are correct d. All statements are correct

20. The following statements are correct, except:


a. The greater the risk of misstatement, the more evidence is likely to be required.
b. The higher the quality of evidence, the less may be required.
c. Obtaining more evidence will compensate for its poor quality.
d. The sufficiency and appropriateness of evidence are interrelated.

21. The Philippine Framework for Assurance Engagements identifies two types of assurance engagement a practitioner is
permitted to perform: a reasonable assurance engagement and a limited assurance engagement. Which of the following
is the objective of a reasonable assurance engagement?
a. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement as a
basis for a negative form of expression of the practitioner’s conclusion.
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Auditing Theory: Review of Audit Process
b. A reduction in assurance engagement risk to a very low level in the circumstances of the engagement as a basis for
a disclaimer of the practitioner’s conclusion.
c. A reduction in assurance engagement risk to an acceptably low level that is acceptable in the circumstances of the
engagement as a basis for a positive form of expression of the practitioner’s conclusion.
d. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement as a
basis for a qualified form of the practitioner’s conclusion.

22. In an engagement to perform agreed –upon procedures, an auditor is engaged to


a. Use accounting expertise as opposed to auditing expertise to collect, classify, and summarize financial information.
b. Carry out those procedures of an audit to which the auditor and the entity and any appropriate third parties have
agreed and to report on factual findings.
c. Provide a moderate level of assurance that the information is free of material misstatement.
d. Provide a high, but not absolute level of assurance that the information is free of material misstatement.

23. Which of the following is true of the report based on agreed-upon-procedures?


a. The CPA provides the recipients of the report limited assurance as to reasonableness of the assertion(s) presented in
the financial information.
b. The report states that the auditor has not recognized any basis that requires revision of financial statements.
c. The report is restricted to those parties who have agreed to the procedures to be performed.
d. The report should state that the procedures performed are limited to analytical procedures and inquiry.

24. According to Philippine Standard on Auditing, the procedures employed in doing compilation are:
a. Designed to enable the accountant to express a limited assurance.
b. Designed to enable the accountant to express a negative assurance.
c. Not designed to enable the accountant to express any form of assurance.
d. Less extensive than review procedures but more extensive than agreed-upon procedures.

25. Indicate the level of assurance provided by audit and related services.
A B C D
Audit High High Negative Absolute
Review Moderate None Moderate High
Agreed-upon procedures None None None Limited
Compilation None None None None

Introduction to Auditing
1. The expertise that distinguishes auditors from accountants is in the
a. Ability to interpret generally accepted accounting principles.
b. Requirement to possess education beyond the Bachelor's degree.
c. Accumulation and interpretation of evidence.
d. Ability to interpret FRSC Statements.

2. Identify the following as financial audit (FA), compliance audit (CA), and operational audit (OA).
1) A supervisor is not carrying out his assigned responsibilities.
2) A company's tax return does not conform to income tax laws and regulations.
3) A municipality's financial statements correctly show actual cash receipts and disbursements.
4) A company's receiving department is inefficient.

a. CA, CA, FA, OA c. OA, CA, FA, OA


b. OA, CA, CA, OA d. CA, CA, FA, CA

3. Independent auditing can best be described as a


a. Branch of accounting
b. Discipline that attests to the results of accounting and other operations and data
c. Professional activity that measures and communicates financial and business data
d. Regulatory function that prevents the issuance of improper financial information

4. Which of the following types of audit uses as its criteria laws and regulations?
a. Operational audit b. Compliance audit c. FS audit d. Internal audit

5. An operational audit is designed to


a. Assess the efficiency and effectiveness of management's operating procedures
b. Assess the presentation of management's financial statements in accordance with generally accepted accounting
principles
c. Determine whether management has complied with applicable laws and regulations
d. Determine whether the audit committee of the board of directors is effectively discharging its responsibility to oversee
management's operations

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6. A review of any part of an organization's procedures and methods for the purpose of evaluating efficiency and
effectiveness is classified as a (n)
a. FS Audit b. Operational audit c. Compliance audit d. Production audit

7. Which one of the following is more difficult to evaluate objectively?


a. Efficiency and effectiveness of operations.
b. Compliance with government regulations.
c. Presentation of financial statements in accordance with generally accepted accounting principles.
d. All three of the above are equally difficult.

8. A governmental audit may extend beyond an examination leading to the expression of an opinion on the fairness of
financial presentation to include
Program results Compliance Economy and efficiency
a. Yes Yes No
b. Yes Yes Yes
c. No Yes Yes
d. No No Yes

9. An audit designed to determine the extent to which the desired results of an activity established by the legislative or other
authorizing body are being achieved is a (an)
a. Economy audit b. Efficiency audit c. Program audit d. Financial related audit

10. Which of the following best describes what is meant by the term PSA?
a. Rules acknowledged by the accounting profession because of their universal application.
b. Pronouncements issued by the Auditing Standards Board.
c. Measures of the quality of the auditor's performance.
d. Procedures to be used to gather evidence to support financial statements.

11. A financial statement audit:


a. Confirms that FS assertions are accurate. c. Assures that fraud had been detected.
b. Guarantees that FS are presented fairly. d. Lends credibility to the FS.

12. Which of the following best describes the objective of an audit of financial statements?
a. To express an opinion whether the financial statements are prepared in accordance with prescribed criteria.
b. To express an assurance as to the future viability of the entity whose financial statements are being audited.
c. To express an assurance about the management's efficiency or effectiveness in conducting the operations of entity.
d. To express an opinion whether the financial statements are prepared, in all material respect, in accordance with an
identified financial reporting framework.

13. Which of the following accurately depicts the auditor's responsibility with respect to Philippine Standards on Auditing?
a. The auditor is required to follow the guidance provided by the Standards, without exception.
b. The auditor is generally required to follow the guidance provided by Standards with which he or she is familiar, but
will not be held responsible for departing from provisions of which he or she was unaware.
c. The auditor is generally required to follow the guidance provided by the Standards, unless following such guidance
would result in an audit that is not cost-effective.
d. The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any
departures.

14. Which of the following is responsible for an entity's financial statements?


a. The entity's management c. The entity's audit committee
b. The entity's internal auditors d. The entity's board of directors

15. The best statement of the responsibility of the auditor with respect to audited financial statement is:
a. The audit of the financial statements relieves management of its responsibilities
b. The auditor's responsibility is confined to his expression of opinion about the audited financial statements.
c. The responsibility over the financial statements rests with the management and the auditor assumes
responsibility with respect to the notes of financial statements.
d. The auditor is responsible only to his unqualified opinion but not for any other type of opinion.

16. For an entity's financial statements to be presented fairly in conformity with PFRS, the principles selected should:
a. Be applied on a basis consistent with those followed in the prior year.
b. Be approved by the Auditing Standards Board or the appropriate industry subcommittee.
c. Reflect transactions in a manner that presents the financial statements within a range of acceptable limits.
d. Match the principles used by most other entities within the entity's particular industry.

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17. As used in auditing, which of the following statements best describes "assertions"?
a. Assertions are the representations of management as to the reliability of the information system.
b. Assertions are the auditor's findings to be communicated in the audit report.
c. Assertions are the representations of management as to the fairness of the financial statements.
d. Assertions are found only in the footnotes to the financial statements.

18. The auditor communicates the results of his or her work through the medium of the
a. Engagement letter b. Audit report c. Management letter d. Financial statements.

19. Which of the following least likely limits the auditors ability to detect material misstatement?
a. Most audit evidences are conclusive rather than being persuasive.
b. The inherent limitations of any accounting and internal control system.
c. Audit is based on testing
d. Audit procedures that are effective in detecting ordinary misstatements are ineffective in detecting
intentional misstatements.

20. Which of the following statements does not describe a condition that creates a demand for auditing?
a. Conflict between an information preparer and a user can result in biased information.
b. Information can have substantial economic consequences for a decision maker.
c. Expertise is often required for information preparation and verification.
d. Users can directly assess the quality of information.

21. Because an examination in accordance with generally accepted auditing standards is influenced by the possibility of
material errors, the auditor should conduct the examination with an attitude of
a. Professional responsiveness c. Objective judgment
b. Conservative advocacy d. Professional skepticism

22. Certain fundamental beliefs called "postulates" underlie auditing theory. Which of the following is not a postulate of
auditing?
a. No long-term conflict exists between the auditor and the management of the enterprise under audit.
b. Economic assertions can be verified.
c. The auditor acts exclusively as an auditor.
d. An audit has a benefit only to the owners.

23. An audit can have a significant effect on


a. Information Risk c. Business Risk
b. The risk-free interest rate d. All of these

24. The main way(s) to reduce information risk include the following, except
a. To have the user verify the information
b. To have the financial statements audited
c. To have the management prepare the financial statements
d. To have the user share the information risk with management

25. Which of the following is an appraisal activity established within an entity as a service to the entity?
a. External auditing b. Internal auditing c. Financial auditing d. Compliance auditing

26. The scope and objectives of internal auditing vary widely and depend on the size and structure of the entity and the
requirements of its management. Ordinarily, internal auditing activities include one or more of the following:
A. B. C. D.
Establishment and review of the accounting and Yes Yes No No
internal control systems
Examination of financial and operating information Yes Yes No Yes
Review of the economy, efficiency and effectiveness of Yes Yes Yes Yes
operations
Review of compliance with laws, regulations and other Yes No Yes Yes
external requirements

27. To operate effectively, an internal auditor must be independent of


a. The entity
b. The line functions of the organizations
c. The employer-employee relationship which exists for other employees in the organization
d. Internal auditor does not need to be independent of the entity and any member of the organization

28. To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most
likely should report to

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a. Board of Directors b. VP for Finance c. Controller d. Audit Committee

29. Which statement is correct regarding the relationship between internal auditing and the external auditor?
a. Some judgments relating to the audit of the financial statements are those of the internal auditor.
b. The external audit function's objectives vary according to management's requirements.
c. Certain aspects of internal auditing may be useful in determining the nature, timing and extent of external
audit procedures.
d. The external auditor is responsible for the audit opinion expressed, however that responsibility may be
reduced by any use made of internal auditing.

30. Which of the following statements is not a distinction between independent auditing and internal auditing?
a. Independent auditors represent third party users external to the auditee entity, whereas internal auditors
report directly to management.
b. Although independent auditors strive for both validity and relevance of evidence, internal auditors are
concerned almost exclusively with validity.
c. Internal auditors are employees of the auditee, whereas independent auditors are independent contractors.
d. The internal auditor's span of coverage goes beyond financial auditing to encompass operational and
performance auditing.

Audit Process and Evidence-Gathering Procedures


1. Set the following phases in proper order:
i. Pre-Engagement iii. Evidence-Gathering v. Post-Audit Responsibilities
ii. Internal Controls iv. Planning vi. Reporting
a. i, ii, iii, iv, v, vi b. i, iv, ii, iii, vi, v c. i, iv, iii, ii, v, vi d. i, iv, ii, iii, v, vi

2. Acts to be performed in order to obtain audit evidence.


a. Audit standards b. Audit procedures c. Audit program d. Audit strategy

3. Audit procedures performed to obtain an understanding of the entity and its environment, including its internal control, and
to assess the risks of material misstatements at the financial statement and assertion levels.
a. Risk assessment procedures c. Tests of control
b. Substantive procedures d. Analytical procedures

4. Audit procedures to test the operating effectiveness of controls in preventing or detecting and correcting material
misstatements at the assertion level.
a. Risk assessment procedures c. Tests of control
b. Substantive procedures d. Analytical procedures

5. Audit procedures to detect material misstatements at the assertion level.


a. Risk assessment procedures c. Tests of control
b. Substantive procedures d. Analytical procedures

6. An auditor may achieve audit objectives related to particular assertions by:


a. Performing analytical procedures. c. Preparing audit documentation.
b. Adhering to a system of quality control. d. Increasing the level of detection risk.

7. Examining records or documents, whether internal or external, in paper form, electronic form, or other media.
a. Inspection of records or documents c. Observation
b. Inspection of tangible assets d. Inquiry

8. Physical examination of the assets.


a. Inspection of records or documents c. Observation
b. Inspection of tangible assets d. Inquiry

9. Consists of looking at a process or procedures being performed by others.


a. Inspection of records or documents c. Observation
b. Inspection of tangible assets d. Inquiry

10. Consists of seeking information from knowledgeable persons, both financial and nonfinancial, within the entity or outside
the entity.
a. Inspection of records or documents c. Observation
b. Inspection of tangible assets d. Inquiry

11. The process of obtaining a representation of information or of an existing condition directly from third party. It is a specific
type of inquiry.
a. Reperformance b. Confirmation c. Reconciliation d. Recomputation

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12. Consists of checking the mathematical accuracy of documents or records.


a. Reperformance b. Recalculation c. Reconciliation d. Recomputation

13. Auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal
control.
a. Reperformance b. Confirmation c. Reconciliation d. Recomputation

14. Evaluation of financial information made by study of plausible relationships among both financial and non-financial data.
a. Reperformance b. Confirmation c. Reconciliation d. Analytical procedures

15. Which of the following is the best explanation of the difference, if any, between audit objectives and audit
procedures?
a. Audit procedures and audit objectives are essentially the same.
b. Audit objectives are tailor-made for each assignment, audit procedures are generic in application.
c. Audit procedures establish broad general goals, audit objectives specify the detailed work to be performed.
d. Audit objectives define specific desired accomplishments; audit procedures provide the means of achieving
audit objectives.

16. Which of the following is a false statement about audit objectives?


a. Audit objectives should be developed in light of management assertions about the financial statement
components.
b. Selection of tests to meet audit objectives should depend upon the understanding of internal control.
c. The auditor should resolve any substantial doubt about any of management's material financial statement
assertions
d. There should be a one-to-one relationship between audit objectives and procedures.

17. Management assertions are:


a. Stated in the footnotes to the financial statements
b. Explicitly expressed representations about the financial statements
c. Implied or express representations about the accounts in the financial statements
d. Provided to the auditor in the assertions letter, but are not disclosed in the financial statements of the entity.

18. Management assertions are:


a. Directly related to PSAs c. Directly related to GAAP
b. Indirectly related to PSAs d. Indirectly related to GAAP

19. Assertions used by the auditor fall into the following categories, except:
a. Assertions about the faithful representations
b. Assertions about presentation and disclosure
c. Assertions about account balances at period end
d. Assertions about classes of transactions and events

20. Assertions about account balances at the period-end include valuation and allocation, which means that
a. Assets, liabilities and equity interest exist.
b. All assets, liabilities and equity interests that should have been recorded have been recorded.
c. Assets, liabilities and equity interests are included in the financial statements at appropriate amounts and any
resulting valuation or allocation adjustments are appropriately recorded.
d. The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

21. The assertion of cut-off means that:


a. Transactions and events have been recorded in the proper accounts
b. All transactions and events that should have been recorded are recorded
c. Transactions and events have been recorded in the correct accounting period
d. Amounts and other data relating to recorded transactions and events have been recorded appropriately

22. The assertions of occurrence means that:


a. All transactions and events that should have been recorded are recorded
b. Amounts and other data relating to recorded transactions and events have been recorded appropriately
c. Transactions and events that have been recorded have occurred, and pertain to the entity
d. Transactions and events have been recorded in the proper accounts

23. Which description refers to the completeness assertion?


a. All disclosures that should have been included in the financial statements have been included.
b. Disclosed events, transactions and other matters have occurred and pertain to the entity.
c. Financial information is appropriately presented and described, and disclosures are clearly expressed.
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d. Financial and other information are disclosure fairly and at appropriate amounts.

