PHILIPPINE ACCOUNTANCY ACT OF -Disclosure may be made to any party on

2004 (R.A. 9298) consent of the client.

Which of the following is not one of the

specified objectives of the Accountancy Act of
Objectives and Scope - Assessment 2004?

-Promulgation of accounting and auditing

The integrated national professional standards.
organization of Certified Public Accountants
accredited by the Board and the Commission A person is not deemed to be engaged in
per PRC Accreditation No. 15 dated October professional accounting practice if
2, 1975.
-He offers or renders bookkeeping services to
-PICPA more than one client.

Practice in Public Accountancy shall constitute In all of the following situations except one, a
in a person person is deemed to be engaged in
professional accounting practice. Which of
-Holding out himself/herself as one skilled in them is the exception?
the knowledge, science and practice of
accounting, and as a qualified person to render -Appointment in the government where first
professional services as a certified public grade civil service eligibility is a prerequisite.
accountant; or offering or rendering, or both,
to more than one client on a fee basis or It is an organization engaged in the practice of
otherwise. public accountancy, consisting of a sole
proprietor , either alone or with one or more
Which of the following statements concerning staff member(s):
the practice of accountancy in commerce and
industry is incorrect? -Firm

-A CPA is in the practice of accountancy in This is the area of practice of accountancy

commerce and industry when he/she renders namely public accountancy, commerce and
professional services as a Certified Public industry, academe/education and government.
Accountant to more than one client on a fee
basis. -Sector

When a CPA represents her/his client before A person who holds a valid Certificate of
government agencies n tax matters related to Registration and a valid Professional
accounting, the CPA is engaged in what Identification Card issued by the Commission
sector? upon recommendation by the Board to those
who have satisfactorily complied with all the
-Practice in public accountancy legal and procedural requirements for such
issuance, including in appropriate cases,
Which of the following statements concerning having passed the CPA licensure examination
a CPA’s disclosure of confidential client
information is ordinarily correct? -CPA
 The following statements relate to the term of
office of the chairman and the members of the
Board of Accountancy (BOA).
Professional Regulatory Board of (I)No person who has served two (2)
Accountancy - Assessment successive complete terms shall be eligible for
reappointment until the lapse of one (1) year
(II)Appointment to fill up an unexpired term is
not to be considered a complete term
The Board of Accountancy has the power to (III)A person may serve in the Board of
conduct an oversight into the quality of audits Accountancy for eight consecutive years.
of financial statements through a review of the (IV)No person shall serve in the Board for
quality control measures instituted by auditors more than 12 years.
in order to ensure compliance with the
accounting and auditing standards and -All statements are true
practices. This power of the BOA is called
The Board of Accountancy shall submit to the
-Quality assurance review PRC the ratings obtained by each candidate
within _____ days after the examination,
Which of the following statements about the unless extended for just cause.
composition of the Board of Accountancy is
incorrect? -10

-The Board shall elect a chairman from among The following statements relate to some of the
its members to serve for a term of one year. provisions of RA 9298. Which is correct?

A member of the BOA shall, at time his/her -It shall be the primary duty of the PRC and
appointment, possess the following the BOA to effectively enforce the provisions
qualifications, except of RA 9298.

-Must be duly registered CPA with more than The following statements relate to CPE credit
ten (10) years of work experience in any scope units. Which is incorrect?
of practice of accountancy.
-Excess credit units earned may be carried
Which of the following is not one of the basic over to the next three-year period including
duties and responsibilities of the BOA? credit units earned for doctoral and master’s
degrees.
-To designate the dates, places and venues of
the CPA licensure examinations The members of the Professional Regulatory
Board of Accountancy shall be appointed by
Which statement is correct regarding the term the
of office of the chairman and the members of
the Board of Accountancy (BOA)? -President of the Philippines.

-No person who has served two (2) successive Which statement is incorrect regarding the
complete terms shall be eligible for term of office of the chairman and the
reappointment until the lapse of 1 year members of the Board of Accountancy
(BOA)?
-A member of BOA may continuously serve Examination, Registration and Licensure.
office for more than nine years. Assessment

The following statements relate to the term of

office of the chairman and members of the On exam results and report of ratings, which
Board of Accountancy (BOA). Which is of the following is correct?
false?
-None among the given statements is correct.
-No person who has served two successive
complete terms as chairman or member shall The following documents shall be submitted
be eligible for reappointment until the lapse of by applicants for the CPA licensure
two (2) years. examination, except:

Which of the following is not one of the -Baptismal Certificate.

functions of the Board of Accountancy as
specifically provided under RA 9298? The Board shall submit to the Commission the
ratings obtained by each candidate within how
-To perform visitorial powers or review many calendar days after the examination
professional work of accounting practitioners unless extended for just cause?
in a general or random basis.
-Ten
Which of the following is not a valid ground
for suspension or removal of members of the Which of the following will not be found in
Board of Accountancy? the Certificate of Registration issued to
successful examinees?
-Having been charged of any crime involving
moral turpitude. -Date of issuance and expiry date

The following statements relate to the Which of the following statements concerning
submission of nominations to the Board of the issuance of Certificates of Registration and
Accountancy. Which is correct? Professional Identification Cards to successful
examinees is correct?
-The APO shall submit its nominations to the
PRC not later than thirty (30) days prior to the -The BOA shall not register and issue a
expiry of the term of an incumbent chairman Certificate of Registration and Professional
or member. Identification Card to any successful examinee
of unsound mind.
Which of the following is not among the
qualifications of a member of the Board of The certified public accountant shall be
Accountancy? required to indicate which of the following
numbers on the documents he/she signs, uses
-He/ She must have at least 10 years of or issues in connection with the practice of
experience in the practice of public his/her profession?
accountancy • His/her Certificate of Registration
• Professional Identification Card
• Professional Tax Receipt
• Telephone
-Yes The Board, subject to the approval of the
Yes Commission, may revise or exclude any of the
Yes subjects and their syllabi, and add new ones as
No the need arises. Provided that the change shall
not be more often than every
The Board , subject to the approval of the
Commission, may revise or exclude any of the -3 years
subjects and their syllabi, and add new ones as
the need arises provided that the change shall The Board shall submit to the Commission the
not be more often than every ratings obtained by each candidate within how
many calendar days after the examination
-three years unless extended for just cause?

Which of the following exams must be taken -Ten

with two years from the preceding
examination? Which of the following is among the
qualifications of applicants for CPA licensure
-Removal exams for conditioned examinees examination?
(I)Must be a natural born Filipino citizen
The following were the ratings of examinees (II)Must be of good moral character
who took the very difficult CPA Board (III)Must be a holder of the degree of
Examination on May 2010. Bachelor of Science in Accountancy
· Examinee 1 - All subjects garnered a (IV)Must be at least 21 years of age
rating of 95%.
· Examinee 2 - All subjects garnered a -I, II and III only
rating of 75%.
· Examinee 3 - One subject garnered a Which of the following statements concerning
rating of 81% and the other six garnered a the issuance of Certificates of Registration and
rating of 74%. Professional Identification Cards to successful
· Examinee 4 - One subject garnered a examinees is correct?
rating of 64% and the other six garnered a
rating of 85%. -The BOA shall not register and issue a
· Examinee 5 - Three subjects garnered a Certificate of Registration and Professional
rating of 75% and the other four garnered a Identification Card to any successful examinee
rating of 74%. of unsound mind.
· Examinee 6 - All subjects garnered a
rating of 74%. The Board of Accountancy may issue
· Examinee 7 - Four subjects garnered a certificate of registration and professional
rating of 95%, one with 73% and other 2 with identification card to any successful examinee:
64%
· Examinee 8 - Three subjects garnered a -Convicted by a court of political offense.
rating of 95%, one with 74% and other three
with 73%. The following statements relate to CPA
Of the ratings presented above, how many examination ratings. Which of the following is
examinees obtain a conditional status in the incorrect?
Board Exam?

-2
-Candidates who failed in four complete The death or disability of an individual CPA
examinations shall no longer be allowed to and dissolution or liquidation of a firm or
take the examinations the fifth time. partnership shall be reported to the BOA not
later than _______ days following the event.
Which of the following shall be issued to
examinees who pass the CPA licensure -30
examination?
Which of the following statements concerning
-Certificate of registration and professional ownership of working papers is incorrect?
identification card.
-Working papers include reports submitted by
The BOA shall submit to the PRC the ratings a CPA to his/her client.
obtained by each candidate within how many
calendar days after the examination? Which of the following statements concerning
the use of firm or partnership name is
-10 days incorrect?

-A CPA shall practice only under an individual

Practice of Accountancy. Assessment firm or partnership name in accordance with
Philippine laws and shall not include any
Affixing the CPA’s seal and signature on the fictitious name but may indicate
auditor’s report is an indication of: specialization.

-Compliance by the CPA of the requisite The following statements relate to RA 9298
accounting and auditing standards and rules. and its IRRs. Which statement is false?
but may indicate specialization.
-Under the IRR of RA 9298, if a partner in a
If the application for registration to practice two member partnership dues, the surviving
public accountancy of Sayson and Co. CPAs, partner may continue to practice as an
was approved on July 31, 2009, the individual under the existing frim title which
registration shall expire on includes the deceased partner’s name for a
period of time not to exceed five ears.
-December 31, 2011
A registered professional shall be permanently
The letters “CPA” shall be engraved in what exempted from CPE requirements upon
part of the CPA’s seal? reaching the age of

-Middle of the smaller circle. -A registered professional shall be

permanently exempted from CPE
Which of the following definitions in the Act requirements upon reaching the age of
describe a convention?
Which of the following is not observed or
-It refers to the gathering of professionals required on a 3-year period basis?
which shall include, among others,
conferences, symposia or assemblies for round -Reinstatement of a revoked COR
table discussions.
Which of the following is not represented in
the AASC?
-Bureau of Internal Revenue -Individual CPA

The sector that is most represented in the Listed below are names of four CPA firms and
AASC is the pertinent facts relative to each firm. Unless
otherwise indicated, the individuals named are
-Public Practice CPAs and partners, and there are no other
partners. Which is a violation of the
Which of the following does not constitute a Implementing Rules and Regulations of RA
practice of accountancy? 9298?

-A person is appointed as a marketing director -Joni and Jona, CPAs (Joni died about three
of a government-owned and controlled years ago; Jona is continuing the firm as a sole
corporation. proprietor.)

The death or disability of an individual CPA Below are the names of three CPA firms and
and/or the dissolution and liquidation of a firm pertinent facts relative to each firm. Unless
or partnership of CPAs shall be reported to the otherwise indicated, the individuals named are
BOA not later than _____ days from the date CPAs and partners, and there are no other
of such death, dissolution or liquidation. partners. Which firm name and related facts
indicates a violation of the IRR of RA 9298?
-30
-Hugo and Pugo, CPAs (Hugo died 25 months
The Board of Accountancy may, after the ago, Pugo is continuing the firm as a sole
expiration of _____ years from the date of proprietor)
revocation of a certificate of registration,
reinstate the validity of a revoked certificate of A partner surviving the death or withdrawal of
registration. all the other partners in a partnership may
continue to practice under the partnership
-2 name for a period of not more than ____ years
after becoming a sole proprietor.
If the application for registration to practice
public accountancy of Sayson and Co. CPAs, -2
was approved on July 31, 2009, the
registration shall be renewed on or before Special/ temporary permit may be issued by
the Board to the following persons except:
-September 30, 2011
-A foreign CPA who can prove that the
Which of the following is required for a country of which he or she is a citizen admits
partnership for public accountancy practice? citizens of the Philippines to the practice of the
same profession without restriction.
-All partners must be CPAs.
A partner surviving the death or withdrawal of
Per RA 9298: A certified public accountant all the other partners in a partnership may
engaged in the practice engaged in the practice continue to practice under the partnership
of public accountancy under his/her name, by name for a period of not more than ____ years
himself/herself only or with one or more staff after becoming a sole proprietor.
members.
-none
According to the Philippine Accountancy Act
According to RA 9298, if a partner in a two- of 2004 (RA 9298), any person who shall
member partnership dies, the surviving partner violate RA 9298 or any of its implementing
may continue to practice as an individual rules and regulations as promulgated by the
under the existing firm title which includes the Professional Regulatory Board of
deceased partner’s name Accountancy subject to the approval of the
PRC, shall upon conviction, be punished by:
-For a period of time not to exceed two years.
-Not less than fifty thousand (P50,000), or by
imprisonment for a period not exceeding two
(2) years, or both

Penal and Final Provisions - Assessment A person whose CPA certificate has been
revoked

-May be reinstated as a CPA by the Board of

Any person who shall violate any of the Accountancy after two years if he has acted in
provisions of the Accountancy Act or any of an exemplary manner
its implementing rules and regulations
promulgated by the Board of Accountancy Which of the following is not one of the
subject to the approval of the PRC, shall upon penalties that can be imposed by the Board of
conviction , be punished by Accountancy?

-A fine of not less than P50,000 or by -Fine or imprisonment

imprisonment for a period not exceeding two
years or both

Which of the following is not one of the

grounds for proceedings against a CPA?
CODE OF ETHICS
-Engaging in public practice while being
employed in a private enterprise.

Which of the following statements is/are

correct? Fundamental Principles - Assessment
Statement 1: It shall be the primary duty of the
Commission and the Board to effectively
enforce the provisions of RA 9298 and its
Implementing Rules and Regulations.
Statement 2: Any person may bring before the Which statement is correct regarding the Code
Commission, Board, or the aforementioned of Ethics for Professional Accountants in the
officers of the law, cases of illegal practice or Philippines?
violations of RA 9298 and its Implementing
Rules and Regulations. -All CPA’s are expected to comply with the
ethical requirements of the Code and other
-Both statements are correct ethical requirements that may be adopted and
approved by IFAC. Apparent failure to do so
may result in an investigation into the CPA’s
conduct. -independence

The principle of objectivity imposes which of Which statement is incorrect regarding the
the following obligations on professional Code of Ethics for Professional Accountants in
accountants the Philippines?

-Not to compromise professional or business -The code is divided into two parts, part A and
judgement because of bias, conflict of interest part B
undue influence of others.
The Code of Ethics for Professional
Which of the following ethical principles Accountants in the Philippines defined
implies fair dealings and truthfulness? “practice” as

-integrity -A sole proprietor or a partnership of

professional accountants which offers
Which of the following fundamental principles professional services to the public.
would most likely be threatened when a
professional accountant in public practice The CPA profession deemed it necessary to
quotes a professional fee that is too low? establish a code of ethics and a mechanism for
its enforcement because
-professional competence and due care
-Acceptance of responsibility to the public is a
Professional competence should include distinguishing mark of a profession.
1) Attainment of professional competence
2) Maintenance of professional competence Which of the following ethical principles
would most likely be compromised if a
-1) YES 2) YES; professional accountant fails to modify his/her
report on financial information that is
Which of the following is a member of IFAC? incorrect, incomplete or unsatisfactory?

-PICPA -integrity

A professional accountant has a professional Which of the following fundamental principles

duty or right to disclose confidential would most likely be threatened when a
information in each of the following, except professional accountant accepts an
engagement before knowing all the pertinent
-To disclose to BIR fraudulent scheme facts about the new engagement?
committed by the client on payment of income
tax. -professional competence and due care

Part A of the Code of professional ethics Which of the following is incorrect regarding
establishes fundamental principles of professional competence?
professional ethics for professional
accountants and provides a conceptual -Professional accountants may portray
framework for applying those principles. themselves as having expertise or experience
Which of the following is not one of the they do not possess.
fundamental principles:
The term receiving accountant includes the Competence as a certified public accountant
following, except includes all of the following except

-A professional accountant in public practice -Warranting the infallibility of the work

currently holding an audit appointment or performed.
carrying out accounting, taxation, consulting,
or similar professional services for a client. According to the standards of the profession,
which of the following circumstances will
The principle of professional behavior requires prevent a CPA performing audit engagements
a professional accountant to from being independent?

-Act in a manner consistent with the good -Employment of the CPA’s spouse as a
reputation of the profession and refrain from client’s director of internal audit
any conduct which might bring discredit to the
profession. Which of the following fundamental principles
requires a professional accountant to comply
May a CPA hire for the CPA’s public with relevant laws and regulations?
accounting firm a non-CPA systems analyst
who specializes in developing computer -professional behavior
systems?
The term professional accountant in public
-Yes, provided the CPA is able to supervise practice includes the following, except
the specialist and evaluate the specialist’s end
product -Professional accountants employed in the
public sector having managerial
According to the ethical standards of the responsibilities.
profession, which of the following acts is Which of the following is not a fundamental
generally prohibited? ethical principle?

-Retaining client records after an engagement -Independence

is terminated prior to completion and the client
has demanded their return The essence of the due care principle is that
the auditor should not be guilty of:
The underlying reason for a code of
professional ethics is -negligence

-The need for public confidence in the quality The phase of professional competence that
of service of the profession. requires a professional accountant to adopt a
program designed to ensure quality control in
Which of the following is the correct order of the performance of professional services
steps in attaining professional competence? consistent with technical and professional
1. education standards is:
2. professional experieces
3. professional examination -maintenance of professional competence

-1, 3 and 2 Professional accountants may encounter

problems in identifying unethical behavior or
in resolving an ethical conflict. When faced
with significant ethical issues, professional integrity of prospective client’s management
accountants should do the following, except and board of directors?

-If the problem is not resolved with the -integrity and professional behavior
immediate superior and the professional
accountant determines to go to the next higher
managerial level, the immediate superior need
not be notified of the decision. Threats to Compliance with the
Fundamental Principles - Assessment
The code of ethics for professional
accountants applies to

-All CPAs A loan, or guarantee of a loan, to the firm from

an audit client that is a bank or a similar
The principle of confidentiality imposes an institution, would not create a threat to
obligation on professional accountants to independence provided
refrain from: I. The loan, or guarantee, is made under
normal lending procedures, terms and
-using confidential information acquired as a requirements.
result of professional and business II. The loan is immaterial to both the
relationships to their personal advantage or the firm receiving the loan and the audit client.
advantage of third parties.
-Both I and II
Which of the following is not explicitly
referred to in the Code of Ethics as source of Intimidation threat
technical standards?
-Occurs when a member of the assurance tem
-Commission of Audit (COA) may be deterred from acting objectively and
exercising professional skepticism by threats,
The principle of confidentiality applies to: actual or perceived, from the directors, officers
or employees of an assurance client.
-All professional accountants
Which of the following fundamental principles
Which statement is incorrect regarding the would most likely be threatened when a
Code of Ethics for Professional Accountants in professional accountant in public practice
the Philippines? assumes custody of client’s assets?

-Where a national statutory requirement is in -integrity

conflict with a provision of the IFAC Code,
the IFAC Code requirement prevails. When threats to independence that are not
clearly insignificant are identified, the
Before accepting a new client relationship, a following are appropriate, except
professional accountant in public practice
should consider whether acceptance would -When the firm decides to accept or continue
create threats to compliance with the the assurance engagement, the decision need
fundamental principles. Which of the not be documented provided the threats
following fundamental principles will be identified were eliminated.
threatened when question arises about the
This threat to independence occurs when a A partner rotating after a pre-defined period
member of the assurance team has recently should not resume the lead engagement
performed services for an assurance client that partner role until a further period of time,
directly affect the subject matter information normally ____ year(s), has elapsed.
of the assurance engagement (e.g., valuation
services). -2

-Self-review threat. Occurs when, by virtue of a close relationship

with an assurance client, its directors, officers
The following circumstances may create or employees, a firm or a member of the
intimidation threats, except assurance team becomes too sympathetic to
the client’s interests.
-A member of the assurance team being, or
having recently been, a director or officer of -Familiarity threat
the client.
Which of the following threats to
Using the same senior personnel on an independence may be created by family and
assurance engagement over a long period of personal relationships between a member of
time would most likely create the assurance team and a director, an officer,
or an employee of the assurance client in a
-familiarity threat position to exert direct and significant
influence over the subject matter information
This refers to the threat that a professional of the assurance engagement?
accountant will not appropriately evaluate of a
previous judgement made or service -Self-interest, familiarity or intimidation
performed by the professional accountant, by threats
another individual within the professional
accountant’s firm or employing organization, A close business relationship between a firm
on which the accountant will rely when or a member of the audit team, or a member of
forming a judgement as a part of providing a that individual’s immediate family, and the
current service. audit client or its management may create

-Self- review threat -Self-interest and intimidation threats

Which part of the Code establishes the These are fees calculated on a predetermined
fundamental principles of professional ethics basis relating to the outcome or result of a
for professional accountants and provides a transaction or the result of the work
conceptual framework that professional performed.
accountants shall apply to identify threats to
compliance with the fundamental principles, -Contingent fees
evaluate the significance of the threats
identified, and apply safeguards, when A threat to objectivity may be created when a
necessary, to eliminate the threats or reduce professional accountant in public practice
them to an acceptable level? performs services for clients whose interests
are in conflict with each other. In addition, this
-Part A. could also pose threat to

-confidentiality
 III. Policies and procedures
Which of the following threats to to empower staff to communicate to senior
independence may be created when litigation levels within the firm any issue of
takes place, or appears likely, between the firm independence and objectivity that concerns
or a member of the assurance team the them.
assurance client?
-I, II, and III
-Self-interest or intimidation threat
Occurs when any product or judgment of a
As defined in the Code, “a valuation previous assurance engagement or non-
comprises the making of assumptions with assurance engagement needs to be re-
regard to future developments, the application evaluated in reaching conclusions on the
of certain methodologies and techniques, and assurance engagement or when a member of
the combination of both in order to compute a the assurance team was previously a director
certain value, or range of values, for an asset, a or officer of the assurance client, or was an
liability or for a business as a whole.” Which employee in a position to exert direct and
of the following threats may be created when a significant influence over the subject matter of
firm or a network firm performs valuation for the assurance engagement.
an audit client that is to be incorporated in the
client’s financial statements? -Self-review threat

-Self-review threat Intimidation threat

Which of the following circumstances would -Occurs when a member of the assurance team
least likely create self-interest threat? may be deterred from acting objectively and
exercising professional skepticism by threats,
-Having a close personal relationship between actual or perceived, from the directors, officers
a member of the assurance team and the or employees of an assurance client.
assurance client, its directors, officers or
employees. The recruitment of senior management for an
assurance client, such as those in a position to
When a close family member of a member of affect the subject matter of the assurance
the assurance team is a director, an officer, or engagement, may create the following current
an employee of the assurance client in a or future threats to independence, except
position to exert direct and significant
influence over the subject matter information -Self-review threat
of the assurance engagement, threats to
independence may be created. If the threats Acting for an audit client in the resolution of a
are other than clearly insignificant, which of dispute or litigation would most likely create
the following safeguards can be applied to
reduce the threats to an acceptable level? -advocacy threat
I. Removing the individual from the
assurance team. Examples of circumstances that may create
II. Where possible, structuring the self-review threat least likely include
responsibility of the assurance team so that the
professional does not deal with matters that are -Potential employment with an assurance
within the responsibility of the close family client.
member.
Examples of circumstances that may create According to the Philippine Code of Ethics,
familiarity threat least likely include independence is potentially affected by self-
interest, self-review, advocacy, familiarity and
-Dealing in, or being a promoter of, share or intimidation threats. Which of the following
other securities in an assurance client. best describes “advocacy threat”?

Examples of circumstances that may create -This occurs when a firm, or a member of the
self-interest threat include assurance team, promotes, or may be
perceived to promote, an assurance client’s
-All of the above. position or opinion to the point that objectivity
may, or may be perceived to be, compromised.
This occurs when a firm or a member of the
assurance team could benefit from a financial This occurs when any product or judgment of
interest in an assurance client. a previous assurance engagement or non-
assurance engagement needs to be revaluated
-self-interest threat in reaching conclusions on the assurance
engagement or when a member of the
Which of the following is a “self-review” assurance team was previously a director or
threat to member independence? officer of the assurance client, or was an
employee in a position to exert direct and
-An engagement team member prepares significant influence over the subject matter if
invoices for the attest client the assurance engagement.

This refers to the threat that a financial or -self-review threat

other interest will inappropriately influence the
professional accountant’s judgement or
behaviour;
Safeguards - Assessment
-Self- interest threat

The threat that a professional accountant will

be deterred from acting objectively because of Safeguards with the firm’s own systems and
actual or perceived pressures from the client is procedures, include the following except
known as
-External review of the firm’s quality control
-Intimidation threat system.

Which of the following would not generally Safeguards created by the profession,
create a threat to independence? legislation or regulation, include the following,
except
-The purchase of goods and services from an
assurance client by the firm (or from a -Policies and procedures that emphasize the
financial statement audit client by a network assurance client’s commitment to fair financial
firm) or a member of the assurance team reporting.
provided that the transaction is in the normal
course of business and on an arm’s length The safeguards available to eliminate the
basis. threats or reduce them to an acceptable level
include
(1) Safeguards created by the profession firm chooses not to eliminate the activities or
legislation or regulation interest creating the threat, the only course of
(2) Safeguards within the assurance client action available will be the
(3) Safeguards within the firm’s own systems
and procedures -Refusal to perform, or withdrawal from, the
assurance engagement.
-(1)YES; (2)YES; (3)YES
Statement 1: Safeguards are actions or other
Statement 1: Safeguards are actions or other measures that may eliminate threats or reduce
measures that may eliminate threats or reduce them to an acceptable level.
them to an acceptable level. Statement 2: They fall into two broad
Statement 2: They fall into two broad categories: (a) Safeguards created by the
categories: (a) Safeguards created by the profession, legislation or regulation; and (b)
profession, legislation or regulation; and (b) Safeguards in the work environment.
Safeguards in the work environment.
-True, True
-True, True
Safeguards within the firm’s own systems and
When a professional accountant is asked to procedures, include the following, except
provide a second opinion, the professional
accountant has a responsibility to identify -External review of a firm’s quality control
potential threat to fundamental principles. If system.
the identified threat is other than clearly
insignificant, appropriate safeguards should be When the professional accountant determines
applied. Which of the following safeguards that appropriate safeguards are not available or
could possibly eliminate the threat that arises cannot be applied to eliminate the threats to
when providing second opinions? independence or reduce them to an acceptable
level, the professional accountant shall
-Seek client’s permission to contact the I. Eliminate the circumstance or
existing accountant relationship creating the threats.
II. Decline or terminate the audit
Which of the following is an example of engagement.
engagement-specific safeguards in the work
environment? -Either I or II

-Disclosing to those charged with governance Consideration of the nature of the safeguards
of the client the nature of service provided and to be applied will be affected by matters such
extent of fees charged. as the
(1) Significance of the threat
Safeguards within the assurance client, include (2) Nature of the assurance engagement
the following, except (3) Intended users of the assurance report
(4) Structures of the firm
-Professional standards and monitoring and
disciplinary processes. -(1) YES; (2) YES; (3)YES; (4)YES

When the safeguards available are insufficient According to Section 240 of the Code of
to eliminate the threats to independence or to Ethics, fees charged for assurance
reduce them to an acceptable level, or when a engagements should be a fair reflection of the
value of the work involved. In determining be incompatible with the rendering of
professional fees, the following should be professional services.
taken into account, except

-The outcome or result of a transaction or the Who should take responsibility for the overall
result of the work performed. quality on each audit engagement?

These are policies and procedures designed to -Engagement partner

eliminate or to reduce threats to fundamental
principles to an acceptable level. Which statement is incorrect regarding
relations with other professional accountants
-Safeguards in public practice?

-The receiving accountant may express any

criticism of the professional services of the
Professional Appointment - Assessment existing accountant without giving the latter an
opportunity to provide all relevant
information.

The engagement partner should take A distinct sub-group, whether organized on

responsibility for the direction, supervision, geographical or practice lines.
and performance of the audit engagement in
compliance with professional standards and -Office
regulatory and legal requirements, and for the
auditor’s report that is issued to be appropriate Which of the following are elements of a CPA
in the circumstances. Supervision includes the firm’s quality control that should be
following, except considered in establishing its quality control
policies and procedures?
-Informing the members of the engagement
team of their responsibilities. -1) Yes 2) Yes 3) Yes

Communication between the receiving Which statement is incorrect regarding

accountant and existing accountant is not Professional Competence and Responsibilities
intended Regarding the Use of Non-Accountants?

