Ranao Council – Alkhwarizmi International College

Accountancy Department
FINAL MOCKBOARD EXAMINATION 2015

Subject: AUDITING THEORY

SET B
GENERAL INSTRUCTION: Read carefully the questions below and choose the best
statement among the choices. Shade the letter corresponding to your answer on the sheet
provided along with this questionnaire. Erasures are strictly not allowed.

1. An auditor should disclose the substantive reasons for expressive an adverse opinion in
the Basis for Adverse Opinion paragraph
A. Following the opinion paragraph.
B. Preceding the opinion paragraph.
C. Following the introductory paragraph.
D. Within the notes to the financial statements.

2. In which of the following circumstances would an auditor’s report least likely include
specific reference to the corresponding figures?
A. When the auditor’s report on the prior period, as previously issued, included a modified
opinion and the matter which gave rise to the modification is resolved and properly dealt
with in the financial statements.
B. When the auditor’s report on the prior period, as previously issued, included a modified
opinion and the matter which gave rise to the modification is unresolved, and results in a
modification of the auditor’s report regarding the current period figures.
C. When the auditor’s report on the prior period, as previously issued, included a modified
opinion and the matter which gave rise to the modification is unresolved, but does not
result in a modification of the auditor’s report regarding the current period figures.
D. When the auditor’s report on the prior period financial statements containing a material
misstatement included an unmodified opinion and the prior period financial statements
have not been revised and reissued, and the corresponding figures have not been
properly restated and/or appropriate disclosures have not been made.

3. Comparative financial statements include the financial statements of the prior year that
were audited by a predecessor auditor whose report is not presented. If the
predecessor’s report was qualified, the incoming auditor should
A. Express an opinion only on the current year’s statements and make no reference to the
prior year’s statements.
B. Issue an updated comparative audit report indicating the division of responsibility.
C. Request the client to reissue the predecessor’s report on the prior year’s statements.
D. Indicate the substantive reasons for the qualification in the predecessor auditor’s
opinion.

4. An auditor expressed a qualified opinion on the prior year’s financial statements because
of a lack of adequate disclosure. These financial statements are properly restated in the
current year and presented in comparative form with the current year’s financial
statements. The auditor’s updated report on the prior year’s financial statements should
A. Make no reference to the type of opinion expressed on the prior year’s financial
statements.
B. Express an unmodified opinion on the restated financial statements of the prior year.
C. Be accompanied by the auditor’s original report on the prior year’s financial statements.
D. Continue to express a qualified opinion on the prior year’s financial statements.

5. A client is presenting a comparative (two-year) financial statements. Which of the

following is correct concerning reporting responsibilities of a continuing auditor?
A. The auditor may issue either one audit report on both presented years, or two audited
reports, one on each year.
B. The auditor should issue one audit report, but only on the most recent year.
C. The auditor should issue two audit reports, one on each year.
D. The auditor should issue one audit report that is on both presented years.

6. Which of the following phrases would an auditor most likely include in the auditor’s
report when expressing a qualified opinion because of inadequate disclosure?
A. Subject to the departure from generally accepted accounting principles, as described
above.
B. With the foregoing explanation of theses omitted disclosures.

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C. Except for the omission of the information discussed in the Basis for Qualified Opinion
paragraph.
D. Do not present fairly in all material respects.

7. An auditor’s report on financial statements prepared in accordance with the financial

reporting provisions of a contract (that is, a special purpose framework) to comply with
the provisions of that contract should include all of the following, except
A. An opinion as to whether the financial statements are presented fairly, in all material
respects, in accordance with the financial reporting provisions of the contract.
B. A statement that indicates the basis of accounting used.
C. An opinion as to whether the basis of accounting used is appropriate under the
circumstances.
D. Reference to the note to the financial statements that describes the basis of
presentation.

8. An auditor’s report on financial statements prepared on the cash receipts and

disbursements basis of accounting should include all of the following, except
A. A statement that the audit was conducted in accordance with Philippine Standards on
Auditing.
B. A reference to the note to the financial statements that describes the cash receipts and
disbursements basis of accounting.
C. A statement that the cash receipts and disbursements basis of accounting is not a
comprehensive basis of accounting.
D. An opinion as to whether the financial statements are presented fairly, in all material
respects, in accordance with the cash receipts and disbursements basis of accounting.

9. Which of the following statements is correct with respect to an auditor’s report

expressing an opinion on a specific element on a financial statement?
A. The auditor who has expressed an adverse opinion on the financial statements as a
whole can never express an unmodified opinion on a specific element in these financial
statements.
B. The materiality determined for a specific element of a financial statement may be lower
than the materiality determined for the entity’s complete set of financial statements.
C. Such a report can only be issued if the auditor is also engaged to audit the entire set of
financial statements.
D. The attention devoted to the specific element is usually less than it would be if the
financial statements as a whole were audited.

