Which of the following is broadest in scopeWhich of the following is

broadest in scope?
 Operations audit

It is the risk that the practitioner expresses an inappropriate

conclusion when the subject matter information is materially
misstated
 Assurance engagement risk

Which of the following is incorrect regarding the “three-party

relationship” element of assurance engagement?
 Professional accountants are those persons who are member of the
PICPA, who should be in public practice

 Which of the following criteria is unique to the independent

auditor’s attest function?
 Independence

Broadly defined, the subject matter of any audit consist of

 Assertions

The following statements relate to the relevance of audit evidence.

Which is correct?
 Relevance deals with the logical connection with, or bearing
upon, the purpose of the audit procedure, direction of testing
and, where appropriate, the assertion under consideration

If a change in the type of engagement from higher to lower level of

assurance is not justified, the auditor should
 Refuse to agree to management's request on the change of
engagement and continue with the original engagement

An attitude that includes a questioning mind and a critical

assessment of audit evidence is referred to as
 Professional skepticism

Concerning retention of working papers, the PSQC

 Requires retention for at least 7 years

Which one of the following is not a key attribute needed to perform

assurance?
 Accounting skills

Which of the following is not one of the subcomponents of the control

environment?
 Adequate separation of duties

Control activity component of internal control

 Consists of the policies and procedures that help ensure that
management directives are carried out

An auditor obtains knowledge about a new client's business and its

industry in order to
 Understand the events and transactions that may have an effect on
the client's financial statements

An understanding of a client’s business and industry and knowledge

about operations are essential for performing an adequate audit. For
a new client, most of this information is obtained
 from the predecessor auditor

Which of the following professionals has primary responsibility for

the performance of an audit?
 The partner in charge of the engagement

When the auditor attempts to understand the operation of the

accounting system by tracing a few transactions through the
accounting system, the auditor is said to be:
 performing a walk-through

Initial audit planning involves four matters. Which of the following

is not one of these?
 Request that bank balances be confirmed

The basic concept of internal control which recognizes that the cost
of internal control should not exceed the benefits expected to be
derived is known as
 Reasonable assurance

In planning an audit engagement, the auditor is required to develop

and document a(an)
I. Audit Plan
II. Flowchart
III. Overall Audit Strategy
 Both I and III

Which of the following risks of material misstatement relating to

cash pertains to completeness assertion?
 Cash is understated because not all bank accounts and receipts
have been recorded

An auditor uses the knowledge by the understanding of internal

control and the final assessed level of control risk primarily to
determine nature, timing, and extent of the
 compliance tests

Which of the following statements is/are correct?

Statement 1: Where the terms of the engagement are changed, the
auditor and the client should agree on the new terms.

Statement 2: The auditor should not agree to a change of engagement

when there is no reasonable justification for doing so.
Statement 3: If the auditor is unable to agree to a change of the
engagement and is not permitted to continue the original engagement,
the auditor should withdraw and consider whether there is any
obligation, either contractual or otherwise, to report to other
parties, such as the board of directors or shareholders, the
circumstances necessitating the withdrawal.
 All statements are correct

Which of the following statements is correct concerning an auditor's

responsibilities regarding financial statements?
 An auditor's responsibilities for audited financial statements
are confined to the expression of the auditor's opinion

Which of the following would best be described as an assurance

service?
 Offering an opinion concerning the accuracy of statements made on
a client’s web site relating to the client’s online privacy
policies.

In making a decision whether to accept or reject a client, the

auditor considers the following except
 The audit client’s compliance with applicable rules and
regulations

The auditor is studying internal control policies and procedures

within the sales, shipping, and billing subset of the revenue
cycle.  Which of the following conditions suggests a need for
additional testing of controls?
 Internal control over billing and shipping is thought to be
strong and the auditor considers additional testing of selected
controls will result in a major reduction in substantive testing

Reasonable assurance in a financial statement audit is

 A high level of assurance

Which of the following can be significantly affected by an audit?

 Information risk

Which of the following sets the scope, timing, and direction of the
audit?
 audit strategy

Other information that the auditor may use as audit evidence least
likely includes
 Adjustments to the FS that are not reflected in formal journal
entries

An auditor’s working papers will ordinarily be least likely to

include documentation showing how the
 Client’s schedules were prepared

Which of the following is an example of the concept of inherent risk?

