Auditing Theory: Professional Responsibilities and Other Topics

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Philippine Accountancy Act of 2004

1. The primary duty to enforce the provisions of RA 9298 and its IRR rests with
a. PRC b. BOA c. PRC and BOA d. AASC

2. The following are the objectives of the R.A. No. 9298, except
a. The standardization and regulation of accounting education
b. The examination for registration of certified public accountants
c. The development of virtuous, productive and well-rounded certified public
accountants
d. The supervision, control, and regulation of the practice of accountancy in the
Philippines

3. It is the area of practice of accountancy namely public accountancy,

commerce and industry, academe/education and government.
a. Scope of Services b. Field c. Area d.
Sector

4. A person who holds a valid Certificate of Registration and a valid Professional

Identification Card issued by the Commission upon recommendation by the
Board to those who have satisfactorily complied with all the legal and
procedural requirements for such issuance, including in appropriate cases,
having passed the CPA licensure examination
a. Professional Accountant c. Certified Public Accountant
b. Practitioner in Public Accounting d. Board Passer

5. An organization engaged in the practice of public accountancy, consisting of a

sole proprietor, either alone or with one or more staff member(s).
a. Individual CPA b. Firm c. Partnership d.
Sole Proprietor

6. A certified public accountant engaged in the practice of public accountancy

under his/her name, by himself/herself only or with one or more staff
member(s).
a. Individual CPA b. Firm c. Partnership d.
Sole Proprietor

7. A CPA is in public practice when he/she

a. Represents his/her employer before government agencies on tax and
other matters related to accounting.
b. Represents his/her clients before government agencies on tax and other
matters related to accounting.
c. Teaches accounting, auditing, management advisory services, accounting
aspect of finance, business law and other technically related subjects.
d. Holds, or is appointed to, in an accounting professional group in
government or in a government-owned and/or controlled corporation
where decision making requires professional knowledge in the science of
accounting.

8. 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 P 10,000,000.

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 Auditing Theory: Professional Responsibilities and Other Topics
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. That the business or company where the above position exists has an
annual revenue of at least P5,000,000 and/or paid-up capital of at least P
10,000,000.

9. A meaningful experience shall be considered as satisfactory compliance

with the requirements of Section 28 of RA 9298 if it is earned in (Choose the
incorrect one)
a. Commerce and industry and shall include significant involvement in
general accounting, budgeting, tax administration, internal auditing,
liaison with external auditors, representing his/her employer before
government agencies on tax and matters related to accounting or any
other related functions.
b. Academe/education and shall include teaching for at least three (3)
trimesters or two (2) semesters subjects in either financial accounting,
business law and tax, auditing problems, auditing theory, financial
management and management services.
c. Government and shall include significant involvement in general
accounting, budgeting, tax administration, internal auditing, liaison with
the Commission on Audit or any other related functions.
d. Public practice and shall include at least two years as audit assistant and
at least one year as auditor in charge of audit engagement covering full
audit functions of significant clients.

10. Which of the following is defined as “the integrated national professional

organization of Certified Public Accountants accredited by the Board and the
Commission per PRC Accreditation No. 15 dated October 2, 1975” by R.A. 9298?
a. Accredited National Professional Organization of Certified Public Accountants
or APO
b. Financial Reporting Standards Council or FRSC
c. Association of CPA’s in Parlor Operations or ACPAPO
d. Philippine Institute of Certified Public Accountant or PICPA

11. A study, appraisal, or review by the Board or its duly authorized

representatives, of the quality of audit of financial statements through a review
of the quality control measures instituted by an Individual CPA, Firm or
Partnership of CPAs engaged in the practice of public accountancy to ascertain
his/her/its compliance with prescribed professional, ethical and technical
standards of public practice.
a. Quality Review c. Peer Review
b. Quality Control d. Advancement and Quality
Compliance Oversight

12. Documents showing the outline embodying topics and concepts of major
subjects prescribed in specific course of study to serve as the basis for test
questions in the CPA licensure examinations.
a. Syllabus c. Candidates’ Body of Knowledge
(CBOK)
b. Curriculum d. Syllabi

13. The Professional Regulatory Board of Accountancy of

a. a chairman and 6 members
b. a chairman and 6 members appointed by PRC
c. a chairman and 6 members appointed by the President of the Philippines
d. 6 members of Independent Auditing Firms

14. A member of the BOA shall, at the time of his/her appointment, possess
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 Auditing Theory: Professional Responsibilities and Other Topics
the following qualifications, except
a. Must be a natural-born citizen and resident of the Philippines.
b. Must be a duly registered CPA with more than ten (10) years of work
experience in any scope of practice of accountancy.
c. Must be of good moral character and must not have been convicted of
crimes involving moral turpitude.
d. Must not be a director or officer of the APO at the time of his/her
appointment.

15. Which statement is incorrect regarding the term of office of the chairman
and the members of the Board of Accountancy (BOA)?
a. The Chairman and members of the Board shall hold office for a term of
three years.
b. No person who has served two (2) successive complete terms shall be
eligible for reappointment until the lapse of one (1) year.
c. A person may serve the BOA for not more than twelve years.
d. A member of the BOA may continuously serve office for more than nine
years.

16. The Commission upon the recommendation of the Board shall within ninety
(90) days from the effectivity of the IRR, create an accounting standard setting
body to be known as the
a. Accounting Standards Council c. Financial Reporting Standards
Committee
b. Financial Reporting Standards Council d. Accounting Standards
Committee

17. The Commission upon the recommendation of the Board shall within ninety
(90) days from the effectivity of the IRR, create an auditing standard setting
body to be known as the
a. Auditing, Assurance and Practices Council c. Auditing and Assurance
Standards Committee
b. Auditing and Assurance Standards Council d. Auditing Standards and
Practices Committee

18. The creation of FRSC and AASC is intended to assist the BOA in carrying
out its function to
a. To monitor the conditions affecting the practice of accountancy and adopt
such measures, rules and regulations and best practices as may be
deemed proper for the enhancement and maintenance of high
professional, ethical, accounting and auditing standards.
b. To supervise the registration, licensure and practice of accountancy in the
Philippines.
c. To prescribe and adopt the rules and regulations necessary for carrying
out the provisions of RA 9298.
d. To prepare, adopt, issue or amend the syllabi of the subjects for
examinations.

19. The PRC upon the recommendation of the Board of Accountancy (BOA)
shall create a council to assist the BOA in carrying out its powers and
functions and in attaining its objective of continuously upgrading the
accountancy education in the Philippines to make the Filipino CPA globally
competitive. This council is to be known as the
a. CPAs in Education Council c. Council of CPAs in Education
b. Education Technical Council d. CPAs in the Academe Council

20. Which of the following does not fall under the admission requirements for
CPA examinations?
a. A Filipino citizen
b. Is of good moral character
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 Auditing Theory: Professional Responsibilities and Other Topics
c. At least twenty one years of age
d. Has not been convicted of any criminal offense involving moral turpitude

21. Under foreign reciprocity, special/temporary permit may be issued by the

Board subject to the approval of the Commission and payment of the fees the
latter has been prescribed and charged thereof to the following persons except
a. A foreign CPA called for consultation or for a specific purpose which, in the
judgment of the Board, is essential for the development of the country.
b. A foreign CPA engaged as a professor, lecturer or critic in fields essential to
accountancy education in the Philippines
c. A foreign CPA who is an internationally recognized expert or with
specialization in any branch of accountancy and his/her service is essential
for advancement of accountancy in the Philippines
d. A foreign certified public accountant who visits the Philippines to study
additional learning in the field of computer system and design.

22. The following were the ratings of examinees who took the easy but tricky
CPA Board Examination on May 2013.
 Examinee 1 - All subjects garnered a rating of 95%.
 Examinee 2 - All subjects garnered a rating of 75%.
 Examinee 3 - One subject garnered a rating of 81% and the other six
garnered a rating of 74%.
 Examinee 4 - One subject garnered a rating of 64% and the other six
garnered a rating of 85%.
 Examinee 5 - Three subjects garnered a rating of 75% and the other four
garnered a rating of 74%.
 Examinee 6 - All subjects garnered a rating of 74%.
 Examinee 7 - Four subjects garnered a rating of 95%, one with 73% and
other 2 with 64%.
 Examinee 8 - Three subjects garnered a rating of 95%, one with 74% and
other three with 73%.
Of the ratings presented above, how many examinees obtain a conditional
status in the Board Exam?
a. 4 b. 2 c. 3 d. 1

23. A CPA certificate is evidence of

a. Independence as a professional.
b. Basic competence at the time of certification.
c. Membership in the accredited association.
d. Completion of continuing professional education program.

24. The Board shall submit to the Commission the ratings obtained by each
candidate within
a. 2 calendar days after the examination c. 10 calendar days after the
examination
b. 5 calendar days after the examination d. 15 calendar days after the
examination

25. Which of the following statement is incorrect in accordance with Sec 18

Failing Candidates to Take Refresher Course?
a. any candidate who fails two complete CPA Board Examinations shall take the
Refresher Course
b. must be enrolled in and completed at least twenty four units of subjects
given in the licensure examination
c. the examination in which the candidate was conditioned together with the
removal examination on the subject in which he/she failed shall be counted
as two complete examinations

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 Auditing Theory: Professional Responsibilities and Other Topics
d. the examination in which the candidate was conditioned together with the
removal examination on the subject in which he/she failed shall be counted
as 1 complete examination

26. Which of the following is not one of the grounds for proceedings against a
CPA?
a. Gross negligence or incompetence in the practice of his profession.
b. Engaging in public practice while being employed in a private enterprise.
c. Insanity.
d. Immoral or dishonorable conduct.

