NATIONAL COLLEGE OF BUSINESS AND ARTS

Cubao-Fairview-Taytay
SECOND SEMESTER SY 2015-2016
MID-TERM DEPARTMENTAL EXAMINATIONS 3 HRS
ACCOUNTING 12 – 07 AUDIT & ASSURANCE, ETHICS & GOOD GOVERNANCE

INSTRUCTIONS: Select the correct answer for each of the following questions. Mark only one answer
for each item by shading the corresponding letter of your choice on the answer sheet provided.
STRICTLY NO ERASURES ALLOWED. Use Pencil No. 2 only.

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

2. In all cases, audit reports must

A. Be signed by the individual who performed the audit procedures.
B. Certify the accuracy of the quantitative information which was audited.
C. Communicate the auditor’s finding to the general public.
D. Inform readers of the degree of correspondence between the quantifiable information and the
established criteria.

3. The auditor communicates the results of his or her work through the medium of the
A. Engagement letter
B. Management letter.
C. Audit report
D. Financial statements.

4. As used in auditing, which of the following statements best describes "assertions"?

A. Assertions are the representations of management as to the reliability of the information
system.
B. Assertions are the auditor's findings to be communicated in the audit report.
C. Assertions are the representations of management as to the fairness of the financial
statements.
D. Assertions are found only in the footnotes to the financial statements.

5. The expertise that distinguishes auditors from accountants is in the

A. Ability to interpret generally accepted accounting principles.
B. Requirement to possess education beyond the Bachelor’s degree.
C. Accumulation and interpretation of evidence.
D. Ability to interpret ASC Statements.

6. The framework for auditing and related services as addressed by PSA excludes
A. Review
B. Compilation
C. Tax services
D. Agreed upon procedure

7. It refers to the level of auditor’s satisfaction as to the reliability of an assertion being made by one
party for use by another party.
A. Confidence level
B. Assurance level
C. Reasonableness level
D. Tolerable level
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8. Which of the following is true of the report based on agreed-upon-procedures?

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

9. Which of the following is not normally a service rendered by public accountants?

A. Management consultation service
B. Internal auditing
C. Attest function
D. Taxation

10. A CPA firm offers management advisory services to clients. Its primary purpose is to
A. Furnish professional advice and assistance which will enable the client to improve
operations.
B. Keep the CPA firm competitive with other firms.
C. Establish the firm as a consultant, thus ensuring its future expansion and growth.
D. Permit the firm’s staff members to acquire expertise in other areas of practice.

11. The government agency tasked by law of implementing and enforcing the regulatory policies of the
national government with respect to the regulation and licensing of the various professions and
occupations under its jurisdiction is
A. PRC
B. BOA
C. COA
D. SEC

12. Which statement is correct regarding AASC?

A. The AASC shall be composed of 15 members plus a Chairman.
B. The chairman and members of the AASC shall be appointed by the President of the
Philippines upon the recommendation of PRC.
C. The chairman and members of the AASC shall have a non-renewable term of 3 years.
D. The chairman should have been or presently a senior practitioner in public accountancy.

13. The following sectors represented by the PICPA to the membership of AASC have one
representative, except
A. Government
B. Commerce and industry
C. Public practice
D. Academe

14. A person is not deemed to be engaged in professional accounting practice if

A. Her merely holds himself out as skilled in the science and practice of accounting and qualified
to render services as a CPA.
B. He merely offers to render services as a CPA to the public, but does not actually render such
services.
C. He offers or renders bookkeeping services to more than one client.
D. He installs and revises accounting systems for more than one client.

15. Practice in Public Accountancy shall constitute in a person

A. Involved in decision making requiring professional knowledge in the science of accounting, or
when such employment or position requires that the holder thereof must be a certified public
accountant.
B. In an educational institution which involve teaching of accounting, auditing, management
advisory services, finance, business law, taxation, and other technically related subjects.

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C. 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,
D. Holding out himself/herself as one skilled in the knowledge, science and practice of
accounting, and as a qualified person to render professional services as a certified public
accountant; or offering or rendering, or both, to more than one client on a fee basis or
otherwise.

16. Any position in any business or company in the private sector which requires supervising the
recording of financial transactions, preparation of financial statements, coordinating with the
external auditors for the audit of such financial statements and other related functions shall be
occupied only by a duly registered CPA. Provided (choose the incorrect one)
A. That the business or company where the above position exists has a paid-up capital of at
least P5,000,000 and/or an annual revenue of at least P10,000,000.
B. The above provision shall apply only to persons to be employed after the effectivity of the
Implementing Rules and Regulations of RA 9298.
C. The above provision shall not result to deprivation of the employment of incumbents to the
position.
D. None of the above.