24. Confirming proper title to equipment supports which of the following assertions?
a. Existence or occurrence c. Presentation and disclosure
b. Insurance coverage d. Rights and obligations

25. The auditor notices that a client’s cash-basis financial statements are prepared with accrual basis financial titles. This
situation bears on which financial statement assertion?
a. Valuation or allocation c. Rights and obligations
b. Presentation and disclosure d. Completeness

26. The process of vouching helps establish that all recorded transactions are
a. Recorded b. Complete c. Valid d. Presented properly

27. Physical examination of tangible assets is not a sufficient form of evidence when the auditor wants to determine the:
a. Existence of the asset c. Condition or quality of the asset
b. Quantity and description of the asset d. Ownership of the asset

28. Which of the following audit procedures is used extensively throughout the audit but does not, by itself, provide sufficient
appropriate evidence?
a. Inspection of records or documents c. Inquiry
b. Observation d. Inspection of tangible assets

29. Evidence obtained directly by the auditor is more reliable than information obtained indirectly. Which of the following is
not an example of the auditor’s direct knowledge?
a. Inspection b. Observation c. Computation d. Inquiry

30. In testing for lower-of-cost-or-net realizable value, the auditor is gathering evidence to support which of the following
assertions?
a. Pricing b. Accuracy c. Valuation d. Rights and obligations

Preliminary Engagement Activities


1. Which of the following would not be a consideration of a CPA firm in deciding whether to accept a new client?
a. The client’s financial ability.
b. The client’s standing in the business community.
c. The client’s relations with its previous CPA firm.
d. The client’s probability of achieving an unqualified opinion.

2. Auditors must not only decide whether to accept new clients; they also should periodically review their list of current
clients and remove those clients the firm no longer wants to be associated with. Reasons for discontinuing clients might
include the following, except:
a. Difficulty in working with client personnel.
b. Inability to negotiate an acceptable increase in the audit fee.
c. Evidence indicating a client’s management has integrity.
d. Client need for specialized services the current firm is unable or unwilling to provide.

3. Management’s integrity affects all of the following risks except:


a. Business risk c. Audit risk
b. Financial Reporting risk d. All of these risks are affected

4. Which of the following factors most likely would influence an auditor’s determination of the auditability of an entity’s
financial statements?
a. The complexity of the accounting system c. The adequacy of the accounting records
b. The existence of related-party transactions d. The operating effectiveness of control procedures

5. Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial
statement audit cannot be performed?
a. Management fails to modify prescribed internal controls for changes in information technology.
b. Internal control activities requiring segregation of duties are rarely monitored by management.
c. Management is dominated by one person who is also the majority stockholder.
d. There is a substantial risk of intentional misapplication of accounting principles.

6. Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor auditor,
the CPA should

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a. Contact the predecessor auditor without advising the prospective client and request a complete report of the
circumstances leading to the termination of the engagement with an understanding that all information disclosed will
be kept confidential.
b. Accept the engagement without contacting the predecessor auditor since the CPA can include audit procedures to
verify the reason given by the client for the termination.
c. Not communicate with the predecessor auditor because this would in effect be asking the auditor to violate the
confidential relationship between an auditor and the client.
d. Advise the client of the intention to contact the predecessor auditor and request a permission for the contact.

7. Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
a. The prospective client has already completed its physical inventory count.
b. The CPA lacks an understanding of the prospective client's operations and industry.
c. The CPA is unable to review the predecessor auditor's audit documentation.
d. The prospective client is unwilling to make all financial records available to the CPA.

8. Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be
rejected?
a. The details of most recorded transactions are not available after a specified period of time.
b. Internal control activities requiring the segregation of duties are subject to management override.
c. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.
d. Management has a reputation for consulting with several accounting firms about significant accounting issues.

9. If the prospective client refuses to permit the predecessor to respond or limits the predecessor’s response, the successor
should:
a. Continue to ask the predecessor auditor questions on facts that might bear on the integrity of management
b. Accept the engagement but only after an equitable increase in the professional fee
c. Inquire as to the reasons and consider the implications in deciding whether to accept the engagement
d. Issue a disclaimer of opinion because the limited response of the predecessor auditor constitutes a significant scope
limitation

10. A firm has obtained information that would have caused it to decline an engagement had the information been available
earlier. Actions available to the auditor would include the following, except:
a. Reporting the information and its implications to the person/s who appointed the CPA
b. Withdraw from the engagement
c. Withdraw from the client relationship
d. Issue a disclaimer of opinion

11. According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed terms would
need to be recorded in a(n)
a. Client representation letter c. Engagement letter
b. Memo placed in the working papers d. Comfort letter

12. An engagement letter is best described as


a. A letter from the company to the auditors specifying management’s expectations for completion of the audit on a
timely basis and the fees.
b. A letter from the auditors to company management specifying that management is responsible for the financial
statements, and the auditors will issue an opinion on the financial statements.
c. A letter from the auditors to company management that specifies the responsibilities of both the company and the
auditors in completing the audit and the timing for its completion.
d. A letter from the Board of Directors’ audit committee to the auditor that indicates the auditor has been engaged to
perform the audit and the fees to be paid.

13. An engagement letter is prepared with the interest(s) of __________.


a. The auditor only c. The public
b. The client only d. Both the client and the auditor

14. Engagement letters are widely used in practice for:


a. Audits only c. Assurance engagements only
b. Professional engagements of all types d. Related services only

15. The primary purpose of the engagement letter is to:


a. Satisfy the requirements of the CPA’s liability insurance policy
b. Remind management that the primary responsibility for the financial statements rests with management
c. Provide a written record of the agreement with the client as to the services to be provided
d. Provide a starting point for the auditor’s preparation of the preliminary audit program

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16. Engagement letter that documents and confirms the auditor’s acceptance of the engagement would normally be sent to
the client.
a. Before the auditor report is issued c. At the end of the fieldwork
b. After the audit report is issued d. Before the commencement of the engagement

17. An auditor's engagement letter most likely would include a statement regarding:
a. Management's responsibility to provide certain written representations to the auditor.
b. Conditions under which the auditor may modify the preliminary judgment about materiality.
c. Internal control activities that would reduce the auditor's assessment of risk.
d. Materiality matters that could modify the auditor's preliminary assessment of fraud risk.

18. An audit engagement letter least likely include:


a. A reference to the inherent limitations of an audit that there is an unavoidable risk that some material misstatements
may remain undiscovered
b. Description of any letters or reports that the auditor expects to submit to the client
c. Identification of specific audit procedures that the auditor needs to undertake
d. Basis on which fees are computed and any billing arrangements

19. An engagement letter should ordinarily include information on the objectives of the engagement and
A B C D
 CPA’s responsibilities Yes Yes Yes No
 Client’s responsibilities Yes No No No
 Limitations of engagement Yes Yes No No

20. Which of the following is (are) valid reasons why an auditor sends to his client an engagement letter?
A B C D
 To avoid misunderstanding with respect to management Yes Yes No No
 To confirm the auditor’s acceptance of the appointment Yes Yes Yes No
 To document the objective and scope of the audit Yes Yes Yes Yes
 To ensure CPA’s compliance to PSA Yes No No Yes

21. The form and content of the audit engagement letters may vary for each client, but they would generally include reference
to except:
a. Management’s responsibility for all the financial statements.
b. The scope of the audit, excluding reference to applicable legislation, regulations, or pronouncements of professional
bodies to which the auditor adheres.
c. The form of any reports or any communication of results of engagement.
d. Unrestricted access to whatever records, documentation and other information requested in connection with the
audit.

22. In making arrangements for an audit, there should be a clear understanding between the auditor and the client as to the
following except:
a. Assurance of auditor’s independence c. Terms of settlement for audit services
b. The type of audit to be performed d. Official to whom audit report shall be addressed

23. An auditor's engagement letter most likely would include a statement that:
a. Lists potential significant deficiencies discovered during the prior year's audit.
b. Explains the analytical procedures that the auditor expects to apply.
c. Describes the auditor's responsibility to evaluate going concern issues.
d. Limits the auditor's responsibility to detect errors and fraud.

24. Which of the following statements is/are correct?


Statement 1: On recurring audits, the auditor should consider whether circumstances require the terms of the
engagement to be revised and whether there is a need to remind the client of the existing terms of engagement.
Statement 2: The auditor should send a new engagement letter each year to an established client.
a. Only statement 1 is correct c. Both statements are correct
b. Only statement 2 is correct d. Both statements are incorrect

25. On recurring audit engagements, the auditor may decide not to send a new engagement letter each period. In which of
the following situations will there be no need to send a new letter?
a. Revisions or special terms of the engagement
b. Significant change in nature or size of the client’s business
c. Indications of misunderstanding of the objective and scope of the audit
d. Recent change of middle management and rank and file organizational structure

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Auditing Theory: Review of Audit Process
26. A client’s insistence that the audited results are reported quickly after the fiscal year end is of concern to auditors
because:
a. Many uncertainties inherent in the financial statements cannot be resolved until several months after the year-end
closing of the books.
b. The financial statements are less reliable because the period covered by the review for subsequent events is
shortened
c. Many clients have December 31 year ends and it is difficult to complete the audit when many of the client’s personnel
are on holidays.
d. Time pressure created by unrealistic deadlines increases the risk of errors in judgment and in the performance of
audit procedures.

27. If the auditor concludes that there is reasonable justification for the change in engagement, the report to be issued would
a. Be that appropriate for the revised terms of the engagement
b. Include reference to the original engagement
c. Include reference to any procedures that may have been performed in the original engagement
d. Not include reference to any procedures that may have been performed, particularly when the new engagement is to
undertake agreed-upon procedures

28. If a change in the type of engagement from higher to lower of assurance is not justified, the auditor should:
a. Qualify the report on the original engagement.
b. Continue with the revised engagement, but make explicit reference about the original engagement.
c. Refuse to agree to management’s request on the change of engagement and continue with the original engagement.
d. Withdraw from the engagement.

29. Which of the following helps prevent misunderstandings during audit planning?
a. Auditor involvement in the preparation of the client’s financial records.
b. Client involvement in determining specific audit planning issues.
c. A preliminary meeting conference with the client to discuss fees, timing, client assistance and related issues.
d. Involvement of the client’s internal auditors in setting materiality levels and determining the scope of audit tests.

30. One of the first things that the auditor will do after accepting a new client is:
a. Communicate with the predecessor auditor.
b. Contact the client’s attorney to discover legal obligations.
c. Study the client’s internal control structure.
d. Tour the client’s facilities.

Audit Planning and Risk Assessment Procedures


1. Which of the following statements is/are correct?
Statement 1: The client should plan the audit work so that the audit will be performed in an effective manner.

Statement 2: The auditor should conduct the audit with an attitude of professional skepticism.

Statement 2: The auditor should develop and document an overall audit plan describing the scope and conduct of the
audit.
a. Only one statement is correct c. All statements are correct
b. Only two statements are correct d. All statements are incorrect

2. It involves establishing the overall audit strategy for the engagement and developing an audit plan in order to reduce audit
risk to an acceptably low level.
a. Reporting b. Planning c. Field work d. Organizing

3. 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.

4. Which of the following statements is incorrect?


a. The auditor should plan the audit so that the engagement will be performed in an effective manner.
b. Planning an audit involves establishing the overall audit strategy for the engagement and developing the audit plan,
in order to reduce audit risk to an acceptably low level.
c. Planning involves the engagement partner and other key members of the engagement team to benefit from their
experience and insight and to enhance the effectiveness and efficiency of the planning process.
d. Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after
(or in connection with) the completion of the previous audit and continues until the finalization of the audit program.

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5. 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.

6. Which of the following activities shall not be included in preplanning an audit?


a. Understanding the client’s reason for obtaining an audit
b. Investigating the client’s background
c. Determining the likelihood of issuing an unqualified audit opinion on the client’s financial statements
d. Communicating with the prospective client’s prior auditor to inquire about any disagreements with the client

7. The auditors plan should


A B C D
 Precede action Yes No Yes No
 Be flexible Yes No No Yes
 Be cost-beneficial Yes Yes Yes Yes

8. Which of the following statements is/are correct?


Statement 1: The overall audit plan and the audit program should not be revised during the course of the audit.

Statement 2: The auditor should develop and document an audit program setting out the nature, timing and extent of
planned audit procedures required to implement the overall audit plan.
a. Only statement 1 is correct c. Both statements are correct
b. Only statement 2 is correct d. Both statements are incorrect

9. Which of the following statements is/are correct?


Statement 1: According to PSA 300, the auditor may discuss elements of planning with those charged with governance
and the entity's management.

Statement 2: The audit plan sets the scope, timing and direction of the audit guides the development of the more detailed
overall audit strategy.

Statement 3: The overall audit strategy is more detailed than the audit plan and includes the nature, timing and extent of
audit procedures to be performed engagement team members to obtain sufficient appropriate audit evidence to reduce
audit risk to an acceptably low level.
a. Only 1 statement is correct c. All statements are correct
b. Only 2 statements are correct d. All statements are incorrect

10. Which of the following matters should be considered by the auditor in developing the overall audit strategy?
a. Important characteristics of the entity, its business, its financial performance and its reporting requirements including
changes since the date of the prior audit
b. Conditions requiring special attention, such as the existence of the related parties
c. The setting of materiality level for audit purposes
d. All of the above

11. The timing of the audit and nature of communications required include the following, except:
a. The organization of meetings with management, and those charged with governance, to discuss the nature, extent
and timing of the audit work.
b. The discussion with management and those charged with governance regarding the expected type and timing of
reports to be issued and other communications.
c. Audit areas where there is a higher risk of material misstatement.
d. The entity’s timetable for reporting, such as interim and final stages.

12. In developing the overall audit strategy, the focus of the engagement team’s efforts is considered. Which of the following
is not appropriately classified as a factor affecting the focus of the team’s efforts?
a. The financial reporting framework on which the financial information to be audited has been prepared, including any
need for reconciliation to another reporting framework.
b. Setting materiality for planning purposes.
c. Audit areas where there is a higher risk of material misstatement.
d. Volume of transactions, which may determine whether it is more efficient for the auditor to rely on internal control.

13. In developing an overall audit strategy, an auditor should consider:


a. Whether the allowance for sampling risk exceeds the achieved upper precision limit.
b. Findings from substantive tests performed at interim dates.

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c. Whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in the
financial statements.
d. Preliminary evaluations of materiality, audit risk, and internal control.

14. This serves as the set of instructions to assistants involved in the audit and as a means to control and record the proper
execution of the work of the personnel involved in the service.
a. Audit procedures b. Audit plan c. Audit program d. Audit risk model

15. The auditor should design the written audit program, so that:
a. All material transactions will be selected for substantive testing.
b. Substantive tests prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either tests of controls or tests of transactions.

16. One of the primary uses of an audit program is to


a. Provide for a standardized approach to the audit engagement
b. Serve as a tool for planning, directing and controlling the audit work
c. Document an auditor’s understanding of the internal control
d. Delineate the audit risk accepted by the auditor

17. The auditor should document the overall audit strategy and the audit plan, including significant changes made during the
audit engagement. Which of the following statements on documentation is incorrect?
a. Documentation of the overall audit strategy may be made in the form of a memorandum that contains key decisions
regarding the overall scope, timing and conduct of the audit.
b. The auditor may use standard audit programs or audit completion checklists, but such programs and checklists need
to be tailored to the particular client.
c. The auditor’s documentation of any significant changes to the originally planned overall audit strategy and to the
detailed audit plan need not include the reasons for the significant changes.
d. The form and extent of documentation depend on such matters as the size and complexity of the entity, materiality,
the extent of other documentation, and the circumstances of the specific engagement.

18. An audit program is ordinarily prepared for an audit engagement because:


a. It documents the auditor’s understanding of the client’s internal control.
b. It aids in instructing assistants in the work to be done.
c. It is required by generally accepted auditing standards.
d. It explains any weaknesses noted in the evaluation of the client’s existing internal control.

19. The audit program usually cannot be finalized until the


a. Consideration of the entity’s internal control has been completed.
b. Engagement letter has been communicated to the audit committee.
c. Reportable conditions have been communicated to the audit committee.
d. Search for unrecorded liabilities has been performed and documented.