-To protect a professional accountant in public -If at any time the professional accountant is
practice from accepting the appointment in not satisfied that proper ethical behavior can
circumstances where all the pertinent facts are be respected or assured, the engagement
not known. should not be accepted unless the engagement
has commenced in which case the auditor is
Which statement is incorrect regarding allowed to finish the engagement.
activities incompatible with the practice of
public accountancy? The existing accountant, on receipt of the
communication from the proposed
-A professional accountant in public practice professional accountant in public practice,
should not concurrently engage in any should not
business, occupation or activity which would
-Disclose all information needed by the
proposed professional accountant in public
practice to be able to decide whether or not to
accept the appointment, if permission is not Professional fees should be a fair reflection of
granted. the value of the professional services
performed for the client, taking into account:
For audits of financial statements of listed
entities, the engagement partner should not -All of the above
issue the auditor’s report until the completion
of the Which of the following actions by a
professional accountant in public practice will
-Engagement Quality Control Review not result in violation of the code of Ethics
regarding commissions?
Retainer’s fee basis is when
-Entering into an arrangement for the purchase
-The client is billed a fixed fee periodically for of the whole or part of an accounting practice
the services rendered during a designated requiring payments to individuals formerly
period of time. engaged in the practice or payments to their
heirs or estates.
As defined in PSQC 1, __________ is a
process comprising an ongoing consideration In determining estimates of fees, an auditor
and evaluation of the firm’s system of quality may take into account each of the following,
control, including a periodic inspection of a except the
selection of completed engagements, designed
to provide the firm with reasonable assurance -Attainment of specific findings
that its system of quality control is operating
effectively. Which statement is incorrect regarding
professional fees?
-Monitoring
The nature, timing, and extent of an audit -It is not proper for a professional accountant
firm’s quality control policies and procedures in public practice to charge a client a lower fee
depend on than has previously been charged for similar
1) The CPA Firm’s Size services.
2) The Nature of the CPA Firm’s Practice
3) Appropriate Cost-Benefit Considerations Which of the following fee arrangements
would violate the code of Professional
-1) Yes 2) Yes 3) Yes Conduct?

Which of the following is incorrect regarding -A fee based on the approval of a bank loan.
integrity and objectivity?
The CPA should not undertake an engagement
-Professional accountants should neither if his audit fee is to be based upon
accept nor offer any gifts or entertainment.
-a percentage of audited net income

The Rules of Conduct will ordinarily be

Fees and Other Types of Remuneration - considered to have been violated when the
Assessment professional accountant represents that
specific consulting services will be performed Publicity by individual professional
for a stated fee and it is apparent at the time of accountants in public practice is acceptable
the representation that the provided:
(1)It has as its object the notification to the
-Professional accountant would not be public or such sectors of the
independent. public as are concerned, of matters of
fact in a manner that is not false, misleading or
Professional fees should be a fair reflection of deceptive
the value of the professional services (2)It is in good taste
performed for the client, taking into account: (3)It is professionally dignified
(1) The skill and knowledge required for the (4)It avoids frequent repetition of, and any
type of professional services involved. undue prominence being given to the name of
(2) The level of training and experience Of the the professional accountant in public practice
persons necessarily engaged In performing the
professional services -(1)NO; (2)YES; (3)YES; (4)NO
(3)The time necessarily occupied by each
person engaged in performing the professional All forms of advertisements must have a prior
services review and approval by the
(4) The degree of responsibility that
Performing those services entails -Risk management partner

-(1) YES; (2)YES (3)YES; (4)YES The holding of media-covered events

undertaken only to commemorate a
Yellow, a non-CPA has a law practice. Red, professional accountant’s anniversaries in
CPA, has agreed to pay Yellow 10% of the fee public practice does not violate the rules on
for services rendered by Red to Yellow’s advertising and solicitation provided that such
clients. Who, if anyone, is in violation of the undertaking should be done only every _____
code of ethics? years of celebration.

-Only Red -5

In which of the following situations would a This is the communication to the public of
CPA be in violation of the rules of information as to the services or skills
professional ethics in determining professional provided by professional accountants in public
fees? practice with a view to procuring professional
business.
-A fee that is based on 10% of the client’s
adjusted net income for the current year -Advertising

In the marketing and promotion of themselves

and their work, professional accountants
Marketing Professional Services - should
Assessment
-All of the above.

Which of the following is not acceptable?

-An appointment of a professional accountant designed for the deliberate promotion of that
in a matter of national importance was professional accountant.
publicized.
-Publicity
As defined in the Code of Ethics, __________
is the communication to the public of Which of the following statements concerning
information as to the services or skills publicity is incorrect?
provided by professional accountants in public
practice with a view to procuring professional -Professional accountants who author books or
business. articles on professional subjects may state
their name and professional qualifications;
-Advertising give the name of their organization; and give
any information as to the services that the firm
Advertising as defined in the Code of Ethics, provides.
means
Which of the following is true regarding
-The communication to the public of advertising and solicitation?
information as to the services or skills
provided by professional accountants in public -Advertising, but not solicitation, by individual
practice with a view to procuring professional professional accountants in public practice is
business. permitted in the Philippines.

Which of the following is acceptable? In the marketing and promotion of themselves

and their work, professional accountants
-A professional accountant in public practice should
indicated in his stationery that he is a tax
expert. -All of the above.

The approach to a potential client for the Advertising as defined in the Code of Ethics,
purpose of offering professional services is means
called
-The communication to the public of
-solicitation information as to the services or skills
provided by professional accountants in public
A CPA in public practice should not practice with a view to procuring professional
business.
-Publish services in billboards like tarpaulin or
streamers Professional accountants press and other
media releases undertaken to commemorate
Generally, advertising and publicity in any anniversaries in public practice by informing
medium are acceptable provided it is: the public of their achievements or
contributions towards nation building are
-not self-laudatory
-Allowed provided such undertaking is done
As defined in the Code of Ethics, __________ only once every 5 years.
is the communication to the public of facts
about a professional accountant which are not The communication to the public of facts
about a professional accountant which are not
designed for the deliberate promotion of that Custody of Client Assets - Assessment
professional accountant.

-Publicity
When a professional accountant is entrusted
This refers to the communication to the public with the custody of money or other assets
of facts about a professional accountant which belonging to others, the professional
are not designed for the deliberate promotion accountant should not
of that professional accountant.
-use such assets for purposes other than those
-Publicity for which they are intended
Professional accountant who author books or
articles on professional subjects, may state Which statement is incorrect regarding clients’
(1)His or her name monies?
(2)Professional qualification
(3)Name of organization -Fees due from a client may be drawn from
(4)Information as to the services his or Her clients’ monies without the need of notifying
firm provide the client.

-(1)YES; (2)YES; (3)YES; (4)NO

A professional accountant in public practice is Objectivity - All Services - Assessment

allowed to When a professional accountant learns of a
material error or omission in a tax return of a
-Inform interested parties through any medium prior year, or of the failure to file a required
that a partnership or salaried employment of tax return, the professional accountant has a
an accountancy nature is being sought. responsibility to do the following, except

-Immediately inform the revenue authorities.

A professional accountant may be associated

Gifts and Hospitality - Assessment with a tax return that

-Uses of estimates if such use is generally

acceptable or if it is impractical under the
Offer of gifts or undue hospitality from a circumstances to obtain exact data.
client may create threats to objectivity. In
evaluating the significance of threat created by Which of the following is incorrect regarding
such offer, the professional accountant should the professional accountants’ tax practice?
consider the:
(1)Nature of the offer -A professional accountant may hold out to a
(2)Value of the offer client or an employer the assurance that the tax
(3)Intent behind the offer return prepared and the tax advice offered are
beyond challenge.
-(1)YES; (2)YES; (3)YES
Independence - Assessment -(1)YES; (2)YES; (3)NO

A CPA, while performing an audit, strives to

achieve independence in appearance in order
Independence is required whenever a to
professional accountant performs:
-Maintain public confidence in the profession.
-assurance services
If requested to perform a review engagement
Which of the following will not create self- for a nonpublic entity in which an accountant
interest threat for a professional accountant in has an immaterial direct financial interest, the
public practice? accountant is

-Preparing the original data used to generate -Not independent and, therefore, may not issue
records that are the subject matter of the a review report.
assurance engagement.
The Code of Ethics requires the members of
Which of the following is incorrect regarding the assurance team and the firm to be
independence? independent of the assurance client during the
period of the assurance engagement. Which of
-Independence is a combination of the following statements relating to the period
impartiality, intellectual honesty and a of engagement is correct?
freedom from conflicts of interest.
-In the case of a financial statement audit
The following statements relate to the engagement, the engagement period includes
provision of taxation, internal audit or IT the period covered by the financial statements
Systems services to audit clients. Which is reported on by the firm.
false?
For assurance engagements provided to clients
-Preparing calculations of current and deferred that are not audit clients, when the report is not
tax liabilities (or assets) for an audit client for expressly restricted for use by identified users,
the purpose of preparing accounting entries the following should be independent of the
that will be subsequently audited by the firm client
creates a self-interest threat. (1)The members of the assurance team
(2)The firm
Direct financial interest is a financial interest (3)Network firms
(1)Owned directly by and under the control of
an individual or entiry (including those -(1)YES; (2)YES; (3)NO
managed on a discretionary basis by other)
(2) beneficially owned through a collective The firm should be independent of the client in
investment vehicle, estate, trust or other the following engagements
intermediary over which the individual or (1)Assurance engagements provided to an
entity has control audit client
(3)beneficially owned through a collective (2)Assurance engagements provided to clients
investment vehicle, estate, trust or other that are not audit clients, when the report is not
intermediary over which the individual or expressly restricted for use by identified users
entity has no control (3)Assurance engagements provided to clients
that are not audit clients, when the assurance
report is expressly restricted for use by The following statements relate to the
identified users provision of legal services to an audit client.
Which is incorrect?
-(1)YES; (2)YES; (3)NO
-The provision of legal services to an audit
Independence in auditing means client involving matters that would not be
expected to have a material effect on the
-Taking an unbiased viewpoint financial statements may create a self-review
threat.
One of the major differences between auditors
and other professionals is that most Which of the following is an example of an
professionals intimidation threat that may affect the
independence of the professional accountant?
-Need not be concerned about independence.
-Threat of replacement over a disagreement
Independence is potentially affected by with the application of an accounting
(I)Self-interest threat principle.
(II)Intimidation threat
(III)Self-review threat Financial interest means
(IV)Familiarity threat
(V)Advocacy Threat -An interest in an equity or other security,
debenture, loan or other debt instrument of an
-I,II,III,IV and V entity, including rights and obligations to
acquire such an interest and derivatives
Close family include the following, except directly related to such interest.

-Spouse The following forms of assistance to a

financial statement audit client do not
It refers to the avoidance of facts and generally threaten the firm’s independence,
circumstances that are so significant that a except
reasonable and informed third party, having
knowledge of all relevant information, -Authorizing or approving transactions
including safeguards applied, would
reasonably conclude a firm’s or a member of The Philippine Code of Ethics for professional
the assurance team’s integrity, objectivity or accountants requires independence
professional skepticism had been (1)Of mind
compromised. (2)In appearance

-Independence in appearance -(1)YES (2)YES

Which of the following circumstances may Which of the following should be independent
create advocacy threat for a professional of the financial statement audit client?
accountant in public practice? (1)The members of the assurance team
(2)The firm
-The firm promoting shares in an audit client. (3)Network firms

-(1)YES; (2)YES; (3)YES

For assurance engagements provided to an Which one of the following is not a provider
audit client, the following should be of assurance services?
independent of the client
(1)members of the assurance team -PICPA
(2)The firm
(3)Network firms Which of the following statements is (are) true
regarding the provision of assurance services?
-(1)YES; (2)YES; (3)YES (I) The third party who receives the assurance
generally pays for the assurance received
According to the standards of the profession, (II) Assurance services always involve a report
which of the following activities would most by one person to a third party on which an
likely not impair a CPA’s independence? independent organization provides assurance.
(III) Assurance services can be provided either
-Providing advisory services for a client on information or processes.

Kar, CPA, is a staff auditor participating in the -III only

audit engagement of Fort, Inc. Which of the
following circumstances impairs Kar’s The definition of auditing contained within A
independence? Statement of Basic Auditing Concepts
recognizes that auditing includes both a(n)
-Kar’s sibling is director of internal audit at
Fort -Investigative process and a reporting process.

Objective of a review engagement (PSRE

2400)

FUNDAMENTALS OF AUDITING AND -To enable an auditor to state whether, on the

ASSURANCE SERVICES basis of procedures which do not provide all
the evidence that would be required in an
audit, anything has come to the auditor’s
attention that causes the auditor to believe that
the financial statements are not prepared, in all
Assurance and Engagement: Nature and material respects, in accordance with
Objective - Assessment Philippine Financial Reporting Standards

The Philippine Framework for Assurance

Engagements
Independent auditing can best be described as
a -Defines and describes the elements and
objectives of an assurance engagement, and
-Discipline that attests to the results of identifies engagements to which PSAs,
accounting and other operations and data. PSREs, and PSAEs apply.
The following are the general principles
governing an audit of FS Audit, except After accepting an assurance engagement, a
practitioner is not allowed to change the
-Professionalism engagement to a non-assurance engagement,
or from a reasonable assurance engagement to
a limited assurance engagement, except when
there is reasonable justification for the change. The characteristics for determining whether
Which of the following ordinarily will justify a criteria are suitable include:
request for a change in the engagement? (1)Relevance
I. A change in circumstances that affects the (2)Reliability
intended users’ requirements. (3)Completeness
II. A misunderstanding concerning the nature (4)Neutrality
of the engagement. (5)Comparability
(6)Feedback value
-Both I and II
-(1)Yes; (2)Yes; (3)Yes; (4)Yes;
Which of the following is least likely an (5)No; (6)No
application of maintaining an attitude of
professional skepticism? Which of the following is broadest in scope?

-In planning and performing an audit, the -Assurance services.

auditor assumes that management is dishonest.
The Philippine Framework for Assurance
Assurance services may include which of the Engagements
following except?
-Defines and describes the elements and
-Tax preparation services objectives of an assurance engagement, and
identifies engagements to which PSAs,
Which of the following is responsible for the PSREs, and PSAEs apply.
fairness of representations made in financial
statements? Assurance engagements may include

-The client's management. -Review engagements and examination of

prospective financial information
The subject matter of an assurance
engagement may take many forms including It refers to the level of satisfaction as to
reliability of an assertion being made by one
-All of the above party for use by another party

The decision of whether the criteria are -Assurance level

suitable involves considering whether the
subject matter of the assurance engagement is The decision as to whether the criteria are
capable of reasonably consistent evaluation or suitable involves considering whether the
measurement using such criteria. Which of the subject matter is capable of reasonably
following characteristics is not considered consistent evaluation against or measurement
necessary in determining whether the criteria using such criteria. The characteristics for
are suitable? determining whether criteria are suitable
include the following except
-Sufficiency
-Sufficiency
Main standards to govern review engagements
Which one of the following is not a key
-PSREs attribute needed to perform assurance?
-Accounting skills
-Implementing a system that improves the
The objective of the ordinary examination of processing of information.
financial statements is the expression of an
opinion on the accuracy of such financial Which of the following services would be
statements. most likely to be structured as an assurance
The independent auditor’s opinion is an engagement?
assurance as to the future viability of the
entity. -An engagement to issue a report addressing
an entity’s compliance with requirements of
-The first statement is false, the second specified laws.
statement is false
Assurance engagements may include
Assurance services are best described as A. Review engagements and examination
of prospective financial information
-Independent professional services that B. The preparation of tax returns where no
improve the quality of information, or its conclusion conveying assurance is expressed
context, for decision makers. C. Consulting (or advisory) engagements,
such as management and tax consulting
When a CPA expresses an opinion on the D. Engagements covered by Philippine
financial statements, his responsibilities extend Standards for Related Services, such as
to agreed-upon procedures engagements and
compilations of financial or other information
-Whether the results of the client’s operating
decisions are fairly presented in the financial -A only
statements.
The subject matter of an assurance
The type of assurance provided in a review engagement may take many forms, including:
engagement is (1)Nonfinancial performance or condition
(2)Behavior
-Negative (3)Financial performance or condition
(4)Physical characteristics
A concept relating to the accumulation of the (5)Systems and Processes
audit evidence necessary for the auditor to
conclude that there are no material -(1)Yes; (2)Yes; (3)Yes; (4)Yes;
misstatements in the financial statements taken (5)Yes
as a whole.
Which of the following statements does not
-Reasonable assurance properly describe an element of the theoretical
framework of auditing?
Which of the following provides a positive
form and high level of assurance? -Auditors act on behalf of management

-An audit report on external financial The primary purpose of an independent

statements on which an adverse opinion is financial statement audit is to
expressed.

Assurance services least likely involve

-Provide users with an unbiased opinion about I. The third party who receives the
the fairness of information reported in the assurance generally pays for the assurance
financial statements. received
II. Assurance services always involve a
Level of assurance in a review engagement report by one person to a third party on which
an independent organization provides
-Moderate assurance.
III. Assurance services can be provided either
on information or processes.

-III only
Elements of Assurance Engagements -
Assessment Which of the following is not one of the
elements of an assurance engagement?

-An opinion about whether the subject matter

In performing an attestation engagement, a conforms, in all material respects, with the
CPA typically identified criteria.

-Expresses a conclusion about an assertion Suitable criteria are required for reasonably
consistent evaluation or measurement of the
Which of the following is incorrect regarding subject matter of an assurance engagement.
the three party relationship element of Which of the following statements concerning
assurance engagement? the characteristics of suitable criteria is
correct?
-All of the above statements are correct
-Neutral criteria contribute to conclusions that
Which of the following elements is most likely are free from bias.
to be a component of a direct reporting
assurance engagement? In an assurance engagement, the outcome of
the evaluation or measurement of a subject
-Auditor independence matter against criteria is called

Which of the following is not a component of -Subject matter information

assurance services?
All assurance engagements contain five basic
-A user or a group of users who derive value elements. Which of the following is not one
from the service provided. of these elements?

It refers to the level of satisfaction as to -Engagement acceptance

reliability of an assertion being made by one
party for use by another party Which of the following is an example of an
assurance engagement?
-Assurance level
-Reporting on financial statements prepared
Which of the following statements is (are) true using other comprehensive basis of
regarding the provision of assurance services? accounting.
 Which of the following services is the broadest
Types of Assurance Engagements - and most inclusive?
Assessment
-Assurance

Which of the following statements is true

The objective of an agreed-upon procedures concerning in an assurance engagement?
engagement
-Sufficiency is the measure of the quantity of
-Is to carry out those procedures of an audit evidence
nature to which the auditor and the entity and
any appropriate third parties have agreed and Which statement is incorrect regarding related
to report on factual findings. services?

The framework for auditing and related -In a consultancy engagement, the accountant
services as addressed by PSA excludes is engaged to use accounting expertise as
opposed to auditing expertise to collect,
-Tax services classify and summarize financial information.

According to PSA 120, which of the following Absolute assurance is generally not attainable
is an appropriate combination of procedures as a result of such factors as:
required in completing a review engagement (1)The use of testing
(2)The inherent limitations of internal control
-Inquiry and analytical procedures system
(3)The use of judgment
What type of assurance engagement is (4)Most audit evidence are persuasive rather
involved when the practitioner expresses a than conclusive
negative form of conclusion?
-(1)Yes; (2)Yes; (3)Yes; (4)Yes
-Limited assurance engagement
Which of the following is not an assurance
It refers to the level of satisfaction as to the service?
reliability of an assertion being made by one
party for use by another party -Compilation of financial information

-assurance level Which of the following services provides a

moderate level of assurance about the client’s
CPAs engaged in public accounting practice financial statements?
render services in the following areas except
-Review
-Internal auditing
The following are assurance engagements,
Which of the following audits can be regarded except
as being solely a “compliance” audit?
-Tax services
-BIR examiners’ examinations of the returns What are the three most commonly sought
of taxpayers assurance services?
 external auditor. The external auditor is
-Audits, reviews and other assurance services expected to

Engagements frequently performed by -Express an opinion as to fairness of Camden’s

professional accountants that are not assurance financial statements.
engagements include the following, except
The primary reason for an audit by an
-Reasonable assurance engagement independent, external audit firm is to

What type of assurance engagement is -Provide increased assurance to users as to the

involved when the practitioner expresses a fairness of the financial statements
positive form of conclusion?
Auditing is a systematic process that includes
-Reasonable assurance engagement all of the following except:

The Framework of PSA (PSA 120) applies to -Providing important managerial decisions for
client
-Agreed upon procedures
The independent auditor’s responsibility in a
regular audit is to express an opinion on the
financial statements. The auditor’s opinion;
Auditing: Nature , Philosophy and
Objectives. Assessment -Helps establish the credibility of the financial
statements

The primary objective of the ordinary Types of Audit - Assessment

examination of financial statements by a CPA
is the expression of an opinion.

-The fairness with the financial statements Widely-accepted established framework in

present financial position and results of evaluating the effectiveness of internal control
operations is that of

Which of the following best describes why an -COSO

independent auditor is asked to express an
opinion on the fair presentation of financial Internal auditing relates to an
statements?
-Audit which serves the needs of management
-The opinion of an independent party is
needed because a company may not be Examination of evidence regarding an
objective with respect to its own financial assertion to determine its correspondence to
statements. established criteria carried out in a manner
suitable to the court
An audit of the financial statements of
Camden Corporations being conducted by an -Forensic audit
Internal auditing provides assistance primarily the intent of the legislation that established the
to program.

-Management and Board of Directors -Program audit

This audit involves a study of a specific unit of Determines the objectives of an internal audit
an organization for the purpose of measuring function
its performance.
-Management
-Operational
Which of the following criteria is unique to the
Not belonging to the group of audits below independent auditor’s attest function?

-Compliance -Independence

It refers to the functions and activities Users of the audit report can reasonably expect
necessary for the performance of a major the audited financial statements to be
purpose for which a government agency is
established. -Presented fairly according to the substance of
GAAP
-Program
The following are the general principles
Internal auditing relates to an governing audit of financial statements:

-Audit which serves the needs f management I. Loyalty

II. Confidentiality
Per Glossary of Terms (PSA), functions of III. Objectivity
internal auditing include, among other things, IV. Professionalism
examining, evaluating and monitoring the V. Professional Behaviour
adequacy and effectiveness of VI. Independence

-Internal control -II, III , V and VI only

Internal auditing encompasses Describe operational audit.

-Both financial and operational auditing -It focuses on finding aspects of operations
where controls could be implemented to
Per Corporation Code of the Philippines reduce operational waste
Section 35, the by-laws of a corporation may
create an executive committee composed of This audit involves a review of an
not less than how many members? organization’s procedures to determine
whether the organization adheres to specific
-3 procedures, rules or regulations set by an
authoritative body.
This audit involves examination and
evaluation of an agency’s costs and outputs of -Compliance
a specific activity/program and its benefits and
effects and determining whether these achieve
It usually includes the components of
compliance, performance and financial
statements audit
Internal auditors review the adequacy of the
-Comprehensive audit company’s internal control system primarily to

Since the main goal in fraud audit is not -Determine whether the internal control
assurance but rather an investigation of system provides reasonable assurance that the
anomalies, this is of least concern. company’s objectives and he goals are met
efficiently and economically
-Materiality
Which of the following best describes an
Which of the following types of audits are auditor’s professional skepticism?
most similar?
-Auditors should make a critical assessment,
-Compliance audits and independent financial with an inquisitive mind, of the sufficiency
statement audits and appropriateness of audit evidence
obtained.
These audits are similar in most respects
The independent auditor’s opinion helps
-Financial and compliance establish the credibility of the financial
statements.
Independence of the internal auditors would be The independent auditor’s opinion is an
least likely achieved if internal auditors report assurance as to the efficiency or effectiveness
to the with which management has conducted the
affairs of the entity.
-Controller
-The first statement is true, the second
This audit uses laws and regulations as its statement is false
established criteria.
What are the two most important qualities for
-Compliance an operational auditor

A primary purpose of an operational audit is to -Competence and technical training

provide

-A measure of management performance in PHILIPPINE STANDARDS ON AUDITING

meeting organizational goal. AND QUALITY CONTROL

An objective of operational audit is to assess General Standards - Assessment

whether
Which one of the following is not one of the
-Specific units of the entity are functioning three General Standards?
effectively and efficiently
-Proper planning and supervision.

The generally accepted auditing standard that

Types of Auditors. Assessment requires “Adequate technical training and
proficiency” is normally interpreted as -Apply to independent examination of
requiring the auditor to have: financial statements of any entity when such
an examination is conducted for the purpose of
-formal education in auditing and accounting. expressing an opinion thereon.

The General Standards stress the importance An audit involves ascertaining the degree of
of: correspondence between assertions and
established criteria. In the case of financial
-personal qualities the auditor should possess. statement audit, which of the following is not a
valid criterion?

Standards of Field Work - Assessment & -Philippine Standards on Auditing.

Standards of Reporting - Assessment
These statements are issued to provide
Which of the following statements most practical assistance to auditors in
accurately captures the intent of the standards implementing the PSAs
of field work?
-PAPS
-Field work standards are primarily directed at
the auditor’s planning, understanding of Which of the following is not normally a
internal control, and evidence accumulation. service rendered by public accountants?

The auditor’s judgment concerning the overall -Internal auditing

fairness of presentation of financial position,
results of operations, and changes in cash flow An audit involves ascertaining the degree of
is applied within the framework of: correspondence between assertions and
established criteria. In the case of financial
-generally accepted accounting principles. statement audit, which of the following is not a
valid criterion?
The objective of the consistency standard is to
provide assurance that -Philippine Standards on Auditing.

-The comparability of financial statements The following statements relate to the

between periods in not materially affected by accounting profession:
changes in accounting principles without I. To merit public trust and confidence,
disclosure the professional person must convince the
public that he will place public service ahead
of personal reward.
II. A CPA certificate is evidence of basic
competence in the discipline of accounting at
Philippine Standards on Auditing - the time the certificate is granted.
Assessment III. A code of professional conduct is one of
the most important distinguishing
characteristics of a profession.
State whether the foregoing statements are true
The Philippine Standards on Auditing issued or false.
by AASC
-All of the statements are true.
 The firm should establish policies and
According to Philippine Standard on Auditing, procedures designed to promote an internal
the procedures employed in doing compilation culture based on the recognition that quality is
are: essential in performing engagements. Such
policies and procedures should require the
-Not designed to enable the accountant to firm’s chief executive officer (or equivalent)
express any form of assurance or, if appropriate, the firm’s managing board
of partners (or equivalent), to assume ultimate
A CPA firm offers management advisory responsibility for the firm’s system of quality
services to clients. Its primary purpose is to control.

-Furnish professional advice and assistance -Leadership responsibilities for quality within
which will enable the client to improve the firm
operations.
Quality control policies and procedures should
provide the firm reasonable assurance that the
policies and procedures relating to the other
elements of quality control are being
Elements of a System of Quality Control - effectively applied. This statement defines the
Assessment quality control element of

-Monitoring

In pursuing a CPA firm’s quality control In compliance with the element of human
objectives, a CPA firm may maintain records resources, the firm should address issues
indicating which partners or employees of the relating to
CPA firm were previously employed by the
CPA firm’s clients. Which quality control -assignment of engagement teams
element would this be most likely to satisfy?
Which of the following is an element of a CPA
-Independence firm’s quality control system that should be
considered in establishing its quality control
The nature and extent of a CPA firm’s quality policies and procedures?
control policies and procedures depend on
1) The CPA firm’s size -Assigning personnel to engagements
2) The nature of CPA firm’s Practice
3) Cost-benefit considerations The primary purpose of establishing quality
control policies and procedures for deciding
-1) Yes 2) Yes 3) Yes whether to accept a new client is to

A quality control policy that requires -Minimize the likelihood of association with
personnel in the firm to adhere to integrity, clients whose management lacks integrity.
objectivity, confidentiality and professional
behavior, relates to The nature and extent of a CPA firm’s quality
control policies and procedures depend on
-Ethical Requirements (1) The CPA firm’s size
(2) The nature of CPA firm’s Practice
(3) Cost-benefit considerations
 accounting and auditing problems that may
-(1) Yes; (2) Yes; (3) Yes affect the nature, timing and extent of audit
procedures with which they are involved.
Quality control policies and procedures should
be implemented at -Direction
1) Level of the audit firm
2) Individual audits In connection with the element of monitoring,
a CPA firm’s system of quality control should
-1) Yes 2) Yes ordinarily provide for the maintenance of
The following statements relate to quality
control for audit work. Which statement is -Documentation to demonstrate compliance
false? with its policies and procedures.

