AUDITING THEORY

1) Broadly define, the subject matter of any audit consists of

A. Financial statement

B. Economic data

C. Assertions

D. Operating data

E. None of the above

2) The criteria for evaluating quantitative information vary. For example, in the case of an independent
audit of financial statements by CPA firms, the criteria usually the

A. IFRS, IFRS for SMEs

B. International Accounting Standards

C. International Standard on Auditing

D. National Internal Revenue Code

E. Regularions of the Securities and Exchange Commission

3) An audit of financial statements is conducted to determine if the

A. Overall financial statements are stated in accordance with the applicable financial reporting
framework

B. Management fraud

C. Organization is operating efficiently and effectively

D. Auditee is following specific procedures or rules set down by some higher authority

E. Client's internal control is functioning as intended

4) An audit involves ascertaining the degree of correspondence between assertions and established
criteria. In the case of an audit of financial statements, which of the following would not be a valid criterion?

A. International Accounting Standards

B. International Financial Reporting Standards

C. International Standards on Auditing

D. Philippine Accounting Standards

5) Most of the independent auditor's work in formulating an opinion on financial statements consists of

A. Studying and evaluating internal control

B. Obtaining and examining evidential matter

C. Examining cash transactions

D. Comparing recoded accountability with assets

6) An Audit that involves obtaining and evaluating evidence about the efficiency and effectiveness of an
entity's operating activities in relations to specified objectives is a(n):

A. External Audit

B. Compliance Audit

C. Operational Audit

D. Financial Statement Audit

7) In financial statement audits, the audit process should be conducted in accordance with

A. The audit program

B. International Standards on Auditing

C. International Accounting Standards

D. International Financial Reporting Standards

8) Which of the following best describes the operational audit?

A. In requires the constant review by internal auditors of the administrative controls as they relate
to operations of the company.

B. It concentrates on implementing financial and accounting control in a newly organized company.

C. It attempts and is designed to very the fair presentation of a company's results of operations.

D. It concentrates on seeking out aspects of operations in which wast would be reduced by the
introduction of controls.

9) Which of the following types of audit uses laws and regulations as its criteria?

A. Operational audit

B. Financial statement audit

C. Compliance audit

D. Performance audit

10) A typical objective of an operational audit is to determine whether an entity's

A. Internal control structure is adequately operating as designed

B. Operational information is in accordance with generally accepted accounting principles.

C. Specific operating units are functioning efficiently and effectively.

D. Financial statements present fairly the results of operations

11) The auditor communicates the results of his/her work throught the medium of the

A. Engagement letter

B. Audit report

C. Management letter

D. Financial Statements

12) Which of the following types of auditing is performed most commonly by CPA's on contractual basis?

A. Internal auditing

B. Income tax auditing

C. Government auditing

D. External auditing

13) Independent auditing best described as a

A. Professional activity that measures and communicate financial accounting data

B. Subset of accounting

C. Professional activity that attests to the fair presentation of financial statements

D. Regulatory activity that prevents, the issuance of improper financial information

14) The overall objective of internal auditing is to

A. Attest to the efficiency with which resources are employed.

B. Ascertain that controls are cost justified.

C. Provide assurance that financial data have been accurately recorded.

D. Assist members of the organization in the effective discharge of their responsibilities.

15) Internal auditing is an independence appraisal function established within an organization to examine
and evaluate its activities, to that end, internal auditing provides assistance to

A. External auditors

B. Stockholders

C. Management and the board of directors

D. Government
 AUDITING THEORY – PREBOARD

1) Which of the following best describes “high level of assurance”?

A. It refers to the professional accountant having obtained evidence based on procedures agreed
upon between the practitioner and the intended users to be satisfied that findings be reported to the
intended users.

B. It refers to the professional accountant having obtained sufficient external and internal
appropriate evidence to be satisfied that the subject matter is plausible in the circumstances.

C. It refers to the professional accountant having obtained sufficient appropriate evidence to

conclude that the subject matter conforms in all material respects with identified suitable criteria.