20. The audit program should contain the following, except:


a. Audit objective
b. Time budget for the various audit areas
c. Set of planned audit procedures
d. The combined assessed level of inherent and control risk

21. Audit procedures may be classified as risk assessment procedures and further audit procedures. Which of the following
best describes risk assessment procedures?
a. These procedures test the operating effectiveness of controls in preventing, or detecting and correcting, material
misstatements at the assertion level.
b. These procedures are used detect material misstatements at the assertion level.
c. These are procedures for obtaining an understanding of the entity and its environment, including its internal control,
to assess the risks of material misstatement at the financial statement and assertion levels.
d. These procedures include tests of details of classes of transactions, account balances, and disclosures and
analytical procedures.

22. In performing an audit of financial statements, the auditor should obtain a sufficient knowledge of a client’s business and
industry to
a. Develop an attitude of professional skepticism concerning management’s financial statements assertions.
b. Make constructive suggestion concerning improvements causes the financial statements taken as a whole to be
materially misstated.
c. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be
materially misstated.
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d. Understand the events and transactions that may have an effect on the client’s financial statements.

23. Which of the following procedures is not performed as a part of planning an audit engagement?
a. Reviewing working papers of the prior year c. Designing an audit program
b. Performing analytical procedures d. Test of controls

24. Which of the following procedures not normally performed as part of obtaining an understanding of the client’s
environment?
a. Reading trade publications to gain a better understanding of the client’s industry
b. Studying the internal controls over cash receipts and disbursements
c. Confirming customer accounts receivable for existence and valuation
d. Touring the client’s facilities

25. Which of the following procedures would an auditor least likely perform in planning a financial statement audit?
a. Coordinating the assistance of entity personnel in data preparation.
b. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity.
c. Selecting a sample of vendor’s invoices for comparison to receiving reports.
d. Reading the current year’s interim financial statements.

26. Audit risk has three components: inherent risk, control risk and detection risk. Which of the following statements is
correct?
a. Detection risk is a function of the efficiency of an audit procedure.
b. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
c. The risk that material misstatement will not prevent or detected on a timely basis by internal control can be reduced
to a zero by effective controls.
d. The existing levels of inherent risk, control risk and detection risk can be changed at the discretion of the auditor.

27. Which of the following audit risk components maybe assessed in quantitative terms?
Inherent Risk Control Risk Detection Risk
a. Yes No Yes
b. Yes Yes Yes
c. No No No
d. No No Yes

28. Some accounts balances, such as those for retirement benefits and finance lease, are the results of complex calculations.
The susceptibility to material misstatements in these types of accounts is referred to as
a. Audit risk b. Detection risk c. Control risk d. Inherent risk

29. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are:
a. Elements of audit risk while detection risk is not.
b. Changes at the auditor’s discretion while detection risk is not.
c. Functions of the client and its environment while detection risk is not.
d. Considered at the individual account balance level while detection risk is not.

30. There is an inverse relationship that exist between the acceptable level of detection risk and the
a. Risk of misapplying audit process c. Risk of falling to discover material misstatement
b. Assurance provided by substantive tests d. Preliminary judgments about materiality levels

31. On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk,
and therefore the risk of material misstatement, from that originally planned. To achieve an overall audit risk level that is
substantially the same as the planned audit risk level, the auditor would:
a. Increase inherent risk c. Decrease substantive testing
b. Increase materiality levels d. Decrease detection risk

32. Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about
materiality?
a. The anticipated sample size of the planned substantive tests.
b. The entity’s annualized interim financial statements.
c. The results of the internal control questionnaire.
d. The contents of the management representation letter.

33. Which of the following statements is not correct about materiality?


a. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in
conformity with GAAP, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that
could be material to any one of the financial statements.
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c. Materiality judgments are made in light of surrounding circumstanced and necessarily involve both quantitative and
qualitative judgments.
d. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person
who will rely on the financial statements.

34. In considering materiality for planning purposes, Munda, auditor believes that misstatements aggregating P60,000 would
have material effect on an entity’s income statement, but that misstatements would have to aggregate P40,000 to
materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be
expected to detect misstatements that aggregate:
a. P40,000 b. P50,000 c. P60,000 d. P100,000

35. Which of the following statements concerning materiality thresholds in incorrect?


a. Materiality thresholds may change between the planning and review stages of the audit. These changes may be due
to quantitative and/or qualitative factors.
b. The smallest aggregate level of errors or fraud that could be considered material to any of the financial statements is
referred to as a materiality threshold.
c. In general, the more misstatements the auditor expects, the higher should be the aggregate materiality threshold.
d. Aggregate materiality thresholds are a function of the auditor’s preliminary judgment concerning audit risk.

36. The auditor should plan the nature, timing and extent of direction and supervision of engagement team members and
review their work. Which of the following statements is incorrect regarding direction, supervision and review?
a. The auditor plans the nature, timing, and extent of direction and supervision of engagement team members based on
the assessed risk of material misstatement.
b. As the assessed risk of material misstatement increases, for the area of audit risk, the auditor ordinarily increases the
extent and timeliness of direction and supervision of engagement team members.
c. As the assessed risk of material misstatement decreases, for the area of audit risk, the auditor performs a more
detailed review of their work.
d. The auditor plans the nature, timing and extent of the review of the team’s work based on the capabilities and
competence of the individual team members performing the audit work.

37. Which of the following matters would an auditor most likely consider when establishing the scope of the audit?
a. The expected audit coverage, including the number and locations of the entity’s components to be included.
b. The entity’s timetable for reporting, such as at interim and final stages.
c. The discussion with the entity’s management concerning the expected communications on the status of audit work
throughout the engagement and the expected deliverables resulting from the audit procedures.
d. Audit areas where there is a higher risk of material misstatement.

38. In connection with the planning phase of an audit engagement, which of the following statements is always correct?
a. Observation of inventory count should be performed at year-end.
b. An engagement should not be accepted after the client’s financial year-end
c. Final staffing decisions must be made prior to completion of the planning stage.
d. A portion of the audit of a continuing audit client can be performed at interim dates.

39. A retailing entity uses the Internet to execute and record its purchase transactions. The entity's auditor recognizes that the
documentation of details of transactions will be retained for only a short period of time. To compensate for this limitation,
the auditor most likely would:
a. Compare a sample of paid vendors' invoices to the receiving records at year-end.
b. Perform tests several times during the year, rather than only at year-end.
c. Plan for a large measure of tolerable misstatement in substantive tests.
d. Increase the sample of transactions to be selected for cutoff tests.

40. Which of the following matters would an auditor least likely to consider when setting the direction of the audit?
a. The availability of client personnel and data.
b. The selection of the engagement team and the assignment of audit work to the team members.
c. The engagement budget which includes consideration of the appropriate amount of time to allot for areas where
there may be higher risks of material misstatement.
d. The manner in which the auditor emphasizes to engagement team members the need to maintain a questioning mind
and to exercise professional skepticism in the gathering and evaluation of audit evidence.

Internal Control Consideration


1. It is a process, effected by those charged with governance, management, and other personnel, designed to provide
reasonable assurance regarding the achievement of objectives in the following categories:
 Effectiveness and efficiency of operations
 Reliability of financial reporting
 Compliance with applicable laws and regulations
a. Internal auditing b. Internal control c. Business strategy d. Accounting process
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2. Which of the following best describes an internal control system?


a. All the policies and procedures adopted by the management of an entity to assist in achieving management's
objective of ensuring, as far as practicable, orderly and efficient conduct of its business, including adherence to
management policies; safeguarding of assets; prevention and detection of fraud and error; accuracy and
completeness of the accounting records; and timely preparation of reliable financial information.
b. The series of tasks and records of an entity by which transactions are processed as a means of maintaining
financial records. Such systems identify, assemble, analyze, calculate, classify, record, summarize and report
transactions and other events.
c. This includes, but is not limited to, plan of organization and the procedures and records that are concerned with the
decision processes leading to management’s authorization of transactions. It promotes operational efficiency and
adherence to managerial policies.
d. This comprises the plan of organization and the procedures and records that are concerned with the safeguarding of
assets and the reliability of financial records. It involves systems of authorization and approval controls over assets,
internal audit and all other financial matters.

3. Which of the following is not one of the essential concepts of internal controls?
a. It is a process
b. It is effected by those charged with governance, management, and other personnel in an entity
c. It is a means or tool used by management to achieve the entity’s objectives
d. It can be expected to absolute assurance regarding that the achievement of the entity’s objectives

4. A reason to establish internal control is to:


a. Have a basis for planning the audit
b. Provide reasonable assurance that the objectives of the organization are achieved
c. Encourage compliance with organizational objectives
d. Ensure the accuracy, reliability and timeliness of information

5. Internal controls are not designed to provide reasonable assurance that


a. Transactions are executed in accordance with management’s authorization
b. Irregularities will be eliminated
c. Access to assets is permitted only in accordance with management’s authorization
d. The recorded accountability for assets is compared with the existing assets at reasonable intervals

6. Internal control can only provide reasonable, not absolute, assurance of achieving entity control objectives. One of the
factors limiting the likelihood of achieving those objectives is that:
a. The auditor’s primary responsibility is the detection of fraud.
b. The board of directors is active and independent.
c. The cost of internal control should not exceed its benefits.
d. Management monitors internal control.

7. Which of the following is an example of an inherent limitation in a client’s internal control system?
a. The effectiveness of procedures depends on the segregation of employee duties.
b. Procedures are designed to assure the execution and recording of transactions in accordance with management’s
authorization.
c. In the performance of most control procedures, there are possibilities of errors arising from mistakes in judgment.
d. Procedures for handling large numbers of transactions are processed by information technology (IT) equipment.

8. An internal control system that is working effectively


a. Eliminates risk and potential loss of to the entity
b. Cannot be circumvented by management
c. Is unaffected by changing circumstances and conditions encountered by the entity
d. Reduces the need for management the review exception reports on a day-to-day basis

9. This internal component is the foundation for all other components. It set the tone of the organization, provides discipline
and structure, and influences the control consciousness of employees.
a. Control activities c. Control environment
b. Monitoring of control d. Entity's risk assessment process

10. Which of the following statements best describes “control environment”?


a. The entity’s process for identifying business risks relevant to financial reporting objectives and deciding about actions
to address those risks, and the results thereof.
b. The system for transferring information from transaction processing systems to the general ledger or the financial
reporting system.
c. Policies and procedures that help ensure that management directives are carried out.

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d. This includes the governance and management functions and the attitudes, awareness, and actions of those charged
with governance and management concerning the entity’s internal control and its importance to the entity.

11. Which of the following considered control environment elements?


Commitment Detection Organizational
To competence Risk Structure
a. Yes No Yes
b. Yes Yes Yes
c. No No No
d. No No Yes

12. The information system consists of the following:


A B C D
 Infrastructure (physical and hardware components) Yes Yes No Yes
 Software Yes Yes Yes Yes
 People No Yes No No
 Procedures and inputs No Yes Yes No

13. An entity’s risk assessment process includes how management:


A B C D
 Identifies risk Yes Yes No Yes
 Assesses significance and likelihood of occurrence
of these identified risks Yes Yes Yes No
 Decides upon actions to manage these risks Yes No Yes No

14. Risks can arise or change due to circumstances such as the following, except:
a. There is a change in the regulatory or operating environment (i.e. a new law has been passed which prohibits the use
of a chemical which is a main ingredient of the company’s major product).
b. New employees have been hired by the company.
c. The company switched from manual information systems to a computerized system.
d. The accounting and financial reporting framework has remained stable for the past five years, and no new
pronouncements have been made.

15. Under PSA 315, monitoring of controls is an internal control component that involves a process of assessing the quality of
internal control performance over time. It involves assessing the design and operation of controls on a timely basis and
taking necessary corrective actions. Monitoring of controls is accomplished through ongoing monitoring activities,
separate evaluations, or a combination of the two. An entity's ongoing monitoring activities often include
a. Periodic reporting by the entity's internal auditors about the functioning of internal control
b. Reviewing the purchasing account
c. Periodic audits by the audit committee
d. The audit of the annual financial statements

16. Control activities constitute one of the five components of internal control. Which of the following is not included in this
internal control component?
a. Segregation of duties c. An internal audit function
b. Performance reviews d. Authorization

17. Which of the following is a management control method that most likely could improve management's ability to supervise
company activities effectively?
a. Monitoring compliance with internal control requirements imposed by regulatory bodies.
b. Limiting direct access to assets by physical segregation and protective devices.
c. Establishing budgets and forecasts to identify variances from expectations.
d. Supporting employees with the resources necessary to discharge their responsibilities.

18. PSA 315 requires the auditor to obtain an understanding of the client’s internal controls
a. For every audit c. For first-time audits
b. Sufficient to find any frauds which may exist d. Whenever it would be appropriate

19. In planning the audit, the auditor obtains a sufficient understanding of the existing internal control. Which one of the
following is not among the auditor's primary objectives for obtaining such knowledge?
a. Identify types of material misstatements.
b. Consider the factors that affect the risk of material misstatement.
c. Make constructive suggestions to the client for improvement.
d. Design effective substantive tests.

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20. The primary purpose of the auditor’s consideration of internal control is to provide a basis for
a. Determining whether procedures and records that are concerned with the safeguarding of assets are reliable.
b. Constructive suggestions to clients concerning deficiencies in internal control.
c. Determining the nature, timing and extent of audit tests to be applied.
d. The expression of an opinion.

21. When obtaining knowledge about an entity's internal control, it is important for the auditor to consider the competence of
its employees, because their competence bears directly and importantly upon the
a. Cost-benefit relationship of internal control
b. Comparison of recorded accountability with assets
c. Achievement of the objectives of internal control
d. Timing of substantive tests to be performed

22. Obtaining an understanding of internal control involves:


A B C D
 Evaluating the design of a control Yes Yes Yes No
 Determining whether the control has been implemented Yes Yes No Yes
 Testing the effectiveness of a control No Yes Yes Yes

23. Which of the following statements best describes the phrase, “evaluating the design of a control”?
a. Considering whether the control, individually or in combination with other controls, is capable of effectively
preventing, or detecting and correcting, material misstatements.
b. Determining whether the control exists and that the entity is using it.
c. Expressing an opinion as to the effectiveness of a control.
d. Observing the application of specific controls.

24. When obtaining an understanding of the accounting and internal control system the auditor may trace a few transactions
through the accounting system. This technique is:
a. Reperformance b. Walk-through c. Control test d. Validity Test

25. When obtaining an understanding of an entity’s internal control, an auditor should concentrate on the substance of
controls rather than their form because:
a. The controls may be operating effectively but may not be documented.
b. Management may establish appropriate controls but not act on them.
c. The controls may be so inappropriate that no reliance is contemplated by the auditor.
d. Management may implement controls with costs in excess of benefits.

26. After obtaining an understanding of an entity’s internal control structure and assessing control risk, an auditor may next:
a. Perform tests of control to verify management’s assertions that are embodied in the financial statements.
b. Apply analytical procedures as substantive tests to validate the assessed level of control risk.
c. Consider whether evidential matter is available to support a further reduction in the assessed level of control risk.
d. Evaluate whether the internal control structure policies and procedures detected material misstatements in the
financial statements.

27. After obtaining an understanding of internal control and assessing control risk, an auditor decided to perform tests of
controls. The auditor most likely decided that
a. Additional evidence to support a further reduction in control risk is not available.
b. It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.
c. An increase in the assessed level of control risk is justified for certain financial statement assertions.
d. There were many internal control weaknesses that could allow errors to enter the accounting system.

28. Tests of controls are used to test whether controls are:


a. Operating effectively c. Properly incorporated in the financial statements
b. Placed in operation or implemented d. Properly documented by the client

29. Which of the following is the auditor’s purpose of further testing internal control procedures?
a. Provide a basis for reducing the assessed level of control risk below that which resulted from the auditor’s initial
understanding of internal control.
b. Reduce the risk that errors or fraud which are not prevented or detected by internal control are not detected by the
independent audit.
c. Provide assurance that transactions are executed in accordance with management’s authorization and access to
assets is limited by a proper segregation of functions.
d. Provide assurance that transactions are recorded as necessary to permit the preparation of the financial statements
in accordance with PFRS.

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30. Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal
control activities are suitably designed to prevent or detect material misstatements?
a. Reperforming the activities for a sample of transactions.
b. Performing analytical procedures using data aggregated at a high level.
c. Vouching a sample of transactions directly related to the activities.
d. Observing the entity's personnel applying the activities.