-According to PSA 220, audit firms should In making a decision to accept or retain a
adopt standardized quality control policies and client, the firm should consider all of the
procedures. following except

Which of the following is one of the elements -The type of opinion to be issued
of a CPA firm’s quality control system?
Which of the following quality control
-Leadership responsibilities objectives would be least important to the
auditor?
Which of the following is not one of the major
concerns of the auditor when establishing -Determination of audit fee.
quality control policies and procedures?
A CPA firm’s quality control procedure
-Billing arrangements pertaining to the acceptance of a prospective
audit client would most likely include
Which of the following is an element of a CPA
firm’s quality control system that should be -Inquiry of management as to whether
considered in establishing its quality control disagreements between the predecessor auditor
policies and procedures? and the prospective client were resolved
satisfactorily.
-Independence
Which of the following is one of the elements
A quality control policy that requires of a CPA firm’s quality control system?
personnel in the firm to adhere to
independence, integrity, objectivity, -Delegation
confidentiality and professional behavior,
relates to

-Professional Requirements Quality Control Review - Assessment

This involves informing assistants of their

responsibilities and the objectives of the
procedures they are to perform. It also According to PSA 220, who should take
involves informing them of matters such as the responsibility for the overall quality on each
nature of the entity’s business and possible audit engagement?
 -Reviews and tests compliance with the
-engagement partner assigned to the firm’s general quality control policies and
engagement procedures.

The examination by CPAs of a CPA firm’s

auditing practices to ascertain compliance with
its quality control system Definition of Error - Assessment

-Peer review

Monitoring, as an element of quality control Per PSA 240, these are events or conditions
policies of a firm, requires: that indicate an incentive or pressure to
commit fraud or provide an opportunity to
-Providing reasonable assurance that the commit fraud.
firm’s other quality control policies and
procedures are effectively operating. -Fraud risk factors

It is the process designed to provide an Which of the following is an example of

objective evaluation, before the auditor’s fraud?
report is issued, of the significant judgments
the engagement team made and the - misappropraition of assets or group of assets
conclusions they reached in formulating the
auditor’s report: Which of the following is most likely to be
presumed to represent fraud risk on an audit?
-Engagement quality control review
-Improper revenue recognition
Acceptance and continuance of client
relationships and specific audit engagements The term “error” refers to unintentional
include considering all of the following, misrepresentation of financial information.
except: Examples of errors are when
I. Assets have been misappropriated
-Whether the internal control of the client is II. Transactions without substance have
adequate enough to detect and prevent been recorded
material misstatements in the financial III. Records and documents have been
statements. manipulated and falsified
IV. The effects of the transactions have
The work performed by the assistants should been omitted from the records
be reviewed by personnel of at least equal Which of the following best describes what is
competence to consider all of the following meant by the term “fraud risk factor”?
except:
-Factors whose presence often have been
-The engagement personnel maintained observed in circumstances where frauds have
independence in the performance of the occurred
examination.
Per PSA 240, it involves intentional
Which of the following quality control misstatements including omissions of amounts
procedures is a monitoring activity? or disclosures in financial statements to
deceive financial statement users.
-Fraudulent financial reporting -Material error, material fraud, and certain
illegal acts
The risk of fraudulent financial reporting
increases in the presence of? “Error includes ”

-Incentive systems based on operating income -An incorrect accounting estimate arising from
oversight or misinterpretation of facts
Fraudulent financial reporting involves
intentional misstatements including omissions The most difficult type of misstatement to
of amounts or disclosure in financial detect is fraud based on
statements to deceive financial statement
users. It may be accomplished in a number of -The nonrecording of transactions
ways, including:
Which of the following statements best
-Manipulation, falsification, r alteration of describes the auditor’s responsibility to detect
accounting records or supporting conditions relating to financial stress of
documentation from which the financial employees or adverse relationships between a
statements are prepared company and its employees?

The term “error” refers to unintentional -The auditor is not required to plan the audit to
misrepresentation of financial information. discover these conditions, but should consider
Examples of errors are when them if he or she becomes aware of them
I Assets have been misappropriated during the audit.
II Transactions without substance have
been recorded The primary factor that distinguishes errors
III Records and documents have been from fraud is
manipulated and falsified
IV The effects of the transactions have been -whether the underlying cause of misstatement
omitted from the records is intentional or unintentional

-all of the above statements are false Which of the following factors or conditions is
an auditor least likely to plan an audit to
The primary factor that distinguishes errors discover?
from fraud is?
-Financial pressures affecting employees
-whether the underlying cause of misstatement
is intentional or unintentional Material misstatements may emanate from all
of the following except:
Which of the following statements best
identifies the two types of fraud? -limitations of the audit

-fraudulent financial reporting and Which of the following would be classified as

misappropriation of assets an error?

Which of the following most accurately -Misinterpretation by management of facts that

summarizes what is meant by the term existed when the financial statements were
“material misstatement”? prepared
 II. Rational or irrational.
Per PSA 240, what separates error from fraud?
-I only
-Intention

An attitude that includes a questioning mind

and a critical assessment of audit evidence is Definition and Types of Fraud - Assessment
referred to as

-Professional scepticism
The types of intentional misstatements that are
Not included in the fraud triangle relevant to the auditor’s consideration of fraud
include
-Fraud risk factor I. Misstatements resulting from fraudulent
financial reporting
Which of the following is an example of an II. Misstatements resulting from
error? misappropriation of assets

-Oversight that resulted in an incorrect - I and II

accounting estimates
Which of the following statements is
Not included in the fraud triangle incorrect?

-Fraud risk factor -The auditor is not and can not be held
responsible for the detection of fraud or error
Fraudulent financial reporting is often called:
Which of the following best describes what is
-Management fraud meant by the term “fraud risk factor”?

Which of the following factors would most -Factors whose presence often has been
likely heighten an auditor’s concern about the observed in circumstances where frauds have
risk of fraudulent financial reporting? occurred

-An overly complex organizational structure Which of the following is a commission of

involving unusual lines of authority fraudulent financial reporting (management
fraud)?
Which of the following most accurately
summarizes what is meant by the term -Recording fictitious journal entries,
“material misstatement?” particularly close to the end of an accounting
period, to manipulate operating results or
-Material error, material fraud, and certain achieve other objectives
illegal acts
Misstatements in the financial statements can Fraud involving one or more members of
arise from fraud or error. The distinguishing management or those charged with governance
factor between fraud and error is whether the is referred to as
underlying action that results in the
misstatement of the financial statements is -Management fraud.
I. Intentional or unintentional.
In distinguishing between the detection of a
material management fraud and an equally -He should consider the potential effect on the
material error, audits financial statements

-cannot be expected to provide the same Which of the following conditions identified
degree of assurance during fieldwork of an audit is most likely to
affect the auditor’s assessment of the risk of
Should the auditor uncover circumstances misstatement due to fraud?
during the audit that may cause suspicions of
management fraud, the auditor must -Missing documents

-evaluate their implications and consider the Which of the following statements best
need to modify audit procedures describes an auditor’s responsibility regarding
misstatements?
The auditor’s best defense when material
misstatements in the financial statements are -An auditor should obtain reasonable
not uncovered in the audit is that assurance that the financial statements taken as
a whole are free from material misstatement,
-the audit was conducted in accordance with whether caused by fraud or error
PSA
S1 The risk of not detecting a material
Given that an audit in accordance with misstatement resulting from fraud is higher
generally accepted auditing standards is than the risk of not detecting one resulting
influenced by the possibility of material errors from error.
and fraud, the auditor should conduct the audit S2 The risk of the auditor not detecting a
with an attitude of material misstatement resulting from
management fraud is greater than for
-professional responsiveness. employee fraud.
S3 The auditor recognizes the fact that
When performing a financial statement audit, audit procedures that are effective for
auditors are required to explicitly assess the detecting error may not be effective in
risk of material misstatement due to detecting fraud.

-Fraud -1) True 2) True 3) True

When the auditor identifies a misstatements in Auditing standards require that auditors be
the financial statements, the auditor should aware of relevant factors relating to fraud.
consider whether such a misstatement may be Which of the following statements about fraud
indicative of fraud and if there is such an is false?
indication, the auditor should
-Fraud involves actions of management but
-Consider the implications of the misstatement excludes the actions of employees or third
in relation to other aspects of the audit parties

Which of the following should the auditor If the auditor is unable to determine whether
likely to do when the application of planned fraud or error has occurred because of
audit procedures indicates the possible limitations imposed by the circumstances, the
existence of fraud r error?
auditor would most likely issue a report that 2)Inadequate planning, performance or
contains: judgment
3)the absence of professional competence and
-a qualified opinion due care

Management has the responsibility to detect -1) no 2) no 3) no

and prevent misstatements due to fraud and
error. This responsibility is accomplished
through
Management's and Auditor's Responsibility
-Implementing adequate accounting and - Assessment
internal control systems

Which of the following is an example of

fraudulent financial reporting? Whether the auditor has performed an audit in
accordance with PSAs is determined by
-Company management changes inventory
count tags and overstates ending inventory, -The adequacy of the audit procedures
while understating cost of goods sold. performed in the circumstances and the
suitability of the auditor’s report based on the
In comparing management fraud with result of these procedures
employee fraud, the auditor’s risk of failing to
discover the fraud is Which of the following factors is most
important concerning an auditor's
-Greater for management fraud because of responsibility to detect errors and
management’s ability to override existing irregularities?
internal controls, which is always assumed an
audit. -The risk that mistakes, falsifications, and
omissions may cause the financial statements
The responsibility for the detection and to contain material misstatements.
prevention of errors, fraud and noncompliance
with laws and regulations rests with The primary responsibility for the prevention
and detection of fraud and error rests with.
-management and those charged with
governance -Both b and c

The auditor is most likely to presume that a An auditor should recognize that the
high risk of defalcation exists if application of auditing procedures may
produce evidential matter indicating the
-Inadequate segregation of duties places an possibility of errors and irregularities and
employee in a position to perpetrate and therefore should
conceal fraud
-Plan and perform the engagement with an
The subsequent discovery of material attitude of professional skepticism.
misstatement of the financial statements
resulting from fraud or error, in and of itself, The management responsibility to detect and
indicates: prevent fraud and error is accomplished by
1)a failure to obtain reasonable assurance
-Establishing a control environment and statements may be materially misstated as a
implementing adequate internal control result of fraud
policies and
procedures. When planning and performing audit
procedures and evaluating and reporting the
Auditing standards require that auditors be results thereof, the auditor should
aware of relevant factors relating to fraud.
Which of the following statements about fraud -Consider the risk of material misstatements in
is false? the financial statements resulting from fraud

-Fraud involves actions of management but In connection with the examination of

excludes the actions of employees or third financial statements, an independent auditor
parties could be responsible for failure to detect a
material fraud
Audits of financial statements are designed to
obtain assurance of detecting material -The auditor planned the work in a hasty and
misstatements due to inefficient manner.
1)Errors
2)Fraudulent financial reporting Communication of a misstatement resulting
3)Misappropriation of assets from fraud, or a suspected fraud, or error to the
appropriate level of management on a timely
-1) yes 2) yes 3) yes basis is important because it enables
management to take action as necessary.
Which statement is incorrect regarding the Ordinarily, the appropriate level of
auditor’s responsibility to consider fraud and management is
error in an audit of financial statements?
-At least one level above persons who appear
-The auditor should design test of control to to be involved with the misstatement or
reduce to an acceptably low level the risk that suspected fraud
misstatements resulting from fraud and error
that are material to the financial statements The auditor may encounter exceptional
taken as a whole will not be detected circumstances that bring into question the
auditors ability to continue performing the
Auditing standards require that auditors be audit, including where
aware of relevant factors relating to fraudulent
reporting. Which of the following statements -The auditor’s consideration of the risk of
is false concerning fraudulent reporting? material misstatement resulting from fraud and
the results of audit tests indicate a significant
-Fraud involves actions of management but risk of material and pervasive fraud
excludes the actions of employees or third
parties.

The auditor least likely obtains written Definition of Non-compliance - Assessment

representations from management that the
management:

-It has disclosed to the auditor the results of its Based on PSA 250, noncompliance refers to
assessment of the risk that the financial
-acts of omission or commission by the client -1) True 2) False 3) True
which are contrary to prevailing laws and
regulations The responsibility for the prevention and
detection of noncompliance rests with
Which of the following is not true about the
auditor’s consideration of compliance with -Management.
laws and regulations?

-The auditor should obtain oral representation Management's and Auditor's Responsibility
that management has disclosed to the auditor - Assessment
all known actual or possible noncompliance
with laws and regulations.

To obtain general understanding about the The following are examples of circumstances
law’s and regulations affecting the client’s that may indicate the possibility that the
business, the auditor would least likely financial statements may contain a material
misstatements resulting from fraud, except
-Obtain a lawyer’s representation letter.
-Unavailability of other than photocopied r
According to PSA 250, the risk of not electronically transmitted documents when
detecting material misstatement due to documents in original form are expected to
noncompliance is high. This can be attributed exist.
to all of the following factors, except:
Which of the following is least likely to be
-The detection prevention and detection of required on an audit?
noncompliance rests with management.
-Make a legal determination of whether fraud
The following may indicate non-compliance, has occurred.
except
The absence of which of the following internal
-Payments with proper exchange control control increases the opportunity for fraud?
documentation
-The absence of any of the above increases the
S1 The auditor is not responsible for opportunity for fraud
preventing non-compliance and cannot be
expected to detect noncompliance with all The absence of any of the above increases the
laws and regulations. opportunity for fraud
S2 Whether an act constitutes non-
compliance is ultimately a matter of -An overly complex organizational structure
professional judgment. involving unusual lines of authority
S3 Non-compliance refers to acts of
omission or commission by the entity, either Which of the following statements is correct
intentional or unintentional, which are relating to the auditor’s consideration of
contrary to the prevailing laws or regulations. fraud?
Non-compliance does not include personal
misconduct by those charged with governance, -The auditor’s interest in fraud consideration
management or employees of the entity. relates to fraudulent acts that cause a material
misstatement of financial statements.
 -An illegal payment to a foreign official that
Experience has shown that certain conditions was not recorded
in an organization are symptoms of possible
management fraud. Which of the following Which of the following parties is least likely to
conditions would not be considered an uncover fraud?
indicator of possible fraud?
-External auditors
-Managements are subject to formal
performance review on a regular basis. An auditor who discovers that a client’s
employees paid small bribes to municipal
Which of the following is most likely to be officials most likely would withdraw from the
considered a risk factor relating to fraudulent engagement if
financial reporting?
-Management fails to take the appropriate
-Negative cash flows from operations remedial action.

Whom should auditors contact when they If specific information comes to an auditor’s
suspect a fraud? attention that implies the existence of possible
illegal acts that could have a material, but
-a and c indirect effect on the financial statements, the
auditor should next
Which of the following factors would most
likely heighten an auditor’s concern about the -Apply audit procedures specifically directed
risk of fraudulent financial reporting? to ascertaining whether an illegal act has
occurred.
-An overly complex organizational structure
involving unusual lines of authority Which of the following is correct concerning
requirements about auditor communications
The following are examples of circumstances about fraud?
that may indicate the possibility that the
financial statements may contain a material -Fraud that involves senior management
misstatements resulting from fraud, except should be reported directly to the audit
committee regardless of the amount involved.
-Fewer responses to confirmations than
anticipated or a greater number of responses Which of the following is most likely to be a
than anticipated. response to the auditor’s assessment that the
risk of material misstatement due to fraud for
The primary responsibility for the prevention the existence of inventory is high?
and detection of fraud error rests with.
-Observe test counts of inventory at certain
-Those charged with governance locations on an unannounced basis.
What is an auditor’s responsibility who
Which of the following relatively small discovers management involved in what is
misstatements most likely could have a financially immaterial fraud?
material effect on an entity’s financial
statements? -Report the fraud to the audit committee.
Which of the following might not be a signal the intended degree of reliance to be placed on
of a lack of integrity in management? the

-Prior criminal conviction of an assembly line -Management representation letter

foreman
The following are examples of circumstances
The following are examples of circumstances that may indicate the possibility that the
that may indicate the possibility that the financial statements may contain a material
financial statements may contain a material misstatement resulting from fraud, except
misstatements resulting from fraud, except
-Usual delays by the entity in providing
-Fewer responses to confirmations than requested information
anticipated or a greater number of responses
than anticipated. Which of the following should the auditor
likely to do when the application of planned
The most likely explanation why the auditor’s audit procedures indicates the possible
examination cannot reasonably be expected to existence of fraud or error?
bring all illegal acts by the client to the
auditor’s attention is that -He should consider the potential effect on the
financial statements
-Illegal acts by clients often relate to operating
aspects rather than accounting aspects. THE FINANCIAL STATEMENTS AUDIT

When considering fraud risk factors relating to

management’s characteristics, which of the
following is least likely to indicate a risk of
possible misstatement due to fraud? General Approach - Assessment

-Use of unusually conservative accounting

practices
An audit of FS is conducted to determine if the
Auditing standards regarding the detection of
indirect-effect illegal acts clearly state that the -Overall financial statements are stated in
auditor provides accordance with an applicable financial
reporting framework
-No assurance that they will be detected
It refers to the audit procedures deemed
During the annual audit of Ajax Corp., a necessary in the circumstances to achieve the
publicly held company, Jones, CPA, a objective of the audit.
continuing auditor, determined that illegal
political contributions had been made during -Scope of an audit
each of the past seven years, including the year
under audit. Jones notified the board of The purpose of an audit of FS is to
directors about the illegal contributions, but
they refused to take any action because the -Enhance the degree of confidence of intended
amounts involved were immaterial to the users of the FS
financial statements. Jones should reconsider
Which of the following is incorrect regarding The proper sequence in applying the above
the general principles of an audit? steps is:

-The auditor would ordinarily expect to -baedc

find evidence to support management
representations and assume they are Which of the following is the correct order of
necessarily correct. steps in the audit process?
A. Perform test of controls
Which of the following is not one of the seven B. Develop an overall strategy for the
broad categories of financial statement expected conduct and scope of the audit
assertions, as classified in Glossary of Terms? C. Obtain client’s written representation
D. Prepare engagement letter
-Ownership E. Perform substantive tests

Management assertions are -D, B, A, E, C

-Implied or expressed representations about

the accounts in the financial statements
Accepting an Engagement - Assessment
The auditor is required to maintain
professional skepticism throughout the audit.
Which of the following statements concerning
professional scepticism is false? An engagement letter should be written before
the start of an audit because
-A belief that management and those charged
with governance are honest and have integrity -All of the choices given
relieves the auditor of the need to maintain
professional scepticism. When a CPA is approached to perform an
audit for the first time, the CPA should make
The auditor’s opinion inquiries of the predecessor auditor. This is
necessary procedure because the predecessor
-Enhances the credibility of the financial may be able to provide the successor with
statements. information that will assist the successor in
determining whether the engagement should
Overview of the Audit Process - Assessment be accepted.
Before accepting an audit engagement, a
successor auditor makes specific inquiries of
the predecessor auditor regarding
disagreements the predecessor had with the
The five major phases in conducting a risk- client concerning auditing procedures and
based audit process are: accounting principles.
a. Audit planning and risk assessment
activities -Both statements are true
b. Preliminary engagement activities
c. Completing the audit and post- audit The form and content of the audit engagement
responsibilities letters may vary for each client, but they
d. Reporting and communication would generally include reference to:
e. Responses to assessed risks
-management’s responsibility for the financial The following matters are generally included
statements in an auditor’s engagement letter, except
On an audit engagement performed by a CPA
firm with one office, at the minimum, -The factors to be considered in setting
knowledge of the relevant professional preliminary judgments about materiality
accounting and auditing standards should be
held by In determining audit fees, an auditor may take
account each of the following except
-The auditor with final responsibility for the
audit -Size and amount of capital of client

The auditor shall agree the terms of the audit The engagement letter will do one, some, or
engagement with management or those all of the following:
charged with governance, as appropriate. 1. State whether the CPA will perform
Which of the following normally signs the audit, review, or compilation services.
engagement letter for an audit of a public 2) State whether the CPA will perform tax
company or management advisory or other services.
3) State any restriction to be imposed on
-Audit committee the CPA’s work.
4) Identify deadlines for completing the
What is the most likely course of action that work.
will be taken by an auditor in assessing 5) State the amount and type of work to be
management integrity? done by client’s personnel in generating
auditor’s working papers.
-Research the background and histories of 6) State the CPA’s fees for the engagement.
officers Inform the client that the CPA does not have
responsibility for detecting fraud.
In a continuing engagement, the continuing The engagement letter does
auditor would most likely send a new
engagement letter when -All seven of the above stated items.

-there is a recent change in the client’s board When an auditor believes that an
of directors understanding with the client has t been
established, he or she should ordinarily
Communication with a predecessor auditor is
initiated by: -Decline to accept or perform the audit

-The successor auditor In which of the following situations would the

auditor be unlikely to send a new engagement
Which of the following factors do not letter to a continuing client?
influence the decision of the auditor to send a
separate engagement letter to the parent entity -a recent change in the partner and/or staff in
and its component (subsidiary, branch, or the audit engagement
division) assuming the same auditor handles
both entities? Prior to the acceptance of an audit engagement
with a client who has terminated the services
-Ethical requirements of the predecessor auditor, the auditor should
-Advise the client of the intention to contact -Yes
the predecessor auditor and request permission Yes
for the contact. Yes
Yes
Dora, CPA, accepted an engagement to audit Yes
the financial statements of Tech Resources, a
nonpublic entity. Before the completion of the Which of the following would be least likely
audit, Tech requested Dora to change the to be included in the auditor’s engagement
engagement to a review of financial letter?
statements. Before Dora agrees to change the
engagement, Dora is required to consider the -Type of opinion to be issued
(1) Legal or contractual implications of the
request Preplanning the audit involves several key
(2) Reason given for Tech’s Request activities. Which of the following would not
be included in preplanning an audit?
-(1)Yes; (2)Yes
-Determining the likelihood of issuing an
Which of the following will an auditor least unqualified audit opinion on the client’s
likely discuss with the former auditors of a financial statements
potential client prior to acceptance?

-Fees charged for services

An engagement letter should ordinarily Retention of Existing Clients - Assessment

include information on the objectives of the
engagement and
(1) CPA’s responsibilities
(2) Management’s responsibilities The auditor would most likely withdraw from
(3) Limitations of engagement the engagement if

-(1)Yes; (2)Yes; (3)Yes -the auditor is unable to agree to a change of

the engagement and is not permitted to
A written understanding between the auditor continue the original engagement
and the client concerning the auditor’s
responsibilities for the discovery of illegal acts Assuming the recurring audit, in which of the
is usually set forth in a(an). following situations would the auditor be
unlikely to send a new engagement letter to
-engagement letter the client?

In making a decision to accept or continue -A recent change partner and/ or staff involved
with a client, the auditor should consider in the audit engagement.
its competence
its independence In a continuing engagement, the continuing
its ability to serve the client properly auditor would most likely send a new
the integrity of clients management engagement letter when
agreement of the terms of engagement with the
management -there is a recent change in the client’s board
of directors.
 engagement. The agreed terms would need to
Which of the following would not be a valid be recorded in a(n)
justification for changing the nature of an
engagement? -engagement letter

-there was a management imposed scope An engagement letter should ordinarily

limitation that requires modification of audit include information on the objectives of the
opinion. engagement and ….
CPA’s responsibilities
Management’s responsibilities
Limitations of engagement
Engagement Letter - Assessment

-Yes
Yes
The following matters are generally included Yes
in an auditor’s engagement letter, except
Which of the following is (are) valid reasons
-The factors to be considered in setting why an auditor sends to his client an
preliminary judgments about materiality engagement letter?
To avoid misunderstanding with respect to
Which of the following is not one of the engagement
principal contents of an engagement letter? To confirm the auditor’s acceptance of the
appointment
-objectives of the financial statements To document the objective and scope of the
audit
Which of the following would be least likely To ensure CPA’s compliance to PSA
to be included in the auditor’s engagement
letter? -Yes
Yes
-Type of opinion to be issued Yes
No
Engagement letter that documents and
confirms the auditor’s acceptance of the The following are the reasons why the auditor
engagement would normally be sent to the will send a new engagement letter each
client. period, except

-before the commencement of the engagement -A recent change in the audit team

Which of the following is not included in an

engagement letter?
Understanding the Entity and its
-Restriction on cash balances, lines of credit Environment - Assessment
by similar arrangements

According to PSA 210, the auditor and the

client should agree on the terms of Reasons to evaluate internal control would not
include
 III. Objectives and strategies and the related
-Basis for type of opinion to be rendered business risks that may result in a material
misstatement of the financial statements.
A primary objective of procedures performed IV. Measurement and review of the entity’s
to obtain an understanding of internal control financial performance.
is to provide an auditor with Internal control

-Knowledge necessary to assess the risks of -All of the above

material misstatements
To obtain evidential matter abut control risk,
Which of the following is not a medium that an auditor selects tests from a variety of
can normally be used by an auditor to record techniques including
information concerning a client’s internal
control policies and procedures -Inquiry

-Procedures manual In the audit of a private company, the auditor

will test controls when control risk is initially
Which of the following would an auditor least assessed at:
likely perform when obtaining understanding Low
of the entity’s internal control? moderate
high
-Reperformance of internal control
-yes
When an auditor increase the planned assessed yes
level control risk because certain control no
procedures were determined to be ineffective
the auditor would most likely increase the An auditor obtains knowledge about a new
client's business and its industry to
-Extent of test of details (substantive tests)
-Understand the events and transactions that
Which of the following statements about may have an effect on the client's financial
auditor documentation of the client’s internal statements.
control is correct?
Which of the following is not useful for
-No one particular form of documentation is obtaining an understanding of internal
necessary, and the extent of documentation controls?
may vary.
-Read industry trade magazines
The auditor’s understanding of the entity and
the environment consists of the following When the auditor attempts to understand the
aspects operation of the accounting system by tracing
I. Industry, regulatory, and other external a few transactions through the accounting
factors, including the applicable financial system, the auditor is said to be:
reporting framework
II. Nature of the entity, including the entity’s -Performing a walk- through
selection and application of accounting
policies An auditor is required to establish an
understanding with a client regarding the
services to be performed for each engagement. The auditor's review of the client's internal
This understanding generally includes control is documented in order to substantiate

-The auditor’s responsibility for ensuring that -Compliance with PSA.

the audit committee is aware of any significant
deficiencies in internal control that come to the After obtaining an understanding of a client’s
auditor’s attention controls, an auditor may decide to omit tests of
the controls. Which of the following in not
For the auditor to assess control risk account appropriate reason to omit tests of controls?
balances at less than the maximum
-The controls appear adequate.
-The external auditor must test and valuate
some of the controls To obtain an understanding of the relevant
policies and procedures of internal control, the
Reasons to evaluate internal control would not auditor performs all of the following except:
include
-Design substantive tests
-Basis for type of opinion to be rendered
When obtaining an understanding of the
Which of the following statements is correct accounting and internal control system the
with respect to obtaining an understanding auditor may trace a few transactions through
with a client? the accounting system. This technique is:

-Auditor must document their understanding -Walk-through test

of the engagement.
An auditor intends to perform tests of control
on a client’s cash disbursements procedures.
If the control procedures leave no audit trail of
Understanding the Internal Control documentary evidence, the auditor most likely
(CONINC) - Assessment will test the procedures by

-Inquiry and observation.

Of the following, the best statement of the In an auditor’s consideration of internal

CPA’s primary objective in considering control, the completion of a questionnaire is
internal control is that the review is intended most closely associated with which of the
to provide following?

-A basis for reliance on the system and -Understanding the system

determining the scope of other auditing
procedures. The primary objective of procedures
performed to obtain an understanding of
The primary objective of procedures internal control is to provide an auditor with
performed to obtain an understanding of
internal control is to provide an auditor with -Knowledge necessary to plan the audit.

-Knowledge necessary to plan the audit.

In obtaining an understanding of an entity’s Because of the risk of material misstatement,
internal control structure, an auditor is an audit of financial statements in accordance
required to obtain knowledge about the with PSAs should be planned and performed
Operating effectiveness of Design of policies with an attitude of
Policies and procedures and
procedures -Professional skepticism.

-No Yes

Corporate directors, management, external

auditors, and internal auditors all play Developing an Overall Audit Strategy -
important roles in creating a proper control Assessment
environment. Top management is primarily
responsible for

-Establishing a proper environment and When planning the audit, the auditor should
specifying overall internal control. make inquiries of management. Such inquiries
should address the following, except
Which of the following is an incorrect
statement concerning the relationship of the -Management’s consideration of how an
internal auditor and the scope of the external element of unpredictability will be
audit of an entity’s financial statements? incorporated into the nature, timing, and extent
of the audit procedures to be performed.
-The internal auditors may determine the
extent to which audit procedures should be The following are the matters to be considered
employed by the external auditor. by the auditor in establishing the overall audit
strategy, except
Which of the following statements about
internal control is correct? -Computation of audit fees

-The cost-benefit relationship should be When the auditor identifies a misstatement in

considered in designing internal control. the financial statements, the auditor should
consider whether such a misstatement may be
Which of the following is correct about indicative of fraud and if there is such an
internal control? indication, the auditor should

-One of the inherent limitations of accounting -Consider the implications of the misstatement
and internal control systems is the possibility in relation to other aspects of the audit.
that the procedures may become inadequate
due to changes in conditions, and compliance Which of the following matters should be
with procedures may deteriorate. considered by the auditor in developing the
overall audit strategy?
Which of the following statements about
internal control is correct? -All of the above.