 Loans receivable for a finance company are less likely to be
collectible than those of a bank

Inherent risk is _______ related to detection risk and _______

related to the amount of audit evidence
 inversely, directly

Which of the following is not a potential effect of an auditor’s

decision that a lower acceptable audit risk is appropriate?
 Less evidence is accumulated

Which of the following is expected to be performed by an auditor in

the pre-engagement phase?
 Evaluate auditability

Tests of controls are directed toward the control’s

 Effectiveness

Non assurance services include all of the following services except:

 Examination of prospective financial statements

A conceptually logical approach to the auditor's evaluation of

internal accounting control consists of the following four steps:

I. Determine whether the necessary procedures are prescribed and

are being followed satisfactorily.
II. Consider the types of errors and fraud that could
occur.
III. Determine the internal control policies and procedures that
should prevent or detect errors and fraud.
IV. Evaluate any weakness to determine its effect on the nature,
timing, or extent of auditing procedures to be applied and
suggestions to be made to the client.
What should be the order in which these four steps are performed?
 II, III, I, IV

An auditor’s risk assessment indicates the likelihood of

overstatement in the audit client’s purchases account.  The auditor
will most likely perform
 Vouching
ABC Company uses its sales invoices for posting perpetual inventory
records. Inadequate internal control over the invoicing allows goods
to be shipped but not invoiced. The inadequate controls could cause
what type of misstatement in each of the following accounts?

(1) Revenues
(2) Receivables
(3) Inventories
 Understatement, understatement, overstatement

Unlike consulting services, assurance services

 Report on the quality of information

The following statements pertain to obtaining an understanding of

the entity and its Environment. Which is incorrect?
 The depth of the overall understanding that is required by the
auditor in performing the audit is equal to that possessed by
management in managing the entity

Which of the following is not appropriate for purposes of testing the

effectiveness of controls
 Evaluate prior experience with the client

Which of the following is not a correct statement regarding the

allocation of the preliminary judgment about materiality to balance
sheet accounts
 The allocation has virtually no effect on audit costs because the
auditor must collect    sufficient appropriate audit evidence

Which of the following is most likely to occur at the beginning of an

initial audit engagement?
 Determine the client’s reason for an audit

Auditing is a systematic process that includes all of the following

except
 Providing important managerial decisions for a client

Whenever an auditor compares client data to client-prepared budgets,

there are two special concerns. Indicate if the two items below are
concerns.

(i)Assessing whether the budgets were realistic plans

(ii)Client data may have been altered to conform to the budget

 A concern; a concern

Regardless of how the preliminary judgment about materiality is

allocated, the auditor must be confident that total combined
misstatements in all accounts are
 less than or equal to the preliminary judgment
The major concern when using nonfinancial data in analytical
procedures is the
 accuracy of the nonfinancial data

When an independent CPA assists in preparing the financial statements

of a publicly held entity, but has not audited or reviewed them, the
CPA should issue a disclaimer of opinion. In such situations, the CPA
has no responsibility to apply any procedures beyond
 Reading the financial statements for obvious material
misstatements

Which of the following refers to “nature of an entity”?

 The entity’s operations, its ownership and governance, the types
of investments that it is making and plans to make, the way that
the entity is structured and how it is financed

Which of the following is not an example of the application of

professional skepticism?
 Inquiring of prior year engagement personnel regarding their
assessment of management's honesty and integrity

The validity of evidential matter is dependent on the circumstances

under which it is obtained. However, there is an hierarchy of audit
evidence reliability. The situations given below indicate the
relative reliability a CPA has placed on two types of evidence
obtained in different situations.  Which of these is an exception to
one of the general presumptions on evidence reliability?
 The CPA places more reliance on the report of an expert on an
inventory of precious gems than on the CPA’s physical
observation of the gems

Only _______ involve physical examination and confirmation

 tests of balances

Which of the following statements concerning physical controls is

incorrect?
 Access to computer hardware should not be limited to authorized
personnel

Which of the following statements is true concerning evidence in an

assurance engagement?
 Sufficiency is the measure of the quantity of evidence.

Which of the following services would be most likely to be structured

as an assurance engagement
 An engagement to issue a report addressing an entity’s
compliance with requirements of specified laws.
In some assurance engagements, the evaluation or measurement of the
subject matter performed by the responsible party, and the subject
matter information is in the form of an assertion by the responsible
party that is made available to intended users. These engagements are
called
 Assertion-based engagements

An unqualified conclusion is appropriate when

 The auditor has obtained reasonable assurance that the financial
statements are fairly stated in all material respects in
accordance with the applicable reporting framework.

Assurance services are best described as

 Independent professional services that improve the quality of
information, or its context, for decision makers

Which of the following activities best describe the term operational

audit?
 Seeks out aspects of company operations in which introduction of
proper controls would reduce waste.

Engagements frequently performed by professional accountants that are

not assurance engagements include the following, except
 Reasonable assurance engagement

Which of the following is (are) correct regarding the three party

relationship element of assurance engagement?
 All of the above

The reason why the company needs external person to audit its
financial statements despite having in-house auditors is that
 Different interests may exist between the company management and
intended users of the financial statements.

