1.

In determining the primary responsibility of the external auditor for an audit of a company’s
financial statements, the auditor owes primary allegiance to:

A. the management of the audit client because the auditor is hired and paid by
management.

B. the audit committee of the audit client because that committee is responsible for
coordinating and reviewing all audit activities within the company.

C. stockholders, creditors, and the investing public.

D. the Auditing and Assurance Standards Council, because it determines auditing standards
and auditor’s responsibility.

2. Which of the following is a correct statement?

A. An audit provides limited assurance by attesting to the fairness of the client’s

assertions.

B. A review provides positive assurance by attesting the reliability of the client’s

assertions.

C. Management consulting services provide attestation in all cases.

D. Accounting services do not provide attestation.

3. Unlike consulting services, assurance services:

A. make recommendation to management

B. report on how to use information
C. report on the quality of information
D. are two-party contracts.

4. The risk associated with a company's survival and profitability is referred to as:

A. Business Risk
B. Information Risk
C. Detection Risk
D. Control Risk
5. The review of a company's financial statements by a CPA firm:

A. Is substantially less in scope of procedures than an audit

B. Requires detailed analysis of the major accounts
C. Is of similar scope as an audit and adds similar credibility to the statements
D. Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the
statements

6. Assurance services may include which of the following?

A. attesting to financial statements
B. examination of the economy and efficiency of governmental operations
C. evaluation of a division's performance for management
D. all of the given choices

7. The auditor of financial statements must make very difficult interpretations regarding
authoritative literature. Additionally, the auditor must

A. proceed beyond PFRS to assess how the economic activity is portrayed in the financial
statements.

B. force management to make certain decisions regarding their financial statements.

C. disregard independence in order to find the underlying truth of the evidence.

D. establish new criteria by which financial statements may be compared.

8. Which one of the following is not a part of the attest process?

A. gathering evidence about assertions

B. proving the accuracy of the books and records
C. evaluating evidence against objective criteria
D. communicating the conclusions reached

9. Which one of the following is not a reason why the users of financial statements
desire for an independent assessment of the financial statement presentation?

A. complexity of transactions affecting the financial statements

B. lack of criteria on which to base information
C. remoteness of the user from the organization
D. all of them are potential reasons

10. Independent professional services that are provided on financial or other information that
improve the quality of decision making are known as

A. internal auditing.
B. financial auditing.
C. assurance services.
D. attestation services.

11. An audit which determines whether organizational policies are being followed and whether
external mandates are being met is known as

A. a financial audit.
B. a compliance audit.
C. an operational audit.
D. none of the above

12. Which of the following describes how the objective of a review of financial statements
differs from the objective of a compilation engagement?

A. The primary objective of a review engagement is to test the completeness of the financial
statements prepared, but a compilation tests for reasonableness.
B. The primary objective of a review engagement is to provide positive assurance that the
financial statements are fairly presented, but a compilation provides no such assurance.
C. In a review engagement, accountants provide limited assurance, but a compilation
expresses no assurance.
D. In a review engagement, accountants provide reasonable or positive assurance that
the financial statements are fairly presented, but a compilation provides limited
assurance.

13. Which type of risk does the management of a company have the most control over in the
short term?

A. Inherent risk
B. Control risk
C. Detection risk
D. Sufficiency risk

14. An audit program provides a proof that

A. sufficient competent evidential matter is obtained.
B. the work is adequately planned.
C. there is compliance with generally accepted standards of reporting.
D. there is a proper study and evaluation of internal control.

15. Which of the following ultimately determines the specific audit procedures necessary to
provide an independent auditor with a reasonable basis for the expression of an opinion?

A. The audit program

B. The auditor's judgment
C. Philippine Standards on Auditing
D. The auditor's working papers

16. When unable to obtain sufficient competent evidential matter to determine whether
certain client management‟s acts are non-compliance to laws and regulations, the auditor
would most likely issue

A. an unqualified opinion with a separate explanatory paragraph.

B. either a qualified opinion or an adverse opinion.
C. either a disclaimer of opinion or a qualified opinion.
D. either an adverse opinion or a disclaimer of opinion.