17. Advertising, as defined in the Code of Ethics, means

A. The communication to the public of facts about a professional accountant which are not
designed for the deliberate promotion of that professional accountant.
B. The approach to a potential client for the purpose of offering professional services.
C. The communication to the public of information as to the services or skills provided by
professional accountants in public practice with a view to procuring professional business.
D. Any of the above.

18. Existing accountant, as defined in the Code of Ethics, means

A. A professional accountant employed in industry, commerce, the public sector or education.
B. A professional accountant in public practice currently holding an audit appointment or
carrying out accounting, taxation, consulting or similar professional services for a client.
C. Those persons who hold a valid certificate issued by the Board of Accountancy.
D. A sole proprietor, or each partner or person occupying a position similar to that of a partner
and each staff in a practice providing professional services to a client irrespective of their
functional classification (e.g., audit, tax or consulting) and professional accountants in a
practice having managerial responsibilities.

19. The term professional accountant in public practice includes the following, except
A. A sole proprietor providing professional services to a client.
B. Each partner or person occupying a position similar to that of a partner staff in a practice
providing professional services to a client.
C. Professional accountants employed in the public sector having managerial responsibilities.
D. A firm of professional accountants in public practice.

20. The term receiving accountant includes the following, except

A. A professional accountant in public practice to whom the existing accountant has referred tax
engagement.
B. A professional accountant in public practice to whom the client of the existing accountant has
referred audit engagement.
C. A professional accountant in public practice who is consulted in order to meet the needs of
the client.
D. A professional accountant in public practice currently holding an audit appointment or
carrying out accounting, taxation, consulting or similar professional services for a client.

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21. Related entity is an entity that has any of the following relationships with the client, except
A. An entity that has direct or indirect control over the client provided the client is material to
such entity.
B. An entity with a direct financial interest in the client even though such entity has no significant
influence over the client provided the interest in the client is material to such entity.
C. An entity over which the client has direct or indirect control.
D. An entity which is under common control with the client (referred to as a “sister entity”)
provided the sister entity and the client are both material to the entity that controls both the
client and sister entity.

22. The Code recognizes that the objectives of the accountancy profession are to work to the highest
standards of professionalism, to attain the highest levels of performance and generally to meet the
public interest requirement set out above. These objectives require four basic needs to be met
including the following, except
A. Credibility
B. Quality of Services
C. Professionalism
D. Integrity

23. In order to achieve the objectives of the accountancy profession, professional accountants have to
observe a number of prerequisites or fundamental principles. The fundamental principles include
the following, except
A. Objectivity
B. Professional Competence and due Care
C. Technical Standards
D. Confidence

24. The principle of professional behavior requires a professional accountant to

A. Be straightforward and honest in performing professional services.
B. Be fair and should not allow prejudice or bias, conflict of interest or influence of others to
override objectivity.
C. Perform professional services with due care, competence and diligence.
D. Act in a manner consistent with the good reputation of the profession and refrain from any
conduct which might bring discredit to the profession.

25. Prior to the acceptance of an audit engagement with a client who has terminated the services of the
predecessor auditor, the CPA should
A. Contact the predecessor auditor without advising the prospective client and request a
complete report of the circumstance leading to the termination with the understanding that all
information disclosed will be kept confidential.
B. Accept the engagement without contacting the predecessor auditor since the CPA can include
audit procedures to verify the reason given by the client for the termination.
C. Not communicate with the predecessor auditor because this would in effect be asking the
auditor to violate the confidential relationship between auditor and client.
D. Advise the client of the intention to contact the predecessor auditor and request permission for
the contact.

26. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding the predecessor’s
A. Opinion of any subsequent events occurring since the predecessor’s audit report was issued.
B. Understanding as to the reasons for the change of auditors.
C. Awareness of the consistency in the application of GAAP between periods.
D. Evaluation of all matters of continuing accounting significance.

27. A successor auditor most likely would make specific inquiries of the predecessor auditor regarding
A. Specialized accounting principles of the client’s industry.
B. The competency of the client’s internal audit staff.
C. The uncertainty inherent in applying sampling procedures.

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D. Disagreements with management as to auditing procedures.

