AT-03: FINANCIAL STATEMENTS AUDITS – OVERVIEW

1. A structured representation of historical financial information, including related notes,

intended to communicate an entity’s economic resources or obligations at a point in time
or the changes therein for a period of time in accordance with a financial reporting
framework.
A. Annual report
B. Engagement documentation
C. Accounting records
D. Financial statements

2. This term describes the role of person(s) or organization(s) with responsibility for
overseeing the strategic direction of the entity and obligations related to the
accountability of the entity.
A. Governance
B. Audit committee
C. Control environment
D. Management

3. According to the IAASB’s glossary of terms, this term refers to persons with executive
responsibilities for the conduct of entity’s operations.
A. Top rank personnel
B. Those charged with governance
C. Boards of directors
D. Management

4. An operating committee of a company’s board of directors that is in charge of overseeing

financial reporting and disclosure.
A. Governance
B. Audit committee
C. Control environment
D. Management

5. This term refers to the risks that a client’s financial statements may be materially false
and/or misleading.
A. Business risk
B. Information risk
C. Client risk
D. Risk assessment

6. Which of the following methods is most commonly used to reduce information risk?
A. Allow users to verify information.
B. Users share information risk with management.
C. Have the financial statements audited.
D. Allow all users to prepare the statements.

7. The following are conditions that create a demand from users for assurance on reliability
of the financial information:
A. Transactions that are numerous and complex.
B. Users separated from accounting records by distance and time.
C. Financial decisions that are important to investors and users.
 D. All of the choices are examples of the said conditions.

8. Which of the following best describes the reason why independent auditors report on
financial statements?
A. A management fraud may exist and it is more likely to be detected by independent
auditors.
B. A poorly designed internal control structure may be in existence.
C. A misstatement of account balances may exist and is generally corrected as the
result of the independent auditor’s work.
D. Different interests may exist between the company preparing the statements and the
persons using the statements.

9. The best statement of the responsibility of the auditor with respect to audited financial
statements is:
A. The auditor’s responsibility on fair presentation of financial statements is limited only
up to the date of the audit report.
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 qualified opinion but not for any other type of
opinion.

10. The general principles for conducting financial statement audits include which of the
following?
A. Compliance with the Code of Ethics for CPAs.
B. Compliance with Philippine Standards on Auditing.
C. Planning and performing the audit with professional skepticism.
D. All of the choices apply.

11. Philippine Standards on Auditing (PSAs) should be looked upon by practitioners as:
A. Ideals to strive for, but which are not achievable.
B. Maximum standards which denote excellent work.
C. Benchmark to be used on all audits, reviews, and compilations.
D. Minimum standards of performance which must be achieved on each audit
engagement. (x)

12. The phrase used to express the auditor’s opinion is:

A. “absence of material and pervasive misstatements in the financial statements”
B. “present fairly, in all material respects”
C. “provide reasonable, but not absolute assurance”
D. All of these choices are acceptable phrases to express the auditor’s opinion.

13. According to IAASB’s Glossary of Terms, this refers to a high, but not, absolute level of
assurance
A. Professional judgement
B. Conservatism
C. Audit risk
D. Reasonable assurance
14. An attitude that includes a questioning mind, being alert to conditions which may indicate
possible misstatement due to error or fraud, and a critical assessment of evidence.
A. Professional skepticism
B. Materiality
C. Conservative advocacy
D. Reasonable assurance

15. This term refers to the possibility of the harm or loss or danger. It can also refer to a
factor, thing, or element or course involving uncertain danger; or a hazard.
A. Materiality
B. Jeopardy
C. Contingency
D. Risk

16. Which of the following best describes audit risk?

A. The susceptibility of an account balance or class of transactions to misstatement that
could be material, individually or when aggregated with misstatements in other
balances of classes, before consideration of any related controls.
B. The risk that a misstatement that could occur in an account balance of transactions
and that could be material individually or in the aggregate, will not be prevented or
detected and corrected on a timely basis by the company’s internal control.
C. The risk that an auditor’s substantive procedures will not detect a misstatement that
exists in an account balance or class of transactions that could be material,
individually or when aggregated with misstatements in other balances or classes.
D. The risk that the auditor gives an inappropriate audit opinion when the
financial statements are materially misstated.

17. Inherent risk and control risk collectively are known as:
A. The dual risk team
B. The risk of information dissemination
C. The risk of material misstatement
D. The dependent variables of risk

18. Which of the following best describes detection risk?

A. The risk that an auditor’s substantive procedures will not detect a
misstatement that exist in an account balance or class of transactions that
could be material, individually or when aggregated with misstatements in other
balances or classes.
B. The risk that a misstatements that could occur in an account balance or class of
transactions and that could be material individually or in the aggregate, will not be
prevented or detected and corrected on a timely basis by the company’s internal
control.
C. The susceptibility of an account balance or class of transactions to misstatement that
could be material, individually or when aggregated with misstatement in other
balances of classes, before consideration of any related controls.
D. The risk that the auditor gives an inappropriate audit opinion when the financial
statements are materially misstated.

19. This term refers to the application of relevant training, knowledge and experience within
the context provided by auditing, accounting and ethical standards, in making informed
 decisions about the courses of action that are appropriate in the circumstances of the
audit engagement
A. Professionalism
B. Conservatism
C. Professional judgement
D. Materiality

20. An adult has inherent limitations that affect the auditor’s ability to detect material
misstatements. Which of the following is among the factors that result to these inherent
limitations?
A. Use of testing.
B. Inherent limitations of accounting and internal control system.
C. Evidence that is basically persuasive rather than conclusive.
D. All of the choices properly describe factors that result to inherent limitations of
audits.
AT-04 THE CPA PROFESSION / R.A. No. 9298

1. The Philippine Accountancy Act of 2004 – shall provide for and govern:
A. The standardization and regulation of accounting education.
B. The examination for registration of Certified Public Accountants.
C. The supervision, control, and regulation of the practice of accountancy in the
Philippines.
D. All of the answers.

2. As used in Republic Act No. 9298, this term refers to the area of practice of
accountancy:
A. Line
B. Section
C. Segment
D. Sector

3. Regulation of the accounting profession include:

A. Public Regulation as provided for in the Philippine Accountancy Act of 2004.
B. Regulation within the profession, through the implementation of the Code of Ethics.
C. Regulation within the firm, through the implementation of a system of quality control.
D. All of the answers.

4. This refers to those persons who hold a valid certificate issued by the Board of
Accountancy, whether they be in public practice, industry, commerce, the public sector,
or education.
A. Professional accountant
B. Professional account in public practice
C. Senior accounting practitioner
D. Audit associate

5. A person is deemed to be in practice of the accounting profession in commerce and

industry when he/she:
A. Holds, or is appointed to a position in an accounting professional group in
government or in a government-owned and/or controlled corporation, where
decision-making requires professional knowledge in the science of accounting.
B. Is involved in decision-making requiring professional knowledge in the science of
accounting, as well as the accounting aspects of finance and taxation, or is
employed in a position that requires a CPA.
C. Is in an educational institution which involves teaching of accounting, auditing,
management advisory services, accounting aspect of finance, business law, taxation,
and other technically related subjects.
D. Holds out himself/herself as one skilled in the knowledge, science and practice of
accounting, and as someone qualified to render professional services as a CPA.

6. S1 To be qualified as having passed the licensure examination for accountants, a

candidate must obtain a general average of seventy-five percent, with no grades lower
than sixty-five percent in majority of the subjects.
S2 A candidate with conditional credits must take a removal examination within two
years from the date of the preceding examination.
A. True, true
B. True, false
 C. False, true
D. False, false

7. Any candidates who fails in _____ complete CPA Board Examinations shall be
disqualified from taking another set of examinations unless he/she submits evidence to
the satisfaction of the BOA that he/she enrolled in and completed at least _____ of
subjects given in the licensure examination.
A. 3, 15 units per year for a total of 60 units
B. 2, 24 units
C. 2, 15 units/year, total of 60 units
D. 3, 24 units

8. Determine the appropriate rating of the student who obtained the following individual
marks:
S1 – 100 S2 – 74 S3 – 74
S4 – 74 S5 – 74 S6 – 74
A. Passed
B. Failed
C. Conditioned
D. Cannot be determined

9. A certificate under seal, bearing a registration number, issued to an individual, by the

PRC, upon recommendation by the Board of Accountancy, signifying that the individual
has complied with all the legal and procedural requirements for such issuance, including,
in appropriate cases, having successfully passed the CPA licensure examinations.
A. Certificate of registration.
B. Certificate of accreditation.
C. Certificate of identification.
D. Certificate of quality review.

10. A professional identification card has a validity of:

A. 1 Year
B. 2 Years
C. 3 Years
D. 4 years

11. The Continuing Professional Development (CPD) programs for accountancy shall have
these objectives:
A B C D
 To raise and maintain the professional’s
capability for delivering professional services. Yes Yes No Yes
 To attain and maintain the highest standards
and quality in the practice of his profession. Yes Yes Yes No
 To make the profession globally competitive. Yes No Yes No

12. According to PRC Resolution 990 2016, how many units of continuing professional
development must a CPA undertake?
A. Sixty (60) credit units for three years, provided that a minimum of fifteen (15) credit
units shall be earned in each year.
B. Forty-five (45) credit units for three years, provided that a minimum of fifteen (15)
credit units shall be earned in each year.
 C. One-hundred twenty (120) credit units for three years.
D. Minimum of fifteen (15) credit units earned in each year.

13. The following are regarded by RA9298 as CPA services in public practice if offered or
rendered on a fee basis and to more than one client:
A B C D
 Preparation and signing of audit reports. Yes Yes Yes Yes
 Professional assistance on accounting
procedures. Yes No No Yes
 Representation of clients before governmental
agencies on tax and other matters regardless
of its relation to accounting. Yes Yes No No

(For numbers 13 and 14) ABC Company is a business in the private sector. The company has
several administrative positions that require, among others the supervision of the recording of
financial transactions; preparation of financial statements; coordination with the external
auditors for the audit of the financial statements; another related functions.