D. It refers to the professional accountant having obtained sufficient evidence to conclude that he
has no knowledge of any required modifications to be made in the financial statements in order for
them to conform of prescribed criteria.

2) Which statement is incorrect regarding an engagement to perform agreed-upon procedures?

A. An auditor is engaged to carry out those procedures of an audit nature to which the auditor

and the entity and any appropriate third parties have agreed and to report on factual findings.

B. The recipients of the report must form their own conclusions from the report by the auditor.

C. The report is restricted to those parties that have agreed to the procedures to be performed.

D. The report on factual findings is expressed in the form of negative assurance.

3) Which of the following engagements provides third parties the highest level of assurance about the
client’s financial statements?

A. Audit

B. Review

C. Agreed-upon procedures

D. Compilation

4) In which of the following situations can third parties assume responsibility of the auditor regarding
association with financial information?

A. When the auditor attaches a report to that information.

B. When the auditor consents to the use of the auditor's name in a professional connection.

C. Either a or b.

D. Neither a nor b.

5) Which statement is incorrect regarding assurance engagement risk?

A. Engagement risk is the risk that the practitioner will express an inappropriate conclusion that the
subject matter conforms in all material respects with suitable criteria.

B. All components of the engagement risk model will be significant for all assurance engagements.

C. The extent to which the practitioner considers the relevant components of engagement risk will
be affected by the engagement circumstances.

D. Business risk is not part of engagement risk and does not affect the application of Philippine
Standard on Assurance Engagements.

6) A concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that
there are no material misstatements in the financial statements taken as a whole.

A. Reasonable assurance

B. Positive assurance

C. Moderate assurance

D. Negative assurance
7) Which statement is incorrect regarding the external auditor’s consideration of the work of internal
auditing?

A. The external auditor should consider the activities of internal auditing and their effect, if any, on
external audit procedures.

B. The external auditor should obtain a sufficient understanding of internal audit activities to assist
in planning the audit and developing an effective audit approach.

C. During the course of planning the audit, the external auditor should perform a preliminary

assessment of the internal audit function when it appears that internal auditing is relevant to the
external audit of the financial statements in specific audit areas.

D. When the external auditor intends to use specific work of internal auditing, the external

auditor need not evaluate and test that work to confirm its adequacy for the external auditor's purposes.

8) The independent auditor lends credibility to client’s financial statements by

A. Maintaining a clear-cut distinction between management’s representations and the auditor’s

representation.

B. Testifying under oath about client’s financial statements.

C. Stating in the auditor’s management letter that the examination was made in accordance with
generally accepted auditing standards.

D. Attaching an auditor’s opinion to the client’s financial statements

9) Which of the following is responsible for the fairness of representations made in financial statements?

A. The independent auditor.

B. The internal auditor.

C. The client's management.

D. The audit committee.

10) The exposure period allowed for each exposure draft of PSA to be considered by the organizations and
persons to whom it is sent for comment is generally

A. Four months

B. Three months

C. Two months

D. Six months

11) Which statement is incorrect regarding the pronouncements of ASPC?

A. The PSAs and Interpretations may also have application, as appropriate, to other related
activities of auditors.

B. PSAs contain basic principles and essential procedures (identified in bold type black lettering)
together with related guidance in the form of explanatory and other material.

C. PSAs need only be applied to material matters.

D. The Interpretations have the same authority as the PAPSs.

12) The following should be occupied only by a duly registered CPA, except

A. Any position in any business or company in the private sector which requires supervising the
recording of financial transactions.

B. Any position in any business or company in the private sector which requires preparation of
financial statements.

C. Any position in any business or company in the private sector which requires coordinating with
the internal auditors for the audit of financial statements.

D. The position of the dean that supervises the BSA program of an educational institution.

13) Which of the following is not represented in the Auditing and Assurance Standards Council?

A. Board of Accountancy

B. Bangko Sentral ng Pilipinas

 C. Bureau of Internal Revenue

D. Securities and Exchange Commission

14) A study, appraisal, or review by the BOA or its duly authorized representatives, of the quality of audit of
financial statements through a review of the quality control measures instituted by an Individual CPA, Firm or
Partnership of CPAs engaged in the practice of public accountancy.

