CPA REVIEW SCHOOL OF THE PHILIPPINES AT 96 PW

Manila

AUDITING THEORY CPA Review

MULTIPLE CHOICE QUESTIONS

1. A CPA performed the following engagements in March 2024. Which is considered an

attestation engagement?
I. Audit of 2023 financial statements
II. Examination of 2025 proposed financial statements
A. I only
B. II only
C. Both I and II
D. Neither I nor II

2. A CPA should decide NOT to accept a new client for an audit engagement if
A. the CPA lacks an understanding of the client’s industry and accounting principles prior to
acceptance.
B. The client’s management has unusually high turnover.
C. Both and A and B.
D. Neither A nor B.

3. All of the following are correct regarding an auditor’s understanding with a potential client
prior to beginning an audit EXCEPT:
A. the understanding should list the audit fees and frequency of billing.
B. the understanding should cover the responsibilities of the independent auditor.
C. the understanding should cover the limitations of the engagement.
D. the understanding should be in the form of an engagement letter in order to be in
conformity with auditing standards.

4. Which of the following procedures would an auditor perform in planning a financial statement
audit?
I. Selecting a sample of vendors’ invoices for comparison to receiving reports.
II. Coordinating the assistance of entity personnel in data preparation.
III. Reading the current year’s interim financial statements.
A. II only
B. II and III only
C. I, II, and III
D. III only

5. Some accounting estimates may involve relatively low estimation uncertainty and may give
rise to lower risks of material misstatements, such as those ______________.
A. with fair value estimates for which a highly specialized entity-devloped model is used
B. relating to the outcome of litigation
C. with fair value estimates for derivative financial instruments not publicly traded
D. that are frequently made and updated because they relate to routine transactions.

6. Which of the following meets the definition of an assurance engagement but does NOT need
to be performed in accordance to the Framework for Assurance Engagement?
A. Consulting (or advisory) engagements, such as management and tax consulting.
B. The preparation of tax returns where no conclusion conveying assurance is expressed.
C. Agreed-upon procedures engagements and compilations of financial or other information.
D. Engagements to testify in legal proceedings regarding accounting, auditing, taxation or
other matters.

7. The _______________ sets the scope, timing and direction of the audit, and guides the
development of the more detailed ______________.
A. overall audit strategy; audit plan

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B. audit plan; overall audit strategy

C. audit risk plan; substantive tests
D. audit plan; risk assessment procedures

8. Which of the following procedures is a practitioner least likely to perform during a review
engagement?
A. Comparing the financial statements with anticipated results in budgets and forecasts.
B. Studying the relationships of financial statement elements expected to conform to
predictable patterns.
C. Inquiring of management about actions taken at the board of directors’ meetings.
D. Observing the safeguards over access to and use of assets and records.

9. The _________________ element of internal control includes the governance and

management functions and the attitudes, awareness, and actions of those charged with
governance and management concerning the entity’s internal control and its importance in
the entity.
A. control activities
B. control environment
C. monitoring
D. risk assessment process

10. Under the Code of Ethics, the following are examples of situations that might create a conflict
of interest, EXCEPT
A. Providing services to a seller and a buyer in relation to different transactions.
B. Preparing valuations of assets for two parties who are in an adversarial position with
respect to the assets.
C. Representing two clients in the same matter who are in a legal dispute with each other.
D. In relation to a license agreement, providing an assurance report for a licensor on the
royalties due while advising the licensee on the amounts payable.

11. The auditor shall obtain sufficient appropriate audit evidence about whether the opening
balances contain misstatements that materially affect the current period’s financial statements
by:
A. Evaluating whether audit procedures performed in the current period provide evidence
relevant to the closing balances.
B. Determining whether the prior period’s closing balances have been correctly brought
forward to the current period.
C. Performing specific audit procedures to obtain evidence regarding the closing balances.
D. Determining whether the closing balances reflect the application of appropriate accounting
policies.

12. Which of the following is correct about forensic audits?

A. Forensic are usually performed in situations in which fraud has been found or suspected.
B. Forensic audits are equivalent to compliance audits.
C. Forensic audits are performed by law firms; they are not performed by CPA firms.
D. All audits are forensic audits.

13. On the basis of audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of control risk, and therefore the risk of material misstatement, from that
originally planned. To achieve an overall audit risk level that is substantially the same as the
planned audit risk level, the auditor would ________________.
A. decrease detection risk.
B. decrease substantive testing.
C. increase inherent risk.
D. increase materiality level.

14. Which is least likely beneficial in adequately planning an audit of financial statements?
A. Assist in coordination of work done by auditors of components and experts.
B. Assist in the selection of engagement team members with appropriate levels of capabilities
and competence.

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C. Aid the auditor to identify and resolve potential problems on a timely basis.
D. Aid the auditor to devote appropriate attention to all areas of the audit.

15. A summary of findings rather than assurance is most likely to be included in

A. Audit report.
B. Compilation report.
C. Examination report.
D. Agreed-upon procedures report.

16. A purpose of a management representation letter is to reduce

A. The possibility of a misunderstanding concerning management’s responsibility for the
financial statements.
B. The scope of an auditor’s procedures concerning related party transactions and
subsequent events.
C. Audit risk to an aggregate level of misstatement that could be considered material.
D. An auditor’s responsibility to detect material misstatements only to the extent that the
letter is relied on.

17. The auditor shall express an adverse opinion when

A. The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to the
financial statements.
B. The auditor is unable to obtain sufficient appropriate audit evidence on which to base the
opinion, but the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not pervasive.
C. The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are both material and pervasive to the
financial statements.
D. The auditor is unable to obtain sufficient appropriate audit evidence on which to base the
opinion, and the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive.