14. These positions should be occupied by duly registered CPAs, if ABC Company has:
Paid-up capital of at least Annual revenue of
A. P 5,000,000 P 10,000,000
B. P 10,000,000 P 10,000,000
C. P 5,000,000 P 5,000,000
D. P 10,000,000 P 5,000,000

15. Suppose that these positions are currently occupied by non-CPAs. will the effectivity of
the IRR displace the incumbents to these positions?
A. Yes, the non-CPAs will be terminated, provided equitable benefits are available for
them, and the resulting vacancies will be field in by CPAs.
B. No, the IRR specifically provides the provision shall not result to the
deprivation of the employment of incumbents to the position.
C. Yes, unless the non-CPAs are able to take and pass the CPA board examinations
within two years from the effectivity to the implementing rules and regulations of RA
9298.
D. Cannot be determined without additional information.

16. According to the IRR, the following can teach business law:
CPAs Members of the IBP
A. Yes Yes
B. Yes No
C. No Yes
D. No No

17. The policy for accreditation covers CPAs involved in teaching of accounting and related
subjects in the:
A. Primary level only
B. Primary and secondary levels only
C. Secondary and tertiary levels only
D. Primary, secondary, tertiary and graduate level
18. Which of the following is an incorrect requirement for accreditation of Accounting
Teachers?
A. Possession of relevant Master’s Degree
B. Completion of 12 units of relevant education subjects from CHED recognized
schools
C. A total of two years’ meaningful experience in actual accounting work
D. Proof that the CPA has undergone continuing professional education, totaling 120
units

19. According to resolution 2008-88, accreditation granted for accounting teachers in valid
for:
A. One year
B. Two years
C. Three years
D. Four years

20. The Board of Accountancy, subject to the approval of the PRC, may revise or exclude
any of the subjects and their syllabi, and add new ones as the need arises provided that
the change shall not be more often than:
A. Every two years.
B. Every three years
C. Every four years.
D. Every five years.

21. S1 A BS Accountancy graduate who takes and successfully passes the CPA board
Examinations shall still be required to take the Civil Service Examination prior to holding
an entry-level government position.
S2 Practice in government shall constitute in a person who holds, or is appointed to a
position in an accounting professional group in government or in a government-owned
and/or controlled corporation, including those performing proprietary functions, where
decision making requires professional knowledge in the science of accounting or where
civil services eligibility as a certified public accountant is a prerequisite.
A. True, true
B. True, false
C. False, true
D. False, false

22. Which of the following is not a ground for the suspension or revocation of certificate of
registration and professional identification card?
A. Possession of an unsound mind.
B. Practice in more than one field of accountancy.
C. Conviction of a criminal offense involving moral turpitude.
D. Unprofessional or unethical conduct, malpractice, or violation of RA9298.

23. The punishment, upon conviction, for any any person who has violated any of the
provisions of the Accountancy Act of 2004, or any of its implementing Rules and
Regulations as promulgated by the Board of Accountancy:
A. A fine of not less than fifty thousand pesos (P50,000.00) and imprisonment for a
period not exceeding two (2) years.
B. A fine of not less than fifty thousand pesos (P50,000.00) but not an imprisonment.
C. No fine but an imprisonment for a period not exceeding two (2) years.
 D. A fine of not less than fifty thousand pesos (P50,000.00) or imprisonment for a
period not exceeding two (2) years, or both.

24. A CPA whose certificate has been revoked:

A. Is required to take the CPA Board Licensure examinations before reinstatement
B. May be reinstated by the BOA after the expiration of 2 years from the date of
revocation
C. Can no longer be reinstated as a Certified Public Accountant
D. Has committed a crime involving moral turpitude

25. Which of the following is not a ground for refusal to issue a certificate of registration and
professional identification card.
A. Conviction of criminal offense involving moral turpitude.
B. Guilty of immoral or dishonorable conduct.
C. Unsound mind.
D. Conviction for a political offense.
AT-05: PRACTICE OF THE ACCOUNTANCY PROFESSION

1. S1 A BSA graduate is allowed to practice public accountancy under his or her own
name immediately upon passing the CPA Board Exams.
S2 The certificate of accreditation to practice public accountancy is granted only once
and remains in effect until withdrawn, suspended, or revoked in accordance with R.A.
NO. 9298.
A. True, true
B. True, false
C. False, true
D. False, false

2. Which of the following is incorrect?

A. Single proprietorship and partnerships for the practice of public accountancy shall be
registered certified public accountants in the Philippines.
B. A certificate public accountant shall be issued to certified public accountants in
public practice only upon showing, that such registrant has acquired a
maximum of three (3) years meaningful experience in any areas of public
practice including taxation.
C. Meaningful experience, as mentioned by RA 9298 are explained in detail under
Section 28A of the Implementing Rules and Regulations.
D. The SEC shall not register any corporation organized for the practice of public
accountancy.

3. According to Board Resolution 71 Series of 2004, individual CPAs, Firms or Partnerships

of CPAs, including partners and staff members thereof shall register with the Board of
Accountancy and the Professional Regulation Commission. If the application for the
registration of John and Sloan, CPAs, was approved on July 19,2013, it shall file for
renewal on or before:
A. July 19,2016.
B. September 30, 2015
C. September 30,2016.
D. D. December 31,2015.

4. CPAs may practice public accountancy under the following forms of organizations,
except:
A. Sole Proprietorships
B. General Partnerships
C. Limited liability partnerships
D. Corporations

5. Below the names of three CPA firms and pertinent facts relative to each firm. Unless
otherwise indicated, the individuals named the CPAs and partners, and there are no other
partners. Which of these indicates a violations of the IRR of RA9298?
A. A, B and C, CPAs (A died seven years ago; B and C are continuing the firm).
B. G and H, CPAs (G died 3 years ago, and H is continuing the firm as a sole
proprietor).
C. D and E, CPAs (the name of F, a third partner is omitted from the firm name).
D. K and L, CPAs( K died 3 years ago, L was admitted into the partnership two months
after K’s death. There are seven other active partners, all whom have their names
omitted from the firm name).
6. Which of the following functions would usually be performed by a senior associate?
A. Signs the audit report.
B. Assumes overall responsibility for the audit.
C. Performs detailed audit procedures.
D. Prepares the audit program and performs more complex audit procedures.
E. Tasked with liaison work between partners and other team members

7. The amount of audit fees depend largely on the:

A. Size and capitalization of the company under audit.
B. Amount of profit for the year.
C. Availability of cash.
D. Volume of audit work and degree of competence and responsibilities involved.

8. Under the method of billing a client, the external auditors charges on the basis of actual
time spent by principals/partners, supervisors, seniors and juniors at the predetermined
rates agreed upon with the client.
A. Per diem basis.
B. Retainer basis.
C. Flat fee or flat sum basis
D. Maximum fee basis

9. Any advertising by professional accountants beyond their name, address, telephone

number and membership in professional organizations has been traditionally considered
unethical in the Accountancy Professions, due to the following reasons, except:
A. Advertising could lead to undue competition between and among practitioners,
causing a decline in quality of service.
B. Advertising would encourage a more personal approach to clients.
C. The cost of advertising would outweigh any savings that might result from
competition.
D. Small or new practitioners would be unlikely to have the financial resources to match
the advertising of larger or more established practices.

10. Which of the following is allowed under the revised rules on advertising?
A. Self-laudatory statements
B. Discrediting, disparaging, or attacking other firms or CPA practitioners
C. Referring to, using or citing actual or purported testimonials by third parties
D. None of these are allowed forms of advertising.

11. Before advertisements are disseminated, they must be subject to the review of:
A. Those charged with governance of the clients of the CPA.
B. Managing partner and Quality Control partner of the firm.
C. Board of Accountancy and Professional Regulation Commission.
D. Risk Management partner and Managing partner of the firm.

12. Which of the following cannot be mentioned by an author in publicizing a book in

accounting?
A. Name
B. Qualifications
C. Membership in professional organizations
D. Services that author’s firm provides
13. May a CPA give a brochure to a non-client?
A. No, because this is a violation of the revised rules of advertising
B. Yes, since this is acceptable under the revised rules on advertising
C. No, unless the non-client becomes a client within 10 days from receipt of the brochure
D. Yes, if the non-client has made an unsolicited request

14. Which of the following partner profile information may be posted in a firm’s website?
A. Name
B. Educational attainment and brief listing of services
C. Postal address, telephone, fax and email-address
D. All of these may be posted in a firm’s website

15. Subjects or citizens of foreign countries:

A. May be allowed to practice accountancy in the Philippines, regardless of the
provisions of existing laws and international treaty obligations, including mutual
recognition agreements entered into by the Philippine government with other
countries.
B. Are not allowed to practice accountancy in the Philippines, unless they take, and
pass, the certified public accountant licensure examination given by the Board of
Accountancy.
C. May be allowed to practice accountancy in the Philippines, subject to the
provisions of existing laws and international treaty obligations, including
mutual recognition agreements entered into by the Philippine government with
other countries.
D. Are never allowed to practice accountancy in the Philippines because they will
jeopardize the interests of Filipino certified public accountants.

16. RA9298 provides that temporary or special permits may be issued to foreign CPAs in the
following situations, except:
A. A foreign CPA was called for consultation which, in the judgment of the Board of
Accountancy, is essential for the development of the Philippines. The permit restricts
the foreign CPA’s practice to the particular consultation work being performed. No
Filipino CPA was qualified for such consultation.
B. A foreign CPA was engaged to lecture on fields essential to accountancy
education in practice provided such practice is conducted outside class hours.
C. A foreign CPA, an IFRS expert, is engaged for services deemed essentials for the
advancement of accountancy in the Philippines.
D. All of the above situations do not justify the issuance of a temporary or special permit.

17. Provide the definition of the following acronyms under the ASEAN Integration Mutual
Recognitions Arrangement on Accountancy Services:
ACPA – ASEAN Chartered Professional Accountant
ACPACC – ASEAN Chartered Professional Accountant Coordinating Committee
RFPA – Recognize Foreign Professional Accountant

18. Violations of the IRR shall subject the CPA to fines and penalties as provided for in RA
No. 9298, including its IRR. Such violations include:
A. Engaging in public accounting practice without first registering with the BOA and the
SEC.
B. Continuing to engage in the practice of the public accountancy after the expiration of
the registration/ accreditation
C. Continuing to engage in the practice of public accountancy after suspension,
revocation or withdrawal of registration.
D. Giving any false information, data, statistics, reports or other statement which tend to
mislead, mislead, obstruct, or obscure the registration of an individual CPA, Firm or
Partnership of CPAs under the IRR.
E. Giving any misrepresentation to the effect that registration was secured in the truth
when in fact, it was not secured
F. Failure or refusal to undergo quality review
G. All of the answers.
AT-06: ORGANIZATIONS IN THE ACCOUNTANCY PRACTICE

1. Which organization(s) has the primary duty of effectively enforcing the provisions of RA
9298?
I. Professional regulatory Board of Accountancy
II. Department of Justice
III. Professional Regulation Commission
IV. Philippine Institute of Certified Public Accountants

A. I and II
B. II and III
C. I, III and IV
D. I and III

2. Fill out the table below to summarize pointers on the Board of Accountancy:
Composition
Nomination
1 Complete Term
Maximum no. of years
Vice Chairman (term)
2 Consecutive complete terms

3. The following are qualifications of the members of the Board of Accountancy, except:
A. Natural-born citizen and resident of the Philippines.
B. Duly registered CPA with at least 5 years of work experience in any scope of
practice
C. Good moral character, not convicted of crimes involving moral turpitude.
D. No direct, or indirect pecuniary interest in any school, college ,university or institution
conferring the B.S. Accountancy degree or providing CPA Review classes.

