1. Which of the following is not one of the general principles governing the audit of financial statements?

a. The auditor should plan and perform the audit with an attitude of professional skepticism.
b. The auditor should obtain sufficient appropriate evidence primarily through inquiry and analytical
procedures to be able to draw reasonable conclusions.
c. The auditor should conduct the audit in accordance with PSA.
d. The auditor should comply with the Philippine Code of Professional Ethics.
2. The primary reason for an audit by an external audit firm is
a. To satisfy governmental regulatory requirements
b. To guarantee that there are no misstatements in the financial statements
c. To provide increased assurance to users as to the fairness of the financial statements
d. To ensure that any fraud will be discovered
3. The criteria for evaluating quantitative information vary. For example, in the case of an independent audit of financial
statements by CPA firms, the criteria are usually the
a. Philippine Standards on Auditing
b. Philippine Financial Reporting Standards
c. National Internal Revenue Code
d. Regulations of the Securities and Exchange Commission
4. In determining the primary responsibility of the external auditor for an audit of a company’s financial statements, the
auditor owes primary allegiance to
a. Stockholders, creditors, and the investing public
b. The management of the audit client because the auditor is hired and paid by the management
c. The Auditing and Assurance Standards Council because it determines auditing standards and auditor’s
responsibility
d. The audit committee of the audit client because that committee is responsible for coordinating and reviewing
all audit activities within the company
5. Whenever a CPA professional is engaged to perform an audit of financial statements according to Philippine
Standards on Auditing, he is required to comply with those standards in order to
a. Eliminate audit risk
b. Have a measure of the quality of audit performance
c. To reduce the auditor’s responsibility
d. Eliminate the professional judgment in resolving audit issues
6. Which of the following best describes an operational audit?
a. It attempts of verifying the fair presentation of a company’s results of operations.
b. It concentrates on implementing financial and accounting control in a newly organized company.
c. It concentrates on seeking out aspects of operations in which waste would be reduces by the
introduction of controls.
d. It requires constant review of the administrative controls by internal auditors as they relate to operations of
the company.
7. Internal auditors are expected to add value to the organization through improved operational effectiveness. In
edition, theory responsibilities include all of the following except
a. reviewing their reliability and integrity of information
b. ensuring compliance with the company’s accounting policies
c. verifying accounting information for external users
d. ensuring compliance with applicable governmental regulations
8. An audit designed to provide reasonable assurance of detecting violations of a specific provisions of contracts or
grant agreements would be called a(n)
a. performance audit
b. management audit
c. operational audit
d. compliance audit
9. Which of the following types of auditing is performed most commonly by CPAs on a contractual basis?
a. internal auditing
b. income tax auditing
c. government auditing
d. external auditing
10. Which one of the following is not a major difference between operational and financial auditing?
a. purpose of the audit
b. distribution of the report
c. testing of the effectiveness of internal controls
d. audits of non-financial areas
11. Which one of the following is not a similarity between external and internal auditors?
a. Both must be independent of the company.
b. Both must be competent.
c. Both follow a similar methodology in performing their audits.
d. Both consider risk and materiality in deciding the extent of their tests and evaluating results.
12. Which of the following statements does not describe a condition that creates a demand for auditing?
a. Conflict between an information preparer and a user can result in biased information.
b. Information can have substantial economic consequences for a decision-maker.
c. Expertise is often required for information preparation and verification.
d. Users can directly assess the quality of information.
13. Which of the following is not one of the reasons why auditors provide only reasonable assurance on the financial
statements?
a. The auditor commonly examines a sample, rather than the entire population of transactions.
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c. Fraudulently prepared financial statements are often difficult to detect.
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 d. Auditors believe that reasonable assurance is sufficient in the vast majority of cases.
14. Which of the following statements is not correct?
a. It would be a violation of the completeness assertion if management would record a sale that did
not take place.
b. The completeness assertion deals with matters opposite from those of the existence assertions.
c. The completeness assertion is concerned with the possibility of omitting items from the financial statements
that should have been included.
d. The existence assertion is concerned with inclusion of amount that should not have been included.
15. Which of the following statements is not correct?
a. There are many ways an auditor can accumulate evidence to meet the overall audit objectives.
b. Sufficient appropriate evidence must be accumulated to meet the auditor’s professional responsibility.
c. The cost of accumulating the evidence should be minimized.
d. Gathering evidence and minimizing costs are equally important considerations that affect the
approach the auditor selects.
16. When the auditor develops supporting evidence for amounts posted to account balances with documentary
evidence, that process is called
a. inquiry
b. confirmation
c. inspection
d. physical examination
17. Which of the following audit procedures is used extensively throughout the audit and often is complementary to
performing other audit procedures?
a. inspection
b. observation
c. inquiry
d. confirmation
18. Which of the following would an auditor least likely perform as part of the auditor’s preliminary engagement
activities?
a. Perform procedures regarding the continuance of the client relationship and the specific engagement.
b. Evaluate compliance with ethical and independence requirements.
c. Establish an understanding of the terms of the engagement.
d. Obtain an understanding of the legal and regulatory framework applicable to the entity.
19. Preliminary knowledge about the client’s business and industry must be obtained prior to the acceptance of the
engagement primarily to
a. Determine the degree of knowledge and expertise required by the engagement.
b. Determine the integrity of management.
c. Determine whether the firm is independent with the client.
d. Gather evidence about the fairness of the financial statements.
20. Dianne, CPA, is succeeding Jerome, CPA, on the audit engagement of Jilly Corporation. Dianne plans to consult
Jerome and to review Jerome’s prior year working papers. Dianne may do so if
a. Jerome and Jilly consent
b. Jilly consents
c. Jerome consents
d. Dianne and Jerome consent
21. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor
auditor regarding
a. Disagreements the predecessor had with the client concerning auditing procedures and accounting
principles
b. The predecessor’s evaluation of matters of continuing accounting significance
c. The degree of cooperation the predecessor received concerning the inquiry of the client’s lawyer
d. The predecessor’s assessments of inherent risk and judgments about materiality
22. Which of the following factors most likely would influence an auditor’s determination of the auditability of the entity’s
financial statements?
a. the complexity of the accounting system
b. the existence of related party transactions
c. the adequacy of the accounting records
d. the operating effectiveness of control procedures
23. In making client acceptance decisions the audit firm will consider
a. inherent and control risk of the client
b. audit risk to the CPA firm
c. the client’s business risk and the CPA firm’s engagement risk
d. CPA firm’s potential ongoing revenue from the audit client
24. The purpose of an engagement letter is to
a. document the CPA firm’s responsibility to external users of the audited financial statements
b. document the terms of the engagement
c. notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated
d. emphasize management’s responsibility for approving the audit program
25. If 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 the 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.
26. In a continuing engagement, the continuing auditor would most likely send a new engagement letter when
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b. there is a recent change in client’s management
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 c. there are new accounting pronouncements affecting the client’s financial statements
d. there are expected minor changes in the nature or size of the client’s business
27. The use of engagement letter is the best method of documenting
I. The required communication of significant deficiencies in internal control structure
II. Significantly lower materiality levels than those used in the prior audit
III. The description of any letters or reports that the auditor expects to issue
IV. Notification of any changes in the original arrangements of the audit
a. I and II
b. I and IV
c. II and III
d. III and IV
28. Which of the following are valid reasons why an auditor sends to his client an engagement letter?
I. To avoid misunderstanding with respect to engagement
II. To confirm the auditor’s acceptance of the appointment
III. To document the objective and scope of the audit
IV. To ensure CPA’s compliance to PSA
a. I, II, III and IV
b. I, II and III
c. II and III
d. I, III, and IV
29. In which of the following situations would the auditor be unlikely to send a new engagement letter to a continuing
client?
a. a change in terms of the engagement
b. a significant change in the nature or size of the client’s business
c. a recent change of client management
d. a recent change in the partner and/or staff in the audit engagement
30. Romero requested permission to communicate with the predecessor auditor and review certain portions of the
predecessor auditor’s work papers. The prospective client’s refusal to permit this will bear directly on Romero’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

