1.

Which of the following would not be a consideration of a CPA firm in deciding whether to accept a new
client?
A. The client’s probability of achieving an unqualified opinion.
B. The client’s financial ability.
C. The client’s relations with its previous CPA firm.
D. The client’s standing in the business community.
2. After accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding:
A. The predecessor’s evaluation of matters of continuing accounting significance.
B. Disagreements which the predecessor had with the client concerning auditing procedures and
accounting principles.
C. The client’s ability to pay the fee for this engagement.
D. The predecessor’s assessments of inherent risk and judgments about materiality.
3. The objective and scope of the audit and the extent of the auditor’s responsibilities to the client are best
documented in a(n):
A. Client’s representation letter C. Audit engagement letter.
B. Independent auditor’s report D. Management letter
4. Which of the following is not a valid reason why an auditor sends to his client an engagement letter?
A. Avoid misunderstanding with respect to the engagement
B. Confirms the auditor’s appointment
C. Discloses the objective and scope of the audit
D. Assures CPA’s compliance to PSAs
5. The secondary purpose of the engagement letter is to:
A. Remind management that the primary responsibility for the financial statements rests with
management.
B. Satisfy the requirements of the CPA’s liability insurance policy.
C. Provide a written record of the agreement with the client as to the services to be provided.
D. Provide a starting point for the auditor’s preparation of the preliminary audit program.
6. S1 The engagement letter will include identification of significant dates throughout the engagement.
S2 The engagement letter will inform the client about the audit procedures to be performed.
A. True, true B. False, false C. True, false D. False, true

7. Which of the following procedures is performed primarily during audit planning?

A. Risk assessment procedures
B. Tests of controls
C. Substantive tests
D. All of the above are performed primarily during audit planning
8. Which of the following is not a risk assessment procedure?
A. Inquiries of management and others within the entity
B. Analytical procedures
C. External confirmation with customers
D. Observation and inspection
9. S1 Materiality judgments are made in light of surrounding circumstances and necessarily involve both
quantitative and qualitative judgments.
S2 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.
A. True, true B. False, false C. True, false D. False, true

10. S1 Analytical procedures are required to be used in planning a financial statement audit.
S2 Analytical procedures are required to be used all throughout the audit.
A. True, true B. False, false C. True, false D. False, true

11. S1 In a financial statement audit, audit risk represents the probability that internal controls fail and the
failure is not detected by the auditor’s procedures.
S2 Audit risk may be eliminated by 100% testing of the items in the population.
A. True, true B. False, false C. True, false D. False, true

12. In a financial statement audit, detection risk represents:

A. The susceptibility of an account balance to error that could be material.
B. The risk that error could occur and not be prevented or detected by the internal control structure of
the client.
C. The risk that the auditor fails to modify materially misstated financial statements.
D. The risk that error could occur and not be detected by the auditor’s procedures.
13. The following statements describe components of internal control. Which one describes risk assessment
process?
A. This 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.
B. The process for identifying business risks relevant to financial reporting objectives and deciding
about actions to address those risks, and the results thereof.
C. The classes of transactions in the entity’s operations that are significant to the financial statements.
D. The policies and procedures that help ensure that management directives are carried out.
14. S1 The auditor assesses detection risk because it affects the level of control risk that the auditor may
accept.
S2 The auditor assesses control risk because it affects the level of detection risk that the auditor may
accept.
A. True, true B. False, false C. True, false D. False, true

15. Which of the following would not be a method used to conduct tests of
controls?
A. Inquiry and observation. C. Reperformance.
B. Inspection. D. Analytical procedures

16. As the auditor plans to rely more on the client’s internal control structure,
A. Substantive tests should increase. C. Substantive tests should decrease.
B. Tests of controls should increase. D. Tests of controls should decrease.
17. S1 Audit evidence comprises all the information available to the auditor during an audit engagement.
S2 Accounting records, on their own, constitute sufficient appropriate evidential matter.
A. True, true B. False, false C. True, false D. False, true

18. Which of the following is an example of the auditor’s direct knowledge?

I. Inspection
II. Observation
III. Computation
A. I only B. I and III C. II and III D. I, II and III

19. S1 An auditor should recognize that the application of auditing procedures may produce evidential matter
indicating the possibility of errors and irregularities and therefore should not depend on internal
accounting control features that are designed to prevent or detect errors or irregularities.
S2 Inquiries of the client’s internal audit staff, held in private, constitute one of the most reliable sources
of evidence in testing the rights and obligations assertion related to land and buildings.
A. True, true B. False, false C. True, false D. False, true

20. Which of the following is an example of fraud?

A. Client personnel make mistakes in gathering or processing accounting data from which financial
statements are prepared.
B. Client personnel alter accounting records from which financial statements are prepared.
C. Client personnel overlook or misinterpret facts, causing accounting estimates to be incorrect.
D. Client personnel make mistakes in the application of accounting principles.

21. Which of the following situations are applicable to fraud as well as error?
A. Mistakes in gathering or processing accounting data
B. Suppression of the recording of accounting transactions
C. Misinterpretation of facts, causing the classification of leases to be incorrect
D. Misapplication of accounting policies

22. Which of the following best describes a portion of the auditor’s responsibility regarding illegal acts by
clients?
A. The auditors have a responsibility to discover all material illegal acts.
B. If audit procedures reveal illegal acts, the auditors should take appropriate actions.
C. If the auditors suspect that illegal acts have been performed, they should conduct a legal audit of
the company
D. The auditor’s responsibility for the detection of all illegal acts is the same as their responsibility
regarding material errors and irregularities.
23. Which of the following is not generally included in the working papers file?
A. Documentation of the auditor’s understanding of the accounting and internal control systems.
B. Copy of the internal auditor’s audit program.
C. Analyses of significant ratios and trends.
D. An indication as to who performed the audit procedures and when they were performed.
24. The standard (unmodified) audit report includes the following:
I. Emphasis of a matter paragraph
II. Unqualified opinion
A. I only B. II only C. I and II D. Neither I nor II

25. When restrictions that materially limit the scope of the audit are imposed by the client, the auditor
generally should issue which of the following opinions?
A. “Except for” C. Unqualified
B. Adverse D. Disclaimer

26. An audit report should be dated no earlier than:

A. Date the report is delivered to the entity audited.
B. Date the auditee has obtained sufficient, appropriate audit evidence.
C. Date of the completion of the audit.
D. Date a letter of audit inquiry is received from the entity’s attorney of record.