4. The accredited Integrated Professional Organization (APO) shall submit its nomination for
the Board od Accountancy (with complete documentation) to the Commission.
A. Not later than 60 (sixty) days prior to the expiry of the term of an incumbent
chairman or member.
B. On the date of expiry of the term of an incumbent chairman or member.
C. After the 60th day from the expiry of the term of an incumbent chairman or member.
D. Upon request by the Commission for the submission of nominations.

5. The following are among the powers and functions of the Board of Accountancy, except:
A. To prescribe and adopt the rules and regulations necessary for implementing
RA9298.
B. To prescribe and/or adopt a Code of Ethics for the practice of accountancy.
C. To ensure, in coordination with the DECS that all higher educational instruction
and offering of accountancy comply with prescribed policies, standards and
requirements of the course.
D. To conduct an oversight into the quality of audits of financial statements.

6. The following are grounds for suspension or removal of members of the Board of
Accountancy, except:
A. Neglect of duty or incompetence
 B. Violation or tolerance of any violation of RA9298 and its IRR, or the Code of Ethics
and technical and professional standards of practice for CPAs.
C. Pending case on a crime involving moral turpitude.
D. Manipulation or rigging of the CPA licensure examination results.

7. Identify the organization being described by each of the following statements:

_SEC_ This is the government agency that regulates the registration and operations of
corporations, partnerships, and other forms of association in the Philippines.
_BIR_ This organization aims to raise revenues for the government through the effective
and efficient collection of taxes, provide quality services to taxpayers, and enforce tax laws
in an impartial and uniform manner.
Insurance Commission Its mandate is to regulate and supervise the insurance industry
for the promotion of the national interest.
_BSP_ The primary objective of this agency is to maintain price stability conducive to a
balanced and sustainable economic growth.

8. According to the IRR, this council is tasked to assist the BOA in continuously upgrading
accountancy education in the Philippines to make the Filipino CPAs globally competitive.
A. Quality Review Committee
B. Educational Technical Council
C. CPD Council
D. Commission on Higher Education
9. S1 The Philippine Institute of Certified Public Accountants is registered with the SEC as a
non-profit corporation and recognized by the BOA, subject to the approval by the PRC.
S2 Membership in the PICPA shall be a bar to membership in any other association of
certified public accountants.
A. True, true
B. True, false
C. False, true
D. False, false

10. Unless there is a valid reason to have additional representation, the PICPA shall have
how many national directors?
A. 12
B. 14
C. 15
D. 20

11. The PICPA national directors shall be apportioned according to four geographic sectors
based on the ratio of latest available number of members in good standing from those
areas. Which of the following is NOT a geographic sector?
A. Luzon
B. NCR
C. Mindanao
D. CAR

12. A PICPA director can only represent a sector in a region if he/she has been a member in
good standing in such sector in the region for at least __ years at the time of his/her
nomination:
 A. Two years
B. Three years
C. Four years
D. Five years

13. Sectoral organizations have been established to promote the interests of groups of
professional accountants. Which of the following is the sectoral organization for CPAs in
Public Practice?
A. GACPA
B. ACPAPP
C. ACPACI
D. ACPAE

14. The PRC CPD Council shall bee composed of:

A. A chairperson and three members
B. A chairperson, vise-chairperson and two members
C. A chairperson and two members
D. A chairperson, vice-chairperson and three members.

15. Standard-setting bodies also affect the provision of services in public accounting.
Local International
Accounting Standards FRSC IASB
Auditing Standards AASC IAASB

16. This committee is created to conduct an oversight into the quality of audits of financial
statements through a review of the quality control measures instituted by individual CPAs,
Firms or Partnerships.
A. Quality Review Council
B. Quality Control Committee
C. Quality Review Committee
D. Engagement Quality Control Review

17. The QRC shall have the following functions:

A. Conduct quality control review on applicants for registration to practice public
accountancy and render a report on such quality review.
B. Revoke the certificate of registration and professional ID of an individual CPA, firm, or
partnership of CPAs who have not observed quality control measures.
C. All of the answers
D. None of the answers
18. The Constitution of the Philippines requires this Office to “keep the general accounts of
the Government and for such period as may be provided by law, preserve the vouchers
pertaining thereto.”
A. National Accounting Office
B. Ministry of Finance
C. Commission on Audit
D. Accounting Units

19. The following are the duties of the Commission on Audit (COA), except:
A. Define the scope of its audit and examination
 B. Promulgate accounting rules and regulations
C. Keep the general accounts of the government
D. Assume fiscal responsibility for the government and its instrumentalities.

20. Which of the following is a correct qualification of the Chairman and Two Commissioners
of the COA?
A. A naturalized citizen of the Philippines
B. At least 40 years of age upon appointment
C. CPAs with no leas than 5 years of auditing experience or members of the Philippine
bar who have been engaged in law practice for at least 5 years.
D. Must not have been candidates for any elective position preceding
appointment.
AT- 07: QUALITY CONTROL

1. The policies and procedures adopted by a firm designed to provide it with reasonable
assurance regarding compliance with professional standards regulatory and legal
requirements, and appropriateness of reports issued by the firm:
A. Internal controls
B. Monitoring
C. Code of Ethics
D. Quality Controls

2. A basic objectives of a CPA firm is to provide professional services that conform with
professional standards. Reasonable assurance of achieving this basic objectives is
provided though
A. A system of peer review
B. Continuing professional education
C. System of quality control
D. Compliance with PSA

3. PSQC No. 1 applies to ____________, while PSA 220 applies to ____________.

A. Assurance engagements, audits
B. Audits, assurance engagements
C. Audits, reviews
D. Assurance, reporting

4. Which of the following are elements of quality control according to PSQC 1?

A. Leadership responsibilities
B. Relevant ethical requirements
C. Monitoring
D. All of the above
5. The firms leadership includes the following:
A B C D
 Chief executive officer Yes Yes No No
 Managing board of partners No Yes Yes No

6. Actions and messages that encourage culture of quality are communicated though:
A. Training, seminars, meetings, formal or informal dialogue, mission statements.
B. Newsletters and briefing memoranda, internal documentation and training materials.
C. Partners and staff appraisal procedures
D. All of the these

7. Ethical requirements to which the engagement team and engagement quality control
reviewer are subject, which ordinarily comprise parts A and B of the Code of Ethics
together with national requirements that are more restrictive.
A. Fundamental principles
B. Relevant ethical requirements
C. Client screening criteria
 D. Pre-conditions to an audit

8. The following are the fundamental principles of professional ethics, except:

A. Independence
B. Professional competence and due care
C. Objectivity
D. Integrity

9. Which of the following to self-interest threat?

A. This may occur as a result of the financial or other interests of a professional
accountant or close family member
B. This may occur when a previous judgement need to be re-evaluated by te
professional accountant responsible for that judgement
C. This may occur when a professional accountant promotes a position or opinion to the
point that subsequent objectivity may be compromised
D. This may occur when, because of a close relationship, a professional accountant
becomes too sympathetic to the interest of the others

10. The firm should obtain written confirmation of compliance withs its policies and
procedure on independence from all firm personal required to be independent by the
Code of Ethics at least:
A. Monthly
B. Quarterly
C. Annually
D. Every 3 years

11. By obtaining confirmation and taking appropriate action on information indicating

noncompliance, the firm demonstrates the importance that it attaches to independence
and makes the issue current, and visible to, its personnel. Written confirmation:
A. May be in paper format only
B. May be in electronic format only
C. May be in paper form or electronic form.
D. Is not required since oral confirmation will suffice per PSQC1.

12. The familiarity threat that may be created by using the same senior personnel o an
assurance engagement over a long period of time and the safeguards that may be
appropriate to address such a treat. Accordingly , safeguards may include:
A. Rotation of senior personnel
B. Engagement quality control review
C. Both A and B
D. Neither A or B

13. With regard to the integrity of a client, matters the firm considers include the following:
A. The identity and business reputations client’s principal owners, key management,
related parties and those charged with its governance.
B. The nature of the client’s operations, including its business practices.
 C. Information concerning the attitude of the client’s principal owners, key management
and those charged with its governance towards such matters as governance towards
such matters as aggressive interpretation of accounting standards and the internal
control environment.
D. All the answers

14. A CPA, while performing an audit, strives to achieve independence in appearance in

order to
A. Reduce the risk and the liability of the auditor
B. Comply with the requirements of the various regulators
C. To achieve independent in fact
D. Maintain public confidence in the profession

15. A CCPA, establishes quality control policies and procedures for deciding whether to
accept new client or continue to perform services for a current client. The primary
purpose for establishing such policies and procedures is
A. To enable the auditor to attest to the integrity or reliability of the client
B. To comply with the quality control standards established by regulatory bodies
C. To lessen the exposure to litigation resulting from failure to detect irregularities in
client financial statements
D. To minimize the likelihood of association with client whose management lacks
integrity

16. 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 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 both the engagement and the client relationship
D. Continue the engagement, sine the Code of the Ethics requires started
engagement to be finished regardless of subsequent developments and
information

17. When a firm withdraws from an engagement, the firm may have reportorial
responsibilities to the following:
A B C D
 Appropriate level of management Yes Yes Yes Yes
 Those charged with governance Yes Yes No No
 Regulatory authorities Yes No No Yes

18. Personal issue that must be addressed by the system of quality control include the
following:
A. Recruitment and performance evaluation
B. Capabilities and competence
C. Career development and promotion
 D. Compensation and estimation of personal needs
E. All of the answers.

