PSA 501 – Audit Evidence – Additional Considerations on Specific Items 6.

6. Which of the following statements concerning litigation, claims, and assessments, which were
1. When inventory is material to the financial statements, the auditor should obtain sufficient extracted from a letter from a client’s lawyer, is most likely to cause the auditor to request
appropriate audit evidence regarding its existence and condition by attendance at physical clarification?
inventory counting unless impracticable. Where attendance is impracticable, due to factors such a. “I believe that the possible liability to the company is nominal in amount.”
as the nature and location of the inventory, the auditor should b. “I believe that the action can be settled for less than the damages claimed.”
a. Take or observe some physical counts on an alternative date and, when necessary, perform c. “I believe that the plaintiff’s case against the company is without merit.”
tests of intervening transactions. d. “I believe that the company will be able to defend this action successfully.”
b. Consider whether alternative procedures provide sufficient appropriate audit evidence of 7. The appropriate date for the client to specify as the effective date in the audit inquiry to a lawyer is
existence and condition to conclude that the auditor need not make reference to a scope a. The balance sheet date.
limitation. b. Seven working days after the request is received by the lawyer.
c. Issue qualified or disclaimer of opinion. c. The date of the audit inquiry itself.
d. Issue qualified or adverse opinion. d. The expected date of the completion of audit field work.
2. When litigation or claims have been identified or when the auditor believes they may exist, the 8. The refusal of a client’s lawyer to provide a representation on the legality of a particular act
auditor should committed by the client is ordinarily
a. Seek direct communication with the entity’s lawyers. a. Sufficient reason to issue a “subject to” opinion.
b. Disclose the litigation and claims in the auditor’s report. b. Considered to be a scope limitation.
c. Issue unqualified opinion with explanatory paragraph. c. Insufficient reason to modify the auditor’s report because of the lawyer’s obligation of
d. Issue qualified or adverse opinion. confidentiality.
3. The auditor should carry out procedures in order to become aware of any litigation and claims d. Proper grounds to withdraw from the management.
involving the entity which may have a material effect on the financial statements. Such 9. Which statement is incorrect regarding valuation and disclosure of long-term investments?
procedures least likely include a. When long-term investments are material to the financial statements, the auditor should obtain
a. Making appropriate inquiries of management including obtaining representations. sufficient appropriate audit evidence regarding their valuation and disclosure.
b. Reviewing board minutes and correspondence with the entity’s lawyers. b. Audit procedures regarding long-term investments ordinarily include considering evidence as
c. Examining interest expense accounts. to whether the entity has the ability to continue to hold the investments on a long term basis.
d. Using any information obtained regarding the entity’s business including information obtained c. If market quotations exceed the carrying amounts, the auditor would consider whether a write-
from discussions with any in-house legal department. down is required.
4. The primary source of information to be reported about litigation, claims, and assessments is the d. If there is an uncertainty as to whether the carrying amount will be recovered, the auditor
a. Client’s lawyer c. Client’s management would consider whether appropriate adjustments and/or disclosures have been made.
b. Court records d. Independent auditor 10. Which statement is incorrect regarding segment information?
5. The primary reason an auditor requests that letters of inquiry be sent to a client’s attorneys is to a. Segment information is information in the financial statements regarding distinguishable
provide the auditor with components or industry and geographical aspects of an entity.
a. The probable outcome of asserted claims and pending or threatened litigation. b. When segment information is material to the financial statements, the auditor should obtain
b. Corroboration of the information furnished by management about litigation, claims, and sufficient appropriate audit evidence regarding its disclosure in accordance with generally
assessments. accepted accounting principles in the Philippines.
c. The attorneys’ opinions of the client’s historical experiences in recent similar litigation. c. The auditor considers segment information in relation to the financial statements taken as a
d. A description and evaluation of litigation, claims, and assessments that existed at the balance whole, and is ordinarily required to apply auditing procedures that would be necessary to
sheet date. express an opinion on the segment information standing alone.
 d. Audit procedures regarding segment information ordinarily consist of analytical procedures III. Accounting policies applied in the prior period.
and other audit tests appropriate in the circumstances. a. All of these c. I only
PSA 505 – External Confirmations b. I and II only d. II and III only
11. Which statement is incorrect regarding external confirmation? 16. Which of the following is least considered in determining the sufficiency and appropriateness of
a. External confirmation is the process of obtaining and evaluating audit evidence through a the audit evidence that the auditor will obtain regarding opening balances?