31. In conducting an audit in accordance with PSAs, the auditor is required to identify and assess the risks of material
misstatement at the financial statements level, and at the assertion level for classes of transactions, account balances,
and disclosure. Some of these risks, in the auditor's judgment, require special audit consideration, such as those that
involve fraud or complex transactions. Such risks are called
a. Business risks b. Audit risks c. Significant risks d. Material risks

32. Which of the following statements concerning audit risk and its components is incorrect?
a. Regardless of the assessed levels of inherent and control risks, the auditor should always perform some substantive
procedures for material account balances and classes of transactions
b. The higher the assessment of inherent and control risks, the more evidence the auditor obtain from the performance
of substantive procedures
c. The assessed level of inherent risk need not be considered in determining the nature, timing and extent of
substantive procedures required to reduce audit risk to an acceptably low level
d. After obtaining an understanding of the accounting and internal control systems, the auditor should make a
preliminary assessment of control risk, at the assertion level, for each material account balance or class of
transactions

33. Which of the following statements is correct?


a. Tests of controls are necessary if the auditor plans to use the primarily substantive approach.
b. Tests of controls are necessary if the auditor plans to assess the level of control risk at a HIGH (maximum) level.
c. The auditor can simultaneously obtain an understanding of internal control and perform tests of controls.
d. After performing tests of controls, the auditor will always assess control risk at a HIGH level.

34. Tests of controls may include the following, except:


a. Reperformance of internal control procedures
b. Inquiries about, and observation of, internal controls which leave no audit trail
c. Analytical procedures involving comparison of operating expenses with budget amount
d. Inspection of documentary support to transactions evidencing authorization

35. Evidence of the performance of control risk assessment procedures includes all of the following except
a. Flowcharts b. Questionnaires c. Lead schedule d. Memoranda

36. Which of the following statements regarding auditor documentation of the client’s internal control structure is correct?
a. Documentation must include flowcharts.
b. Documentation must include procedural write-ups.
c. No documentation is necessary although it is desirable.
d. No one particular form of documentation is necessary, and the extent of documentation may vary.

37. When control risk is assessed at HIGH for all financial statements assertions, an auditor should document the auditor’s
A B C D
 Understanding of the entity’s internal control structure Yes Yes No Yes
 Conclusion that control risk is HIGH No Yes Yes Yes
 Basis for concluding that control risk is HIGH No No Yes Yes

38. A control that reduces the risk that an existing or potential control weakness will result in a failure to meet a control
objective is referred to as:
a. Compensating control b. Non-routine control c. Conditional control d. Offset control

39. When a compensating control exists, a weakness in the system:


a. Is no longer a concern because the potential for misstatement has been sufficiently reduced.
b. Is reduced but it is not removed; therefore, it is still of concern to the auditor.
c. Could cause a material loss, so it must be tested using substantive procedures.
d. Is magnified and must be removed from the sampling process and examined in its entity.

40. If no changes have occurred since the controls were last tested, a CPA should
a. Rely on the prior year audit’s assessment of internal controls and use this assessment in the current year.
b. Test the operating effectiveness of such controls at least once in every fourth audit.
c. Rely entirely on the performance of substantive audit procedures.
d. Test the operating effectiveness of such controls at least once in every third audit
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Other Matters Related to Internal Controls


1. This refers to person(s) or organization(s) (e.g., a corporate trustee) with responsibility for overseeing the strategic
direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial
reporting process.
a. Top level management c. Those charged with governance
b. Management d. Audit Committee

2. Matters to be communicated to those charged with governance may include the following, except
a. The auditor’s responsibilities in relation to the financial statement audit
b. Significant findings from the audit
c. Auditors independence
d. Planned audit opinion

3. Which of the following statements is correct concerning an auditor’s required communication with those charged with
governance of an audit client?
a. This communication is required to occur before the auditor’s report on the financial statements is issued.
b. This communication should include discussion of any significant disagreements with management concerning the
financial statements.
c. Any significant matter communicated to the audit committee also should be communicated to management.
d. Significant audit adjustments proposed by the auditor and recorded by management need not be communicated to
those charged with governance.

4. Which of the following statements is correct about an auditor’s required communication with those charged with
governance of an audit client?
a. Any matters communicated to the entity’s audit committee also are required to be communicated to the entity’s
management.
b. The auditor is required to inform those charged with governance about significant misstatements discovered by the
auditor and subsequently corrected by management.
c. Disagreements with management about the application of accounting principles are required to be communicated in
writing to those charged with governance.
d. Weaknesses in internal control previously reported to those charged with governance need not be recommunicated.

5. Which of the following best describes reportable conditions?


a. A significant deficiency (or combination of significant deficiencies) that results in a reasonable possibility of a material
misstatement which will not be prevented or detected.
b. A situation in which the design or operation of a control does not allow management or employees, in the normal
course of performing their assigned functions, to prevent or detect material misstatements on a timely basis.
c. A control deficiency that is less severe than a material weakness, but important enough to merit attention by those
responsible for oversight of the company's financial reporting.
d. It refers to significant deficiencies in the design or operation of the internal control structure that could adversely
affect the organization’s ability to record, process, summarize, and report financial data consistent with the assertions
of management in the financial statements.

6. Reportable conditions are matters that come to an auditor's attention and that should be communicated to an entity's
audit committee because they represent
a. Material irregularities or illegal acts perpetrated by management.
b. Significant deficiencies in the design or operation of internal control.
c. Flagrant violations of the entity's documented conflict of interest policies.
d. Intentional attempts by client personnel to limit the scope of the auditor's work.

7. In general, a material weakness in internal control may be defined as a condition in which material errors or irregularities
may occur and not be detected within a timely period by
a. An independent auditor during tests of controls.
b. Employees in the normal course of performing their assigned functions.
c. Management when reviewing interim financial statements and reconciling account balances.
d. Outside consultants who issue a special-purpose report on internal control structure.

8. Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to
the audit committee?
a. Management's failure to renegotiate unfavorable long-term purchase commitments.
b. Recurring operating losses that may indicate going concern problems.
c. Evidence of a lack of objectivity by those responsible for accounting decisions.
d. Management's current plans to reduce its ownership equity in the entity.

9. Which of the following statements concerning material weaknesses and significant deficiencies is correct?

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a. An auditor should not identify and communicate material weaknesses separately from significant deficiencies.
b. Compensating controls may limit the severity of a material weakness or significant deficiency.
c. Upon discovery an auditor should immediately report all material weaknesses and significant deficiencies identified
during an audit.
d. All significant deficiencies are material weaknesses.

10. The development of constructive suggestions to clients for improvements in internal control is
a. A requirement of the auditor’s consideration of internal control.
b. A desirable by-product of an audit engagement.
c. Addressed by the auditor only during a special engagement.
d. As important as establishing a basis for reliance upon the internal control structure.

11. A third-party organization (or segment of a third-party organization) that provides services to user entities that are part of
those entities’ information systems relevant to financial reporting.
a. Service organization c. Service organization’s system
b. Subservice organization d. Third-party organization

12. This refers to controls that the service organization which assumes, in the design of its service, will be implemented by
user entities, and, if necessary to achieve control objectives, are identified in the description of its system.
a. Complementary user entity controls c. Primary user entity controls
b. Complementary service entity controls d. Primary service entity controls

13. When obtaining an understanding of the user entity in accordance with PSA 315 (Redrafted), the user auditor shall obtain
an understanding of how a user entity uses the services of a service organization in the user entity’s operations, including:
a. b. c. d.
 The nature of the services provided by the service organization and the
significance of those services to the user entity, including the effect thereof Yes Yes Yes Yes
on the user entity’s internal control
 The nature and materiality of the transactions processed or accounts or
Yes Yes Yes Yes
financial reporting processes affected by the service organization
 The degree of interaction between the activities of the service organization
Yes No No Yes
and those of the user entity
 The nature of the relationship between the user entity and the service
organization, including the relevant contractual terms for the activities No No Yes Yes
undertaken by the service organization.

14. Type 1 report on service organization includes a report on


Description of controls Design of controls Operating effectiveness of
controls
a. Yes No Yes
b. Yes Yes Yes
c. No No No
d. Yes Yes No

15. If the user auditor is unable to obtain a sufficient understanding from the user entity, the user auditor shall obtain
understanding from any other procedures. Which of the following is least likely procedure that will be used by the auditor?
a. Obtaining a type 1 or type 2 report, if available
b. Contacting the service organization, through the user entity, to obtain specific information
c. Visiting the service organization and performing procedures that will provide the necessary information about the
relevant controls at the service organization
d. Contacting law enforcement agencies to force the user entity to provide the necessary information relevant to
understanding by the user auditor.

16. Which of the following is the least concern of the client auditor in reviewing the report of service organization auditor on
suitability of internal control design of the service organization?
a. The accuracy of description of the service organization's accounting and internal control systems, ordinarily prepared
by the management of the service organization.
b. The systems' controls have been placed in operation.
c. The accounting and internal control systems are suitably designed to achieve their stated objectives.
d. The type of documentation of the understanding of the service organization's control system.

17.AAA Company processes payroll transactions for schools. Raymund, CPA, is engaged to report on AAA’s policies and
procedures implemented as of a specific date. These policies and procedures are relevant to the schools’ internal control,
so Raymund’s report will be useful in providing the schools’ independent auditors with information necessary to plan their
audits. Raymund’s report expressing an opinion on AAA’s policies and procedures implemented as of a specific date
should contain a(n)
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a. Description of the scope and nature of Raymund’s procedures.
b. Statement that AAA’s management has disclosed to Raymund all design deficiencies of which it is aware.
c. Opinion on the operating effectiveness of AAA’s policies and procedures.
d. Paragraph indicating the basis for Raymund’s assessment of control risk.

18. Which of the following is correct on reporting by the user auditor?


a. The user auditor should never refer to the work of a service auditor.
b. The user auditor can only refer to the work of the service auditor if it will issue modified opinion.
c. When reference to the service auditor work is required by law or regulation, the user auditor’s report shall indicate
that the reference does not diminish the user auditor’s responsibility for the audit opinion.
d. The user auditor should not issue unmodified opinion when using the work of a service auditor.

19.AAA Company processes payroll transactions for a retailer. Francis, CPA, is engaged to express an opinion on a
description of AAA’s internal controls implemented as of a specific date. These controls are relevant to the retailer’s
internal control, so Francis’s report may be useful in providing the retailer’s independent auditor with information
necessary to plan a financial statement audit. Francis’s report should
a. Contain a disclaimer of opinion on the operating effectiveness of AAA’s controls.
b. State whether AAA’s controls were suitably designed to achieve the retailer’s objectives.
c. Identify AAA’s controls relevant to specific financial statement assertions.
d. Disclose Francis’s assessed level of control risk for AAA.

20. Which of the following is correct on reporting by the user auditor?


a. The user auditor should never refer to the work of a service auditor.
b. The user auditor can only refer to the work of the service auditor if it will issue modified opinion.
c. When reference to the service auditor work is required by law or regulation, the user auditor’s report shall indicate
that the reference does not diminish the user auditor’s responsibility for the audit opinion.
d. The user auditor should not issue unmodified opinion when using the work of a service auditor.

21. In comparison to the external auditor, an internal auditor is more likely to be concerned with
a. Internal control. c. Cost accounting procedures.
b. Operational auditing. d. Reviewing interim financial statements.

22. The objectives of internal audit functions vary widely and depend on the size and structure of the entity and the
requirements of management and, where applicable, those charged with governance. The activities of the internal audit
function may include one or more of the following, except
a. Monitoring of internal control.
b. Examination of financial and operating information.
c. Review of compliance with laws and regulations.
d. Issuing opinion as to whether internal controls are effective.

23. The independent auditor should acquire an understanding of the internal audit function as it relates to the independent
auditor’s consideration of internal control because
a. The audit programs, working papers, and reports of internal auditors can often be used as a substitute for the work of
the independent auditor’s staff.
b. The procedures performed by the internal audit staff may eliminate the independent auditor’s need for an extensive
consideration of internal control.
c. The work performed by internal auditors may be a factor in determining the nature, timing and extent of the
independent auditor’s procedures.
d. The understanding of the internal audit function is an important substantive test by the independent auditor.

24. If the independent auditors decide that the work performed by the internal auditor may have a bearing on their own
procedures, they should consider the internal auditor’s
a. Competence and objectivity. c. Efficiency and experience.
b. Independence and review skills. d. Training and supervisory skills.

25. If the independent auditor decides that the work performed by internal auditors may have a bearing on the independent
auditor’s own procedures, the independent auditor should consider the objectivity of the internal auditors. One method of
judging objectivity is to
a. Review the recommendation made in the reports of internal auditors.
b. Examine, on a test basis, documentary evidence of the work performed by internal auditors.
c. Inquire of management about the qualification of the internal audit staff.
d. Consider the client’s practices for hiring, training, and supervising the internal audit staff.

26.Ash Retailing, Inc. maintains a staff of three full-time internal auditors who report directly to the controller. In planning to
use the internal auditors to provide assistance in performing the audit, the independent auditor most likely will
a. Place limited reliance on the work performed by the internal auditors.

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b. Decrease the extent of the tests of controls needed to support the assessed level of detection risk.
c. Increase the extent of the procedures needed to reduce control risk to an acceptable level.
d. Avoid using the work performed by the internal controls.

27. Which of the following is not a responsibility that should be assigned to a company's internal audit department?
a. Evaluating internal control c. Reporting on effectiveness of operating segments
b. Approving disbursements d. Investigating potential merger candidates

28. For which of the following judgments may an independent auditor share responsibility with an entity’s internal auditor who
is assessed to be both competent and objective?
Assessment of Assessment of
inherent risk control risk
a. Yes Yes
b. Yes No
c. No Yes
d. No No

29. During an audit, an internal auditor may provide direct assistance to an independent CPA in
Obtaining Performing tests of Performing substantive
understanding of controls tests
internal control
a. No No No
b. Yes No No
c. Yes Yes No
d. Yes Yes Yes

30. In connection with the examination of financial statements by an independent auditor, the client suggests that members of
the internal audit staff be utilized to minimize audit costs. Which of the following tasks could most appropriately be
delegated to the internal audit staff?
a. Selection of accounts receivable for confirmation, based upon the internal’s judgment as to how many accounts and
which accounts will provide sufficient coverage.
b. Preparation of schedules for negative accounts receivable responses.
c. Evaluation of the internal control for accounts receivable and sales.
d. Determination of the adequacy of the allowance for doubtful accounts.

Audit Evidence
1. All the information used by the auditor in arriving at the conclusion on which the audit opinion is based. It includes the
information contained in the accounting records underlying the financial statements (underlying accounting data) and
other information (corroborating information).
a. Audit Evidence b. Audit risk c. Audit opinion d. Audit program

2. Which of the following best describes the primary purpose of audit procedures?
a. To detect fraud
b. To verify the accuracy of account balances
c. To comply with generally accepted accounting principles
d. To gather corroborative evidence to support the audit opinion

3. Which of the following statements is/are correct?


Statement 1: Audit evidence comprises source documents and accounting records, underlying the financial statements
and corroborating information from other sources.

Statement 2: Audit evidence is obtained to form an appropriate mix of tests of control and substantive procedures.

Statement 3: The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on
which to base the audit opinion.
a. Statements 1 and 2 only c. Statements 2 and 3 only
b. Statements 1 and 3 only d. All statements are correct

4. All of the following are underlying accounting data, except:


a. Minutes of meetings c. Records of initial entries and supporting documents
b. General and subsidiary ledgers d. Worksheets and spreadsheets for cost allocations

5. Accounting records least likely include


a. General and subsidiary ledgers c. Work sheets and supporting cost allocations
b. Comparable data about competitors d. Records of initial entries and supporting records

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6. Other information that the auditor may use as audit evidence least likely includes
a. Minutes of meetings.
b. Confirmations from third parties.
c. Adjustments to the financial statements that are not reflected in formal journal entries.
d. Information obtained by the auditor from such audit procedures as inquiry, observation, and inspection.