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

A. studying and evaluating internal control.

B. obtaining and examining evidential matter.
C. examining cash transactions.
D. comparing recorded accountability with assets.

18. Evidential matter is generally considered sufficient when

A. it is competent.
B. there is enough of it to afford a reasonable basis for an opinion on the financial
statements.
C. it has the qualities of being relevant, objective, and free from known bias.
D. it has been obtained through random selection.

19. To test for unsupported entries in the ledger, the direction of audit testing should be from the

A. ledger entries.
B. journal entries.
C. externally generated documents.
D. original source documents.
20. Tracing from source documents to journals most directly addresses which financial
statement assertion?

A. Valuation
B. Completeness
C. Existence
D. Rights

21. In testing the existence assertion for an asset, an auditor ordinarily works from the

A. financial statements to the potentially unrecorded items.

B. potentially unrecorded items to the financial statements.
C. accounting records to the supporting evidence.
D. supporting evidence to the accounting records.

22. Who is responsible for establishing the process and controls for preparing accounting
estimates?

A. The independent auditor

B. The internal auditor
C. The management
D. The controller

23. The auditor communicates the results of his or her work through the medium of the

a. Engagement letter c. Management letter.

b. Audit report d. Financial statements.

24. 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.

25. 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.

26. Which of the following criteria is unique to the independent auditor’s attest function?
a. General competence
b. Familiarity with the particular industry of each client
c. Due professional care
d. Independence

27. Assurance engagement

a. Is an engagement in which a practitioner is engaged to issue, or does issue, a

written communication that expresses a conclusion about the reliability of a
written assertion that is the responsibility of another party.
b. Is a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the
degree of correspondence
between those assertions and established criteria and communicating the
results to interested users.
c. Is an engagement in which the auditor provides a moderate level of
assurance that the information subject to the engagement is free of material
misstatement.
d. Is an engagement intended to enhance the credibility of information about a
subject matter by evaluating whether the subject matter conforms in all material
respects with suitable criteria, thereby improving the likelihood that the
information will meet the needs of an intended user.

28. The criteria for evaluating quantitative information vary. For example, in the audit of
historical financial statements by CPA firms, the criteria are usually

a. Generally accepted auditing standards.

b. Generally accepted accounting principles.
c. Regulations of the Internal Revenue Service.
d. Regulations of the Securities and Exchange Commission.

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

a. Operational audit c. Financial statement audit

b. Compliance audit d. Financial audit

30. An operational audit is designed to

a. Assess the efficiency and effectiveness of management’s operating
procedures
b. Assess the presentation of management’s financial statements in
accordance with generally accepted accounting principles
c. Determine whether management has complied with applicable laws and
regulations
d. Determine whether the audit committee of the board of directors is effectively
discharging its responsibility to oversee management’s operations
31. A financial statement audit:

a. Confirms that financial statement assertion are accurate.

b. Lends credibility to the financial statements.
c. Guarantees that financial statements are presented fairly.
d. Assures that fraud had been detected.

32 Which of the following best describes the objective of an audit of financial statements?

a. To express an opinion whether the financial statements are prepared in

accordance with prescribed criteria.
b. To express an assurance as to the future viability of the entity whose financial
statements are being audited.
c. To express an assurance about the management’s efficiency or
effectiveness in conducting the operations of entity.
d. To express an opinion whether the financial statements are prepared, in all
material respect, in accordance with an identified financial reporting
framework.

33. Which of the following is responsible for an entity’s financial

statements?

a. The entity’s management c. The entity’s audit committee

b. The entity’s internal auditors d. The entity’s board of directors

34. Which of the following least likely limits the auditors ability to detect material misstatement?

a. Most audit evidences are conclusive rather than being persuasive.

b. The inherent limitations of any accounting and internal control system.
c. Audit is based on testing
d. Audit procedures that are effective in detecting ordinary misstatements are
ineffective in detecting intentional misstatements.