27. A certificate of accreditation shall be issued to certified public

accountants in public practice only upon showing, in accordance with rules
and regulations promulgated by the Board and approved by the
Commission, that such registrant has acquired how many years of
meaningful experience in any of the areas of public practice?
a. One b. Two c. Three d. Four

28. It refers to the inculcation, assimilation and acquisition of knowledge,

skills, proficiency and ethical and moral values, after the initial registration
of a professional that raise and enhance the professional’s technical skills
and competence.
a. Professional Development c. Continuing Professional
Education
b. Quality Review d. Continuous Professional
Education

29. Which statement is correct regarding CPE requirements for renewal of

professional license?
a. The total CPE credit units required for CPAs shall be sixty (60) units for
three (3) years, provided that a minimum of twenty (20) credit units shall
be earned in each year.
b. A registered professional shall be permanently exempted from CPE
requirements upon reaching the age of 60 years old.
c. A registered professional who is working abroad shall be temporarily
exempted from compliance with CPE requirement during his/her stay
abroad, provided that he/she is has been out of the country for at least
one year immediately prior to the date of renewal.
d. Those who failed to renew professional licenses for a period of five (5)
continuous years from initial registration, or from last renewal shall be
declared delinquent.

30. A registered professional who is working or practicing his/her profession

or furthering his/her studies abroad shall be temporarily exempted from
compliance with CPE requirement during the period of his/her stay abroad,
provided that he/she has been out of the country for at least
a. one year immediately prior to the date of renewal
b. two years immediately prior to the date of renewal
c. three years immediately prior to the date of renewal
d. five years immediately prior to the date of renewal

31. A registered professional shall be permanently exempted from CPE

requirements upon reaching the age of
a. 55 years old b. 60 years old c. 65 years old d. 70
years old

32. Who is not permitted by law to practice accountancy?

a. A partnership of CPAs c. A corporation whose
stockholders are all CPAs
b. An individual CPA practitioner d. A partnership of CPAs
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 Auditing Theory: Professional Responsibilities and Other Topics
with some non-CPA staff

33. The death or disability of an individual CPA and/or the dissolution and
liquidation of a firm or partnership of CPAs shall be reported to the BOA not later
than ____ days from the date of such death, dissolution or liquidation.
a. 15 b. 30 c. 60 d. 90

34. Below are the names of three CPA firms and pertinent facts relative to
each firm. Unless otherwise indicated, the individuals named are CPAs and
partners, and there are no other partners. Which firm name and related
facts indicates a violation of the IRR of RA 9298?
a. Joyce, Ara and Angela, CPAs (Joyce died about 10 years ago, Ara and
Angela are continuing the firm)
b. Lupin and Fujico, CPAs ( the name of Goymon a third active partner is
omitted in the firm name)
c. Hugo and Pugo, CPAs (Hugo died 25 months ago, Pugo is continuing the
firm as a sole proprietor)
d. Bubu and Bibi, CPAs (Bibi died 3 years ago; Bobot was admitted into the
partnership 2 months after Bibi's death.)

35. Any person who shall violate any of the provisions of RA 9298 or any of
its implementing rules and regulations as promulgated by the Board subject
to the approval of the Commission, shall, upon conviction, be punished by
a. A fine of not less than fifty thousand pesos (P50,000.00) or by
imprisonment for a period not exceeding two (2) years or both.
b. A fine of not less than one hundred thousand pesos (P100,000.00) or by
imprisonment for a period not exceeding two (2) years or both.
c. A fine of not less than fifty thousand pesos (P50,000.00) or by
imprisonment for a period not exceeding three (3) years or both.
d. A fine of not less than one hundred thousand pesos (P100,000.00) or by
imprisonment for a period not exceeding three (3) years or both.

Organizations Affecting the Accountancy Profession

1. The following statements relate to the qualifications of the SEC commissioners.
Which is incorrect?
a. The commissioners must be natural-born citizens of the Philippines.
b. The commissioners must be of good moral character, of unquestionable
integrity, of known probity, and patriotism, and with recognized competence
in social and economic disciplines.
c. The majority of the commissioners, including the Chairperson, shall be
members of the Philippine Bar.
d. The Chairperson and the commissioners must be at least thirty-five (35)
years of age.

2. Which of the following is not a function of the Bangko Sentral ng Pilipinas (BSP)?
a. Recommend measures to improve the efficiency and effectiveness of
government operations.
b. Supervise banks and exercise regulatory powers over non-bank institutions
performing quasi-bank functions.
c. Determine the exchange rate policy of the Philippines.
d. Extend discounts, loans and receivables to banking institutions for liquidity
purposes.

3. The BSP Monetary Board is composed of seven (7) members appointed by the
President of the Philippines for a term of
a. 4 years b. 5 years c. 6 years d. 7 years

4. The COA conducts a comprehensive audit that includes

a. Financial and compliance audits c. Compliance and
performance audits
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 Auditing Theory: Professional Responsibilities and Other Topics
b. Financial and financial-related audits d. Financial, compliance, and
performance audits

5. The Securities and Exchange Commission has some of the following powers and
functions relevant to public accounting professions, except?
a. Issue cease and desist orders to prevent fraud or injury to the investing
public;
b. Impose sanctions for the violation of laws and the rules, regulations and
orders issued pursuant thereto;
c. Issues and may revoke public practitioner’s certificates and grants license
thereto
d. Approve, reject, suspend, revoke or require amendments to registration
statements, and registration and licensing applications;

6. The chairman of the Commission on Audit shall serve

a. 3 years without appointment c. 6 years without reappointment
b. 5 years with reappointment d. 7 years without reappointment

7. The following are the reportorial responsibility of the Commission on Audit,

except
a. Financial condition and operation of the not-for-profit corporations to the
President and the Congress.
b. Operational efficiency and effectiveness of the government and its agencies.
c. Accountability of government records.
d. Accountability of government funds

8. Which of the following is a correct qualification of the Chairman and Two

Commissioners of the Commission on Audit?
a. A citizen of the Philippines.
b. At least 40 years of age upon appointment.
c. CPA's with no less than 5 years of auditing experience or members of
Philippine bar who have been engaged in law practice for at least 5 years.
d. Must not have been candidates for any elective position preceding
appointment.

9. Which of the following is not one of the duties of the Commission on Audit
a. Define the scope of its audit and examination
b. Assume fiscal responsibility for the government and its instrumentalities
c. Keep the general accounts of the government
d. Promulgate accounting rules and regulations

10. Which of the following agencies is least likely to affect the public accounting
profession
a. Department of Trade and Industry c. Insurance Commission
b. Bankgo Sentral ng Pilipinas d. Bureau of Internal Revenue

Code of Ethics for Professional Accountants in the Philippines

1. The Code of Ethics for Professional Accountants in the Philippines is approved by
______, recommended for adoption by the _____.
a. BOA, PICPA b. SEC, BOA c. PICPA, BOA d. BOA, President

2. Which of the following statements best describes why the profession of certified
public accountants has deemed it essential to promulgate a code of professional
ethics and to establish a mechanism for enforcing observation of the Code?
a. A pre-requisite to success is the establishment of an ethical code that
primarily defines the professional’s responsibility to clients and colleagues.
b. A distinguishing mark of a profession is its acceptance of responsibility to the
public.
c. A requirement of most state laws calls for the profession to establish a code
of ethics.
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 Auditing Theory: Professional Responsibilities and Other Topics
d. An essential means of self-protection for the profession is the establishment
of flexible ethical standards by the profession.

3. Which of the following is not a modification made to IFAC Code of Ethics?

a. The term “corporation” was deleted from the definitions
b. The period of rotation of the lead engagement partner was changed from
seven to five years
c. The phrase “who are certified public accountants and who hold a valid
certificate issued by the Board of Accountancy” was added in the definition
of professional accountant
d. The paragraph on advertising and solicitation was modified to include
advertisements on newspapers of national circulation.

4. Which of the following statements best describes Integrity?

a. Be straightforward and honest in performing professional services.
b. Perform professional services with due care, competence and diligence
c. Do not compromise professional judgement because of bias, conflict of
interest or undue influence of others.
d. Do not use of disclose any such confidential information without proper and
specific authority or unless there is a legal or professional right or duty to
disclose.

5. The principle of professional competence and due care imposes which of the
following obligations on CPA’s?
a. To refrain from disclosing confidential information obtained as a result of
professional and business relationships without proper and specific authority
unless there is a legal or professional right or duty to disclose.
b. To comply with relevant laws and regulations and avoid any situation that
may bring discredit to the profession.
c. To act diligently in accordance with applicable technical and professional
standards when providing professional services.
d. Not to compromise professional or business judgment because of bias,
conflict of interest or undue influence of others.