27. Which of the following statements indicates an adverse opinion?

A. “The financial statements do not present fairly in all material respects the financial position, results of
operations, and cash flows in conformity with GAAP.”
B. “The auditor does not express an opinion on the financial statements.”
C. “The financial statements present fairly in all material respects the financial position, results of
operations, and cash flows in conformity with GAAP.”
D. “Except for the effects of a matter, the financial statements present fairly in all material respects the
financial position, results of operations, and cash flows in conformity with GAAP.”

28. In which of the following paragraphs can you find the phrase “Philippine Financial Reporting Standards”?
I. Opening paragraph
II. Management responsibility paragraph
III. Auditor’s responsibility paragraph
IV. Opinion paragraph
A. I only B. II and III C. II and IV D. II, III and IV

29. This means the application of audit procedures to less than 100% of items within an account balance or
class of transactions, where all sampling units have a chance of being selected for testing.
A. Audit sampling C. Haphazard testing
B. Selecting specific items D. Statistical sampling
30. A sample in which every possible combination of items in the population has an equal chance of
constituting the sample is a
A. Random sample. C. Judgment sample.
B. Statistical sample. D. Representative sample.

31. S1 The documentary evidence which physically represents the sampling units in a given population, is
known as sampling form.
S2 Error that arises from an isolated event that has not recurred other than on specifically identifiable
occasions and is therefore not representative of errors in the population is known as projected error.
A. True, true B. False, false C. True, false D. False, true

32. S1 An advantage of statistical sampling over non-statistical sampling methods in tests of controls is that
the statistical sampling methods provide an objective basis for qualitatively evaluating sampling risk.
S2 Statistical sampling methods do not allow the auditor to eliminate the need to use judgment in
determining the appropriate sample size.
A. True, true B. False, false C. True, false D. False, true

33. One of the causes of sampling error is

A. The use of inappropriate or ineffective audit procedures.
B. Fatigue and lack of attention to detail
C. Failure to draw a representative sample.
D. The use of attributes sampling instead of variables sampling.

34. Which of the following comments best illustrates the concept of non- sampling risk?
A. A randomly chosen sample may not be representative of the population as a whole on the
characteristic of interest.
B. An auditor may select audit procedures that are not appropriate to achieve the specific objective.
C. An auditor uses attributes sampling instead of variables sampling.
D. The documents related to the chosen sample may not be available for inspection.
35. At times a sample may indicate that the auditor’s assessed level of control risk for a given control is
reasonable when, in fact, the true compliance rate does not justify the “less than high” level. This situation
illustrates the risk of
A. Assessing control risk too low. C. Incorrect rejection.
B. Assessing control risk too high. D. Incorrect acceptance.

36. The consequence of assessing control risk too high relates to

the
a. Efficiency of the audit. c. Preliminary estimates of materiality levels.
b. Effectiveness of the audit. d. Allowable risk of tolerable error.

37. The likelihood of assessing control risk too low is the risk that the sample selected
to test controls:
A. Does not support the auditor’s planned assessed level of control risk when the true operating
effectiveness of the control structure justifies such an assessment.
B. Contains misstatements that could be material to the financial statements when aggregated with
misstatements in other account balances or transactions classes.
C. Contains proportionately fewer deviations from prescribed internal control structure policies or
procedures than exist in the balance or class as a whole.
D. Supports the auditor’s planned assessed level of control risk when the true operating
effectiveness of the control structure does not justify such an assessment.

38. While performing a substantive test of details during an audit,

the auditor determined that the sample results supported the
conclusion that the recorded account balance was materially
misstated. It was, in fact, not materially misstated. This
situation illustrates the risk of
A. Incorrect rejection. C. Assessing control risk too low.
B. Incorrect acceptance. D. Assessing control risk too high.

39. A sampling method that is useful when testing controls is:

A. Non-statistical sampling. C. Discovery sampling.
B. Attribute estimation sampling. D. Stratified random sampling.

40. If the auditor is concerned that a population may contain exceptions, the determination of a sample size
sufficient to include at least one such exception is a characteristic
A. Random sampling C. PPS Sampling
B. Discovery sampling D. Variable sampling

41. S1 Statistical sampling may be applied to test controls when a client’s control procedures leave an audit
trail as evidence of compliance.
S2 For purposes of audit sampling in tests of controls, errors refer to misstatements.
A. True, true B. False, false C. True, false D. False, true

42. A decrease in the expected population deviation rate will cause the sample size to:
A. Increase C. Remain unchanged
B. Decrease D. Cannot be determined.
43. This is the deviation rate that an auditor will permit in the population and would still be willing to reduce
the assessed level of control risk:
A. Population deviation rate. C. Sample deviation rate.
B. Tolerable misstatement. D. Tolerable deviation rate.

44. Which of the following sampling methods is used to estimate a numerical measurement of a population,
such as a peso value?
A. Attribute sampling. C. Variables sampling.
B. Stop-or-go sampling. D. Random-number sampling.

45. When selecting samples, a decrease in the tolerable misstatement will cause the sample size to:
A. Increase C. Remain unchanged
B. Decrease D. Cannot be determined.
46. This is the misstatement that the auditor finds in the sample, adjusted to estimate the misstatement in the
population.
A. Tolerable misstatement. C. Projected misstatement.
B. Sample misstatement. D. Anticipated misstatement.

47. When performing a test of a control with respect to control over cash receipts, an auditor may use a
systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of
this type of sampling is that the items in the population
A. Must be systematically replaced in the population after sampling.
B. May systematically occur more than once in the sample.
C. Must be recorded in a systematic pattern before the sample can be drawn.
D. May occur in a systematic pattern, thus destroying the sample randomness.