7. An evidence to be considered appropriate must be:


a. Relevant b. Reliable c. Relevant and reliable d. Relevant or reliable

8. The most reliable form of documentary evidence are those documents that are:
a. Internally generated c. Authorized by a responsible official
b. Pre-numbered d. Easily duplicated

9. Which of the following procedures would provide the most reliable audit evidence?
a. Inquiries of the client’s internal audit staff held in private
b. Inspection of prenumbered client purchase orders filed in the vouchers payable department
c. Analytical procedures performed by the auditor on the entity’s trial balance
d. Inspection of bank statements obtained directly from the client’s financial institution

10. Which of the following statements relating to the competence of evidential matter is always true?
a. Evidence gathered by auditors must be both valid and relevant to be considered competent.
b. Properly designed analytical procedures will detect material misstatements.
c. Evidential matter gathered by an auditor from outside a client is reliable.
d. Oral representations made by management are not valid.

11. Which of the following statements regarding reliability of evidence is incorrect?


a. Audit evidence is more reliable when it is obtained from independent sources outside the entity.
b. The condition of internal controls of the entity does not contribute to the reliability of audit evidence.
c. Audit evidence that is generated internally is more reliable when the related controls are effective.
d. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly.

12. Which statement is incorrect regarding the nature of further audit procedures?
a. The nature of further audit procedures refers to their purpose and type.
b. Certain audit procedures may be more appropriate for some assertions than others.
c. The auditor is required to obtain audit evidence about the accuracy and completeness of information produced by the
entity’s information system when that information is used in performing audit procedures.
d. The higher the auditor’s assessment of inherent and control risks, the less reliable and relevant is the audit evidence
sought by the auditor from substantive procedures.

13. As the acceptable level of detection risk decreases, an auditor may change the
a. Timing of substantive tests by performing them at an interim date rather than at year-end
b. Nature of substantive tests from a less effective to a more effective procedure
c. Timing of tests of controls by performing them at several dates rather than at one time
d. Assessed level of inherent risk to a higher amount

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 re-performance. c. Inquiry and inspection
b. Observation and inquiry. d. Inquiry and analytical procedures.

15. “Physical examination” is the inspection or count by the auditor of assets such as:
a. Cash or inventory only
b. Cash, inventory, cancelled checks, and sales documents
c. Cash, inventory, securities, notes receivable, and tangible assets
d. Cash, inventory, cancelled checks, and tangible fixed assets

Confirmation and Analytical Procedures


1. Confirmation is most likely to be the relevant form of evidence with regard to assertions about accounts receivable
when the auditor has concerns about the receivables’
a. Valuation b. Classification c. Existence d. Completeness

2. Confirmation is the process of obtaining a representation of information or of an existing condition directly from a third
party. Traditionally, confirmation is used to verify:
a. Fixed asset additions.
b. Bank balances and accounts receivables.
c. Individual transactions between organizations, such as sales transactions.
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d. All three of the above.

3. Who signs the confirmation requests:


a. The appropriate level of management c. The audit partner
b. The CEO/CFO of the client d. Both management and the auditor

4. When the recipient has accomplished the confirmation request, replies should be:
a. Sent directly to the auditor
b. Sent directly to the client, after which the client gives the replies to the auditor
c. Sent directly to the auditor, with another copy of the reply going to the client
d. Not sent back since a confirmation request does not necessitate replies

5. Positive confirmation requests is not used when:


a. A large number of small balances is involved.
b. The entity’s information systems and internal controls are unreliable or ineffective
c. The information available to corroborate management’s assertion(s) is only available outside the entity
d. Specific fraud risk factors, such as risk of management override of internal controls, prevent the auditor from relying
on evidence from the entity.

6. Negative confirmation requests may be used when:


a. A substantial number of errors is expected
b. A large number of large balances is involved
c. The assessed levels of inherent and control risks are high
d. The auditor has no reason to believe that respondents will disregard these requests

7. Where no response is received to a positive confirmation request, the auditor should


a. Contact the recipient/respondent in order to force a response from such recipient
b. Issue a qualified opinion or a disclaimer of opinion on grounds of a scope limitation
c. Issue a qualified opinion or an adverse opinion, depending on the materiality involved
d. Contact the recipient to elicit a response and perform alternative procedures as necessary

8. If management refuses to allow the auditor to send confirmation request, the auditor ordinarily performs the following
audit procedure, except:
a. Report the management to the House of Representatives and to the Senate, as necessary.
b. Where possible, perform alternative procedures designed to obtain relevant and reliable audit evidence.
c. Evaluate the possible effect on the auditor’s opinion when the auditor concludes that the management’s refusal is
unreasonable and no alternative procedures can be performed.
d. Evaluate the reasonableness of management’s refusal on the assessment of the relevant risks of material
misstatements, including risk of fraud, and on the nature, timing and extent of other audit procedures.

9. Analytical procedures are required:


A B C D
 As a risk assessment procedure performed during planning Yes Yes Yes Yes
 As a substantive test procedure during evidence gathering Yes Yes No No
 As an overall review at audit completion No Yes No Yes

10. Analytical procedures used in planning an audit should focus on identifying:


a. Material weaknesses in the internal control system
b. The predictability of financial data from individual transactions
c. The various assertions that are embodied in the financial statements
d. Areas that may represent specific risks relevant to the audit

11. The objective of performing analytical procedures in planning an audit engagement is to identify the existence of:
a. Unusual transactions and events
b. Illegal acts that went undetected because of internal control weaknesses
c. Related party transactions
d. Recorded transactions that were not properly authorized

12. Which of the following procedures would an auditor most likely perform in planning an audit of financial statements?
a. Inquiring of the client’s legal counsel concerning pending litigation.
b. Comparing the financial statements to anticipated results.
c. Examining computer generated exception reports to verify the effectiveness of internal controls.
d. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

13. Analytical procedures used in planning an audit should focus on


a. Reducing the scope of tests of controls and substantive tests.
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b. Providing assurance that potential misstatements will be identified.
c. Enhancing the auditor’s understanding of the client’s business.
d. Assuming the adequacy of the available evidential matter.

14. In performing analytical procedures, set the following procedures in proper order.
iii. Calculate predictions and compare them to recorded amount
iv. Develop an expectation
v. Define a significant difference
vi. Investigate significant difference
a. i, ii, iii, iv b. ii, i, iii, iv c. i, ii, iv, iii d. ii, i, iv, iii

15. An auditor compares expenses as a percent of sales to expectations. This is an example of


a. Ratio analysis b. Crease analysis c. Trend analysis d. Vertical analysis

16. Which of the following results from analytical procedures might indicate inventory obsolescence?
a. A decline in inventory turnover c. A decline in the gross margin ratio
b. A decline in days’ sales in inventory d. An increase in operating margin

17. Analytical procedures are


a. Substantive tests designed to evaluate a system of internal control.
b. Tests of controls designed to evaluate the validity of management's representation letter.
c. Substantive tests designed to evaluate the reasonableness of financial information.
d. Tests of controls designed to evaluate the reasonableness of financial information.

18. A basic premise underlying the application of analytical procedures is that


a. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations
b. Statistical tests of financial information may lead to the discovery of material errors in the financial statements
c. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known
conditions to the contrary
d. These procedures cannot replace tests of balances and transactions

19. The following are purposes of analytical procedures, except:


a. Assist the auditor in planning the nature, timing and extent of other audit procedures
b. As a test to obtain audit evidence about the suitability of design and effective operation of internal controls.
c. As a substantive procedure when their use can be more effective or efficient that tests of details in reducing detection
risk for specific financial statement assertions
d. As an overall review of the financial statements in the final review stage of the audit.

20. Where there are unusual fluctuations and relationships ordinarily begins with inquiries of management, followed by
A B C D
 Corroboration of management’s responses Yes No Yes No
 Consideration of the need to apply other audit procedures based on Yes Yes No No
the results of management inquiries

Audit Sampling
1. The application of audit procedures to less than 100% of items within a class of transactions on account balances such
that all sampling units have a chance of selection.
a. Audit sampling c. 100% examination
b. Specific items testing d. Statistical sampling

2. Any approach to sampling that uses probability theory to evaluate sample results, including measurement of sampling
risk, and randomly selects samples is:
a. Statistical Sampling b. Attribute sampling c. Non-statistical sampling d. Variable sampling

3. The risk that the auditor’s conclusion based on a sample may be different from the conclusions reached if the entire
population were subjected to the same audit procedure.
a. Audit risk b. Control risk c. Sampling risk d. Information risk

4. Non sampling risk arises from the following, except:


a. reliance on persuasive rather than conclusive audit evidence
b. use of inappropriate audit procedures
c. misinterpretation of audit evidence
d. failure to recognize an error

5. Which of the following explanations best describes the distinguishing feature of statistical sampling?
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a. It allows the auditor to have the same degree of confidence as with judgment sampling but with substantially less
work.
b. It allows the auditor to substitute sampling techniques for audit judgment
c. It provides for measuring mathematically the degree of uncertainty that results from examining only a part of the data.
d. It provides for measuring the actual misstatements in financial statements in terms of reliability and precision.

6. The maximum error in a population that the auditor is willing to accept.


a. Tolerable Error b. Sample error c. Anomalous Error d. Expected Population Error

7. An error that arises from an isolated event that has not recurred other than on specifically identifiable occasions
and is therefore not representative of errors in the population.
a. Tolerable Error b. Sample error c. Anomalous Error d. Expected Population Error

8. This is the process of dividing a population into subpopulations, each of which is a group of sampling units which
have similar characteristics.
a. Subdivision b. Statistical c. Stratification d. Non-statistical sampling

9. The objective of stratification is:


a. To reduce the variability of items within each stratum and therefore allow sample size to be reduced without a
proportional increase in sampling risk.
b. To mathematically quantify sampling risk.
c. To reduce sampling risk.
d. To select samples that are more representative of the population.

10. The number of sampling units in the population is divided by the sample size to give a sampling interval. When using this
sample selection method, the auditor would need to determine that sampling units within the population are not structured
in such a way that the sampling interval corresponds with a particular pattern in the population.
a. Systematic selection b. Haphazard selection c. Block selection d. Variable sampling

11. The auditor selects the sample without following a structured technique. It is not appropriate when using statistical
sampling.
a. Systematic selection b. Haphazard selection c. Block selection d. Variable sampling

12. Selecting a block(s) of contiguous items from within the population. it would rarely be an appropriate sample selection
technique when the auditor intends to draw valid inferences about the entire population based on the sample.
a. Systematic selection b. Haphazard selection c. Block selection d. Variable sampling

13. The consequence of assessing control risk too high relates to the
a. Efficiency of the audit c. Preliminary estimates of materiality levels
b. Effectiveness of the audit d. Allowable risk of tolerable error.

14. Which of the following best describes what the auditor means by the rate of occurrence in the attribute sampling
plan?
a. The number of errors that can be reasonably expected to be found in a population.
b. The frequency with which a certain characteristic occurs within a population.
c. The acceptable risk that the sample is not representative of the population.
d. The peso range within which the true population totals can be expected to fail.

15. The tolerable rate of deviations for a compliance test is generally


a. Lower than the expected rate of errors in the related accounting records.
b. Higher than the expected rate of errors in the related accounting records.
c. Identical to the expected rate of errors in the related accounting records.
d. Unrelated to the expected rate of errors in the related accounting records.

16. In planning a statistical sample for a test of controls, an auditor increased the expected population deviation rate from the
prior year’s rate because of the results of the prior year’s tests of controls and the overall control environment. The
auditor most likely would then increase the planned:
a. Tolerable rate c. Risk of assessing control risk too low
b. Allowance for sampling risk d. Sample size

17. Which of the following statements is correct concerning statistical sampling in tests of controls?
a. The expected population deviation rate has little or no effect on determining sample size except for very small
populations.
b. As the population size doubles, the sample size also should double.
c. For a given tolerance rate, a larger sample size should be selected as the expected population deviation rate
decreases.
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d. The population size has little or no effect on determining sample size except for a very small population.

18. An auditor is testing internal control procedures that are evidenced on an entity’s voucher by matching random numbers
with voucher numbers. If a random number matches the number of a voided voucher, the voucher should ordinarily be
replaced by another voucher in the random sample if the voucher
a. Constitutes deviation c. Cannot be located
b. Has been properly voided d. Represents an immaterial peso amount

19. An auditor plans to examine a sample of 20 purchase orders for proper approvals as prescribed by the client’s internal
control procedures. One of the purchase orders in the chosen sample of 20 cannot be found, and the auditor is unable to
use alternative procedures to test whether that purchase order was properly approved. The auditor should
a. Choose another purchase order to replace the missing purchase order in the sample.
b. Consider this test of control invalid and proceed with substantive tests since internal control cannot be relied upon.
c. Treat the missing purchase order as a deviation for the sample.
d. Select a completely new set of 20 purchase orders.

20. The final step in the evaluation of the audit results in tests of controls is the decision to:
a. Determine the error in each sample.
b. Conclude whether the control tested is effective or is not effective.
c. Determine sampling error and calculate the estimated total population error.
d. Project the point estimate.

21. Sampling technique used by auditors in detecting fraud or locating a particular event.
a. Statistical Sampling b. Variable sampling c. Discovery Sampling d. Attribute Sampling

22. Which of the following sampling plans would be designed to estimate a numerical measurement of a population such as
peso value?
a. Numerical sampling c. Discovery sampling
b. Sampling for attributes d. Sampling for variables

23. In applying variables sampling, an auditor attempts to:


a. Estimate a qualitative characteristic of interest
b. Determine various rates of occurrence for specified attributes
c. Discover at least one instance of a critical deviation
d. Predict a monetary population value within a range of precision

24. Tolerable error is a measure of the maximum monetary error that may exist in an account balance without causing the
financial statements to be materially misstated, and is directly related to:
a. Reliability of evidence b. Audit risk c. Materiality d. Cost-benefit analysis.

25. Which of the following is true about alpha and beta errors?
a. The alpha error is of greater concern to the auditor than the beta error.
b. The beta error is greater concern to the auditor than the alpha error.
c. The beta error and the alpha error are of equal importance to the auditor.
d. Neither the alpha error nor the beta error need be considered by the auditor.

26. The risk which the auditor is willing to take of acceptance a balance as correct when the true error in the balance is equal
to or greater than the tolerable misstatement is
a. The upper bound c. The tolerable risk
b. The acceptable risk of incorrect acceptance d. The lower bound

27. A number of factors influence the sample size for a substantive test of details of an account balance. All other
factors being equal, which of the following would lead to a larger sample size?
a. Greater reliance on internal controls c. Smaller expected frequency of errors
b. Greater reliance on analytical procedures d. Smaller measure of tolerable misstatement

28. The final step in the evaluation of the audit results in substantive tests is the decision to:
a. Determine sampling error and calculate the estimated total population error
b. Accept the population as fairly stated or to require further action
c. Determine the error in each sample
d. Project the point estimate

29. Use of the ratio estimation sampling technique to estimated peso amounts is inappropriate when
a. The total book value is known and corresponds to the sum of all the individual book values.
b. A book value for each sample item is unknown.
c. There are some observed differences between audited values and book values.
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d. The audited values are nearly proportional to the book values

30. When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating
the possible misstatement in either direction. This statistical concept is known as
a. Precision c. Projected misstatement
b. Reliability d. Standard deviation

Audit of Accounting Estimates, Including Fair Value


1. Which of the following statements is incorrect about accounting estimates?
a. Management is responsible for making accounting estimates included in the financial statements.
b. When evaluating accounting estimates, the auditor should pay particular attention to assumptions that are objective
and are consistent with industry patterns.
c. The risk of material misstatement is greater when accounting estimates are involved.
d. The evidence available to support an accounting estimate will often be more difficult to obtain and less conclusive
than evidence available to support other items in the financial statements.