18. The “Basis for Opinion” section of the auditor’s report shall NOT
A. Include a statement that the auditor is independent of the entity in accordance with the
relevant ethical requirements, and has fulfilled the auditor’s other ethical responsibilities
in accordance with these requirements.
B. Specify the date of, or period covered by, each financial statement comprising the financial
statements.
C. Refer to the section of the auditor’s report that describes the auditor’s responsibilities
under the Philippine Standards on Auditing (PSAs).
D. State whether the auditor believes that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s opinion.

19. This government agency is responsible for the registration of corporations and partnerships,
as well as monitoring of compliance with the Corporation Code, Civil Code provisions on
partnerships, Foreign Investments Act, and other related laws.
A. Bangko Sentral ng Pilipinas (BSP).
B. Securities and Exchange Commission (SEC).
C. Bureau of Internal Revenue (BIR).
D. Philippine Stock Exchange (PSE).

20. 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.

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21. Which of the following is not one of the principal duties of the COA?
A. Keep the general accounts of the government and preserve the vouchers and supporting
papers pertaining thereto.
B. Maintain price stability conducive to a balanced and sustainable economic growth.
C. Promulgate accounting and auditing rules and regulations including those for the
prevention and disallowance of irregular, unnecessary, excessive, extravagant or
unconscionable expenditures, or uses of government funds and properties.
D. Submit to the president of the Philippines and congress, within the time fixed by law, an
annual report covering the financial condition and operation of the government.

22. The following statements relate to assurance engagements. Choose the incorrect statements.
1. The objective of an assurance engagement is for a professional accountant to evaluate or
measure a subject matter that is the responsibility of another party against identified
suitable criteria, and to express a conclusion that provides the intended user with a level
of assurance about the subject matter.
2. Assurance engagements performed by professional accountants are intended to enhance
the credibility of information about a subject matter.
3. Assurance engagements involve two parties: a professional accountant and an intended
user.
4. The subject matter of an assurance engagement is limited to historical or prospective
financial information.
5. The intended user in an assurance engagement is the person or class of persons for whom
the professional accountant prepares the report for a specific use or purpose.
A. 2, 3, 4, and 5. C. 3 and 4.
B. 2, 4, and 5. D. 1, 2, 3, and 4.

23. Assistants to whom work is delegated need appropriate direction. Direction involves
A. Informing assistants of their responsibilities and the objectives of the procedures they are
to perform.
B. Informing assistants of matters, such as the nature of the entity’s business and possible
accounting or auditing problems that may affect the nature, timing, and extent of audit
procedures with which they are involved.
C. Both A and B.
D. Neither A nor B.

24. Narratives, flowcharts, and internal control questionnaires are three common methods of
A. documenting the auditor’s understanding of internal controls.
B. designing the audit manual and procedures.
C. documenting the auditor’s understanding of a client’s organizational structure.
D. testing the internal controls.

25. The following audited balances pertain to OWEL Company.

Accounts payable:
January 1, 2024 P286,924
December 31, 2024 737,824
Inventory balance:
January 1, 2024 815,386
December 31, 2024 488,874
Cost of goods sold – 2024 1,859,082

How much was paid by OWEL Company to its suppliers in 2024?

A. P2,636,494
B. P1,081,670
C. P1,734,694
D. P1,983,470

Computation:
Cost of goods sold – 2024
Inventory, Dec. 31, 2024
Goods available for sale
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Inventory, Jan. 1, 2024

Purchases
Accounts payable, Jan. 1, 2024
Total
Accounts payable, Dec. 31, 2024
Amount paid to suppliers in 2024

26. Fraud refers to an intentional act by one or more individuals among management, employees
or third parties, which results in a misrepresentation of financial statements while error refers
to unintentional mistakes in financial statements. Fraud may involve

1. Manipulation, falsification or alteration of records or documents.

2. Misappropriation of assets.
3. Mathematical or clerical mistakes in the underlying records and accounting data.
4. Suppression or omission of the effects of transactions from records or documents.
5. Oversight or misinterpretation of facts
6. Recording of transactions without substance.
7. Misapplication of accounting policies.

A. 1, 2, 4, 6, and 7.
B. 1, 2, 3, 4, 6, and 7.
C. 1, 2, 3, and 6
D. 1, 2, 4, 5, and 6.

27. As defined in PSA 500, __________ is an individual or organization possessing the expertise
in a field other than accounting or auditing, whose work in that field is used by the entity to
assist the entity in preparing the financial statements.
A. auditor’s expert C. auditor’s internal expert
B. management’s expert D. auditor’s external expert

28. The date of the end of the latest period covered by the financial statements, which is normally
the date of the most recent balance sheet in the financial statements subject to audit is the
A. Date the financial statements are issued.
B. Date of the auditor’s report.
C. Date of the financial statements.
D. Date of approval of the financial statements.

29. Which one of the following statements concerning sampling risk and nonsampling risk is
correct?
A. Neither sampling risk nor nonsampling risk can be reduced by the auditor.
B. Sampling risk, but not nonsampling risk, can be reduced by the auditor.
C. Nonsampling risk, but not sampling risk, can be reduced by the auditor.
D. Both sampling risk and nonsampling risk can be reduced by the auditor.

30. Users of financial statements demand independent audits because ____________

A. management relies on the auditor to improve the entity’s internal control.
B. management may not be objective in reporting.
C. users expect auditors to correct errors of management.
D. users want assurance that fraud does not exist.

31. Audit working papers are indexed by means of reference numbers. The primary purpose of
indexing is to
A. Permit cross-referencing and simplify supervisory review.
B. Support the audit report.
C. Eliminate the need for follow-up reviews.
D. Determine that working papers adequately support findings, conclusions, and reports.