6. According to the Code of Ethics, professional competence and due care may be
divided into two phases: attainment of professional competence and
maintenance of professional competence. The attainment of professional
competence requires the following, except
a. initially a high standard of general education
b. a continuing awareness of and an understanding of relevant technical
professional and business developments.
c. specific education, training and examination in professionally relevant
subjects
d. whether prescribed or not, a period of work experience

7. After beginning an audit of a new client, Ash, CPA, discovers that the
professional competence necessary for the engagement is lacking. Ash informs
management of the situation and recommends another CPA, and management
engages the other CPA. Under these circumstances:
a. Ash’s lack of competence should be considered to be a violation of generally
accepted auditing standards
b. Ash may request compensation from the client for any professional services
rendered to it in connection with the audit
c. Ash’s request for a commission from the other CPA is permitted because a
more competent audit can now performed
d. Ash may be indebted to the other CPA since the other CPA can collect form
the client only the amount the client originally agreed to pay Ash

8. AAA Commercial Inc. engages the services of Al, CPA, to make a project study
on the expanded food vending operations of the corporation with the
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 Auditing Theory: Professional Responsibilities and Other Topics
corresponding staffing and compensation package for its executive staff. Al,
however, has primarily auditing expertise and only in general merchandising
operations. Al may properly:
a. Accept the engagement and carry it out consistent with auditing standards
b. Accept the engagement but exercise 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

9. AAA Corporation recently entered into several transactions involving complex

accounting procedures. Joy, chief accountant was asked by the Corporation’s
directors if he can properly account for transactions. Joy does not possess the
competence required under the circumstances. Which of the following
responses would not be a violation of the Code of Personal Ethics?
a. Joy agrees to handle the accounting issues involved but does not engage an
expert for assistance or support
b. Joy represents that he is an expert on the complex accounting procedure,
and agrees to tackle the recording issues involved in the transactions
c. Joy engages an expert on the relevant accounting procedures in order to
properly account for the complex accounting procedures
d. All of the above choices are ethical responses

10. The requirement of which principle is of particular importance in an

assurance engagement in ensuring that the conclusion of the professional
accountant has value to the intended user
a. Professional competence and due care c. Objectivity
b. Professional behavior d. Integrity

11. Objectivity in the Code refers to a CPA’s ability:

a. To independently distinguish between accounting practices that are
acceptable and those that are not.
b. To maintain an impartial attitude on all matters which come under the CPA’s
review
c. To be unyielding in all matters dealing with auditing procedures
d. To independently choose between alternate accounting principles and
auditing standards

12. In which of the situations given below would disclosure by a CPA be in

violation of the Code?
a. Disclosing confidential information in order to properly discharge the CPA’s
responsibilities in accordance with his profession’s standards
b. Disclosing confidential information in compliance with a subpoena issued by
a court
c. Disclosing confidential information to another accountant interested in
purchasing the CPA’s practice
d. Disclosing confidential information in a review of the CPA’s professional
practice by the PICPA Quality Review Committee

13. Owen, CPA, has an overbearing superior, and the superior is suppressing the
recording of certain transactions of the company. Owen is being asked to act
contrary to technical and professional standards. The Code of Ethics states that
the first remedy in case of ethical conflict.
a. Follow the established policies of the employing organization to seek a
resolution of such conflicts
b. Review the conflict problem with the superior
c. Review the conflict problem with the next higher managerial level, after
giving notice to the immediate superior of the intention to do so
d. Seek counseling and advice on a confidential basis with an independent
advisor or the applicable professional accountancy body or regulatory body
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14. The state of mind that permits the provision of an opinion without being
affected by influences that compromise professional judgment.
a. Professional skepticism c. Objectivity
b. Independence in appearance d. Independence of mind

15. The avoidance of facts and circumstances that are so significant a

reasonable and informed third party, having knowledge of all relevant
information, would reasonably conclude a CPA’s integrity, objectivity or
professional skepticism had been compromised.
a. Principles of segregation c. Independence in mind
b. Independence in appearance d. Preemptive estoppel

16. Occurs when a firm or a member of the assurance team could benefit from a
financial interest in, or other self-interest conflict with, an assurance client
a. Self-interest b. Self-review c. Advocacy d.
Familiarity

17. Occurs when any product or judgment of a previous assurance engagement

or non-assurance engagement needs to be re-evaluated in reacting conclusions
on the assurance engagement.
a. Self-interest b. Self-review c. Advocacy d.
Familiarity

18. Occurs when a firm, or a member of the assurance team, promotes, or may
be perceived to promote, an assurance client’s position or opinion to the point
that objectivity may, or may be perceived to be, compromised. Such may be
the case if a firm or a member of the assurance team were to subordinate their
judgment to that of the client.
a. Self-interest b. Self-review c. Advocacy d.
Familiarity

19. Occurs when a member of the assurance team was previously a director or
officer of the assurance client, or was an employee in a position to exert direct
and significant influence over the subject matter of the assurance engagement.
20. Self-interest b. Self-review c. Advocacy d.
Familiarity

21. Occurs when, by virtue of a close relationship with an assurance client, its
directors, officers or employees, a firm or a member of the assurance team
becomes too sympathetic to the client’s interest
a. Self-interest b. Intimidation c. Advocacy d.
Familiarity

22. Occurs when a member of the assurance team may be deterred from acting
objectively and exercising professional skepticism by threats, actual or
perceived, form the directors, officers or employees of an assurance client.
a. Self-interest b. Intimidation c. Advocacy d.
Familiarity

23. These are policies and procedures designed to eliminate or to reduce threats
to fundamental principles to an acceptable level.
a. International controls b. Control activities c. Safeguards d.
Segregation of duties

24. Regarding safeguards, the Code of Ethics focuses on:

a. Reducing or eliminating all threats to independence
b. Reducing all threats to independence
c. Eliminating all threats to independence

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 Auditing Theory: Professional Responsibilities and Other Topics
d. Reducing or eliminating threats to independence which are not clearly
insignificant

25. Which of the following may be considered by a professional accountant to

eliminate or reduce threats to an acceptable level?
i. Safeguards created by the profession, legislation or regulation
ii. Safeguards created in the work environment
iii. Resign from the client or the employer
iv. Decline or discontinue the professional engagement
a. I and II only b. III and IV c. I and IV only d. II and II only

26. Which of the following circumstances may create self-interest threats for a
professional accountant in public practice?
a. Performing a service for a client that directly affects the subject matter of the
assurance engagement
b. Acting as an advocate on behalf of an assurance client in litigation or
disputes with third parties
c. A financial interest in a client or jointly holding a financial interest with a
client
d. Being threatened with litigation

27. The following are examples of circumstances that may create familiarity
threats, except
a. Promoting shares in a listed entity when that entity is a financial statement
audit client
b. Long association of senior personnel with the assurance client
c. A member of the engagement team having a close or immediate family
relationship with a director or officer of the client
d. A former partner of the firm being a director or officer of the client or an
employee in a position to exert direct and significant influence over the
subject matter of the engagement

28. The following may create intimidation threats, except

a. Being threatened with dismissal or replacement in related to a client
engagement
b. Being threatened with litigation
c. Being pressured to reduce inappropriately the extent of work performed in
order to reduce fees
d. A member of the assurance team being, or having recently been, a director
or officer of the client

29. Which of the following is an example of engagement-specific safeguards in

the work environment?
a. Advising partners and professional staff of those assurance clients and
related entities from which they must be independent
b. Disclosing to those charged with governance of the client the nature of
service provided and extent of fees charged
c. A disciplinary mechanism to promote compliance with the firm’s policies and
procedure
d. Published policies and procedures to encourage and empower staff to
communicate to senior levels within the firm any issue relating to compliance
with the fundamental principles that concerns them.

30. A direct financial interest or material indirect financial interest in the

assurance client of a member of the assurance team or his immediate family
member may create a significant self-interest threat. Which of the following
safeguards would be least likely considered to eliminate the threat or reduce it
to an acceptable level?
a. Discuss the matter with those charged with governance of the assurance
client
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b. Dispose of the direct financial interest prior to the individual becoming a
member of the assurance team;
c. Dispose of the indirect financial interest in total or dispose of a sufficient
amount of it so that the remaining interest is no longer material prior to the
individual becoming a member of the assurance team; or
d. Remove the member of the assurance team from the assurance
engagement.

31. A loan, or guarantee of a loan, from an assurance client that is a bank or a

similar institution, to a member of the assurance tear or his immediate family,
would not create a threat to independence provided the loan, or a guarantee, is
a. Immaterial to the member of the assurance team or his immediate family
b. Immaterial to the assurance client
c. Immaterial to both the member of the assurance team or his immediate
family and the assurance client
d. Made under normal lending procedure, terms and requirements

32. This is 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.
a. Advertising b. Publicity c. Solicitation d. Marketing
services

33. This is the communication to the public of facts about a professional

accountant which are not designed for the deliberate promotion of that
professional accountant
a. Advertising b. Publicity c. Solicitation d. Marketing
services

34. In which of the following situations would a CPA be in violation of the rules of
professional ethics in determining professional fees?
a. A fee based on appropriate rates per hour or per day for the time of each
person engaged in performing professional services
b. A fee which is lower compared to the fee charged in the prior year for similar
services
c. A fee based on appropriate rates per hour, where the appropriate rate is
based on the fundamental premise that the organization and conduct of the
CPA and the services provided to clients are well planned, controlled and
manage
d. A fee that is based on 10% of the client’s adjusted net income for the current
year

35. Which of the following actions by a CPA in public practice will not result in
violation of the Code of Ethics regarding commissions?
a. Accepting commission for referring a client to a third party.
b. Accepting commission for the referral of the products or services of others.
c. Receipt of referral fees by the referring CPA when no services are performed
by the referring accountant.
d. Entering into an arrangement for the purchase of the whole or part of an
accounting practice requiring payments to individuals formerly engaged in
the practice or payments to their heirs or estates.

36. The rendering of two or more types of professional services concurrently:

a. Is a violation of the Code of Ethics.
b. Would impair integrity, objectivity or independence, or the good reputation of
the profession.
c. Does not itself impair integrity, objectivity or independence.
d. Is inconsistent with the practice of public accountancy.

37. Which statement is incorrect regarding client’s monies?

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a. Client’s monies should not be held by the CPA if there is reason to believe
that the monies were obtained form, or are to be used for, illegal activities.
b. A CPA in public practice should maintain one or more bank accounts for
client’s monies.
c. Monies may only be drawn from the client account on the instructions of the
client.
d. Fees due from a client may be drawn from client’s monies without the need
of notifying the client.