-The cost-benefit relationship should be In developing the overall audit strategy for a
considered in designing internal control. new client factor not to be considered is:
-The specific procedures to be performed to
gather audit evidence. -Relate to their activities concerning the
design and effectiveness of the entity’s
Which of the following is not considered by internal control and whether management has
the auditor when preparing an overall audit satisfactorily responded to any findings from
plan? those activities

-The content of the management A client maintains perpetual inventory records

representation letter. in both quantities and peso. If the assessed
level of control risk is high, an auditor would
After gaining an understanding of internal probably
control and assessing the risks of material
misstatement, an auditor decided to perform -Request the client to schedule the physical
tests of controls. The auditor most likely inventory count at the end of the year
decided that
Which of the following are considered control
-It is not possible or practicable to reduce the environment elements?
risks of material misstatement at the assertion Commitment to Competence
level to an acceptably low level with audit Detection Risk Organizational
evidence obtained only from substantive test Structure
procedures.
-Yes No Yes
In developing the overall audit strategy for a
new client factor not to be considered is: The following are examples of conditions and
events that may indicate the existence of risks
-The specific procedures to be performed to of material misstatement, except
gather audit evidence.
-Operations in regions that are economically
stable.
Risk Assessment Procedures - Assessment
Which of the following is least likely to be
included in an auditor’s inquiry of
management while obtaining information to
Why would the auditor assess control risk? identify the risks of material misstatement due
of fraud?
-Because it indicates where inherent risk may
be the greatest. -Are financial reporting operations controlled
by and limited to one location?
Which of the following audit risk components
may be assessed in non-quantitative terms? Which statement is incorrect regarding the
1) Inherent Risk extent of tests of controls?
2) Control Risk
3) Detection Risk -The more the auditor relies on the operating
effectiveness of controls in the assessment of
-1) Yes 2) Yes 3) Yes risk, the lesser is the extent of the auditor’s
tests of controls.
Inquiries directed towards internal audit
personnel may most likely Detection risk is
-The risk that an auditor’s substantive The assessment of the risks of material
procedures will not detect a misstatement that misstatement at the financial statement level is
exists in an account balance or class or affected by the auditor’s understanding of the
transactions that could be material, control environment. Weaknesses in the
individually or when aggregated with control environment ordinarily will lead the
misstatements in other balances or classes. auditor to

The risk that an auditor’s substantive -Modify the nature of audit procedures to
procedures will not detect a misstatement that obtain more persuasive audit evidence.
exists in an account balance or class or
transactions that could be material, Which of the following statements concerning
individually or when aggregated with materiality threshold is incorrect?
misstatements in other balances or classes.
-In general, the more misstatements the auditor
-Obtain an understanding of the entity and its expects, the higher should be the aggregate
environment, including its internal control, to materiality threshold.
assess the risks of material misstatement at the
financial statement and assertion levels. Opportunities to misappropriate assets
increase when there are
Your client, a merchandising concern, has
annual sales of P30,000,000 and a 40% gross -Inventory items that are small in size, of high
profit rate. Tests reveal that 2% of the peso value, or in high demand.
amount of purchases do not get into inventory
because of breakage and inventory pilferage Which of the following is the best definition of
by employees. The company estimates that detection risk?
these losses could be reduced to 0.5% of
purchases by designing and implementing -The auditor will fail to detect material
certain controls costing approximately misstatement that occur.
P350,000. Should the controls be designed
and implemented? Which of the following combinations of
engagement risk, audit risk, and materiality
-No, because the cost of designing and would lead the auditor to most audit work?
implementing the added controls exceeds the 1) Engagement Risk
projected savings. 2) Audit Risk
3) Materiality
The two types of intentional misstatements
that are relevant to the auditor’s consideration -1) Moderate 2) Low 3) Low
of fraud include, misstatements resulting from
fraudulent financial reporting and As the acceptable level of detection risk
misstatements resulting from misappropriation decrease an auditor may
of assets. Fraudulent financial reporting least
likely involve. -Postpone the planned timing on substantive
tests from interim dates to the year-end.
-Embezzling receipts, stealing physical assets
or intellectual property, causing an entity to Which of the following factors most likely
pay for goods and services not received, or would influence an auditor’s determination of
using an entity’s assets for personal use.
the auditability of an entity’s financial -Inquiries of the entity’s external legal counsel
statements? or of valuation experts that the entity has used.

-The adequacy of the accounting records Which of the following is least likely to be
considered a risk assessment procedure?
Which of the following is an incorrect
statement? -Confirmation of ending accounts receivable.

-Detection risk cannot be changed at the According to PSA 400 – Risk Assessments
auditor’s discretion and Internal Control, audit risk means

Which statement is incorrect regarding -The risk that the auditor gives an
substantive procedures? inappropriate audit opinion when the financial
statements are materially misstated.
-The auditor always performs substantive
procedures for each class of transactions, Which of the following would not be a source
account balance, and disclosure. of information about risk of a potential new
audit client?
Which type of risk does the management of a
company have the most control over in the -The new auditor’s permanent file
short term?
Which of the following statements is correct
-Control risk concerning an auditor’s assessment of control
risk?
The existence of a related party transaction
may be indicated when another entity -Assessing control risk may be performed
concurrently during an audit with obtaining an
-absorbs expense of the corporation. understanding of the entity’s internal control

An auditor may decide to assess control risk at Auditors appear not to exhibit due care if there
the maximum level for certain assertions was
because the auditor believes
-High audit risk
-Controls are unlikely to pertain to the
assertions. When there are numerous property and
equipment transactions during the year, an
Which of the following audit risk components auditor who plans to assess control risk at a
may be assessed in non-quantitative terms? low level usually performs
(Control risk, Detection risk, Inherent risk)
-Tests of controls and limited tests of current
-Yes, Yes, Yes year property and equipment transactions.

The auditor should perform the following risk Which of the following control activities in an
assessment procedures to obtain an entity’s revenue/receipt cycle would provide
understanding of the entity and its reasonable assurance that all billed sales are
environment, including its internal control, correctly posted to the accounts receivable
except: ledger?
-Daily sales summaries are compared to daily
postings to the accounts receivable ledger. -Develop an expectation; calculate predictions
and compare them to them recorded amount;
Why should the auditor plan more work on define a significant difference; investigate
individual accounts as lower acceptable levels significant differences.
of both audit risk and materiality are
established? Analytical procedures are used in an audit
because it is assumed of financial statements
-To find smaller errors that

The probability of an auditor’s procedures -Plausible relationships among data may

leading to the conclusion that a material error reasonably be expected to exist and continue
does not exist in an account balance when, in in the absence of known conditions to the
fact, such error does exist referred to as contrary.

-detection risk. Which of the following results from analytical

procedure might indicate obsolete inventory?
Which of the following is most likely to be an
overall response to fraud risks identified in an -A decline in inventory turnover
audit?
Analytical procedures used in planning an
-Use less predictable audit procedures. audit should focus on

-Enhancing the auditor’s understanding of the

client’s business and identifying areas of
Analytical Procedures - Assessment potential risk.

When must an auditor perform analytical

The objective of performing analytical review procedures in a financial statement
procedures in planning an audit is to identify audit?
the existence of
-Planning the nature, timing and extent of
-Unusual transactions and events procedures

Analytical procedures used planning an audit Analytical procedures performed in the overall
should focus on review stage of an audit suggest that several
accounts have unexpected relationships. The
-Enhancing the auditor’s understanding of the results of these procedures most likely indicate
client’s business and identifying areas of that
potential risk.
-Additional substantive tests of details are
Which of the following is not a reason for required.
utilizing analytical procedures
Evaluations of financial information made by
-To determine the magnitude of error in the FS a study of plausible relationships among both
financial and non-financial data. It also
Analytical procedures are performed in the encompasses the investigation of identified
following order: fluctuations and relationships that are
inconsistent with other relevant information or Analytical procedures enable the auditor to
that differ form expected values by a predict the balance or quantity of an item
significant amount. under audit. Information to develop this
estimate can be obtained from all the
-Analytical procedures following except

Auditors try to identify predictable relations -Tracing transactions through the system to
when using analytical procedures. determine whether procedures are being
Relationships involving transactions from applied as prescribed
which of the following accounts most likely
would yield the highest level of evidence?

-Payroll expense Documenting the Audit Plan - Assessment

Which of the following nonfinancial

information would an auditor most likely
consider in performing analytical procedures An audit program provides proof that
during the planning phase of an audit?
-the work was adequately planned.
-Square footage of selling space
The element of the audit planning process
An auditor’s analytical procedures most likely most likely to be agreed upon with the client
would be facilitated if the entity before implementation of the audit strategy is
the determination of the
-Uses a standard cost system that produces
variance reports -schedules and analyses to be prepared by the
client’s staff.
Which of the following would not be
considered an analytical procedure? How can the audit program best be described
at the beginning of the audit process?
-Projecting an error rate by comparing the
results of a statistical sample with the actual -Temporary
population characteristics.
As a form of analytical procedure, trend When planning the audit, if the auditor has no
analysis reason to believe that illegal acts exist, the
auditor should
-Is based on the assumption that performance
will continue in line with previous -make inquiries of management regarding their
performance or industry trends unless policies and their knowledge of violations, and
something unusual is happening I the then rely on normal audit procedures to detect
company. errors, irregularities, and illegalities.

Which of the following most likely would Which one of the following is not considered a
indicate the existence of related parties? valid source of information about the client’s
processes?
-Borrowing money at an interest rate
significantly below the market rate. -Confirmation of third parties
Which of the following is not true regarding Which statement best describe the emphasis of
planning in an electronic environment? the systems and substantive approaches in the
audit plan?
-The procedures used are not changed
Audit program is basically s listing of all the -The system approach focuses on testing
things the auditor will do to gather sufficient, controls to make sure they are effective, while
competent evidence. Which item would not be the substantive approach is the detailed testing
contained in an audit program? of specific accounts for accuracy.

-Documentation of system being reviewed With respect to the auditor’s planning of a

year-end examination which of the following
In deciding whether to use the work of internal statements is always true?
auditors, external auditors must evaluate the
internal auditors’ -It is an acceptable practice to carry out
substantial parts of the examination at interim
-objectivity and competence dates.

After an auditor has been engaged to perform When a CPA is approached to perform an
the first audit for a nonpublic entity, the client audit for the first time, the CPA should make
requested to change the engagement to a inquiries of the predecessor auditor. This is a
review. In which of the following situations necessary procedure because the predecessor
would there be a reasonable basis to comply may be able to provide the successor with
with the client’s request? information that will assist the successor in
determining
-The client’s bank required an audit before
committing to a loan, but the client -whether the engagement should be accepted.
subsequently acquired alternative financing. The audit plan includes:

An audit program is -All of the above

-the detailed plan of audit procedures to be As a part of audit planning, CPAs should
performed in the course of the audit. design audit programs for each individual
audit and should include audit steps and
The audit plan includes: procedures to

-All of the above -provide assurances that the objectives of the

audit are met.
Auditing standards require a successor auditor
to communicate with the predecessor auditor. An audit plan is a
The Code of Ethics requires confidentiality;
therefore, the client’s permission must be -document that provides an overview of the
obtained before the communication can be company and a general plan for the audit work
made by to be accomplished, timing of the work, and
other matters of concern to the audit.
-the successor auditor.
An initial (first-time) audit requires more audit
time to complete than a recurring audit. One of
the reason for this is that
 control, and the tone of internal control
-the client’s business, industry and internal typically originates, rests with
control are unfamiliar to the auditor and need
to be carefully studied. -The management/TCWG

The elements of the audit planning process As generally conceived, the “audit committee”
most likely to be agreed upon with the client of a publicly held company should be made up
before implementation of the audit strategy is of
the determination of the
-Members of the board of directors who are
-timing of inventory observation procedures to not officers or employees.
be performed.
Which of the following least likely affects the
nature, timing, and extent of the procedures
performed by the auditor to obtain an
understanding of the accounting and internal
Nature of Internal Control - Assessment control systems of an audit client?

-The level of acceptable detection risk

The process designed and affected by those Which of the following is correct about
charged with governance, management, and internal control?
other personnel to provide reasonable
assurance about the achievement of the -One of the inherent limitations of accounting
entity’s objectives with regard to reliability of and internal control systems is the possibility
financial reporting, effectiveness and that the procedures may become inadequate
efficiency of operations and compliance with due to changes in conditions, and compliance
applicable laws and regulations. with procedures may deteriorate.

-Internal control Proper segregation of functional

responsibilities calls for separation of the
As generally conceived, the “audit committee” functions of
of a publicly held company should be made up
of -Authorization, recording, and custody.

-Members of the board of directors who are In general, a material weakness in internal
not officers or employees. control may be defined as a condition in which
material errors or irregularities may occur and
Corporate directors, management, external not be detected within a timely period by
auditors, and internal auditors all play
important roles in creating a proper control -Employees in the normal course of
environment. Top management is primarily performing their assigned functions.
responsible for
When considering the effectiveness of a
-Establishing a proper environment and system of internal accounting control, the
specifying overall internal control. auditor should recognize that inherent
The primary responsibility for designing, limitations do exist. Which of the following is
implementing and maintaining internal
an example of an inherent limitation in a Proper segregation of functional
system of internal accounting control? responsibilities calls for separation of the
functions of
-In the performance of most control
procedures, there are possibilities of errors -Authorization, execution, and recording.
arising from mistakes in judgment
In evaluating the design of the entity’s internal
When considering internal control, an auditor control environment, the auditor considers the
should be aware of the concept of reasonable following elements and how they have been
assurance, which recognizes that incorporated into the entity’s processes. Such
elements would include all of the following
-The cost of an entity’s internal control should except
not exceed the benefits expected to be derived.
-Information and communications systems
According to PSA 400, which of the following
is correct regarding internal control system? The process of evaluating the quality of
internal control overtime is known as
-In the audit of financial statements, the
auditor is only concerned with those policies -Monitoring
and procedures within the accounting and
internal control systems that are relevant to the Which of the following does not relate to the
financial statements. firm’s quality control policies and procedures
on engagement performance?
When considering the effectiveness of a
system of internal accounting control, the -Independence
auditor should recognize that inherent
limitations do exist. Which of the following is Which of the following is not a component of
an example of an inherent limitation in a an entity’s internal control?
system of internal accounting control?
-Control risk
-In the performance of most control
procedures, there are possibilities of errors Which of the following is not part of the
arising from mistakes in judgment control environment?

-Information and communication systems.

Components of Internal Control - Proper segregation of functional

Assessment responsibilities calls for separation of the
functions of
Which of the following is a responsibility that
should not be assigned to only one employee? -Authorization, execution, and recording.

-Access to securities in the company’s safe An entity’s ongoing monitoring activities often
deposit box. include

-Reviewing the purchasing function.

Control environment component of internal
control A secondary purpose of the auditor's
consideration of internal control is to provide
-Includes the governance and management
functions and the attitudes, awareness, and -A basis for constructive suggestions about
actions of those charged with governance and improvements in internal control structure.
management concerning the entity’s internal
control and its importance in the entity. Which of the following activities would be an
example of Physical Control?
The policies and procedures that help ensure
that management directives are carried out are -Access to computer facilities and records is
referred to as the: limited to authorized personnel.

-Control activities Internal control procedures are not designed to

provide reasonable assurance that
Proper segregation of functional
responsibilities calls for separation of the -Irregularities will be eliminated.
functions of
Transaction authorization within an
-Authorization, execution, and recording. organization may be either specific or general.
An example of specific transaction
When obtaining an understanding of an authorization is the
entity’s control environment, an auditor should
concentrate on the substance of management’s -Approval of a construction budget for a new
policies and procedures rather than their form warehouse
because
Which of the following best describes the
-Management may establish appropriate interrelated components of internal control?
policies and procedures but not act on them
-Control environment, risk assessment, control
The overall attitude and awareness of an activities, information and communication
entity’s board of directors concerning the systems, and monitoring
importance of the internal control structure
usually is reflected in its

-Control environment Consideration of Internal Controls -

Assessment
Which of the following is not an element of a
system of quality control? To obtain an understanding of the relevant
policies and procedures of internal control, the
-Measurement and review of performance auditor performs all of the following except:

Which of the following best describe the -Design substantive tests

interrelated components of internal control?
After considering internal control, an auditor
-Control environment, risk assessment, control might decide to
activities, information and communication
systems, and monitoring.
-Increase the extent of substantive tests in -The quantity of audit evidence needed is
areas where internal control is weak affected by the risk of misstatement (the
greater the risk, the more audit evidence is
Before relying on the system of internal likely to be required) and also by the quality of
control, the auditor obtains a reasonable such audit evidence (the higher the quality, the
degree of assurance that the internal control less may be required).
procedures are in use and operating as
planned. The auditor obtains this assurance by Which of the following statements is incorrect
performing planned regarding relevance of audit evidence?

-Tests of controls -Obtaining audit evidence relating to a

particular assertion is a substitute for obtaining
After considering a client’s internal control, an audit evidence regarding another assertion.
auditor has concluded that the system is well
designed and is functioning as anticipated.
Under these circumstances, the auditor would
most likely Relationship Between Substantive Test and
Test of Controls - Assessment
-Not increase the extent of planned substantive
tests

In an auditor’s consideration of internal The auditor is examining copies of sales

control, the completion of a questionnaire is invoices only for the initials of the person
most closely associated with which of the responsible for checking the extensions. This
following? is an example of a

-Understanding the system -Test of controls

After obtaining an understanding of a client’s An auditor wishes to perform tests of controls

controls, an auditor may decide to omit tests of on a client’s cash disbursements procedures.
the controls. Which of the following in not If the controls leave no audit trail of
appropriate reason to omit tests of controls? documentary evidence, the auditor most likely
will test the procedures by
-The controls appear adequate.
-Observation and inquiry.

Observation

Effectiveness of Substantive Tests - -Consists of looking at a process or procedure

Assessment being performed by others.

In which of the following circumstances

would the use of the negative form of accounts
Which statement is correct regarding the receivable confirmation most likely be
sufficiency and appropriateness of audit justified?
evidence?
-A small number of accounts may be in
dispute and the accounts receivable balance
arises from sales to many customers with
small balances. -Auditors are expected to address all
information that may exist.
Which of the following should be considered
by the auditor in deciding which means (or Which of the following statements concerning
combination of means) to use in selecting evidential matter is true?
items for testing?
I. The risk of material misstatement related -A client’s accounting records cannot be
to the assertion being tested. considered sufficient evidence to support the
II. Audit efficiency. financial statements.

-Both I and II Accounting records least likely include

Each of the following might, by itself, form a -Comparable data about competitors
valid basis for an auditor to decide to omit a (benchmarking).
test except for the
S1. The quantity of audit evidence needed is
-Difficulty and expense involved in testing a affected by the risk of misstatement and also
particular item. by the quality of such audit evidence.
S2. The reliability of audit evidence is
Which of the following statements is correct influenced by its source and by its nature and
concerning the use of negative confirmation is dependent on the individual circumstances
requests? under which it is obtained.

-Unreturned negative confirmation requests -Both statements are true.

rarely provide significant explicit evidence.
Audit information is usually considered
The principal reason for an independent relevant when it is
auditor to gather and evaluate audit evidence is
to -Consistent with the audit objectives.

-Form an opinion of the financial statements The principal reason for an independent
auditor to gather and evaluate audit evidence is
Confirmation is most likely to be a relevant to
form of evidence with regard to assertions
about accounts receivable when the auditor -Form an opinion of the financial statements
has concerns about the receivables
Which of the following terms is used in the
-Existence standard to describe the effects on the financial
statements of misstatements or the possible
effects on the financial statements, if any, that
are undetected due to an inability to obtain
Audit Evidence - Assessment sufficient appropriate audit evidence?

-Pervasive

Which statement is incorrect regarding audit Other information that the auditor may use as
evidence? audit evidence least likely includes
 by classifying and summarizing similar or
-Adjustments to the financial statements that related items?
are not reflected in formal journal entries.
-Lead schedules.
Which of the following statements concerning
evidential matter is correct? Working papers that record the procedures
used by the auditor to gather evidence should
-A client's accounting data cannot be be
considered sufficient audit evidence to support
the financial statements. -Designed to meet the circumstances of the
particular engagement.
Which of the following generalizations does
not relate to the appropriateness of evidence? Which of the following conditions constitutes
inappropriate working paper preparation?
-An auditor’s opinion, to be economically
useful, is formed within reasonable time and -All forms and directives used by the auditee
based on evidence obtained at a reasonable department are included in the working papers.
cost.
It means the materials prepared by and
Leadership responsibilities within the firm for, or obtained and retained by the
shall be assumed by the auditor in connection with the performance of
the audit.
-Chief executive officer
-Documentation
Which of the following generalizations in
assessing the reliability of audit evidence is An auditor’s working papers will ordinarily be
incorrect? least likely to include documentation showing
how the
-Audit evidence that is generated internally is
not affected by the effectiveness of the -Client’s schedules were prepared.
controls imposed by the entity.
Which of the following pairs of accounts
Holding other planning considerations equal, a would an auditor most likely analyze on the
decrease in the amount of misstatement in a same working paper?
class of transactions that an auditor could
tolerate most likely would cause the auditor to -Notes receivable and interest income.

-Perform the planned auditing procedures Which of the following is not a purpose of
closer to the balance sheet date working papers?

Audit Documentation / Working Paper - -Support the client’s financial statements.

Assessment
Why does an auditor document audit
evidence?

Which of the following eliminates voluminous -To support audit opinion and to provide
details from the auditor’s working trial balance evidence that the audit was carried out in
accordance with PSA.
 not use when evaluating the reasonableness of
During the course of an audit engagement an the estimate?
auditor prepares and accumulates audit
working papers. The primary purpose of the -Confirm the estimate with independent
audit working papers is to parties.

-Support the auditor's opinion. Which of the following is an audit procedure

that an auditor most likely would perform
concerning litigation, claims, and
assessments?
Auditing Accounting Estimates -
Assessment -Discuss with management its policies and
procedures adopted for evaluating and
accounting for litigation, claims, and
assessments.
Management prepares accounting estimates
and the auditor is responsible for evaluating Which of the following is not an audit
the reasonableness of the estimates. Which of procedure that the independent auditor would
the following would not be an auditor’s perform with respect to litigation, claims, and
objective when evaluating estimates? assessments?

-The accounting estimates developed by -Confirm directly with the client’s lawyer that
management are accurate with 100% certainty. all claims have been recorded in the financial
statements.
The auditor should adopt one or a combination
of the following approaches in the audit of an In evaluating the assumptions on which the
accounting estimate: estimate is based, the auditor would need to
I. Review and test the process used by pay particular attention to assumptions which
management to develop the estimate. are
II. Use an independent estimate for
comparison with that prepared by -Subjective or susceptible to material
management. misstatement.
III. Review subsequent events which
confirm the estimate made.

-Any of the above Related Parties - Assessment

It means an approximation of the amount of an Which one of the following is not a Field
item in the absence of a precise means of Work Standard?
measurement
-Due professional care.
-Accounting estimate

It is the responsibility of the auditor to

evaluate the reasonableness of the accounting
estimates made by management. Which one Using the Work of an Expert - Assessment
of the following approaches would the auditor
Which of the following statements concerning In using the work of a specialist, an auditor
the auditor’s use of the work of a specialist is referred to the specialist’s findings in the
true? auditor’s report. This is an appropriate
reporting practice if the
-If the specialist is related to the client, the
auditor is still permitted to use the specialist’s -Auditor, as a result of the specialist’s
findings as corroborative evidence. findings, adds an explanatory paragraph
emphasizing a matter regarding the financial
A person or firm possessing special skill, statements.
knowledge and experience in a particular field
other than accounting and auditing is called Which of the following statements is correct
a/an concerning an auditor’s use of the work of an
expert?
-expert
-The work of an expert who is related to the
Which of the following least likely requires client may be acceptable under certain
the services of an expert? circumstances

-Application of accounting methods in When the auditor has to determine the need to
computing inventory balances. use the work of an expert, he would least
likely consider:
Which statement is incorrect regarding the
auditor’s use of the work of an expert? -The cost of using the services of an expert.

-When the auditor uses the work of an expert Which of the following statements is correct
employed by the auditor, that work is used in about the auditor’s use of the work of an
the employee's capacity as an assistant on the expert?
audit.
-The auditor should obtain an understanding of
An expert may be: the methods and assumptions used by the
Engaged by the entity expert
Engaged by the auditor
Employed by the entity
Employed by the auditor

-Yes Considering the Work of Internal Auditing

Yes - Assessment
Yes
Yes

Which of the following steps is an auditor The scope and objectives of internal auditing
most likely to take when using an expert to vary widely and depend on the size and
obtain assurance concerning a material structure of the entity and the requirements of
financial statement assertion? its management. Ordinarily, internal auditing
activities include one or more of the following,
-Assess the competence and objectivity of the except
expert
-Establishment of adequate accounting and
internal control systems

An independent appraisal activity established

within an entity as a service to the entity is Basic audit Sampling Concepts -
Assessment
-internal auditing

Which of the following is considered a

primary reason for creating an internal audit The risk that the auditor’s conclusion based on
department? a sample may be different from the conclusion
if the entire population were subjected to the
-To evaluate and improve the effectiveness of same audit procedure is
control processes.
-Sampling risk
Which of the following is not an appropriate
function of internal auditing? Which of the following constitutes audit
sampling?
-expressing an opinion about the fair
presentation of the financial statements. -Applying audit procedures to less than 100%
of items within an account balance or class of
When obtaining an understanding and transactions such that all sampling units have a
performing a preliminary assessment of the chance of selection.
internal audit function, the auditor should
consider the internal auditors’ The entire set of data about which the auditor
Organizational status wishes to draw conclusions is called
Scope of functions
Technical competence and due care -Population.

-Yes Which of the following constitutes audit

Yes sampling?
Yes
-Applying audit procedures to less than 100%
Which of the following statements in relation of items within an account balance or class of
to the preliminary assessment of internal transactions such that all sampling units have a
auditing is false? chance of selection.