32. Which of the following statements concerning the auditor’s responsibility regarding
subsequent events is INCORRECT?

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A. The auditor should perform audit procedures designed to obtain sufficient appropriate
audit evidence that all events up to the date of the auditor’s report that may require
adjustment of, or disclosure in, the financial statements have been identified.
B. The audit procedures to identify events that may require adjustment of, or disclosure in,
the financial statements should be performed as near as practicable to the date of issuance
of the audited financial statements.
C. When the auditor becomes aware of events which materially affect the financial
statements, the auditor should consider whether such events are properly accounted for
and adequately disclosed in the financial statements.
D. The auditor does not have any responsibility to perform audit procedures or make inquiry
regarding the financial statements after the date of the auditor’s report.

33. When planning the audit, the auditor should make inquiries of management. Such inquiries
should address the following, except
A. Management’s assessment of the risk that the financial statements may be misstated due
to fraud.
B. Management’s process for identifying and responding to the risks of fraud in the entity.
C. Management’s consideration of how an element of unpredictability will be incorporated
into the nature, timing, and extent of the audit procedures to be performed.
D. Management’s communication, if any, to those charged with governance regarding its
processes for identifying and responding to the risks of fraud in the entity.

34. The following statements relate to the auditor’s inquiry regarding litigation and claims. Which
is correct?
A. When litigation or claims have been identified or when the auditor believes they may exist,
the auditor should seek direct communication with entity’s lawyers.
B. The auditor considers the status of legal matters up to the balance sheet date.
C. If management refuses to give the auditor permission to communicate with the entity’s
lawyers, this would be a scope limitation and should ordinarily lead to a qualified or
adverse opinion.
D. The letter of audit inquiry, which should be prepared by the auditor and sent by
management, should request the lawyer to communicate directly with the auditor.

35. According to PSA 520, Analytical Procedures, “analytical procedures” means the analysis of
significant ratios and trends including the resulting investigation of fluctuations and
relationships that are inconsistent with other relevant information or deviate from predicted
amounts. These procedures are used for the following purposes, except
A. As tests of control to determine the effectiveness of the design and operation of the
entity’s accounting and internal controls.
B. As substantive procedures when their use can be more effective or efficient than tests of
details in reducing detection risk for specific financial statement assertions.
C. To assist the auditor in planning the nature, timing and extent of other audit procedures.
D. As an overall review of the financial statements in the final review stage of the audit.

36. The following statements relate to the auditor’s use of the work of an expert:
1. The auditor should assess the appropriateness of the expert’s work as audit evidence
regarding the financial statement assertion being considered.
2. If the results of the expert’s work do not provide sufficient appropriate audit evidence
or if the results are not consistent with other audit evidence, the auditor should resolve
the matter.
3. When issuing an unmodified auditor’s report, the auditor should not refer to the work
of an expert.
Statement 1 Statement 2 Statement 3
A. True True True
B. True False True
C. False True False
D. False False True

37. An operational audit is designed to

A. Assess the efficiency and effectiveness of management’s operating procedures.

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B. Assess the presentation of management’s financial statements in accordance with PFRS.

C. Determine whether management has complied with applicable laws and regulations.
D. Determine whether the audit committee of the board of directors is effectively discharging
its responsibility to oversee management’s operations.

38. In a financial statement audit, audit risk represents the probability that
A. Internal control fails and the failure is not detected by the auditor’s procedures.
B. The auditor unknowingly fails to modify an opinion on materially misstated financial
statements.
C. Inherent and control risk cause errors that could be material to the financial statements.
D. The auditor is not retained to conduct a financial statement audit in the succeeding year.

39. The auditor is examining copies of sales invoices only for the initials of the person responsible
for checking the extensions. This is an example of a ______________
A. test of controls.
B. substantive test.
C. dual-purpose test
D. test of balances.

40. The risk that the audit will fail to uncover a material misstatement is eliminated ________.
A. if client has good internal control
B. if client follows Financial Reporting Standards
C. when the auditor has complied with Standards on Auditing
D. under no circumstances

41. Internal control is the process designed, implemented and maintained by those charged with
governance, management and other personnel to provide reasonable assurance about the
achievement of an entity’s objectives with regard to __________.
A. reliability of financial reporting
B. effectiveness and efficiency of operations
C. compliance with applicable laws and regulations
D. All of the above

42. Which of the following is the best example of a substantive test?

A. Examining a sample of cash disbursements to test whether expenses have been properly
approved.
B. Confirmation of balances of accounts receivable.
C. Comparison of signatures on checks to a list of authorized signers.
D. Flowcharting of the client’s cash receipts system.

43. Analytical procedures performed in the overall review stage of an audit suggest that several
accounts have unexpected relationships. The results of these procedures most likely indicate
that _____________.
A. irregularities exist among the relevant account balances
B. internal control procedures are not operating effectively
C. additional tests of details are required
D. the communication with the audit committee should be revised

44. A document that details what the auditor will do to gather sufficient, appropriate evidence is
the __________.
A. audit strategy
B. audit program
C. audit procedure
D. audit risk model

45. In the context of an audit of financial statements, substantive tests are audit procedures that
__________.
A. may be eliminated under certain conditions
B. are designed to discover significant subsequent events
C. may be either tests of transactions, direct tests of financial balances, or analytical tests

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D. will increase proportionately with the auditor’s assessment of control risk

46. 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 amount.

47. Which of the following least likely requires the services of an expert?
A. Valuations of certain types of assets like land and buildings.
B. Legal opinions concerning interpretations of statutes and regulations.
C. Determination of amounts using specialized techniques.
D. Application of accounting methods in computing inventory balances.