38. Which fundamental principle may be threatened when the CPA in public
practice is asked to provide a second opinion on the application of accounting,
auditing, reporting or other standards or principle to specific circumstances or
transactions by, or on behalf of a company or entity that is not an existing
client?
a. Integrity c. Confidentiality
b. Professional competence and due care d. Professional behavior

39. A client seeking a second opinion does not permit the CPA to communicate
with the existing accountant. In such cases, the CPA should:
a. Issue a disclaimer of opinion due to a significant client-imposed scope
limitation
b. Consider whether, taking all the circumstances into account, it is appropriate
to provide the opinion sought
c. Consider whether to issue a qualified opinion or disclaimer of opinion due to
significant client-imposed scope limitation
d. Communicate the client’s refusal activity directly to the existing accountant

40. Circumstances that threaten the ability of a professional accountant in

business to perform duties with the appropriate degree of professional
competence and due care include the following, except:
a. Insufficient time for properly performing or completing the relevant duties
b. Incomplete, restricted or otherwise inadequate information for performing
the duties properly
c. Sufficient experience, training and/or education
d. Inadequate resources for the proper performance of the duties

System of Quality Control

1. The Philippine Standard on Quality Control (PSQCs) are to be applied to
a. Assurance engagements only.
b. Review engagement only.
c. Compilation and review engagements only.
d. All services that fall under the AASCs engagement standards.

2. The main purpose of implementing a system of quality control is to provide firm

reasonable assurance of the following, except
a. Firm and its personnel will comply with PSA and legal requirements to enable
the firm to issue an appropriate person.
b. Audit will be conducted in accordance with PSA.
c. Personnel to perform every engagement shall be independent.
d. The firm will issue a report that is appropriate in the circumstances.

3. The partner or other person in the firm who is responsible for the engagement
and its performance, and for the report that is issued on behalf of the firm, and
who, where required, has the appropriate authority from a professional, legal or
regulatory body.
a. Engagement partner c. Personnel
b. Engagement quality control reviewer d. Suitably qualified external
person

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4. All personnel performing an engagement, including any experts contracted by
the firm in connection with that engagement.
a. Staff b. Personnel c. Professionals d.
Engagement team

5. As defined in PSQC1, this refers to a sole practitioner, partnership or other

entity of CPAs.
a. Firm b. Engagement team c. Personnel d.
Professional accountant

6. An entity whose shares, stock or debt are quoted or listed on a recognized stock
exchange, or are marketed under the regulations of a recognized stock
exchange or other equivalent body.
a. Quoted entity b. Listed entity c. Public sector entity d.
Recognized entity

7. This term refers to partners and staff.

a. Assurance team b. Network Firm c. Personnel d. Staff

8. An entity under common control, ownership or management with the firm or

any entity that a reasonable and informed third party having knowledge of all
relevant information would reasonably conclude as being part of the firm
nationally or internationally.
a. Firm b. Network firm c. Engagement team d. Listed
entity

9. In relation to completed engagements, these are procedures designed to

provide evidence of compliance by engagement teams with the firm’s quality
control policies and procedures.
a. Inspection c. Monitoring
b. Quality control d. Engagement quality control
review

10. An individual outside the firm with the capabilities and competence to act as
an engagement partner.
a. Suitably qualified external person c. Engagement partner
b. Partner d. Engagement quality control reviewer

11. A process designed to provide an objective evaluation, before the report is

issued, of the significant judgments the engagement team made and the
conclusions they reached in formulating the report
a. Peer review c. Inspection
b. Engagement quality control review d. Monitoring

12. A basic objective of a CPA firm is to provide professional services that

conform with professional standards. Reasonable assurance of achieving this
basic objective is provided through
a. A system of peer review.
b. A system of quality controls.
c. Continuing professional education.
d. Compliance with generally accepted reporting standards.

13. Which of following factors affect the nature, timing and extent of an audit
firm's quality control policies and procedures?
A B C D
 Size and nature of practice Yes Yes No No
 Geographic dispersion Yes Yes Yes No
 Organization Yes No Yes No
 Appropriate cost/benefit Yes Yes No No

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considerations

14. Within the context of quality control, the primary purpose of continuing
professional education and training activities, is to enable a CPA firm to provide
personnel within the firm with:
a. Technical training that assures proficiency as an auditor.
b. Professional education that is required in order to perform with due
professional care.
c. Knowledge required to fulfill assigned responsibilities and to progress within
the firm.
d. Knowledge required in order to perform a peer review.

15. In pursuing its quality control objectives with respect to assigning personnel
to engagements, a public accounting firm may use policies and procedures such
as
a. Rotating employees from assignment to assignment on a random basis to aid
in the staff training effort.
b. Requiring timely identification of the staffing requirements of specific
engagements so that enough qualified personnel can be made available.
c. Allowing staff to select the assignments of their choice to promote better
client relationships.
d. Assigning a number of employees to each engagement in excess of the
number required so as not to overburden the staff and interfere with the
quality of the audit work performed.

16. Audit firms are subject to many risks when they carry out an audit
assignment. As a result of this, the firm may suffer:
a. Action through the courts so that damages are payable
b. Loss of client
c. Adverse publicity and loss of reputation
d. All of the following may be suffered by the firm

17. This quality control element requires a firm to establish policies and
procedures to provide it with reasonable assurance that engagements are
performed in accordance with professional standards and regulatory and legal
requirements, and that the firm or the engagement partner issue reports that
are appropriate in the circumstances.
a. Ethical requirements c. Engagement performance
b. Monitoring d. Human resources

18. Quality control in audit firms, both at the firm level and at the level of a
specific audit is essential to all audit firms. Methods of quality control in large
firms include all of the following except
a. Peer reviews c. Sub-contracting work to other
practices
b. Use of technical manuals d. Training

19. Which of the following is not an example of quality control procedure likely to
be used by a public accounting firm to meet its professional responsibilities to
clients?
a. Completion of independence questionnaires by all partners and employees.
b. Review and approval of audit plan by the partner in charge of the
engagement just prior to signing the auditor’s report.
c. Evaluating professional staff after the conclusion of each engagement.
d. Evaluating its integrity of management for each new audit client.

20. A partner, other person in the firm, suitably qualified external person, or a
team made up of such individuals, with sufficient and appropriate experience
and authority to objectively evaluate, before the report is issued, the significant

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judgments the engagement team made and the conclusions they reached in
formulating the report.
a. Engagement partner c. Personnel
b. Engagement quality control reviewer d. Suitably qualified external
person

21. In pursuing a firm’s quality control objectives, a firm should adopt policies
and procedures to enable it to identify and evaluate circumstances and
relationships that create threats to independence, and to take appropriate
action to eliminate those threats or reduce them to an acceptable level by
applying safeguards, or, if considered appropriate, to withdraw from the
engagement. Which quality control element would this be most likely to
satisfy?
a. Ethical requirements c. Leadership responsibilities for
quality within the firm
b. Monitoring d. Human resources

22. Per PSQC1, what aspects are most important in determining the eligibility of
engagement quality control review?
a. Technical qualifications and objectivity c. Competence and
independence
b. Integrity and objectivity d. All of these

23. The primary purpose of establishing quality control policies and procedures
for deciding whether to accept a new client is to
a. Enable the CPA firm to attest to the reliability of the client
b. Satisfy the CPA firm’s duty to the public concerning the acceptance of new
clients
c. Minimize the likelihood of association with clients whose management lacks
integrity
d. Anticipate before performing any fieldwork whether an unqualified opinion
can be expressed

24. Which element of a system of quality control is addressed by the

establishment of policies and procedures designed to provide the firm with
reasonable assurance that it has sufficient personnel with the competence,
capabilities, and commitment to ethical principles?
a. Ethical requirements c. Leadership responsibilities for
quality within the firm
b. Monitoring d. Human resources

25. Where internal technical and training resources are unavailable, the firm
a. Violates a basic tenet of quality control regarding capabilities and
competence
b. Cannot adequately provide for the professional development needs of its
members.
c. Must obtain, within two years, the necessary internal technical and training
resources
d. May use a suitably qualified external person for the purpose.

26. In a certain audit engagement, several key members of the engagement

team had differences of opinion regarding a certain matter. In this case:
a. The engagement partner shall issue a disclaimer of opinion due to scope
limitation.
b. An increase in the audit fee will be requested due to the extension of the
time required to complete the engagement.
c. Documentation will be made regarding the unresolved matter, and the
auditor will withdraw from the engagement altogether.
d. The report shall not be issued until the matter is resolved

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27. During the course of audit engagement, the CPA needed additional studies
and consultation with experts. This additional study and consultation is deemed
to be
a. An unusual practice which should have voided the audit engagement
b. Lack of competence on the part of the CPA
c. An appropriate part of the professional conduct of the audit engagement
d. Undertaken as a responsibility of management

28. A process comprising an ongoing consideration and evaluation of the firm’s

system of quality control, including a periodic inspection of a selection of
completed engagements, designed to enable the firm to obtain reasonable
assurance that its system of quality control is operating effectively.
a. Inspection c. Quality review
b. Engagement quality control review d. Monitoring

29. An inspection cycle ordinarily spans no more than:

a. One year b. Two years c. Three years d. Four
years

30. The firm should communicate the results of the monitoring of its quality
control system to engagement partners and other appropriate individuals within
the firm at least:
a. Every six months c. Every two years
b. Every twelve months d. Every three years

Fraud, Error and Non-Compliance

1. Which of the following most accurately summarizes what is meant by the term
“material misstatement”?
a. Fraud and direct-effect illegal acts
b. Fraud involving senior management and material fraud
c. Material error, material fraud and certain illegal acts
d. Material error and material illegal acts

2. Fraud includes all of the following except:

a. Recording of transactions without substance
b. Suppression or omission of the effects of transactions from records or
documents
c. Mathematical or clerical mistakes in the underlying records and accounting
data
d. Misappropriation of assets

3. Which of the following acts are considered fraud?

I. Changing of records and documents
II. Misinterpretation of facts
III. Misappropriation of assets
IV. Recording of transactions without documentation
V. Clerical mistakes
a. I and II only b. III only c. I, III and IV onlyd. I, II, III, IV and V

4. Which of the following is not an example of an error?

a. Entity personnel make mistakes in gathering or processing accounting data
from which a financial statements are prepared.
b. Entity personnel alter accounting records from which financial statements
are prepared.
c. Entity personnel overlook or misinterpret facts, causing accounting estimates
to be incorrect.
d. Entity personnel make mistakes in the application of accounting principles.