-Effective internal auditing will often allows a An error that arises from an isolated event that
modification in the nature, timing, reduction has not recurred other than on specifically
in the extent and even eliminate in its entirety identifiable occasions and is therefore not
some procedures performed by the external representative of errors in the population is
auditor called

Which of the following is most likely to be an -Anomalous error

audit area where a CPA places reliance on the
work of a client’s internal auditors? Audit sampling involves the

-When assessing control risk

-Application of audit procedures to less than
100% of items within a class of transactions or
an account balance such that all items have a Factors Affecting Sample Design -
chance of selection. Assessment

The entire set of data from which a sample is

selected and about which the auditor wishes to
draw conclusions is Which of the following best illustrates the
concept of sampling risk?
-Population
-A randomly chosen sample may not be
Sampling risk that leads the auditor to representative of the population as a whole on
conclude that controls are more effective than the characteristic of interest.
they are actually is
At times a sample may indicate that the
-Risk of assessing control risk too low auditor’s assessed level of control risk for a
given control is reasonable when, in fact, the
An auditor, planning an attribute sample from true compliance rate does not justify the
a large number of invoices, intends to estimate assessed level.
the actual rate of deviations. Which factor This situation illustrates the risk of
below is the most important for the auditor to
consider? -Assessing control risk too low

-Audit objective An advantage of using statistical over non-

statistical sampling methods in tests of
Audit sampling is not involved in the controls is that the statistical methods
following, except
-Provide an objective basis for quantitatively
-Selecting the sample without following a evaluating sample risk
structured technique.
Which of the following best illustrates the The diagram below depicts the auditor’s
concept of sampling risk? estimated maximum deviation rate compared
with the tolerable rate and also depicts the true
-A randomly chosen sample may not be population deviation rate compared with the
representative of the population as a whole on tolerable rate.
the characteristic of interest
True State of Population
Which of the following is true about sampling Auditor’s
and non-sampling risks? Estimate Deviation
Rate Deviation Rate
-Sampling risk can be reduced by increasing Based on Is less than
sample size. Exceeds
Sample Results Tolerable
The following situations will likely lead the Rate Tolerable Rate
auditor to use 100% testing, except Maximum
Deviation Rate I
-When testing controls that leave audit trail. III
Is Less than
 Tolerable Rate -Higher than the expected rate of errors in the
Maximum related accounting records.
Deviation Rate II
IV Population, as defined in PSA 530, means the
Exceeds entire set of data from which a sample is
Tolerable Rate selected and about which the auditor wishes to
As a result of tests of controls, the auditor draw conclusions. It is important for the
assesses control risk higher than necessary and auditor to ensure that the population is
thereby increases substantive testing. This is I. Appropriate to the objective of the audit
illustrated by procedure.
II. Complete.
-II
-Both I and II
While performing a substantive test of details
during an audit, the auditor determined that the The size of a sample designed for dual-
sample results supported the conclusion that purpose testing should be
the recorded account balance was materially
misstated. It was, in fact, not materially -The larger of the samples that would
misstated. This situation illustrates the risk of otherwise have been designed for the two
separate purposes
-Incorrect rejection. Conducting a substantive test of an account
balance, an auditor hypothesis that no material
The decision whether to use statistical or non- misstatement exists. The risk that sample
statistical sampling depends upon the results will support the hypothesis when a
material misstatement actually does exist is the
-Auditor’s judgment risk of

A monetary amount set by the auditor in -Incorrect acceptance.

respect of which the auditor seeks to obtain an
appropriate level of assurance that the Which of the following combinations results
monetary amount set by the auditor is not in a decrease in sample size in a sample for
exceeded by the actual misstatement in the attributes?
population is 1) Risk of assessing control risk too low
2) Tolerable rate
-Tolerable misstatement 3) Expected population deviation rate

The likelihood of assessing control risk too -1) Increase 2) Increase 3)

low is the risk that the sample selected to test Decrease
controls
At times a sample may indicate that the
-Does support the auditor’s planned assessed auditor’s assessed level of control risk for a
level of control risk when the true operating given control is reasonable when, in fact, the
effectiveness of the control does not justify true compliance rate does not justify the
such an assessment. assessed level.
This situation illustrates the risk of
The tolerable rate of deviations for a test of
controls is generally -Assessing control risk too low
 Decrease

Factors Affecting Sample Size - Assessment How would increases in tolerable

misstatement and assessed level of control risk
affect the sample size in a substantive test of
details?
A number of factors influence the sample size Increase in tolerable misstatement
for a substantive test of details of an account Increase in assessed level of control risk
balance. All other factors being equal, which
of the following would lead to a larger sample -Decrease sample size
size? Increase sample size

-Smaller measure of tolerable misstatement

Which of the following sample planning Sample Selection Methods - Assessment

factors would influence the sample size for a
substantive test of details for a specific
account?
Expected amount of misstatements An auditor is applying mean-per-unit
Measure of tolerable misstatement estimation. Assuming estimated audited value
is P950,000, the achieved allowance for
-Yes sampling risk is P75,000, and recorded book
Yes value is P925,000, what is the auditor's
conclusion?
Which of the following courses of action
would an auditor most likely follow in -Recorded book value is not likely misstated
planning a sample of cash disbursements if the by a material amount.
auditor is aware of several unusually large
cash disbursements? An auditor wishes to sample 200 sales receipts
from a population of 5,000 receipts issued
-Stratify the cash disbursements population so during the last year. The receipts have
that the unusually large disbursements are preprinted serial numbers and are arranged in
selected. chronological (and thus serial number) order.
The auditor randomly chooses a receipt from
The entire set of data about which the auditor the first 25 receipts and then selects every 25th
wishes to draw conclusions is called receipt thereafter. The sampling procedure
described here is called
-Population.
-Systematic random sampling.
Which of the following combinations results
in a decrease in sample size in a sample for Using statistical sampling to assist in verifying
attributes? the year-end accounts payable balance, an
Risk of assessing control risk too low auditor has accumulated the following data:
Tolerable rate Number of
Expected population deviation rate Book
Balance Determined by
-Increase Accounts
Increase Balance
 the Auditor
Population An auditor is applying a difference estimation
4,100 sampling plan. Recorded book value is
P5,000,000 P1,000,000 and the auditor estimates a
? P75,000 understatement difference. In this
Sample case, the auditor’s estimated population value
200 is
P 250,000
P300,000 -P1,075,000
Using the ratio estimation technique, the
auditor’s estimate of year-end accounts Which of the following sampling methods
payable balance is would be used to estimate a numerical
measurement of a population, such as a peso
-P6,000,000 value?
-Variables sampling
Which of the following statistical sampling
plans does not use a fixed sample size for tests A sample in which every possible combination
of controls? of items in the population has an equal chance
of constituting the sample is a
-Sequential sampling
-Random sample
Which of the following statistical selection
techniques is least desirable for use by an
auditor?
Evaluation of Sample Results - Assessment
-Stratified selection

When the auditor goes through a population

and selects items for the sample without regard The estimate of the population peso value
to their size, source, or other distinguishing using difference estimation sampling is
characteristics, it is called __________.

-Haphazard selection -P5,700,000

If the auditor is concerned that a population If the auditor is concerned that a population
may contain exceptions, the determination of a may contain exceptions, the determination of a
sample size sufficient to include at least one sample size sufficient to include at least one
such exception is a characteristic of such exception is a characteristic of

-Discovery sampling -Discovery sampling

In statistical sampling methods used in When sampling for attributes, which of the
substantive testing, when would an auditor following would decrease sample size?
most likely stratify a population into Risk of assessing
meaningful groups? Tolerable rate
Expected population
-If the population has highly variable recorded Control risk too low
amounts. of deviation
 deviation rate b. Misstatement (test of details)

-Increase Increase -Neither A or B

Decrease
An auditor is evaluating the results of a
Several risks are inherent in the evaluation of variables sampling plan. Which of the
audit evidence that has been obtained through following is not relevant to the auditor's
the use of statistical sampling. An example of judgment about the sample?
a beta or Type II error related to sampling risk
is the failure to -Management's explanations for why errors in
the sample occurred.
-Reject the statistical hypothesis that a book
value is not materially misstated when the true If a selected random number matches the
book value is materially misstated. number of a voided voucher, the voucher
ordinarily should be replaced by another
After partially completing a control review of voucher in the sample if the voucher
the accounts payable department, an auditor
suspects that some type of fraud has occurred. -Has been properly voided
To ascertain whether the fraud is present, the
best sampling approach is to use One of the audit objectives for a
manufacturing company is to verify that all
-Discovery sampling to select a sample of rework is reviewed by the production
vouchers processed by the department during engineer. Which of the following audit
the past year. procedures would provide the best evidence
for meeting this objective?
Which of the following most likely would be
an advantage in using classical variables -Trace a sample of rework orders to entries in
sampling rather than probability-proportional- the review log.
to-size (PPS) sampling?
When using classical variables sampling for
-Inclusion of zero and negative balances estimation, an auditor normally evaluates the
generally does not require special design sampling results by calculating the possible
considerations. error in either direction. This statistical
concept is known as
The risk of incorrect acceptance and the risk of
assessing control risk too low relate to the -Precision.

-Effectiveness of the audit Which of the following engagement objectives

will be accomplished by tracing a sample of
Which of the following sampling methods is accounts receivable debit entries to customer
used to estimate a numerical measurement of a invoices and related shipping documents?
population, such as a peso value?
-Accounts receivable represent valid sales.
-Variables sampling.
An auditor desired to test credit approval on
Per PSA 530, projection of sample results to 10,000 sales invoices processed during the
the population, is only necessary in the case of year. The auditor designed a statistical sample
A. Deviations (test of controls) that would provide 1% risk of assessing
control risk too low (99% confidence) that not stratification when using systematic selection
more than 7% of the sales invoices lacked is
approval. The auditor estimated from previous
experience that about 2 1/2% of the sales -Probability proportionate to size sampling
invoices lacked approval. A sample of 200
invoices was examined and 7 of them were Conducting a substantive test of an account
lacking approval. The auditor then determined balance, an auditor hypothesis that no material
the achieved upper precision limit to be 8%. In misstatement exists. The risk that sample
the evaluation of this sample, the auditor results will support the hypothesis when a
decided to increase the level of the preliminary material misstatement actually does exist is the
assessment of control risk because the risk of

-Tolerable rate (7%) was less than the -Incorrect acceptance.

achieved upper precision limit (8%)
Each time an auditor draws a conclusion based
When would difference estimation or ratio on evidence from a sample, an additional risk,
estimation sampling methods be sampling risk, is introduced. An example of
inappropriate? sampling risk is

-If differences between the book values and -Drawing an erroneous conclusion from
audit values of a population are rare. sample data.

In applying variables sampling, an auditor Statistical sampling may be applied to test

attempts to controls when a client’s control procedures

-Predict a monetary population value within a -Leave an audit trail as evidence of

range of precision. compliance.

The next 3 questions are based on the Since auditors are interested in the occurrence
following information: of exceptions in population, they refer to the
An auditor has obtained the following data by occurrence as
selecting a random sample from an inventory
population: -Deviation rate
Number Audited Carrying
Of Items Value Amount When using classical variables sampling for
Sample 200 P220,000 P estimation, an auditor normally evaluates the
200,000 sampling results by calculating the possible
Population 5,000 ? error in either direction. This statistical
P5,200,000 concept is known as
The estimate of the population peso value
using mean-per-unit sampling is __________. -Precision.

-P5,500,000 Which of the following statements is not

correct?
An auditor is preparing to sample accounts
receivable for overstatement. A statistical -An advantage of using statistical sampling is
sampling method that automatically provides that the cost/benefit ratio is always positive.
An auditor plans to test a sample of 20 checks Which of the following procedures would an
for counter signatures as prescribed by the auditor most likely perform to obtain evidence
client’s control procedures. One of the checks about the occurrence of subsequent events?
in the chosen sample of 20 cannot be found.
The auditor should consider the reasons for -Inquiring as to whether any unusual
this limitation and adjustments were made after the date of the
financial statements.
-Treat the missing check as a deviation for the
purpose of evaluating the sample. After an audit report containing an unmodified
opinion on a client’s financial statements was
An auditor wants to select a statistically issued, the client decided to sell the shares of a
representative sample from a population of subsidiary that accounts for 30% of its revenue
475 inventory control sheets. Each sheet lists and 25% of its net income. The auditor should
the description, physical count, bar code, and
unit cost for 50 inventory items. The auditor -Take no action because the auditor has no
uses a random number table to construct the obligation to make any further inquiries
sample; the first two columns are listed below.
14326 is the randomly chosen starting point; Which of the following statements best
the sample’s first item is found on page 143, describes the “date of the financial
line 26. (The route used by the auditor is down statements?”
Column A to the top of Column B.)
Column A Column B -The date of the end of the latest period
75233 06852 covered by the financial statements, which is
14326 42904 normally the date of the most recent balance
76562 64854 sheet in the financial statements subject to
28123 04978 audit.
64227 33150
80938 04301 Which of the following conditions or events
22539 41240 most likely would cause an auditor to have
29452 69521 substantial doubt about an entity’s ability to
Where is the fifth item in the sample located? continue as a going concern?

-Page 331, line 50. -Cash flows from operating activities are
negative.

Which of the following events occurring after

Subsequent Events - Assessment the issuance of an auditor’s report most likely
would cause the auditor to make further
inquiries about the previously issued financial
After issuing a report, an auditor has no statements?
obligation to make continuing inquiries or
perform other procedures concerning the -The discovery of information regarding a
audited financial statements, unless contingency that existed before the financial
statements were issued.
-Information, which existed at the report date
and may affect the report, comes to the By definition, subsequent events for reporting
auditor’s attention. purposes occur between:
-the balance sheet date and the report date. the matter with management, and consider
taking actions appropriate in the
PSA 570 (Going Concern) states that a circumstances.
fundamental principle in the preparation of
financial statements is the going concern Which of the following procedures would an
assumption. Under this assumption, an entity auditor most likely perform to obtain evidence
is ordinarily viewed as continuing in business about an entity’s subsequent events?
for the foreseeable future with neither the
intention nor the necessity of liquidation, -Obtain a letter from the entity’s attorney
ceasing trading or seeking protection from describing any pending litigation, unasserted
creditors pursuant to laws and regulations. claims, or loss contingencies.
The responsibility to make an assessment of an
entity’s ability to continue as a going concern As used in PSA 560 (Subsequent Events), the
rests with the term “subsequent events” refers to

-Entity’s management -Both I and II.

Which of the following audit procedures
would most likely assist an auditor in Harold, CPA, believes there is substantial
identifying conditions and events that may doubt about the ability of Jersamtan Co. to
indicate there could be substantial doubt about continue as a going concern for a reasonable
an entity’s ability to continue as a going period of time. In evaluating Jersamtan’s
concern? plans for dealing with the adverse effects of
future conditions and events, Harold most
-Review of compliance with terms of debt likely would consider, as a mitigating factor,
agreements. Jersamtan’s plans to

Which of the following statements best -Postpone expenditures for research and
describes the auditor’s responsibility development projects.
concerning the appropriateness of the going
concern assumption in the preparation of the
financial statements?

-The auditor’s responsibility is to consider the Related Parties - Assessment

appropriateness of management’s use of the
going concern assumption and consider
whether there are material uncertainties about The auditor should review information
the entity’s ability to continue as a going provided by those charged with governance
concern that need to be disclosed in the and management identifying
financial statements. I. The names of all known related parties.
II. Related party transactions.
Which of the following statements best
expresses the auditor’s responsibility with -Both I and II.
respect to facts discovered after the date of the
auditor’s report but before the date the Which of the following auditing procedures
financial statements are issued? most likely would assist an auditor in
identifying related-party transactions?
-The auditor should consider whether the
financial statements need amendment, discuss
-Reviewing confirmations of loans receivable In which of the following circumstances
and payable for indications of guarantees. would an auditor most likely meet with the
client’s legal counsel to discuss the likely
An auditor searching for related party outcome of the litigation and claims?
transactions should obtain an understanding of I. The auditor determines that the matter is
each subsidiary’s relationship to the total a significant risk.
entity because II. There is a disagreement between
management and the entity’s legal counsel.
-The business structure may be deliberately III. The subject matter of the litigation is
designed to obscure related party transactions. complex.

After determining that a related party -I, II, and III.

transaction has, in fact, occurred, an auditor The auditor should consider the status of legal
should matters up to the

-Obtain an understanding of the business -Date of the auditor’s report.

purpose of the transaction.
The auditor is required to obtain audit
When auditing related party transactions, the evidence that management
auditor place primary emphasis on I. Acknowledges its responsibility for the
fair presentation of the financial statements in
-proper accounting for, and disclosure of, the accordance with applicable financial reporting
related party transactions framework.
II. Has approved the financial statements.
Which of the following events most likely
indicates the existence of related parties? -Both I and II.

-Making a loan without scheduled terms for The refusal of a client’s lawyer to provide a
repayment of the funds. representation on the legality of a particular
act committed by the client is ordinarily

-Considered to be a scope limitation.

Litigation, Claims and Assessments -
Assessment The primary reason an auditor requests that
letters of inquiry be sent to a client’s attorneys
is to provide the auditor with

The primary source of information to be -Corroboration of the information furnished by

reported about litigation, claims, and management about litigation, claims, and
assessments is the assessments.

-Client’s management Which of the following statements extracted

from a client’s lawyer’s letter concerning
The letter of audit inquiry should be litigation, claims, and assessments most likely
would cause the auditor to request
-Prepared by management and sent by the clarification?
auditor.
-“I believe that the action can be settled for -Chief executive officer and the chief financial
less than the damages claimed.” officer.

Management’s refusal to give the auditor “There have been no communications from
permission to communicate with the entity’s regulatory agencies concerning noncompliance
legal counsel is most likely to lead to with, or deficiencies in, financial reporting
practices that could have a material effect on
-A qualified opinion or a disclaimer of the financial statements.” The foregoing
opinion. passage is most likely from a

-Management representation letter.

Management Representation Letter - When considering the use of management’s

Assessment written representations as audit evidence about
the completeness assertion, an auditor should
understand that such representations

Which of the following statements concerning -Complement, but do not replace, substantive
management representations is incorrect? tests designed to support the assertion.

-Representations by management can be a When an audit is made in accordance with

substitute for other audit evidence that the generally accepted auditing standards, the
auditor could reasonably expect to be auditor should always
available.
-Obtain certain written representations from
If management refuses to furnish certain management.
written representations that the auditor
believes are essential, which of the following Which of the following is responsible for the
is appropriate? fairness of the representations made in
financial statements?
-This may have an effect on the auditor’s
ability to rely on other representations of -Client's management
management.
The date of the management representation
What type of opinion should be expressed if letter should coincide with the date of the
the client’s management refuses to provide a
representation that the auditor considers -Auditor’s report
necessary?
Which of the following statements concerning
-Qualified opinion or a disclaimer of opinion. management representations is incorrect?

A written representation from a client’s -Representations by management can be a

management that, among other matters, substitute for other audit evidence that the
acknowledges responsibility for the fair auditor could reasonably expect to be
presentation of financial statements, should available.
normally be signed by the
Wrap-up Procedures (final analytical -The omission of the procedure impairs the
procedures, going concern) - Assessment auditor’s present ability to support the
previously expressed opinion.
The primary objective of analytical procedures
used in the final review stage of an audit is to

-Assist the auditor in assessing the validity of

the conclusions reached.
AUDIT REPORTS ON FINANCIAL
Analytical procedures used in the overall STATEMENTS
review stage of an audit generally include

-Considering unusual or unexpected account

balances that were not previously identified
Basic Elements of the Unqualified Auditor's
Which of the following is true? Report - Assessment

-The auditor should evaluate management’s

assessment of the entity’s ability to continue as An auditor refers to significant related party
a going concern. transactions in a middle paragraph of the
report. If the ensuring opinion paragraph
contains the words, “with the foregoing
explanation,” the auditor’s report would be
considered a (an)
Post-Audit Responsibilities - Assessment
-Example of inappropriate reporting.

The date of the audit report is important

An auditor concludes that the omission of a because
substantive procedure considered necessary at
the time of the examination may impair the -The user has a right to expect that the auditor
auditor's present ability to support the has performed certain procedures to detect
previously expressed opinion. The auditor subsequent events that would materially affect
need not apply the omitted procedure if the financial statements through the date of the
report
-The results of other procedures that were
applied tend to compensate for the procedure Per PSA 700, the auditor’s report should be
omitted. addressed

An auditor concludes that a substantive -Either to the shareholders or the board of

auditing procedure considered necessary directors of the entity whose financial
during the prior period’s audit was omitted. statements are being audited
Which of the following factors would most
likely cause the auditor promptly to apply the The introductory paragraph of the standard
omitted procedure? audit report may include the following:
I. Identification of the entity whose
financial statements have been audited.
II. Statement that the financial -promoting credibility of the report in the
statements have been audited. global marketplace
III. Title of each of the financial
statements that comprise the complete set of The audit report should not be dated
financial statements.
IV. Reference to "basic financial -Earlier than the date on which the auditor
statements" without indicating the title of each obtains sufficient appropriate evidence
of the financial statements.
V. Reference to the summary of The audit report date is important to users
significant accounting policies and other because it indicates the
explanatory notes
VI. Specific date and period covered by -Last day of the auditor’s responsibility for the
the financial statements. review of significant events that occurred after
VII. Reference to Philippine Standards on the date of the financial statements.
Auditing.
Which of the foregoing are specifically Identify the appropriate type of opinion to
required by the applicable standards on issue when the auditor is satisfied that there is
auditing to be included or referred to in the a remote likelihood of a loss resulting from the
introductory paragraph of the standard audit resolution of an uncertainty.
report?
-Unqualified opinion.
-I, II, III, V, VI
The auditor may address the report to all of the
Which of the following is not usually the following, except:
addressee in an external audit report?
-the President and/or CEO of client company
-Management in audit of public company
The introductory paragraph of the auditor’s
The auditor's standard report states that the report should
financial statements are presented fairly
-Refer to the summary of significant
-in all material respects. accounting policies and explanatory notes

Which among the following is not an Which of the following is not one of the basic
appropriate addressee of an independent elements of the auditor’s report
auditor’s report?
-Client’s address
-President of the client company
The element of the auditor's report that
Which is not referred to in the management’s distinguishes it from reports that might be
responsibility paragraph? issued by others is

-Effectiveness and efficiency of operating -Title

decisions
The auditor s report should describe an audit
The auditing profession recognizes the need by addressing some concerns that may
for uniformity in reporting as a means of include:
I. An audit includes evaluating the of operations, and cash flows in conformity
appropriateness of the accounting policies with GAAP.
used.
II. An audit includes evaluating the A choice between qualified or adverse opinion
reasonableness of accounting estimates made is made when the cause of misstatement is
by management. I. Material disagreement with management
III. Evaluating the overall presentation of on PFRS application (PFRS departure)
the financial statements. II. Inability to gather sufficient appropriate
IV. An audit involves performing evidence because of restriction on procedures
procedures to obtain audit evidence about the (scope limitation)
amounts and disclosures in the financial
statements. -I only
V. The procedures selected depend on
the auditor's judgment. Which of the following situation, the effect of
Which of the foregoing concerns are stated in which is significant, least likely require a
the audit report? decision of whether to issue a qualified or
adverse opinion?
-I, II, III, IV, V
-Limitation on the scope of the auditor's work.
Which of the following statements is a basic
element of the standard audit report? When an auditor issues an adverse opinion, the
implication is that the auditor
-An audit includes assessing significant
estimates made by the management -Does not believe the statements are fairly
presented.

If the financial statements, including

accompanying notes, fail to disclose
Matters That Affect The Auditor's information that is required by PFRSs, the
Unqualified Opinion - Assessment auditor should express either a(an)

-Adverse opinion or a “subject to” qualified

opinion.
When financial statements are presented
wherein accounting principles have not been Addition of an "emphasis of a matter"
applied consistently, an auditor, may issue paragraph to what remains an unqualified
a(an): opinion is least likely for which of the
(1) Qualified Opinion following situations?
(2) Disclaimer of opinion
-Scope limitation.
-(1) Yes (2) No
Restrictions imposed by a client prohibit the
Which of the following statements indicates a observation of physical inventories, which
qualified opinion? account for 35% of all assets. Alternative
audit procedures cannot be applied, although
-Except for the effects of a matter, the the auditor was able to examine satisfactory
financial statements present fairly in all evidence for all other items in the financial
material respects the financial position, results statements. The auditor should issue a(an)
 Under which of the following circumstances
-Disclaimer of opinion. would a disclaimer of opinion not be
appropriate?
Per Glossary of Terms, it is a difference
between the amount, classification, -The financial statements fail to contain
presentation, or disclosure of a reported adequate disclosure concerning related party
financial statement item and the amount, transactions.
classification, presentation, or disclosure that
is required for the item to be in accordance When the financial statements contain a
with the applicable financial reporting departure from PFRS, the effect of which is
framework. material, the auditor should
- Qualify the opinion and explain the effect of
-Misstatement the departure from PFRS in a separate
paragraph.
A CPA engaged to examine financial
statements observes that the accounting for a When disclaiming an opinion due to a client-
certain material item is not in conformity with imposed scope limitation, an auditor should
generally accepted accounting principles, and indicate in a separate paragraph why the audit
that this fact is prominently disclosed in the did not comply with PSAs. The auditor should
notes to the financial statements. The CPA also omit the
does not agree with this departure from PFRS (1) Auditor’s responsibility paragraph
and should (2) Opinion paragraph

-Qualify the opinion because of the deviation -(1) Yes (2) No

from generally accepted accounting principles.
The principal auditor is satisfied with the
An auditor concludes that there is substantial independence and professional reputation of
doubt about an entity's ability to continue as a the other auditor who has audited a subsidiary
going concern. If the entity's disclosures about but wants to indicate the division of
continued existence are adequate, the audit responsibility. The principal auditor should
report should include
(1) A disclaimer of opinion -Modify the introductory, auditor’s
(2) An unqualified opinion responsibility and opinion paragraphs of the
report
-(1) No (2) Yes
In which of the following circumstances
Which of the following circumstances may not would an auditor usually choose between
result to a disclaimer of opinion? issuing a qualified opinion of a disclaimer of
opinion?
-The accounts receivable of the client
comprised 80 percent of the total assets. The -Inability to obtain sufficient competent
auditor was instructed by the client not to evidential matter.
confirm account balances. The auditor
however was satisfied by the results of A qualified opinion is expressed when a
alternative audit procedures misstatement is

-Material
An auditor may reasonably issue an “except reasonable justification for seeking a change
for” qualified opinion for as required by BIR.
(1) Inadequate disclosure The paragraph likely appears in:
(2) Scope limitation
-A qualified opinion
-(1) Yes (2) Yes

In extreme cases such as situations involving

multiple uncertainties that are significant to
the financial statements, the auditor Matters That Do Not Affect The Auditor's
Unqualified Opinion - Assesment
-may consider to express a disclaimer of
opinion

A departure from PFRS is disclosed in a note

to the financial statements. The auditor PSA 701 provides guidance on the:
should:
-auditor’s report that contains an opinion other
-Issue a qualified opinion than unqualified and/or a modified report due
to an emphasis of matter
If the scope of the examination has been
satisfactory for all items except for one of Grant Company’s financial statements
material amount, the auditor should issue a adequately disclose uncertainties that concern
(an) future events, the outcome of which are not
reasonably estimable. The auditor’s report
-Qualified opinion. should include a (an)

An adverse opinion would be issued when a -Unmodified opinion

misstatement’s impact is
A qualified opinion should be expressed as
-Highly material being:

An explanatory paragraph may be added to the -“except for” the effects of the matter to which
audit report while at the same time issuing an the qualification relates
unqualified opinion in all cases except when:
When there are multiple uncertainties
-the audit work has been materially limited by significantly affecting the financial statements,
management. the auditor’s report would most likely contain

An explanatory paragraph reads as follows: -A disclaimer of opinion

The Company has adopted the first-in, first-out
method of determining inventory costs, If the auditor is unable to sufficient
whereas it previously used the weighted appropriate evidence concerning the opening
average method. Athough use of the first-in, balances, the auditor’s report should include:
first-out method is in conformity with (1) Qualified Opinion;
generally accepted accounting principles, in (2) Adverse Opinion;
our opinion the Company has not provided (3) Disclaimer of Opinion
-(1) Yes; (2) No; (3) Yes amounts included for EZ Inc., is based solely
on the report of the other auditors.
Eagle Company’s financial statements contain These sentences
a departure from PFRSs because, due to
unusual circumstances, the statements would -Indicate division of responsibility.
otherwise be misleading. The auditor should
express an opinion that is An auditor includes a separate paragraph in an
otherwise unmodified report to emphasize that
-Unqualified and describe the departure in a the entity being reported on had significant
separate paragraph. transactions with related parties. The
inclusion of this separate paragraph
When the financial statements contain material
departures from PFRS and the auditor -Is appropriate and would not negate the
modifies the opinion, the auditor describes the unqualified opinion.
effects in
An auditor concludes that there is substantial
-In a separate explanatory paragraph doubt about an entity's ability to continue as a
going concern. If the entity's disclosures about
When a principal auditor decides to make continued existence are adequate, the audit
reference to another auditor’s examination, the report should include
principal auditor’s report should always (1) A disclaimer of opinion
indicate clearly, in the introductory, auditor’s (2) A qualified opinion
responsibility, and opinion paragraphs, the
-(1) No; (2) No
-Division of responsibility.
The auditor’s report on financial statements
If the current periods accounting policies have include the following sentences:
not been consistently applied in relation to the “………………………………… we draw
opening balances and if the change has not attention to Note X to the financial statements.
been properly accounted for and disclosed, the The Company is the defendant in a lawsuit
auditor’s report may include: alleging infringement of certain patent rights
(1) Qualified Opinion; and claiming royalties and punitive damages.
(2) Adverse Opinion; The Company has filed a counter action, and
(3) Disclaimer of Opinion preliminary hearings and discovery
proceedings on both actions are in progress.
-(1) Yes; (2) Yes; (3) No The ultimate outcome of the matter cannot
presently be determined, and no provision for
The introductory paragraph of an auditor’s any liability that may result has been made in
report contains the following sentences: the financial statements.”
We did not audit the financial statements of The above statement:
EZ Inc., a wholly-owned subsidiary, which
statements reflect total assets and revenues -is a qualification of an opinion
constituting 27 percent and 29 percent,
respectively, of the related consolidated totals. Which of the following is a matter that do not
Those statements were audited by other affect the auditor’s opinion?
auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the -Emphasis of matter
Grant Company’s financial statements The paragraph likely is intended to:
adequately disclosed uncertainties that concern
future events, the outcome of which are not -Emphasize a matter
susceptible of reasonable estimation. The
auditor’s report should include a(an)

-Unqualified opinion.
Principal Auditor - Assessment
The emphasis of a matter paragraph is
normally placed:

-After the opinion paragraph but before the The current period's auditor who did not audit
section containing other reporting the prior period's financial statements is called
responsibilities.
-Incoming auditor
An auditor may not be able to express an
unqualified opinion when the following Principal auditor is
circumstances exist and, in the auditor’s
judgment, the effect of the matter is or may be -The auditor with responsibility for reporting
material to the financial statements: on the financial statements of an entity when
(1) There is a limitation on the scope of the those financial statements include financial
auditor’s work; information of one or more components
(2) There is a disagreement with management audited by another auditor.
regarding the acceptability of the accounting
policies selected, the method of their
application or the adequacy of financial
statement disclosures. Relying on the Work of Other Auditors -
(3) The auditor wants to give emphasis to an Assessment
important matter affecting the financial
statements

-(1) Yes; (2) Yes; (3) No If the principal auditor decides to refer in the
report to the audit made by another auditor
Which of the following does not result to
modification of opinion on financial -The other auditor is responsible for his report
statements? and his work

-Limitations that are beyond the control of All of the following are considered
management. modification of the report except

An explanatory paragraph reads as follows: -Report on consolidated financial statements

On October 15, 2007, the Company emerged where the principal auditor assumes
from bankruptcy. As discussed in the notes the responsibility for the work of another auditor
financial statements, the Company accounted
for the reorganization using “fresh accounting” Assume that Mr. Swabe, a principal auditor,
and, as a result, the post-reorganization decided to refer in his report the examination
financial statements are not comparable to the of another auditor, he is required to disclose
pre-organization financial statements the
 report, Grain, CPA, the successor auditor,
-Portion of the financial statements examined should
by the other auditor. I. Not name Jewel as the
predecessor auditor.
When using the work of another auditor, the II. Indicate the type of report issued
principal auditor should ordinarily perform the by Jewel.
following procedure III. Indicate the substantive reasons
for Jewel’s qualification.
-All of the above.
-I, II, and III
In which of the following circumstances may
the auditor issue an unqualified standard audit When reporting on comparative financial
report? statements, an auditor ordinarily should
change the previously issued opinion on the
-The auditor relies on the report of another prior year's financial statements if the
auditor.
-Prior year's financial statements are restated
When part of the examination is to be to conform with generally accepted accounting
performed by another auditor, the principal principles.
auditor may decide to assume responsibility
for the other auditor’s work and make no They are presented as complete financial
reference to such work when: statements capable of standing alone, but not
an integral part of the current period financial
-The other auditor was retained by the statements intended to be read nly in
principal auditor and worked under his relationship to the current period figures.
supervision
-Comparative financial statements

An auditor’s report on comparative financial

Comparative Financial Statements - statements should be dated as of the date of the
Assessment
-Completion of the auditor’s recent field work.