2. In evaluating the reasonableness of an entity’s accounting estimates, an auditor normally would be concerned about
assumptions that are
a. Susceptible to bias c. Insensitive to variations
b. Consistent with prior periods d. Similar to industry guidelines

3. Which of the following would an auditor ordinarily perform first in evaluating management’s accounting estimates for
reasonableness?
a. Develop independent expectations of management’s estimates.
b. Consider the appropriateness of the key factors or assumptions used in preparing the estimates.
c. Test the calculations used by management in developing the estimates.
d. Obtain an understanding of how management developed its estimates.

4. Which of the following would an auditor generally perform to obtain assurance that accounting estimates are properly
accounted for and disclosed?
a. Inquiry of management
b. Make an independent estimate for comparison with client’s estimate
c. Review subsequent events
d. Obtain knowledge about the applicable financial reporting standards related to the accounting estimate

5. Which of the following procedures would an auditor least likely perform when evaluating the reasonableness of
management’s estimates?
a. Make an independent estimates for comparison with management estimates
b. Read minutes of board of directors’ meeting
c. Review and test the process used by management
d. Review subsequent events and confirm the estimate made

6. In evaluating an entity’s accounting estimates, one of an auditor’s objectives is to determine whether the estimates are
a. Not subject to bias c. Based on objective assumptions
b. Consistent with industry guidelines d. Reasonable in the circumstances

7. In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and
assumption that are
a. Consistent with prior periods c. Objective and not susceptible to bias
b. Similar to industry guidelines d. Deviations from historical patterns

8. When auditing the fair value of an asset or liability, valuation issues ordinarily arise at the point of
Initial recording Subsequent to initial recording
a. Yes Yes
b. Yes No
c. No Yes
d. No No

9. Which of the following is least likely to be an approach followed when auditing the fair values of assets and liabilities?
a. Review and test management’s process of valuation.
b. Confirm valuation with audit committee members.
c. Independently develop an estimate of the value of the account.
d. Review subsequent events relating to the account.

10. Which of the following is not a specialist upon whose an auditor may rely?
a. Actuary b. Internal auditor c. Appraiser d. Engineer
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Audit Documentation
1. According to PSA 230 “Documentation”, working papers do not
a. Assist in the planning and performance of the audit.
b. Assist in the supervision and review of the audit work.
c. Record the audit evidence resulting from the audit work performed to support an auditor’s opinion.
d. Prove the independence of the auditor.

2. Statement 1: Working papers are the property of the auditor.

Statement 2: Although portions of or extracts from the working papers maybe made available to the entity at the discretion
of the auditor, they may be substitute for the entity’s accounting records.
a. Only statement one is correct c. Both statements are correct
b. Only statement two is correct d. Both statements are incorrect

3. Statement 1: The auditor should prepare working papers which are sufficiently complete and detailed to provide an
overall understanding of the audit.

Statement 2: The auditor should record in the working papers information on planning the audit work, the nature, timing
and extent of the audit procedures performed, the results thereof, and the conclusions drawn from the audit evidence
obtained.
a. Only statement one is correct c. Both statements are correct
b. Only statement two is correct d. Both statements are incorrect

4. Audit working papers are used to record the results of the auditor’s evidence gathering work. When preparing working
papers, the auditor should remember that
a. Working papers should be designed to meet the circumstances and the auditor’s need for each engagement.
b. Working papers should be kept on the client’s premises so as to provide ready access to them by the client.
c. Working papers should be at the primary support for the financial statements being examined.
d. Working papers should be considered as a substitute for the client’s accounting records.

5. The primary purpose of audit working papers is to


a. Provide evidence of compliance with auditing standards.
b. Provide management with an independent copy of financial records.
c. Provide protection against litigation.
d. Document deficiencies in client policies and procedures.

6. Which of the following statements is incorrect?


a. Documentation prepared at the time the work is performed is likely to be more accurate than documentation
prepared subsequently.
b. The auditor ordinarily includes from audit documentation superseded drafts of working papers and financial
statements, notes that reflect incomplete or preliminary thinking, previous copies of documents corrected for
typographical or other errors, and duplicates of documents.
c. It is neither necessary nor practicable to document every matter the auditor considers during the audit.
d. Oral explanations by the auditor, on their own, do not represent adequate support for the work the auditor performed
or conclusions the auditor reached, but may be used to explain or clarify information contained in the audit
documentation.

7. Audit working papers should not


a. Include any client-prepared papers or documents other than those prepared by the CPA or his assistant.
b. Be kept by the CPA after review and completion of the audit except for items required for the income tax return or the
permanent file.
c. Be submitted to the client to support the financial statements and to provide evidence of the audit work performed.
d. Be themselves be expected to provide sufficient support for the auditor’s opinion.

8. Which of the following is not a factor affecting the independent auditor’s judgment 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 control.
c. The expertise of client personnel and their participation in preparing schedules.
d. The type of financial statements, schedules, or other information on which the auditor is reporting.

9. Although the quantity, type and content of working paper will vary with the circumstances, the working papers
generally include the
a. Copies of those client records examined by the auditor during the course of the engagement.
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b. Evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit.
c. Auditor’s comments concerning the efficiency and competence of client management personnel.
d. Auditing procedures followed, and the testing performed in obtaining evidential matter.

10. Which of the following is generally included or shown in the auditor’s working papers?
a. The procedures used by the auditor to verify the personal financial status of members of the client’s management’s
team.
b. Analysis that are designed to be a part of, or a substitute for, the client’s accounting records.
c. Excerpts from authoritative pronouncements that supports the underlying generally accepted accounting principles
used in preparing the financial statements.
d. The manner in which exceptions and unusual matters disclosed by the auditor’s procedures were resolved or
treated.

11. An auditor’s working papers should


a. Not be permitted to serve as a reference source for the client.
b. Not contain comments critical of management.
c. Show that the accounting records agree or reconcile with the financial statements.
d. Be considered the primary support for the financial statements being audited.

12. Using laptop computers in auditing may affect the methods used to review the work of staff assistants because
a. Supervisory personnel may not have an understanding of the capabilities and limitations of computers.
b. Working paper documentation may not contain readily observable details of calculations.
c. The audit fieldwork standards for supervision may differ.
d. Documenting the supervisory review may require assistance of management services personnel.

13. Documentation is a form of evidence


a. Used in every financial statement audit
b. Used in most financial statement audit
c. Used on the rare occasions when it is both readily available and less costly than other procedures
d. Used when nothing is available that is more competent

14. An audit working paper that shows the detailed evidence and procedures regarding the balance in the accumulated
depreciation account in the year under audit will be found in the
a. Current file of working papers c. Other information working papers in the current file
b. Permanent file of working papers d. Planning memorandum in the current file

15. In the case of recurring audits, some working papers files may be classified as audit files which are updated with new
information of continuing importance. This type of audit file is known as:
a. Current audit file c. Electronic audit file
b. Permanent audit file d. Planning memorandum file

16. The audit working paper that reflects the major components of an amount reported in the FS is the
a. Inter-bank transfer schedule c. Supporting schedule
b. Carry-forward schedule d. Lead schedule

17. 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 statements, is referred to as a
a. Working trial balance c. Summarizing schedule
b. Lead schedule d. Supporting schedule

18. What do you call the type of working paper where matters of importance are noted down for further verification?
a. Summary sheet b. Audit program c. Agenda sheet d. Supporting schedules

19. The current file of the auditor’s working papers generally should include
a. A flowchart of the internal controls c. A copy of the financial statements
b. Organization charts d. Copies of bond and note indentures

20. The permanent file portion of the auditor’s working papers generally should include
a. A copy of the engagement letter.
b. A copy of key customer confirmation.
c. Names and addresses of audit staff personnel on the engagements.
d. Time and expense reports.

21. The permanent (continuing) file of an auditor’s working paper most likely would include copies of the
a. Lead schedules b. Attorney’s letter c. Bank statements d. Debt agreements

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22. The current file of an auditor’s working paper most likely would include copy of the
a. Bank reconciliation c. Articles of incorporation
b. Pension plan contract d. Flowchart of the internal control activities

23. 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 controls.

24. In general, which of the following statements is correct with respect to ownership, possession, or access to working
papers prepared by a CPA firm in connection with an audit?
a. The working papers may be obtained by third parties where they appear to be relevant to issues raised in litigation.
b. The working papers are subject to the privileged communication rule which, in a majority of jurisdictions,
prevents third-party access to the working papers.
c. The working papers are the property of the client after the client pays the fees.
d. The working papers must be retained by the CPA firm for a period of ten years.

25. For what minimum period should audit working papers be retained by the independent CPA?
a. For the period during which the entity remains a client of the independent CPA.
b. For the period during which an auditor-client relationship exists but not more than six (6) years.
c. For the statutory period within which legal action may be brought against the independent CPA.
d. For as long as the CPA is in public practice.

26. Which of the following documentation is required for an audit in accordance with PSA?
a. An internal control questionnaire c. A planning memorandum or checklist
b. A client engagement letter d. A client representation letter

27. The auditor should complete the assembly of the financial audit file on a timely basis after the date of the auditor’s
report. As PSQC 1 indicates, days after the date of the auditor’s report is ordinarily an appropriate time limit within
which to complete the assembly of the financial audit file.
a. 30 b. 60 c. 90 d. 120

28. After the assembly of the final audit file has been completed, the auditor not delete or discard audit documentation before
the end of its retention period. As PSQC 1 indicates, the retention period for audit engagement ordinarily is no shorter
than years from the date of the auditor’s report
a. 5 b. 3 c. 7 d. 10

29. The main advantage of properly indexed working papers is to


a. Reduce the size of the file c. Better organize the working papers
b. Allow division of labor within the audit team d. Facilitate the efficient use of audit staff

30. During the working paper review, an audit supervisor finds that the auditor’s reported findings are not adequately cross-
referenced to supporting documentation. The supervisor will most likely instruct the auditor to
a. Prepare working paper to indicate that the full scope of the audit was carried out.
b. Familiarize him/herself with the sequence of working papers so that he/she will be able to answer questions about
the conclusions stated in the report.
c. Eliminate any cross-references to other working papers since the system is unclear.
d. Provide a working paper indexing system that shows the relationship between findings, conclusions, and the
related facts.

Completing the Audit


1. Which of the following is not among the characteristics of the procedures performed in completing the audit?
a. They are optional since they have only an indirect impact on the opinion to be expressed
b. They involve many subjective judgments by the auditor
c. They are performed after the reporting date
d. They are usually performed by audit managers or other senior members of the audit team who have extensive audit
experience

2. Analytical procedures used in the overall review stage of an audit generally include
a. Considering unusual or unexpected account balances that were not previously identified
b. Performing test of transactions to corroborate management’s financial statement assertions
c. Gathering evidence concerning account balances that have not changed from the prior year
d. Re-testing control procedures that appeared to be ineffective during the assessment of control risk

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3. Analytical procedures performed in the overall review stage of an audit suggest that several accounts have
unexpected relationships. The results of these procedures most likely indicate that
a. The communication with the audit committee should be revised
b. Irregularities exist among the relevant account balance
c. Additional substantive tests of details are required
d. Internal control activities are not operating effectively

4. Where an unusual fluctuation is indicated by analytical procedures and management is unable to provide a
satisfactory explanation, the auditor must assume that there is a high probability that an error or irregularity exists. In
this case, the auditor must
a. Issue either a qualified or an adverse opinion
b. Issue a disclaimer
c. Issue either a qualified opinion or a disclaimer
d. Design other appropriate audit procedures to determine if such errors do exists

5. The responsibility for the identification and disclosure of related parties and transactions with such parties rests with the
a. Auditor b. Management c. FRSC d. SEC

6. The auditor should review information provided by those charged with governance and management identifying
I. The names of all known related parties
II. Related party transactions
a. I only b. II only c. Both I and II d. Neither I nor II

7. Which of the following events most likely indicates the existence of related parties?
a. Making a loan without scheduled terms for payment of the funds
b. Discussing merger terms with a company that is a major competitor
c. Selling a real estate at a price that differs significantly from its book value
d. Borrowing a large sum of money at a variable rate of interest

8. An auditor searching for related party transactions should obtain an understanding of each subsidiary’s relationship
to the total entity because
a. This may permit the audit of intercompany account balances to be performed as of concurrent dates
b. This may reveal whether particular transactions would have taken place if the parties had not been related
c. The business structure may be deliberately designed to obscure related party transactions
d. Intercompany transactions may have been consummated on terms equivalent to arm’s-length transactions

9. After determining that a related party transactions has, in fact, occurred, an auditor should
a. Obtain an understanding of the business purpose of the transaction
b. Substantiate that the transaction was consummated on terms equivalent to an arm’s-length transaction
c. Add a separate paragraph to the auditor’s report to explain the transactions
d. Perform analytical procedures to verify whether similar transactions occurred, but were not recorded

10. “Subsequent events” are defined as events which occur subsequent to the
a. Reporting date
b. Date of the auditor’s report
c. Reporting date but prior to the date of the auditor’s report
d. Date of the auditor’s report and concern contingencies which are not reflected in the financial statements

11. When completing the audit, the auditor performs procedures designed to identify subsequent events may require
adjustment of, or disclosure in the financial statements. Accordingly
Those that provide evidence about Those that are indicative of conditions that
conditions that exist at period end arose subsequent to period end
a. Will require adjustment Will require adjustment
b. Will require adjustment Will require disclosure
c. Will require disclosure Will require disclosure
d. Will require disclosure Will require adjustment

12. Which of the following statements best describes the “date of the financial statements?”
a. The date on which those with the recognized authority assert that they have prepared the entity’s complete set of
financial statements, including the related notes, and that they have taken responsibility for them
b. The date that the auditor’s report and audited financial statements are made available to third parties
c. The date of the end of the latest period covered by the financial statements, which is normally the date of the most
recent balance sheet in the financial statements subject to audit
d. The date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion on the
financial statements

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13. Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of
subsequent events?
a. Inquiring as to whether any unusual adjustment were made after the date of the financial statements
b. Confirming a sample of material accounts receivable established after the date of the financial statements
c. Comparing the financial statement being reported on with those of the prior period
d. Investigating personnel changes in the accounting department occurring after the date of the financial statements

14. Which of the following statements best expresses the auditor’s responsibility with respect to facts discovered after
the date of the auditor’s report but before the date the financial statements are issued?
a. The auditor should amend the financial statements
b. If the facts discovered will materially affect the financial statements, the auditor should issue a new report which
contains either a qualified opinion or an adverse opinion
c. The auditor should consider whether the financial statements need amendment, discuss the matter with
management, and consider taking actions appropriate in the circumstances
d. The auditor should withdraw from the engagement

15. After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning
the audited financial statement, unless
a. Final determinations or resolutions are made of contingencies that had been disclosed in the financial statements
b. Information about an event that occurred after the date of the auditor’s report comes to the auditor’s attention
c. The control environment changes after issuance of the report
d. Information, which existed at the report date and may affect the report, comes to the auditor’s attention

16. Which of the following events occurring after the issuance of an auditor’s report most likely would cause the auditor to
make further inquiries about the previously issued financial statements?
a. A technological development that could affect the entity’s future ability to continue as a going concern
b. The entity’s sale of a subsidiary that accounts for 30% of the entity’s consolidated sales
c. The discovery of information regarding a contingency that existed before the financial statement were issued
d. The final resolution of a lawsuit disclosed in the notes to the financial statements

17. Which of the following procedures should an auditor generally perform regarding subsequent events?
a. Compare the latest available interim financial statements with the financial statements being audited
b. Send second requests to the clients customers who failed to respond to initial accounts receivable confirmation
requests
c. Communicate material weaknesses in the internal control structure to the client’s audit committee
d. Review the cut-off bank statements for several months after the year-end

18. The procedures to identify events that may require adjustment of, or disclosure in, the financial statements
would be performed as near as practicable to the date of the auditor’s report. These procedures would ordinarily
include the following except
a. Reviewing procedures management has established to ensure that subsequent events are identified
b. Reading minutes of the meetings of shareholders, the board of directors and audit and executive committee held
after period end and inquiring about matters discussed at meetings for which minutes are not yet available
c. Testing the effectiveness of those internal control policies and procedures that may have significantly changed in the
subsequent period
d. Inquiring or extending previous oral or written inquiries, of the entity’s lawyers concerning litigation and claims