5. Which of the following statements concerning fraud is incorrect?

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a. Fraud generally involves incentive or pressure to commit fraud, a perceived
opportunity to do so, and some rationalization of the act.
b. Two types of misstatements relevant to the auditor include material
misstatements arising from fraudulent financial reporting and material
misstatements arising from misappropriation of assets.
c. Fraud involves actions of management but excludes the actions of
employees or third parties.
d. An audit rarely involves the authentication of documentation; thus, fraud
may go undetected by the auditor.

6. An auditor should recognize that the application of auditing procedures may

produce evidential matter indicating the possibility of errors or irregularities and
therefore should
a. Design audit tests to detect unrecorded transactions.
b. Extend the work to audit most recorded transactions and records of an entity.
c. Plan and perform the engagement with an attitude of professional
skepticism.
d. Not depend on internal accounting control features that are designed to
prevent or detect errors or irregularities.

7. Whether the auditor has performed an audit in accordance with PSA 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

8. Which of the following statements best describes an auditor’s responsibility

regarding misstatements?
a. An auditor should obtain absolute assurance that material misstatements in
the financial statements will be detected.
b. An auditor should obtain reasonable assurance that the financial statements
taken as a whole are free from material misstatements, whether caused by
fraud or error.
c. An auditor is responsible to detect material errors but has no responsibility to
detect material fraud that is concealed through employee collusion or
management override of internal control.
d. An auditor’s failure to detect a material misstatement resulting from fraud is
an indication of noncompliance with the requirements of the Philippine
Standards on Auditing.

9. Which of the following statements is/are correct?

Statement 1: The responsibility for the prevention and detection of fraud and
error rests with the auditor through implementation of accounting and internal
control systems.
Statement 2: The accounting and internal control systems eliminate the
possibility of fraud and error.
a. Only statement 1 is correct c. Both statements are correct
b. Only statement 2 is correct d. Both statements are incorrect

10. When is the auditor responsible for detecting fraud?

a. When the fraud did not result from collusion.
b. When third parties are likely to rely on the client’s financial statements.
c. When the client’s system of internal control is judged by the auditor to be
inadequate.
d. When the application of generally accepted auditing standards would have
uncovered the fraud.

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11. The regular examination of financial statements is not primarily designed to
disclose fraud and other irregularities although their discovery may result.
Normal audit procedures are more likely to detect a fraud arising from:
a. Forgeries on company checks c. Collusion on the part of several
employees
b. Theft of inventories d. Failure to record cash receipts
for services rendered

12. When obtaining an understanding of the entity and its environment,

including its internal control, the auditor may identify events or conditions that
indicate an incentive or pressure to commit fraud or provide an opportunity to
commit fraud. Such events or conditions are referred to as
a. Fraud conditions b. Fraud risk factors c. Fraudulent activities d.
Fraud environment

13. Which of the following is least likely a category of fraud risk factors that
relate to misstatements, resulting from fraudulent financial reporting?
a. Management’s characteristics and influence over the control environment
b. Industry conditions
c. Operating characteristics and financial stability
d. Susceptibility of assets to misappropriation

14. Which of the following characteristics most likely would heighten an auditor’s
concern about risk of intentional manipulation of financial statements?
a. Turnover of senior accounting personnel is low.
b. Insiders recently purchased additional shares of the entity’s stock.
c. Management places substantial emphasis on meeting earnings projections.
d. The rate of change in the entity’s industry is slow.

15. Which of the following conditions or events may create incentive/pressures

to commit fraud?
a. Inadequate accounting system of authorization and approval of transactions.
b. Lack of mandatory vacations for employees performing key control functions.
c. Excessive pressure on management or operating personnel to meet financial
targets established by those charged with governance, including sales or
profitability incentive goals.
d. Inadequate access controls over automated records.

16. Opportunities to misappropriate assets increase when there are (select the
exception)
a. Large amounts of cash on hand or processed
b. Inventory items that are small in size, of high value, or in high demand
c. Known or anticipated future employee layoffs
d. Easily convertible assets, such as bearer bonds, computer chips or diamonds

17. Which of the following statements is correct?

a. It is usually easier for the auditor to uncover irregularities than errors.
b. It is usually easier for the auditor to uncover errors than irregularities.
c. It is usually equally difficult for the auditor to uncover errors or irregularities.
d. None of the given statements is correct.

18. Which of the following statements describes why a properly designed and
executed audit may not detect a material fraud?
a. Audit procedures that are effective for detecting unintentional misstatements
may be ineffective for an intentional misstatement that is concealed through
collusion.
b. An audit is designed to provide reasonable assurance of detecting material
errors, but there is no similar responsibility concerning material fraud.

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c. The factors considered in assessing control risk indicated an increased risk of
intentional misstatements, but only a low risk of unintentional errors in the
financial statements.
d. The auditor did not consider factors influencing audit risk for account
balances that have pervasive effects on the financial statements taken as a
whole.

19. When conducting an audit, errors that arouse suspicion of fraud should be
given greater attention than other errors. This is an example of applying the
criterion of
a. Reliability of evidence b. Materiality c. Risk d.
Dual-purpose testing

20. When an independent auditor’s examination of financial statements

discloses special circumstances that make the auditor suspect that material
errors and irregularities may exist, the auditor’s initial course of action should
be to
a. Recommend that the client pursue the suspected fraud to a conclusion that
is agreeable to the auditor.
b. Extend normal audit procedures in an attempt to detect the full extent of the
suspected fraud.
c. Reach an understanding with the proper client representative as to whether
the auditor or client is to make the investigation necessary to determine if a
fraud has in fact occurred.
d. Decide whether the fraud, if in fact it should exist, might be of such a
magnitude as to affect the auditor’s report on the financial statements.

21. When the auditor’s regular examination leading to an opinion on the financial
statement discloses specific circumstances that make him suspect that fraud
may exist and he concludes that the results of such fraud, if any, could not be
so material as to affect his opinion, he should
a. Make a note in his working papers of the possibility of a fraud of immaterial
amount so as to pursue the matter next year.
b. Reach an understanding with the client as to whether the auditor or the
client, subject to auditor’s review, is to make the investigation necessary to
determine whether fraud has occurred and, if so, the amount thereof.
c. Refer the matter to the appropriate representatives of the clients with the
recommendations that is to be pursued to a conclusion.
d. Immediately extend his audit procedures to determine if fraud has occurred
and, if so, the amount thereof.

22. If the auditor has determined that there may be fraud that may have
material effect on the financial statements, all of the following should be done
except
a. Consider the implications for other aspects of the audit.
b. Discuss the matter with a level of management where fraud might have
occurred.
c. Try to obtain evidence to determine whether the fraud is material and what
its effect will be on the financial statements.
d. If appropriate, suggest that the client consult with legal counsel on matters
of law.

23. Which of the following is correct concerning the required documentation in

the working papers of the performance of the assessment of the risk of material
misstatements due to fraud?
a. All risk factors considered should be documented and the response to each
documented.
b. Those risk factors identified and the auditor’s response to them should be
documented.

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c. The major categories of risk factors must be identified, but the particular
responses to risk factors identified need not be documented.
d. No specific documentation is required.

24. It refers to acts of omission or commission by the entity being audited, either
intentional or unintentional, which are contrary to prevailing laws or regulations.
a. Noncompliance b. Illegal acts c. Deplorable acts d.
Unforgivable acts

25. According to PSA 250, “Consideration of Laws and Regulations in an Audit of

Financial Statements”, the following are indications that noncompliance may
have occurred, except
a. Investigation by government departments or payment of fines or penalties.
b. Management is dominated by one person or a small group and there is no
effective oversight board or committee.
c. Unauthorized transactions or improperly recorded transactions.
d. Purchasing at prices significantly above or below market price.

26. When an auditor becomes aware of a possible illegal act by a client, the
auditor should obtain understanding of the nature of the act to
a. Increase the assessed level of control risk.
b. Evaluate the effect on the financial statements.
c. Recommend remedial actions to the audit committee.
d. Determine the reliability of management’s representations.
27. The most likely explanation why the auditor’s examination cannot reasonably
be expected to bring all illegal acts by the client to the auditor’s attention is
that
a. Illegal acts are perpetrated by management override of internal control.
b. Illegal acts by clients often relate to operating aspects rather than
accounting aspects.
c. The client’s internal control may be so strong that the auditor performs only
minimal substantive testing.
d. Illegal acts may be perpetrated by the only person in the client’s
organization with access to both assets and the accounting records.