48. While ________________ engagement involves the application of audit skills and techniques
and the gathering of evidence, it does not ordinarily involve an assessment of accounting and
internal control systems, tests of records, and of responses to inquiries by obtaining
corroborating evidence through inspection, observation, confirmation, and computation.
A. compilation
B. review
C. agreed-upon procedures
D. consultancy

49. After considering internal control, an auditor might decide to ___________.

A. increase the extent of tests of controls and substantive tests in areas where internal
control is strong
B. reduce the extent of tests of controls in areas where internal control is strong
C. reduce the extent of both substantive tests and tests of controls in areas where internal
control is strong
D. increase the extent of substantive tests in areas where internal control is weak

50. Which of the following procedures can be performed only in the subsequent period?
A. Examination of data to determine that a proper cutoff has been made.
B. Tests of the details of balances.
C. Tests of the details of transactions.
D. Reading of the minutes of the board of directors’ meetings.

51. The establishment of an overall audit strategy or plan involves

I. Determining the characteristics of the engagement that define its scope.
II. Ascertaining the reporting objectives of the engagement to plan the timing of the audit
and the nature of the communications required.
III. Considering the important factors that will determine the focus of the engagement
team’s efforts.
A. I and II only.
B. II and III only.
C. I and III only.
D. I, II, and III.

52. In obtaining an understanding of internal control relevant to the audit, the auditor may trace
several transactions through the system, including how the transactions interface with any
service organizations whose services are part of the entity’s information system. The primary
objective of this procedure is to
A. Evaluate the design of internal control and determine whether it has been implemented.
B. Determine the effectiveness of internal control.
C. Detect fraud.
D. Replace substantive tests.

53. Which of the following questions would an auditor most likely include in the production cycle
internal control questionnaire?

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A. Are details of individual disbursements for raw materials compared to the total for posting
to the general ledger?
B. Are vendor invoices for raw materials approved before payment?
C. Are all issuances of raw materials to production based on approved requisition forms?
D. Are signed checks for the purchase of raw materials sent directly to intended payees after
signing, without being returned to the person who authorized the invoice processing?

54. The engagement partner should be satisfied that appropriate procedures regarding the
acceptance and continuance of client relationships and specific audit engagements have been
followed, and that conclusions reached in this regard are appropriate and have been
documented. Acceptance and continuance of client relationships and specific audit
engagements include considering:
I. The integrity of the principal owners, key management, and those charged with
governance of the entity.
II. Whether the engagement team is competent to perform the audit engagement and has
the necessary time and resources.
III. Whether the firm and the engagement team can comply with ethical requirements.
A. I only.
B. I and II only.
C. II and III only.
D. I, II, and III.

55. Prior to beginning the field work on a new audit engagement in which a CPA does not possess
expertise in the industry in which the client operates, the CPA should
A. Reduce audit risk by lowering the preliminary levels of materiality.
B. Design special substantive tests to compensate for the lack of industry expertise.
C. Engage financial experts familiar with the nature of the industry.
D. Obtain a knowledge of matters that relate to the nature of the entity’s business.

56. Which of the following statements relating to communication of audit matters of governance
interest is incorrect?
A. Audit matters of governance interest include only those matters that have come to the
attention of the auditor as a result of the performance of the audit.
B. In an audit in accordance with PSAs, the auditor should design audit procedures for the
specific purpose of identifying matters of governance interest.
C. The auditor should identify relevant persons who are charged with governance and with
whom audit matters of governance interest are to be communicated.
D. The auditor’s communications with those charged with governance may be made orally
or in writing.

57. To protect the integrity of the database, data sharing by different users requires organization,
coordination, rules, and guidelines. The individual responsible for managing the database
resource is the _____________.
A. programmer
B. database administrator
C. user
D. IT manager

58. In the audit of financial statements, the auditor is only concerned with those policies and
procedures within the accounting and internal control systems that are relevant to the
financial statement assertions. The understanding of relevant aspects of the accounting and
internal control systems, together with the inherent and control risk assessments and other
considerations, will enable the auditor to
A. Identify the types of potential misstatements that could occur in the financial statements.
B. Consider factors that affect the risk of material misstatements.
C. Design appropriate audit procedures.
D. All of the above.

59. In representing that the financial statements are presented fairly, in all material respects, in
accordance with generally accepted accounting principles, management implicitly or explicitly

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makes __________ regarding the recognition, measurement, presentation, and disclosure of

the various elements of financial statements and related disclosures.
A. assertions
B. allegations
C. conclusions
D. assurances

60. Which of the following procedures is most likely to give the greatest assurance that securities
held as investments are safeguarded?
A. There is no access to securities between year-end and the date of the auditor’s security
count.
B. Proceeds from the sale of investments are received by an employee who does not have
access to securities.
C. Investment acquisitions are authorized by a member of the board of directors before
execution.
D. Access to securities requires the signatures and presence of two designated officials.

61. The diamond-shaped symbol is commonly used in flowcharting to show or represent a

A. Process or a single step in a procedure or program.
B. Terminal output display.
C. Decision point, conditional testing, or branching.
D. Predefined process.

62. Sequential access means

A. Data are stored on magnetic tape.
B. The address of the location of data is found through the use of either an algorithm or an
index.
C. Each record can be accessed in the same amount of time.
D. To read record 500, records 1 through 499 must be read first.

63. An auditor is concerned with completing various phases of the audit after the balance sheet
date. This subsequent period extends to the date of the
A. Delivery of the auditor’s report to the client.
B. Auditor’s report.
C. Final review of the audit working papers.
D. Public issuance of the financial statements.