19. Which of the following methods are most likely to develop capabilities and competence?
A. Professional education
B. Continuing professional development, including training.
C. Work experience and coaching by more expensive experienced staff
D. Self-study modules on professional accounting and auditing literature
E. All of the answers.

20. Engagement supervisions includes:

A. Tracking the progress of the engagement.
B. Considering the capabilities and the competence of individual members of client
personnel.
C. Addressing all issues arising during the engagement and modifying the planned
approach appropriately.
D. Identifying matters for consultation or considering by less experienced engagement
team members during the engagement.

21. A reviewers responsibilities shall include the following except:

A. The work has been performed in accordance with GAAP
B. Consultation with experts has been made of all phases of the engagement
C. The worked performed supports the conclusions reached and is appropriately
documented;
D. Whether the system of quality control is operating effectively and adequately

22. In a certain audit engagement, several key members of the engagement team had
differences of opinion regarding a certain matter. In this case:
A. The engagement partner shall issue a disclaimer of opinion due to scope of imitation
B. An increase in the audit free will be requested due to the extension of the time
required to complete the engagement
C. Documentation will be made regarding the unresolved matter, and the author will
withdraw from the engagement altogether
D. The report shall not be issued until the matter is resolved

23. This is review that provides an objective evaluation of the significant judgements made
by the engagement team and the conclusions reached in formulating the report.
A. Engagement quality review
B. Engagement judgement review procedures
C. Peer review
D. System of quality control

24. An engagement quality control review is required to be performed:

A. Immediately after the re-assessment of control risk
B. For all the audits of financial statements listed entities
C. For all types of audits, regardless of the subject matter of the engagement
D. At engagement completion after the report is issued
25. A partner, other person in the firm, suitability qualified external person, or a team made
up of such individuals, with sufficient and appropriate experience and authority to
objectively and the conclusions they reached in formulating the report.
A. Engagement partner
B. Engagement quality control reviewer
C. Personnel
D. Suitability qualified external person
26. An individual outside the firm with the capabilities and the competence to act as an
engagement partner, for example a partner of another firm, or an employee (with
appropriate experience) of either professional accountancy body whose members ma
perform audits and reviews of historical financial information, or other assurance or
related services engagements, or of an organization that provides quality control
services.
A. Suitability qualified external person
B. Partner
C. Engagement partner
D. Engagement quality control reviewer
27. What aspects are most important in determining the eligibility of engagement quality
control reviewers?
A. Technical qualifications and objectivity.
B. Integrity and objectivity.
C. Competence and independence.
D. All of these
28. Original paper documentation may be scanned and stored electronically for practical
reasons. After scanning, the original paper document:
A. Shall be discarded following stablished principles on waste disposal.
B. Shall be kept on fie for future reference.
C. Shall be considered for retention or disposal depending on legal or regulatory
requirements and other factors.
D. None of these

29. In the case of the audit, final engagement files should be completely assembled not
more than days after of the audit report:
A. 60
B. 30
C. 10
D. 5

30. The normal retention period for audit engagement documentation is no shorter than
from the date of the audit report.
A. Two years
B. Four years
C. Five years
D. Seven years
31. The process compromising an ongoing consideration and evaluation on the firm’s
system of quality control, including a periodic inspection of a selection of completed
engagements, designed to enable the firm to obtain reasonable assurance that its
system of quality control is operating effectively.
A. Inspection
B. Engagement quality control reviewer
C. Quality reviewer
D. Monitoring

32. In relation to completed engagements, these are procedures designed to provide

evidence of compliance by engagement teams with the firm’s quality control policies and
procedures.
A. Inspection
B. Quality control
C. Monitoring
D. Engagement quality control reviewer

33. The inspection of a selection of completed engagements is ordinarily performed on a

cyclical basis. Engagements selected for the inspection include at least:
A. One engagement for each engagement partner over an inspection cycle.
B. Two engagement for each engagement partner over an inspection cycle.
C. One engagement for each firm over an inspection cycle.
D. Two engagement for each firm over an inspection cycle.

34. An Inspection cycle ordinarily spans no more than:

A. One year
B. Two years
C. Three years
D. Four years

35. The firm should be communicate the results of the monitoring of its quality control
system to engagement partners and other appropriate individuals within the firm at least
every:
A. Six months
B. 12 months
C. Two years
D. Three years

36. John and Co. is a firm of a certified public accountants. One of the partners, Mr. Grant
has instructed a senior director, Collin to conduct inspection (cold review) of two past
audits; MPA Corporation and DPA Corporation. Collin was one of the team members of
the MPA engagement team. He had also assisted one of the partners in performing the
hot review. If you are Collin would you conduct the inspection?
A. Yes, as Collin is a better position to conduct the inspection, because of his previous
experience with the engagements.
 B. Yes, PSQC 1 did not mention any prohibition relating to members of the engagement
team conducting inspection.
C. No, Collin should not conduct the inspection of these engagements ass he has
been associated with them is some manner.
D. No, Collin does not have the necessary competence as he is only a director,
inspection must be performed by an audit partner.

37. Anthony and Company is a firm of Certified Public Accountants which has two partners,
Anthony and Hooper. In the current year the firm celebrated its 5th in practice. Two
partners, had a system of quality control from the beginning which has ensured that
each audit is conducted satisfactorily. However the partners have never monitored the
functioning of the quality control system. Is the firm require to implement policies and
procedures in monitoring completed engagement?
A. Yes, PSQC 1 requires that the firm must have policies and procedures in
monitoring its quality control policies and procedures.
B. Yes, but since the firm is composed only two partners, they can perform the
monitoring once every 5 years.
C. No, PSQC 1 does not require monitoring within the firm, since the firm is required to
renew its accreditation with BOA once every three years.
D. No, since the firm is small practice and PSQC 1 does not require monitoring for mall
practice.

38. ABC Company has just completed its annual independence review. Gerry the partner in-
charge for the independence is reviewing a completed copy of the independence
declaration form and noticed that Miss Rita an audit manager declared that his husband
was newly hired as a controller of a company where Miss Rita is the engagement
manager. As partner in-charge for independence what is the best course of action to
take in the situation?
A. Discuss the matter with Miss Rita and the engagement partner and ensure that all
work done by Miss Rita are properly reviewed by the engagement partner.
B. Assigned an engagement quality control reviewer to ensure that all judgement by
Miss Rita are reviewed and ensure she remains objective.
C. Transfer Miss Rita to another engagement to reduce risk of non-compliance
with the independence requirement.
D. Discuss the matter with management and those charged with governance and if they
agree to continue with Miss Rita as audit manager, then should continue managing
the engagement.

39. In performing an acceptance and continuance procedures for a newly accepted

engagement, Ace a new partner in the firm should obtain information relating to:
I. The integrity of the clients management
II. Independence of the firm
III. Competency to serve the client appropriately

A. I and II only
B. II and III only
C. I and II only
 D. I, II and III

40. Who is responsible for forming a conclusion on compliance with independence

requirements that apply to the audit engagements?
A. Audit staff
B. Audit supervisor
C. Engagement supervisor
D. Engagement partner
AT-08: FS AUDIT PROCESS – PRE ENGAGEMENT

1. According to ISQC 1, which of the following is not a consideration for acceptance and
continuance of client relationships?
A. The firm is competent to perform the engagement.
B. The firm can comply with the relevant ethical requirements.
C. The firm has considered the integrity of managements.
D. None of the above.

2. The following are considered by CPA firm in deciding whether to accept a new client,
except:
A. The client’ financial ability.
B. The client’s relations with its previous CPA firm.
C. The client’s standing in the business community.
D. The client’s probability of achieving an unqualified opinion.

3. Before accepting an audit engagement , a successor auditor should make specific

inquiries of the predecessors auditor regarding:
A. Disagreements which the predecessors had with the client concerning auditing
procedures and accounting principle.
B. The predecessor’s evaluation of matters of continuing accounting significance.
C. The degree of cooperation the predecessors received concerning the inquiry of the
client’s legal counsel.
D. The predecessor’s assessments of inherent risk and judgement about materiality.

4. 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 or facts that might bear on the
integrity of management.
B. Accept the engagement but only after an equitable increase in the professional fee.
C. Issue a disclaimer of opinion because the limited response of the predecessor auditor
constitutes a significant scope limitation.
D. Inquire as to the reasons and consider the implications in deciding whether to
accept the engagement.

5. S1 Independence must be consider in deciding whether to accept a company as an audit

client.
S2 Only partners are required by the Code of Ethics to be independent from their
assurance client.
A. True, False
B. B. False, True
C. True, True
D. False, False

6. To emphasize auditor independence from management, many corporations follow the

practice of
 A. Appointing a partner of the CPA firm conducting the audit to the corporation’s audit
committee.
B. Establishing a policy of discouraging social contract between employees of the
corporation and staff of the independent auditor.
C. Requesting that a representative of the independent auditor be on hand at the annual
stockholder’s meeting.
D. Having the independent auditor report to an audit committee of outside members of
the board of directors.
7. After client acceptance, the terms of the engagement are agreed by the auditor with the
client.
A. Independent auditor’s report.
B. Audit engagement letter.
C. Client’s representation letter
D. Audit program

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

A. Remind management that the primary responsibility for the ES rests with
management.
B. Provide a written record of the agreement with the client as to the services to
be provided.
C. Provide a starting point for the auditor’s preparation of the preliminary audit program.
D. Satisfy the requirements of the CPA’s liability insurance policy.

9. The engagement letter will do one, some, or all of the following:

A B C D
1.State whether the CPA will perform audit review or compilation services. Yes Yes Yes Yes
2.State whether the CPA will perform tax or management advisory or other Yes Yes No Yes
services.
3.State any restriction to be imposed on the CPA’s work. No Yes Yes Yes
4.Identify deadlines for completing the work. Yes Yes No Yes
5.State the amount and type of work to be done by client’s personnel in generating No No Yes Yes
auditor’s work papers.
6.State that CPA’s fees for the engagement. Yes Yes No Yes
7.Inform the client that the CPA does not have responsibility for detecting fraud. No No Yes Yes

10. Which of the following is least likely to be included in an audit engagement letter?
A. Identification of specific audit procedures that the auditor needs to undertake.
B. Description of any letters or reports that the auditor expects to submit to the client.
C. A reference to the internet inherent limitations of an audit that there is an unavoidable
risk that some material misstatements may remain undiscovered.
D. Basis on which fees are computed and any billing engagement.