10. When an auditor is requested to express an opinion on the rental and royalty income of
an entity, the auditor may
A. Accept the engagement provided the auditor will comply with relevant ethical
requirements, including those pertaining to independence, relating to financial statement
audit engagements and all PSAs relevant to the audit.
B. Accept the engagement provided distribution of the auditor’s report is limited to the
entity’s management.
C. Not accept the engagement unless also engaged to audit the full financial statements of
the entity.
D. Not accept the engagement because to do so would be tantamount to agreeing to
express a piecemeal opinion.

11. An auditor may report on summary financial statements that are derived from complete
audited financial statements if the
A. Auditor indicates whether the information in the summary financial statements is
consistent with the audited financial statements from which it was derived.
B. Summary financial statements are distributed only to management and the board of
directors.
C. Auditor describes the additional review procedures performed on the summary financial
statements.
D. Summary financial statements are presented in comparative form with the prior year’s
summarized financial statements.

12. A major purpose of the auditor’s report on financial statements is to

A. Assure investors of the complete accuracy of the financial statements.
B. Enhance the degree of confidence of intended users in the financial statements.
C. Deter creditors from extending loans in high-risk situations.
D. Describe the specific auditing procedures undertaken to gather evidence for the opinion.

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13. A CPA engaged to audit financial statements observes that the accounting for a
certain material item is not in accordance with the applicable financial reporting framework,
although the departure is prominently disclosed in a note to the financial statements. The
CPA should
A. Express an unmodified opinion but insert an Emphasis of Matter paragraph emphasizing
the matter by reference to the note.
B. Disclaim an opinion.
C. Not allow the accounting treatment for this item to affect the type of opinion because the
departure from the requirement of the applicable financial reporting framework was
disclosed.
D. Modify the opinion because of the departure from the requirement of the applicable
financial reporting framework.

14. When a qualified opinion is expressed, the implication is that the auditor
A. Does not believe the financial statements are presented in accordance with the applicable
financial reporting framework.
B. Does not know if the financial statements are presented in accordance with the applicable
financial reporting framework.
C. Believes the financial statements are presented fairly.
D. Believes the financial statements are presented fairly “except for” a specific item of
them.

15. On January 2, 2013, the TANYA CO. received a notice from its primary suppliers that
effective immediately all wholesale prices would be increase 10%. On the basis of the
notice, TANYA revalued its December 31, 2012 inventory to reflect the higher costs. As a
result, the statement of financial position reflects inventory stated at an amount higher than
its net realizable value. The inventory constituted a material proportion of total assets;
however, the effect of the revaluation was material to current assets but not to total assets
or net income. In reporting on the company’s financial statements for the year ended
December 31, 2012, in which inventory is valued at the adjusted amount, the auditor would
most likely
A. Express an unmodified opinion provided the nature of the adjustment and the amounts
involved are disclosed in notes to the financial statements.
B. Express a qualified opinion.
C. Disclaim an opinion.
D. Express an adverse opinion.

16. SAMANTHA APARTMENTS CO. completed construction and began to lease a 100-unit
apartment on May 28, 2012. During June, 50 units were leased, and an additional 30 units
were leased in July 2013.

During the month of May 2012, the company charged to expense P 46,000 for the cost of
advertising, a grand opening party, and the advertising agency fee for planning the
campaign. At December 31, 2013, the statement of financial position reflected P 175,000 of
initial direct costs incurred by the company including commissions and legal fees paid in
negotiating the lease. These initial direct costs are shown as an addition to the carrying
amount of the leased asset and is being recognized as an expense over the term of the
lease on the same basis as the lease income.

During your audit of the company’s financial statements for the year ended December 31,
2013 (conducted in accordance with PSAs), no facts other than those described above came
to your knowledge that would cause your opinion to be other than that the financial
statements were presented fairly in accordance with Philippine Financial Reporting
Standards.

What type of opinion should your report contain?

A. An adverse opinion
B. An unmodified opinion
C. A disclaimer of opinion
D. A qualified opinion

17. In which of the following situations would an auditor ordinarily choose between
expressing a qualified opinion or an adverse opinion?
A. The auditor did not observe the entity’s physical inventory and is unable to become
satisfied as to its balance by other auditing procedures.
B. The financial statements fail to disclose information that is required by the applicable
financial reporting framework.

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C. The auditor is asked to report only on the entity’s statement of financial position and not
on the general purpose financial statements.
D. Events disclosed in the financial statements cause the auditor to have substantial doubt
about the entity’s ability to continue as a going concern.