48. S1 A method of sampling in which all items in the population are divided into two or more sub-population
is known as systematic sampling.
S2 One of the disadvantages of haphazard sampling is the risk of conscious bias in the selection of
samples.
A. True, true B. False, false C. True, false D. False, true

49. According to PSA 560, “subsequent events” refer to:

A. Events occurring between the period end and the date of the auditor’s report
B. Facts discovered after the date of the auditor’s report.
C. Events occurring between the week immediately before the end of the period and the date of the
auditor’s report.
D. Events occurring between the period end and the date of the auditor’s report and facts discovered
after the date of the auditor’s report.

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

51. After the date of the audit report but before the financial statements are issued, the auditor becomes
aware of a material subsequent event which requires adjustment in the financial statements. If
management does not amend the financial statements, the audit opinion to be issued would be:
A. Unqualified opinion with explanation C. Adverse opinion
B. Qualified opinion or adverse opinion D. Qualified opinion

52. When obtaining evidence regarding litigation against a client, the CPA would be least interested in
determining:
A. The period in which the underlying causes of litigation occurred.
B. An estimate of when the matter will be resolved.
C. An estimate of the potential loss.
D. The probability of an unfavorable outcome.

53. The secondary source of information to be reported about litigation, claims, and assessments is the
A. Client’s lawyer C. Client’s management
B. Court records D. Independent auditor

54. Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims and
assessments most likely would cause the auditor to request clarification?
A. “I believe that the company will be able to defend this action successfully.”
B. “The possible liability to the company is nominal in amount.”
C. “This case against the company is without merit!”
D. “The action can be settled for less than the damages claimed.”

55. If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments, the
auditor should:
A. Honor the confidentiality of the client-lawyer relationship.
B. Seek to obtain the corroborating information from management.
C. Consider the refusal to be tantamount to a scope limitation.
D. Disclose this fact in the notes to the financial statements.

56. Audit inquiries with the client’s legal counsel should cover cases up to:
 A. The balance sheet date C. The date when the letter was written
B. The date of the audit report D. Cannot be determined

57. The primary objective of analytical procedures used in the final review of an audit is to
A. Obtain evidence from details tested to corroborate particular assertions.
B. Identify areas that represent specific risks relevant to the audit.
C. Assist the auditor in determining the reasonableness of the financial statements.
D. Satisfy doubts when questions arise about a client’s ability to continue in existence.

58. The responsibility for the identification and disclosure of related parties and related party transactions rests
with the:
A. External auditor. C. Internal audit department head
B. Entity management D. Controller
59. Which of the following events most likely indicates the existence of related parties?
A. Discussing terms of merger with a company that is a major competitor.
B. Making a loan with scheduled terms for repayment
C. Borrowing a large sum of money at a very low interest rate.
D. Selling real estate at a price that differs significantly from its carrying value.

60. 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 intercompany account balances to be performed as of concurrent
dates.
B. The business structure may be deliberately designed to obscure related party transactions.
C. This may reveal whether particular transactions would have taken place if the parties had not been
related.
D. Intercompany transactions may have been consummated on terms equivalent to arms’ length
transactions.

61. When auditing related-party transactions, an auditor places primary emphasis on

A. Eliminating the effects of related party transactions.
B. Substance over form of the transactions, and disclosure of the related-party transactions.
C. Testing the existence of the related parties.
D. Determining the accuracy and classification of the related-party transactions.

62. The responsibility to evaluate the cliednt’s assessment of an entity’s ability to continue as a going concern
rests with:
A. The auditor C. The BOA
B. The entity’s management D. The financial statement users

63. 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. Cash flows from operating activities are positive.
B. Share dividends replace annual cash dividends.
C. Significant related party transactions are pervasive.
D. Interest payable in arrears for several months.

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

65. The auditor should obtain evidence of management’s acknowledgment of responsibility for
I. The fair presentation of the financial statements in accordance with PSAs
II. Approval of the financial statements
A. I only B. II only C. Both I and II D. Neither I nor II

66. Which of the following documentation is required for an audit in accordance with Philippine Standards on
Auditing (PSAs)?
A. An internal control questionnaire. C. A client engagement letter.
B. A planning memorandum or checklist. D. A management representation letter.
67. S1 Management representation letters are substitutes for substantive test procedures.
S2 All members of the client’s management are to sign the management representation letter.
A. True, true B. False, false C. True, false D. False, true
68. Written client representation letters are normally signed by the:
A. president and the chairperson of the board.
B. treasurer and the internal auditor.
C. chief executive officer and the chief financial officer.
D. corporate counsel and the audit committee chairperson.

69. Management representation letters should be dated as of the date of the:

A. Statement of financial position. C. Completion of the audit
B. Latest interim financial statements. D. Latest related party transaction.
70. Management’s refusal to furnish a written representation letter on a matter, which the auditor considers
essential, may lead the auditor to choose between the issuance of:
A. Unqualified or qualified opinion C. Adverse opinion or disclaimer of opinion
B. Qualified opinion or Adverse opinion D. Qualified opinion or disclaimer of opinion

71. Which of the following statements is incorrect?

a. PSA 100 states that when an expert is used in the collection and evaluation of evidence, the
practitioner and the expert should on a combined basis, possess sufficient knowledge of the
subject matter and have adequate proficiency in the subject matter for the practitioner to
determine that sufficient, appropriate evidence has been obtained. (x)
b. Compilation engagements ordinarily entails reducing detailed data to a manageable and
understandable form without a requirement to test the assertions underlying that information.
c. According to PSA 200, Objective and General Principles Governing an Audit of Financial
Statements, the professional responsibilities of an auditor include independence, integrity,
objectivity, confidentiality, professional behavior, technical standards, and professional
competence and due care.
d. PSA 210, Terms of Audit Engagements, applies to audits, reviews, and other related services.

72. Assurance services are independent professional services that

a. Include a written communication that expresses a conclusions
b. Improve the quality of information, or its context for decision makers. (x)
c. Include audit services, attest services, and consulting services.
d. Involve the examination of the credibility of a written assertion that is the responsibility of
another party.