64. The ____________ is responsible for the direction, supervision and performance of the group
audit engagement in compliance with professional standards and regulatory and legal
requirements, and whether the auditor’s report that is issued is appropriate in the
circumstances.
A. group engagement partner
B. component auditor
C. team leader
D. principal partner

65. After testing a client's internal control activities, an auditor discovers a number of significant
deficiencies in the operation of a client's internal controls. Under these circumstances the
auditor most likely would _____________.
A. issue a disclaimer of opinion about the internal controls as part of the auditor's report.
B. increase the assessment of control risk and increase the extent of substantive tests.
C. issue a qualified opinion of this finding as part of the auditor's report.
D. withdraw from the audit because the internal controls are ineffective.

66. A substantive strategy is typically used to audit stockholders' equity because __________.
A. controls over stockholders' equity transactions typically are weak
B. a reliance strategy is most efficient
C. the number of transactions is small
D. a substantive strategy likely was used in prior years

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67. Auditors may use positive and/or negative forms of confirmation requests. An auditor most
likely will use
A. The negative form for small balances.
B. The positive form, when the combined assessed level of inherent and control risk for
related assertions is acceptably low, and the negative form when it is unacceptably high.
C. The positive form to confirm all balances regardless of size.
D. A combination of the two forms, with the positive form used for trade balances and the
negative form for other balances.

68. As used in PSA 230, _______________ refers to the record of audit procedures performed,
relevant audit evidence obtained, and conclusions the auditor reached.
A. audit documentation
B. audit file
C. audit planning memorandum
D. management letter

69. Safeguards created by the profession, legislation or regulation include the following, except
A. Continuing professional development requirements.
B. Professional standards.
C. Firm-wide and engagement specific safeguards.
D. Educational, training and experience requirements for entry into the profession.

70. The date of the review report should

A. Not be earlier than the date on which the financial statements were approved by
management.
B. Be earlier than the date on which the financial statements were approved by management.
C. Coincide with the balance sheet date.
D. Not be later than the balance sheet date.

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

72. An accountant may perform an agreed-upon procedures engagement regarding prospective

financial statements provided that
A. Use of the report is to be restricted to the specified users.
B. The prospective financial statements are also examined.
C. Responsibility for the sufficiency of the procedures performed is taken by the accountant.
D. Negative assurance is expressed on the prospective financial statements taken as a whole.

73. The objective of performing analytical procedures in planning an audit is to identify the
existence of ___________.
A. unusual transactions and events
B. noncompliance with laws that went undetected because of internal control weaknesses
C. related party transactions
D. recorded transactions that were not properly authorized

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

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75. When an auditor believes that an understanding with the client has not been established, he
or she should ordinarily
A. Perform the audit with increased professional skepticism.
B. Decline to accept or perform the audit.
C. Assess control risk at the maximum level and perform a primarily substantive audit.
D. Modify the scope of the audit to reflect an increased risk of material misstatement due to
fraud.

76. When approached to perform an audit for the first time, the CPA should make inquiries of the
predecessor auditor. This is a necessary procedure because the predecessor may be able to
provide the successor with information that will assist the successor in determining
A. Whether the predecessor’s work should be used.
B. Whether the company follows the policy of rotating its auditors.
C. Whether in the predecessor’s opinion internal control of the company has been
satisfactory.
D. Whether the engagement should be accepted.

77. The Code of Ethics for Professional Accountants in the Philippines provides the categories of
threats that could compromise or could be perceived to compromise a professional
accountant’s compliance with the fundamental principles. The threat that the professional
accountant will not appropriately evaluate the results of a previous judgment made or service
performed on which the accountant will rely when forming a judgment as part of providing a
current service is called
A. Advocacy threat.
B. Familiarity threat.
C. Self-review threat.
D. Intimidation threat.

78. _____________ are the policies and procedures to help ensure that management directives
are carried out. Examples are authorization, physical controls, and segregation of duties.
A. Risk assessments
B. Substantive tests
C. Control activities
D. Tests of control

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

80. Which of the following is not among the risk assessment procedures that the auditor should
perform in obtaining an understanding of the entity and its environment, including its internal
control?
A. Inquiries of management and others within the entity
B. Analytical procedures
C. Observation and inspection
D. Confirmation

81. Further audit procedures consist which of the following?

I. Risk assessment procedures
II. Substantive procedures
III. Tests of control
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III

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82. Under the Code of Ethics, threats may be created by a broad range of relationships and
circumstances. The threat that a professional accountant will promote a client’s or employer’s
position to the point that the professional accountant’s objectivity is compromised is
A. self-review threat.
B. intimidation threat.
C. familiarity threat.
D. advocacy threat.

83. With respect to the management representation letter, materiality would apply to
management having made available to the auditor access to which of the following?
A. Minutes of board meetings
B. Records relating to revenue and expenses
C. Both A and B.
D. Neither A nor B.

84. Comfort letters ordinarily are signed by the entity’s _______________.

A. independent auditor
B. underwriter of securities
C. audit committee
D. senior management

85. The financial statements to be filed with the SEC shall be accompanied by a Statement of
Management’s Responsibility which bears the signature of the
A. chairman of the board of directors
B. Chief Executive Officer (CEO)
C. Chief Financial Officer (CFO)
D. All of the above

86. Which of the following procedures should a USER auditor include in the audit plan to create
the most efficient audit when an audit client uses a service organization for several processes?
A. Audit the service organization’s controls to test the work of the service auditor.
B. Audit the service organiation’s controls, assess risk, and prepare the audit plan.
C. Review the service auditor’s report and outline the accounting system in a memo to the
working papers.
D. Review the service auditor’s report on controls placed in operation.

87. Which of the following items should be included in an auditor’s report for financial statements
prepared using a special-purpose framework?
A. A section stating that the audit was conducted in accordance with the special-purpose
framework.
B. A sentence stating that the auditor is responsible for the financial statements.
C. The signature of the company controller.
D. A title that includes the word “independent.”

