AUDITING THEORY LONG TEST PART 1
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 of the following statements is (are) incorrect
regarding assurance services?
A. Assurance services can be provided either on
information or processes.
B. The third party who receives the assurance
generally does not pay for the assurance
received.
C. Assurance services always involve a report
by one person to a third party on which an
independent organization provides
assurance.
D. D. All of the above.
3. Which of the following statements does not describe a
condition that creates a demand for auditing?
A. Conflict between the information preparer
and the user can result in biased information.
B. Information can have substantial economic
consequences for a decision maker.
C. Expertise is often required for information
preparation and verification.
D. Users can directly assess the quality of
information.
4. Operational auditing is mainly concerned about:
A. Past protection provided by current internal
control
B. Future improvements for management goals
C. Verification of fair presentation of financial
data
D. Accuracy of data of financial records.
5. Under this mode of billing for audit services, the client
actually does not know in advance how much will be
cost of audit engagement
A. Retainer basis.
B. Maximum fee basis.
C. Flat sum basis.
D. Per diem basis.
6. Which of the following is the least function of the
Board of Accountancy?
A. Determination of the minimum requirements
leading to the admission of candidates to the
CPA examinations.
B. Regulation of the practice of accountancy
C. Supervision over the accredited professional
organization of CPAs
D. Preparation of the contents of the CPA
licensure examinations and rating of
the examination papers.
7. 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
8. Which of the following will least likely create a threat
to independence?
A. A member of the assurance team, partner or
former partner of the firm has joined the
assurance client.
B. Deposits made by, or brokerage accounts of,
a firm or a member of the assurance team
with an assurance client that is a bank, broker
or similar institution, provided the deposit or
account is held under normal commercial
terms.
C. Arrangements to combine one or more
services or products of the firm with one or
more services or products of the assurance
client and to market the package with
reference to both parties.
D. Family and personal relationships between a
member of the assurance team and a director,
an officer or certain employees.
9. The CPA should not undertake an engagement if his
fee is to be based upon
A. A percentage of audited net income.
B. Per diem rates plus expenses.
C. The findings of a tax authority
D. The complexity of the service rendered.
10. Which of the following is most likely a fraud risk
factor?
AUDITING THEORY LONG TEST PART 1
A. A. Management has a practice of conveying
forecast information to analysts, creditors,
and other third parties.
B. Turnover of management has been low
throughout the preceding five-year period.
C. Several claims against the senior
management are outstanding alleging a
violation of the securities law.
D. The company has shown the ability to
generate a positive cash flow from
operations, while reporting earnings and
earnings growth.
11. 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 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.
12. Which of the following should the auditor likely to do
when the application of planned audit procedures
indicates the possible existence of fraud or error?
A. The auditor should resign in order to avoid
legal responsibility.
B. He should discuss the matter with the person
whom he believes is involved with the
irregularities.
C. He should consider the potential effect on the
financial statements.
D. He should refer the suspected fraud or error
to the internal auditor.
13. Isabel Manufacturing, Inc. sought a P2,000,000 loan
from National Lending Corporation. National Lending
insisted that audited financial statements be submitted
before granting credit. Isabel agreed. An audit was
performed by an independent auditor who submitted
an audit report to Isabel that was to be used solely for
the purpose of negotiating a loan from National.
National, upon reading the audited financial
statements, decided in good faith not to extend the
credit desired. Certain ratios, used routinely by
National in reaching credit decisions, were judged
insufficient. Isabel used copies of the audited financial
statements to obtain credit elsewhere. Despite
complying with Philippine Standards on Auditing, the
independent auditor failed to discover a sophisticated
embezzlement scheme perpetrated by Isabel's chief
financial officer. The auditor is liable to
A. Third parties who relied on the audited
financial statements to extend credit.
B. Isabel to repay the audit fee because National
did not extend credit.
C. Isabel for any losses Isabel suffered as a
result of failing to discover the embezzlement.
D. None of the parties.
14. Assuming a recurring audit, in which of the following
situations would the auditor be unlikely to send a new
engagement letter to the client?
A. A recent change in partner and/or staff
involved in the audit engagement.
B. A change in the terms of engagement.
C. A recent change of client management.
D. A significant change in the nature or size of
the client's business.
15. The 1136 Tenants case was chiefly important because of
its emphasis on the legal liability of the CPA when
A. Performing a review of financial statements.
B. An engagement letter is not obtained.
C. An audit results in a disclaimer of opinion.
D. Preparing letters for underwriters.
16. 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
17. Which of the following nonfinancial information would an
auditor most likely consider in performing analytical
procedures during the planning phase of an audit?
A. Square footage of selling space.
B. Turnover of personnel in the accounting department.
C. Objectivity of audit committee members.
D. Management’s plans to repurchase stock.
18. The auditor observed that the long term debt increased
from the prior year, but interest expense increased a larger-
