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INSTRUCTION: Select the BEST answer among the following choices.

Shade the corresponding letter on


your answer sheet. Avoid erasures.

1. For an internal auditor to render impartial and unbiased judgments, he or she must be independent of
the entity's
a. Stockholders.
b. Personnel and operating activities.
c. Independent (external) auditors.
d. Board of directors.

ANS: B

2. Usually, an operational audit is performed


a. By independent external auditors.
b. By a team consisting of an equal number of external and internal auditors.
c. Only when an operating division is experiencing declines in productivity or profitability.
d. By internal auditors at the request of top management or the board of directors.

ANS: D

3. Which of the following activities is typically associated with operational auditing?


a. Determining whether the financial statements are an accurate representation of the entity's
operations.
b. Evaluating the feasibility of attaining the entity's operational objectives.
c. Making recommendations for improving performance.
d. Reporting on the entity's relative success in meeting profitability goals.

ANS: C

4. Program audits performed for governmental entities include


a. Determining the extent to which the desired results or benefits established by the legislature
are being achieved.
b. Determining whether the entity is acquiring resources economically and efficiently.
c. Determining whether the financial statements are presented fairly.
d. Determining whether the entity has adhered with specific financial compliance requirements.

ANS: A

5. An independent auditor might consider the procedures performed by the internal auditors because
a. They are employees whose work must be reviewed during substantive testing.
b. They are employees of the client, but their work might be relied on.
c. Their work impacts upon the cost-benefit tradeoff in evaluating inherent limitations.
d. Their degree of independence may be inferred by the nature of their work.

ANS: B

6. Usually, an operational audit is performed

a. By independent external auditors.


b. By a team consisting of an equal number of external and internal auditors.
c. Only when an operating division is experiencing declines in productivity or profitability.
d. By internal auditors at the request of top management or the board of directors.

ANS: D

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

a. Financial vice-president.
b. Corporate controller.
c. Board of directors.
d. Corporate stockholders.

ANS: C
8. An accountant who is not independent may issue a

a. Compilation report.
b. Review report.
c. Comfort letter.
d. Qualified opinion.

ANS: A

9. An auditor's report would be designated as a special report when it is issued in connection with which
of the following financial statements?

a. Financial statements for an interim period that are subjected to a limited review.
b. Financial statements that are prepared in accordance with a comprehensive basis of accounting
other than GAAP.
c. Financial statements that purport to be in accordance with GAAP but do not include a statement
of cash flows.
d. Financial statements that are unaudited and are prepared from a client's accounting records.

ANS: B

10. When an independent audit report is incorporated by reference in a SEC registration statement, a
prospectus that includes a statement about the independent accountant's involvement should
refer to the independent accountant as

a. Auditor of the financial reports.


b. Management's designate before the SEC.
c. Certified preparer of the report.
d. Expert in auditing and accounting.

ANS: D

11. If information accompanying the basic financial statements in an auditor-submitted document has

been subjected to auditing procedures, the auditor may express an opinion which states that the
accompanying information is fairly stated in

a. Conformity with generally accepted accounting principles.


b. Terms of negative assurance.
c. All material respects in relation to the basic financial statements taken as a whole.
d. Conformity with principles for presenting accompanying information.

ANS: C

12. Which of the following would not be included in an accountant's review report on the financial
statements of a nonpublic entity?

a. A statement that the review was made in accordance with generally accepted auditing
standards.
b. A statement that all information included in the financial statements is the representation of
management.
c. A statement describing the principal procedures performed.
d. A statement describing the auditor's conclusions based on the results of the review.

ANS: A

13. Which of the following best describes what is meant by generally accepted auditing standards?

a. Acts to be performed by the auditor.


b. Measures of the quality of an auditor's performance.
c. Procedures used to gather evidence to support financial statements.
d. Audit objectives generally determined on audit engagements.