88. Which of the following would a successor auditor ask the predecessor auditor to provide after
accepting an audit engagement?
A. Disagreements between the predecessor auditor and management as to significant
accounting policies and principles.
B. Facts known to the predecessor auditor that might bear on the integrity of management.
C. The predecessor auditor’s understanding of the reasons for the change of auditors.
D. Matters that may facilitate the evaluation of financial reporting consistency between the
current and prior years.

89. Which of the following passwords would be most difficult to crack?

A. cute
B. oroplatamata
C. Myfutureself69
D. GnG!!SaKaKa*EMEmo*

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90. Which of the following is a general control that would most likely assist an entity whose
systems analyst left the entity in the middle of a major project?
A. Grandfather-father-son record retention
B. Input and output validation routines
C. Systems documentation
D. Check digit verification

91. Which of the following is a sampling risk that is associated with the efficiency of an audit?
A. Risk of assessing control risk too high
B. Risk of incorrect acceptance
C. Inherent risk
D. Detection risk

92. An auditor traced a sample of purchase orders and the related receiving reports to the
purchases journal and the cash disbursements journal. The purpose of this substantive audit
procedure most likely was to
A. Test whether payments were for goods actually ordered.
B. Verify that cash disbursements were for goods actually received.
C. Determine that purchases were properly recorded
D. Identify unusually large purchases that should be investigated further.

93. Which of the following procedures would an auditor most likely complete to test the existence
assertion of property, plant and equipment?
A. Obtaining a listing of all current-year additions, vouching significant additions to original
invoices, and determining that they have been placed in service.
B. Obtaining a detailed fixed-asset register and ensuring depreciation methods are applied
consistently.
C. Obtaining a listing of current-year additions and verifying tha items are recorded in the
proper period.
D. Obtaining a detailed fixed-asset register and ensuring items are appropriately capitalized.

94. A senior auditor conducted a dual-purpose test on a client’s invoice to determine whether the
invoice was approved and to ascertain the amount and other items of the invoice. Which of
the following lists two sets that the auditor performed?
A. Substantive procedures and analytical procedures
B. Substantive analytical procedures and tests of controls
C. Tests of details and substantive procedures
D. Tests of controls and tests of details

95. During a recent audit of the revenue cycle, a CPA found the client had P1 million in accounts
receivable recorded for fictitious customers. Which of the following tests most likely facilitated
identification of the fraud?
A. Sending positive confirmations to all of the client’s customers with balances on December
31.
B. Examining the reconciliation between the subsidiary ledger and the general ledger control
account.
C. Reviewing the segregation of duties for staff who had responsibility for sales, shipping,
and invoicing.
D. Reviewing the support for open sales orders not yet shipped at December 31.

96. Which of the following audit procedures would be most likely to assist an auditor in identifying
related-party transactions?
A. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.
B. Vouching accounting records for recurring transactions recorded just after the balance
sheet date.
C. Performing analytical procedures to seek indications of possible financial difficulties.
D. Reviewing confirmations of loans receivable and payable for indications of guarantees.

97. Which of the following statements would an auditor most likely require management to
indicate in a written representation letter obtained for an audit?

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A. Management plans to expand into international operations during the next few years.
B. Management believes the financial statements are accurately stated in accordance with
generally accepted auditing standards (GAAS).
C. Management believes the company is the premier company in its industry regarding
service to customers.
D. Management acknowledges its responsibilities for the design and implementation of
programs and controls to detect fraud.

98. Which of the following procedures would be most likely to assist an auditor in identifying
litigation, claims, and assessments?
A. Apply ratio analysis on the current-year’s liability accounts.
B. Read the file of correspondence from taxing authorities.
C. Obtain a letter of representations from the client’s underwriter of securities.
D. Inspect checks included with the client’s bank statement.

99. In evaluating the reasonableness of an entity’s accounting estimates, an auditor normally

would be concerned about assumption that are ____________.
A. susceptible to bias
B. consistent with prior periods
C. insensitive to variations
D. similar to industry guidelines

100. The auditor has set the materiality level for the financial statements as a whole at P150,000.
Which of the following misstatements would the auditor most likely consider material?
A. The client did not record P72,000 in trade accounts payable at year end.
B. The client did not disclose P70,000 of related party transactions.
C. The client misclassified P67,000 of supplies expense as miscellaneous expense.
D. The client’s estimate of the allowance for doubtful accounts is P65,000 more that the
auditor’s estimate.

101. An auditor decides to perform substantive tests on a client’s property and equipment
balance as of an interim date. The auditor has not obtained evidence about the operating
effectiveness of relevant controls. What additional work must be performed to extend the
audit conclusions form the interim date to the balance sheet date?
A. Tests of controls for the period between the interim date and the balance sheet date.
B. Tests of controls for the period between the beginning of the fiscal year and the interim
date.
C. Substantive procedures for the period between the interim date and the balance sheet
date.
D. Analytical comparison of the current-year interim balance with the prior-year interim
balance.

102. At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of
the financial statements. With regard to the valuation of inventory, the auditor concludes
that the evidence obtained is not sufficient to support management’s representations. Which
of the following actions is the auditor most likely to take?
A. Consult with the audit committee and issue a disclaimer of opinion.
B. Consult with the audit committee and issue a qualified opinion.
C. Obtain a statement from management supporting their inventory valuation.
D. Obtain additional evidence regarding the valuation of inventory.

103. Which of the following matters would an auditor most likely consider to be a significant
deficiency to be communicated to those charged with governance?
A. Management’s failure to renegotiate unfavorable long-term purchase commitments.
B. Recurring operating losses that may indicate going concern issues.
C. Evidence of lack of objectivity by those responsible for accounting decisions.
D. Management’s current plans to reduce its ownership equity in the entity.