than-proportionate amount than long-term debt.
Which of the following is the most likely explanation for
this situation?
A. Interest expense decreased, as compared to the prior
year.
B. Short-term borrowing was refinanced on a long term
basis at the same interest rate.
C. Short-term borrowing was refinanced on a long term
AUDITING THEORY LONG TEST PART 1
basis at lower interest rate.
D. Short-term borrowing was refinanced on a long term
basis at higher interest rate.
19. The management’s assessment of the entity’s ability to
continue as a going concern covers a period of:
A. No longer than 12 months from balance date.
B. At least 12 months from the balance sheet date.
C. No longer than 12 months from the date of audit
report.
D. At least 12 months from the date of audit report.
20. 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.
21. An auditor selects a sample from the file of shipping
documents to determine whether invoices were prepared.
This test is performed to satisfy the audit objective of
A. Accuracy
B. Control
C. Completeness
D. Existence
22. To gather audit evidence about the proper credit approval
of sales, the auditor would select a sample of documents
from the population represented by the
A. Subsidiary customers' accounts ledger.
B. Sales invoice file.
C. Customer order file.
D. Bill of lading file.
23. A client's purchasing system ends with the assumption of a
liability and the eventual payment of the liability. Which of
the following best describes the auditor's primary concern
with respect to liabilities resulting from the purchasing
system?
A. Commitments for all purchases are made only after
established competitive bidding procedures are
followed.
B. Accounts payable are not materially understated.
C. Authority to incur liabilities is restricted to one
designated person.
D. Acquisition of materials is not made from one vendor
or one group of vendors.
24. The president of Tsogan Company did not disclose to its
board of directors that he is a principal stockholder of
Sobala Company. The president compelled Tsogan
Company's purchasing agent to purchase supplies from
Sobala Company at prices in excess of typical prices for
such supplies. Which question, if answered "NO" would
have been most likely to disclose the internal control
weakness that permitted this incident to occur or to remain
undetected?
A. Are purchase requisitions used to originate purchasing
activity?
B. Are vendors selected on the basis of competitive bids?
C. Are formal written purchase orders requested for all
significant purchases?
D. Does the accounting department match vendors'
invoices with purchase orders?
25. In obtaining an understanding of a manufacturing entity’s
internal control over inventory balances, an auditor most
likely would
A. Analyze the liquidity and turnover ratios of the
inventory.
B. Perform analytical procedures designed to identify
cost variances.
C. Perform test counts of inventory during the entity’s
physical count.
D. Review the entity’s descriptions of inventory policies
and procedures.
26. Management can best strengthen internal control over the
custody of inventory stored in an off-site warehouse by
implementing
A. Increases in insurance coverage.
B. Reconciliations of transfer slips to/from the warehouse
with inventory records.
C. Regular reconciliation of physical inventories to
accounting records.
D. Regular confirmation of the amount on hand with the
custodian of the warehouse.
27. An employee should not be able to visit the corporate
safety deposit box containing investment securities without
being accompanied by another corporate employee. What
would be a possible consequence of an employee's being
able to visit the safety deposit box unaccompanied?
A. The employee could steal securities and the theft
would never be discovered.
B. It would be impossible to get a fidelity bond on the
employee.
C. There would be no record of when company personnel
visited the safety deposit box.
D. The employee could pledge corporate investments as
security for a short-term personal bank loan.
28. Which of the following statements is incorrect regarding
the reliability of audit evidence?
AUDITING THEORY LONG TEST PART 1
A. Oral representation by the client management is not a
valid evidence. 33. The primary responsibility of a bank acting as registrar of
B. Audit evidence obtained directly by the auditor is capital stock is to
more reliable than that one provided by the client A. Verify that stock is issued in accordance with the
management. authorization of the board of directors and the articles
C. The effectiveness of accounting and internal control of incorporation.
adds to the reliability of internal audit evidence. B. Act as an independent third party between the board of
D. While internal audit evidence is considered to be directors and outside investors concerning mergers,
acceptable, the auditor usually prefers audit evidence acquisitions, and the sale of treasury stock.
form external sources. C. Ascertain that dividends declared do not exceed the
statutory amount allowable in the state of
incorporation.
29. An auditor for a large service company is performing an D. Account for stock certificates by comparing the total
audit of the company's cash balance. The auditor is shares outstanding to the total in the shareholders’
considering the most appropriate audit procedure to use to subsidiary ledger.
ensure that the amount of cash is accurately recorded on
the company's financial statements. The most appropriate
audit procedures for the objective are 34. A Company showed a large restructuring charge on its
A. Examine bank reconciliations, confirm bank balances, income statement in 2004 and has experienced a
and verify cut off of receipts and disbursements; foot constantly rising earnings trend since that time. This
totals of reconciliations and compare to cash account would most nearly represent an example of
balances. A. Using immaterial transactions to increase reported
B. Review collection procedures and perform an earnings to meet analysts' expectations
analytical review of accounts receivable; confirm B. Big bath accounting.