28. Which of the following should an auditor obtain from the predecessor auditor prior to accepting an
audit engagement?
A. Analysis of balance sheet accounts
B. Analysis of income statement accounts
C. All matters of continuing accounting significance
D. Facts that might bear on the integrity of management

29. When an independent auditor is approached to perform an audit for the first time, he or she should
make inquiries of the predecessor auditor. Inquiries are necessary because the predecessor may
be able to provide the successor with information that will assist the successor in determining
whether
A. The predecessor’s work should be used.
B. The company rotates auditors.
C. In the predecessor’s opinion, control risk is low.
D. The engagement should be accepted.

30. If permission from client to discuss its affairs with the proposed auditor is denied by the client, the
predecessor auditor should:
A. Keep silent of the denial.
B. Disclose the fact that the permission to disclose is denied by the client.
C. Disclose adequately to proposed auditor all noncompliance made by the client.
D. Seek legal advice before responding to the proposed auditor

31. The objective and scope of the audit and the extent of the auditor’s responsibilities to the client are
best documented in
A. Independent auditor’s report
B. Client’s representation letter
C. Audit engagement letter
D. Audit program

32. Which of the following is least likely included in an audit engagement letter?
A. The objective of financial reporting.
B. Management responsibility for the financial statements.
C. The form of any reports or other communication of the results of the engagement.
D. Arrangement concerning the involvement of other auditors or experts in some aspects of the
audit.

33. An audit engagement letter least likely includes

A. A reference to the inherent limitation of an audit that some material misstatements may remain
undiscovered.
B. Identification of specific audit procedures that the auditor needs to undertake.
C. Description of any letters or reports that the auditor expects to submit to the client.
D. Arrangements concerning the involvement of internal auditors and other client’s staff.

34. Which of the following least likely requires the auditor to send a new engagement letter?
A. An indication that the client misunderstands the objective and scope of the audit.
B. Any revised or special terms of the engagement.
C. A recent change in the audit firm’s management.
D. Legal requirements and other government agencies’ pronouncements.

35. Which of the following least likely influence the auditor’s decision to send a separate engagement
letter to a component of parent entity client?
A. Legal requirements
B. Degree of ownership over a component entity by parent company
C. Location of the principal place of business of the component entity
D. Who appoints the auditor of the component

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36. Which of the following is a NOT valid reason for a change of the engagement to a lower “level of
assurance”?
A. Change in circumstances affecting the need for the service.
B. Restriction on the scope of the engagement.
C. Misunderstanding as to the nature of the engagement originally requested.
D. The client’s need is satisfied by an engagement that provides lower level of assurance.

37. The development of a general strategy and a detailed approach for the expected nature, timing,
and extent of audit refers to :
A. Supervision
B. Audit procedures
C. Directing
D. Planning

38. The auditor should consider the nature, extent, and timing of the work to be performed and should
prepare a written audit program for every audit. Which audit standard is most closely related to this
requirement?
A. The audit is to be performed by a person or persons having adequate technical training and
proficiency as an auditor.
B. In all matters relating to the assignment, an independent mental attitude is to be maintained by
the auditor(s).
C. Due professional care is to be exercised in the planning and performance of the audit and
preparation of the report.
D. The work is to be adequately planned and assistants, if any, are to be properly supervised.

39. Which of the following would a successor auditor normally perform after acceptance of an audit
client?
A. Inquiry of predecessor auditor regarding the client.
B. Review the SEC filings of the client.
C. Inquiry of bankers regarding the client.
D. Review of predecessor auditor working papers.

40. To obtain an understanding of a continuing client’s business in planning an audit, an auditor most
likely would
A. Perform tests of details of transactions and balances.
B. Review prior-year working papers and the permanent file for the client.
C. Read specialized industry journals.
D. Re-evaluate client’s internal control environment.

41. Which of the following is required documentation in an audit in accordance with generally accepted
auditing standards?
A. A flowchart or narrative of the information system describing the recording and classification
of transactions for financial reporting.
B. An audit program setting forth in detail the procedures necessary to accomplish the
engagement’s objectives.
C. A planning memorandum establishing the timing of the audit procedures and coordinating
the assistance of entity personnel.
D. An internal control questionnaire identifying policies and procedures that assure specific
objectives will be achieved.

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

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

A. Reducing the scope of tests of controls and substantive tests.
B. Providing assurance that potential material misstatements will be identified.
C. Enhancing the auditor’s understanding of the client’s business.
D. Assessing the adequacy of the available evidential matter.