ANS: B
14. The least important evidence of a public accounting firm's evaluation of its system of quality controls
would concern the firm's policies and procedures with respect to

a. Employment (hiring).
b. Confidentiality of audit engagements.
c. Assigning personnel to audit engagements.
d. Determination of audit fees.

ANS: D

15. An objective of the fourth generally accepted standard of reporting, relating to the expression of an
opinion, is to

a. Prohibit the auditor from issuing a report that does not include an opinion on the financial
statements taken as a whole.
b. Inform users that the financial statements and related notes are the joint responsibility of the
auditor and management.
c. Prevent users of financial statements from misinterpreting the degree of responsibility assumed
by the auditor.
d. Ensure adequate informative disclosures in the financial statements.

ANS: C

16. The generally accepted standards of reporting encompass all of the following except

a. Consideration of an entity's internal control structure.


b. Consistent application of accounting principles.
c. Informative disclosures.
d. Conformity of financial statements with GAAP.

ANS: A

17. There is an inverse relationship between the effectiveness of an entity's internal control structure and
the

a. Reliability of financial statements.


b. Extent of detailed audit tests required.
c. Degree of staff supervision required in the performance of an audit.
d. Fairness of management assertions in the financial statements.

ANS: B

18. Which of the following statements is correct concerning the concept of materiality?

a. Materiality is determined by reference to AICPA guidelines.


b. Materiality depends only on the dollar amount involved.
c. Materiality depends on the nature of an item rather than on the dollar amount.
d. Materiality is a matter of professional judgment.

ANS: D

19. The "hallmark" of auditing is

a. Available audit technology.


b. Generally accepted auditing standards.
c. Professional judgment.
d. Materiality and audit risk.

ANS: C

20. Which of the following is mandatory if the auditor is to comply with the general standards of the
AICPAs generally accepted auditing standards?

a. Adequate technical training


b. Use analytical procedures.
c. Use statistical sampling when feasible on an audit engagement.
d. Confirmation of material accounts receivable balances.

ANS: A

21. In pursuing its quality control objectives with respect to assigning personnel to engagements, a public
accounting firm may use policies and procedures such as

a. Rotating employees from assignment to assignment on a random basis to aid in the staff
training effort.
b. Requiring timely identification of the staffing requirements of specific engagements so that
enough qualified personnel can be made available.
c. Allowing staff to select the assignments of their choice to promote better client relationships.
d. Assigning a number of employees to each engagement in excess of the number required so as
not to overburden the staff and interfere with the quality of the audit work performed.

ANS: B

22. Which of the following statements best describes the primary purpose of Statements on Auditing
Standards?

a. Guides intended to set forth auditing procedures that are applicable to a variety of situations.
b. Outlines intended to narrow the areas of inconsistency and divergence of auditor opinion.
c. Authoritative statements, enforced through the code of professional conduct, and intended to
limit the degree of auditor judgment.
d. Interpretations intended to clarify the meaning of generally accepted auditing standards.

ANS: D

23. The fourth generally accepted auditing standard of reporting requires an auditor to render a report
whenever an auditor's name is associated with financial statements. The overall purpose of the
fourth standard of reporting is to require that reports

a. Assure that the auditor is independent with respect to the financial statements audited.
b. State that the audit has been conducted in accordance with generally accepted auditing
standards.
c. Indicate the character of the engagement and the degree of responsibility assumed by the
auditor.
d. Express whether the accounting principles used in preparing the financial statements have been
applied consistently in the period audited.

ANS: C

24. Which of the following underlies the application of generally accepted auditing standards, particularly
the standards of fieldwork and reporting?

a. The elements of materiality and risk.


b. The element of internal control.
c. The element of corroborating evidence.
d. The element of reasonable assurance.
ANS: A

25. A public accounting firm studies its personnel advancement experience to determine whether
individuals meeting stated criteria are assigned increased degrees of responsibility. This is
evidence of the firm's adherence to

a. Generally accepted auditing standards.


b. Quality control standards.
c. Attestation standards.
d. Supervision and review.