balances of accounts receivable; and verify the C. Cookie jar reserves.
existence of appropriate procedures and facilities. D. Creative acquisition accounting.
C. Compare cash receipt lists with the receipts journal
and bank deposit slips; review the segregation of 35. In substantive testing, which of the following would
duties, observe, and test cash receipts. increase sample size?
D. Review the organizational structure and functional
responsibilities; verify the existence and describe A B C D
protection procedures for unused checks, including Assessment Increase Increase Increase Decrease
security measures. of inherent
risk
Reliance on Increase Decrease Decrease Increase
30. Lapping may most likely be detected by internal
A. Careful comparison of the detailed entries on controls
remittance lists and duplicate deposit slips with the Tolerable Decrease Increase Decrease Increase
cash receipts book. error
B. Surprise count of cash on hand. Expected Increase Decrease Increase Decrease
C. Scrutiny of the cutoff bank balance. error
D. A review of sales discounts. Risk of Decrease Increase Decrease Increase
incorrect
acceptance
31. The accuracy of perpetual inventory records may be
established in part by comparing perpetual inventory
records with 36. In assessing sampling risk, the risk of incorrect
A. Purchase requisitions rejection and the risk of assessing control risk too high
B. Receiving reports (risk of under-reliance) on internal accounting control
C. Purchase orders relate to the
D. Vendor payments. A. Efficiency of the audit.
B. Effectiveness of the audit.
C. Selection of the sample.
32. Assets may suffer an impairment in value for a variety of D. Audit quality controls.
reasons, but not likely as a result of:
A. A corporate restructuring.
B. Slumping demand for uncompetitive products. 37. In testing payroll transactions, an auditor discovers
C. Significant increases in market share. that four out of a statistical sample of one hundred
D. Obsolescence. selected time cards were not signed by the appropriate
supervisor. To evaluate the materiality or significance
AUDITING THEORY LONG TEST PART 1
of this control deficiency, the auditor should
A. Compare the tolerable deviation rate with the
expected deviation rate.
B. Compute an upper precision limit and
compare with the tolerable rate.
C. Evaluate the dollar amount of the four time
cards in relation to the financial statements.
D. Report the deviations and let management
assess the significance because they are in the
best position to know.
38. Which of the following procedures would most likely
be performed in connection with a review of
subsequent events?
A. Test of shipping cut-offs.
B. Review of cut-of bank statements.
C. Vouching of subsequent payments of
accounts payable
D. Reading of minutes of meetings of
stockholders and board of directors up to the
date of the audit report.
39. A CIS environment least likely affects
A. The overall objective and scope of an audit.
B. The procedures followed by the auditor in
obtaining a sufficient understanding of the
accounting and internal control systems.
C. The consideration of inherent risk and control
risk through which the auditor arrives at the
risk assessment.
D. The auditor’s design and performance of tests
of control and substantive procedures
appropriate to meet the audit objective.
40. A common difficulty in auditing a computerized
accounting system is:
A. Because of the lack of an audit trail, computer
systems have weaker controls and more
substantive testing is required.
B. Because of the uniform nature of transaction
processing, computer systems have strong
controls and less substantive testing is
required.
C. Data can be erased from the computer with
no visible evidence.
D. The large dissemination of entry points into
the computer system leads to weak overall
reliance on information generated by a
computer.
41. If an auditor is using test data in a client's computer
system to test the integrity of the systems output,
which of the following types of controls is the auditor
testing?
A. General controls.
B. Quantitative test controls.
C. User controls.
D. Application controls.
42. Systems analysts are the personnel within an
organization who are responsible for the development
of the company’s information system. Which one of
the following functions are least likely to be performed
by a systems analyst?
A. Design of compute applications.
B. Preparation of specifications for computer
programming.
C. Developing, coding, and testing computer
programs.
D. Examining user information requirements.
43. Which of the following controls most likely would
assure that an entity can reconstruct its financial
records?
A. Hardware controls are built into the computer
by the computer manufacturer.
B. Backup diskettes or tapes of files are stored
away from
C. Personnel who are independent of data input
perform parallel simulations.
D. System flowcharts provide accurate
descriptions of input and output operations.
44. The audit report date is important to users because it
A. Last day of the fiscal period.
B. Last day of the auditor’s responsibility for the
review of significant events that occurred
after the date of the financial statements.
C. Date on which the financial statements were
filed with the SEC.
D. Last day on which users may institute a
lawsuit either client or auditor.
45. A document, ordinarily issued by an entity on an
annual basis, which includes its financial statements
together with the audit report thereon.
A. Environmental performance report
B. Annual report
C. Special purpose audit report
D. Prospectus
46. When financial statements of a prior period are
presented on a comparative basis with financial
statements of the current period, the continuing auditor
is responsible for
A. Expressing dual dated opinions.
B. Updating the report on the previous financial
statements only if there has been a change in
the opinion.
C. Updating the report on the previous financial
statements only if the previous report was
qualified and the reasons for the qualification
no longer exist.
AUDITING THEORY LONG TEST PART 1
D. Updating the report on the previous financial
statements regardless of the opinion
previously issued.