TRUE OR FALSE
1. As used in the Philippine Framework for Assurance Engagements, the term “practitioner” refers to a CPA in public
practice.
2. Independence is not a requirement for a compilation engagement.
3. In a financial statement audit, reasonable assurance is obtained when the auditor has gathered sufficient
appropriate audit evidence to reduce audit risk to an acceptably low level.
4. A review of financial statements normally involves an assessment of an entity’s accounting and internal control
system.
5. The conclusion: “In our opinion, internal control is effective in all material respects, based on ABC criteria.”
expresses a reasonable assurance in positive form.
6. The responsible party can be one of those for whom the practitioner prepares the assurance report.
7. For agreed-upon procedures and compilation engagement, no assurance is expressed.
8. A practitioner engaged to perform agreed-upon procedures and compilation engagements need not be the auditor
of the entity’s financial statements.
9. Comparison of recorded amounts of major disbursements with appropriate invoices is a typical analytical procedure.
10. An auditor obtains knowledge about a new client’s business and its industry in order to maintain professional
skepticism concerning management’s financial statement assertions.
11. The purpose of an engagement letter is to document the terms of the engagement.
12. A predecessor auditor is required to attempt to initiate communication with the successor auditor prior to the
successor’s acceptance of the engagement.
13. Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatements
due to errors and fraud.
14. In a direct reporting engagement, the responsible party is responsible for the subject matter of the engagement.
15. Under all situations, the responsible party is the party who engages the practitioner.

Answers:

1. T
2. T
3. T
4. F
5. T
6. T
7. T
8. T
9. F
10. F
11. T
12. F
13. T
14.source
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15. F
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