ANS: B

26. The concept of materiality would be least important to an auditor in determining

a. Transactions that should be reviewed.


b. The need for disclosing a particular transaction or event.
c. The extent of audit work planned for particular accounts.
d. The effects of an auditor's direct financial interest in a client.

ANS: D

27. Kimberly Corporation has a few large accounts receivable that total P1,000,000. Charmaine
Corporation has a great number of small accounts receivable that also total P1,000,000. The
importance of an error in any one account is, therefore, greater for Kimberly than for Charmaine.
This is an example of the auditor's concept of

a. Account bias.
b. Audit risk.
c. Materiality.
d. Reasonable assurance

ANS: C

28. Which of the following best describes the character of the three generally accepted auditing standards
classified as general standards?

a. Criteria for competence, independence, and professional care of individuals performing the
audit.
b. Criteria for the content of the financial statements and related footnote disclosures.
c. Criteria for the content of the auditor's report.
d. The requirements for planning and supervision.

ANS: A

29. The first general standard requires that a person or persons have adequate technical training and
proficiency as an auditor. This standard is met by

a. Understanding business and finance.


b. Education and experience in auditing.
c. Continuing professional education.
d. Knowledge of Statements of Auditing Standards

ANS: B

30. The third general standard states that due care is to be exercised in the performance of an audit, and
should be interpreted to mean that an auditor who undertakes an engagement assumes a duty
to perform

a. With reasonable diligence and without fault or error.


b. As a professional who will assume responsibility for losses consequent upon error of judgment.
c. To the satisfaction of the client and third parties.
d. As a professional possessing the degree of skill commonly possessed by others in the field.

ANS: D

31. In connection with the third generally accepted auditing standard of fieldwork, an auditor examines
corroborating evidential matter that includes all of the following except

a. Client accounting manuals.


b. Vendor invoices.
c. Written client representations.
d. Minutes of board meetings.

ANS: C

32. The first standard of fieldwork, which states that the work is to be adequately planned, and assistants,
if any, are to be properly supervised, recognizes that

a. Early appointment of the auditor is advantageous both to the auditor and to the client.
b. Acceptance of an audit engagement after the close of the client's fiscal year is generally not
permissible.
c. Appointment of the auditor subsequent to the physical count of inventories requires a
disclaimer of opinion.
d. Performance of substantial parts of the engagement is necessary at interim dates.

ANS: A

32. What is the magnitude of audit risk if inherent risk is .50, control risk .40, and detection risk .10?

a. .20
b. .10.
c. .04.
d. Not determinable from the facts given.

ANS: D

33. Which of the following underlies the application of generally accepted auditing standards, particularly
the standards of fieldwork and reporting?

a. The elements of materiality and risk.


b. The element of internal control.
c. The element of corroborating evidence.
d. The element of reasonable assurance.

ANS: A

34. Competence as a certified public accountant includes all of the following except

a. Having the technical qualifications to perform an engagement.


b. Possessing the ability to supervise and evaluate the quality of staff work.
c. Warranting the infallibility of the work performed.
d. Consulting others if additional technical information is needed

ANS: C

35. Due professional care requires

a. The examination of all corroborating evidence available.


b. A critical review of the work done at every level of supervision.
c. The exercise of error-free judgment.
d. A consideration of internal control structure that includes tests of controls.

ANS: B

36. The reason an independent auditor gathers evidence is to

a. Form an opinion on the financial statements.


b. Detect fraud.
c. Evaluate management.
d. Evaluate internal controls.

ANS: A

37. An independent audit is important to readers of financial statements because it

a. Provides a measure of management's stewardship function.


b. Measures and communicates the financial data included in financial statements.
c. Objectively examines and reports on management's financial statements.
d. Reports on the accuracy of information in the financial statements.