A. Peer review

B. Quality review

C. Analytical review

D. Administrative review

15) Emong, CPA is applying for renewal of his professional license. He is exempted from the CPE
requirements

A. If he is at least 65 years old.

B. If he is working abroad and he has been out of the country for at least two years immediately
prior to the date of renewal.

C. Either a or b.

D. Under no circumstances.

16) The following statements relate to RA 9298. Which statement is true?

A. The Professional Regulation Commission has the authority to remove any member of the Board
of Accountancy for negligence, incompetence, or any other just cause.

B. Insanity is not a ground for proceeding against a CPA.

C. A person shall be considered to be in the professional practice of accounting if, as an officer in a

private enterprise, he makes decisions requiring professional accounting knowledge.

D. After three years, subject to certain conditions, the Board of Accountancy may order the
reinstatement of a CPA whose certificate of registration has been revoked.

17) There is a need for assurance that all services obtained from a professional accountant are carried out
to the highest standards of performance. This statement relates to

A. Credibility

B. Professionalism

C. Quality of Services

D. Confidence

18) Indicate the normal pattern of development for a professional accountant. I. A period of work
experience. II. High standard of general education. III. Specific education, training and examination in
professionally relevant subjects

A. I, II, III

B. II, III, I

C. III, II, I

D. II, I, III

19) A partner or employee of the firm serving as an officer or as a director on the board of an assurance
client will most likely create

A. Intimidation threat

B. Self-review threat

C. Advocacy threat

D. Familiarity threat

20) Which of the following least likely create a self-review threat?

A. A former officer, director or employee of the assurance client serve as a member of the
assurance team.
 B. A director, an officer or an employee of the assurance client in a position to exert direct and
significant influence over the subject matter of the assurance engagement has been a member of the
assurance team or partner of the firm.

C. Assisting an audit client in matters such as preparing accounting records or financial

statements.

D. A firm, or network firm, provides internal audit services to an audit client.

21) This process may include, particularly in the case of large complex audits, requesting personnel not
otherwise involved in the audit to perform certain additional procedures.

A. Direction

B. Supervision

C. Review

D. All of these

22) Which of the following is least likely a factor that affects the extent of quality control procedures?

A. The size of the firm.

B. The type of clients that the firm serves.

C. The number of practice offices.

D. The nature of the practice.

23) Which statement is incorrect regarding the auditor’s responsibility to consider fraud and error in the
audit of financial statements?

A. The auditor is entitled to accept records and documents as genuine.

B. The auditor is may be held responsible for the prevention of fraud and error.

C. The auditor should consider the risk of material misstatements in the financial statements
resulting from fraud or error.

D. The risk of not detecting a material misstatement resulting from error is lower than the risk of not
detecting a material misstatement resulting from fraud.

24) Which statement is incorrect regarding “fraud risk factors”?

A. Using the auditor’s knowledge of the business, the auditor may identify events or conditions that
provide an opportunity, a motive or a means to commit fraud, or indicate that fraud may already have
occurred.

B. A missing document, an out of balance general ledger, or an analytical procedure that does not
make sense may be the result of circumstances other than fraud.

C. Fraud risk factors indicate the existence of fraud because they often have been present in
circumstances where frauds have occurred.

D. The presence of fraud risk factors may affect the auditor’s assessment of inherent risk or control
risk.

25) Cash receipts from sales on account have been misappropriated. Which of the following acts would
conceal this defalcation and least likely to be detected by an auditor?

A. Understating the sales journal.

B. Overstating the accounts receivable control account.

C. Overstating the accounts receivable subsidiary ledger.

D. Understating the cash receipts journal.

26) Example of the type of information that may come to the auditor's attention that may indicate that
noncompliance with laws or regulations has occurred most likely include

A. Payments for specified services or loans to consultants, related parties, employees or

government employees.

B. Payments for goods or services made to the country from which the goods or services
originated.

C. Purchasing at prices significantly above or below market price.

 D. Sales commissions or agent's fees that appear reasonable in relation to those ordinarily paid by
the entity or in its industry or to the services actually received.

