MM&C CO. CPD TRAINING CENTER, INC.

RANDY S. PADERES MMC AT 1PB

FIRST PREBOARD EXAMS
AUDITING THEORY

DIRECTION: Shade the letter of the most appropriate answer.

1. Which of the following is an element of a CPA firm’s quality control system that should be considered in
establishing its quality control policies and procedures?
a. Complying with the laws and regulations.
b. Using statistical sampling techniques.
c. Assigning personnel to engagements.
d. Considering audit risk and materiality.

2. The relationship between control risk and detection risk is ordinarily

a. Parellel c. Direct
b. Inverse d. Equal

3. Mill, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied
by Modern company regarding Modern’s written assertions about its compliance with contractual requirements to
pay royalties. Mill’s report on these agreed-upon procedures should contain a (an)
a. Disclaimer of opinion about the fair presentation of Modern’s financial statements.
b. List of the procedures performed (or reference thereto) and Mill’s findings.
c. Opinion about the effectiveness of Modern’s internal control activities concerning royalty payments.
d. Acknowledgement that the sufficiency of the procedures is solely Mill’s responsibility.

4. A successor auditor should request the new client to authorized the predecessor auditor to allow a review of the
predecessor’s

Engagement letter Audit Documentation

a. Yes Yes
b. Yes No
c. No Yes
d. No No

5. During the initial planning phase of an audit, a CPA most likely would
a. Identify specific internal control activities that are likely to prevent the fraud.
b. Evaluate the reasonableness of the client’s accounting estimates.
c. Discuss the timing of the audit procedures with the client’s management.
d. Inquire of the client’s attorney as to whether any unrecorded claims are probable of assertion.

6. On the basis of the audit evidence gathered and evaluated, an auditor decides to increase the assessed level of
control risk from that originally planned. 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. Decrease detection risk.
c. Increase inherent risk.
d. Increase materiality risk.

7. In obtaining an understanding of the entity’s internal controls that are relevant to audit planning, a auditor is
required to obtain a knowledge about the
a. Design of relevant internal controls pertaining to the financial reporting in each of the five internal control
components.
b. Effectiveness of the internal controls that have been placed in operation.
c. Consistency with which the internal controls are currently being applied.
d. Controls related to each principal transaction class and account balance.

8. Which of the following are considered control environment factors?

Human resources
Detection Policies and
Risk practices

a. Yes Yes
b. Yes No
c. No Yes
d. No No

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 9. An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements
provided that
a. the distribution of the report is limited to the specified parties involved.
b. the prospective financail statements are also examined.
c. The responsibility for the adequacy of the procedures performed is taken by the accountant.
d. Negative assurance is expressed on the prospective financial statements taken as a whole.

10. Which of the following best decribes why an independent auditor is asked to express an opinino on the fair
presentation of financial statements?
a. it is difficult to prepare financial statements that fairly represent a company’s financial position, cash flow,
and operations without the expertise of an independent auditor.
b. It is management’s responsibility to seek available independent aid in the appraisal of the financial
information shown in its financial statements.
c. The opinion of an independent party is needed because a company may not be objective with respect to
its own financial statements.
d. It is a customary courtesy that all stockholders of a compay receive an independent report on
management’s stewardship in managing the affairs of the business.

11. During the audit of the 2012 financial statements of Goldirock’s Corp, an entity which supplies hardware materials
to construction companies, Mr. Henry Chips received several types of documentary evidences. Which of the
following is considered as the most reliable?
a. Working papers prepared by the Chief Accountant and reviewed personally by the VP-Finance.
b. A check issued by the Treasurer, with the payee’s endorsement, included in the statement mailed by the
bank directly to the auditor.
c. A delivery receipt issued by the shipping department, signed by the customer, with an accompanying copy
of the sales invoice.
d. Vendor’s Confirmation of the balance of an accounts payable mailed by and returned directly to the
auditor.

12. Wald, CPA, is preparing unaudited financial statements for Zaikin Company. During the engagement, Wald
becomes aware that the statements are misleading. Wald should
a. Disclaim an opinion.
b. Insist that the statements be corrected.
c. Issue an adverse opinion.
d. Insist that the statements be audited.

13. In accordance with the provisions of Republic Act No. 9298, the following are the available penalties against
violating CPAs
I. Revocation of CPA license.
II. Suspension of the CPA license
III. Imprisonment and/or fines
a. I and II c. II and III
b. I and III d. I, II and III

14. To exercise due professional care, an auditor should

a. attain the proper balance of professional experience and formal education.
b. Design the audit to detect all instances of illegal acts.
c. Critically review the judgment exercised by those assisting in the audit.
d. Examine all available corroborating evidence supporting management’s assertions.

15. How should generally accepted auditing standards and the Philippine Standards on Auditing be looked on by CPA
practitioners?
a. They are maximum standards that must be complied with.
b. They are minimum standards of performance.
c. They are clearly defined guidelines for determining the extent of evidence to be accumulated.
d. They are minimum specific audit procedures that the auditors are expected to perform.

16. The primary difference between an audit of the balance sheet and the audit of income statement is that the audit
of the balance sheet date more with the verification of
a. Transactions c. Costs
b. Authorizations d. Balances

17. Before accepting an engagement with a new client, the CPA firm shall assess the following except
a. If the auditor is competent to perform the engagemnet, has the capabilities including time and resources
to do so.
b. The auditor can comly with the relevant ethical requirement.
c. If the client has integrity.
d. If the client has the financial capacity to pay the estimated audit fee.