18. Without affecting the CPA’s willingness to express an unmodified opinion on the
client’s financial statement, corporate management may refuse a request to
A. Authorize its attorney to confirm that a list of pending or threatened litigation prepared by
management includes all items known to the attorney.
B. Change its basis of accounting for inventories from first-in, first-out (FIFO) method to
weighted average method.
C. Write down to salvage value certain equipment that is no longer useful.
D. Allow the CPA to examine tax returns for years prior to that of the financial statements
being audited.

19. In which of the following circumstances would an auditor most likely add an Emphasis
of Matter paragraph to the auditor’s report while expressing an unmodified opinion?
A. The auditor is asked to report on a single financial statement (e.g., a statement of
financial position).
B. There is significant doubt about the entity’s ability to continue as a going concern.
C. Management’s estimates of the effects future events are unreasonable.
D. Certain transactions cannot be tested because of management’s records retention policy.

20. If an auditor is satisfied that sufficient evidence supports management’s assertions

about an uncertainty and its presentation or disclosure, the auditor should
A. Express a modified opinion with an Emphasis of Matter paragraph.
B. Express an unmodified opinion with an Emphasis of Matter paragraph.
C. Express an unmodified opinion with an Other Matter paragraph.
D. Express a qualified opinion or disclaim an opinion, depending upon the materiality of the
loss.

21. During the year ended December 31, VICTORIA Co. reported its property, plant and
equipment at the lower of cost or market (LCM) because their fair value had declined. The
loss has been included in the income statement and the adjustment has been fully disclosed
in the notes. If a CPA believes that the values reported in the financial statements are
reasonable, what opinion should be expressed?
A. An unmodified opinion.
B. A “subject to” qualified opinion.
C. An adverse opinion.
D. A disclaimer of opinion.

22. In which of the following circumstances would an auditor most likely add an Emphasis of
Matter paragraph to the auditor’s report while expressing an unmodified opinion?
A. There is a substantial doubt about the entity’s ability to continue as a going concern.
B. Management’s estimates of the effects of future events are unreasonable.
C. No depreciation has been provided in the financial statements.
D. Certain transactions cannot be tested because of management’s records retention policy.

23. An Emphasis of Matter paragraph of an auditor’s report describes an uncertainty as

follows:

Without qualifying our opinion, we draw attention to Note X to the financial statements. The
Company is the defendant in a lawsuit alleging infringement of certain patent rights and
claiming royalties and punitive damages. The Company has filed a counter action and
preliminary hearings and discovery proceedings on both actions are in progress. The
ultimate outcome of the matter cannot presently be determined, and no provision for any
liability that may result has been made in the financial statements.

What type of opinion should the auditor express under these circumstances?
A. Unmodified
B. “Except for” qualified
C. “Subject to” qualified
D. Disclaimer of opinion

24. A client makes test counts on the basis of a statistical plan. The auditor observes such
counts as are deemed necessary and is able to become satisfied as to the reliability of
the client’s procedures. In reporting on the results of the audit, the auditor

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A. Must qualify the opinion if the inventories were material.
B. Can express an unmodified opinion.
C. Must comment in an Emphasis of Matter paragraph as to the inability to observe year-
end inventories.
D. Is required to disclaim an opinion if the inventories were material.

25. Which of the following statements is not included in the auditor’s report?
A. An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements.
B. The procedures selected depend on the auditor’s judgment, including the assessment of
the risk of material misstatements, whether due to fraud or error.
C. An audit includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements
D. An audit also includes evaluating the appropriateness of the accounting policies used
and the reasonableness of accounting estimates made by management, as well as the
overall presentation of the financial statements.

26. The date of the audit report is important because

A. The date of the auditor’s report informs the user of the auditor’s report that the auditor
has considered the effect of events and transactions of which the auditor became aware
and that occurred up to that date.
B. The auditor bills time to the client up to and including the audit report date, and the
statement to the client should reflect this date.
C. PSA requires all audits to be performed on a timely basis
D. This date coincides with the date of the financial statements

27. An addition of an ‘emphasis of a matter” paragraph to an otherwise unmodified report

would be inappropriate when
A. a major catastrophe with a significant effect on the entity’s financial position
B. material inconsistencies exist between other information and audited financial
statements
C. early application of new accounting standards
D. an uncertainty relating to the future outcome of exceptional litigation or regulatory
action

28. Which of the following best describes the auditor’s responsibility when reporting on
comparatives?
A. For corresponding figures, the auditor, the auditor’s opinion on the financial statement
refers to the current period only
B. For all comparatives, the auditor’s opinion refers to each period for which the financial
statements are presented.
C. For all comparatives, the auditor’s opinion the current period only
D. For comparative financial statement, the auditor’s opinion on the financial statements
refers to current period only.