73. Which of the following services would be most likely to be structured as an attest engagement?
a. Advocating a client’s position in tax matter.
b. A consulting engagement to develop a new data-base system for the revenue cycle.
c. An engagement to issue a report addressing an entity’s compliance with requirements of
specified laws. (x)
d. The compilation of client’s forecast information.

74. Which of the following statements is incorrect?

a. Attendance consists of being present during all or part of a process being performed by
others.
b. Audit evidence will comprise source documents and accounting records underlying financial
statements and corroborating information from other sources.
c. The characteristics for determining whether criteria are suitable are relevance, reliability,
neutrality and consistency. (x)
d. Governance describes the role of persons entrusted with the supervision, control and direction
of an entity.

75. The Constitution of the Philippines requires this Office to “keep the general accounts of the
Government and for such period as may be provided by law, preserve the vouchers pertaining
thereto”
a. National Accounting Office
b. Ministry of Finance
c. Auditing units to each bureau or office.
d. Commission on Audit. (x)

76. Which of the following is not required by PSA 200, which states that professional competence and
due care is one of the ethical responsibilities of an auditor in an audit engagement?
a. observance of the relevant Philippine Standards on Auditing
b. critical review of the audit work performed at every level of supervision
c. degree of skill commonly possessed by others in the profession
d. responsibility for losses because of errors of judgment (x)

77. The term testing alludes to the concept of

a. A guarantee
b. A certificate
c. Accuracy
d. Sampling (x)

78. An auditor is unable to obtain absolute assurance that misstatements due to fraud will be detected for
all of the following except
a. Employee collusion.
b. Falsified documentation.
c. Need to apply professional judgment in evaluating fraud risk factors.
 d. Professional skepticism. (x)

79. Philippine Standards on Auditing (PSAs)

a. must be followed on every audit, but the auditor may choose an alternative course of action if
it is justifiable (x)
b. must be followed only on those audits which must be submitted to the SEC
c. are ideal standards that are rarely, if ever, attained
d. must be followed by CPAs who are members of the PICPA, but they are optional for CPAs
who are not members of the PICPA

80. All of the following organizations are represented in both the Financial Reporting Standards Council
(FRSC) and the Auditing and Assurance Standards Council (AASC), except:
a. Professional Regulatory Board of Accountancy
b. Bangko Sentral ng Pilipinas
c. Bureau of Internal Revenue (x)
d. Commission on Audit

81. PSAs include standards on reporting. Which of the following is not one of the focus of PSA 700, the
Auditor’s Report on Financial Statements?
a. adequacy of informative disclosures
b. circumstances when GAAP are not consistently followed
c. whether statements were prepared in accordance with GAAP
d. sufficient appropriate evidence is to be obtained to support the audit conclusions (x)

82. Because external auditors are paid fees by their clients, external auditors
a. are absolutely independent and may conduct audits
b. may be sufficiently independent to conduct audits (x)
c. are never considered to be independent
d. must receive approval of the SEC before conducting audits

83. Which of the following situations best illustrates the application of professional skepticism?
a. G, CPA, is engaged in discussions with J, the client’s controller. G obtains several oral
representations from J, which the former readily accepts without further work or support from
other audit procedures.
b. G, CPA has decided to continue with the audit of FLS Company. Throughout the course of
the audit, G does not believe any of the representations made by J, controller.
c. G, CPA, is discussing several audit issues with J, a member of top management. Throughout
the meeting with J, G neither assumes that J is dishonest, nor assumes unquestioned honesty
in J’s oral representations. (x)
d. G, CPA is engaged in discussions with J, the client’s controller, regarding several audit issues.
Throughout the meeting with J, J neither assumes that G is dishonest, nor assumes
unquestioned honesty in G’s oral representations.

84. Objectivity refers to a practitioner’s ability:

a. To remain impartial. (x)
b. To identify assertions that are appropriate.
c. To be unyielding in all disputes.
d. To choose independently between accounting principles and auditing standards.
85. Before accepting an engagement to audit a new client, a CPA is required to obtain
a. An understanding of prospective client’s industry and business.
b. The prospective client’s signature to the engagement letter.
c. A preliminary understanding of the prospective client’s control environment.
d. The prospective client’s consent to make inquiries of the predecessor auditor, if any. (x)

86. In 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 materiality misstated financial
statements (x)
c. inherent and control risk cause errors that could be material to the financial statements
d. the auditor is not retained to conduct financial statement audit in the succeeding year

87. If the auditor concludes that there is reasonable justification to change the engagement and if the
audit work performed complies with the PSAs applicable to the changed engagement, the report
issued would be that appropriate for:
a. The original engagement, without reference to the original engagement.
b. The revised terms of engagement, without reference to the original engagement. (x)
c. The revised terms of engagement, with reference to the original engagement.
d. The original engagement, with reference to the revised engagement.

88. Which of the following services provides the highest level of assurance to third parties about a
company’s financial statements?
a. Audit (x)
b. Review
c. Compilation
d. Write-up work

89. When CPA firms do an audit of historical financial statements, part of the audit usually consists of
identifying operational problems and making recommendations they may benefit the audit client. The
recommendations can be made orally but they are typically made by use of a
a. Letter of representation
b. Engagement letter.
c. Management letter. (x)
d. Client letter.

90. Which of the following best describes what is meant by the term “fraud risk factor”?
a. Factors whose presence indicates that the risk of fraud is high.
b. Factors whose presences often have been observed in circumstances where frauds have
occurred. (x)
c. Factors whose presence requires modification of planned audit procedures.
d. Reportable conditions identified during an audit.

91. The most difficult type of misstatement to detect is fraud based on

a. The over-recording of transactions.
b. The non-recording of transactions. (x)
c. Recorded transactions in subsidiaries.
d. Related party receivables.

92. Which of the following conditions identified during fieldwork of an audit is most likely to affect the
auditor’s assessment of the risk of misstatement due to fraud?
a. Checks for significant amounts outstanding at year end.
b. Computer generated documents.
c. Missing documents. (x)
d. Year-end adjusting journal entries.