A client is presenting comparative (two-year)

A client is presenting comparative (two- year) financial statements. Which of the following is
financial statements. Which of the following is correct concerning reporting responsibilities of
correct concerning reporting responsibilities of a continuing auditor?
a continuing auditor
-The auditor should issue one audit report that
-The auditor should issue one audit report that is on both presented years.
is on both presented years.
An auditor expressed a qualified opinion on
Jewel, CPA, audited Infinite Co.’s prior year the prior year's financial statements because of
financial statements. These statements are a lack of adequate disclosure. These financial
presented with those of the current year for statements are properly restated in the current
comparative purposes without Jewel’s year and presented in comparative form with
auditor’s report, which expressed a qualified the current year's financial statements. The
opinion. In drafting the current year’s auditor’s
auditor's updated report on the prior year's
financial statements should
Corresponding Figures - Assessment
-Express an unqualified opinion on the It exists when other information, not related to
restated financial statements of the prior year. matters appearing in the audited financial
statements, is incorrectly stated or presented.
The predecessor auditor, who is satisfied after
properly communicating with the successor -Material misstatement of fact
auditor, has reissued a report because the audit
client desires comparative financial They are not presented as complete financial
statements. The predecessor auditor's report statements capable of standing alone, but are
should make an integral part of the current period financial
statements intended to be read only in
-No reference to the report or the work of the relationship to the current period figures.
successor auditor.
-Corresponding figures
Before reissuing the prior year's auditor's
report on the financial statements of a former It exists when other information, contradicts
client, the predecessor auditor should obtain a information in the audited financial statements
letter of representations from the
(1) Former client's management -Material inconsistency
(2) Successor auditor
If an amendment to other information in a
-(1) Yes; (2) Yes document containing audited financial
statements is necessary and the entity refuses
Unaudited financial statements for the prior to make the amendment, the auditor would
year presented in comparative form with consider issuing:
audited financial statements for the current
year should be clearly marked to indicate their -Unqualified opinion w/ explanatory
status and paragraph
I. The report on the prior period
should be reissued to accompany the current This exists when other information contradicts
period report. information contained in the audited financial
II. The report on the current period statements.
should include as a separate paragraph a
description of the responsibility assumed for -material inconsistency
the prior period's financial statements.
An auditor concludes that there is a material
-Either I or II. inconsistency in the other information in an
annual report to shareholders containing
They are not presented as complete financial audited financial statements. If the auditor
statements capable of standing alone, but are concludes that the financial statements do not
an integral part of the current period financial require revision, but the client refuses to revise
statements intended to be read only in or eliminate the material inconsistency, the
relationship to the current period figures. auditor may

-Corresponding figures
-Revise the auditor’s report to include a Other information that is unrelated to matters
separate paragraph describing the material appearing in the audited financial statements
inconsistency that is incorrectly stated or presented is called

An auditor concludes that there is a material -Misstatement of fact

inconsistency in the other information in an
annual report to shareholders containing S1. The auditor’s opinion on financial
audited financial statements. If the auditor statements normally covers the other
concludes that the financial statements do not information
require revision, but the client refuses to revise S2. The other information may undermine the
or eliminate the material inconsistency, the credibility of the audited financial statements
auditor may when there are material inconsistencies

-Revise the auditor's report to include a -False True

separate explanatory paragraph describing the
material inconsistency. Per PSA 720: Financial and non-financial
information (other than the financial
The “other information” in a published report statements and the auditor’s report thereon)
containing audited financial statements may be which is included, either by law, regulation or
relevant to an independent auditor’s custom, in a document containing audited
examination. With respect to “other financial statements and the auditor’s report
information” thereon

-The auditor’s responsibility does not extend -Other Information

beyond the financial information identified in
the report If an amendment to other information in a
document containing audited financial
When audited financial statements are statements is necessary and the entity refuses
presented in a client’s document containing to make the amendment, the auditor would
other information, the auditor should consider issuing:

-Read the other information to determine that -Unqualified opinion with explanatory
it is consistent with the audited financial paragraph
statements.
Other information that contradicts information
They are not presented as complete financial contained in the audited financial statements is
statements capable of standing alone, but are called
an integral part of the current period.
-Inconsistency
-Corresponding figures

Other Information Accompanying the FS Prepared in Accordance with a

Audited Financial Statements - Assessment Comprehensive Basis of Accounting Other
Than GAAP - Assessment
When reporting on financial statements
prepared on the same basis of accounting used
for income tax purposes, the auditor should
include in the report a paragraph that

-States the basis of accounting used Specified Accounts, Elements of Accounts,

or Items in a FS - Assessment
Other comprehensive basis of accounting may
include all of the following except

-The accrual basis of accounting. An auditor is engaged to report on selected

financial data that are included in a client-
PSA 800 “the auditor’s report on special prepared document containing audited
purpose audit engagements” does not apply to financial statements. Under these
a circumstances, the report on the selected data
should
-Audit of financial statements prepared in
accordance with GAAP in the Philippines. -Be limited to data derived from the audited
financial statements.
An auditor’s special report on financial
statements prepared in conformity with the Which statement is correct regarding report on
basis of accounting should include a separate a component of financial statements?
explanatory paragraph before the opinion
paragraph that -This type of engagement may be undertaken
as a separate engagement or in conjunction
-Refers to the note to the financial statements with an audit of the entity’s financial
that describes the basis of accounting. statements.

An auditor's report would be designated as a An auditor’s report on financial statements

special report when it is issued in connection prepared on the cash receipts and
with financial statements that are disbursements basis of accounting should
include all of the following except
-Prepared in accordance with a comprehensive
basis of accounting other than generally -All of the above statements are correct
accepted accounting principles.

Other comprehensive basis of accounting may

include all of the following except
Compliance With Contractual Agreements
-The accrual basis of accounting. - Assessment

An auditor's report would be designated as a

special report when it is issued in connection
with financial statements that are Which of the following types of audits may
include in its audit opinion the following
-Prepared in accordance with a comprehensive phrase – “consistent, in all material respects”.
basis of accounting other than PFRS.
-Audit of summarized financial statement consistent with the audited financial
statements from which it was derived.
Engagements to express an opinion on the
entity’s compliance with contractual An auditor may report on condensed financial
agreements should be undertaken only when statements that are derived from complete
financial statements if the
-The overall aspects of compliance relate to
accounting and financial matters -Auditor indicates whether the information in
the condensed financial statements is fairly
Reports are considered special report when stated in all material respects in relation to the
issued in connection with complete financial statements from which it
has been derived.
-Compliance with aspects of regulatory
requirements related to audited financial
statements.

Reports are considered special reports when Characteristics of CIS - Assessment

issued in connection with

-Compliance with contractual requirements

related to audited financial statements. Which attribute below relates more to
computer processing than manual processing?
Reports are considered special reports when
issued in connection with -Similar transactions are uniformly subjected
to similar instructions.
-Compliance with aspects of contractual
provisions. Computer systems are typically supported by a
variety of utility software packages that are
important to an auditor because they

-May enable unauthorized changes to data

Summarized Financial Statements - files if not properly controlled.
Assessment
A common difficulty in auditing a
computerized accounting system is

Hardy, CPA, asked to express an opinion on -Data can be erased from the computer with no
Gold, Inc. summarized financial information. visible evidence.
Hardy may accept this engagement only if
Which of the following is not an advantage of
-Hardy also audits Gold’s complete financial a computerized accounting system?
statements.
-Computers leave a thorough audit trail which
The auditor’s report on summarized financial can be easily followed
statements should include
Which of the following statements most likely
-An opinion as to whether the information in represents a disadvantage for an entity that
the summarized financial statements is
maintains data files on personal computers -The overall objective and scope of an audit.
(PCs) rather than manually prepared files?
Which of the following statements most likely
-It is usually easier for unauthorized persons to represents a disadvantage for an entity that
access and alter the files. keeps microcomputer-prepared data files
rather than manually prepared files?
A characteristic that distinguishes computer
processing from manual processing is -It is usually easier for unauthorized persons to
access and alter the files.
-Computer processing virtually eliminates the
occurrence of computational errors normally Which would largely change in an audit of a
associated with manual processing. CIS environment?

The characteristics that distinguish computer -Specific methods in implementing the basic
processing from manual processing include the audit concepts
following:
1) Computer processing uniformly subjects Which of the following is least likely to be
like transactions to the same instructions. considered by an auditor considering
2) Computer systems always ensure that engagement of an information technology (IT)
complete transaction trails useful for audit specialist on an audit?
purposes are preserved for indefinite purpose.
3) Computer processing virtually eliminates -Requirements to assess going concern status
the occurrence of clerical errors normally
associated with manual processing.
4.) Control procedures as to segregation of Internal Control in a CIS Environment -
functions may no longer be necessary in Assessment
computer environment

-Only statements 1 and 3 are true

Client/server architecture may potentially
A common difficulty in auditing a involve a variety of hardware, systems
computerized accounting system is: software, and application software from many
vendors. The best way to protect a
-Data can be erased from the computer with no client/server system from unauthorized access
visible evidence. is through

Manual elements in internal control may be -A combination of application and general

more suitable where judgment and discretion access control techniques
are required such as for the following
circumstances (choose the exception): Able Co. uses an online sales order processing
system to process its sales transactions. Able’s
-High volume or recurring transactions sales data are electronically sorted and
subjected to edit checks. A direct output of the
The use of a computer changes the processing, edit checks most likely would be a
storage, and communication of financial
information. A CIS environment may affect -File of all rejected sales transactions
the following, except
 Which of the following is a risk that is higher and CIS application controls. The purpose of
when an electronic funds transfer (EFT) general CIS controls is to
system is used?
-Establish a framework of overall controls
-Unauthorized access and activity over the CIS activities and to provide a
reasonable level of assurance that the overall
End-user computing is an example of which of objectives of internal control are achieved.
the following?
The possibility of erasing a large amount of
-Decentralized processing information stored on magnetic tape most
likely would be reduced by the use of
Decentralized processing
-File protection rings
-Digital signatures
A well-prepared flowchart should make it
An auditor would be most likely to assess easier for the auditor to
control risk at the maximum level in an
electronic environment with automated -Trace the origin and disposition of documents
system-generated information when
Choose the incorrect statement about General
-Fixed asset transactions are few in number, IT-controls?
but large in peso amount.
-They are manual or automated procedures
A “hot site” is most frequently associated with that typically operate at a business process
level and apply to the processing of
-Disaster recovery transactions by individual applications.

An auditor would most likely be concerned .Which of the following controls most likely
with which of the following controls in a would assure that an entity can reconstruct its
distributed data processing system? financial records?

-Access controls -Backup diskettes or tapes of files are stored

away from originals.
Computer personnel least likely
Which function or activity is not performed in
-Originate changes in master files the user department?

Which of the following is unique to CIS? -Conversion of data to machine-readable

format
-Error listing
ABC Co. updates its accounts receivable
The internal controls over computer master file weekly and retains the master files
processing include both manual procedures and corresponding update transactions for the
and procedures designed into computer most recent 2-week period. The purpose of
programs (programmed control procedures). this practice is to
These manual and programmed control
procedures comprise the general CIS controls -Permit reconstruction of the master file if
needed
 soon as possible. In order to accomplish this,
.Which of the following statements is correct an organization can have an arrangement with
concerning internal control when a client is its computer hardware vendor to have a fully
using an electronic data interchange system for operational facility available that is configured
its sales? to the user's specific needs. This is best
known as a (n)
-Encryption controls may help to assure that
messages are unreadable to unauthorized -Hot site
persons.
The auditor shall consider the entity’s CIS
A corporation receives the majority of its environment in designing audit procedures to
revenue from top-secret military contracts with reduce risk to an acceptably low level. Which
the government. Which of the following would of the following statements is incorrect?
be of greatest concern to an auditor reviewing
a policy about selling the company’s used -The methods of applying audit procedures to
microcomputers to outside parties? gather audit evidence are not influenced by the
methods of computer processing.
-Whether deleted files on the hard disk drive
have been completely erased To obtain evidence that online access controls
are properly functioning, an auditor most
An auditor would be most likely to assess likely would
control risk at the maximum level in an
electronic environment with automated -Enter invalid identification numbers or
system-generated information when passwords to ascertain whether the system
rejects them.
-Fixed asset transactions are few in number,
but large in peso amount. An entity has recently converted its purchasing
cycle from a manual process to an online
In entering the billing address for a new client computer system. Which of the following is a
in Emil Company’s computerized database, a probable result associated with conversion to
clerk erroneously entered a non-existent zip the new IT system?
code. As a result, the first month’s bill mailed
to the new client was returned to Emil -Traditional duties are less separated.
Company. Which one of the following would A company often revises its production
most likely have led to discovery of the error processes. The changes may entail revisions to
at the time of entry into Emil Company’s processing programs. Ensuring that changes
computerized database? have a minimal impact on processing and
result in minimal risk to the system is a
-Validity test function of

The possibility of erasing a large amount of -Change control

information stored on magnetic tape most
likely would be reduced by the use of Management is concerned that data uploaded
from a microcomputer to the company’s
-File protection rings mainframe system in batch processing may be
erroneous. Which of the following controls
A critical aspect of a disaster recovery plan is would best address this issue?
to be able to regain operational capability as
-The mainframe computer should subject the To avoid invalid data input, a bank added an
data to the same edits and validation routines extra number at the end of each account
that online data entry would require. number and subjected the new number to an
algorithm. This technique is known as
General IT-controls do not include
-A check digit
-Controls on procedures used to initiate, Which of the following is not an example of
record, process and report transactions or other an application control?
financial data
-An equipment failure causes an error message
An auditor anticipates assessing control risk at on the monitor.
a low level in a CIS environment. Under these
circumstances, on which of the following Adequate control over access to data
procedures would the auditor initially focus? processing may help deter improper use or
alteration of data files. The control can best be
-General control procedures provided by

Matthews Corp. has changed from a system of -User and terminal identification controls,
recording time worked on clock cards to a such as passwords
computerized payroll system in which
employees record time in and out with
magnetic cards. The computer system
automatically updates all payroll records.
Because of this change Auditing Around the Computer -
Assessment
-Part of the audit trail is altered.

Which of the following functions within the

CIS department are incompatible? The employee entered “40” in the “hours
worked per day” field. Which check would
-Data input and data conversion detect this unintentional error?

Which of the following statements is correct -Limit check

concerning the security of messages in an
electronic data interchange (EDI) system? Which of the following is an incorrect
statement regarding testing strategies related to
-Encryption performed by physically secure auditing through the computer?
hardware devices is more secure than
encryption performed by software. -The test data approach involves processing
the client's data on a test basis to determine the
Totals of amounts in computer-record data integrity of the system.
fields, which are not usually added but are
used only for data processing control purposes
are called An auditor who wishes to capture an entity’s
data as transactions are processed and
-Hash totals continuously test the entity’s computerized
information system most likely would use
which of the following techniques?
 -Dynamic linking character reader
-Embedded audit module
A primary reason auditors are reluctant to use
In auditing through a computer, the test data an ITF is that it requires them to
method is used by the auditors to test the
-Identify and reserve the fictitious entries to
-Procedures contained within the program avoid contamination of master file

Smith Corporation has numerous customers. A

customer file is kept on disk storage. Each
customer file contains name, address, credit Auditing Around the Computer -
limit, and account balance. The auditor wishes Assessment
to test this file to determine whether credit
limits are being exceeded. The best procedure
for the auditor to follow would be to Which of the following is an example of
auditing “around” the computer?
-Develop a program to compare credit limits
with account balances and print out the details -The auditor traces adding machine tapes of
of any account with a balance exceeding its sales order batch totals to a computer printout
credit limit. of the sales journal.

Auditors often make use of computer A retail entity uses electronic data interchange
programs that perform routine processing (EDI) in executing and recording most of its
functions such as sorting and merging. These purchase transactions. The entity’s auditor
programs are made available by electronic recognized that the documentation of the
data processing companies and others and are transactions will be retained for only a short
specifically referred to as period of time. To compensate for this
limitation, the auditor most likely would
-Utility programs
-Perform tests several times during the year,
PAPS 1009 (Computer-Assisted Audit rather than only at year-end.
Techniques) states, “Customized or purpose- Which of the following methods of testing
written programs perform audit tasks in application controls utilizes a generalized audit
specific circumstances where package audit software package prepared by the auditors?
software is deemed unsuitable usually because
system constraints make it difficult or -Parallel simulation
impossible to use.” A purpose-written program
may be developed by Which of the following combinations is
1) The auditor correct?
2) The entity being audited 1) Integrated test facility
3) An outside programmer hired by the 2) Test data
auditor 3) Paralel simulation

-1) Yes 2) Yes 3) Yes -(1) Test data, live program; (2) Test data,
live program; (3) Live data, test program
An auditor is least likely to find that a client’s
data is input through The following are benefits of using IT-based
controls, except
 Which of the following is not among the errors
-Over-reliance on computer-generated reports. that an auditor might include in the test data
when auditing a client’s computer system?
In a highly automated information processing
system tests of control -Numeric characters in alphanumeric fields

-May be required in some circumstances Parallel simulation is an audit technique

employed to verify processing logic by
Which of the following does not support the making use of audit test programs. These audit
“test data” approach? test programs "simulate" the processing logic
of an application program or programs under
-It allows fictitious and real transactions to be review. Which statement indicates the use of
processed together without the client operating parallel simulation audit technique?
personnel being aware of the testing process.
-Live transactions are processed using test
An auditor most likely would introduce test programs.
data into a computerized payroll system to test
controls related to the When an auditor tests a computerized
accounting system, which of the following is
-Discovery of invalid employee I.D. numbers true of the test data approach?

Parallel simulation is an audit technique -Test data are processed by the client’s
employed to verify processing by making use computer programs under the auditor’s
of audit test programs. These audit test control.
programs “simulate” the processing logic of an
application program or progress under review. Auditing by testing the input and output of a
Which statement indicates the use of parallel computer system instead of the computer
simulation? program itself will

-Live transactions are processed using test -Not detect program errors which do not show
programs up in the output sampled

Which of the following computer-assisted Which of the following strategies would a

auditing techniques allows fictitious and real CPA most likely consider in auditing an entity
transactions to be processed together without that processes most of its financial data only in
client operating personnel being aware of the electronic form, such as a paperless system?
testing process?
-Continuous monitoring and analysis of
-Integrated test facility approach transaction processing with an embedded audit
module
Output controls ensure that the results of
computer processing are accurate, complete, An auditor estimates that 10,000 checks were
and properly distributed. Which of the issued during the accounting period. If a
following is not a typical output control? computer application control which performs a
limit check for each request is to be subjected
-Matching input data with information on to the auditor’s test data approach, the sample
master files and placing unmatched items in a should include
suspense file
-One transaction 1) The auditor
2) The entity being audited
Which of the following statement is not true 3) An outside programmer hired by the
about test data? auditor

-Test data must consist of all possible valid -1) Yes 2) Yes 3) Yes
and invalid conditions.
Which of the following is an incorrect
statement regarding testing strategies related to
auditing through the computer?

Auditing Through the Computer (CAATS) -The test data approach involves processing
- Assessment the client's data on a test basis to determine the
integrity of the system.
A primary reason auditors are reluctant to use
an ITF is that it requires them to Which of the following is an incorrect
statement regarding testing strategies related to
-Identify and reserve the fictitious entries to auditing through the computer?
avoid contamination of master file
-The test data approach involves processing
Smith Corporation has numerous customers. A the client's data on a test basis to determine the
customer file is kept on disk storage. Each integrity of the system.
customer file contains name, address, credit
limit, and account balance. The auditor wishes It involves application of auditing procedures
to test this file to determine whether credit using the computer as an audit tool. This
limits are being exceeded. The best procedure includes computer programs and data the
for the auditor to follow would be to auditor uses as part of the audit procedures to
process data of audit significance contained in
-Develop a program to compare credit limits an entity’s information systems.
with account balances and print out the details
of any account with a balance exceeding its -Computer-assisted audit techniques
credit limit.

Which is most likely correct about “whitebox

audit” or “auditing through the computer”? Compilation of FS - Assessment

-The focus is more on the processing rather

than the input and output components of the
system. Which of the following services, if any, may a
practitioner who is not independent provide?
PAPS 1009 (Computer-Assisted Audit
Techniques) states, “Customized or purpose- -Compilations but not reviews.
written programs perform audit tasks in
specific circumstances where package audit Prior to commencing the compilation of
software is deemed unsuitable usually because financial statements of an entity, the
system constraints make it difficult or accountant should?
impossible to use.” A purpose-written program
may be developed by
-Acquire knowledge of any specialized In which of the following reports should an
accounting principles and practices used in the accountant not express negative or limited
entity’s industry. assurance?

A professional CPA’s compilation report -A standard compilation report on financial

should be dated as of the date of statements of a nonpublic entity

-Completion of the compilation An accountant’s compilation report should be

dated as of the date of
Which of the following should not be included
in an accountant’s report based upon the -Completion of compilation
compilation of an entity’s financial
statements? Which of the following representations does
an accountant make implicitly when issuing
-A statement that the accountant does not the standard report for the compilation of a
express an opinion but provides only negative nonpublic entity’s financial statements?
assurance on the statements.
-The accountant is independent with respect to
During the course of an audit of financial the entity
statements, the client informs the professional
CPA that he may not correspond with the Which of the following statement is not true
client’s legal counsel. Under these about the reports provided by a CPA?
circumstances, the professional CPA
-In a compilation engagement, no assurance is
-Should ordinarily refuse to issue either a expressed and the users of financial
review of compilation report information do not derive any benefit from the
CPA’s involvement
In a compilation engagement, the accountant is
engaged to use accounting expertise as When the CPA is not independent with respect
opposed to auditing expertise to collect, to a compilation client, the CPA must
classify, and summarize financial information.
What type of assurance is provided by the -Include a separate paragraph in the report
accountant when he/she performs this stating the lack of independence.
engagement?
Ethical principles governing compilation of
-No assurance financial statements include
1) Independence
A professional CPA’s compilation report 2) Competence
should be dated as of the date of 3) Professional behaviors

Completion of the compilation -1) No 2) Yes 3) Yes

A CPA who is not independent may issue a? Which of the following statement is not true
about the reports provided by a CPA?
-Compilation report
-In a compilation engagement, no assurance is
expressed and the users of financial
information do not derive any benefit from the system; but this is not necessary for a
CPA’s involvement compilation engagement

Compilations can be performed for What level of assurance does an accountant

Public companies give on a compilation report?
Non-public companies
-None
-Yes
No Which of the following statements is correct
concerning both an engagement to compile
Which of the following procedures does an and an engagement to review a nonpublic
auditor in a compilation engagement of a non- entity’s financial statements?
public entity ordinarily perform?
-The accountant does not contemplate
-Reading the financial statements to consider obtaining an understanding of internal control.
whether they are free of obvious mistakes in
application of accounting principles. When a professional CPA is not independent
of a client and is requested to perform a
The statement that nothing came to our compilation of its financial statements, the
attention which would indicate that these professional CPA
statements are not fairly presented expresses
which of the following? -May accept the engagement and should
disclose the lack of independence, but not the
-negative assurance reason for the lack of independence

When compiling the financial statements of an Negative assurance may be expressed when an
entity, an accountant should accountant is requested to report agreed-upon
procedures to specified
-Understand the accounting principles and 1) Elements of a Financial Statement
practices of the entity’s industry. 2) Accounts of a Financial Statement

The procedures employed in doing -1) No 2) No

compilation are:
Which of the following procedures does an
-Not designed to enable the accountant to accountant in a compilation engagement of a
express any form of assurance nonpublic entity ordinarily perform?

When performing a compilation engagement, -Reading the financial statements to consider

the accountant is required to whether they are free of obvious mistakes in
the application of accounting principles
-Obtain a general knowledge of the business
and operations of the entity. Main standards to govern compilation
engagements
Which of the following is not a distinction
between a compilation and a review? -PSRSs

-In conducting a review, the CPA must obtain

an understanding of the client's internal control
Which of the following procedures would an appropriate third parties have agrees and to
accountant most likely perform in a report on factual findings.
compilation engagement?
Which of the following is incorrect about
-Collect, classify and summarize financial agreed-upon procedures engagement?
information
-The auditor should be independent of the
When compiling an entity’s financial financial data or financial statements where
statements, an accountant would be least likely agreed procedures have to be applied
to
The objective of an agreed upon-procedures
-Perform analytical procedures designed to engagement is for the auditor to:
identify relationships that appear to be
unusual. -Carry out procedures of an audit nature to
which the auditor and the entity and any
Each page (or front page) of the financial appropriate third parties have agreed and to
information compiled by the accountant report on factual findings
should include the following reference, except
Incorrect regarding an AUP engagement
-Limited Assurance Provided”
-Professional competence, due care and
independence are required in the execution of
the procedures
Agreed-Upon Procedures - Assessment
AUP engagements are normally found in what
type of audit

A CPA's report on agreed-upon procedures -Fraud

related to management's assertion about an
entity's compliance with specified A CPA's report on agreed-upon procedures
requirements should contain: related to management's assertion about an
entity's compliance with specified
-A statement of limitations on the use of the requirements should contain:
report
-A statement of limitations on the use of the
Which of the following is incorrect about report
agreed- upon procedures engagement?
Matters to be agreed in an agreed-upon
-The auditor should be independent of the procedures engagement include the following,
financial data or financial statement where except:
agreed procedures have to be applied.
-Anticipated form of the report and the level of
The objective of an agreed upon- procedures assurance to be provided
engagement is for the auditor to. A report on factual findings is the end product
of the auditor when performing
-Carry out procedures of an audit nature to
which the auditor and the entity and any -Agreed-upon procedures
Which of the following ethical principles does
not apply to an agreed-upon procedure -Independence
engagement?
A CPAs report on agreed-upon procedures
-independence related to management’s assertion about an
entity’s compliance with specified
requirements should contain:
An accountant may accept an engagement to
apply agreed-upon procedures to prospective -A statement of limitations on the use of the
financial statements provided that report

-Use of the report is restricted to the specified

parties.