ANS: C

38. Independent auditing can best be described as

a. A subset of accounting.
b. A professional activity that attests to the fair presentation of financial statements.
c. A professional activity that measures and communicates financial accounting data.
d. A regulatory activity that prevents the issuance of improper financial information.

ANS: B

39. Which of the following has historically had the least influence on the practice of public accounting?

a. The Governmental Accounting Standards Board.


b. The Institute of Internal Auditors.
c. The Securities and Exchange Commission.
d. The PH Congress.

ANS: D

40. Which of the following incorrectly matches the authoritative body with its authoritative
pronouncements?

a. Accounting and Review Services Committee: "Statements on Standards for Accounting and
Review Services"
b. Auditing Standards Board: "Statements on Auditing Standards"
c. Auditing Standards Executive Committee: "Statements on Auditing Procedure"
d. Securities and Exchange Commission: "Financial Reporting Releases"

ANS: C

41. The purpose of a compliance audit for a governmental entity is to determine whether

a. Financial statements comply with GAAP and whether the entity is operating efficiently.
b. Financial statements comply with GAAP and the entity has complied with applicable laws and
regulations.
c. The entity has complied with applicable laws and regulations.
d. Financial statements comply with GAAP.

ANS: B

42. 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.

ANS: A

43. Which of the following criteria is unique to the independent auditor's attest function?

a. General competence.
b. Familiarity with the particular industry of each client.
c. Due professional care.
d. Independence

ANS: D

44. The essence of the attest function is to

a. Detect fraud.
b. Examine individual transactions so that the auditor can certify as to their validity.
c. Determine whether the client's financial statements are fairly stated.
d. Ensure the consistent application of correct accounting procedures.

ANS: C

45. An independent audit aids in the communication of economic data because the audit
a. Confirms the accuracy of management's financial representations.
b. Lends credibility to the financial statements.
c. Guarantees that financial data are fairly presented.
d. Assures the readers of financial statements that any fraudulent activity has been corrected.

ANS: B

46. Which of the following is least likely to be included in an agreed-upon procedures attestation
engagement report?

a. The specified party takes responsibility for the sufficiency of procedures.


b. Use of the report is restricted.
c. Limited assurance on the information presented.
d. A summary of procedures performed.

ANS: C

47. When performing an attestation examination engagement, which of the following is not always
required?

a. Assertion.
b. Practitioner independence.
c. Subject matter.
d. Suitable criteria.

ANS: A

48. Which of the following engagements is most likely to consider availability, security, integrity, and
maintainability of a company's computer systems?

a. Internal control over financial reporting.


b. Trust Services.
c. Website Asssociate
d. Financial statement audit.

ANS: B

49. Which of the following is the least likely to be considered subject matter of an attestation
engagement?

a. Assertion
b. Behavior
c. Historical event
d. Systems and processes.

ANS: A

50. Arel, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial
data supplied by Modit Co. regarding Modit's written assertion about its compliance with contractual
requirements to pay royalties. Arel's report on these agreed-upon procedures should contain a (an).

a. Disclaimer of opinion about the fair presentation of Modit's financial statements.


b. List of the procedures performed (or reference thereto) and Arel's findings.
c. Opinion about the effectiveness of Modit's internal control activities concerning royalty
payments.
d. Acknowledgment that the sufficiency of the procedures is solely Arel's responsibility.

ANS: B

51. Which of the following is not necessarily an attest engagement?


a. An elder care engagement.
b. A WebTrust engagement.
c. An examination of internal control over financial reporting for a nonpublic company.
d. A review of management's discussion and analysis.

ANS: A

52. Which of the following is notcurrently an acceptable form of association with prospective financial
statements?

a. Compilation.
b. Review.
c. Agreed-upon procedures.
d. Examination.
ANS: B

53. Which of the following is correct relating to an engagement to apply agreed-upon procedures to
prospective financial statements?

a. Use of the report is restricted to the specified users.


b. Such engagements are permissible for forecasts but not for projections.
c. Responsibility for the adequacy of the procedures performed is taken by the practitioner.
d. Such engagements are not permissible under the professional standards.