11. Which of the following factors need to be considered in deciding whether to send a
separate engagement letter to a component (in the case of group audits)?
A. Who appoints the auditor of the component.
B. Legal requirements.
C. Whether a separate audit record is to be issued on the component.
 D. All of the above are considered.

12. Which of the following situations will there be a need to send a new letter for recurring
engagements?
A. Revision 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. All of the above are situations that may cause the auditor to send a new letter.

13. The following may lead the client to request for a change in engagement.
A. Restriction on the scope of the engagement.
B. Misunderstanding as to the nature of an audit or related service originally requested.
C. Change in circumstances affecting the need for the service.
D. All of the answer.

14. Where the client is changing auditors, PSA requires communication between the
predecessor and successor auditors. The burden of initiating the communication rest
with:
A. The client.
B. The predecessor auditor
C. The Philippines SEC.
D. The successor auditor.

15. If a change in the type of the engagement from higher to lower level of assurance is
reasonably justified, the report based on the revised engagement:
A. Should qualify the opinion due to a scope limitation.
B. Omits reference to the original engagement.
C. Should always refer to any procedures that may have been performed in the original
engagement.
D. Should refer to the original engagement in a separate paragraph preceding the
opinion paragraph.

16. If a change in the type of engagement from higher to lower 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.

17. According to ISA 220, which of the following information is not necessary for the
engagement partner to consider in client acceptance and continuance decisions?
A. Integrity of minority and non-controlling owners.
B. Comprehensive of engagement team.
C. Engagement team’s compliance with ethical requirements.
D. Significant matters with implications to continuing client relationship.
AT-09: FS AUDIT PROCESS – AUDIT PLANNING

1. This refers to the development of a general strategy and a detailed approach for the
expected nature, timing and extent of audit refers to:
A. Supervision
B. Direction
C. Audit planning
D. Pre-engagement

2. Which of the following is not a purpose of proper planning?

A. Appropriate attention is devoted to important areas of the audit
B. Potential problems are identified
C. Work is completed expeditiously
D. An unqualified opinion is expressed

3. The outputs of auditing are:

A. An overall audit strategy that sets out the direction, scope and focus of the audit
team’s efforts
B. A detailed audit plan containing the nature, extent and timing of risk assessment
procedures and planned further audit procedures at the assertion level
C. Audit programs, tailored as needed to reflect the particular engagement
circumstances
D. All of the above

4. An audit plan contains the nature, extent and timing of procedures for gathering
evidence. Regarding audit procedures, which of the following best describes risk
assessment procedures?
A. This category of procedures is used to obtain 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.
B. This category of procedures is used to test the operating effectiveness of controls in
preventing, or detecting and correcting, material misstatements at the assertion level
C. This category of procedures is used to detect material misstatements at the assertion
level
D. All of these statements describe risk assessment procedures

5. The extent of planning will vary according to the following:

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. All of these affect the extent of planning

6. PSA 315 requires:

A. Obtaining an understanding of the entity and its environment
B. Discussion among the engagement team members about the risk of material
misstatement in the financial statements
C. Identifying and assessing the risks of material misstatement
D. All of the answers
7. The auditor’s understanding of the entity and its environment consists an understanding
of the following aspects:
A. Industry, regulatory and other external factors, including the applicable financial
reporting framework
B. Nature of the entity, including the entity’s selection and application of accounting
policies
C. Objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements
D. All of these

8. An auditor obtains an understanding of the entity and its environment in order to

A. Make constructive suggestions concerning improvements to the client’s internal
control
B. Develop an attitude of professional skepticism concerning management’s financial
statement assertions
C. Evaluate whether the aggregation of known misstatements causes the financial
statements taken as a whole to be materially misstated
D. Understand the events and transactions that may leave have an effect on the
client’s financial statements

9. A person or firm possessing special skill, knowledge and experience in a particular field
excluding accounting and auditing
A. Expert
B. Quality control reviewer
C. Multi-skilled personnel
D. Taxation specialist

10. In which of the following situations would an expert be least likely contracted by a CPA?
A. Application of accounting methods in computing inventory balances
B. Determination of fair values using specialized statistical techniques
C. Legal opinions concerning interpretations of engagements, statues and regulations
D. Valuations of certain types of assets like land and buildings

11. Religious Corp. has a few large accounts receivables that total P1,000,000. Pilgrim
Corp. has a large number of small accounts receivable that also total P1,000,000. The
importance of an error in any one account is, therefore, greater for Religious Corp. than
the Pilgrim Corp. This is an example of the auditor’s concept of:
A. Materiality
B. Comparative analysis
C. Reasonable assurance
D. Relative risk

12. In considering materiality for planning purposes an auditor believes that misstatements
aggregating P10,000 would have a material effect on an entity’s profit and loss, but that
misstatements would have to aggregate P20,000 to materially affect the statement of
financial position. Ordinarily, it would be appropriate to design auditing procedures that
would be expected to detect misstatements that aggregate:
A. P30,000
B. P20,000
C. P15,000
D. P10,000
13. When the auditors allocate the preliminary judgment about materiality to account
balances, the materiality allocated to any given account balance is referred to as:
A. The error range
B. The materiality range
C. Tolerable misstatement
D. Tolerable materiality

14. Regardless of how the allocation of the preliminary judgment about materiality was done,
when the audit is complete the auditor must be confident that the combined errors in all
accounts are
A. Less than the preliminary judgment
B. Equal to the preliminary judgment
C. More than the preliminary judgment
D. Less than or equal to the preliminary judgment

15. The relationship between materiality and audit risk is:

A. Direct
B. Inverse
C. Indeterminable
D. None of these

16. When setting a preliminary judgment about materiality

A. More evidence is required for a low peso amount than for a high peso amount
B. Less evidence is required for a low peso amount than for a high peso amount
C. The same amount of evidence is required for either low or high peso amounts
D. There is no relationship between it and the peso amount of evidence needed

17. These are events or conditions that provide an opportunity, a motive or a means to
commit fraud, or indicate that fraud may already have accured
A. Audit risk
B. Fraud risk factors or red flags
C. Risk of material misstatement
D. Fraud indications

18. Which of the following characteristics most likely would heighten an auditor’s concern
about the risk of intentional manipulation of financial statements?
A. Turnover of senior accounting personnel is low
B. Insiders recently purchased additional shares of the entity’s stock
C. Management places substantial emphasis on meeting earnings projections
D. The rate of change in the entity’s industry is slow

19. This refers to acts of omission or commission by the entity being audited which are
contrary to prevailing law or regulations
A. Fraud
B. Error
C. Non-compliance
D. Misstatements

20. With respect to errors and irregularities, the auditor should plan to
 A. Search for errors that would have a material effect and for irregularities that would
have either material or immaterial effect on the financial statements.
B. Search for irregularities that would have a material effect and for errors that would
have either material or immaterial effect on the financial statements.
C. Search for errors or irregularities that would have a material effect on the
financial statements.
D. Discover errors or irregularities that have either material or immaterial effect on the
financial statements.

21. The auditor should remain alert for evidence of events or conditions which may cast
significant doubt on the entity’s ability to continue as a going concern:
A. During planning and consideration of internal controls
B. During interim audit work
C. During year-end audit work
D. All of the answers.

22. Which one of the following factors is not a good indicator of potential financial failure?
A. Client is constantly short of cash and working capital.
B. Client’s retained earnings were reduced by half as a result of a large dividend
payout.
C. Client relies heavily on debt financing, especially by financing permanent assets with
short-term loans.
D. Client has had increasing net losses for several years.

23. 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

24. Analytical procedures used in planning should focus on:

A. Evaluating the adequacy of evidence gathered concerning unusual balances.
B. Testing individual account balances that depend on accounting estimates
C. Enhancing the auditor’s understanding of the client’s business.
D. Identifying material weaknesses in the control structure.

25. 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.

26. The establishment of the overall audit strategy involves:

A. Determining the characteristics of the engagement that defines it’s scope.
B. Ascertaining the reporting objectives of the engagement to plan the timing of the
audit and the nature of the communications required.
C. Considering the important factors that will determine the focus of the engagement
team’s efforts.
D. All of the answers.
27. With respect to planning an audit, which of the following statements is always true?
A. It is acceptable to perform a portion of the audit of a continuing client at
interim dates.
B. An engagement should not be accepted after the client’s year-end.
C. An inventory count must be observed at year-end
D. Final decisions must be made prior to completion of the planning stage.

28. The element of the audit planning process most likely to be agreed upon with the client
before implementation of the audit strategy is the determination of the
A. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
B. Procedures to be undertaken to discover litigation, claims, and assessments.
C. Pending legal matters to be included in the inquiry of the client’s attorney
D. Timing of inventory observation procedures to be performed.

29. Which of the following is not typically included in initial audit planning?
A. Client acceptance/continuation decisions.
B. Determination of the purpose of the audit.
C. Obtain an understanding with the client
D. Perform analytical procedures as substantive tests.

30. Which of the following is least likely considered by the auditor in establishing the overall
audit strategy and developing the audit plan?
A. Understanding of the accounting and internal control systems.
B. Risk and materiality.
C. The involvement of the other auditors in the audit of major subsidiaries.
D. The terms of payment pertaining to other auditors and their respective clients.

31. Which of the following is not considered by the CPA when he makes an overall audit
plan?
A. Identification of complex accounting areas including those involving accounting
estimates.
B. The effect of information technology on the audit.
C. The content of the representation letters.
D. The nature and timing of reports and other communication with the entity that are
expected under the engagement.

32. This is a listing of all the things which the auditor will use to gather sufficient appropriate
audit evidence:
A. Audit procedures
B. Audit plan
C. Audit program
D. Audit risk model

33. 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.
34. In designing audit programs, an auditor should establish specific audit objectives that
related primarily to the
A. Timing of audit procedures
B. Cost-benefit of gathering evidence
C. Selected audit techniques
D. Financial statement assertions.

35. The audit program should set out the:

A. Nature of planned procedures
B. Timing of planned procedures
C. Extent of planned procedures
D. All of the answers

36. Cost-benefit considerations are part of audit planning. In relation to this, which of the
following audit procedures is usually the least costly to perform?
A. Tests of balances
B. Substantive tests of transactions
C. Analytical procedures
D. Tests of controls

37. 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 signed by the auditor and the client.
C. Reportable conditions have been communicated to the audit committee
D. Search for unrecorded liabilities has been performed and documented

38. The senior auditor responsible for coordinating the field work usually schedules a per-
audit conference with the audit team primarily to
A. Give guidance to the staff regarding both technical and personnel aspects of
the audit.
B. Discuss staff suggestions concerning the establishment and maintenance of time
budgets.
C. Establish the need for using the work of specialists and internal auditors.
D. Provide an opportunity to document staff disagreements regarding technical issues.