35. Because an examination in accordance with generally accepted auditing

standards is influenced by the possibility of material errors, the auditor should
conduct the examination with an attitude of

a. Professional responsiveness c. Objective judgment

b. Conservative advocacy d. Professional skepticism

36. Which of the following best describes why an independent auditor reports on
financial statements?

a. Independent auditors are likely to detect fraud

b. Competing interests may exist between management and the users of the
statements
c. Misstated account balances are generally corrected by an independent
audit.
d. Ineffective internal controls may exist.

37. An audit can have a significant effect on

a. Information Risk c. Business Risk

b. The risk-free interest rate d. All of these

38. Which of the following is an appraisal activity established within an entity as a

service to the entity?

a. External auditing c. Financial auditing

b. Internal auditing d. Compliance auditing

39. Which of the following is an incorrect phrase?

a. Auditing is a systematic process.

b. Auditing subjectively obtains and evaluates evidence.
c. Auditing evaluates evidence regarding assertions.
d. Auditing communicates results to interested users.

40. Which of the following is a correct statement relating to the theoretical framework of
auditing?

a. The financial data to be audited can be verified.

b. Short-term conflicts do not exist between managers who prepare data and
auditors who examine data.
c. Auditors do not necessarily need independence.
d. An audit has a benefit only to the owners.

41. The essence of the attest function is to

a. Detect fraud
b. Examine individual transactions so that the auditor can certify as to their
validity
c. Determine whether the client’s financial statements are fairly stated
d. Ensure the consistent application of correct accounting procedures

42. In “auditing” accounting data, the concern is with

a. Determining whether recorded information properly reflects the economic

events that occurred during the accounting period.
b. Determining if fraud has occurred.
c. Determining if taxable income has been calculated correctly.
d. Analyzing the financial information to be sure that it complies with
government requirements.

43. Users of financial statements demand independent audit because

a. Users demand assurance that fraud does not exist

b. Management may not be objective in reporting.
c. Users expect auditors to correct management errors.
d. Management relies on the auditor to improve internal control.

44. An assurance engagement should exhibit the following elements except

a. A three party relationship c. Appropriate professional fee

b. A conclusion d. A subject matter

45. Agreed-upon procedures provides what level of assurance?

a. None b. High c. Moderate d. Absolute

46. Which statement is correct regarding the sufficiency and appropriateness of audit evidence?

a. Sufficiency is the measure of the quality of audit evidence.

b. Appropriateness is the measure of the quantity of audit evidence; that is, its
relevance and its reliability in providing support for, or detecting misstatements in,
the classes of transactions, account balances, and disclosures and related
assertions.
c. The quantity of audit evidence needed is affected by the risk of misstatement
(the greater the risk, the more audit evidence is likely to be required) and also by
the quality of such audit evidence (the higher the quality, the less may be
required).
d. Merely obtaining more audit evidence may compensate for its poor quality.

47. Which of the following audit procedures is used extensively throughout the audit and
often is complementary to performing other audit procedures?

a. Inspection b. Observation c. Inquiry d.Confirmation

48. Which statement is incorrect regarding Inquiry?

a. Responses to inquiries may provide the auditor with information not previously possessed
or with corroborative audit evidence.
b. Responses to inquiries might provide information that differs significantly from
other information that the auditor has obtained.
c. Responses to inquiries may provide a basis for the auditor to modify or perform
additional audit procedures.
d. Inquiry alone is sufficient to test the operating effectiveness of
controls.

49. Observation
a. Consists of looking at a process or procedure being performed by others.
b. Consists of seeking information of knowledgeable persons, both financial and non-
financial, throughout the entity or outside the entity.
c. Is the process of obtaining a representation of information or of an existing condition
directly from a third party.
d. Is the auditor’s independent execution of procedures or controls that were
originally performed as part of the entity’s internal control.