19. Which of the following material event occurring subsequent to the reporting date would require an adjustment to the
financial statements before they are issued?
a. Sale of long-term debt or capital stock
b. Loss of a plant as a result of a flood
c. Major purchase of a business which is expected to double sales volume
d. Settlement of litigation, in excess of the recorded liability

20. Which of the following events in the subsequent period will require disclosure in the notes to financial statements?
a. Realization of recorded year-end receivables at a different amount than recorded
b. Settlement of recorded year-end estimated product warranty liabilities at a different amount than recorded
c. Purchase of a machine
d. Purchase of a business

21. 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
a. Advise management to disclose the event in notes to the financial statement
b. Disclosure the event in the auditor’s report
c. Withhold submission of the auditor’s report until the extent of the direct effect on the financial statements is known
d. Advise management to adjust the financial statements
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22. Which of the following subsequent events will be least likely to result in an adjustment to the financial statements?
a. Culmination of events affecting the realization of accounts receivable owned as of the reporting date
b. Culmination of events affecting the realization of inventories owned as of the reporting date
c. Material changes in the settlement of liabilities which were estimated as of the reporting date
d. Material changes in the quoted market prices of listed investment securities since the reporting date

23. If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessment, the auditor should
a. Honor the confidentiality of the client-lawyer relationship
b. Consider the refusal to be tantamount to a scope limitation
c. Seek to obtain the corroborating information from management
d. Disclose this fact in a footnote to the financial statement

24. When a CPA has concluded that action should be taken to prevent future reliance on his report he should
a. Advise his client to make appropriate disclosure of the newly discovered facts and their impact on the financial
statement to persons who are currently relying or who are likely rely on the financial statements and the related
auditor’s report
b. Recall the financial statement and issue revised statements and include an appropriate opinion
c. Advise the client and others not to rely on the financial statements and make appropriate disclosures of the
corrections in the statements of a subsequent opinion
d. Recall the financial statement and issue a disclaimer of opinion which should generally be followed by revised
statements and a qualified opinion

25. After an audit report containing an unqualified opinion on a non-public client’s financial statements was issued, the client
decided to sell the shares of a subsidiary that accounts for 30% of its revenue and 25% of its net income. The auditor
should
a. Determine whether the information is reliable and if determined to be reliable, request that revised financial statement
be issued
b. Notify the entity that the auditor’s report may no longer be associated with the financial statements
c. Describe the effect of this subsequently discovered information in a communication with persons known to be relying
on the financial statements
d. Take no action because the auditor has no obligation to make any further inquiries

26. PSA 570 (Going Concern) states that a fundamental principle in the preparation of financial statements is the going
concern assumption. Under this assumption, an entity is ordinarily viewed as continuing in business for the foreseeable
future with neither the intention nor the necessity of liquidation, ceasing trading or seeking protection from creditors
pursuant to laws and regulations. The responsibility to make an assessment of an entity’s ability to continue as a going
concern rests with the
a. Auditor b. Management c. Creditors d. SEC

27. Which of the following statements best describes the auditor’s responsibility concerning the appropriateness of the
going concern assumption in the preparation of the financial statements?
a. The auditor’s responsibility is to make a specific assessment of the entity’s ability to continue as a going concern
b. The auditor’s responsibility is to predict future events or conditions that may cause the entity to cease to continue as
a going concern
c. The auditor’s responsibility is to consider the appropriateness of management’s use of the going concern
assumption and consider whether there are material uncertainties about the entity’s ability to continue as a
going concern that need to be disclosed in the financial statements
d. The auditor’s responsibility is to give a guarantee in the audit report that the entity has the ability to continue as a
going concern

28. Which of the following conditions or events most likely would cause an auditor to have substantial doubt on an entity’s
ability to continue as a going concern?
a. Restrictions on disposal of principal assets are present
b. Significant related party transactions are pervasive
c. Usual trade credit from suppliers is DENIED
d. Arrearages in principal stock dividends are paid

29. Which of the following audit procedure would most likely assist an auditor in identifying conditions and events that may
indicate there could be substantial doubt on an entity’s ability to continue as a going concern?
a. Confirmation of bank balances
b. Reconciliation of interest expense with debt outstanding
c. Confirmation of accounts receivable from customers
d. Review of compliance with terms of debt agreement

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30. Juan, CPA, believes there is substantial doubt about the ability of Peter Co. to continue as a going concern for a
reasonable period of time. In evaluating Peter’s plans for dealing with the adverse effects of future conditions and events,
Juan most likely would consider, as a mitigating factor, Peter’s plan to
a. Postpone expenditures for research and development projects
b. Purchase production facilities currently being leased from a related party
c. Strengthen internal controls over cash disbursement
d. Discuss with lenders the terms and loan agreements

31. When an auditor concludes that there is substantial doubt about a continuing audit client’s ability to continue as a going
concern for a reasonable period of time, the auditor’s responsibility is to
a. Consider the adequacy of disclosure about the client’s possible inability to continue as a going concern
b. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial
statements
c. Report to the client’s audit committee that management’s accounting estimates may need to be adjusted
d. Reissue the prior year’s auditor’s report and add an emphasis of matter paragraph that specifically refers to
“substantial doubt” and “going concern”

32. If, on the basis of the additional procedures carried out and the information obtained, including the effect of mitigating
circumstances, the auditor’s judgment is that the entity will not be able to continue as a going concern, the financial
statement should be prepared using an appropriate basis; otherwise the auditor will issue a(an)
a. An adverse opinion c. Either qualified or adverse opinion
b. A disclaimer of opinion d. An unqualified opinion with explanatory paragraph

33. Which of the following may not cast significant doubt about the going concern assumption of an entity?
a. The entity heavily used long-term capital in financing its investment in permanent assets
b. Non-compliance with capital or other statutory requirements
c. Pending legal or regulatory proceeding against the entity may, if successful, result in claims that are unlikely to be
satisfied
d. Changes in legislation or government policy expected to adversely affect the entity

34. Which of the following statement is not correct about the auditor’s responsibility about management’s use of the
going concern assumptions?
a. The auditor should evaluate management’s assessment of the entity’s ability to continue as a going concern
b. The auditor should inquire of management as to its knowledge of events or conditions beyond the period of
assessment used by management that cast significant doubts on the entity’s ability to continue as a going concern
c. The auditor does not have a responsibility to design procedures other than inquiry of management to tests for
inclination of events or conditions which cast significant doubt on the entity’s ability to continue as a going concern
beyond the period assessed by management
d. The absence of any reference to going uncertainty in the auditor’s report can be reviewed as a guarantee as to the
entity’s ability to continue as a going concern

35. The auditor is required to obtain audit evidence that management


I. Acknowledges its responsibility for the fair presentation of the financial statements in accordance with
applicable financial reporting framework
II. Has approved the financial statements
a. I only b. II only c. Both I and II d. Neither I nor II

36. The date of the management representation letter should coincide with the date of the
a. Financial statements c. Auditor’s report
b. Latest related party transaction d. Latest interim financial information

37. An auditor generally obtains from a client a formal written statement concerning the accuracy of the inventory. The
particular letter of representation is used by the auditor to
a. Reduce the scope of the auditor’s physical inventory work but not the other inventory audit work that is normally
performed
b. Confirm in writing the evaluation basis used by the client to value the inventory at the lower of cost or net realizable
value
c. Lessen the auditor’s responsibility for the fair presentation of balance sheet inventories
d. Remind management that the primary responsibility for the overall fairness of the financial statements rests with
management and not with the auditor

38. A purpose of a management representation letter is to REDUCE


a. Audit risk to an aggregate level of misstatement that could be considered material
b. An auditor’s responsibility to detect material misstatement only to the extent that the letter is relied on
c. The possibility of misunderstanding concerning management’s responsibility for the financial statements
d. The scope of an auditor’s procedures concerning related party transactions and subsequent events
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39. A written representation from a client’s management that, among other matters, acknowledges responsibility for the fair
presentation of financial statements, should normally be signed by the
a. Chief financial officer and the chair of the board of directors
b. Chief executive officer and the chief of financial officer
c. Chief executive officer, the chair of the board and the client’s lawyer
d. Chair of the audit committee of the board of directors

40. Management’s refusal to furnish a written representation letter on a matter which the auditor considers essential
constitutes
a. Prima facie evidence that the financial statement are not presented fairly
b. An illegal act
c. An uncertainty sufficient to preclude an unqualified opinion
d. A scope limitation sufficient to preclude an unqualified opinion

Audit Reporting on General-Purpose Statements


1. The expression “financial statements, taken as a whole “ applies:
a. Equally to a complete set of financial statements and to an individual financial statement.
b. Only to a complete set of financial statements.
c. Equally to each item in each financial statement.
d. Equally to each material item in each financial statement.

2. To distinguish it from report that might be issued by others, such as by officers of the entity, the board of directors, or from
the reports of other auditors who may not have to abide by the same ethical requirements as the independent auditor, the
auditor’s report should have an appropriate
a. Addresses B. TITLE c. Signature d. Opinion

3. The auditor’s report should be addressed


a. Only to the shareholders of the entity whose financial statements are being audited
b. Only to the board of directors of the entity whose financial statements are being audited
c. Either to the shareholders or the board of directors of the entity whose financial statement are being audited
d. Either to the shareholders or the board of directors, or both, of the entity whose statements are being audited

4. Which of the following is included in the introductory or opening paragraph of the auditor’s report?
a. Identification of the financial statements audited, including the date of and period covered by the financial statements
b. A statement that the financial statements are the responsibility of the entity’s management
c. A statement that the audit was conducted in accordance with Philippine Standard on Auditing
d. A statement that the responsibility of the auditor is to express an opinion on the financial statements based on the
audit

5. The following statements relate to the date of the auditor’s report. Which is false?
a. The auditor should date the report as of the completion date of the audit
b. The date of the auditor’s report should not be earlier than the date on which the financial statements are signed
or approved by management
c. The date of the auditor’s report should not be later than the date on which financial statements are signed or
approved by management
d. The date of the auditor’s report always be later than the date of the financial statement (i.e., the statement of
financial position)

6. In which of the following circumstances would an auditor most likely add an emphasis of matter paragraph to the
auditor’s report while expressing an unqualified opinion?
a. There is a substantial doubt about the entity’s ability to continue as a going concern
b. Management’s estimates of the effects of future events are unreasonable
c. No depreciation has been provided in the financial statements
d. Certain transactions cannot be tested because of management’s records retention policy

7. An explanatory paragraph following an opinion paragraph describes an uncertainty as follows:


“As discussed in Note X to the financial statements, the company is a defendant in a lawsuit alleging infringement of
certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation
cannot presently be determines. Accordingly, no provision for any liability that may result upon adjudication has been
made in the accompanying financial statements.”

What type of opinion should the auditor express in these circumstances?


a. Unqualified b. Qualified c. Disclaimer d. Adverse

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8. The independent auditor refers to both PFRS and PSA when writing the standard audit report. These terms are
mentioned in which paragraph?
Auditor’s Management’s
responsibility responsibility Opinion
a. PFRS PFRS PSA
b. PSA PSA PFRS
c. PFRS PFRS PFRS
d. PSA PFRS PFRS

9. An independent auditor discovers that a payroll supervisor of the company being audited has misappropriated P50,000.
The company’s total assets and income before tax are P70 million and P15 million, respectively. Assuming no other
issues affect the report, the auditor’s report will most likely contain a/an
a. Unqualified b. Disclaimer c. Adverse d. Scope qualification

10. A note to the financial statements of the Prudent Bank indicates that all of the records relating to the bank’s business
operations are stored on magnetic disks, and that no emergency backup systems or duplicate disks are stored because
the bank and its auditors consider the occurrence of a catastrophe of be remote. Based upon this note, the auditor’s
should express
a. A qualified opinion c. An adverse opinion
b. An unqualified opinion d. Scope qualification

11. Which of the following statements indicates a disclaimer of opinion?


a. The financial statements do not present fairly in all material respects the financial position, results of operations, and
cash flows in conformity with PFRS.
b. The auditor does not express an opinion on the financial statements.
c. The financial statements present fairly in all material respects the financial position, results of operations, and cash
flows in conformity with PFRS.
d. Except for the effects of a matter, the financial statements present fairly in all material respects the financial position,
results of operations, and cash flows in conformity with PFRS.

12. A modified opinion on the financial statements is necessary when


I. The auditors concludes, based on the audit evidence obtained, that the financial statements as a whole are not free
from material misstatement
II. The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a
whole are free from material misstatement
a. I only b. II only c. Either I or II d. Neither I nor II

13. Which of the following terms is used in the standard to describe the effects on the financial statements of
misstatements or the possible effects on the financial statements, if any, that are undetected due to an inability to
obtain sufficient appropriate audit evidence?
a. Persuasive b. Material c. Pervasive d. Extensive

14. A limitation on the scope of the audit may arise from


I. Circumstances beyond the control of the entity
II. Circumstances relating to the nature and timing of the auditor’s work
III. Limitations imposed by management
a. I and II only b. II and III only c. I and III only d. I, II and III

15. In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an
adverse opinion?
a. The auditor wishes to emphasize an unusually important subsequent event
b. The financial statements fail to disclose information that is required by Philippine Financial Reporting Standards
c. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity’s ability to
continue as a going concern
d. The auditor did not observe the entity’s physical inventory and is unable to become satisfied as to its balance by
other auditing procedures

16. Which of the following phrases would an auditor most likely include in the auditor’s report when expressing a
qualified opinion because of inadequate disclosure?
a. Do not present fairly in all material respects
b. Except for the omission of the information included in the preceding paragraph
c. With the foregoing explanation of these omitted procedures
d. Subject to the departure from generally accepted accounting principles, as described above

17. An auditor’s report includes the following statement: “In our opinion, because of the effects of the matters discussed in the
preceding paragraph, the financial statements do not present fairly, in all material respects, the financial position of ABC
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Company as of December 31, 20X1, and of its financial performance and its cash flows for the year then ended in
accordance with Philippine Financial Reporting Standards.” This auditor’s report contains a/an
a. Qualified b. Unqualified c. Adverse d. Disclaimer

18. An auditor should disclose the substantive reasons for expressing an adverse opinion in an emphasis of matter paragraph
a. Following the opinion paragraph c. Following the introductory paragraph
b. Preceding the opinion paragraph d. Within the notes to the financial statements

19. There are two broad financial reporting frameworks for comparatives: the corresponding figures and the comparative
financial statements. Which of the following statements is correct concerning these reporting frameworks?
a. Under the corresponding figures framework, the corresponding figures for the prior period(s) are considered separate
financial statements
b. Under the comparative financial statements framework, the comparative financial statement for the prior period(s) are
intended to be read in conjunction with the amounts and other disclosures relating to the current period.
c. Under the comparative financial statements framework, the amounts and other disclosures for the prior period(s)
form part of the current period financial statements
d. Under the corresponding figures framework, the corresponding figures for the prior period(s) are integral part of
the current period financial statements

20. Which statement is incorrect regarding PSA 710, Comparatives?


a. The auditor is required to determine whether the comparatives comply in all material respects with GAAP relevant to
the financial statements being audited.
b. There are two broad financial reporting frameworks for comparatives; the corresponding figures and the comparative
financial statements.
c. Under the comparative financial statements framework, the comparatives financial statements for the prior period(s)
are considered separate financial statements.
d. Under the corresponding figures framework, the corresponding figures for the prior period(s) are not an integral part
of the current period financial statements and may be read without reference to amounts and other disclosures
relating to the current period.