27) When the auditor knows that an illegal act has occurred, the auditor must

A. Issue an adverse opinion.

B. Withdraw from the engagement.

C. Report it to the proper government authorities.

D. Consider the effects on the financial statements, including the adequacy of disclosure.

28) Which statement is correct regarding the auditor’s communications of audit matters with those charged
with governance?

A. The auditor’s communications of matters include all audit matters of governance interest.

B. An audit of financial statements is designed to identify all matters that may be relevant to those
charged with governance.

C. The auditor’s communications with those charged with governance may be made orally or in
writing.

D. None of the above.

29) It is in the interest of both client and auditor that the auditor sends an engagement letter, preferably
before

A. The performance of substantive testing.

B. The commencement of the engagement.

C. The completion of audit.

D. Before the issuance of audit report.

30) When a change in the type of engagement from higher to lower level of assurance is reasonably
justified, the report based on the revised engagement (choose the incorrect one)

A. Should not contain a separate paragraph that refers to the original engagement.

B. Should not refer to any procedures that may have been performed in the original engagement.

C. Should qualify the opinion due to scope limitation.

D. Omits reference to the original engagement.

31) A basic tool used by the auditor to control the audit work and review the progress of the audit.

A. Audit program

B. Progress flowchart

C. Engagement letter.

D. Time and Expense Summary

32) Which of the following is not normally a planning procedure?

A. Assess the conclusions reached and the evaluation of the overall financial statement
presentation through the use analytical procedures.

B. Consider the risk of the existence of related-party transactions.

C. Consider the nature of the audit reports expected to be rendered.

D. Identify items likely to require adjustments.

33) An understanding of the client’s business and industry and knowledge about the company’s operations
are essential for doing an adequate audit. For a new client, most of this information is obtained

A. From the predecessor auditor.

B. From the SEC.

C. At the client’s premises.

D. From the permanent file.

34) The management’s assessment of the entity’s ability to continue as a going concern covers a period of:

A. Not longer than 12 months from balance date.

B. At least 12 months from the balance sheet date.

C. Not longer than 12 months from the date of audit report.

D. At least 12 months from the date of audit report.

35) Which of the following would an auditor most likely use in determining the auditor’s preliminary
judgment about materiality?

A. The results of the internal control questionnaire.

B. The contents of the management representation letter

C. The entity’s annualized interim financial statements.

D. The anticipated sample size of the planned substantive tests.

36) How can the audit program best be described at the beginning of the audit process?

A. Tentative.

B. Comprehensive.

C. Conclusive.

D. Optional.

37) Which of the following is appropriate about risk assessment?

A. Detection risk is eliminated if an auditor were to examine 100 percent of the account balance or
class of transactions

B. There is an inverse relationship between detection risk and the combined level of inherent and
control risk.

C. The assessed level of inherent and control risk can be sufficiently low, thus resulting to
eliminating the need for substantive tests.

D. Audit risk may be more appropriately determined by assessing inherent and control risk
separately.

38) Which of the following most directly illustrates inherent risk?

A. Inadequate segregation of duties

B. Confirmation of receivables by an auditor fails to detect a material misstatement.

C. ABC Company, a client company, lacks sufficient working capital to continue operations.

D. A client fails to discover employee fraud on a timely basis because bank accounts are not
reconciled monthly

39) Which of the following is a valid statement about the assessment of control risk?

A. There is a positive relationship between detection risk and the combined level of inherent and
control risk.

B. The auditor should consider the assessed levels of inherent and control risks in determining the
nature, timing, and extent of substantive procedures required to eliminate audit risk.

C. Misstatements discovered by conducting substantive procedures may cause the auditor to

modify the previous assessment of control risk.

D. The assessed level of inherent and control risks can be sufficiently low in order to eliminate the
auditor’s need to perform substantive tests on some assertions. The assessed level of inherent and
control risks can be sufficiently low in order to eliminate the auditor’s need to perform substantive tests
on some assertions.

40) The auditor should perform which of the following as risk assessment procedure?