29. When the audited financial statements of the prior period year are presented together
with those of the current year, the continuing auditor’s report should cover
A. both years
B. only the current year
C. only the current year, but the prior year’s report should be presented
D. only the current year but the prior year should be referred to.

30. Which of the following does not require modification of audit report?
A. The report is qualified because the financial statements contain a material departure
from GAAP
B. The report includes an emphasis of a matter
C. The audit report on group financial statements where the financial statements of the
components were audited by another auditor
D. the report is qualified because the scope of the auditor’s work is restricted.

31. If group auditor makes no reference to component auditors whose work they have relied
on as a part of the basis for their report, the group auditor
A. is not required to investigate the professional reputation of the other auditor
B. is issuing an inappropriate report
C. is taking full responsibility for the works of the other auditors
D. is issuing a qualified opinion.

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32. Which of the following would not necessarily be a related party transaction?
A. A purchase from another corporation that is controlled by the corporation’s chief
shareholder.
B. A loan from the corporation to a major shareholder.
C. Sale of land to the corporation by the spouse of a director.
D. A sale to another corporation with a similar name.

33. An auditor searching for related party transactions should obtain an understanding of
each subsidiary’s relationship to the total entity because
A. This may permit the audit of inter-company account balances to be performed as of
concurrent dates.
B. This may reveal whether particular transactions would have taken place if the parties
had not been related.
C. The business structure may be deliberately designed to obscure related party
transactions.
D. Inter-company transactions may have been consummated on terms equivalent to an
arm’s-length transaction.

34. For a reporting entity that has participated in related party transactions that are
material, disclosure in the financial statements should include
A. A reference to deficiencies in the entity’s internal control.
B. A statement to the effect that a transaction was consummated on terms equivalent to
those that prevail in arm’s-length transactions.
C. The nature of the relationship and the terms and manner of settlement.
D. Details of the transactions within major classifications.

35. Which of the following statements best describes the “date of the financial statements”?
A. The date on which those with the recognized authority assert that they have prepared
the entity’s complete set of financial statements, including the related notes, and that
they have taken responsibility for them.
B. The date that the auditor’s report and audited financial statements are made available to
third parties.
C. The date of the end of the latest period covered by the financial statements.
D. The date on which the auditor has obtained sufficient appropriate evidence on which to
base the opinion on the financial statements.

36. Which of the following procedures would an auditor most likely perform to obtain
evidence about the occurrence of subsequent events?
A. Inquiring as to whether any unusual adjustments were made after the date of the
financial statements.
B. Confirming a sample of material accounts receivable established after the date of the
financial statements.
C. Comparing the financial statements being reported on with those of the prior period.
D. Investigating personal changes in the accounting department occurring after the date of
the financial statements.

37. After issuing a report, an auditor has no obligation to make continuing inquiries or
perform other procedures concerning the audited financial statements, unless
A. Final determinations or resolutions are made of contingencies that had been disclosed in
the financial statements.
B. Information about an event that occurred after the date of the auditor’s report comes to
the auditor’s attention.
C. The control environment changes after issuance of the report.
D. Information, which existed at the report date and may affect the report, comes to the
auditor’s attention.

38. Which of the ff. statements best describes the auditor’s responsibility concerning the
appropriateness of the going concern assumption in the preparation of the financial
statements?
A. The auditor’s responsibility is to make a specific assessment of the entity’s ability to
continue as a going concern.
B. The auditor’s responsibility is to predict future events or conditions that may cause the
entity to cease to continue as a going concern.
C. The auditor’s responsibility is to consider the appropriateness of management’s use of
the going concern assumption and consider whether there are material uncertainties
about the entity’s ability to continue as a going concern that need to be disclosed in the
financial statements.

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D. The auditor’s responsibility is to give a guarantee in the audit report that the entity has
the ability to continue as a going concern.

39. Which of the following conditions or events most likely would cause an auditor to have
substantial doubt about an entity’s ability to continue as a going concern?
A. Restrictions on the disposal of principal assets are present.
B. Usual trade credit from suppliers is denied.
C. Significant related party transactions are pervasive.
D. Arrearages in principal stock dividends are paid.

40. Harry, CPA, believes there is substantial doubt about the ability of Tansamjer Co. to
continue as a going concern for a reasonable period of time. In evaluating Tansamjer’s
plans for dealing with the adverse effects of future conditions and events, Harry most
likely would consider, as a mitigating factor, Tansamjer’s plans to
A. Purchase equipment and production facilities currently being leased.
B. Accumulate treasury shares at prices favorable to Tansamajer’s historic price range.
C. Negotiate reductions in required dividends being paid on preference shares.
D. Accelerate research and developments projects related to future products.