A CPA may accept an engagement to apply Audit of sales and revenue transactions -
agreed-upon procedures on specified element Assessment
of financial statements provided

-The client takes full responsibility for the

procedures to be performed Which of the following procedures would
ordinarily be expected to best reveal
Matters to be agreed in agreed in an agreed- unrecorded sales at the balance sheet date
upon procedures engagement include the
following, except: -Compare shipping documents with sales
records.
-Anticipated form of the report and the level of
assurance to be provided. Which of the following controls most likely
would help ensure that all credit sales
Independence is not a requirement for which transactions of an entity are recorded?
of the following engagements?
1) Compilation -The billing department supervisor matches
2) Review prenumbered shipping documents with entries
3) Agreed-upon Procedures in the sales journal.

-1) Yes 2) No 3) Yes

An accountant may accept an engagement to

apply agreed-upon procedures that are not Audit of recevable balances - Assessment
sufficient to express an opinion on one or
more specified accounts or items of a financial
statement provided that
It is sometimes impracticable or impossible for
-Distribution of the accountant’s report is an auditor to use normal accounts receivable
restricted. confirmation procedures. In such situations,
the best alternative procedure the auditor
Which of the following ethical principles does might resort to would be
not apply to an agreed-upon procedure
engagement?
-Examining subsequent receipts of year-end for the year ended December 31, 2013, you
accounts receivable. were able to obtain certain information during
your audit of the accounts receivable and
Which of the following statements is correct related accounts.
concerning the use of negative confirmation The December 31, 2013 balance of the
requests? Accounts Receivable control account is
P1,576,000.
-Negative confirmation requests are effective The only entries in the Doubtful Accounts
when understatements of account balances are Expense account were:
suspected. · A credit of P2,592 on December 2, 2013
because Company A remitted in full for the
When there is a large number of relatively accounts charged off on October 31, 2013; and
small account balances, negative confirmation · A debit on December 31 for the amount
of accounts receivable is feasible if internal of the credit to the Allowance for Doubtful
accounting control is Accounts.
The Allowance for Doubtful Accounts
-Strong, and the individuals receiving the schedule is presented below:
confirmation requests are likely to give them Debit
adequate consideration. Credit Balance
January 1, 2013
Negative confirmation of accounts receivable P29,264
is less effective than positive confirmation of October 31, 2013
accounts receivable because Accounts written-off:
Co. A – P2,592
-The auditor cannot infer that all Co. B – P6,560
nonrespondents have verified their account Co. C – P4,512 P12,064
information 17,200
December 31, 2013
Returns of positive confirmation requests for P78,800 P96,000
accounts receivable were very poor. As an An aging schedule of the accounts receivable
alternative procedure, the auditor decided to as of December 31, 2013 is presented below:
check subsequent collections. The auditor had
satisfied himself that the client satisfactorily Amount to which the allowance
listed the customer name next to each check is to
listed on the deposit slip; hence, he decided be adjusted after adjustments
that for each customer for which a Age Net debit balance and
confirmation was not received that he would corrections have been made
add all amounts shown for that customer on 0 to 1 month P745,920 1 percent
each validated deposit slip for the two months 1 to 3 months 614,560 2 percent
following the balance-sheet date. The major 3 to 6 months 177,440 3 percent
fallacy in the auditor’s procedures is that Over 6 months 48,000 Definitely
uncollectible, P8,000;
-By looking only at the deposit slip the auditor P16,000 is
would not know if the payment was for the considered uncollectible;
receivable at the balance sheet date or a The
subsequent transaction. remainder is estimated to be
In connection with your examination of the 80%
financial statements of Tenacity Corporation collectible
There is a credit balance in one account The December 31, 2013 balance of the
receivable (0 to 1 month) of P16,000; it Accounts Receivable control account is
represents an advance on a sales contract. P1,576,000.
Also, there is a credit balance in one of the 1 The only entries in the Doubtful Accounts
to 3 months account receivable of P4,000 for Expense account were:
which merchandise will be accepted by the · A credit of P2,592 on December 2, 2013
customer. because Company A remitted in full for the
The ledger accounts have not been closed as of accounts charged off on October 31, 2013; and
December 31, 2013. The Accounts Receivable · A debit on December 31 for the amount
control account is not in agreement with the of the credit to the Allowance for Doubtful
subsidiary ledger. The difference cannot be Accounts.
located, and you decided to adjust the control The Allowance for Doubtful Accounts
account to the sum of the subsidiaries after schedule is presented below:
corrections are made. Debit
QUESTIONS: Credit Balance
Based on the above and the result of your January 1, 2013
audit, answer the following: P29,264
How much is the net adjustment to the October 31, 2013
Doubtful Accounts expense account? Accounts written-off:
Co. A – P2,592
-P48,287 credit Co. B – P6,560
Co. C – P4,512 P12,064
One of the major audit procedures for 17,200
determining whether the allowance for December 31, 2013
doubtful receivables is adequate is P78,800 P96,000
An aging schedule of the accounts receivable
-The preparation of a list of aged accounts as of December 31, 2013 is presented below:
receivable.
Amount to which the allowance
Confirmation is the process of obtaining and is to
evaluating a direct communication from a be adjusted after adjustments
third party in response to a request for Age Net debit balance and
information about a particular item affecting corrections have been made
financial statement assertions. Two assertions 0 to 1 month P745,920 1 percent
from which confirmation of accounts 1 to 3 months 614,560 2 percent
receivable balances provides primary evidence 3 to 6 months 177,440 3 percent
are Over 6 months 48,000 Definitely
uncollectible, P8,000;
-Rights and obligations and existence. P16,000 is
considered uncollectible;
In connection with your examination of the The
financial statements of Tenacity Corporation remainder is estimated to be
for the year ended December 31, 2013, you 80%
were able to obtain certain information during collectible
your audit of the accounts receivable and There is a credit balance in one account
related accounts. receivable (0 to 1 month) of P16,000; it
represents an advance on a sales contract.
Also, there is a credit balance in one of the 1
to 3 months account receivable of P4,000 for December 31, 2013
which merchandise will be accepted by the P78,800 P96,000
customer. An aging schedule of the accounts receivable
The ledger accounts have not been closed as of as of December 31, 2013 is presented below:
December 31, 2013. The Accounts Receivable
control account is not in agreement with the Amount to which the allowance
subsidiary ledger. The difference cannot be is to
located, and you decided to adjust the control be adjusted after adjustments
account to the sum of the subsidiaries after Age Net debit balance and
corrections are made. corrections have been made
QUESTIONS: 0 to 1 month P745,920 1 percent
Based on the above and the result of your 1 to 3 months 614,560 2 percent
audit, answer the following: 3 to 6 months 177,440 3 percent
How much is the adjusted balance of Accounts Over 6 months 48,000 Definitely
Receivable as of December 31, 2013? uncollectible, P8,000;
P16,000 is
-P1,597,920 considered uncollectible;
The
In connection with your examination of the remainder is estimated to be
financial statements of Tenacity Corporation 80%
for the year ended December 31, 2013, you collectible
were able to obtain certain information during There is a credit balance in one account
your audit of the accounts receivable and receivable (0 to 1 month) of P16,000; it
related accounts. represents an advance on a sales contract.
The December 31, 2013 balance of the Also, there is a credit balance in one of the 1
Accounts Receivable control account is to 3 months account receivable of P4,000 for
P1,576,000. which merchandise will be accepted by the
The only entries in the Doubtful Accounts customer.
Expense account were: The ledger accounts have not been closed as of
· A credit of P2,592 on December 2, 2013 December 31, 2013. The Accounts Receivable
because Company A remitted in full for the control account is not in agreement with the
accounts charged off on October 31, 2013; and subsidiary ledger. The difference cannot be
· A debit on December 31 for the amount located, and you decided to adjust the control
of the credit to the Allowance for Doubtful account to the sum of the subsidiaries after
Accounts. corrections are made.
QUESTIONS:
The Allowance for Doubtful Accounts Based on the above and the result of your
schedule is presented below: audit, answer the following:
Debit How much is the adjusted balance of the
Credit Balance Allowance for Doubtful Accounts as of
January 1, 2013 December 31, 2013?
P29,264
October 31, 2013 -P38,113
Accounts written-off:
Co. A – P2,592 When there is a large number of relatively
Co. B – P6,560 small account balances, negative confirmation
Co. C – P4,512 P12,064 of accounts receivable is feasible if internal
17,200 accounting control is
-Strong, and the individuals receiving the -Acquisitions are to be made through and
confirmation requests are likely to give them approved by the department in need of the
adequate consideration. equipment.

An aged trial balance of accounts receivable is

usually used by the auditor to

-Evaluate the provision for bad debts expense Audit of acquisitions and purchases -
Assessment
Which of the following statements is correct
concerning the use of negative confirmation
requests?
In your audit of the December 31, 2012,
-Negative confirmation requests are effective financial statements of CHICKEN, INC., you
when understatements of account balances are found the following inventory-related
suspected. transactions.
A. Goods costing P50,000 are on
Which of the following procedures would an consignment with a customer. These goods
auditor most likely perform for year-end were not included in the physical count on
accounts receivable confirmation when the December 31, 2012.
auditor did not receive replies to second B. Goods costing P16,500 were delivered
requests? to Chicken, Inc. on January 4, 2013. The
invoice for these goods was received and
-Inspect the shipping records documenting the recorded on January 10, 2013. The invoice
merchandise sold to debtors. showed the shipment was made on December
29, 2012, FOB shipping point.
C. Goods costing P21,640 were shipped
FOB shipping point on December 31, 2012,
and were received by the customer on January
Expenditure cycle - Assessment 2, 2013.Although the sale was recorded in
2012, these goods were included in 2012
ending inventory.
Proper authorization for acquisition is essential D. Goods costing P8,640 were shipped to a
because it customer on December 31, 2012, FOB
destination. These goods were delivered to the
-Ensures that goods/services are for authorized customer on January 5, 2013, and were not
company purposes included in the inventory. The sale was
properly taken up in 2013.
It is an internal document sent by the E. Goods costing P8,600 shipped by a
department in need of the supplies to the vendor under FOB destination term, were
purchasing department. received on January 3, 2013, and thus were not
included in the physical inventory. Because
-Purchase requisition the related invoice was received on December
31, 2012, this shipment was recorded as a
Which of the following policies is an internal purchase in 2012.
control weakness related to the acquisition of
factory equipment?
F. Goods valued at P51,000 were received included in the physical inventory. Because
from a vendor under consignment term. These the related invoice was received on December
goods were included in the physical count. 31, 2012, this shipment was recorded as a
G. Chicken, Inc. recorded as a 2012 sale a purchase in 2012.
P64,300 shipments of goods to a customer on F. Goods valued at P51,000 were received
December 31, 2012, FOB destination. This from a vendor under consignment term. These
shipment of goods costing P37,500 was goods were included in the physical count.
received by the customer on January 5, 2013, G. Chicken, Inc. recorded as a 2012 sale a
and was not included in the ending inventory P64,300 shipments of goods to a customer on
figure. December 31, 2012, FOB destination. This
Prior to any adjustments, Chicken, Inc.’s shipment of goods costing P37,500 was
ending inventory is valued at P445,000 and the received by the customer on January 5, 2013,
reported net income for the year is P1,648,000. and was not included in the ending inventory
Purchase cut-off procedures test the cut-off figure.
and completeness assertions. A company Prior to any adjustments, Chicken, Inc.’s
should include goods in its inventory if it ending inventory is valued at P445,000 and the
reported net income for the year is P1,648,000.
-Has physical possession of the goods. Chicken’s December 31, 2012, inventory
should be increased by
In your audit of the December 31, 2012,
financial statements of CHICKEN, INC., you -P40,000
found the following inventory-related
transactions.
A. Goods costing P50,000 are on
consignment with a customer. These goods
were not included in the physical count on Audit of payroll transactions - Assessment
December 31, 2012.
B. Goods costing P16,500 were delivered
to Chicken, Inc. on January 4, 2013. The
invoice for these goods was received and Bagtit Company has 35 employees who work
recorded on January 10, 2013. The invoice 8-hour days and are paid hourly. On January
showed the shipment was made on December 1, 2012, the company began a program of
29, 2012, FOB shipping point. granting its employees 10 days paid vacation
C. Goods costing P21,640 were shipped each year. Vacation days earned in 2012 may
FOB shipping point on December 31, 2012, first be taken on January 1, 2013. Information
and were received by the customer on January relative to these employees is as follows:
2, 2013.Although the sale was recorded in Year
2012, these goods were included in 2012 Hourly Wages
ending inventory. Vacation Days Earned by Each Employee
D. Goods costing P8,640 were shipped to a Vacation Days Used by Each Employee
customer on December 31, 2012, FOB 2012
destination. These goods were delivered to the P12.90
customer on January 5, 2013, and were not 10
included in the inventory. The sale was 0
properly taken up in 2013. 2013
E. Goods costing P8,600 shipped by a 13.50
vendor under FOB destination term, were 10
received on January 3, 2013, and thus were not 8
2014
14.25
10 Audit of inventory balances - service and
10 merchandising - Assessment
Bagtit has chosen to accrue the liability for
compensated absences at the current rates of
pay in effect when the compensated time is
earned. In conducting your audit of V-Power
What is the amount of the accrued liability for Corporation, a company engaged in import
compensated absences that should be reported and wholesale business, for the fiscal year
at December 31, 2014? ended June 30, 2011, you determined that its
internal control system was good.
-P47,460 Accordingly, you observed the physical
inventory at an interim date, May 31, 2011
Bagtit Company has 35 employees who work instead of at June 30, 2011.
8-hour days and are paid hourly. On January You obtained the following information from
1, 2012, the company began a program of the company’s general ledger.
granting its employees 10 days paid vacation Sales for eleven months ended May 31, 2011
each year. Vacation days earned in 2012 may P1,344,000
first be taken on January 1, 2013. Information Sales for the fiscal year ended June 30, 2011
relative to these employees is as follows: 1,536,000
Purchases for eleven months ended May 31,
Year 2011
Hourly Wages (before audit adjustments)
Vacation Days Earned by Each Employee 1,080,000
Vacation Days Used by Each Employee Purchases for the fiscal year ended June 30,
2012 2011
P12.90 1,280,000
10 Inventory, July 1, 2010
0 140,000
2013 Physical inventory, May 31, 2011
13.50 220,000
10 Your audit disclosed the following additional
8 information.
2014 · Shipments costing P12,000 were
14.25 received in May and included in the physical
10 inventory but recorded as June purchases.
10 · Deposit of P4,000 made with vendor
Bagtit has chosen to accrue the liability for and charged to purchases in April 2011.
compensated absences at the current rates of Product was shipped in July 2011.
pay in effect when the compensated time is · A shipment in June was damaged
earned. through the careless of the receiving
What is the amount of expense relative to department. This shipment was later sold in
compensated absences that should be reported June at its cost of P16,000.
on Bagtit’s income statement for 2012? In audit engagements in which interim
physical inventories are observed, a frequently
-P36,120 used auditing procedure is to test the
reasonableness of the year-end inventory by
the application of gross profit ratio. Based on used auditing procedure is to test the
the above and the result of your audit, you are reasonableness of the year-end inventory by
to provide the answers to the following: the application of gross profit ratio. Based on
The June 30, 2011 inventory using the gross the above and the result of your audit, you are
profit method is to provide the answers to the following:
The cost of goods sold during the month of
-P260,000 June, 2011 using the gross profit ratio method
is
In conducting your audit of V-Power
Corporation, a company engaged in import -P148,000
and wholesale business, for the fiscal year
ended June 30, 2011, you determined that its In conducting your audit of V-Power
internal control system was good. Corporation, a company engaged in import
Accordingly, you observed the physical and wholesale business, for the fiscal year
inventory at an interim date, May 31, 2011 ended June 30, 2011, you determined that its
instead of at June 30, 2011. internal control system was good.
You obtained the following information from Accordingly, you observed the physical
the company’s general ledger. inventory at an interim date, May 31, 2011
Sales for eleven months ended May 31, 2011 instead of at June 30, 2011.
P1,344,000 You obtained the following information from
Sales for the fiscal year ended June 30, 2011 the company’s general ledger.
1,536,000 Sales for eleven months ended May 31, 2011
Purchases for eleven months ended May 31, P1,344,000
2011 Sales for the fiscal year ended June 30, 2011
(before audit adjustments) 1,536,000
1,080,000 Purchases for eleven months ended May 31,
Purchases for the fiscal year ended June 30, 2011
2011 (before audit adjustments)
1,280,000 1,080,000
Inventory, July 1, 2010 Purchases for the fiscal year ended June 30,
140,000 2011
Physical inventory, May 31, 2011 1,280,000
220,000 Inventory, July 1, 2010
Your audit disclosed the following additional 140,000
information. Physical inventory, May 31, 2011
· Shipments costing P12,000 were 220,000
received in May and included in the physical Your audit disclosed the following additional
inventory but recorded as June purchases. information.
· Deposit of P4,000 made with vendor · Shipments costing P12,000 were
and charged to purchases in April 2011. received in May and included in the physical
Product was shipped in July 2011. inventory but recorded as June purchases.
· A shipment in June was damaged · Deposit of P4,000 made with vendor
through the careless of the receiving and charged to purchases in April 2011.
department. This shipment was later sold in Product was shipped in July 2011.
June at its cost of P16,000. · A shipment in June was damaged
QUESTIONS: through the careless of the receiving
In audit engagements in which interim department. This shipment was later sold in
physical inventories are observed, a frequently June at its cost of P16,000.
QUESTIONS: · A shipment in June was damaged
In audit engagements in which interim through the careless of the receiving
physical inventories are observed, a frequently department. This shipment was later sold in
used auditing procedure is to test the June at its cost of P16,000.
reasonableness of the year-end inventory by In audit engagements in which interim
the application of gross profit ratio. Based on physical inventories are observed, a frequently
the above and the result of your audit, you are used auditing procedure is to test the
to provide the answers to the following: reasonableness of the year-end inventory by
The cost of goods sold during the month of the application of gross profit ratio. Based on
June, 2011 using the gross profit ratio method the above and the result of your audit, you are
is to provide the answers to the following:
The gross profit ratio for eleven months ended
-P148,000 May 31, 2011 is

In conducting your audit of V-Power -25%

Corporation, a company engaged in import
and wholesale business, for the fiscal year
ended June 30, 2011, you determined that its
internal control system was good. Audit of trade payable balances and
Accordingly, you observed the physical accrued liabilities - Assessment
inventory at an interim date, May 31, 2011
instead of at June 30, 2011.
You obtained the following information from
the company’s general ledger.
Sales for eleven months ended May 31, 2011 On January 2, 2009, San Gin Company
P1,344,000 introduced a new line of products that carry a
Sales for the fiscal year ended June 30, 2011 three-year warranty against factory defects.
1,536,000 Estimated warranty costs related to peso sales
Purchases for eleven months ended May 31, are as follows: 1% of sales in the year of sale,
2011 2% in the year after sales and 3% in the
(before audit adjustments) second year after sale.
1,080,000 Sales
Purchases for the fiscal year ended June 30, Actual Warranty Expenditure
2011 2009
1,280,000 P100,000
Inventory, July 1, 2010 P 750
140,000 2010
Physical inventory, May 31, 2011 250,000
220,000 3,750
Your audit disclosed the following additional 2011
information. 350,000
· Shipments costing P12,000 were 11,250
received in May and included in the physical P700,000
inventory but recorded as June purchases. P15,750
· Deposit of P4,000 made with vendor What amount should San Gin report as
and charged to purchases in April 2011. warranty expense in 2011?
Product was shipped in July 2011.
-P21,000
During 2011, San Gin Company guaranteed a -P 0
supplier’s P500,000 loan from a bank. On
October 1, 2011, San Gin was notified that the
supplier had defaulted on the loan and filed for
bankruptcy protection. Counsel believes San
Gin will probably have to pay between Receipt and disbursement cycle -
P250,000 and P450,000 under its guarantee. Assessment
As a result of the supplier’s bankruptcy, San
Gin entered into a contract in December 2011
to retool its machines so that San Gin could Which one of the following would the auditor
accept parts from other suppliers. Retooling consider to be an incompatible operation?
costs are estimated to be P300,000. What
amount should San Gin report as a liability in -The cashier posts the receipts to the accounts
its December 31, 2011, statement of financial receivable subsidiary ledger cards
position?
The person who signs the checks
-P350,000
-Is also responsible for mailing the checks
Beginning 2011, San Gin began marketing a
new beer called “Blue Colt”. To help promote Which of the following procedures would an
the product, the management is offering a auditor most likely perform in auditing the
special beer mug to each customer for every statement of cash flows?
20 specially marked bottle caps of Blue Colt.
San Gin estimates that out of the 300,000 -Reconcile the amounts included in the
bottles of Blue Colt sold during 2011, only statement of cash flows to the other financial
50% of the marked bottle caps will be statements’ balances and amounts
redeemed. For the year 2011, 8,000 mugs were Internal control over cash receipts is weakened
ordered by the company at a total cost of when an employee who receives customer
P360,000. A total of 4,500 mugs were already mail receipts also
distributed to customers. What is the amount
of the liability that San Gin Company should -Records credits to individual accounts
report on its December 31, 2011 statement of receivable
financial position?
Which department cancels supporting
P135,000 documents after payment is mailed?

A court case decided on 21 December 2011 -Treasury

awarded damages against San Gin. The judge
has announced that the amount of damages
will be set at a future date, expected to be in
March 2012. San Gin has received advice Audit of cash balances - Assessment
from its lawyers that the amount of the
damages could be anything between P20,000
and P7,000,000. As of December 31, 2011, An auditor ordinarily should send a standard
how much should be recognized in the confirmation request to all banks with which
statement of financial position regarding this the client has done business during the year
court case?
under audit, regardless of the year-end balance c. Bank reconciliation statement
because this procedure prepared by the cashier for the Allied bank
account follows:
-Seek information about indebtedness to the Bank balance
bank P310, 500
Add: Deposit in transit P61,250
To gather evidence regarding the balance per Bank service charges 1,250
books in a bank reconciliation, an auditor 62,500
would most likely examine Total
373,000
-General ledger Less: Outstanding checks
Check no. Amount
The primary evidence regarding year-end bank 214 P 2,500 *
balances is documented in the 219 20,750
225 6,000
-Standard bank confirmations 228 8,500
28,750
The auditor gathers evidence regarding the Book balance
validity of deposits in transit by examining the P344,250
*Check certified by the bank in
-cut off bank statement December 2013.
All reconciling items were traced to the bank
The following data were taken from your statement. Further investigation indicated that
current working papers in connection with the deposits in transit include a customer’s
your audit of the Resolve Company’s financial post-dated check amounting to P40,000. The
statements for the year ended December 31, check represents a collection from account
2013. customer for sales made in the middle of
Cash account consists of the following items: October 2010.
Petty cash fund QUESTIONS:
P 25,000 Based on the application of the necessary audit
Security Bank checking account procedures and appreciation of the above data,
(37,500) you are to provide the answers to the
Allied Bank current account following:
344,250 How much is the adjusted cash as of
Total per GL December 31, 2013?
P 331,750
a. The count of the cashier’s -P358,500
accountability on January 2, 2014, revealed
total bills and coins of P9,000. Unreplenished A proof of cash is normally used
vouchers for various expenses totaled P16,000,
of which P3,000 pertains to January 2014. -to test the transaction process when controls
b. On December 29, 2013, a check for over cash are weak
P87,500 was drawn against Security Bank
current account resulting in bank overdraft of Which of the following sets of information
P37,500. The check was picked up by the does an auditor usually confirm in one form?
supplier on January 3, 2014.
-Cash in bank and collateral for loans
The following data were taken from your post-dated check amounting to P40,000. The
current working papers in connection with check represents a collection from account
your audit of the Resolve Company’s financial customer for sales made in the middle of
statements for the year ended December 31, October 2010.
2013. QUESTIONS:
Cash account consists of the following items: Based on the application of the necessary audit
Petty cash fund procedures and appreciation of the above data,
P 25,000 you are to provide the answers to the
Security Bank checking account following:
(37,500) How much is the adjusted balance of petty
Allied Bank current account cash fund as of December 31, 2013?
344,250
Total per GL -P12,000
P 331,750
a. The count of the cashier’s The following data were taken from your
accountability on January 2, 2014, revealed current working papers in connection with
total bills and coins of P9,000. Unreplenished your audit of the Resolve Company’s financial
vouchers for various expenses totaled P16,000, statements for the year ended December 31,
of which P3,000 pertains to January 2014. 2013.
b. On December 29, 2013, a check for Cash account consists of the following items:
P87,500 was drawn against Security Bank Petty cash fund
current account resulting in bank overdraft of P 25,000
P37,500. The check was picked up by the Security Bank checking account
supplier on January 3, 2014. (37,500)
c. Bank reconciliation statement Allied Bank current account
prepared by the cashier for the Allied bank 344,250
account follows: Total per GL
Bank balance P 331,750
P310, 500 a. The count of the cashier’s
Add: Deposit in transit P61,250 accountability on January 2, 2014, revealed
Bank service charges 1,250 total bills and coins of P9,000. Unreplenished
62,500 vouchers for various expenses totaled P16,000,
Total of which P3,000 pertains to January 2014.
373,000 b. On December 29, 2013, a check for
Less: Outstanding checks P87,500 was drawn against Security Bank
Check no. Amount current account resulting in bank overdraft of
214 P 2,500 * P37,500. The check was picked up by the
219 20,750 supplier on January 3, 2014.
225 6,000 c. Bank reconciliation statement
228 8,500 prepared by the cashier for the Allied bank
28,750 account follows:
Book balance Bank balance
P344,250 P310, 500
*Check certified by the bank in Add: Deposit in transit P61,250
December 2013. Bank service charges 1,250
All reconciling items were traced to the bank 62,500
statement. Further investigation indicated that Total
the deposits in transit include a customer’s 373,000
Less: Outstanding checks Total per GL
Check no. Amount P 331,750
214 P 2,500 * a. The count of the cashier’s
219 20,750 accountability on January 2, 2014, revealed
225 6,000 total bills and coins of P9,000. Unreplenished
228 8,500 vouchers for various expenses totaled P16,000,
28,750 of which P3,000 pertains to January 2014.
Book balance b. On December 29, 2013, a check for
P344,250 P87,500 was drawn against Security Bank
*Check certified by the bank in current account resulting in bank overdraft of
December 2013. P37,500. The check was picked up by the
All reconciling items were traced to the bank supplier on January 3, 2014.
statement. Further investigation indicated that c. Bank reconciliation statement
the deposits in transit include a customer’s prepared by the cashier for the Allied bank
post-dated check amounting to P40,000. The account follows:
check represents a collection from account Bank balance
customer for sales made in the middle of P310, 500
October 2010. Add: Deposit in transit P61,250
QUESTIONS: Bank service charges 1,250
Based on the application of the necessary audit 62,500
procedures and appreciation of the above data, Total
you are to provide the answers to the 373,000
following: Less: Outstanding checks
How much is the cash shortage as of Check no. Amount
December 31, 2013? 214 P 2,500 *
219 20,750
-P6,500 225 6,000
228 8,500
Cash receipts should be deposited on the day 28,750
of receipt or the following business day. Book balance
Select the most appropriate audit procedure to P344,250
determine that cash is promptly deposited. *Check certified by the bank in
December 2013.
-Compare the daily cash receipts totals with All reconciling items were traced to the bank
the bank deposits statement. Further investigation indicated that
the deposits in transit include a customer’s
The following data were taken from your post-dated check amounting to P40,000. The
current working papers in connection with check represents a collection from account
your audit of the Resolve Company’s financial customer for sales made in the middle of
statements for the year ended December 31, October 2010.
2013. QUESTIONS:
Cash account consists of the following items: Based on the application of the necessary audit
Petty cash fund procedures and appreciation of the above data,
P 25,000 you are to provide the answers to the
Security Bank checking account following:
(37,500) How much is the adjusted Allied Bank current
Allied Bank current account account as of December 31, 2013?
344,250
-P296,500 account were required. Contributing to the
inventory problem could be weaknesses in
internal control that led to the failure to record
some
Production cycle - Assessment
-Purchases returned to vendors.

Which of these is implemented to maintain

accurate inventory records? Audit of inventory balances -
manufacturing - Assessment
-Periodic counts are conducted to adjust the
perpetual records

A most likely procedure in obtaining an

understanding of a manufacturing entity’s Cherry Lou Factory started operations in 2012.
internal control over inventory balances Cherry Lou manufactures bath towels. 60% of
the production are “class A” which sell for
-Reviewing the entity’s description of ₱500 per dozen and 40% are “class B” which
inventory policies and procedures sell for ₱250 per dozen. During 2012, 6,000
dozens were produced at an average cost of
Which of the following is a question that the ₱360 per dozen. The inventory at the end of
auditor would expect to find on the production the year was as follows:
cycle section of an internal control 220 dozens “Class A”@ ₱360
questionnaire? ₱79,200
300 dozens “Class B”@ ₱360
-Are all releases by storekeepers of raw 108,000
materials from storage based on approved P187,200
requisition documents? The management considers the relative sales
value method as a more equitable basis of cost
distribution.
Required:
Audit of cost of goods sold balance - How much of the total cost should be allocated
Assessment to “Class A”?