21. When the prior period financial statement are not audited, the incoming auditor should state in the auditor’s report that
I. The corresponding figures are unaudited
II. The incoming auditor is not required to perform procedures regarding opening balances of the current period
a. I only b. II only c. Both I and II d. Neither I nor II

22. When comparative financial statements are presented, the auditor’s opinion on the financial statements “taken as a
whole” should be considered to apply to the financial statements of the
a. Current period only
b. Periods presented plus one preceding period
c. Current and immediately preceding period only
d. Current period and those of the other periods presented

23. In which of the following circumstances would an auditor’s report least likely include specific reference to the
corresponding figures?
a. When the auditor’s report on the prior period, as previously issued, included a modified opinion and the matter which
gave rise to the modification is resolved and properly dealt with in the financial statements
b. When the auditor’s report on the prior period, as previously issued, included a modified opinion and the matter which
gave rise to the modification is unresolved, and results in a modification of the auditor’s report regarding the current
period figures
c. When the auditor’s report on the prior period, as previously issued, included a modified opinion and the matter which
gave rise to the modification is unresolved, but does not result in a modification of the auditor’s report regarding the
current period figures
d. When the auditor’s report on the prior period financial statement containing a material misstatement included an
unmodified opinion and the prior period financial statements have not been revised and reissued, and the
corresponding figures have not been properly restated and/or appropriate disclosures have not been made

24. Comparative financial statements include the financial statements of the prior year that were audited by a predecessor
auditor whose report is not presented. If the predecessor’s report was qualified, the incoming auditor should
a. Express an opinion only on the current’s year statements and make no reference to the prior year’s statements
b. Issue an updated comparative audit report indicating the division of responsibility
c. Request the client to reissue the predecessor’s report on the prior year’s statement
d. Indicate the substantive reasons for the qualification in the predecessor auditor’s opinion

25. The predecessor auditor, who is satisfied after properly communicating with the incoming auditor, has reissued his/her
auditor’s report on prior year financial statements. The predecessor auditor’s report should
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a. Refer to the work of the incoming auditor in the scope and opinion paragraphs
b. Refers to the report of the incoming auditor only in the scope paragraphs
c. Refer to both the work and the report of the incoming auditor only in the opinion paragraph
d. Not refer to the report or the work of the incoming auditor

26. The following statements relate to unaudited prior year financial statements that are presented in comparative form
with audited current year financial statements. Which is incorrect?
a. The incoming auditor should state in the auditor’s report that the comparative financial statements are unaudited
b. The incoming auditor need not perform audit procedures regarding opening balances of the current period
c. Clear disclosure in the financial statements that the comparative financial statements are unaudited is encouraged
d. In situations where the incoming auditor identifies that the prior year unaudited figures are materially misstated, the
auditor should request management to revise the prior year’s figures or if management refuses to do so,
appropriately modify the report.

27. When audited financial statements are presented in a document (e.g., annual report) containing other information, the
auditor
a. Has no responsibility for the other information because it is not part of the basic financial statements
b. Should read the other information to consider whether it is inconsistent with the audited financial statements
c. Has an obligation to perform auditing procedures to corroborate the other information
d. Is required to express a qualified opinion if the other information has a material misstatement of fact

28. An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders
containing audited financial statements. If the auditor concludes that the financial statement do not require revision, but
the client refuses to revise or eliminate the material inconsistency, the auditor may
a. Disclaim an opinion on the financial statements after explaining the material inconsistency in an emphasis of matter
paragraph
b. Revise the auditor’s report to include an emphasis of matter paragraph describing the material inconsistency
c. Express a qualified opinion after discussing the matter with the client’s directors
d. Consider the matter closed because the other information is not in the audited statements

29. PSA 720 states, “If, on reading the other information, the auditor identifies a material inconsistency, the auditor should
determine whether the audited financial statement or the other information needs to be amended”. What type of opinion
should be expressed if the client refuses to make the necessary amendment in the financial statements?
a. Disclaimer of opinion
b. Qualified opinion or disclaimer of opinion
c. Unqualified opinion with an emphasis of matter paragraph describing the material inconsistency
d. Qualified or adverse opinion

30. If an amendment to other information in a document containing audited financial statements is necessary and the entity
refuses to make the amendment, the auditor would consider issuing:
a. Qualified or disclaimer of opinion c. Unqualified opinion with explanatory paragraph
b. Adverse or disclaimer of opinion d. Qualified or adverse opinion

31. If an accounting change has no material effect on the financial statements in the current year but the change is
reasonably certain to have a material effect in later years, the change should be
a. Treated as a consistency modification in the auditor’s report for the current year.
b. Disclosed in the notes to the financial statement of the current year.
c. Disclosed in the notes to financial statements and referred to in the audit report for the current year.
d. Treated as a subsequent event.

32. An auditor completed field work on March 31, 2013 for a December 31, 2012 year-end client. A significant subsequent
event occurred on April 14, 2013. In this case, which of the following report dates would not be appropriate?
a. March 31, 2013 c. April 14, 2013
b. March 31, except Note 1, April 14, 2013 d. December 31, 2012

33. Rexy, CPA, dated her audit report (on a client’s 2012 financial statements) as of February 14, 2013, except for Note X, as
to which the date is March 15, 2013. In this case, Rexy is taking responsibility for:
a. All subsequent events occurring through March 15, 2013.
b. All subsequent events occurring through February 14, 2013 only.
c. All subsequent events occurring through February 14, 2013, and the specific subsequent event referred to in Note X
through March 15, 2013.
d. Only the specific subsequent event referred to Note X through March 3, 2013.

34. A person or firm possessing special skill, knowledge and experience in a particular field other than accounting and
auditing is called a/an
b. Professional b. Expert c. Consultant d. Assistant
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35. During an audit, the auditor may need the assistance of an expert in obtaining sufficient appropriate evidence. A common
example is
a. Evaluating the potential financial statement effect of an employee fraud
b. Determination of the amounts using actuarial computations
c. Evaluating the integrity of management
d. Determining the sufficiency and appropriateness of evidential matter obtained

36. Each of the following procedures requires the assistance of an expert except
a. Determining the physical condition or quantity of underground
b. Determining the value of works of art
c. Interpreting major contracts
d. Determining the adequacy of disclosure in the notes to the financial statements

37. When would the auditor refer to the work of an appraiser in the auditor’s report?
a. An adverse opinion is expressed based on a difference of opinion between the client and the outside appraiser as to
the value of certain assets
b. A disclaimer of opinion is expressed because of a scope limitation imposed on the auditor by the appraiser
c. A qualified opinion is expressed because of a matter unrelated to the work of the appraiser
d. An unqualified opinion is expressed and an emphasis of matter paragraph is added to disclose the use of the
appraiser’s work

38. When determining the need to use the work of an expert, the auditor would consider the following except
a. The materiality of the financial statement item being considered
b. The risk of misstatement based on the nature and complexity of the matter being considered
c. The quantity and quality of other audit evidence available
d. The professional certification or licensing by, or membership in, an appropriate professional body

39. The auditor is most likely to place little reliance on the work of an expert who:
a. Does not have the highest level of certification for their profession
b. Received his formal training at a nonaccredited institution
c. Is an attorney who barely passed the bar examination
d. Is employed by the entity

40. An auditor used the services of an expert during the audit of a client’s financial statements. When issuing an unmodified
auditor’s report, the auditor should:
a. Mention the expert and justify the use of the expert’s services.
b. Not mention the expert in the opinion and instead disclose the expert in the notes.
c. Not mention the expert as this might mislead financial statements users
d. Mention the expert in both the audit report and the notes to the financial statements.

Audit Reporting on Special Reports


1. The following are special purpose audit engagements, except:
a. Compilation of financial statements.
b. Audits involving statements prepared in accordance with a comprehensive basis of accounting other than generally
accepted accounting principles in the Philippines.
c. Audits of specified accounts, elements of accounts, or items in a financial statement.
d. Audits of compliance with contractual agreements.

2. Which of the following statements is incorrect?


a. Before undertaking a special purpose audit engagement, the auditor should ensure there is agreement with the
client as to the exact nature of the engagement and the form and content of the report to be issued.
b. When requested to report in a prescribed format, the prescribed format always prevails over the format presented in
PSA 800.
c. The auditor needs to consider whether any significant interpretations of an agreement on which the financial
information is based are clearly disclosed in the financial information.
d. In certain circumstances, the auditor may wish to indicate in the report the purpose for which the report is prepared
and any restrictions on its distribution and use.

3. A comprehensive basis of accounting comprises a set of criteria used in preparing financial statements which applies to
all material items and which has substantial support. Other comprehensive financial reporting frameworks may include the
following, except
a. A conglomeration of accounting conventions devised to suit individual preference.
b. That used by an entity to prepare its income tax return.
c. The cash receipts and disbursements basis of accounting.
d. The financial reporting provisions of a government regulatory agency.
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4. Which of the following statements is/are correct?


Statement 1: A comprehensive basis of accounting comprises a set of criteria used in preparing financial statements
which applies to all material items and which has substantial support.
Statement 2: A conglomeration of accounting conventions devised to suit individual preference is considered as another
comprehensive basis of accounting.
a. Only the first statement is correct c. Both statements are correct
b. Only the second statement is correct d. Both statements are incorrect

5. Other comprehensive financial reporting frameworks may include the following, except:
a. The Philippine Financial Reporting Framework
b. That used by an entity to prepare its income tax return
c. The cash receipts and disbursements basis of accounting
d. The financial reporting provisions of a government regulatory agency

6. Auditors may issue a special report for all of the following except for audit of financial presentations
a. That are prepared on a cash basis of accounting that the entity uses to file its tax return
b. Of specified elements or accounts
c. Of an organization that has limited the scope of the audit
d. To comply with contractual agreements

7. The fact that the financial statements are prepared under the modified cash basis should be disclosed in
a. The financial statements
b. The management letter given to the client.
c. The auditor’s special report on the financial statements
d. Both the financial statements and the auditor’s special report therein

8. If the financial statements prepared on special reporting frameworks are not suitably titled or the basis of accounting is not
adequately disclosed, the auditor should:
a. Withdraw from the engagement
b. Issue an appropriately modified report
c. Reword the title of the financial statements
d. Request for an additional representation in the management representation letter

9. An accountant is requested to express an opinion on a particular balance sheet account, but not on other accounts. This
is
a. An invalid audit engagement, since the scope is significantly limited.
b. Acceptable provided the auditor provides moderate assurance only.
c. Known as reporting on components of financial statements.
d. Unacceptable accounting practice, since it is obviously restricted to prevent the discovery of irregularities perpetrated
by client management.

10. Audits of components of financial statements:


a. Must be undertaken as a separate, stand-alone engagement.
b. Must be performed in conjunction with an audit of the entity’s financial statements.
c. May be undertaken as a separate engagement or in conjunction with an audit of the entity’s financial statements.
d. Are not allowed since it is tantamount to expressing a piecemeal opinion on the accounts subjected to the audit.

11. The following statements relates to audit of specific components of financial statements. Which is incorrect?
a. This type of engagement may be undertaken as a separate engagement or in conjunction with an audit of the entity’s
financial statements.
b. The auditor needs to consider financial statement items that are interrelated and which could materially affect the
information on which the audit opinion is to be expressed.
c. The auditor’s examination will ordinarily be less extensive than if the same component were to be audited in
connection with a report on the entire financial statements.
d. When an adverse opinion or disclaimer of opinion on the entire financial statements has been expressed, the auditor
may report on components of the financial statements only if those components are not so extensive as to constitute
a major portion of the financial statements.

12. Which statement is correct regarding report on a component of financial statements?


a. This type of engagement may be undertaken as a separate engagement or in conjunction with an audit of the entity's
financial statements.
b. In determining the scope of the engagement, the auditor need not consider those financial statement items that are
interrelated and which could materially affect the information on which the audit opinion is to be expressed.
c. The auditor's examination will ordinarily be less extensive than if the same component were to be audited in
connection with a report on the entire financial statements.
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d. When an adverse opinion or disclaimer of opinion on the entire financial statements has been expressed, the auditor
may report on components of the financial statements even if those components are so extensive as to constitute a
major portion of the financial statements.

13. When an auditor is requested to express an opinion on the rental and royalty income of an entity, the auditor may
a. Accept the engagement provided the auditor’s opinion is expressed in a special purpose engagement report.
b. Accept the engagement provided distribution of the auditor’s report is limited to the entity’s management.
c. Not accept the engagement unless also engaged to audit the full financial statement of the entity.
d. Not accept the engagement because to do so would be tantamount to agreeing to express a piecemeal opinion.

14. Which of the following statement is correct with respect to an auditor’s report expressing an opinion on a specific
element on a financial statement?
a. The auditor who has expressed an adverse opinion on the financial statements as a whole can never express an
unmodified opinion on a specific element in these financial statements.
b. Such a report can only be issued if the auditor is also engaged to audit the entire set of financial statements.
c. The attention is devoted to the specific element is usually less than it would be if the financial statements as a whole
were audited.
d. The materiality determined for a specific element of a financial statement may be lower than the materiality
determined for the entity’s complete set of financial statements.

15. Which statement is incorrect regarding report on compliance with contractual agreements?
a. The auditor cannot be requested to report on an entity's compliance with certain aspects of contractual
agreements, such as bond indentures or loan agreements.
b. Engagements to express an opinion as to an entity's compliance with contractual agreements should be
undertaken only when the overall aspects of compliance relate to accounting and financial matters within the
scope of the auditor's professional competence.
c. When there are particular matters forming part of the engagement that are outside the auditor's expertise, the
auditor would consider using the work of an expert.
d. The report should state whether, in the auditor's opinion, the entity has complied with the particular provisions of
the agreement.

16. An accountant who is not independent of the client is precluded from issuing
a. Report on factual findings of procedures.
b. Compilation report on historical financial statements.
c. Compilation reports on prospective financial statements.
d. Special reports on compliance with contractual agreements.

17. Summarized financial statements are presented:


a. In considerably less detail than annual audited financial statements
b. In considerably more detail than annual audited financial statements
c. In equal detail with annual audited financial statements
d. In equal detail with the interim financial statements

18. Which statement is incorrect regarding report on summarized financial statements?


a. Unless the auditor has expressed an audit opinion on the financial statements from which the summarized
financial statements were derived, the auditor should not report on summarized financial statements.
b. Summarized financial statements are presented in considerably less detail than annual audited financial
statements.
c. Summarized financial statements need to be appropriately titled to identify the audited financial statements from
which they have been derived.
d. Summarized financial statements contain all the information required by the financial reporting framework used
for the annual audited financial statements.

19. Bal, CPA, is requested to report on summarized financial statements of Ting Books, Inc. Bal has not expressed an audit
opinion on the financial statements from which the summarized financial statements were derived. Based solely on this
information, should Bal accept the engagement?
a. Yes, because a report on summarized financial statements is a separate engagement.
b. No, because PSA 810 mandates that the auditor should not report on summarized financial statements unless the
auditor has expressed an audit opinion on the financial statements from which the summarized financial statements
were derived.
c. Yes, because an audit of summarized financial statements is comparable to the audit of financial statements from
which such summarized statements were derived.
d. None of the above choices can be selected because of lack of information.

20. Engagements to express an opinion on the entity’s compliance with contractual agreements should be undertaken only
when
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Auditing Theory: Review of Audit Process
a. The contract specifically requires the auditor to express an opinion as to entity’s compliance.
b. The CPA’s report will be in the form of negative assurance.
c. The overall aspects of compliance relate to accounting and financial matters.
d. The financial statements are prepared in conformity with other comprehensive basis of accounting.

“You cannot change the past, but you can learn from it. When the same situation arises, you can do things differently
and enjoy a more successful present.”

“You’re a winner when you decide to be.


No other person must give you permission to be successful. There’s no one else to blame when you’re not. Your life
is exactly what you determine to make of it.”

“Flaming enthusiasm, backed up by horse sense and persistence, is the quality that most often makes for success.”
– Dale Carnegie

“The path to success is in front of you, and you are free to travel that path one step at a time. Each step is within
your reach. It’s up to you to take every one of them.”

“Small, simple acts can reliably lead to big, magnificent achievements. It’s just a matter of putting enough of those
small, simple actions together in the same direction.”

“Our greatest glory is not in never falling, but in rising up every time we fall.” – Ralph Waldo Emerson

END OF HANDOUTS

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AT by Raymund Francis A. Escala, CPA, MBA AT – 11th Batch – HQ02