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 18. Yayamaning Co. engages the services of Mr. Ka Hirapan, CPA to make a project study on the expanded food
vending operations of the Corporation with the corresponding staffing and compensation package for its executive
staff. Mr. Ka Hirapan, however, has primarily auditing expertise and only in general merchandising operations.
Mr. Ka Hirapan may properly
a. Accept the engagement and carry it out consistent with the standards on auditing.
b. Accept the engagement but exercise more due professional care.
c. Accept the engagement and acquire the necessary competence or consult with established authorities.
d. Decline the engagement for lack of experience or competence in an entirely new line of specialization.

19. Engagement letters are widely used in practice for professional engagements of all types. The primary purpose of
the engagement letter is to
a. Remind management that the primary responsibility for the financial statements rests with management.
b. Satisfy the requirements of the CPA’s liability insurance policy.
c. Provide a starting point for the auditor’s preparation of the preliminary audit program.
d. Provide a written record of the agreement with the client as to services to be provided.

20. Internal accounting control comprises the plan of organization and the procedures and records that are concerned
with the safeguarding of assets and the
a. Decision process of management.
b. Reliability of financial records.
c. Authorization of transactions.
d. Achievement of administrative objectives.

21. The audit risk against which the auditor requires reasonable protection is a combination of two separate risks. The
first of these is that material errors will occur in the accounting process by which the financial statements are
developed and the second is that
a. A company’s system of intenral control is not adequate to detect errors and irregularities.
b. Those errors that occur will not be detected in the auditor’s examinations.
c. Management may possess an attitude that lacks integrity.
d. Evidence gathered is not sufficient and appropriate enough for the auditor to form an opinon.

22. A and Z are partners in a two-member partnership providing CPA services. A dies, leaving Z as the sole survivor in
the partnership. Subsequent to the death of A, the surviving partner may continue to practice as an individual
under the existing firm title (which includes A’s name) for not more than
a. five years c. three years
b. four years d. two years

23. After accepting an assurance engagement, a practitioner is not allowed to change the engagement to a non-
assurance engagement or from a raesonable assurance engagement to a limited assurance engamgenet, except
when there is reasonable justification for the change. Which of the following ordinarily will justify a request for a
change in the engagement?
IV. A change in circumstances that affects the intended user’s requirements.
V. A misunderstanding concerning the nature of the engagement.
a. I only c. II only
b. Both I and II d. Neither I or II

24. An accountant providing a compilation service must

a. Be independent of the client.
b. Assure that the work is performed by a person with adequate training and with the professional care.
c. Carefully review the information provided by the client.
d. Provide limitted assurance that the information follows the acceptable financial reporting standards in the
Philippines.

25. The risk that the audit will fail to uncover a material misstatement is eliminated
a. if client has good internal control.
b. If client follows financial reporting standards.
c. When the auditor has complied with Philippine Standards on Auditing (PSAs)
d. Under no circumstances.

26. A firm of CPAs may use policies and procedures such as notifying professional personnel as to the name of audit
clients having publicly held securities and conforming periodically with such personnel that prohibited relations do
not exist. This is done to achieve effective quality control in which of the following areas?
a. Acceptance and continuance of clients
b. Human resources
c. Ethical Requirements
d. Leadership responsibilities for quality within the firm.

27. The level of assurance provided by an audit of detecting a material misstatement is referred to as:
a. Absolute assurance. c. Negative assurance
b. High assurance d. Reasonable assurance

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 28. Which of the following is correct regarding benefits of audit planning?
a. Audit planning helps coordinate the work to be done by auditors of components and other parties such as
experts, specialists, etc.
b. Audit planning helps ensure that the audit is properly organized, managed and performed in an effective
and efficient manner.
c. Audit planning aids in ensuring the examination of financial statements can be performed without
problems and difficulties.
d. Audit planning helps ensure that appropriate attention is devoted to important areas of the audit.

29. When a practitioner knows that a subject of an assurance engagement may be misleading because they were not
prepared in conformity with its critera, he or she must issue
a. a qualified opinion
b. an adverse opinion
c. a disclaimer of opinion
d. a qualified or an adverse opinion depending on the materiality of the item in question.

30. The responsibility for adopting sound accounting policies, maintaining an adequate internal control structure, and
making fair representations in the financial statements rests
a. With management.
b. With the independent auditor.
c. Equally with the management and auditor.
d. With the internal audit department.

31. An auditor may compensate for a weakness in the internal conrol structure by increasing the
a. Level of detection risk.
b. Extent of test of controls.
c. Preliminary judgment about audit risk.
d. Extent of analytical procedures.

32. Which of the following is correct regarding business risk?

a. The risk of material mistatements in the financial statements is broader than business risk, though it
includes the latter.
b. The auditor should identify or assess all business risks.
c. All business risks give rise to risks of material misstatements.
d. A business risk may have an immediate consequene for the risk of misstatement for classes of
transactions, account balances, and disclosures at the assertion level or the financial statements as a
whole.

33. Which of the following statements is not correct about materiality?

a. The concept of materiality recognizes that some matters are important for fair presentation of financial
statements in conformity with GAAP, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of
misstatements that could be material to any one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstances and necessarily involve both
quantitative and qualitative judgments.
d. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a
reasonable person who will rely on the financial statements.

34. To obtain an understanding of a continuing client’s business in planning an audit, an auditor most likely would
a. Performs 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. Reevaluate the client’s internal control environment.

35. Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement?
a. The CPA’s lack of understanding of the prospective client’s internal auditor’s computer-assisted audit
techniques.
b. Management’s disregard of its responsibility to maintain an adequate internal control environment.
c. The CPA’s inability to determine whether related-party transactions were consummated on terms
equivalent to arm’s-length transactions.
d. Management’s refusal to permit the CPA to perform substantive tests before the year-end.

END OF MMC AT-1PB

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