39. Which of the following procedures is least likely performed in planning an FS 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

40. Which of the following statements is not a reason for utilizing analytical review
procedures?
A. To assess the entity’s ability to continue as a going concern
B. To identify areas with no unusual fluctuations so that fewer detailed tests may be
performed on those accounts
C. To highlight changes from the prior year to the current year so that trends can be
identified which will influence audit planning
D. To determine the magnitude of errors in the financial statements.
AT-10: UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENT

1. Which of the following is(are) the required area(s) of understanding of an audit client?
A. Relevant industry, regulatory, and other external factors including the applicable
financial reporting framework
B. Nature of the entity
C. Entity’s objectives and strategies, and those related business risk that may result in
risks of material misstatement
D. All of the above

2. When the continuing auditor intends to use information about the entity and its
environment obtained in prior periods, the auditor should:
A. Seek permission with the client in using the prior period information obtained by the
auditor.
B. Determine whether to equitably reduce the audit fee due to lower audit effort
expended during the engagement.
C. Determine whether changes have occurred that may affect the relevance of
such information in the current audit.
D. Assess control risk as “high” for the assertions affected by the prior period
information.

3. Relevant industry conditions include the following, except:

A. The market and competition, including demand, capacity and price competition.
B. Cyclical or seasonal activity
C. Product technology relating to the entity’s products
D. Regulatory framework for a regulated industry

4. Which of the following matters is not included under “regulatory environment”?

A. Accounting principles and industry specific practices
B. Legislation regulation that significantly affect the entity’s operations
C. Government policies currently affecting the conduct of the entity’s business
D. General level of economic activity (for example, recession, growth).

5. The nature of the entity refers to the following , except:

A. The entity’s operation, its ownership, and governance.
B. The types of investments that it is making and plans to make
C. The way that the entity is structured and how it is financed.
D. Other external factors, such as general economic conditions.

6. These are the operational approaches by which management intends to achieve its
objectives.
A. Strategies
B. Planning Methods
C. Business risk approaches
D. Operational plans

7. These result from significant conditions, events, circumstances, actions or inactions that
could adversely affect the entity’s ability to achieve its objectives and execute its
strategies.
A. Business failure
B. Information risk
 C. Business obstacles
D. Business risk

8. In obtaining an understanding of a client’s objectives, strategies and related business

risks, the auditor would most likely consider the following as business risks, except.
A. The entity does not have the personnel or expertise to deal with the changes in the
industry.
B. There is increased product liability
C. Demand has not been accurately estimated
D. The entity relies more on debt financing rather than equity financing
E. All of the above are considered
S1 Business risk is broader in scope than the risk of material misstatement.
S2 Most business risks have financial consequences and they may have an effect on
financial statements of an entity.
A. True, false
B. False, true
C. True, true
D. False, false

9. The auditor’s understanding of the entity’s selectin and application of accounting policies
encompasses the following: A. B. C. D.
 The methods the entity uses to account for significantYes Yes Yes Yes Yes
And unusual transactions
 The effect of significant accounting policies in controversial No Yes Yes No
or emerging areas for which there is a lack of authoritative
guidance or consensus.
 The changes in the entity’s accounting policies Yes No Yes No

10. S1 Performance measures and their review indicate to the auditor aspects of the entity’s
performance that management and others consider to be not of importance.
S2 The sources of information used in measuring and reviewing financial performance
consist of externally and internally-generated information.
A. True, false
B. False, true
C. True, true
D. False, false

11. Examples of matters an auditor may consider under measurement and review of the
entity’s financial performance include the following( select the exception ):
A. Key ratios and operating statistics
B. Use of information technology
C. Competitor analysis
D. Employee performance measures and incentive compensation policies.

12. According to PSA 315, the auditor should document:

A. The discussion among the engagement team
B. Key elements of the understanding obtained regarding each of the aspects of the
entity and its environment, including each of the internal control components.
C. The identified and assessed risks of material misstatement at the financial
statement level and at the assertion level, the risks identified and related controls
evaluated
 D. All of the choices

13. The form and extent of documentation is influences by the following:

A. Nature, size and complexity of the entity and its internal control
B. Availability of information from the entity
C. Specific audit methodology and technology used in the course of the audit
D. All of these factors affect the form and extent of documentation.
AT-11: UNDERSTANDING OF THE ENTITY’S INTERNAL CONTROL

1. This is the process designed and effected by those charged with governance,
management and other personnel to provide reasonable assurance about the
achievement of the entity’s objectives on financial reporting, operations and compliance.
A. Strategies
B. Operating Plans
C. Internal Control
D. Risk Assessment

2. 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.

3. According to PSA 315, the auditor uses the understanding of internal control to:
A. Identify types of potential misstatements.
B. Consider factors that affect the risk of material misstatement.
C. Design the nature, timing, and extent of further audit procedures (i.e., tests of
controls and substantive tests)
D. All of these.

4. In an audit or financial statement, an auditor’s primary consideration regarding a control

is whether it:
A. Enhances management’s decision making processes.
B. Reflects management’s philosophy and operating style.
C. Affects management’s financial statement assertions.
D. Provides adequate safeguards over access to assets.

5. What is the relationship between an entity’s objectives and the controls it implements to
provide reasonable assurance about the achievement?
A. Direct
B. Inverse
C. Adverse
D. Cannot be determined

6. The auditor would most likely to be concerned with internal control policies and
procedures that provide reasonable assurance about:
A. The efficiency of management’s decision making process
B. Appropriate prices the entity should charge for each products.
C. Methods of assigning production tasks to employees.
D. The entity’s ability to process and summarize financial data

7. These controls may also be relevant to the audit if the external auditor intends to make
use of company-produced information in designing and performing further audit
procedures (test of controls and substantive tests):
A. Controls over completeness and consistency.
B. Controls over existence and occurrence.
C. Controls over completeness and accuracy.
D. Controls over presentation and disclosure.
8. The following are components of internal control:
A. Organizational structure, management philosophy, and planning.
B. Legal environment of the firm, management philosophy, and organizational structure.
C. Risk assessment process, back up facilities, responsibility accounting and natural
laws.
D. Control environment, risk assessment process, control activities, information system
and communication, and monitoring.

9. 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 system’s to the
general ledger or the financial reporting system.
C. Policies and procedures that help ensure that management directives are carried
out.
D. This includes the governance and management functions and attributes, awareness,
and actions of those charged with governance and management concerning the
entity’s internal control and its importance to the entity.

10. Management’s attitude towards aggressive financial reporting and its emphasis on
meting projected profit goals most likely would significantly influence an entity’s control
environment when:
A. Management is dominated by one individual who is also a shareholder.
B. External policies established by parties outside the entity affects its accounting
practices.
C. The audit committee is active on seeing the entity’s financial reporting policies.
D. Internal auditors have direct access to the board of directors and entity management.

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

A. Identifies business risks relevant to financial reporting objectives.
B. Estimates the significance of the risks.
C. Assesses the likelihood of the occurrence of risks.
D. All of the choices.

12. Risks can arise or change due to circumstances such as the following, except:
A. There is a change in the regulatory or operating environment.
B. No 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 experienced significant
revision.

13. The information system consists of the following:

A. Infrastructure (physical and hardware components) and software.
B. People
C. Procedures and data
D. All of these.

14. The objective of the recording function of transactions (in the context of internal
accounting control) is to
 A. Limit access to assets and to permit preparation of financial statements in
accordance with GAAP.
B. Assure compliance with the rules of all regulatory bodies having jurisdiction over the
reporting entity.
C. Permit preparation of financial statements in accordance with GAAP and to maintain
accountability of assets.
D. Encourage operational efficiency and adherence to prescribed managerial policies.

15. Which of the following statements describe the processing function of an accounting
system?
A. Identifying and capturing the relevant information for transactions or events.
B. Editing and validation, calculating, measuring, valuing, summarizing, and reconciling
functions.
C. The preparation of financial reports as well as other information, in electronic or
printed format, that the entity uses in measuring and reviewing the entity’s financial
performance.
D. All of these statements describe the recording function.

16. Which of the following descriptions pertain to physical control?

A. Control activities that include reviews and analyses of actual performance versus
budgets, forecasts, and prior period performance.
B. Control performed to check accuracy, completeness, and authorization of
transactions.
C. Physical security of assets, including adequate safeguards such as secured facilities
over access to assets and records.
D. The assignment of incompatible functions to different people.
E. Control activities involving the specific or general authorization of a transaction.

17. Which of the following would be preventive controls?

A. The use of batch totals.
B. Reconciling the accounts receivable subsidiary file with the control account.
C. Requirement that two persons open mail.
D. Preparation of bank reconciliation.

18. An example of specific transaction authorization is the:

A. Setting of automatic reorder points.
B. Establishment of sales prices.
C. Establishment of a customer’s credit limits.
D. Approval of a construction budget for a new warehouse.

19. A proper segregation of duties requires:

A. That an individual authorizing a transaction should record it also.
B. That an individual authorizing a transaction maintain custody of the asset that
resulted from the transaction.
C. That an individual maintaining custody of an asset be entitled to access the
accounting records for the asset.
D. That the different individuals should handle custody, authorization and record-
keeping.

20. A process implemented by management to assess the effectiveness of internal control

performance over time.
 A. Monitoring of controls
B. Quality control system
C. Test of controls
D. Risk assessment procedures

21. An entity’s ongoing monitoring activities often include:

A. Periodic audits by the audit committee.
B. Reviewing the purchasing function.
C. The audit of the annual financial statements.
D. Control risk assessment in conjunction with quarterly reviews.

22. An effective internal control structure

A. Reduces the need for management to review exception reports on a day-to-day
basis.
B. Eliminates risk and potential loss to the organization.
C. Cannot be circumvented by management.
D. Is unaffected by changing circumstances and conditions encountered by the
organization.

23. 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 controls.

24. When an organization has a strong internal control structure, management can expect
various benefits. The benefit least likely to occur is
A. Reduces cost of an external audit.
B. Elimination of employee fraud.
C. Availability of reliable data for decision-making purposes and protection of important
documents and records.
D. Some assurance of compliance with SEC regulations.

25. 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.