direct communication from a third party in response to a request for information about a a. The length of years in operations of the entity.
particular item affecting assertions made by management in the financial statements. b. The materiality of the opening balances relative to the current period’s financial statements.
b. External confirmation of an account receivable provides strong evidence regarding the c. The accounting policies adopted by the entity.
valuation of the account as at a certain date. d. The risk of misstatements of accounts.
c. The auditor should tailor external confirmation requests to the specific audit objective. 17. Which of the following accounts is more difficult for the auditor to be satisfied as to the balance at
d. The auditor may use positive or negative external confirmation requests or a combination of the beginning of the period?
both. a. Accounts receivable c. Inventory
12. Negative confirmation requests is unlikely to be used to reduce audit risk to an acceptable level b. Accounts payable d. Accrued interest payable
when: 18. If, after performing necessary audit procedures, the auditor is unable to obtain sufficient
a. The assessed level of inherent and control risk is low. appropriate audit evidence concerning opening balances, the auditor's report should include:
b. A large number of small balances is involved. I. A qualified opinion
c. A substantial number of errors is expected. II. A disclaimer of opinion
d. The auditor has no reason to believe that respondents will disregard these requests. III. An opinion which is qualified or disclaimed regarding the results of operations and cash flows
13. An auditor should perform alternative procedures to substantiate the existence of accounts and unqualified regarding financial position
receivable when a. Any of the abovec. Either I or II
a. No reply to a positive confirmation request is received. b. None of the aboved. I only
b. No reply to a negative confirmation request is received. 19. If the opening balances contain misstatements which could materially affect the current period's
c. Collectability of the receivables is in doubt. financial statements and the effect of the misstatement is not properly accounted for and
d. Pledging of the receivables is probable. adequately disclosed, the auditor should express a
PSA 510 – Initial Engagements – Opening Balances a. Unqualified opinion with explanatory paragraph. c. Qualified or disclaimer of opinion.
14. For initial audit engagements, the auditor should obtain sufficient appropriate audit evidence that: b. Qualified or adverse opinion. d. Adverse or disclaimer of opinion.
a. The opening balances do not contain misstatements that materially affect the current period's 20. If the current period's accounting policies have not been consistently applied in relation to opening
financial statements. balances and if the change has not been properly accounted for and adequately disclosed, the
b. The prior period's closing balances have been correctly brought forward to the current period auditor should express a
or, when appropriate, have been restated. a. Unqualified opinion with explanatory paragraph. c. Qualified or disclaimer of opinion.
c. Appropriate accounting policies are consistently applied or changes in accounting policies b. Qualified or adverse opinion. d. Adverse or disclaimer of opinion.
have been properly accounted for and adequately disclosed. PSA 520 – Analytical Procedures
d. All of the above. 21. It means the analysis of significant ratios and trends including the resulting investigation of
15. Opening balances means those account balances which exist at the beginning of the period. fluctuations and relationships that are inconsistent with other relevant information or which deviate
These are based upon the closing balances of the prior period and reflect the effects of: from predicted amounts.
I. Current transactions (e.g. stock dividends) that will be given retroactive effect recognition. a. Analytical proceduresc. Tests of controls
II. Transactions of prior periods. b. Substantive proceduresd. Audit sampling
22. Analytical procedures are used for the following purposes, except: accounts have unexpected relationships. The results of these procedures most likely indicate that
a. To assist the auditor in planning the nature, timing and extent of other audit procedures. a. Irregularities exist among the relevant account balances.
b. As a test performed to obtain audit evidence about the suitability of design and effective b. Internal control activities are not operating effectively.
operation of the accounting and internal control systems. c. Additional tests of details are required.
c. As substantive procedures when their use can be more effective or efficient than tests of d. The communication with the audit committee should be revised.
details in reducing detection risk for specific financial statement assertions. 28. As a result of analytical procedures, the independent auditor determines that the gross profit
d. As an overall review of the financial statements in the final review stage of the audit. percentage has declined from 30% in the preceding year to 20% in the current year. The auditor
23. Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. should
Information to develop this estimate can be obtained from all of the following, except a. Document management’s intentions with respect to plans for reversing this trend.
a. Comparison of financial data with data for comparable prior periods, anticipated results (e.g., b. Evaluate management’s performance in causing this decline.
budgets and forecasts), and similar data for the industry in which the entity operates. c. Require footnote disclosure.
b. Study of the relationships of elements of financial data that would be expected to conform to a d. Consider the possibility of a misstatement in the financial statements.
predictable pattern based upon the entity’s experience. 29. An auditor’s decision either to apply analytical procedures as substantive tests or to perform tests
c. Study of the relationships of financial data with relevant nonfinancial data. of transactions and account balances usually is determined by the
d. Tracing transactions through the system to determine whether procedures are being applied a. Availability of data aggregated at a high level.
as prescribed. b. Relative effectiveness and efficiency of the tests.