44. Analytical procedures, which means the analysis of significant ratios and trends including the
resulting investigation of fluctuations and relationships that are inconsistent with other relevant
information or which deviate from predicted amounts, are not required to be applied
A. At the planning stage of the audit
B. As substantive procedures
C. Overall review stage of the audit
D. None of the above

45. Which of the following statements is correct concerning analytical procedures?

A. Analytical procedures usually involve comparisons of ratios developed from recorded
amounts to assertions developed by management.
B. Analytical procedures used in planning an audit generally use data aggregated at a high level.
C. Analytical procedures can replace tests of controls in gathering evidence to support the
assessed level of control risk.
D. Analytical procedures are more efficient, but not more effective, than tests of details and
transactions.

46. Which of the following is an effective audit planning and control procedures that helps prevent
misunderstandings and inefficient use of audit personnel?
A. Make copies, for inclusion in the working papers, of those client supporting documents
examined by the auditor.
B. Provide the client with copies of the audit programs to be used during the audit.
C. Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and
other information.
D. Arrange to have the auditor prepare and post any necessary adjusting or reclassification
entries prior to final closing.

47. Which of the following is correct statement?

A. The auditor should use professional judgment to assess audit risk and to design audit
procedures to ensure it is eliminated.
B. The auditor is an insurer, and his or her report constitutes a guarantee.
C. The subsequent discovery that a material misstatement exists in the financial statements is
evidence of inadequate planning, performance, or judgment on the part of the auditor.
D. The auditor should obtain an understanding of the accounting and internal control systems
sufficient to plan the audit and develop an effective audit approach.

48. According to PSA 400 – Risk Assessments and Internal Control, audit risk means
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 or classes,
assuming that there were no related internal controls.
B. The risk that a misstatement, that could occur in an account balance or class of transactions
and that could be material, individually or when aggregated with misstatements in other
balances or classes, will not be prevented or detected and corrected on a timely basis by the
accounting and internal control systems.
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.

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49. Inherent risk and control risk differ from detection risk in that they
A. Arise from the misapplication of auditing procedures.
B. May be assessed in either quantitative or nonquantitative terms.
C. Exist independently of the financial statement audit.
D. Can be changed at the auditor’s discretion.

50. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are
A. Elements of audit risk while detection risk is not.
B. 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.

51. Which of the following is an incorrect statement?

A. Detection risk is a function of the effectiveness of an auditing procedure and its application.
B. Detection risk arises partly from uncertainties that exists 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 the financial statements.

52. Which of the following is an incorrect statement?

A. Detection risk cannot be changed at the auditor’s discretion.
B. If individual audit risk remains the same, detection risk bears an inverse relationship to
inherent and control risks.
C. The greater the inherent and control risks the auditor believes exists, the less detection risk
that can be accepted.
D. The auditor might make separate or combined assessments of inherent risk and control risk.

53. Why would the auditor assess control risk?

A. Because it indicates where inherent risk may be the greatest.
B. Because it determines whether sampling risk is sufficiently low.
C. Because it affects the level of detection risk the auditor may accept.
D. Because it includes the aspects of nonsampling risk that are controllable.

54. The relationship between acceptable level of detection risk and the combined level of inherent and
control risk is
A. Direct
B. Inverse
C. Parallel
D. Independent

55. The audit risk model consists of: AR = IR x CR x 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 Low?
A. Highest
B. Medium
C. Lower
D. Higher

56. An auditor decides to increase the assessed level of control risk from that originally planned on the
basis of audit evidence gathered and evaluated. To achieve an overall audit risk level that is
substantially the same as the planned audit risk level, the auditor would
A. Decrease substantive testing.
B. Increase inherent risk.
C. Increase materiality levels.
D. Decrease detection risk.

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57. As the acceptable level of detection risk decreases, the assurance directly provided from
A. Substantive tests should increase.
B. Substantive tests should decrease.
C. Tests of controls should increase.
D. Tests of controls should decrease.

58. Which of the following statements is true?

A. If control risk is assessed at maximum, the nature of related substantive tests should be
changed from more to less effective.
B. If control risk is assessed at maximum, the nature of related substantive tests should be
changed from less to more effective.
C. If control risk is assessed at maximum, the timing of related substantive tests should be
changed from year-end to an interim date.
D. If control risk is assessed at maximum, the extent of related substantive tests should be
changed from a larger to a smaller sample.

59. Which of the following is correct about internal control?

A. Accounting and internal control systems provide management with conclusive evidence that
objectives are reached.
B. One of the inherent limitations of accounting and internal control systems is the possibility
that the procedures may become inadequate due to changes in conditions, and compliance
with procedures may deteriorate.
C. Most internal controls tend to be directed at non-routine transactions.
D. Management does not consider costs of the accounting and internal control systems.