41. The date of the written representation shall be

A. After the date of the auditor’s report.
B. After the date of approval of the entity’s financial statements.
C. Before the entity’s financial statements are issued.
D. As near as practicable to, but not after the date of the auditor’s report on the financial
statements.

42. A written management representation letter is most likely to be an auditor’s best source
of corroborative information of a client’s intention to
A. Settle an outstanding lawsuit for an amount less than the accrued loss contingency.
B. Discontinue a line of business.
C. Terminate an employee pension plan.
D. Make a public offering of its ordinary share capital.

43. A written representation from a client’s management that, among other matters,
acknowledges responsibility for the fair presentation of financial statements, should
normally be signed by the
A. Chief financial officer and the chair of the board of directors
B. Chief executive officer and the chief financial officer
C. Chief executive officer, the chair of the board of directors, and the client’s lawyer
D. Chair of the audit committee of the board of directors

44. To which of the following matters would materiality limits not apply in obtaining written
management representations?
A. Reductions of obsolete inventory to net realizable value.
B. The disclosure of compensating balance arrangements involving related parties.
C. Losses from purchase commitments at prices in excess of market value.
D. The availability of minutes of shareholders’ and directors’ meetings.

45. The primary reason an auditor requests that letter of inquiry be sent to a client’s
attorneys is to provide the auditor with
A. A description and evaluation of litigations, claims, and assessments that existed at the
balance sheet date.
B. The attorneys’ opinions of the client’s historical experiences in recent similar litigation.
C. Corroboration of the information furnished by management about litigation, claims, and
assessments.
D. The probable outcome of asserted claims and pending or threatened litigation.

46. The letter of audit inquiry should be

A. Prepared and sent by the auditor
B. Prepared by management and sent by the auditor
C. Prepared and sent by management
D. Prepared by the auditor and sent by management

47. Audit sampling for test of control is generally appropriate when

A. control leaves evidence of performance
B. control leaves no evidence of performance
C. 100% of the transactions is tested

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D. examining specific high value items in the population

48. Which of the following best illustrates the concept of sampling risk?
A. A randomly chosen sample may not be representative of the population as a whole on
the characteristics of interest
B. An auditor may select audit procedures that are not appropriate to achieve the specific
objective
C. An auditor may fail to recognize errors in the documents examined for chosen sample
D. The documents related to the chosen sample may not be available for inspection

49. An advantage of using statistical sampling is that such techniques

A. mathematically measure risk
B. eliminate the need for judgmental decisions
C. define the value of reliability necessary to provide audit assurance
D. have been established in the courts to be superior to nonstatistical sampling

50. In assessing sample risk, alpha risks relate to the

A. Efficiency of the audit
B. Selection of the sample
C. Effectiveness of the audit
D. Audit quality controls

51. A number of factors influence the sample size for a substantive test of details of an
account balance. All other factors being equal, which of the following would lead to a
larger sample size?
A. Assessing control risk at a low level
B. Greater reliance on analytical procedures
C. Smaller expected frequency of misstatements
D. Smaller measure of tolerable misstatements

52. What is the primary objective of using stratification as a sampling method in auditing?
A. To increase the confidence level at which a decision will be reached from the results of
the sample selected
B. to determine the occurrence rate for a given characteristic in the population being
studied
C. to decrease the effect of variance in the total population
D. to determine the precision range of the sample selected

53. Which of the following statement is not true

A. Tests of transaction are often performed several months prior to the balance sheet date.
B. It is common to use analytical procedure at any time during the audit.
C. When controls are not considered effective, or when control deviations are discovered,
substantive tests will be eliminated.
D. Tests of details of balances are normally done last.

54. If accounts receivable turned over 7.1 times in 2011 as compared to only 5.6 times in
2012, it is possible that there were
A. Unrecorded credit sales in 2012
B. Unrecorded cash receipts in 2011
C. More thorough credit investigations made by the company late in 2011
D. Fictitious sales in 2012

55. Evidential matter is generally considered sufficient when

A. It is appropriate
B. There is enough of it to afford a reasonable basis for an opinion on financial statements.
C. It has the quality of being relevant, objective and free from unknown bias.
D. It has been obtained by random selection.

56. In determining validity of accounts receivable, which of the following would the auditor
consider to be the most reliable?
A. Documentary evidence that supports the accounts receivable balance.
B. Credits to accounts receivable from the cash receipts book after the close of business at
year end.
C. Direct telephone communication between auditor and debtor.
D. Confirmation replies received directly from customers.