26. Which of the following conditions supports strong internal control?

A. Strict monitoring by the Bureau of Internal Revenue
B. The existence of related parties and related party transactions.
C. Pressure by the financial community to improve earnings performance.
D. An economic downturn.
27. Which of the following pertains to the control environment?
A. Management has created and maintained a culture of honesty and ethical behavior.
B. The process in which operating activities are assigned.
C. Both a and b
D. Neither a nor b

28. Which of the following pertains to risk assessment?

A. An audit client’s process for identifying business risks relevant to the financial
reporting objective.
B. Business procedures, within both IT and manual systems, by which those
transactions are initiated, recorded, processed, corrected, transferred to the general
ledger and reported in the financial statements.
C. Client policies on limiting physical access to assets and records
D. All of the above.

29. Which of the following pertains to information systems?

A. An audit client’s process for identifying business risks relevant to the financial
reporting objective.
B. Business procedures, within both IT and manual systems, by which those
transactions are initiated, recorded, processed, corrected, transferred to the general
ledger and reported in the financial statements.
C. Client policies on limiting physical access to assets and records
D. All of the above.

30. Which of the following pertains to control activities?

A. An entity’s policy on assessing the likelihood of a specific risk’s occurrence.
B. Business procedures, within both IT and manual systems, by which those
transactions are initiated, recorded, processed, corrected, transferred to the general
ledger and reported in the financial statements.
C. Client policies on limiting physical access to assets and records.
D. An audit client’s process for identifying business risks relevant to the financial
reporting objective.

31. Which of the following is (are) a correct statement(s) for internal control systems of small
companies?
A. Elements of internal control for small entities may not be available in documentary
form.
B. Segregation of incompatible duties are often inadequate due to staff limitations.
C. The involvement of the owner-manager may be a compensatory control for the
inadequate segregation of incompatible duties.
D. All of the above.
AT-12: RISK ASSESSMENT AND RESPONSE TO ASSESSED RISKS

1. Set the following steps in proper order:

A. Determine the nature, extent and timing of substantive test
B. Make a preliminary control risk assessment
C. Obtain understanding of the entity and its environment
D. Determine the appropriate response to assessed risks
E. Re-assess control risk

2. Which of the following statements best describes the phrase, "evaluating the designs 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.

3. 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. Management may establish appropriate controls but not act on them.
B. The controls may be operating effectively but may not be documented.
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.

4. As part of obtaining understanding of internal controls, an auditor is not required to:

A. Consider factors that affect the risk of material misstatements.
B. Ascertain whether internal control policies and procedures, have been placed in
operation.
C. Identify the types of potential misstatements that may occur.
D. Obtain knowledge about the operating effectiveness of internal control.

5. Narratives, flowcharts, and internal control questionnaires are three commonly used
methods of
A. Designing the audit manual and procedures.
B. Testing the internal control structure.
C. Documenting the study of internal controls.
D. Documenting the auditor's understanding of client's organizational structure.

6. 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.

7. 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. Reporformance
B. Walk-through
C. Control test
D. Validity test

8. After obtaining a sufficient understanding of internal control, the auditor:

A. Assess the need to apply GAAS.
B. Determines the preliminary assessment of control risk.
C. Assesses detection risk to determine the acceptable level of inherent risk.
D. Determines the assessed levels of detection risk and inherent risk.

9. What are the different levels of risk assessment?

A. "High" and "Low"
B. "High" and "Less than High"
C. "Maximum" and "Minimum"
D. "Higher" and "Lower"

10. An auditor's preliminary control risk assessment is at a HIGH level. Which of the following
are possible reasons for this preliminary assessment?
I. The entity's internal control system is not effective
II. Evaluating the effectiveness of the entity's internal control system would not be
efficient
A. I only
B. II only
C. Both I and II
D. Neither I and II

11. When control risk is assessed at less than high for all financial statements assertions, can
auditor should document the auditor's
A B C D

 Understanding of the entity's internal control Yes Yes No Yes

structure

 Conclusion that control risk is less than high No Yes Yes Yes
 Basis for the conclusion that control risk is less Yes Yes No No
than high

12. Overall responses to address the risks of material misstatements at the financial
statement level include:
A. Emphasizing to the audit team that need to maintain professional skepticism in
gathering and evaluating audit evidence.
B. Assigning more experienced staff or those with special skills or using experts
 C. Incorporating additional elements of unpredictability in the selection of further audit
procedures.
D. All of the answers.

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

A. Operating effectively
B. Placed in operation or implemented
C. Properly incorporated in the financial statements.
D. Properly documented by the client.

14. S1 Tests of controls are necessary if the auditor plans to use the primarily substantive
approach
S2 Test of controls are necessary if the auditor plans to assess the level of control risk at
a high level.

A. True, true
B. False, false
C. True, false
D. False, true

15. If the auditor anticipates reliance on the client's internal controls, the auditor would:
A. Test controls and use the results of testing as a basis of for determining the
nature, extent and timing of substantive tests.
B. No longer perform tests of controls and proceed immediately to substantive tests.
C. Perform tests of controls and increase the amount of substantive tests.
D. Eliminate the need for performance of substantive tests.

16. After documenting internal control in an audit engagement, the auditor may perform tests
on:
A. Those controls that the auditor plans to rely on.
B. Those controls in which deficiencies or weaknesses were identified.
C. Those controls that have a material effect on the balances in the financial statements.
D. Those controls that were reviewed (selected on a random basis).

17. 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
budgeted amount.
D. Inspection of documentary support for transactions evidencing authorization.

18. After considering a client's internal control structure, an auditor has concluded that it is
well designed and is functioning as intended. Under these circumstances the auditor
would most likely
A. Perform tests control to the extent outlined in the audit program.
B. Determine the control procedures that should prevent or detect errors and
irregularities.
C. Not increase the extent of predetermined substantive tests.
D. Determine whether transactions are recorded to permit preparation of financial
statements in conformity with generally accepted accounting principles.
19. If the auditor wants to perform more effective substantive tests, auditor will perform:
A. More test of details (transactions and balances) and less analytical procedures.
B. More analytical procedures and less test of details (transactions and balances).
C. Test of details and analytical procedures in equal procedures.
D. Neither test of details nor analytical procedures.

20. Which of the following is a correct response of the auditor when he allows a lower
acceptable level of detection risk?
Nature of substantive tests Timing of substantive tests Extent of substantive tests
A. A. Less effective Year-end More extensive
B. B. Less effective Interim Less extensive
C. C. More effective Year-end More extensive
D. D. More effective Interim Less
extensive

21. The audit risk model is used primarily:

A. For planning purposes in determining how much evidence to accumulate.
B. While doing tests of controls.
C. To determine the type of opinion to express.
D. To evaluate the evidence which has been gathered.

22. Which of the following equations best describes the audit risk model?
A. AR=A+L+C
B. B.AR=(IR×CR)/DR
C. C.AR=(IR×DR)/CR
D. D.AR=IR×CR×DR

23. Inherent risk and control risks differ from detection risk in that inherent risk and control
risk are
A. Elements of audit risk while detection risk is not.
B. Changed at the auditor's discretion while detection risk is not.
C. Considered at the individual account balance level while detection risk is not.
D. Functions of the client and its environment while detection risk is not.

24. Which of the following is not a consideration when the auditor is attempting to assess the
inherent risk?
A. Nature of the client's business.
B. Existence of related parties.
C. Frequency and intensity of top management review.
D. Susceptibility to defalcation.

25. Inherent risk is reduced when the likelihood of defalcation is low. This would be true for
an account such as:
A. Property, plant and equipment
B. Held for trading securities
C. Cash
D. Accounts receivable

26. When the auditor assesses inherent risk, he considers among others the follwing factors,
except:
 A. Integrity of management.
B. Nature of the entity's business.
C. Unusual pressures on management.
D. Results of interim tests.

27. Which of the following is an incorrect statement?

A. Detection risk is a function of effectiveness of an auditing procedure and its
application.
B. Detection risk arises partly from uncertainties that exist when the auditor does not
examine 100 percent of the population.
C. Detection risk arises partly because of other uncertainties that exist even if the auditor
were to examine 100 percent of the population.
D. Detection risk exists independently of the audit of financial statements.

28. The acceptable level of detection risk (ADR) and the combined level of inherent risk (IR)
and control risk (CR) are____
A. Directly
B. Inversely
C. Proportionately
D. Not

29. The audit risk model consists of: AR=IR×CR×DR. The detection risk is the dependent
variable. What is the acceptable level of detection risk if the assessed level of inherent
risk is high and the control risk is medium?
A. Lowest
B. Lower
C. Medium
D. Higher

30. Which of the following pertains to detection risk?

A. An entity's asset custodian and record-keeping function for cash are handled by one
process owner.
B. An entity operates in a highly complex business environment.
C. An auditor uses substantive analytical procedures instead of test of balances.
D. None of the above.
AT-13: FURTHER AUDIT PROCEDURES (TESTS OF CONTROLS)
1. Which of the following is ordinarily a test of internal control procedure?
A. Examination of signatures on checks.
B. Count and list cash on hand.
C. Sending confirmation letters to banks.
D. Obtain or prepare reconciliation statements of bank accounts as of the balance sheet
date.

2. Which of the following is least likely to be evidence the auditor examines to determine
whether operations are in compliance with the internal control structure?
A. Records documenting usage of IT programs.
B. Confirmations of accounts receivable.
C. Canceled supporting documents.
D. Signature on authorization forms.

3. Tests of controls are concerned primarily with each of the following questions:
I. How were the controls applied?
II. Were the necessary controls consistently performed?
III. By whom were the controls applied?
A. A, B, C. C. B and C.
B. A and B. D. A and C.

4. It is most appropriate that tests of controls be applied to transactions and controls:

A. At the balance sheet date.
B. At each quarterly interim period.
C. For the entire period under audit.
D. At the beginning of the fiscal year.

5. Gem, CPA is considering reliance on the internal controls of Lime Manufacturing Inc. for
the 2012 audit. If Gem obtains audit evidence about the operating effectiveness of
controls during the interim period, Grace should:
A. Rely on the operating effectiveness of these controls up to period end.
B. Determine what additional audit evidence should be obtained for the remaining
period.
C. Should assess risk as HIGH for the remaining period.
D. Should rely on controls for the interim audit, but not for the year-end work.

6. In testing controls, it is best to remember this statement: “The basic components of

business operations and the primary subject matter of internal accounting control are:
A. Assets.” C. Transactions.”
B. Control methods and behavior.” D. Employees.”