Statement 1: The Auditor is required to comply with majority of the

PSAs relevant to the audit of an entity’s financial statements.
Statement 2: A PSA is relevant to the audit when the PSA is in effect
and the circumstances addressed by the PSA exists.
 Only Statement 2 is correct

make the internal audit department independent, he should report

directly to the
 Audit committee.

The Philippine Standards on Auditing issued by AASC

 apply to independent examination of financial statements of any
entity when such an examination is conducted for the purpose of
expressing an opinion.

Which of the following statements is (are) true regarding the

provision of assurance services
I.  The third party who receives the assurance generally pays for the
assurance received.
II.  Assurance services always involve a report by one person to a
third party on which an independent organization provides assurance.
III.  Assurance services can be provided either on information or
processes.
 III only

The following are characteristics of direct reporting assurance

engagements, except
 The subject matter information is in the form of an assertion by
the responsible party that is made available to the intended
users.

The single feature that most clearly distinguishes auditing,

attestation, and assurance is
 Scope of services

Which of the following is an example of subjective evidence?

 Inquiries of the credit manager about the collectibility of
noncurrent accounts receivable.

"Our audit is subject to the inherent risk that material errors and
fraud, including defalcations, if they
exist, will not be detected. However, we will inform you of fraud
that comes to our attention, unless it
is inconsequential."

The above passage is most likely from a(an):

 Engagement letter

Analytical procedures used in planning an audit should focus on:

 Enhancing the auditor's understanding of the client's business

As used in auditing, which of the following statements best describes

“assertions”?
 Assertions are the representations of management as to the
fairness of presentation of the financial statements

The element of the audit planning process most likely to be agreed

upon with the client before implementation of the audit strategy is
the determination of the
 Timing of inventory observation procedures to be performed
The audit work performed by each assistant should be reviewed to
determine whether it was adequately performed and to evaluate whether
the
 Results are consistent with the conclusions to be presented in
the auditor's report

Which of the following factors most likely would influence an

auditor’s determination of the auditability of an entity’s
financial statements?
 The adequacy of the accounting records

Each of the following might, by itself, form a valid basis for an

auditor of deciding to omit a test except for the:
 difficulty and expense involved in testing a particular item.

The outputs of audit planning are

 All of the answers

The objective of performing analytical procedures in planning an

audit is to identify the existence of
 unusual transactions and events.

Which of the following ultimately determines the specific audit

procedures necessary to provide an independent auditor with a
reasonable basis for the expression of an opinion?
 The auditor’s judgment.

Which of the following auditor concerns most likely could be so

serious that the auditor concludes that a financial statement audit
cannot be conducted?
 The integrity of the entity's management is suspect

Which of the following statements relating to the appropriateness of

audit evidence is always true?
 Evidence gathered by auditors must be both valid and relevant to
be considered appropriate

Which of the following types of audit evidence is the most

persuasive?
 Bank statements obtained from the client

“The detailed instructions for the collection of a particular type

of audit evidence that is to be obtained at some time during the
audit” is the definition of a(n)
 audit procedure

An example of vouching would be

 trace from the acquisitions journal to supporting vendor’s
invoices.
Which of the following procedures would an auditor most likely
perform in planning a financial statement audit?
 Comparing the financial statements to anticipated results
Which of the following relatively small misstatements most likely
could have a material effect on an entity's financial statements?
 An illegal payment to a foreign official that was not recorded

An auditor should design the written audit program so that

 The audit procedures selected will achieve specific audit
objectives

As the acceptable level of detection risk decreases, the assurance

directly provided from
 Substantive tests should increase

Inquiries directed towards those charged with governance may most

likely
 Help the auditor understand the environment in which the
financial statements are prepared.

Which statement is incorrect regarding significant risks that require

special audit consideration?
 Routine, non-complex transactions that are subject to systematic
processing are more likely to give rise to significant risks
because they have higher inherent risks

The financial statements are not likely to correctly reflect

Philippine Financial Reporting Standards if
 the controls affecting the reliability of financial reporting are
inadequate.

Why should the auditor plan more work on individual accounts as lower
acceptable levels of both audit risk and materiality are established?
 To find smaller errors

Which of the following is not required by PSA No. 315, "Consideration

of Fraud in a Financial Statement Audit"?
 Conduct the audit with professional skepticism, which includes an
attitude that assumes balances are incorrect until verified by
the auditor.

The main purpose of risk assessment procedures is to

 Obtain an understanding of the entity and its environment,
including its internal control, to assess the risks of material
misstatement at the financial statement and assertion levels.
Which of the following is most likely to be an overall response to
fraud risks identified in an audit?
 Use less predictable audit procedures.

Proper segregation of functional responsibilities in an effective

system of internal control calls for separation of the functions of:
 Authorization, recording, and custody.

Which of the following is least likely to be an evidence of operating

effectiveness of controls?
 Confirmation of bank balances.