47. Identify the appropriate type of opinion to issue when

the auditor is satisfied that there is a remote likelihood
of a loss resulting from the resolution of an
uncertainty.
A. Unqualified opinion.
B. Unqualified opinion with a separate
explanatory paragraph.
C. Qualified opinion or disclaimer of opinion,
depending on whether the uncertainty is
adequately disclosed.
D. Qualified opinion or disclaimer of opinion,
depending upon the materiality of the loss.

48. When an auditor reports on financial statements

prepared on an entity’s income tax basis, the auditor’s
report should
A. Disclaim an opinion on whether the
statements were examined in accordance
with GAAS.
B. Not express an opinion on whether the
statements are presented in conformity with
the comprehensive basis of accounting used.
C. Include an explanation of how the results of
operations differ from the cash receipts and
disbursements basis of accounting.
D. State that the basis of presentation is a
comprehensive basis of accounting other than
GAAP.

49. Which of the following is an appropriate combination

of procedures required in completing a review
engagement?
A. Inquiry and observation
B. Inquiry and analytical procedures
C. Analytical procedures and inspection
D. Observation and analytical procedures

50. The auditor’s report on summarized financial

statements should include
A. An opinion as to whether the information in
the summarized financial statements is
presented fairly, in all material respects.
B. An opinion as to whether the information in
the summarized financial statements is
consistent with the audited financial
statements from which it was derived.
C. A statement of negative assurance.
D. A description of the auditor’s factual findings
including sufficient details of errors and
exceptions found.