50. This consists of checking the mathematical accuracy of documents or records.

a. Reperformance b. Recalculation c. Confirmation d. Inspection

51. The most reliable form of documentary evidence are those documents that are
a. Prenumbered c. Easily duplicated
b. Internally generated d. Authorized by a responsible official

52. It means the materials prepared by and for, or obtained and retained by the
auditor in connection with the performance of the audit.

a. Documentation c. Engagement letter

b. Audit evidence d. Audit report

53. Which of the following is not a purpose of working papers?

a. Assist in the planning and performance of the audit.
b. Assist in the supervision and review of the audit work.
c. Record the audit evidence resulting from the audit work performed to support the
auditor’s opinion.
d. Support the client’s financial statements.

54. Why does an auditor document audit evidence?

a. To comply with the requirements of gathering all available evidence.

b. To provide client reference for all account balances and correcting
entries.
c. To support audit opinion and to provide evidence that the audit was
carried out in accordance with PSA.
d. To document all records of misstatements noted in the financial
statements.
55. 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.

56. 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

57. 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.

58. 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. c. Increase inherent risk.

b. Increase materiality levels. d. Decrease detection risk.

59. The main purpose of risk assessment procedures is to

a. Obtain an understanding of the entity and its environment, including its internal
control, to assess the risks of material misstatement at the financial statement and
assertion levels.

b. Test the operating effectiveness of controls in preventing, or detecting and

correcting, material misstatements at the assertion level.

c. Detect material misstatements at the assertion level.

d. All of the above.

60. Inquiries directed towards those charged with governance may most likely

a. Relate to their activities concerning the design and effectiveness of the entity’s
internal control and whether management has satisfactorily responded to any
findings from these activities.
b. Help the auditor understand the environment in which the financial
statements are prepared.
c. Relate to changes in the entity’s marketing strategies, sales trends, or
contractual arrangements with its customers.
d. Help the auditor in evaluating the appropriateness of the selection and application
of certain accounting policies.

61. Whether the auditor has performed an audit in accordance with PSAs is determined by

a. The adequacy of the audit procedures performed in the circumstances and the
suitability of the auditor’s report based on the result of these procedures.
b. The absence of material misstatements.
c. The absence of material errors.
d. The Securities and Exchange Commission.

62. In financial statement audits, the audit process should be conducted in accordance with

a. The audit program

b. Philippine Standard on auditing
c. Philippine Accounting Standards
d. Philippine Financial Reporting Standards.

63. An examination of part of an organization’s procedure and methods for the purpose of
evaluating efficiency and effectiveness is what type of audit?

a. Operational audit
b. Compliance audit
c. Financial statement audit
d. Production audit

64. The level of assurance provided by an auditor on an audit report is

a. low
b. high
c. moderate
d. none

65. The reason an independent auditor gathers evidence is to

a. form an opinion on financial statements

d. detect fraud
c. evaluate management’s performance
d. evaluate the entity’s internal control

66 Generally Accepted Auditing Standards (GAAS) and Philippine Standards on

Auditing (PSA) should be looked upon by practitioners as:

a. Ideals to work towards, but which are not achievable

b. Maximum standards which denote excellent work.
c. Minimum standards of performance which must be achieved on each audit
engagement.
d. Benchmark to be used on all audits, reviews, and compilations..

67. Which of the following best describes what is meant by Generally Accepted
Auditing Standards?

a. Pronouncements issued by the Auditing Standards and Practices

Council.

b. Procedure to be used to gather evidence to support financial

statements.
c. Rules acknowledged by the accounting profession because of their universal compliance.
d. Measures of the quality of the auditor’s performance

68. A CPA should comply with applicable generally accepted auditing standards
on every engagement

a. Without exception
b. Except in examinations that result in a qualified report
c. Except in engagements where the CPA is associated with unaudited financial
statements.
d. Except in examinations of interim financial statements.

69. A CPA is most likely to refer to one or more of the three general auditing
standards in determining

a. The nature of the CPA’s auditing qualification.

b. The scope of the CPA’s auditing procedures.
c. Requirements for the review of internal control.
d. Whether the CPA should undertake an audit engagement.

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

a. Reduce risk and liability.

b. Comply with the generally accepted standards of field work
c. Become independent in fact.
d. Maintain public confidence in the profession.