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

94. Which of the following is most likely to be a response to the auditor’s assessment that the risk of
material misstatement due to fraud for the existence of inventory is high?
a. Observe test counts of inventory of certain locations on an unannounced basis. (x)
b. Perform analytical procedures rather than taking test counts.
c. Request that the inventories be counted prior to year-end.
 d. Request that inventory counts at the various locations be counted on different dates so as to
allow the same auditor to be present at every count.

95. Which of the following is not a component of audit planning?

a. Observing the client’s annual physical inventory-taking and making test counts of selected
items. (x)
b. Making arrangements with the client concerning the timing of audit fieldwork and use of the
client’s staff in completing certain phases of the examination.
c. Obtaining an understanding of the entity and its environment, including its internal control.
d. Developing audit programs.

96. In planning an examination, the auditor would consider all of the following matters, except
a. Anticipated reliance on internal controls
b. Preliminary judgment about materiality levels for audit purposes
c. Financial statements items likely to require adjustment
d. The kind of audit opinion likely to be given (x)

97. In developing the overall audit plan for a new client, a factor not to be considered is
a. The terms of the engagement and any statutory responsibilities
b. The client’s business, including the structure of the organization and accounting system used
c. The amount of estimated audit fee (x)
d. The audit risks and procedures to be performed to achieve audit objectives

98. A CPA may reduce audit work on a first time audit by reviewing the working papers of the predecessor
auditor. The predecessor should permit the successor to review working papers relating to matters of
continuing significance, such as those that relate to
a. Extent of reliance on the work of specialists
b. Fee arrangements and summaries of payments
c. Analysis of contingencies (x)
d. Staff hours required to complete the engagement

99. Following PSAs, which of the following is not one of the assertions made in financial statements by
management concerning each major account and class of transactions?
a. Relevance. (x)
b. Existence.
c. Valuation.
d. Presentation and disclosure.

100. Assertions are representations of management that are embodied in financial statement
components. They can be either explicit or implicit. Which of these assertions is not about valuation
or allocation?
a. Property is recorded at historical cost.
b. Trade accounts receivable in the balance sheet are stated at net realizable value.
c. Notes payable in the balance sheet include all such obligations of the entity. (x)
d. Property cost is systematically allocated to appropriate accounting period.

101. Which statement is correct?

a. A review involves the application of audit skills and techniques and the gathering of evidence.
(x)
b. A review comprises inquiry, confirmation, and analytical procedures which are designed to
review the reliability of an assertion that is the responsibility of one party for use by another
party.
c. In a compilation engagement, the accountant is engaged to use auditing expertise as
opposed to accounting expertise.
d. Since no assurance is expressed in a compilation engagement, users of compiled information
derive no benefit, even when the service has been performed with due professional skill and
care.
102. Adequate planning helps ensure that appropriate attention is devoted:
a b(x) c d

To important areas of the audit Yes Yes Yes Yes

So that potential problems are
promptly identified Yes Yes No No
So that the work is completed
expeditiously No Yes No Yes

103. Which of the following procedures would an auditor most likely perform in planning a
financial statement audit?
 a. Reviewing investment transactions of the audit period to determine whether related parties
were created.
b. Performing analytical procedures to identify areas that may represent specific risks. (x)
c. Reading the minutes of stockholder and director meeting to discover whether any unusual
transactions have occurred.
d. Obtaining a written representation letter from the client to emphasize management’s
responsibilities.

104. A preliminary or entrance conference with the auditee is a useful step in avoiding
misunderstandings. Which of the following items is usually not covered in a preliminary conference?
a. Special problems known to be relevant to the audit.
b. Extent to which the independent auditor will need assistance and cooperation from the
organization’s personnel.
c. Condition of accounting records and other data sources which may affect the cope of the
audit and difficulty of completion.
d. Audit program to be followed. (x)

105. Audit programs generally include procedures necessary to test actual transactions and
resulting balances. These procedures are primarily designed to
a. Detect irregularities that result in misstated financial statements.
b. Test the adequacy of internal control.
c. Gather corroborative evidence (x)
d. Obtain information for informative disclosures.

106. A procedure designed to test for peso errors or irregularities directly affecting the correctness
of financial statement balances is a
a. Substantive test. (x)
b. Compliance test.
c. Test of controls.
d. Definition of peso-unit sampling.

107. The following statements relate to the scope of practice of accountancy. Which one is
correct?
a. Practice in Education/Academe shall constitute in a person in an educational institution which
involve teaching of accounting, auditing, management advisory services, accounting aspects
of finance, business law, taxation, and other technically-related subjects. (x)
b. Members of the Integrated Bar of the Philippines are the only ones allowed to teach business
law and taxation.
c. In connection with the practice of accountancy in commerce and industry, any position in any
business or company in the private sector which requires supervising the recording of
financial transactions, preparation of financial statements, coordinating with the external
auditors for the audit of such financial statements and other related functions shall be
occupied only by a duly registered CPA, provided that such business or company must have
authorized capital of at least Five Million Pesos (5,000,000.00) and/or annual revenue of at
least Ten Million Pesos (10,000,000.00).
d. Practice in government shall constitute in a person who holds, or is appointed to, a position in
an accounting professional group in government or in a government-owned and/or controlled
corporation, excluding those performing proprietary functions, where decision-making
requires knowledge in the science of accounting.
108. The following, except one, are the duties normally performed by the engagement partner:
a. To manage the firm.
b. To establish contact with clients.
c. To discuss with the client problems that may arise during the audit. (x)
d. To decide on questions of policy.

109. Which of the following is not a power of the Professional Regulatory Board of Accountancy?
a. To prescribe and adopt the rules and regulations necessary for carrying out the provisions of
RA9298
b. To hold exclusive power to administer oaths in connection with the administration of RA9298 (x)
c. To issue, suspend, revoke, or reinstate the Certificate of Registration for the practice of the
accountancy profession
d. To monitor the conditions affecting the practice of accountancy and adopt such measures,
including promulgation of accounting and auditing standards, rules and regulations and best
practices, as may be deemed proper for the enhancement and maintenance of high
professional, ethical, accounting and auditing standards.