57. Which of the following statements is correct about the working papers?

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A. Working papers should not include documentation prepared by the client.
B. Every matter the auditor considers in an audit must be documented in the working
papers.
C. In determining the extent of working paper documentation, it may be useful to consider
what would be necessary to provide another auditor who has no previous experience
with the audit an understanding of the detailed aspects of the audit.
D. The auditor should prepare the working papers which are sufficiently complete and
detailed to provide an overall understanding of the audit.

58. The current file of the auditor’s working papers generally should include
A. A flowchart of the internal accounting controls.
B. A copy of the financial statements
C. Organization charts.
D. Copies of bond and note indentures.

59. The fundamental purpose of an internal control is to

A. Safeguard the resources of the organization
B. Provide reasonable assurance that the objectives of the organization are achieved
C. Encourage compliance with organization objectives
D. Ensure the accuracy, reliability, and timeliness of information

60. Which of the following best describes an inherent limitation that should be recognized by
an auditor when considering the potential effectiveness of an internal control structure?
A. Procedures whose effectiveness depends on segregation of duties can be circumvented
by collusion
B. The competence and integrity of client personnel provide an environment conducive to
control and provides assurance that effective control will be achieved
C. Procedures designed to assure the execution and recording of transactions in accordance
with proper authorizations are effective against fraud perpetrated by management
D. The benefits expected to be derived from effective internal control usually do not exceed
the cost of such control

61. The overall attitude and awareness of an entity’s board of directors concerning the
importance of the internal control usually is reflected in its
A. Computer-based controls
B. Systems of segregation of duties
C. Control environment
D. Safeguards over access to assets

62. Obtaining knowledge about whether the control is implemented can best be obtained by
A. Inquiry of client’s personnel
B. Reading procedures manual
C. Tracing transactions through the information system relevant to financial reporting
D. Performing tests of control

63. For certain controls, such as segregation of duties, documentary evidence may not exist.
An auditor would most likely test the procedures by
A. Reperformance and corroboration
B. Observing and inquiry
C. Inspection and vouching
D. Confirmation and recomputation

64. Whish of the following is not an expert upon whose work an auditor may rely?
A. Actuary
B. Internal auditor
C. Appraiser
D. Engineer

65. To operate effectively, an internal auditor must be independent of

A. The line functions of the organizations
B. The entity
C. The employer-employee relationship which exist for other employees in the organization
D. The audit committee of the board of directors

66. Which of the following would the auditor generally perform to obtain assurance that
accounting estimates are properly accounted for and disclosed?
A. Inquiry of management

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B. Make an independent estimate for comparison with client’s estimate
C. Review subsequent events
D. Obtain knowledge about the applicable financial reporting standards related to the
accounting estimates

67. A CPA is conducting the first examination of a client’s financial statements. The CPA
hopes to reduce the audit work by consulting with the predecessor auditor and reviewing
the predecessor’s working papers. This procedure is
A. Acceptable if the client and the predecessor auditor agree to it.
B. Acceptable if the CPA refers in the audit report to reliance upon the predecessor auditor’s
work.
C. Required if the CPA is to render an unmodified opinion.
D. Unacceptable because the CPA should bring an independence viewpoint to a new
engagement.

68. To obtain an understanding of a continuing client’s business in planning an audit, an

auditor most likely would
A. Perform test of details of transactions and balances
B. Review prior year working papers and the permanent file for the client.
C. Read specialized industry journals
D. Re-evaluate the client’s internal control system

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

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

70. Inherent risk and control risk differ from detection risk in that inherent and control risks
A. Arise from the misapplication of auditing procedures.
B. May be assessed in quantitative or non- quantitative terms.
C. Exist independently of the financial statement audit.
D. Can be changed at the auditor’s discretion.

71. As the acceptable level of detection risk decreases, an auditor may change the
A. Timing of substantive tests by performing them at an interim date rather than at year-
end
B. Nature of substantive tests from a less effective to a more effective procedure
C. Timing of tests of controls by performing them at several dates rather than at one time
D. Assessed level of inherent risk to a higher level.