ANS: A

54. When reporting upon a review engagements on an entity's management discussion and analysis, the
report is ordinarily:

a. A general use report.


b. A restricted use report.
c. Required to include a disclaimer of opinion.
d. Included with the entity's report on internal control over financial reporting.

ANS: B

55. When management presents a written assertion on internal control effectiveness, it evaluates the
company's internal control using reasonable criteria for internal control, referred to as.

a. Control environment criteria.


b. Tone criteria.
c. Control criteria
d. Integrated criteria.

ANS: C

56. Providing assurance using a series of reports provided simultaneously or shortly after the related
information is released is referred to as:

a. Continuous auditing.
b. Serial auditing.
c. Systems reliability auditing.
d. Simultaneity auditing.

ANS: A

57. Which attest engagement aligns most directly with a financial statement audit in terms of assurance
provided?

a. Agreed-upon procedures.
b. Evaluation.
c. Examination.
d. Review
58. Under the attestation standards, in which of the following circumstances is a review report least
likely to be issued?

a. Criteria are agreed-upon or only available to specified users.


b. Established criteria exist, but other criteria are used.
c. The subject matter departs from the criteria.
d. A significant limitation on the scope of the engagement has occurred.

ANS: D

59. When a CPA is associated with a forecast, all of the following should be disclosed except the:

a. Sources of information.
b. Character of the work performed by the CPA.
c. Major assumptions in the preparation of the forecast.
d. Probability of achieving estimates

ANS: D

60. The party responsible for assumptions identified in the preparation of prospective financial
statements is usually:

a. A third-party lending institution.


b. The client's management.
c. The reporting accountant.
d. The client's independent auditor.

ANS: B

61. In an audit in accordance with generally accepted auditing standards, the auditors must test
compliance with those laws and regulations that:

a. Have a direct and material effect on the financial statements.


b. Have a direct and material effect on major federal programs.
c. Have a material direct or indirect effect on the financial statements.
d. Have a material effect on major or nonmajor programs.

ANS: A

62. For the highest degree of independence the director of internal auditing should report directly to:

a. The controller.
b. The audit committee of the board of directors.
c. The executive vice-president.
d. The chief accountant.

ANS: B

63. Internal auditing is considered to be part of an organization's:

a. Accounting system.
b. Control activities.
c. Monitoring.
d. External controls.

ANS: C

64. It is the end of his client's first quarter and Bill Smith, CPA is performing a compilation of his client's
interim financial statements. He has discovered that the client does not wish to present notes to the
financial statements. The appropriate CPA report includes:

a. Qualified opinion ("subject to" the omission of the notes).


b. Compilation report with an adverse opinion due to inadequate disclosure.
c. Standard compilation report.
d. Compilation report with an indication that all required disclosures under GAAP may not be
presented with the statements.

ANS: D

65. Which of the following would be used on a review engagement?

a. Examination of board minutes.


b. Confirmation of cash and accounts receivable.
c. Comparison of current-year to prior-year account balances.
d. Recalculation of depreciation expense.

ANS: C

66. An audit should be designed to achieve reasonable assurance of detecting material misstatements
due to:

a. Errors.
b. Errors and fraud.
c. Errors, fraud, and those illegal acts with a direct effect on financial statement amounts.
d. Errors, fraud and illegal acts.

ANS: C

67. To qualify as "generally accepted," an accounting principle must:

a. Have substantial authoritative support.


b. Be covered in one or more of the SASs issued by the AICPA.
c. Be set forth in a Financial Reporting Release issued by the SEC.
d. Have received the approval of the FASB.