28. If the auditor concludes that the noncompliance has a material effect on the
financial statements, and has not been properly reflected in the financial
statements, the auditor should express
a. A qualified opinion or an adverse opinion c. A disclaimer of opinion
b. A qualified opinion or a disclaimer of opinion d. A qualified or an
unqualified opinion

29. An auditor who discovers that client employees have committed an illegal
act that has a material effect on the client’s financial statements, most likely
would withdraw from the engagement if
a. The illegal act is a violation of generally accepted accounting principles.
b. The client does not take the remedial action that the auditor considers
necessary.
c. The illegal act was committed during a prior year that was not audited.
d. The auditor has already assessed control risk at the maximum level.

30. An auditor concludes that a client has committed an illegal act that has not
been properly accounted for or disclosed. The auditor should withdraw from the
engagement if
a. Auditor is precluded from obtaining sufficient competent evidence about the
illegal act.
b. Illegal act has an effect on the financial statements that is both material and
direct.
c. Auditor cannot reasonably estimate the effect of the illegal act on the
financial statements.
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d. Client refuses to accept the auditor’s report as modified for the illegal act.

Transaction Cycles – Revenue/Receipt Cycle

1. The transaction cycles approach leads to efficient processing of large number of
transactions because
a. Transaction cycles are easier to computerize.
b. A large number of transactions within a given cycle can be categorized into a
relatively small number of distinct types.
c. The transaction cycle approach represents the natural order of business.
d. Transaction cycles are easy to understand.

2. The overall objective in the audit of the sales and collection cycle is to evaluate
whether
a. The sales account and the accounts receivable account are free of errors.
b. The sales account and the accounts receivable are free of material errors.
c. The accounts balances affected by the cycle are fairly presented in
accordance with GAAP.
d. The sales account and the accounts receivable account are presented fairly
in accordance with GAAP.

3. Which of the following business function is associated with the revenue/receipt

cycle?
a. Obligations are paid to vendors and employees.
b. Resources are held, used or transformed.
c. Resources are distributed to outsiders in exchange for promises of future
payments.
d. Capital funds are received from investors and creditors.

4. Which department executes the sales transactions?

a. Sales department under the sales manager c. Billing department under
the billing clerk
b. Credit department under the credit manager d. Treasury department under
the treasurer

5. Which of the following is not normally considered a step in the credit sales
functions?
a. Accepting customer orders c. Shipping the sales orders
b. Approving credit d. Acquiring goods to fill the order

6. A document for recording the description, quantity and related information for
goods ordered by a customer is the
a. Customer order b. Shipping document c. Sales order
d. Remittance advice

7. For most firms, the function of indicating credit approval is recorded on the
a. Customer order b. Remittance advice c. Sales order
d. Sales invoice

8. Before goods are shipped on account, a properly authorized person must

a. Prepare the sales invoice c. Approve the journal entry
b. Approve credit d. Verify that the unit price is
accurate

9. A document prepared to initiate shipment of the goods sold is the

a. Sales order b. Sales invoice c. Bill of lading d.
Customer order

10. The document used to indicate to the customer the amount of a sale and due
date of the payment is the

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a. Sales order b. Bill of lading c. Shipping document d.
Sales invoice

11. The document which accompanies the customer’s payment is the

a. Credit memo b. Sales invoice c. Remittance advice
d. Monthly statement

12. The document which supports reductions in accounts receivable is the

a. Remittance advice b. Sales invoice c. Credit memo
d. Monthly statement

13. A file for recording individual sales, cash receipts, and sales returns and
allowances for each customer is the
a. Sales journal c. Cash receipts journal
b. General ledger d. Accounts receivable subsidiary
ledger

14. A document sent to each customer showing their beginning accounts

receivable balance and the amount and date of each sale, cash payment
received, credit memo issued, and the ending accounts receivable balance is
the
a. Monthly statement c. Remittance advice
b. Sales invoice d. Accounts receivable subsidiary
ledger

15. A listing of the amount owed by each customer which shows how long each
component part has been due is the
a. Trial balance c. Accounts receivable trial balance
b. Working trial balance d. Aged accounts receivable trial
balance

16. To achieve good internal control, which department should perform the
activities of matching shipping documents with sales orders and preparing daily
summaries?
a. Billing department c. Shipping department.
b. Credit department d. Sales order department.

17. Which of the following controls most likely would be effective in offsetting the
tendency of sales personnel to maximize sales volume at the expense of high
bad debt write-offs?
a. Employees responsible for authorizing bad debt write-offs are denied access
to cash.
b. Employees involved in the credit granting are separated from sales function.
c. Shipping documents and sales invoices are matched by an employee who
does not have authority to write-off bad debts.
d. Subsidiary accounts receivable records are reconciled to the control account
by an employee independent of the authorization of credit.

18. The use of pre-numbered invoices, then accounting for their numeric
sequence, meets primarily the:
a. Valuation or allocation assertion c. Completeness assertion
b. Rights and obligations assertion d. Existence or occurrence
assertion

19. Which of the following control procedures could prevent or detect errors or
frauds arising from shipments made to unauthorized parties?
a. Document policies and procedures for scheduling shipments.
b. Establish procedures for reviewing and approving prices and sales terms
before sale.

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c. Pre-number bills of lading and assure that related billings are made on a
periodic basis.
d. Prepare and periodically update lists of authorized customers.

20. To achieve control when there is no billing department, the billing function
should be performed by the
a. Accounting department c. Shipping department
b. Sales department d. Credit and collection department

21. The person who opens the mail commonly prepares a remittance advice
when a customer fails to return one with a payment. Consequently, mail should
be opened by the
a. Credit manager c. Sales manager
b. Receptionist d. Accounts receivable clerk

22. Which of the following would the auditor consider to be an incompatible

operation if the cashier receives remittances from the mail room?
a. The cashier makes the daily deposit at a local bank.
b. The cashier prepares the daily deposit.
c. The cashier endorses the checks.
d. The cashier posts the receipts to the accounts receivable subsidiary ledger.

23. Which of the following would best protect a company that wishes to prevent
lapping?
a. Segregating duties so that accounting has no access to an incoming mail
b. Segregating duties so that no employee has access both to checks from
customers and to currency from daily cash receipts
c. Having customers send payments directly to the company's bank
d. Requesting that customers checks be made payable to the company and be
addressed to the treasurer

24. Which of the following fraudulent activities most likely could be perpetrated
due to lack of effective control in the revenue cycle?
a. The failure to prepare shipping documents may cause an overstatement of
inventory balances.
b. Authorization of credit memos by personnel who receives cash may permit
the misappropriation of cash.
c. Fictitious transactions may be recorded that may cause an understatement
of revenues and overstatement of receivables.
d. Claims received from customers for goods returned may be intentionally
recorded in other customer’s accounts.

25. During the review of a small owner-managed company’s internal controls,

the auditor discovers that the accounts receivable clerk approves credit memos
and has access to cash. Which of the following controls would offset this
deficiency?
a. The owner reviews errors in billings to customers and postings to subsidiary
records.
b. The owner reviews credit memos after they are recorded.
c. The controller reconciles the detailed receivables records to the general
ledger.
d. The controller reviews the monthly bank statement directly and reconciles
the checking accounts.

26. A purpose of tests of controls for shipping is to determine whether:

a. Billed goods are shipped
b. Shipments are made in accordance with approved sales and orders
c. Sales orders are properly recorded
d. Shipping personnel route goods to related parties

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27. The purpose of tests of controls over billing is to determine whether
a. Billed goods have been shipped c. Billing department
personnel are competent
b. Shipments are billed d. Credit is approved before goods
are billed

28. When designing audit procedures, the direction of test is a crucial step in
satisfying the
a. Valuation objective c. Cutoff objective
b. Completeness objective d. Classification objective

29. The auditor traces items from the journals back to the source documents in
order to satisfy the
a. Validity objective c. Completeness objective
b. Ownership objective d. Valuation objective

30. To determine whether internal control operates effectively to minimize errors

of failure to bill a customer for a shipment, the auditor would select a sample of
transactions from the population represented by the
a. Shipping records file c. Sales invoice
b. Customer order file d. Subsidiary customer accounts
ledger

31. To determine whether internal control operates effectively to minimize errors

of failure to post invoices to the customer’s accounts ledger, the auditor would
select a sample of transactions from the population represented by the
a. Bill of lading file c. Sales invoice file
b. Customer order file d. Subsidiary customer accounts
ledger

32. Tracing copies of sales invoice to shipping documents provides evidence that
a. Shipments were recorded as receivables
b. Billed sales were shipped
c. Shipments were billed
d. Debits to accounts receivable were for sales shipped

33. Tracing shipping documents to sales invoices provides evidence that

a. Shipments were billed c. Recorded sales were shipped
b. Shipments were recorded as sales d. Invoiced sales were shipped

34. To test for the possibility of a shipment to a fictitious customer, the auditor
traces from the
a. Bill of lading to the credit authorization c. Sales journal to the
accounts receivable ledger
b. Credit authorization to the bill of lading d. Accounts receivable ledger
to the bill of lading

35. 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. Customer order file c. Sales invoice file
b. Bill of lading file d. Subsidiary customer’s accounts ledger

Transaction Cycles – Expenditure/Disbursement Cycle

1. The primary audit objective regarding the purchasing of materials by the client
is to
a. Ascertain that materials paid for are on hand.
b. Observe the annual physical count.
c. Investigate the recording of unusual transactions regarding materials.
d. Determine the reliability of financial reporting by the purchasing function.
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2. A request by an authorized employee for goods or services is made on the

a. Purchase order c. Purchase requisition
b. Debit memo d. Acquisition transaction file

3. Which of the following is a primary function of the purchasing department?

a. Ensuring the acquisition of goods of a specified quality.
b. Authorizing the acquisition of goods.
c. Verifying the propriety of goods of a specified quality.
d. Reducing expenditures for goods acquired.