72. Management assertions are

A. stated as the footnotes to the financial statements
B. implied or expressed representations about the accounts in the financial statements
C. explicitly expressed representations about the financial statements
D. provided to the auditor in the Assertion Letter, but are not disclosed on the financial
statements

73. Which of the following assertions does not relate to classes of transactions and events
for the period?
A. Completeness
B. Valuation
C. Cut-off
D. Accuracy

74. Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday’s
predecessor auditor was Post, CPA, who has been notified by Monday that Post’s services
have been terminated. Under these circumstances, which party should initiate the
communication between Hill and Post?
A. Hill, the incoming auditor
B. Post, the predecessor auditor
C. Monday’s controller of CFO

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D. The chairman of Monday’s board of directors

75. Which of the following is an example of an error?

A. Defalcation
B. Suppression or omission of the effects of transactions from the records or documents
C. Recording of transactions without substance
D. Misapplication of accounting policies

76. An example of vouching would be

A. trace from receiving reports to the acquisition journal.
B. trace from the acquisitions journal to the supporting vendor’s invoices.
C. trace from duplicate bank deposit slips to the cash receipts journal.
D. trace from canceled checks to the cash disbursements journal.

77. Which of the following is correct concerning a “fraud risk factor”?

A. Its presence indicates that the risk of fraud is high
B. It has been observed in circumstances where frauds have occurred
C. It requires modifications of the planned procedures
D. It is also a material weakness in internal control

78. Broadly defined, the subject matter of any audit consists of

A. Financial Statements
B. Economic Data
C. Assertions
D. Operating Data

79. The criteria for evaluating quantitative information vary. For example, in the case of an
independent audit of financial statements by CPA firms, the criteria are usually the
A. PFRS or PFRS for SMEs
B. Philippine Standards on Auditing
C. National Internal Revenue Code
D. Regulations of the Securities and Exchange Commission

80. An audit of financial statements is conducted to determine if the

A. Organization is operating efficiently and effectively
B. Auditee is following specific procedures or rules set down by some higher authority
C. Overall financial statements are stated in accordance with the applicable financial
reporting framework.
D. Client’s internal control is functioning as intended.

81. Which of the following statements about the composition of the Board of Accountancy is
incorrect?
A. The four sectors in the practice of accountancy shall as much as possible be equitably
reperesented in the Board.
B. The Board shall be composed of a chairman and six members.
C. The members of the Board shall be appointed by the President of the Philippines from a
list of three recommendees for each position and ranked by the Commission, from a list
of five nominees for each position submitted by Accredited Professional Organization
(APO)
D. The Board shall elect a chairman from among its members to serve for a term of one
year.

82. Which of the following is not a valid ground of suspension or removal of members of the
Board of Accountancy?
A. Neglect of duty or incompetence.
B. Rigging the CPA licensure examination results.
C. Violating 9298.
D. Being charged of crimes involving moral turpitude.

83. Which of the following is correct?

A. Any candidate who fails in two (2) complete CPA board examinations will no longer be
allowed to take another set of examinations
B. Any candidate who fails in two (2) complete CPA board examinations shall be disqualified
from taking another set of examinations unless he / she submits evidence to the
satisfaction of the Board that he / she enrolled in and completed at least twenty-four (24)
units of subjects given in the Licensure examination.

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C. The examination in which the candidate was conditioned and the removal examination
on the subject in which he / she failed shall be counted as two (2) complete
examinations.
D. The refresher course should be completed within two 920 years from the preceding
examination.

84. The Board of Accountancy may issue certificate of registration and professional
identification card to any successful examinee:
A. Of unsound mind
B. Convicted by a court of political offense.
C. Guilty of immoral or dishonorable conduct.
D. Who has falsely represented himself / herself in his / her application for examination.

85. Below are the names of four CPA firms and pertinent facts relating to them. Unless
otherwise indicated, the individuals named are CPAs and partners and there are no other
partners. Which firm name and related facts indicate a violation of the Philippine
Accountancy Act of 2004?
A. Binhi, Binti and Bigti, CPAs (Bigti died about five years ago; Binhi and Binti are continuing
the firm)
B. Ti and Ramos, CPAs (The name of R. Hermosilla, CPA, a third partner is omitted from the
firm name.)
C. Bitay and Bigo, CPAs (Bitay died about three years ago; Bigo is continuing the firm as a
sole practitioner.)
D. R. Hermosilla and Co., CPAs (R. Hermosilla has ten other partners who are all CPAs.)

86. The following are benefits of using IT-based controls, except

A. Ability of process large volume of transactions.
B. Over-reliance on computer-generated reports.
C. Ability to replace manual controls with computer-based controls.
D. Reduction in misstatements due to consistent processing of transactions.

87. In planning the portions of the audit which may be affected by the client’s CIS
environment, the auditor should obtain an understanding of the significance and
complexity of the CIS activities and the availability of data for use in the audit. The
following relate to the complexity of CIS activities except when
A. Transactions are exchanged electronically with other organizations (for example, in
electronic data interchange systems [EDI]).
B. Complicated computations of financial information are performed by the computer
and/or material transactions or entries are generated automatically without independent
validation.
C. Material financial statement assertions are affected by the computer processing.
D. The volume of transactions is such that users would find it difficult to identify and correct
errors in processing.