ANS: A

68. Which of the following best describes a portion of the auditors' responsibility regarding illegal acts
by clients?

a. The auditors have a responsibility to discover all material illegal acts.


b. If audit procedures reveal illegal acts, the auditors should take appropriate actions.
c. If the auditors suspect illegal acts have been performed, they should conduct a legal audit of the
company.
d. The auditors' responsibility for the detection of all illegal acts is the same as their responsibility
regarding material misstatements due to errors and fraud.

ANS: D

69. The auditors who find that the client has committed an illegal act would be most likely to withdraw
from the engagement when the:

a. Management fails to take appropriate corrective action.


b. Illegal act has material financial statement implications.
c. Illegal act has received widespread publicity.
d. Auditors cannot reasonably estimate the effect of the illegal act on the financial statements.

ANS: A

70. When a conflict exists between an accounting principle supported by a pronouncement of an


authoritative body and an accounting principle supported by widely recognized practice, which standard
prevails?

a. The authoritative body pronouncement.


b. The widely recognized pronouncement.
c. Both are of equal authority and the form of the transaction prevails over its substance.
d. Neither, other accounting literature must be consulted to determine the appropriate accounting
treatment.

ANS: A

71. To present fairly in conformity with generally accepted accounting principles the financial
statements must:

a. Be consistently applied.
b. Inform users of all matters that could materially affect a decision.
c. Reflect transactions and events within a range of reasonable limits.
d. Be considered preferable to the users of those financial statements.

ANS: C

72. An audit performed in accordance with generally accepted auditing standards generally should:

a. Be expected to provide absolute assurance that illegal acts will be detected where internal
control is effective.
b. Be relied upon to disclose violations of truth in lending laws.
c. Encompass a plan to actively search for all illegalities which relate to operating aspects.
d. Not be relied upon to provide absolute assurance that all illegal acts will be detected.

ANS: D

73. When the auditors express an opinion on financial statements their responsibilities extend to:

a. The underlying wisdom of their client's management decisions.


b. Whether the results of their client's operating decisions are fairly presented in the financial
statements.
c. Active participation in the implementation of the advice given to their client.
d. An ongoing responsibility for their client's solvency.

ANS: B

74. Which of the following is not required by the generally accepted auditing standard that states that
due professional care is to be exercised in the performance of the audit?

a. Observance of the standards of field work and reporting.


b. Critical review of the audit work performed at every level of supervision.
c. Degree of skill commonly possessed by others in the profession.
d. Responsibility for losses because of errors of judgment.

ANS: D

75. A peer review in which the peer reviewers study and appraise a CPA firm's system of quality control
to perform accounting and auditing work is referred to as a(n):

a. Engagement review.
b. Inspection review.
c. Supervision review.
d. System review.

ANS: D

76. The risk associated with a company's survival and profitability is referred to as:

a. Business Risk.
b. Information Risk.
c. Detection Risk.
d. Control Risk.

ANS: A
77. The risk that information is misstated is referred to as:

a. Information risk.
b. Inherent risk.
c. Relative risk.
d. Business risk.

ANS: A

78. The attest function:

a. Is an essential part of every engagement by the CPA, whether performing auditing, tax work, or
other services.
b. Includes the preparation of a report of the CPA's findings.
c. Requires a consideration of internal control.
d. Requires a complete review of all transactions during the period under examination.

ANS: B

79. An operational audit differs in many ways from an audit of financial statements. Which of the
following is the best example of one of these differences?

a. The usual audit of financial statements covers the four basic statements, whereas the
operational audit is usually limited to either the balance sheet or the income statement.
b. The boundaries of an operational audit are often drawn from an organization chart and are not
limited to a single accounting period.
c. Operational audits do not ordinarily result in the preparation of a report.
d. The operational audit deals with pre-tax income.

ANS: B

80. The review of a company's financial statements by a CPA firm:

a. Is substantially less in scope of procedures than an audit.


b. Requires detailed analysis of the major accounts.
c. Is of similar scope as an audit and adds similar credibility to the statements.
d. Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the
statements.

ANS: A