60. Corporate directors, management, external auditors, and internal auditors all play important roles in
creating a proper control environment. Top management is primarily responsible for
A. Establishing a proper environment and specifying overall internal control.
B. Reviewing the reliability and integrity of financial information and the means used to collect
and report such information.
C. Ensuring that external and internal auditors adequately monitor the control environment.
D. Implementing and monitoring controls designed by the board of directors.

61. Which of the following best describe the interrelated components of internal control?
A. Organizational structure, management philosophy, and planning.
B. Control environment, risk assessment, control activities, information and communication
systems, and monitoring.
C. Risk assessment, backup facilities, responsibility accounting and natural laws.
D. Legal environment of the firm, management philosophy, and organizational structure.

62. In an audit of financial statements, an auditor’s primary consideration regarding a control is whether
it
A. Reflects management’s philosophy and operating style.
B. Affects management’s financial statement assertions.
C. Provides adequate safeguards over access to assets.
D. Enhances management’s decision-making processes.

63. Effective internal control

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

64. Which of the following statements about internal control is correct?

A. Properly maintained internal controls reasonably assure that collusion among employees
cannot occur.
B. Establishing and maintaining internal control is the internal auditor’s responsibility.
C. Exceptionally strong control allows the auditor to eliminate substantive tests.

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D. The cost-benefit relationship should be considered in designing internal control.

65. The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk
that
A. Tests of controls may fail to identify controls relevant to assertions.
B. Material misstatements may exist in the financial statements.
C. Specified controls requiring segregation of duties may be circumvented by collusion.
D. Entity policies may be overridden by senior management.

66. A proper understanding of the client’s internal control is an integral part of the audit planning
process. The results of the understanding
A. Must be reported to the shareholders and the SEC.
B. Bear no relationship to the extent of substantive testing to be performed.
C. Are not reported to client management.
D. May be used as the basis for withdrawing from an audit engagement.

67. An entity should consider the cost of a control in relationship to the risk. Which of the following
controls best reflects this philosophy for a large peso investment in heavy machine tools?
A. Conducting a weekly physical inventory.
B. Placing security guards at every entrance 24 hours a day.
C. Imprinting a controlled identification number on each tool.
D. Having all dispositions approved by the vice president of sales.

68. 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.

69. Audit sampling is not involved in the following, except

A. Performing a walkthrough test.
B. Performing analytical procedures
C. Selecting the sample without following a structured technique.
D. Testing controls that leave no audit trail.

70. The following situations will likely lead the auditor to use 100% testing, except
A. When the population constitutes a small number of large value items.
B. When both inherent and control risks are high and other means do not provide sufficient
appropriate audit evidence
C. When the repetitive nature of a calculation or other process performed by a computer
information system makes a 100% examination cost effective.
D. When testing controls that leave audit trail.

71. An error that arises from an isolated event that has not recurred other than on specifically
identifiable occasions and is therefore not representative of errors in the population is called
A. Sampling error.
B. Anomalous error.
C. Non-sampling error.
D. Projected error.

72. Which of the following is true about sampling and non-sampling risks?
A. Sampling risk can be reduced by increasing sample size.
B. Sampling risk cannot be eliminated.
C. Non-sampling risk can be eliminated by proper engagement planning, supervision, and
review.

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D. Non-sampling risk arises from the possibility that the auditor’s conclusion, based on a sample
may be different from the conclusion reached if the entire population were subjected to the
same audit procedure.

73. Which statement is incorrect about sampling risk?

A. Sampling risk arises from the possibility that the auditor’s conclusion, based on a sample may
be different from the conclusion reached if the entire population were subjected to the same
audit procedure.
B. Risk of assessing control risk too low and risk of incorrect acceptance affects audit
effectiveness as it would usually lead to additional work to establish that initial conclusions
were incorrect.
C. The mathematical complements of sampling risks are termed confidence levels.
D. Risk of assessing control risk too high is the risk that the auditor will conclude, in the case of a
test of control, that control risk is higher than it actually is.

74. An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps
an auditor to
A. Minimize the failure to detect errors and frauds.
B. Eliminate nonsampling risk.
C. Reduce the level of audit risk and materiality to a relatively low amount.
D. Measure the sufficiency of the evidential matter obtained.

75. Each time an auditor draws a conclusion based on evidence from a sample, an additional risk,
sampling risk, is introduced. An example of sampling risk is
A. Projecting the results of sampling beyond the population tested.
B. Properly applying an improper audit procedure to sample data.
C. Improperly applying a proper audit procedure to sample data.
D. Drawing an erroneous conclusion from sample data.

***END OF EXAMINATION***

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