88. The most important segregation of duties in the organization of the information systems
function is
A. Using different programming personnel to maintain utility programs from those who
maintain the application programs.
B. Having a separate information officer at the top level of the organization outside of the
accounting function.
C. Assuring that those responsible for programming the system do not have access to data
processing operations.
D. Not allowing the data librarian to assist in the data processing operation.

89. The following are a database administrator’s responsibilities, except

A. Develop application programs to access the database.
B. Design the content and organization of the database.
C. Protect the database and its software.
D. Monitor and improve the efficiency of the database.

90. An entity installed antivirus software on all its personal computer. The software was
designed to prevent initial infections, stop replication attempts, detect infection after
their occurrence, mark affected system components, and remove viruses from infected
components. The major risk in relying on antivirus software is that it may
A. Consume too many system resources.
B. Interfere with system operations.
C. Not detect certain viruses.

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D. Make software installation too complex.

91. The CPA profession deemed it necessary to established a code of ethics and a
mechanisms for its enforcement because
A. An ethical conduct that stresses the CPA’s responsibility to clients and colleagues is a
prerequisite to success.
B. A requirement of law provides that CPAs establish a code of ethics.
C. Acceptance of responsibility to the public is distinguishing mark of a profession.
D. The establishment of flexible ethical standards provides self-protection for CPAs.

92. The phase of professional competence that requires a professional accountant to adopt a
program designed to ensure quality control in the performance of professional services
consistent with technical and professional standard is:
A. attainment of professional competence
B. maintenance of professional competence
C. application of professional competence
D. review of professional competence

93. A CPA shall not disclose confidential information obtain during an audit engagement in
which one of the following situations?
A. When the security of the state is requires.
B. With the consent of the client.
C. In defense of himself when sued by his client.
D. To a successor auditor without the client’s consent.

94. In which of the following circumstances would a CPA be bound by ethics to refrain from
disclosing any confidential information obtained during the course of a professional
engagement?
A. The CPA is issued a summon enforceable by a court order which orders the CPA to
present confidential information.
B. A major stockholder of a client company seeks accounting information from the CPA after
the management declined to disclose the requested information.
C. Confidential client information is made available with the client’s permission.
D. An inquiry by the Professional Regulation Commission and the CPA needs the disclosure
to defend himself

95. The networks firms are required to be independent of the client

A. for assurance engagements provided to an audit client.
B. for assurance engagements provided to clients that are not audit clients, when the report
is not expressly restricted for use by identified users.
C. for assurance engagements provided to clients that are not audit clients, when the
assurance report is expressly restricted for use by identified users.
D. for non-assurance engagements.

96. This occurs when any product or judgment of a previous assurance engagement or non-
assurance engagement needs to be revaluated in reaching conclusions on the assurance
engagement or 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 if the assurance engagement.
A. self-interest threat
B. advocacy threat
C. self-review threat
D. familiarity threat

97. Which of the following is an example of an intimidation threat that may affect the
independence of the professional accountant?
A. Preparation of original data used to generate financial statements or preparation of other
records that are the subject matter for the assurance engagement.
B. Threat of replacement over a disagreement with the application of an accounting
principle.
C. Dealing in, or being a promoter of, share or other securities in an audit client.
D. A member of the assurance team having an immediate family member or close family
member who is a director or officer of the assurance client.

98. Safeguards within the client’s systems and procedures may include:
A. Involving another firm to perform or re-perform part of the assurance engagement.

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B. Discussing independence issues with the audit committee or others charged with
governance.
C. Policies and procedures to emphasize the assurance client’s commitment to fair financial
reporting.
D. Involving an additional professional accountant to review the work done or otherwise
advise as necessary.

99. If a member of the assurance team, or their immediate family member, has a direct
financial interest, or a material indirect financial interest, in the assurance client, the self-
interest threat created would be so significant. Consequently, the professional
accountant should apply appropriate safeguards in order to eliminate the threat or
reduce it to an acceptable level. Which of the following safeguards would not be
appropriate?
A. Dispose of the direct financial interest prior to the individual becoming a member of the
assurance team
B. Dispose of the indirect financial interest in total prior to the individual becoming a
member of the assurance team
C. Dispose of a sufficient amount of the indirect financial interest so that the remaining
interest is no longer material prior to the individual becoming a member of the
assurance team.
D. Limit the participation of the member of the assurance team

100. Which of the following activities would least likely impair the professional accountant’s
independence?
A. Serving as an officer or director of an audit client.
B. Determining which recommendation of the firm should be implemented
C. Being an honorary member of an audit client.
D. Reporting, in a management role, to those charged with governance

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