7. When controls leave no documentary evidence or trail:

A. It is impossible for the auditor to verify them so he/she will have to rely on substantive
tests.
B. The only thing available as verification of their effectiveness is inquiry of
management.
C. The auditor generally observes them being applied.
D. It is impossible to audit that area of the client’s system.
8. Audit evidence concerning segregation of duties ordinarily is best obtained by:
A. Performing tests of transactions that corroborate management’s financial statement
assertions.
B. Observing the employees as they apply specific controls.
C. Obtaining a flowchart of activities performed by available personnel.
D. Developing audit objectives that reduce control risk.

9. The objective of dual-purpose tests is to:

A. Evaluate whether internal controls are operating effectively.
B. Detect material misstatement in the client’s financial statements.
C. Identify unusual trends or patterns in comparative financial statements.
D. Test internal controls as well as transactions and balances using the same test
procedures.

10. When the auditor identifies an area of the accounting system with missing controls i.e., a
material weakness, this would lead to a modification of the audit program in that area
that would:
A. Increase the amount of tests of controls.
B. Increase the reliance on tests of controls.
C. Cause the issuance of a qualified or adverse opinion.
D. Eliminate the need for a test of controls.

11. If the auditors do NOT perform tests of controls of certain assertions:

A. They have performed a substandard audit.
B. They are not required to communicate reportable conditions relating to those
accounts to management.
C. They must issue a qualified opinion.
D. They must assess control risk at the MAXIMUM level for those assertions.

12. Tests of controls are least likely to be omitted with regard to:
A. Accounts believed to be subject to ineffective control activities.
B. Accounts representing few transactions.
C. Accounts representing many transactions.
D. Subsequent events.

13. 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 __________ control.
A. Conditional
B. Limited
C. Compensating
D. Offset

14. When a compensating control exist, a weakness in the system:

A. Is no longer a concern because the potential for misstatement has been
sufficiently reduced.
B. Is reduced but 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 examine in its
entirety.
15. During the review of a small business client’s internal control system, the auditor
discovered that the accounts receivable clerk approves credit memos and has access to
cash. Which of the following controls would be most effective in offsetting this
weakness?
A. The owner reviews errors in billings to customers and postings to the subsidiary
ledger.
B. The controller receives the monthly bank statement directly and reconcile the
checking accounts.
C. The owner reviews credit memos after they are recorded.
D. The controller reconciles the total of the subsidiary ledger to the amount shown in the
general ledger.

16. If evidence was obtained in the prior year’s audit that indicates a key control was
operating effectively:
A. It will unnecessary to test that control this year.
B. The tests of that control will be reduced this year.
C. The extent of tests of that control may be reduced this year if the auditor
determines that it is still in place.
D. The auditor would not test this area again this year.

17. If no changes have occurred since the controls were last tested, a CPA should:
A. Rely on the prior year audit’s management 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.

18. PSA 265 states that the auditor is to communicate deficiencies in internal control that the
auditor has identified during the audit and that in the auditor’s judgment, are of sufficient
importance to merit the respective attention of the following:
A. Management only
B. Those charged with governance only
C. Management and those charged with governance
D. Management and those charged with governance, and the Securities and Exchange
Commission

19. Reportable conditions are matters that come to an auditor’s attention, which should be
communicated to an entity’s audit committee because they represent:
A. Material irregularities or illegal acts perpetrated by high-level management.
B. Significant deficiencies in the design or operation of the internal control
structure.
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 field work.

20. Which of the following statements concerning material weaknesses and reportable
conditions is correct?
A. An auditor should identify and communicate material weaknesses separately from
reportable conditions.
B. All material weaknesses are reportable conditions.
 C. An auditor should report immediately material weaknesses and reportable conditions
discovered during and audit.
D. All reportable conditions are material weaknesses.

21. The auditors who become aware of an internal control reportable condition are required
to communicate this to the:
A. Audit committee and client’s legal counsel.
B. Board of directors and internal auditors.
C. Audit committee.
D. Internal auditors.

22. A deficiency in internal control exists when:

A B C D
 A control is designed, implemented or operated in such
a way that it is unable to prevent, or detected and Yes Yes No No
correct, misstatements in the FS on a timely basis.
 A control necessary to prevent, or detect and correct,
misstatements in the FS on a timely basis is missing. No Yes Yes No

23. A deficiency or combination of deficiencies in internal control that, in the auditor’s

professional judgment, is of sufficient importance to merit the attention of those charged
with governance.
A. Reportable condition
B. Acute deficiency in control
C. Significant deficiency in internal control
D. Material control deficiency

24. Significant deficiencies in internal control are to be communicated:

A. Orally, but also in writing
B. In writing
C. Orally or in writing
D. Under in circumstances

25. 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.

26. When reporting on conditions relating to an entity’s internal control structure observed
during an audit of the financial statements, the auditor should include a
A. Description of tests performed to search for material weaknesses.
B. Statement of a positive assurance on the structure.
C. Paragraph describing the inherent limitations of the structure.
D. Restriction on the distribution of the report.

27. S1: The most important control for petty cash is that two individuals maintain joint
custody of the asset.
S2: The most important control for petty cash is the use of an imprest fund.
A. True, True
 B. False, False
C. True, False
D. False, True

28. For effective internal control, employees maintaining the accounts receivable subsidiary
ledger should not also approve:
A. Employee overtime wages
B. Write-offs of customer accounts
C. Cash disbursements
D. None of the above

29. Auditors are often concerned with three aspects of internal controls related to the sales
and collection cycle. Which of the following is not one of those controls?
A. Controls that detect or prevent embezzlements
B. Controls over cutoff.
C. Controls over acquisitions.
D. Controls related to the allowance for doubtful accounts.

30. Which of the following control objectives pertain to existence of trade receivables?
A. Recorded credit sales transactions are real and not fictitious.
B. Recorded credit sales transactions include the effects of all transactions that have
occurred.
C. The entity is entitled to trade receivable balances shown at the period-end.
D. Recorded cash balances are realizable at the amounts stated.

31. The accounts payable department usually has responsibility for verifying the propriety of
acquisitions by comparing the details on the:
A. Vendor’s invoice and the receiving report.
B. Vendor’s invoice and the purchase requisition.
C. Purchase order, receiving report, and vendor’s invoice.
D. Purchase requisition, purchase order, and receiving report.
AT-14: FURTHER AUDIT PROCEDURES (SUBSTANTIVE TESTS)

1. Tests to determine whether the accounting transactions have been properly authorized,
correctly recorded and summarized in the journals, and correctly posted to subsidiary
ledgers and the general ledger are:
A. Tests of Controls
B. Substantive tests of transactions
C. Substantive tests of balances
D. Analytical procedures.

2. The primary emphasis in most tests of details of balances is on the:

A. Balance sheet accounts
B. Income statement accounts
C. Cash flow statement accounts
D. All of these

3. As required by PSA 500, the auditor’s substantive procedures should include the
following:
A. Agreeing the financial statements to the underlying accounting records.
B. Examining material journal entries and other adjustments made during the course o
preparing the financial statements.
C. Both A and B
D. Neither A nor B

4. Ultimately, what is sufficient appropriate audit evidence depends on:

A. The users of the financial statements under audit.
B. The professional judgment of the client’s management and those charged with
governance.
C. The professional judgment of the auditor.
D. A combination of the professional judgments of the auditor and the client’s
management.

5. S1 A given set of audit procedures may provide audit evidence that is relevant to certain
assertions, but not to others.
S2 The auditor often obtains audit evidence from different sources or of a different
nature that is relevant to the same assertion.
S3 Obtaining audit evidence relating to a particular assertion (for example, existence) is
a substitute or obtaining audit evidence regarding another assertion (such as ownership
rights).
A. False, True, True
B. True, False, True
C. True, True, False
D. False, False, False

6. Which of the following statements on reliability is incorrect? Audit evidence (that) is

A. Generally more reliable when it exists in documentary form as compared to evidence
consisting of oral representations from the client.
B. Generally more reliably when obtained directly by the auditor as compared to audit
evidence obtained indirectly (second-hand knowledge) or by interference.
C. Generally more reliable when it is obtained from independent sources outside the
entity as compared to audit evidence obtained from within the entity.
 D. Generally internally under conditions of good internal control does not meet
the required appropriateness of evidence mentioned in PSA 500.

7. Management assertions drive the auditor’s quest for audit evidence. These assertions
are:
A. Directly related to generally accepted auditing standards.
B. Directly related to generally accepted accounting principles.
C. Indirectly related to generally accepted auditing standards.
D. Indirectly related to generally accepted accounting principles.

8. Assertions about account balances at the period-end include valuation and allocation,
which means that
A. Assets, liabilities, and equity interests 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.

9. The following are descriptions of assertions about classes of transactions and events for
the period under audit. Which of the following statements refer to cut-off?
A. All transactions and events that should have been recorded have been recorded.
B. Amounts and other data relating to recorded transactions and events have been
recorded appropriately.
C. Transactions and events have been recorded in the correct accounting period.
D. Transactions and events have been recorded in the proper account.
E. Transactions and events that have been recorded have occurred, and pertain to the
entity.

10. The following are descriptions of assertions about presentation and disclosure. Which
one refers to completeness?
A. All disclosures that should have been included in the financial statements
have been included.
B. Disclosed events, transactions. And others matters have occurred and pertain to the
entity.
C. Financial information is appropriately presented and described, and disclosures are
clearly expressed.
D. Financial and other information are disclosed fairly and at appropriate amounts.

11. 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.
B. Observation
C. Inquiry
D. Inspection of tangible assets.

12. Complete the statement. “the evidence gathering technique o observation:

A. Is useful in most parts of the audit”.
B. Is rarely sufficient by itself”.
 C. Is limited to what the auditor sees”.
D. Requires the gathering of corroborative evidence”.

13. Physical examination o tangible assets is not a sufficient form of evidence when the
auditor wants to determine the:
A. Existence of the asset.
B. Quantity and description of the asset.
C. Condition or quality of the asset.
D. Ownership of the asset.

14. Confirmation is the process of obtaining a representative of information or of an existing

condition directly from the third party. Traditionally, confirmations are used to verify:
A. Individual transactions between organizations, such as sales transactions.
B. Fixed asset additions.
C. Bank balances and accounts receivable.
D. All three of the above.

15. 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

16. Who signs the confirmation request letter prior to sending the same to the recipient?
A. The appropriate level of management.
B. The auditor partner.
C. The CEO/CFO of the client.
D. Both management and the auditor.