24. Analytical procedures used as a substantive procedure focus on c. Timing of tests performed after the balance sheet data.
a. Understanding the business and in identifying areas of potential risk. d. Auditor’s familiarity with industry trends.
b. Detecting material misstatements in the financial statements. 30. An auditor’s preliminary analysis of accounts receivable turnover revealed the following rates;
c. Obtaining audit evidence about the suitability of design and effective operation of the 2005 2004 2003
accounting and internal control systems 4.3 6.2 7.3
d. Whether the financial statements as a whole are consistent with the auditor’s knowledge of the Which of the following is the most likely cause of the decrease in accounts receivable turnover?
business. a. Increase in the cash discount offered c. Shortening of due date terms
25. Which of the following statements concerning analytical procedures is true? b. Liberalization of credit policy d. Increased cash sales
a. Analytical procedures may be omitted entirely for some financial statement audits. 31. Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained
b. Analytical procedures used in planning the audit should not use nonfinancial information. decrease in the ratio of gross profit to sales suggests which of the following possibilities?
c. Analytical procedures usually are effective and efficient for tests of controls. a. Unrecorded purchases
d. Analytical procedures alone may provide the appropriate level of assurance for some b. Unrecorded sales
assertions. c. Merchandise purchases being charged to selling and general expense
26. The application of analytical procedures is based on the expectation that relationships among data d. Fictitious sales
exist and continue in the absence of known conditions to the contrary. Which of the following items 32. Analytical procedures used in the overall review stage of an audit generally include
tend to be the most predictable for purposes of analytical procedures applied as substantive tests? a. Considering unusual or unexpected account balances that were not previously identified.
a. Relationships involving balance sheet accounts. b. Performing tests of transactions to corroborate management’s financial statement assertions.
b. Transactions subject to management discretion. c. Gathering evidence concerning account balances that have not changed from the prior year.
c. Relationships involving income statement accounts. d. Retesting controls that appeared to be ineffective during the assessment of control risk.
d. Data subject to audit testing in the prior year. 33. The investigation of unusual fluctuations and relationships ordinarily begins with
27. Analytical procedures performed in the overall review stage of an audit suggest that several a. Identification significant fluctuations or relationships that are inconsistent with other relevant
 information or that deviate from predicted amounts. concern.
b. Inquiries of management. b. Fair value is normally the amount that an entity would receive or pay in a forced transaction,
c. Comparing management's responses with the auditor's knowledge of the business and other involuntary liquidation, or distress sale.
evidence obtained during the course of the audit. c. The measurement of fair value may be relatively simple for assets that are bought and sold in
d. Consideration of the need to apply other audit procedures. active and open markets.
PSA 540 – Audit of Accounting Estimates d. The estimation of fair value may be achieved through the use of a valuation model or through
34. It means an approximation of the amount of an item in the absence of a precise means of the assistance of an expert, such as an independent appraiser.
measurement 39. The degree to which a fair value measurement is susceptible to misstatement is a(an)
a. Accounting estimate c. Accounting error a. Audit risk b. Inherent risk c. Control risk d. Detection risk
b. Accounting policy d. Accounting change 40. Regarding fair value measurements and disclosures, the auditor is not required to
35. The auditor should adopt one or a combination of the following approaches in the audit of an a. Obtain evidence about management's intent to carry out specific courses of action, and
accounting estimate: consider its ability to do so, where relevant to the fair value measurements and disclosures
I. Review and test the process used by management to develop the estimate. under GAAP in the Philippines.
II. Use an independent estimate for comparison with that prepared by management. b. Evaluate whether the entity's method for its fair value measurements is applied consistently.
III. Review subsequent events which confirm the estimate made. c. Use the work of an expert.
a. Any of the above c. Either I or II d. Test the entity's fair value measurements and disclosures.
b. None of the above d. I only 41. Which of the following is ordinarily the best evidence of fair value?