110. Which of the following factors or conditions is an auditor least likely to plan an audit to
discover?
a. Financial pressures affecting employees. (x)
b. High turnover of senior management.
c. Inadequate monitoring of significant controls.
d. Inability to generate positive cash flows from operations.

111. Which of the following is the best criterion for evaluating a staff auditor’s work performance?
a. Quantity of deficiency findings.
b. Ability to get along with clients.
c. Working papers appearance.
d. Fulfillment of objectives set forth in the audit. (x)

112. International Standards on Auditing (ISAs) on which the PSAs are based are generally
applicable to the public sector, including government business enterprises. However, the applicability
of the equivalent PSAs on Philippine public sector entities has not been addressed by the Auditing
Standards and Practices Council (Note: The ASPC has been replaced by the Auditing and Assurance
Standards Council). It is the understanding of the ASPC that this matter will be addressed by:
a. The Association of CPAs in Public Practice itself in due course.
b. The Commission on Audit itself in due course. (x)
c. The Professional Regulation Commission of the Philippines itself in due course.
d. The Professional Regulatory Board of Accountancy itself in due course.

113. Materiality should be considered by the auditor when:

a. Determining the nature, timing and extent of audit procedures and evaluating the effect of
misstatements. (x)
b. Evaluating the effect of misstatements.
c. Determining the nature, timing and extent of audit procedures.
d. Evaluating the effect of misstatements but not when determining the nature, timing and
extent of audit procedures.

114. Which one of the following statements is correct concerning the concept of materiality?
a. Materiality is determined by reference to guidelines established by the Philippine Institute of
CPAs.
b. Materiality depends only on the peso amount of an item relative to other fees in the financial
statements.
c. Materiality depends on the nature of an item rather than the peso amount.
d. Materiality is a matter of professional judgment. (x)

115. Pirma and Lang, CPAs, is doing the 2006 audit of SAN MIGUEL BEEF. The partner assigned to
the engagement, Mr. Pirma, works at the Manila office of the firm. Which of the following audit firm
personnel should obtain a sufficient understanding of San Miguel Beef and its environment, including
its internal control?
a. Assistants assigned to the Manila Office of Pirma and Lang, CPAs.
b. The whole team assigned to the San Miguel Beef audit engagement. (x)
c. All firm professionals, regardless of their involvement in the engagement.
d. Only Mr. Pirma, since is he is the one to sign the audit report for San Miguel Beef’s 2006
financial statements.

116. The following statements relate to Councils mentioned in the Implementing Rules and
Regulations of the Philippine Accountancy Act of 2004. Which of these statements is incorrect?
 a. The Chairpersons of the FRSC and the AASC shall both be appointed by the Professional
Regulation Commission.
b. Any member of any existing accounting and auditing standard-setting council shall not be
disqualified from being appointed to the FRSC and the AASC as the case may be for the terms
provided herein.
c. The Education Technical Council was created to assist the Professional Regulation Commission
in carrying out its powers and functions and to further assist in the attainment of the
objective of continuously upgrading the accountancy education in the Philippines. (x)
d. The PRC CPE Council shall be composed of a chairperson and two (2) members.

117. Auditing standards require the auditor to obtain an understanding of the client’s internal
controls
a. for every audit (x)
b. for first-time audits
c. sufficient to find any frauds which may exist
d. whenever it would be appropriate

118. Which of the following best describes the interrelated components of internal control?
a. Organizational structure, management philosophy, and planning.
b. Control environment, risk assessment, control activities, information and communication
systems, and monitoring. (x)
c. Risk assessment, backup facilities, responsibility accounting and natural laws.
d. Legal environment of the firm, management philosophy and organizational structure.

119. An auditor should obtain sufficient knowledge of an entity’s information system relevant to
financial reporting to understand the
a. Safeguards used to limit access to computer facilities
b. Process used to prepare significant accounting estimates (x)
c. Procedures used to assure proper authorization of transactions
d. Policies used to detect the concealment of fraud

120. Internal control cannot be designed to provide reasonable assurance regarding the
achievement of objectives concerning
a. Reliability of financial reporting
b. Elimination of all fraud (x)
c. Compliance with applicable laws and regulations
d. Effectiveness and efficiency of operations

121. The following statements relate to reinstatement, reissuance and replacement of revoked or
lost certificates. Which one of these statement(s) is(are) correct?
(1) The Board may, after the expiration of two (2) years from the date of revocation of a
certificate of registration and upon application and for reasons deemed proper and
sufficient, reinstate the validity of a revoked certificate of registration and in so doing,
may, in its discretion, exempt the applicant from taking another examination.
(2) A new certificate of registration to replace lost, destroyed, or mutilated certificate/license
may be issued, subject to the rules promulgated by the Board and the Commission, upon
payment of the required fees.
(3) The Board shall issue a resolution, subject to the approval of the Commission in granting
a petition for reinstatement to the practice of accountancy.

a. (1) and (2)

b. (1) and (3)
c. (2) and (3)
d. (1), (2), and (3) (x)

122. Experience has shown that certain conditions in an organization are symptoms of possible
management fraud. Which of the following conditions would not be considered indicators of possible
fraud?
 a. Managers regularly assuming subordinates’ duties.
b. Managers dealing in matters outside their profit center’s scope.
c. Managers not complying with corporate directives and procedures.
d. Managers subject to formal performance reviews on a regular basis. (x)

123. Which of the following statements is incorrect?

a. Internal auditing relates to audit which serves the needs of management.
b. Government auditing often extends beyond examinations leading to the expression of opinion
on the fairness of financial presentation and includes audits of efficiency, effectiveness and
compliance.
c. A compliance audit is designed to evaluate the efficiency and effectiveness of an organization
or some part thereof. (x)
d. CPA firms, internal auditors and governmental auditors can perform operational audits.