4. If internal control is well-designed, employees in the same department most

likely would approve purchase orders and also
a. Reconcile the open invoice file c. Inspect goods upon receipt
b. Authorize requisition of goods d. Negotiate terms with vendors

5. The authority to accept incoming goods in receiving should be based on a(n)

a. Vendor's invoice c. Bill of lading
b. Materials requisitions d. Approved purchase order

6. Control over merchandise purchase is improved when a company's receiving

department
a. Relies on shipping documents to prepare receiving reports
b. Accepts and counts all merchandise received from known vendors
c. Accepts merchandise only if an approved purchase order is on hand
d. Is responsible for handling merchandise but not for representing receiving
reports

7. Internal control is improved when the quantity of merchandise ordered is

omitted from the copy of the purchase order sent to the
a. Department that initiated the requisition c. Purchasing agent
b. Receiving department d. Accounts payable department

8. Omitting quantities from copies of purchase orders sent to the receiving

department is a control procedure intended mainly to
a. Ensure that goods received are physically counted by receiving department
personnel
b. Identify and return damaged goods as soon as they are received
c. Provide a cross-check for verifying the accuracy of perpetual inventory
records
d. Prevent theft of goods by receiving department personnel

9. The purchase order forwarded to the receiving department indicates the

vendor’s name and the quantities of materials ordered. This may possibly
cause
a. Payment for unauthorized items c. Overpayment for incomplete
deliveries
b. Payment for unauthorized vendors d. Delay in recording purchases

10. The document which specifies the amount of money owed to the vendor for
an acquisition is the
a. Receiving report c. Purchase order
b. Vendor’s invoice d. Accounts payable trial balance

11. The accounts payable department receives a purchase order form to

accomplish all of the following, except
a. Comparing invoice price to purchase order price.
b. Ensuring that the purchase had been properly authorized.
c. Comparing quantity ordered to quantity purchased.

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d. Ensuring that the goods had been received by the party requesting the
goods.

12. Which of the following is the most effective control procedure to detect
vouchers that were prepared for the payment of goods that were not received?
a. Count goods upon receipt in the storeroom.
b. Match the purchase order, receiving report and vendor’s invoice for each
voucher in accounts payable department.
c. Compare goods received with goods requisitioned in receiving department.
d. Verify vouchers for accuracy and approval in internal audit department.

13. Which of the following controls is not usually performed in the vouchers
payable department?
a. Matching the vendor’s invoice with the related receiving report.
b. Approving vouchers for payment by having an authorized employee sign the
vouchers.
c. Indicating the asset and expense accounts to be debited.
d. Accounting for unused pre-numbered purchase orders and receiving reports.

14. Which of the following controls is not usually performed in the treasurer’s
department?
a. Approving vendor’s invoices for payment c. Verifying the accuracy of checks
and vouchers
b. Cancelling payment vouchers when paid d. Controlling the mailing of checks
to vendors

15. When processing and recording cash disbursements, it is important to have a

method of cancelling the supporting documents to prevent their reuse as
support for another check at a later time. A common method is to
a. Shred the documents so that they can’t be reused.
b. Transfer the possession of the documents to a bank vault such as a safety
deposit box.
c. Move the documents to a permanent off-site facility such as a warehouse.
d. Write the check number on the supporting documents.

16. For good internal control, the person who should sign checks is the
a. Person preparing the checks c. Purchasing agent
b. Accounts payable clerk. d. Treasurer

17. Operating control of the check-signing machine normally should be the

responsibility of the
a. General accounting function c. Treasury function
b. Legal counsel d. Internal audit function

18. The mailing of disbursement checks and remittance advices should be

controlled by the employee who
a. Signed the checks last
b. Approved the vouchers for payment
c. Matched the receiving reports, purchase orders, and vendor invoices
d. Verified the mathematical accuracy of the vouchers and remittance advices

19. The procedure that would discourage the resubmission of vendor invoices
after they have been paid is
a. A requirement for double endorsement of checks.
b. The cancellation of vouchers by accounting personnel.
c. The cancellation of vouchers by treasurer personnel.
d. The mailing of payments directly to payees by accounting personnel.

20. Which is incorrect?

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a. After payment, the purchase order, receiving report and vendor’s invoice are
stamped paid to prevent duplicate payments
b. Before recording in the journals, accounting department normally matches
purchase order, receiving report and vendor’s invoice
c. Voided checks are mutilated, retained and accounted for
d. Two signatures must be present on checks regardless of its amount

21. Which of the following controls is most effective in assuring that recorded
purchases are free of material errors?
a. The receiving department compares the quantity ordered on purchase orders
with the quantity received on receiving reports.
b. Vendor’s invoices are compared with purchase orders by an employee who is
independent of the receiving department.
c. Receiving reports require the signature of the individual who authorized the
purchase.
d. Purchase orders, receiving reports, and vendor’s invoices are independently
matched in preparing vouchers.

22. How can an auditor test to determine whether Receiving Department

procedures are applied properly?
a. Test a sample of receiving documents c. Interview Receiving
department personnel
b. Review procedures manuals d. Observe receiving procedures on
a surprise basis

23. An auditor performs a test to determine whether all merchandise for which of
the client was billed was received. The population for this test consists of all
a. Merchandise received c. Vendor’s invoices
b. Cancelled checks d. Receiving reports

24. It shows the total hours worked by each production employee in a day.
a. Clock card b. Job time ticket c. Payroll register d. Time summary

25. Which of the following is not a common activity within personnel and payroll?
a. Preparing and updating personnel records c. Preparing and recording
payroll
b. Distributing paychecks to employees d. Initiating terminations

26. Which of the following procedures is most likely to ensure that employee job
time tickets are accurate?
a. Approve the payroll voucher in the accounts payable department
b. Keep employment information in the human resources department
c. Make sure that the number of hours per week on each employee’s job time
ticket is 40
d. Check the employee check cards against the job time tickets

27. The proper use of prenumbered termination notice forms by the payroll
department should provide assurance that all
a. Uncashed payroll checks were issued to employees who have not been
terminated.
b. Personnel files are kept up to date.
c. Employees who have not been terminated receive their payroll checks.
d. Terminated employees are removed from the payroll.

28. The purpose of segregating the duties of hiring personnel and distributing
payroll checks is to separate the
a. Human resources function from the controllership function
b. Administrative controls from the internal accounting controls
c. Authorization of transactions from the custody of related assets
d. Operational responsibility from the record keeping responsibility
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29. To minimize the opportunities for fraud, unclaimed cash payroll should be
a. Deposited in a safe deposit box c. Held by the controller
b. Held by the payroll custodian d. Deposited in a special bank
account

30. A large retail enterprise has established a policy that requires that the
paymaster deliver all unclaimed payroll checks to the internal auditing
department at the end of each payroll distribution day. This policy was most
likely adopted in order to
a. Assure that employees who were absent on a payroll distribution day are not
paid for that day.
b. Prevent the paymaster from cashing checks that are unclaimed for several
weeks.
c. Prevent a bona fide employee's check from being claimed by another
employee.
d. Detect any fictitious employee who may have been placed on the payroll.

31. Which of the following control procedures could best prevent direct labor
from being charged to manufacturing overhead?
a. Comparison of daily journal entries with factory labor summary.
b. Examination of routing tickets from finished goods on delivery.
c. Reconciliation of work in process inventory with cost records.
d. Recomputation of direct labor based on inspection of time cards.

32. In the audit of the following types of profit-oriented enterprises, which one
would the auditor be most likely to place special emphasis on testing the
internal controls over proper classification of payroll transactions?
a. A manufacturing organization c. A retailing organization
b. A wholesaling organization d. A service organization

33. Which of the following statements best explains why the accuracy of payroll
calculations and of payroll account distribution is critical to auditor?
a. Employees will complain to management if their paychecks do not reflect
wages or salaries earned.
b. Payroll is paid in cash, an account that is highly susceptible to frauds.
c. Auditing standards require that tests of cash and payroll be coordinated
d. Payroll impacts several statement of financial position and statement of
comprehensive income accounts

34. It would be appropriate for the payroll accounting department to be

responsible for which of the following functions?
a. Approval of employee time records
b. Maintenance of records of employment, discharges, and pay increases
c. Preparation of periodic government reports as to employees’ earnings and
withholding taxes
d. Temporary retention of unclaimed employee paychecks

35. On a surprise basis, an auditor may elect to distribute paychecks to

employees personally. What is the primary purpose of this audit procedure?
a. To assure that no extra payroll checks are prepared and distributed
b. To test whether all paid employees exist
c. To assure that paychecks are not distributed to an employee absent on the
day the auditor distributes checks.
d. To test the procedures for distributing paychecks

Auditing in a CIS environment

1. Which statement is incorrect when auditing in a CIS environment?

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a. A CIS environment exists when a computer of any type or size is involved in
the processing by the entity of financial information of significance to the
audit, whether that computer is operated by the entity or by a third party.
b. The auditor should consider how a CIS environment affects the audit.
c. The use of a computer changes the processing, storage and communication
of financial information and may affect the accounting and internal control
systems employed by the entity.
d. A CIS environment changes the overall objective and scope of an audit.

2. Which of the following characteristics distinguishes computer processing from

manual processing?
a. Computer processing virtually eliminates the occurrence of computational
error normally associated with manual processing
b. Errors or fraud in computer processing will be detected soon after their
occurrences
c. The potential of systematic error is ordinarily greater in manual processing
than in computerized processing
d. Most computer systems are designed so that transaction trails useful for
audit purposes do not exist.