How is the audit program best described at the beginning of the audit
process?
 Temporary

If, when performing analytical procedures, an auditor observes that

operating income has declined significantly between the preceding
year and the current year, the auditor should next
 consider the possibility that the financial statements may be
materially misstated.

Internal control is primarily established within a company to

accomplish which of the following objectives?
 Provide reasonable assurance that the company's objectives will
be achieved

Which of the following concepts is most useful in assessing the scope

of an auditor's program relating to various accounts?
 Materiality

Which of the following statements best describes materiality?

 Materiality provides a cutoff point at which judgment, based on
the financial statements, may be altered

The purpose of tests of controls is to provide reasonable assurance

that the
 control procedures are functioning as intended

An auditor is testing credit authorization procedures by examining

sales invoices for credit approval by the credit department. The
procedures will be considered to be working adequately if 96% of all
sales invoices either indicate approval or are cash sales. The
auditor selects a random sample of 100 invoices. In this situation,
which of the following outcomes illustrates underassessment?
 The auditor finds no deviations and concludes that procedures
work adequately. The true population deviation rate is 5%.

Which of the following would not be considered an analytical

procedure?
 Projecting a deviation rate by comparing the results of a
statistical sample with the actual population characteristics

An inventory acquisition is received late in the afternoon of

December 31 after the physical inventory is completed. If the
acquisition is included in accounts payable and purchases, but
excluded from inventory, the result
 Is an understatement of net earnings

An auditor confirms a representative number of open accounts

receivable as of December 31 and investigates respondent’s
exceptions and comments. By this procedure, the auditor would most
likely to learn of which of the following?
 One of the cashiers has been covering embezzlement by lapping

the major reason that the difference and ratio estimation methods
would be expected to produce audit efficiency is that the
 Variability of the population of differences or ratios is less
than that of the population of book values or audited values

Omitting quantities from copies of purchase orders sent to the

receiving department is a control procedure intended mainly to
 Ensure that goods received are physically counted by receiving
department personnel

Of the following, which is the most efficient audit procedure for

testing accrued interest earned on bond investments?
 Recomputing interest earned

Which of the following procedures most likely would provide an

auditor with evidence about whether an entity's internal control
activities are suitably designed to prevent or detect material
misstatements?
 Observing the entity's personnel applying the activities

In applying variables sampling, an auditor attempts to

 Predict a monetary population value within a range of precision

The primary concern in testing payroll-related liabilities is to make

sure that
 There are no understated or omitted accruals

For which of the following audit tests would an auditor most likely
use attribute sampling?
 Inspecting purchase orders for proper approval by supervisors

Which of the following statements best describes why an auditor would

use only substantive procedures to evaluate specific relevant
assertions and risks?
 Testing the operating effectiveness of the relevant controls
would not be efficient.

Which of the following is the most effective control procedures to

detect vouchers that were prepared for the payment of goods that were
not received?
 Match purchase order, receiving report and vendor’s invoice for
each voucher in accounts payable department

For effective internal control purposes, the vouchers payable

department generally should
 Establish the agreement of the vendor’s invoice with the
receiving report and purchase order

The audit of year-end physical inventories should include steps to

verify that the client’s purchases and sales cutoffs were adequate.
The audit steps should be designed to detect whether merchandise
included in the physical count at year-end was not recorded as a
 Sale in the current period

As a result of tests of controls, an auditor overassessed control

risk and increased substantive testing. This overassessment occurred
because the true occurrence rate in the population was
 Less than the occurrence rate in the auditor’s sample

The auditor’s objective during an observation of a client’s

physical inventory count is to
 Obtain direct knowledge that the inventory exists and has been
properly counted

Proper separation of duties is useful to prevent various types of

misstatements. Which of the following is not an essential separation
of duties?
 Persons having access to cash should not have access to
marketable securities

Holding other planning considerations equal, an increase in the

amount of misstatement in a class of transactions that an auditor
could tolerate most likely would cause the auditor to
 Apply the planned substantive tests prior to the balance sheet
date

Which of the following statements is correct?

 The population size has little or no effect on sample size except
for very small populations.

As the acceptable level of detection risk decreases, an auditor may

 Postpone the planned timing of substantive tests from interim
dates to the year-end
Which of the following errors would be least likely to be discovered
during the tests of the bank reconciliation?
 Payment was made to an employee for more hours than he worked

In order to efficiently establish the correctness of the accounts

payable cutoff, the auditor is most likely to
 Coordinate cutoff tests with physical inventory observation

The expected population deviation rate of client billing errors is

3%. The auditor has established a tolerable rate of 5%. In the review
of client invoices the auditor should use
 Attribute sampling

When an acquisition is on an FOB origin basis, the inventory and

related accounts payable must be recorded in the current period if
the goods were
 Shipped prior to the balance sheet date