104. Under which of the following circumstances would an auditor be considered to be using the
work of an auditor’s expert?

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A. The client engages an outside computer expert service organization to prepare its payroll.
B. A tax expert employed by the auditor’s CPA firm reviews the client’s tax accruals.
C. The auditor makes inquiries of the client’s lawyer regarding pending litigation.
D. The auditor engages a lawyer to interpret the provisions of a complex contract.

105. An auditor finds several errors in the financial statements that the client prefers not to
correct. The auditor determines that the errors are not material in the aggregate. Which of
the following actions by the auditor is most appropriate?
A. Document the conclusion that the errors do not cause the financial statements to be
misstated, but do not summarize uncorrected errors in the audit documentation.
B. Summarize the uncorrected errors in the audit documentation, but do not document
whether the errors cause the financial statements to be misstated.
C. Do not summarize the uncorrected errors in the audit documentation, and do not
document a conclusion about whether the uncorrected errors cause the financial
statements to be misstated.
D. Document the errors in the summary of uncorrected errors, and document the conclusion
that the errors do not cause the financial statements to be misstated.

---END---

Page 16 of 16 Pages
 CPA REVIEW SCHOOL OF THE PHILIPPINES AP 96 PW
Manila

AUDITING PROBLEMS CPA Review

SITUATIONAL

SITUATION 1

The following accounts were included in the unadjusted trial balance of BUNCHING COMPANY
as of December 31, 2024:

Cash ..................................................................................... P 963,200

Accounts receivable .................................................................2,254,000
Inventory ................................................................................6,050,000
Accounts payable ....................................................................4,201,000
Accrued expenses ..................................................................... 431,000

During your audit, you noted that Bunching Company held its cash books open after year-end.
In addition, your audit revealed the following:

1. Receipts for January 2025 of P654,600 were recorded in the December 2024 cash receipts
book. The receipts of P360,100 represent cash sales and P294,500 represent collections from
customers, net of 5% cash discounts.

2. Accounts payable of P372,400 was paid in January 2025. The payments, on which discounts
of P12,400 were taken, were included in the December 2024 check register.

3. Merchandise inventory is valued at P6,050,000 prior to any adjustments. The following

information has been found relating to certain inventory transactions:

a. The invoice for goods costing P175,000 was received and recorded as a purchase on
December 31, 2024. The related goods, shipped FOB destination, were received on
January 4, 2025, and thus were not included in the physical inventory.

b. A P182,000 shipment of goods to a customer on December 30, 2024, terms FOB

destination, are not included in the year-end inventory. The goods cost P130,000 and
were delivered to the customer on January 3, 2025. The sale was properly recorded in
2025.

c. Goods costing P637,500 were shipped on December 31, 2024, and were delivered to the
customer on January 3, 2025. The terms of the invoice were FOB shipping point. The
goods were included in the 2024 ending inventory even though the sale was recorded in
2024.

d. Goods costing P217,500 were received from a vendor on January 4, 2025. The related
invoice was received and recorded on January 6, 2025. The goods were shipped on
December 31, 2024, terms FOB shipping point.

e. Goods valued at P275,000 are on consignment with a customer. These goods are not
included in the inventory figure.

f. Goods valued at P612,800 are on consignment from a vendor. These goods are not
included in the physical inventory.

Based on the above and the result of your audit, determine the adjusted balances of the following
as of December 31, 2024:
1. Cash
A. P963,200 B. P681,000 C. P668,600 D. P693,400

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CPAR - MANILA AP 96 PW

2. Accounts receivable
A. P2,908,600 B. P2,564,000 C. P2,254,000 D. P2,548,500

3. Inventory
A. P6,035,000 B. P6,080,000 C. P5,860,000 D. P5,010,000

4. Accounts payable
A. P4,790,900 B. P4,615,900 C. P4,573,000 D. P4,603,500

5. Current ratio
A. 2.00 B. 1.90 C. 1.84 D. 2.01

SITUATION 2

CALEMBANG COMPANY, whose accounting year ends on December 31, provides delivery
services for packages to be taken between the city and the airport.

On January 1, 2023, the company acquired a delivery van from Togo Trucks. The company paid
cash of P3,060,000 to Togo, which included registration fees of P60,000. Insurance costs for the
first year amounted to P72,000. The truck is expected to have a useful life of five years. At the
end of its useful life, the asset is expected to be sold for P1,440,000, with costs relating to the
sale amounting to P24,000.

On January 1, 2024, Calembang’s management decided to add another vehicle, a flat-top, to the
fleet. This vehicle was acquired from a liquidation auction at a cash price of P1,800,000. The
vehicle needed some repairs for the elimination of rust (cost P138,000) and the replacement of
all tires (cost P37,200). The company believed it would use the flat-top for another two years
and then sell it. Expected selling price was P900,000, with selling costs estimated to be P24,000.

On January 1, 2024, a radio communication system was installed in both vehicles at a cost per
vehicle of P18,000. This was not expected to have any material effect on the future selling price
of either vehicle.

Insurance costs for 2024 were P72,000 for the first vehicle and P54,000 for the newly acquired
vehicle.

On January 1, 2025, the flat-top that had been acquired at auction broke down. The company
thought about acquiring a new vehicle to replace this one but, after considering the costs, decided
to repair the flat-top instead. The vehicle was given a major overhaul at a cost of P390,000.
Although this was a major expense, management believed that the company would keep the
vehicle for another two years. The estimated selling price in three years’ time is P720,000, with
selling costs estimated at P18,000. Insurance costs for 2025 were the same as for the previous
year.