124. A comprehensive and constructive examination of the organizational structure of a company,

institution, or branch of government or any component thereof, its plans and objectives, its means of
operation and its use of human and physical facilities to reveal defects or irregularities and to indicate
possible improvements is called
a. Financial audit
b. Management audit (x)
c. Government audit
d. Internal audit

125. In an audit situation, communication between the successor and predecessor auditors should
be
a. Documented in an engagement letter.
b. Acknowledged in a representation letter.
c. Initiated by the successor auditor. (x)
d. Written and included in the audit report.

126. An auditor who has been invited to submit a proposal for an audit engagement is a
a. Predecessor auditor.
b. Successor auditor. (x)
c. Principal auditor.
d. Interim auditor.

127. JM, CPA, requested permission to communicate with the predecessor auditors of a
prospective client. The prospective client’s refusal to permit this will bear directly on JM’s decision
concerning the
a. Adequacy of the preplanned audit program
b. Ability to establish consistency in application of accounting principles between years.
c. Apparent scope limitation.
d. Integrity of management. (x)

128. The auditors will not ordinarily initiate discussion with the audit committee concerning the
a. Extent to which the work of internal auditors will influence the scope of the examination.
b. Extent to which change in the company’s organization will influence the scope of the
examination.
c. Details of potential problems which the auditors believe might cause a qualified opinion.
d. Details of the procedures which the auditors intend to apply. (x)

129. The policy on delegation states that there is to be sufficient direction, supervision and review
of work at all levels to provide reasonable assurance that the work performed meets appropriate
standards of quality. These procedures include the following, except:
a. Provide for the approval of the scheduling and staffing of the audit by the auditor. (x)
b. Provide procedures for planning audits.
c. Provide procedures for maintaining the firm’s standards of quality for the work performed.
d. Provide on-the-job training during the performance of audits.

130. According to the IRR, how many representatives of the Quality Review Committee will come
from the accredited national professional organization of CPAs?
a. Five members (x)
b. Four members
 c. Six members
d. Seven members

131. Which of the following statements is incorrect?

a. Per PSA 220, the auditor means the person with the final responsibility for the audit.
b. The auditor should implement those quality control procedures which are, in the context of
the policies and procedures of the firm, appropriate for the individual audit.
c. The work performed by each assistant needs to be reviewed by personnel of at least equal
competence.
d. The procedures on skills and competence include those for hiring, for professional
responsibilities and for advancement. (x)

132. The following fraud risk factors relate to industry conditions, except:
a. New accounting, statutory or regulatory requirements that could impair the financial stability
or profitability of the entity.
b. A high degree of competition or market saturation, accompanied by declining margins.
c. Unusually rapid growth or profitability, especially compared with that of other companies in
the same industry. (x)
d. A declining industry with increasing business failures and significant declines in customer
demand.

133. If there is a risk of material misstatement resulting from fraud that may involve or result in
improper revenue recognition, which of the following is the most appropriate course of action for
the auditor to take?
a. Review the entity’s inventory records to help identify locations, areas or items for specific
attention during or after the physical inventory count.
b. Confirm with customers certain relevant contract terms and the absence of side agreements.
(x)
c. Perform tests of non-standard journal entries affecting long-term liabilities to confirm that
they are adequately supported and reflect the underlying events and transactions.
d. Request the assistance of an expert, taking care to ensure that the expert’s assumptions,
methods or findings have also been reviewed by the auditor.

134. When evaluating the possible effect of noncompliance on the financial statements, the
auditor considers the following, except:
a. The potential financial consequences, such as fines, penalties, damages, threat of
expropriation of assets, enforced discontinuation of operations, and litigation.
b. Whether the auditor should be held responsible for preventing such non-compliance. (x)
c. Whether the potential financial consequences require disclosure.
d. Whether the potential financial consequences are so serious as to call into question the fair
presentation given by the financial statements.

135. According to the Implementing Rules and Regulations, which portion of RA9298 embodies the
legislative intent in enacting the Philippine Accountancy Act of 2004?
a. Short title.
b. Objectives.
c. Declaration of policy (x)
d. Scope of practice.

136. Practice of public accountancy shall constitute in a person, be it his/her individual capacity, or
as a partner or as a staff member in an accounting or auditing firm, holding out himself or herself as
one skilled in the knowledge, science and practice of accounting, and as a qualified person to render
professional services as a CPA, or offering or rendering, or both, to more than one client on a fee
basis or otherwise, services such as the following, except:
a. The audit or verification of financial transactions and accounting records.
b. The preparation, signing or certification for clients of reports of audit, balance sheet, and
other financial, accounting and related schedules, exhibits, statements or reports which are to
be used by stockholders or for publication or for credit purposes, or to be filed with a court or
government agency, or to be used for any other purpose.
c. The design, installation, review, and revision of accounting systems and controls.
d. When he/she represents clients before government agencies on tax and other matters outside
the province of accounting. (x)

137. The following statements pertain to the rules and regulations on the accreditation of
individual CPAs, firms and partnerships of CPAs engaged in the public practice of accountancy. Which
one is correct?
a. Within sixty days from the effective date of the revised rules and regulations, individual CPAs,
firms, and partnerships of CPAs who/which are not yet registered shall register with the Board
 and the Commission in the manner provided for in the Implementing Rules and Regulations of
the Philippine Accountancy Act of 2004.
b. The registration shall be valid for a period of two years.
c. Renewal of registration shall be made every three years on or before November 30 on the
year of expiry upon compliance with the requirements set forth in the Implementing Rules
and Regulations.
d. The registration of applicants approved during any month of the year shall expire on the third
year following its approval. (x)

138. Individual CPAs, firms, and partnerships of CPAs organized after the effective date of the
revised rules and regulations set forth in Annex A of the IRR shall register with the board and the
commission and:
a. Shall not commence the practice of public accountancy until a valid Certificate of Registration
has been issued. (x)
b. Shall not commence the practice of public accountancy until a valid Certificate of
Commissioning has been issued.
c. Subject to favorable recommendation of the Board, shall be issued the corresponding
certificate of registration to practice public accountancy, with such certificate being valid for
two years.
d. Subject to favorable recommendation of the Commission, shall be issued the corresponding
certificate of registration to practice public accountancy, with such certificate being valid for
three years.