A. Analytical procedures

B. Confirmation

C. Recalculation

D. Reperformance
41) Which of the following is least likely a potential benefit of effectiveness and efficiency for an entity’s
internal control that IT provides?

A. Enhance the timeliness, availability, and accuracy of information.

B. Enhance the ability to monitor the performance of the entity’s activities and its policies and
procedures.

C. Eliminate the risk that controls will be circumvented.

D. Consistently apply predefined business rules and perform complex calculations in processing
large volumes of transactions or data.

42) Control environment

A. Consists of the policies and procedures that help ensure that management directives are carried
out.

B. Includes the governance and management functions and the attitudes, awareness, and actions
of those charged with governance and management concerning the entity’s internal control and its
importance in the entity.

C. Is 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.

D. Consists of the procedures and records established to initiate, record, process, and report entity
transactions (as well as events and conditions) and to maintain accountability for the related assets,
liabilities, and equity.

43) Which of the following situations will normally result to increase in the extent of audit procedures?

A. Decrease in the risk of material misstatement.

B. Decrease in the degree of assurance the auditor plans to obtain.

C. Decrease in materiality level.

D. None of the above.

44) The auditor should determine overall responses to address the risks of material misstatement at the
financial statement level. Such responses most likely include

A. Assigning less experienced staff.

B. Emphasizing to the audit team the need to maintain professional skepticism in gathering and
evaluating audit evidence.

C. Performing predictable further audit procedures.

D. Performing substantive procedures at an interim date instead of at period end.

45) Which statement is incorrect regarding the nature, timing and extent of tests of controls?

A. Those controls subject to testing by performing inquiry combined with inspection or

reperformance ordinarily provide more assurance than those controls for which the audit evidence
consists solely of inquiry and observation.

B. If the auditor plans to rely on controls that have not changed since they were last tested, the
auditor should test the operating effectiveness of such controls at least once in every third audit.

C. The length of time period between retesting controls is a matter of professional judgment, but
cannot exceed three years.

D. The more the auditor relies on the operating effectiveness of controls in the assessment of risk,
the greater is the extent of the auditor’s tests of controls.

46) Which of the following statements is correct regarding the auditor’s primary objective in performing
procedures to obtain an understanding of the internal control structure?

A. The primary objective is to provide the auditor with an evaluation of the consistency of
application of management’s policies.

B. The primary objective is to provide the auditor with knowledge necessary for audit planning.

C. The primary objective is to provide the auditor with evidential matter to use in assessing
inherent risk.

D. The primary objective is to provide the auditor with a basis for modifying tests of controls.
47) Which of the following would most likely indicate internal control deficiency for the revenue cycle
(including cash receipts)?

A. Credit is granted by a credit department.

B. Cash receipts received in the mail are received by a secretary with no recordkeeping
responsibility.

C. Cash is deposited weekly.

D. Cash disbursements over P100,000 does not require two signatures on the check.

48) The following statements relate directly to test of controls except

A. May involve comparisons of financial information with nonfinancial information.

B. Setting the planned assessed level of control risk at the maximum will eliminate these tests.

C. Often performed concurrently with obtaining an understanding of internal control.

D. Inquire of the accounts receivable clerk regarding the effectiveness of the computer program in
updating accounts receivable balances.

49) After obtaining an understanding of an entity’s internal controls, an auditor may assess control risk at
the maximum for some assertions because the auditor:

A. Believes internal control activities are unlikely to be effective.

B. Determines that internal control is not well-documented.

C. Performs tests of controls to restrict detection of risk to an acceptable level.

D. Identifies control activities that are likely to prevent material misstatements.

50) The report of the service organization auditor on the suitability of design (Type A) will not ordinarily
include an opinion by the service organization auditor that:

A. The description of the service organization's accounting and internal control systems, ordinarily
prepared by the management of the service organization is accurate.

B. The systems' controls have been placed in operation.

C. The accounting and internal control systems are operating effectively based on the results from
the tests of control.

D. The accounting and internal control systems are suitably designed to achieve their stated
objectives.