Questions:

1. On January 1, 2023, Calembang should record the delivery van at

A. P3,000,000 B. P3,060,000 C. P3,132,000 D. 3,156,000

2. What is the total cost of the flat-top vehicle?

A. P1,800,000 B. P1,837,200 C. P1,938,000 D. P1,993,200

3. What is the depreciation expense for 2023?

A. P312,000 B. P316,800 C. P328,800 D. P343,200

4. What is the depreciation expense for 2024?

A. P873,600 B. P879,000 C. P879,900 D. P901,800

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CPAR - MANILA AP 96 PW

5. What is the depreciation expense for 2025?

A. P637,500 B. P691,000 C. P695,500 D. P879,900

SITUATION 3

You have been appointed as auditor of MARULAS CO. Its bookkeeper reports the following
statement of financial position amounts as of June 30, 2024.

Current assets P 885,900

Other assets 1,891,800
Current liabilities 502,260
Other liabilities 600,000
Shareholders’ equity 1,675,440

A review of account balances reveals the following:

a) An analysis of current assets discloses the following:

Cash P178,500
Investment securities – trading 120,000
Accounts receivable 204,900
Inventories, including advertising supplies of P10,500 382,500
P885,900
b) Other assets include the following:

Property, plant, and equipment:

Depreciated book value (cost, P2,325,000) P1,663,500
Deposit with a supplier for merchandise ordered for
August delivery 32,100
Goodwill recorded on the books to cancel losses incurred
by the company in prior years 196,200
P1,891,800
c) Current liabilities include the following:

Salaries payable P37,650

Taxes payable 49,710
Accounts payable
Total owed to suppliers on account P333,900
Less: 6-month note received from a supplier
who purchased some used equipment
on June 29, 2024 15,000 318,900
Notes payable 96,000
P502,260
d) Other liabilities include the following:

10% mortgage note on property, plant, and equipment,

payable in semiannual installments of P60,000 through
June 30, 2029 P600,000

e) Shareholders’ equity includes the following:

Preference shares, 45,000 shares issued and outstanding,

P20 par value P900,000
Ordinary shares, 525,000 shares issued and outstanding,
P1 par value 525,000
Share premium 250,440
P1,675,440

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CPAR - MANILA AP 96 PW

f) Ordinary shares were originally issued for P1,485,000 but the losses of the company for the
past years were charged against share premium.

Based on the preceding information, compute the June 30, 2024, adjusted balances
of the following:

1. Total current assets

A. P918,000 B. P922,500 C. P930,000 D. P933,000

2. Property, plant, and equipment, net of accumulated depreciation

A. P1,662,000 B. P1,663,500 C. P1,891,800 D. P2,325,000

3. Total current liabilities

A. P517,260 B. P549,900 C. P637,260 D. P642,660

4. Total shareholders’ equity

A. P1,317,000 B. P1,479,240 C. P1,485,000 D. P2,385,000

5. Total liabilities and shareholders’ equity

A. P1,117,260 B. P1,479,240 C. P2,595,000 D. P2,596,500

SITUATION 4

CHILE CO. reported pretax incomes of P505,000 and P387,000 for the years ended December
31, 2023 and 2024, respectively. However, the auditor noted that the following errors had been
made:

a. Sales for 2023 included amounts of P191,000 which had been received in cash during 2023,
but for which the related goods were shipped in 2024. Title did not pass to the buyer until
2024.

b. The inventory on December 31, 2023, was understated by P43,200.

c. The company’s accountant, in recording interest expense for both 2023 and 2024 on bonds
payable, made the following entry on an annual basis:
Interest expense 75,000
Cash 75,000

The bonds have a face value of P1,250,000 and pay a nominal interest rate of 6%. They
were issued at a discount of P75,000 on January 1, 2023, to yield an effective interest rate of
7%.

d. Ordinary repairs to equipment had been erroneously charged to the Equipment account during
2023 and 2024. Repairs of P42,500 and P47,000 had been incurred in 2023 and 2024,
respectively. In determining depreciation charges, Chile applies a rate of 10% to the balance
in the Equipment account at the end of the year.

1. What is the corrected pretax income for 2023?

A. P303,200 C. P311,700
B. P225,300 D. P307,450

2. What is the corrected pretax income for 2024?

A. P488,992 C. P484,292
B. P480,042 D. P575,392

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CPAR - MANILA AP 96 PW

SITUATION 5

In the course of your examination of the December 31, 2024, financial statements of TUNISIA
COMPANY, you discovered certain errors that had occurred during 2023 and 2024. No errors
were corrected during 2023. The errors are summarized below:

1. Beginning merchandise inventory (January 1, 2023) was understated by P259,200.

2. Merchandise costing P72,000 was sold for P120,000 to Naval Company on December 28,
2023, but the sale was recorded in 2024. The merchandise was shipped FOB shipping point
and was not included in ending inventory. Tunisia uses a periodic inventory system.

3. A two-year fire insurance policy was purchased on May 1, 2023, for P172,800. The whole
amount was charged to Prepaid Insurance. No adjusting entry was prepared in 2023 and
2024.

4. A one-year note receivable of P288,000 was held by Tunisia beginning October 1, 2023.
Payment of the 10% note and accrued interest was received upon maturity. No adjusting
entry was made on December 31, 2024.

5. Equipment with a 10-year life was purchased on January 1, 2025, for P1,176,000. No
depreciation expense was recorded during 2023 or 2024. Assume that the equipment has no
residual value and that Tunisia uses the straight-line method for recording depreciation.

Required:
Prepare journal entries to correct each of the errors described above. Assume that the nominal
accounts for 2024 have not yet been closed into the income summary account.

---END---

Page 5 of 5 Pages