3. The use of CIS will least likely affect the

a. The procedures followed by the auditor in obtaining a sufficient
understanding of the accounting and internal control systems
b. The auditor’s specific audit objectives
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

4. It relates to materiality of the financial statement assertions affected by the

computer processing.
a. Threshold b. Relevance c. Complexity d.
Significance

5. Which of the following is least likely a risk characteristic associated with CIS
environment?
a. Errors embedded in an application’s program logic maybe difficult to
manually detect on a timely basis.
b. Many control procedures that would ordinarily be performed by separate
individuals in manual system may be concentrated in CIS.
c. The potential unauthorized access to data or to alter them without visible
evidence maybe greater.
d. Initiation of changes in the master file is exclusively handled by respective
users.

6. Which of the following significance and complexity of the CIS activities should
an auditor least understand?
a. The organizational structure of the client’s CIS activities.
b. Lack of transaction trails.
c. The significance and complexity of computer processing in each significant
accounting application.
d. The use of software packages instead of customized software.

7. Which of the following is unique to CIS?

a. Error listing b. Flow chart c. Questionnaire d. Pre-numbered
documents

8. A control which relates to all parts of the CIS is called a (an)

a. Systems control b. General controlc. Applications control d. Universal
control
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9. Which of the following is not a general control?

a. The plan of organization and operation of CIS activity
b. Procedures for documenting, reviewing and approving systems and programs
c. Processing controls
d. Hardware controls

10. Which of the following activities would most likely be performed in the CIS
department?
a. Initiation of changes to master records
b. Conversion of information to machine-readable form
c. Correction of transactional errors
d. Initiation of changes to existing applications

11. End user computing is most likely to occur on which of the following types of
computers?
a. Mainframe c. Personal computers
b. Minicomputers d. Personal reference assistants

12. A personal computer can be used in various configurations, including

a. A stand-alone workstation operated by a single user or a number of users at
different times.
b. A workstation which is part of a local area network of personal computers.
c. A workstation connected to a server.
d. All of the above.

13. Which statement is incorrect regarding personal computer configurations?

a. The stand-alone workstation can be operated by a single user or a number of
users at different times accessing the same or different programs.
b. A stand-alone workstation may be referred to as a distributed system.
c. A local area network is an arrangement where two or more personal
computers are linked together through the use of special software and
communication lines.
d. Personal computers can be linked to servers and used as part of such
systems, for example, as an intelligent on-line workstation or as part of a
distributed accounting system.

14. Which of the following is the least likely characteristic of personal

computers?
a. They are small enough to be transportable.
b. They are relatively expensive.
c. They can be placed in operation quickly.
d. The operating system software is less comprehensive than that found in
larger computer environments.

15. Which of the following is an inherent characteristic of software package?

a. They are typically used without modifications of the programs.
b. The programs are tailored-made according to the specific needs of the user.
c. They are developed by software manufacturer according to a particular
user’s specifications.
d. It takes a longer time of implementation.

16. Which of the following is not normally a removable storage media?

a. Compact disk b. Tapes c. Diskettes d. Hard disk

17. It is a computer program (a block of executable code) that attaches itself to a

legitimate program or data file and uses it’s as a transport mechanism to
reproduce itself without the knowledge of the user.
a. Virus c. System management program
b. Utility program d. Encryption
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18. It refers to plans made by the entity to obtain access to comparable

hardware, software and data in the event of their failure, loss or destruction.
a. Back-up b. Encryption c. Anti-virus d. Wide
Area Network (WAN)

19. Which of the following least likely protects critical and sensitive information
from unauthorized access in a personal computer environment?
a. Using secret file names and hiding the files.
b. Keeping of backup copies offsite.
c. Employing passwords.
d. Segregating data into files organized under separate file directories.

20. What technology is needed in order to convert a paper document into a

computer file?
a. Optical character recognition c. Bar-coding scanning
b. Electronic data interchange d. Joining and merging

21. Computer systems that enable users to access data and programs directly
through workstations are referred to as
a. On-line computer systems c. Database management systems
(DBMS)
b. Personal computer systems d. Database systems

22. Which statement is incorrect regarding workstations?

a. Workstations may be located either locally or at remote sites.
b. Local workstations are connected directly to the computer through cables.
c. Remote workstations require the use of telecommunications to link them to
the computer.
d. Workstations cannot be used by many users, for different purposes, in
different locations, all at the same time.

23. It combines on-line/real time processing and on-line/batch processing.

a. On-Line/Memo Update (and Subsequent Processing)
b. On-Line Downloading/Uploading Processing
c. On-Line/Inquiry
d. On-Line/Combined Processing

24. What type of computer system is characterized by data that are assembled
from more than one location and records that are updated immediately?
a. Microcomputer system c. Batch processing system
b. Minicomputer system d. On-line-real-time system

25. It is a communication system that enables computer users to share

computer equipment, application software, data and voice and video
transmissions.
a. Network b. File server c. Host d. Client

26. A type of network that multiple buildings are close enough to create a
campus, but the space between the buildings is not under the control of the
company is
a. Local Area Network (LAN) c. Metropolitan Area Network
(MAN)
b. Wide Area Network (WAN) d. World Wide Web (WWW)

27. Which of the following is least likely a characteristic of Wide Area Network
(WAN)?
a. Created to connect two or more geographically separated LANs.
b. Typically involves one or more long-distance providers, such as a telephone
company to provide the connections.
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c. WAN connections tend to be faster than LAN.
d. Usually more expensive than LAN.

28. A device that works to control the flow of data between two or more network
segments
a. Bridge b. Router c. Repeater d. Switch

29. The undesirable characteristics of on-line computer systems least likely

include
a. Data are usually subjected to immediate validation checks.
b. Unlimited access of users to all of the functions in a particular application.
c. Possible lack of visible transaction trail.
d. Potential programmer access to the system.

30. General CIS controls may include, except:

a. Organization and management controls. c. Delivery and support controls.
b. Development and maintenance controls. d. Controls over computer data
files.

31. CIS application controls include, except

a. Controls over input c. Monitoring controls.
b. Controls over output d. Controls over processing and
computer data files.

32. Which of the following procedures would an entity most likely include in its
computer disaster recovery plan?
a. Develop an auxiliary supply to provide uninterrupted electricity
b. Store duplicate copies of critical files in location away from the computer
center
c. Maintain a listing of entity passwords with the network manager
d. Translate data for storage purposes with a cryptographic secret code

33. A client is concerned that a power outage or disaster could impair the
computer hardware’s ability to function as designed. The client desires off-site
back-up hardware facilities that are fully configured and ready to operate within
several hours. The client most likely should consider a
a. Cold site b. Cool site c. Warm site d. Hot site

34. To avoid invalid data input, a bank added an extra number at the end of each
account number and subjected the new number to an algorithm. The technique
is known as
a. Optical character recognition c. A dependency check
b. A check digit d. A format check

35. An entity has the following invoices in a batch:

Invoices # Product Quantity Unit Price
201 F10 150 P 5.00
202 G12 200 10.00
203 H20 250 25.00
204 K35 300 30.00
Which of the following most likely presents a hash total?
a. FGHK80 b. 4 c. 204 d. 810

36. When computer programs or files can be accessed from terminals, users
should be required to enter a (an)
a. Parity check c. Self-diagnosis test
b. Personal identification code d. Echo check

37. An auditor most likely be concerned with which of the following controls in a
distributed data processing system.
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a. Hardware controls c. Access controls
b. System documentation controls d. Disaster recovery controls

38. An auditor anticipates assessing control risk at a low level in a computerized

environment. Under these circumstances, on which of the following activities
would the auditor initially focus?
a. Programmed control activities c. Output control activities
b. Application control activities d. General control activities

39. The applications of auditing procedures using the computer as an audit tool
refer to
a. Integrated test facility c. Data-based management system
b. Auditing through the computer d. Computer assisted audit
techniques

40. Which statement is incorrect regarding CAATs?

a. CAATs are often an efficient means of testing a large number of transactions
or controls over large populations.
b. To ensure appropriate control procedures, the presence of the auditor is not
necessarily required at the computer facility during the running of a CAAT.
c. The general principles outlined in PAPS 1009 apply in small entity IT
environments.
d. Where smaller volumes of data are processed, the use of CAATs is more cost
effective.

41. Consists of generalized computer programs designed to perform common

audit tasks or standardized data processing functions.
a. Customized or purpose-written programs c. Package or generalized audit
software
b. System management programs d. Utility programs

42. Audit automation least likely include

a. Expert systems.
b. Tools to evaluate a client’s risk management procedures.
c. Manual working papers.
d. Corporate and financial modeling programs for use as predictive audit tests.

43. When an auditor tests a computerized accounting system, which of the

following is true of the test data approach?
a. Several transactions of each type must be tested
b. Test data are processed by the client’s computer programs under the
auditor’s control
c. Test data must consist of all possible valid and invalid conditions
d. The program tested is different from the program used throughout the year
by the client

44. Which of the following computer-assisted auditing techniques allows fictitious

and real transactions to be processed together without client operating
personnel being aware of the testing process?
a. Integrated test facility c. Parallel simulation
b. Input controls matrix d. Data entry monitor

45. Which of the following methods of testing application controls utilizes a

generalized audit software package prepared by the auditors?
a. Parallel simulation c. Test data approach
b. Integrated test facility d. Exception report tests

“Success is not final, failure is not fatal: it is the courage to continue that
counts.”
– Winston Churchill
Page 34 of 35
AT by Raymund Francis A. Escala, CPA, MBA AT – 11th Batch – HQ02
 Auditing Theory: Professional Responsibilities and Other Topics

END OF HANDOUTS

Page 35 of 35
AT by Raymund Francis A. Escala, CPA, MBA AT – 11th Batch – HQ02