139. Which of the following statements is incorrect?

a. The auditor should plan the audit so that the engagement will be performed in an effective
manner.
b. Planning an audit involves establishing the overall audit strategy for the engagement and
developing the audit report, in order to reduce audit risk to an acceptably low level. (x)
c. Planning involves the engagement partner and other key members of the engagement team
to benefit from their experience and insight and to enhance the effectiveness and efficiency of
the planning process.
d. Planning is not a discrete phase of an audit, but rather a continual and iterative process that
often begins shortly after (or in connection with) the completion of the previous audit and
continues until the completion of the engagement.

140. In performing MAS engagement, CPAs should not take any positions that might
a. Constitute advice and assistance.
b. Provide technical assistance in implementation.
c. Result in new organizational structure.
d. Impair their objectivity. (x)

141. The overall attitude and awareness of an entity’s board of directors concerning the
importance of the internal control structure usually is reflected in its
a. computer-based controls
b. system of segregation of duties
c. control environment (x)
d. safeguards over access to assets

142. Which of the following statements is incorrect?

a. Competence as a CPA includes having the required technical qualifications to perform an audit
engagement.
b. Generally accepted auditing standards are best described as the conventions, rules and
procedures that are necessary to define the accepted accounting practices at a particular
time. (x)
c. Generally, evidential matter is considered sufficient when there is enough of it to afford a
reasonable basis for an opinion.
d. An annual report is a document, which an entity ordinarily issues on an annual basis, which
includes its financial statements together with the audit report thereon.

143. The following statements relate to the Philippine Institute of Certified Public Accountants
(PICPA). Which one is incorrect?
a. A director can only represent a sector in a region if he/she has been a member in good
standing in such sector in the region for at least two years at the time of his/her nomination.
b. There shall only be fourteen national directors, unless there is a valid reason to have
additional representation. (x)
c. The national directors shall be apportioned according to sectors in the four geographic sectors
based on the ratio of latest available number of members in good standing from those areas.
 d. It shall have a full-time career Executive Director who shall implement the policies
promulgated by the PICPA Board of Directors and shall have direct supervision over the PICPA
Secretariat.

144. Which of the following cases illustrate a violation of the provisions of RA9298
and its IRR regarding the rule on temporary and special permits?
a. F, foreign CPA, is internationally recognized as one of the foremost experts in
computerized fraud audits. In the judgment of the Board of Accountancy, obtaining the
services of F is essential for the advancement of accountancy in the Philippines. F is
granted a temporary/special permit to provide training to Filipino auditors regarding the
finer points of his specialization, and his permit is restricted to this particular
engagement.
b. L, foreign CPA, is called for a specific purpose which, in the judgment of the Board of
Accountancy, is essential for the development of the country. L is granted a temporary/
special permit to practice for the particular work that he is being engaged. There is no
Filipino CPA qualified for such specific purpose.
c. C, foreign CPA, is called for consultation, which, in the judgment of the Board of
Accountancy, is essential for the development of the country. C is granted a temporary/
special permit to practice for the particular consultation that she is being engaged.
There is no Filipino CPA qualified for such consultation.
d. S, foreign CPA, is engaged as professor in special international accounting modules which
are essential to accountancy education in the Philippines. She was given a
temporary/special permit which restricts her practice to teaching and performing
compilation work for local enterprises. (x)

145. The following except one, are examples of the type of information that may come to the
auditor’s attention that may indicate that noncompliance with laws or regulations has occurred:
a. Investigation by government departments or payment of fines or penalties.
b. Payments for unspecified services or loans to consultants, related parties, employees or
government employees.
c. Purchasing at prices approximating market price. (x)
d. Existence of an accounting system which fails, whether by design or by accident, to
provide an adequate audit trail or sufficient evidence.

146. Eugene, CPA is planning the audit of Ghostfighter Corporation’s 2006 financial statements. In
documenting the terms of engagement, which of the following statements is most likely to appear in
Eugene’s engagement letter?
a. “Fees for our services are based on our regular per diem rates, plus travel and other out-of
pocket expenses and a certain percentage of the tax savings as a result of audit adjustments
to net income.”
b. “Because of the test nature and other inherent limitations of an audit, together with the
inherent limitations of any accounting and internal control system, there is an unavoidable
risk that even some material misstatements may remain undiscovered.” (x)
c. “During the course of our audit, we may observe opportunities for economy in, or improved
controls over your operations.”
d. “In addition to our report on the financial statements, we expect to provide you with a
separate letter concerning any material weaknesses in accounting and internal control
systems which did not come to our notice.”

147. The following statements pertain to audit planning and materiality. Which one is incorrect?
a. The extent of planning will vary according to the size of the entity, the auditor’s experience
with the entity and knowledge of the business, and the complexity of the audit engagement.
b. Materiality provides a threshold or cut-off point rather than being a primary qualitative
characteristic which information must have if it is to be useful.
 c. Materiality is most useful in assessing the scope of an auditor’s program relating to various
amounts.
d. An overall audit program is first prepared, followed by the development of the overall audit
plan and the establishment of an overall audit strategy. (x)

148. The auditor’s duty of confidentiality would ordinarily preclude the reporting of fraud or error
to a third party. However, in certain circumstances, the duty of confidentiality is justifiably overridden
by the following, except:
a. Law.
b. Statute.
c. Courts of law.
d. Pressure from a competitor of the audit client. (x)

149. Which of the following statements is correct?

a. A profession is distinguished by certain characteristics, one of which is the collection of fees
for services rendered and the fee is based on written agreements with the client.
b. Retainer fee basis is the method of billing clients whereby the billing is done on the basis of
actual time spent by the staff multiplied by the hourly rates agreed upon.
c. The sole proprietorship, corporate, and partnership forms of business organization are the
only allowable legal forms of public accounting practice in the Philippines.
d. The Securities and Exchange Commission shall not register any corporation organized for the
practice of public accountancy. (x)

150. The audit procedures deemed necessary in the circumstances to achieve the objective of the
audit refer to:
a. Audit program
b. Audit objective
c. Substantive procedures
d. Scope of an audit (x)