36. In evaluating the assumptions on which the estimate is based, the auditor would need to pay a. Published price quotations in an active market.
particular attention to assumptions which are b. Discounted cash flow analysis.
a. Reasonable in light of actual results in prior periods. c. Comparative transaction model.
b. Consistent with those used for other accounting estimates. d. None of the above.
c. Consistent with management’s plans which appear appropriate. 42. When testing the entity's fair value measurements and disclosures, the auditor evaluates whether:
d. Subjective or susceptible to material misstatement. a. The assumptions used by management are reasonable.
PSA 545 – Auditing Fair Value Measurements and Disclosures b. The fair value measurement was determined using an appropriate model, if applicable.
37. Which statement is incorrect regarding auditing fair value measurements and disclosures? c. Management used relevant information that was reasonably available at the time.
a. The auditor should obtain sufficient appropriate audit evidence that fair value measurements d. All of the above.
and disclosures are in accordance with GAAP in the Philippines. PSA 550 – Related Parties
b. Many measurements based on estimates, including fair value measurements, are inherently 43. Which statement is incorrect regarding the auditor's responsibilities and audit procedures
imprecise. regarding related parties and transactions with such parties?
c. The auditor's consideration of such assumptions is based on information available to the a. The auditor should perform audit procedures designed to obtain sufficient appropriate audit
auditor at the time of the audit. evidence regarding the identification and disclosure by management of related parties and the
d. The auditor is responsible for predicting future conditions, transactions or events which, had effect of related party transactions that are material to the financial statements.
they been known at the time of the audit, may have had a significant effect on management's b. An audit cannot be expected to detect all related party transactions.
actions or management's assumptions underlying the fair value measurements and c. The auditor is responsible for the identification and disclosure of related parties and
disclosures. transactions with such parties.
38. Which statement is incorrect regarding fair value measurements? d. The auditor needs to have a level of knowledge of the entity's business and industry that will
a. Underlying the concept of fair value measurements is a presumption that the entity is a going enable identification of the events, transactions and practices that may have a material effect
 on the financial statements. 49. Which of the following least likely requires the services of an expert?
44. When auditing related-party transactions, an auditor places primary emphasis on a. Valuations of certain types of assets like land and buildings.
a. Confirming the existence of the related parties. b. Legal opinions concerning interpretations of engagements, statutes and regulations.
b. Verifying the valuation of the related-party transactions. c. Determination of amounts using specialized techniques.
c. Evaluating the disclosure of the related-party transactions. d. Application of accounting methods in computing inventory balances.
d. Ascertaining the rights and obligations of the related parties. 50. When the auditor has to determine the need to use the work of an expert, he would least likely
45. After determining that a related-party transaction has, in fact, occurred, and auditor should consider:
a. Add a separate paragraph to the auditor’s standard report to explain the transaction. a. The cost of using the services of an expert.
b. Perform analytical procedures to verify whether similar transactions occurred, but were not b. The quantity and quality of other audit evidence available.
recorded. c. The materiality of the financial statement item being considered.
c. Obtain an understanding of the business purpose of the transaction. d. The risk of misstatement based on the nature and complexity of the matter being considered.
d. Substantiate that the transaction was consummated on terms equivalent to an arm’s-length
transaction.
46. Which of the following least likely indicates the existence of previously unidentified related parties?
a. Transactions which have abnormal terms of trade., such as unusual prices, interest rates,
guarantees, and repayment terms.
b. Transactions which lack an apparent logical business reason for their occurrence.
c. Transactions in which substance does not differ from form.
d. Unrecorded transactions such as the receipt or provision of management services at no
charge.
PSA 620 – Using the Work of an Expert
47. Which statement is incorrect regarding the auditor’s use of the work of an expert?
a. When using the work performed by an expert, the auditor should obtain sufficient appropriate
audit evidence that such work is adequate for the purposes of the audit.
b. “Expert” means a person or firm possessing special skill, knowledge and experience in a
particular field other than accounting and auditing.
c. The auditor's education and experience enable the auditor to be knowledgeable about
business matters in general, but the auditor is not expected to have the expertise of a person
trained for or qualified to engage in the practice of another profession or occupation.
d. When the auditor uses the work of an expert employed by the auditor, that work is used in the
employee's capacity as an assistant on the audit.
48. An expert may be:
A B C D
Engaged by the entity Yes Yes Yes Yes
Engaged by the auditor No No No Yes
Employed by the entity Yes Yes No Yes
Employed by the auditor No No Yes Yes