-₱1,620,000
When auditing merchandise inventory at year-
end, the auditor performs a purchase cut-off Cherry Lou Factory started operations in 2012.
test to obtain evidence that: Cherry Lou manufactures bath towels. 60% of
the production are “class A” which sell for
-All goods owned at year-end are included in ₱500 per dozen and 40% are “class B” which
the inventory balance. sell for ₱250 per dozen. During 2012, 6,000
dozens were produced at an average cost of
For several years a client’s physical inventory ₱360 per dozen. The inventory at the end of
count has been lower than what was shown on the year was as follows:
the books at the time of the count so that 220 dozens “Class A”@ ₱360
downward adjustments to the inventory ₱79,200
300 dozens “Class B”@ ₱360 of a long-term bank loan by a debit to cash
108,000 and a credit to sales. Which of the following
P187,200 is the most effective procedure for detecting
The management considers the relative sales this type of error?
value method as a more equitable basis of cost
distribution. -Analyze bank confirmation information
Required:
How much is the cost of sales for the year
2012?
Audit of interest expense and finance cost
-₱1,993,500 balances - Assessment

Cherry Lou Factory started operations in 2012.

Cherry Lou manufactures bath towels. 60% of
the production are “class A” which sell for During the course of an audit, an auditor
₱500 per dozen and 40% are “class B” which observes that the recorded interest expense
sell for ₱250 per dozen. During 2012, 6,000 seems excessive in relation to the balance in
dozens were produced at an average cost of long-term debt. This observation could lead
₱360 per dozen. The inventory at the end of the auditor to suspect that
the year was as follows:
220 dozens “Class A”@ ₱360 -Long-term debt is understated.
₱79,200
300 dozens “Class B”@ ₱360 In performing an audit, which one of the
108,000 following procedures would be considered a
P187,200 "substantive" test"?
The management considers the relative sales
value method as a more equitable basis of cost -Comparing last year's interest expense with
distribution. this year's interest expense.
Required:
How much is the value of inventory as of
December 31,2012?
Audit of non-trade liability balances.
-₱166,500 Assessment

Financing cycle - Assessment Bowles Corporation is in the business of

leasing new sophisticated computer systems.
As a lessor of computers , Bowles purchased a
An auditor’s program to examine long-term new system on December 31, 2011. The
debt most likely would include steps that system was delivered the same day (by prior
require arrangement) to General Investment Company,
a lessee. The corporation accountant revealed
-Correlating interest expense recorded for the the following information relating to the lease
period with outstanding debt transaction:
Cost of system to Bowles
Two months before the year end, the P550,000
bookkeeper erroneously recorded the receipt Estimated useful life and lease term
8 years (a) At the end of the lease, the system will
Expected residual value (unguaranteed) revert to Bowles.
P40,000 (b) General is aware of Bowle’s rate of
Bowle’s implicit rate of interest implicit interest.
12% (c) The lease rental consists of equal annual
General’s incremental borrowing rate payments.
14% Questions:
Date of first lease payment Based on the above and the result of your
Dec. 31, 2011 audit, answer the following:
Additional information is as follows: The annual lease payment under the lease is
(a) At the end of the lease, the system will
revert to Bowles. -P95,950
(b) General is aware of Bowle’s rate of
implicit interest.
(c) The lease rental consists of equal annual
payments
Questions: Audit of equity accounts - Assessment
Based on the above and the result of your
audit, answer the following:
The amount to be reported under current
liabilities as liability under finance lease as of The equity section of Urbiztondo
December 31, 2012 is Corporation’s statement of financial position
as of December 31, 2011 is as follows:
-P48,611 Shareholders’ Equity
Share capital, P5 par value; authorized,
Bowles Corporation is in the business of 2,000,000 shares; issued, 400,000
leasing new sophisticated computer systems. shares
As a lessor of computers , Bowles purchased a P2,000,000
new system on December 31, 2011. The Share premium
system was delivered the same day (by prior 850,000
arrangement) to General Investment Company, Retained earnings
a lessee. The corporation accountant revealed 3,000,000
the following information relating to the lease P5,850,000
transaction: The following events occurred during 2012:
Cost of system to Bowles Jan. 5
P550,000 10,000 shares were sold for P9 per share.
Estimated useful life and lease term Jan. 16
8 years Declared a cash dividend of P0.40 per share,
Expected residual value (unguaranteed) payable February 15 to shareholders of record
P40,000 on February 5.
Bowle’s implicit rate of interest Feb. 10
12% 40,000 shares were sold for P11 per share.
General’s incremental borrowing rate Mar. 1
14% A 40% share dividend was declared and
Date of first lease payment issued. Market value per share is currently
Dec. 31, 2011 P15.
Additional information is as follows: April 1
A two-for-one split was carried out. The par April 1
vale of the share was to be reduced to P2.50 A two-for-one split was carried out. The par
per share. Market value on March 31 was P18 vale of the share was to be reduced to P2.50
per share. per share. Market value on March 31 was P18
July 1 per share.
A 10% share dividend was declared and July 1
issued. Market value is currently P10 per A 10% share dividend was declared and
share. issued. Market value is currently P10 per
Aug. 1 share.
A cash dividend of P0.40 per share was Aug. 1
declared, payable September 1 to shareholders A cash dividend of P0.40 per share was
of record on August 21. declared, payable September 1 to shareholders
Dec. 31 of record on August 21.
Profit for 2012 was P1,880,000. Dec. 31
Questions: Profit for 2012 was P1,880,000.
Based on the above and the result of your Questions:
audit, answer the following: Based on the above and the result of your
The balance of share capital as of December audit, answer the following:
31, 2012 is The number of shares issued and outstanding
as of December 31, 2012 is
-P3,465,000
-P1,386,000
The equity section of Urbiztondo
Corporation’s statement of financial position The equity section of Urbiztondo
as of December 31, 2011 is as follows: Corporation’s statement of financial position
Shareholders’ Equity as of December 31, 2011 is as follows:
Share capital, P5 par value; authorized, Shareholders’ Equity
2,000,000 shares; issued, 400,000 Share capital, P5 par value; authorized,
shares 2,000,000 shares; issued, 400,000
P2,000,000 shares
Share premium P2,000,000
850,000 Share premium
Retained earnings 850,000
3,000,000 Retained earnings
P5,850,000 3,000,000
The following events occurred during 2012: P5,850,000
Jan. 5 The following events occurred during 2012:
10,000 shares were sold for P9 per share. Jan. 5
Jan. 16 10,000 shares were sold for P9 per share.
Declared a cash dividend of P0.40 per share, Jan. 16
payable February 15 to shareholders of record Declared a cash dividend of P0.40 per share,
on February 5. payable February 15 to shareholders of record
Feb. 10 on February 5.
40,000 shares were sold for P11 per share. Feb. 10
Mar. 1 40,000 shares were sold for P11 per share.
A 40% share dividend was declared and Mar. 1
issued. Market value per share is currently
P15.
A 40% share dividend was declared and Mar. 1
issued. Market value per share is currently A 40% share dividend was declared and
P15. issued. Market value per share is currently
April 1 P15.
A two-for-one split was carried out. The par April 1
vale of the share was to be reduced to P2.50 A two-for-one split was carried out. The par
per share. Market value on March 31 was P18 vale of the share was to be reduced to P2.50
per share. per share. Market value on March 31 was P18
July 1 per share.
A 10% share dividend was declared and July 1
issued. Market value is currently P10 per A 10% share dividend was declared and
share. issued. Market value is currently P10 per
Aug. 1 share.
A cash dividend of P0.40 per share was Aug. 1
declared, payable September 1 to shareholders A cash dividend of P0.40 per share was
of record on August 21. declared, payable September 1 to shareholders
Dec. 31 of record on August 21.
Profit for 2012 was P1,880,000. Dec. 31
Questions: Profit for 2012 was P1,880,000.
Based on the above and the result of your Questions:
audit, answer the following: Based on the above and the result of your
The balance of retained earnings as of audit, answer the following:
December 31, 2012 is The balance of share premium as of December
31, 2012 is
-P2,001,600
-P2,075,000
The equity section of Urbiztondo
Corporation’s statement of financial position
as of December 31, 2011 is as follows:
Shareholders’ Equity
Share capital, P5 par value; authorized, Investing cycle - Assessment
2,000,000 shares; issued, 400,000
shares
P2,000,000
Share premium A weakness in internal control over recording
850,000 retirements of equipment may cause an auditor
Retained earnings to
3,000,000
P5,850,000 -Select certain items of equipment from the
The following events occurred during 2012 accounting records and locate them in the
Jan. 5 plant.
10,000 shares were sold for P9 per share.
Jan. 16 Which of the following is not a control that is
Declared a cash dividend of P0.40 per share, designed to protect investment securities?
payable February 15 to shareholders of record
on February 5. -Custody over securities should be limited to
Feb. 10 individuals who have recordkeeping
40,000 shares were sold for P11 per share. responsibility over the securities.
 4,100,000
Which of the following controls would a 3,270,000
company most likely use to safeguard Audit notes:
marketable securities when an independent a) All the investments were acquired at the
trust agent is not employed? beginning of 2011. Broker’s fees and
commission charged to expense in 2011
-Two company officials have joint control of related to share acquisition amounted to 10%
marketable securities, which are kept in a bank of their acquisition cost while the company
safe-deposit box. incurred brokers’ fees and commission related
to the bond acquisition amounted to P98,000.
Which of the following controls would be b) ABC Corp. owns 10,000 out of 100,000
most effective in assuring that the proper ordinary shares outstanding of Aye Inc. which
custody of assets in the investing cycle is reported net income in 2011 and in 2012 at
maintained? P5m and P6M, respectively. Aye Inc. also paid
dividends in 2011 at P1.2M. On March 2012,
-The recorded balances in the investment ABC Corp. sold 4,000 of its stock investment
subsidiary ledger are periodically compared in Aye at P150 per share.
with the contents of the safe-deposit box by c) ABC Corp. owns 50% of the preference
independent personnel. shares outstanding of Bee Inc. which reported
net income in 2011 and 2012 at P2M and P3m,
respectively. The company also paid P500,000
dividends to preference shares and P500,000
Audit of investment account balances - dividends to preference shares to ordinary
Assessment shares in 2011 and P750,000 dividends to
preference shares and P750,000 dividends to
ordinary shares in 2012.
d) The See Corp. bonds will mature on
The following were made available to you as December 31, 2014. The yield rate on the
part of your audit of ABC Corp.’s investment acquisition date as a result of the incurrence of
accounts as of and for the period ended the transaction cost was at 8%. Interests are
December 31, 2012: receivable from bonds every December 31.
Acquisition Cost e) ABC Corp. owns 25,000 out of the
FMV (12/31/2011 200,000 ordinary shares outstanding of Dee
FMV (12/31/2012) Corp. which reported net income in 2011 and
Aye Inc, Ordinary Shares 2012 at P2M and P5M, respectively. Dee
P1,200,000 Corp. also paid dividends in 2011 and 2012 at
P1,300,000 P800,000 and P1M, respectively. On
P750,000 December 28, 2012 after receiving the
Bee Inc., Preference Shares dividends declared for 2012, ABC Corp. sold
2,100,000 5,000 Dee Corp. shares at p160 per share.
1,900,000 Required:
2,240,000 Assuming that all the investments are
See Corp., 10% 3,000, P1,000 Bonds accounted for at fair market value through
3,100,000 profit or losses under PAS 39, what is the
3,200,000 realized gain/loss on sale of investments in
3,180,000 2012?
Dee Corp., Ordinary Shares
4,250,000 -60,000.
The following were made available to you as d) The See Corp. bonds will mature on
part of your audit of ABC Corp.’s investment December 31, 2014. The yield rate on the
accounts as of and for the period ended acquisition date as a result of the incurrence of
December 31, 2012: the transaction cost was at 8%. Interests are
Acquisition Cost receivable from bonds every December 31.
FMV (12/31/2011 e) ABC Corp. owns 25,000 out of the
FMV (12/31/2012) 200,000 ordinary shares outstanding of Dee
Aye Inc, Ordinary Shares Corp. which reported net income in 2011 and
P1,200,000 2012 at P2M and P5M, respectively. Dee
P1,300,000 Corp. also paid dividends in 2011 and 2012 at
P750,000 P800,000 and P1M, respectively. On
Bee Inc., Preference Shares December 28, 2012 after receiving the
2,100,000 dividends declared for 2012, ABC Corp. sold
1,900,000 5,000 Dee Corp. shares at p160 per share.
2,240,000 Required:
See Corp., 10% 3,000, P1,000 Bonds Assuming that all the investments are
3,100,000 accounted for as available-for-sale securities
3,200,000 under PAS 39, what is the unrealized holding
3,180,000 gain/loss o be reported in the stockholders’
Dee Corp., Ordinary Shares equity portion of the 2012 statement of
4,250,000 financial position?
4,100,000
3,270,000 -508,147.
Audit notes:
a) All the investments were acquired at the The following were made available to you as
beginning of 2011. Broker’s fees and part of your audit of ABC Corp.’s investment
commission charged to expense in 2011 accounts as of and for the period ended
related to share acquisition amounted to 10% December 31, 2012:
of their acquisition cost while the company Acquisition Cost
incurred brokers’ fees and commission related FMV (12/31/2011
to the bond acquisition amounted to P98,000. FMV (12/31/2012)
b) ABC Corp. owns 10,000 out of 100,000 Aye Inc, Ordinary Shares
ordinary shares outstanding of Aye Inc. which P1,200,000
reported net income in 2011 and in 2012 at P1,300,000
P5m and P6M, respectively. Aye Inc. also paid P750,000
dividends in 2011 at P1.2M. On March 2012, Bee Inc., Preference Shares
ABC Corp. sold 4,000 of its stock investment 2,100,000
in Aye at P150 per share. 1,900,000
c) ABC Corp. owns 50% of the preference 2,240,000
shares outstanding of Bee Inc. which reported See Corp., 10% 3,000, P1,000 Bonds
net income in 2011 and 2012 at P2M and P3m, 3,100,000
respectively. The company also paid P500,000 3,200,000
dividends to preference shares and P500,000 3,180,000
dividends to preference shares to ordinary Dee Corp., Ordinary Shares
shares in 2011 and P750,000 dividends to 4,250,000
preference shares and P750,000 dividends to 4,100,000
ordinary shares in 2012. 3,270,000
Audit notes:
a) All the investments were acquired at the
beginning of 2011. Broker’s fees and Audit of property, plant and equipment
commission charged to expense in 2011 account balances - Assessment
related to share acquisition amounted to 10%
of their acquisition cost while the company
incurred brokers’ fees and commission related
to the bond acquisition amounted to P98,000.
b) ABC Corp. owns 10,000 out of 100,000 Belgium Company acquired the following
ordinary shares outstanding of Aye Inc. which assets and constructed a building as well. All
reported net income in 2011 and in 2012 at this was done during the current year.
P5m and P6M, respectively. Aye Inc. also paid Asset 1 and 2
dividends in 2011 at P1.2M. On March 2012, These assets were purchased as a lump sum
ABC Corp. sold 4,000 of its stock investment for P104,000 cash. The following information
in Aye at P150 per share. was gathered.
c) ABC Corp. owns 50% of the preference Description
shares outstanding of Bee Inc. which reported Initial Cost on Seller’s Books
net income in 2011 and 2012 at P2M and P3m, Depreciation to Date on Seller’s Books
respectively. The company also paid P500,000 Book Value on Seller’s Books
dividends to preference shares and P500,000 Appraised Value
dividends to preference shares to ordinary Machinery
shares in 2011 and P750,000 dividends to P100,000
preference shares and P750,000 dividends to P50,000
ordinary shares in 2012. P50,000
d) The See Corp. bonds will mature on P90,000
December 31, 2014. The yield rate on the Office Equipment
acquisition date as a result of the incurrence of 60,000
the transaction cost was at 8%. Interests are 10,000
receivable from bonds every December 31. 50,000
e) ABC Corp. owns 25,000 out of the 30,000
200,000 ordinary shares outstanding of Dee Asset 3
Corp. which reported net income in 2011 and This machine was acquired by making a
2012 at P2M and P5M, respectively. Dee P10,000 down payment and issuing a P30,000,
Corp. also paid dividends in 2011 and 2012 at 2-year, zero-interest-bearing note. The note is
P800,000 and P1M, respectively. On to be paid off in two P15,000 installments
December 28, 2012 after receiving the made at the end of the first and second years.
dividends declared for 2012, ABC Corp. sold It was estimated that the asset could have been
5,000 Dee Corp. shares at p160 per share. purchased outright for P35,900.
Required: Asset 4
Assuming that all the investments are This machinery was acquired by trading in
accounted for at fair market value through used machinery. (The exchange lacks
profit or losses under PFRS 9, what is the commercial substance.)
unrealized holding gain/loss to be reported in Cost of machinery traded
the 2013 statement of comprehensive income? P100,000
Accumulated depreciation to date of sale
-280,000. 36,000
Fair value of machinery traded
80,000
Cash received
10,000 These assets were purchased as a lump sum
Fair value of machinery acquired for P104,000 cash. The following information
70,000 was gathered.
Asset 5 Description
Office equipment was acquired by issuing 100 Initial Cost on Seller’s Books
shares of P8 par value ordinary shares. The Depreciation to Date on Seller’s Books
shares have a market value of P11 per share. Book Value on Seller’s Books
Asset 6 Appraised Value
Belgium Company purchased office Machinery
equipment for P20,000, terms 2/10, n/30. P100,000
Because the company intended to take the P50,000
discount, it made no entry until it paid for the P50,000
acquisition. The entry was: P90,000
Office Equipment Office Equipment
20,000 60,000
Cash 10,000
19,600 50,000
Purchase Discounts 30,000
400 Asset 3
Asset 7 This machine was acquired by making a
Belgium recently received a land from the P10,000 down payment and issuing a P30,000,
Municipality of San Manuel as an inducement 2-year, zero-interest-bearing note. The note is
to locate its business in the municipality. The to be paid off in two P15,000 installments
appraised value of the land is P270,000 but made at the end of the first and second years.
this was acquired San Manuel 20 years ago at It was estimated that the asset could have been
a cost of P20,000. The company made no purchased outright for P35,900.
entry to record the land because it had no cost Asset 4
basis. This machinery was acquired by trading in
Asset 8 used machinery. (The exchange lacks
Belgium Company constructed a building for commercial substance.)
P600,000. It could have purchased the Cost of machinery traded
building for P740,000. The controller made P100,000
the following entry. Accumulated depreciation to date of sale
Building 36,000
740,000 Fair value of machinery traded
Cash 80,000
600,000 Cash received
Profit on Construction 10,000
140,000 Fair value of machinery acquired
What is the total cost of the office equipment? 70,000
Asset 5
-P46,700 Office equipment was acquired by issuing 100
shares of P8 par value ordinary shares. The
Belgium Company acquired the following shares have a market value of P11 per share.
assets and constructed a building as well. All Asset 6
this was done during the current year. Belgium Company purchased office
Asset 1 and 2 equipment for P20,000, terms 2/10, n/30.
Because the company intended to take the
discount, it made no entry until it paid for the P50,000
acquisition. The entry was: P50,000
Office Equipment P90,000
20,000 Office Equipment
Cash 60,000
19,600 10,000
Purchase Discounts 50,000
400 30,000
Asset 7 Asset 3
Belgium recently received a land from the This machine was acquired by making a
Municipality of San Manuel as an inducement P10,000 down payment and issuing a P30,000,
to locate its business in the municipality. The 2-year, zero-interest-bearing note. The note is
appraised value of the land is P270,000 but to be paid off in two P15,000 installments
this was acquired San Manuel 20 years ago at made at the end of the first and second years.
a cost of P20,000. The company made no It was estimated that the asset could have been
entry to record the land because it had no cost purchased outright for P35,900.
basis. Asset 4
Asset 8 This machinery was acquired by trading in
Belgium Company constructed a building for used machinery. (The exchange lacks
P600,000. It could have purchased the commercial substance.)
building for P740,000. The controller made Cost of machinery traded
the following entry. P100,000
Building Accumulated depreciation to date of sale
740,000 36,000
Cash Fair value of machinery traded
600,000 80,000
Profit on Construction Cash received
140,000 10,000
What is the cost of the building? Fair value of machinery acquired
70,000
-P600,000 Asset 5
Office equipment was acquired by issuing 100
Problem 15 shares of P8 par value ordinary shares. The
shares have a market value of P11 per share.
Belgium Company acquired the following Asset 6
assets and constructed a building as well. All Belgium Company purchased office
this was done during the current year. equipment for P20,000, terms 2/10, n/30.
Asset 1 and 2 Because the company intended to take the
These assets were purchased as a lump sum discount, it made no entry until it paid for the
for P104,000 cash. The following information acquisition. The entry was:
was gathered. Office Equipment
Description 20,000
Initial Cost on Seller’s Books Cash
Depreciation to Date on Seller’s Books 19,600
Book Value on Seller’s Books Purchase Discounts
Appraised Value 400
Machinery Asset 7
P100,000
Belgium recently received a land from the useful life of the patent was only eight years
Municipality of San Manuel as an inducement from the date of its acquisition.
to locate its business in the municipality. The b. On January 3, 2011, in connection with
appraised value of the land is P270,000 but the purchase of a trademark from the Golden
this was acquired San Manuel 20 years ago at Corp., the parties entered into a
a cost of P20,000. The company made no noncompetition agreement. SCAR paid
entry to record the land because it had no cost Golden P800,000, of which three-quarters
basis. related to the trademark and one-quarter
Asset 8 reflected Golden’s agreement not to compete
Belgium Company constructed a building for for a period of five years in the line of
P600,000. It could have purchased the business covered by the trademark. SCAR
building for P740,000. The controller made considers the life of the trademark to be
the following entry. indefinite.
Building c. On January 3, 2011. SCAR acquired all
740,000 the noncash assets and assumed all liabilities
Cash of White Company at a cash purchase price of
600,000 P1,200,000. SCAR determined that the fair
Profit on Construction value of the net assets acquired in the
140,000 transaction is P800,000.
What is the total cost of the machinery? What is the total amortization expense of
intangible assets in 2011?
-P167,900
-68,000

SCAR, Inc. reported other noncurrent asset

Audit of intangible account balances - account balances on December 31, 2010, as
Assessment follows;
Patent
P192,000
Accumulated amortization
(24,000)
SCAR, Inc. reported other noncurrent asset Net patent
account balances on December 31, 2010, as P168,000
follows; Transactions during 2011 and other
Patent information relating to SCAR’s other
P192,000 noncurrent assets included the following:
Accumulated amortization a. The patent was purchased from Ruby
(24,000) Company on January 2, 2009, when the
Net patent remaining legal life was 16 years. On January
P168,000 2, 2011, SCAR determined that the remaining
Transactions during 2011 and other useful life of the patent was only eight years
information relating to SCAR’s other from the date of its acquisition.
noncurrent assets included the following: b. On January 3, 2011, in connection with
a. The patent was purchased from Ruby the purchase of a trademark from the Golden
Company on January 2, 2009, when the Corp., the parties entered into a
remaining legal life was 16 years. On January noncompetition agreement. SCAR paid
2, 2011, SCAR determined that the remaining Golden P800,000, of which three-quarters
related to the trademark and one-quarter
reflected Golden’s agreement not to compete
for a period of five years in the line of Which element of a system of quality
business covered by the trademark. SCAR control is addressed by the establishment
considers the life of the trademark to be of policies and procedures designed to
indefinite. provide the firm with reasonable assurance
c. On January 3, 2011. SCAR acquired all that it has sufficient personnel with the
the noncash assets and assumed all liabilities competence, capabilities, and commitment
of White Company at a cash purchase price of to ethical principles?
P1,200,000. SCAR determined that the fair
value of the net assets acquired in the -Human resources
transaction is P800,000.
What is the carrying amount of intangibles at What threat to independence is created
December 31, 2011? when the litigation support services
provided to an audit client include the
-1,300,000 estimation of the possible outcome and
thereby affects the amounts or disclosures
Which is correct regarding credit units to be reflected in the financial statements?
earned in a continuing professional
education activity? -Self-review threat

-A CPA who has earned 70 units in a 3-year The Code recognizes that the objectives of
period from seminars and conventions cannot the accountancy profession are to work to
carry the excess units to the next 3-year period the highest standards of professionalism,
to attain the highest levels of performance
The Board of Accountancy may issue and generally to meet the public interest
certificate of registration and professional requirements set out above. These
identification card to any successful objectives require four basic needs to be
examinee: met including the following, except

-Must be a natural- born citizen and resident of -Integrity

the Philippines, convicted by a court of
political offense. Confidential client information may be
disclosed in the following circumstances,
Which of the following fundamental except
principles would most likely be threatened
when a professional accountant in public -When the relationship between the client
practice solicits new work through and the auditor ceases.
advertising or other forms of marketing?
A CPA –lawyer, acting as legal counsel to
-professional behavior one of his audit client, is an example of

Which of the following most accurately -Advocacy threat

states how objectivity has been defined by
the Code of Ethics? A direct financial interest or a material
indirect financial interest in the audit
-A combination of impartiality, intellectual client of a member of the audit team or his
honesty and a freedom from conflict of immediate family member may create a
interest significant self-interest threat. Which of
the following safeguards would be least The best description f the scope of internal
likely considered to eliminate the threat or auditing is that it encompasses
reduce it to an acceptable level?
- Both financial and operational auditing
- Discuss the matter with those charged
with governance of the audit client. Operational audits generally have been
conducted by internal and COA auditors,
The auditor’s opinion but may be performed by certified public
accountants. A primary purpose of an
-Is not an assurance as to the efficiency operational audit is to provide
with which management has conducted the
affairs of the entity. -A measure of management performance in
meeting organizational goals.
Which statement is correct regarding
assurance engagements? In some assurance engagements, the
evaluation or measurement of the subject
- It is an engagement in which a matter is performed by the responsible
practitioner expresses a conclusion party, and the subject matter information is
designed to enhance the degree of in the form of an assertion by the
confidence of the intended users other than responsible party that is made available to
the responsible party about the outcome of intended users. These engagements are
the evaluation or measurement of a subject called
matter against criteria.
- Assertion-based engagements
Different government agencies influence
the practice of accountancy in the Internal audit department should be
Philippines. Which of the following responsible to
statements is correct?
- Both the audit committee and senior mgt.
-The Commission on Audit (COA) is
principally tasked to keep the general Which of the following is least likely a
accounts of the government and preserve fraud risk factor?
the vouchers and supporting papers
thereto, and promulgate accounting and - The accounting department is overstaffed
auditing rules and regulations including
those for the prevention and disallowance According to PSA 250, the term
of irregular, unnecessary, excessive, “noncompliance” as used in the standard refers
extravagant or unconscionable to acts of omission or commission by the
expenditures, or uses of government funds entity being audited, either intentional or
and properties. unintentional, which are contrary to the
prevailing laws or regulations. Such acts do
An audit designed to determine to extent to not include
which the desired results of an activity
established by the legislative or other - Personal misconduct (unrelated to the
authorizing body are being achieved. entity’s business activities) by the entity’s
management or employees.
-Program results audit
Auditor responsibility for identifying -Verify processing accuracy concurrently
“direct effect” illegal acts differs from with processing
their responsibility for detecting
The internal auditor is reviewing a new
- indirect-effect illegal acts. policy on electronic mail. Appropriate
elements of such a policy would include
Which of the following characteristics all of the following except:
most likely would heighten an auditor’s
concern about the risk of intentional - Erasing all employee’s electronic mail
manipulation of financial statements? immediately upon employment termination

- Management places substantial emphasis Which of the following is a password

on meeting earnings projections security problem?

Which of the following statements is true? - Users are assigned passwords when
accounts are created, but do not change
- It is usually easier for the auditor to them.
uncover errors than fraud

When fraud has been identified, CPA

responsibility consists of

- Determination of its extent.

An auditor who discovers that a client’s

employees have paid small bribes to public
officials most likely would withdraw from
the engagement if the

- Employees’ actions affect the auditor’s

ability to rely on management’s
representations

A company using EDI (electronic data

interchange) made it a practice to track the
functional acknowledgments from trading
partners and to issue warning messages if
acknowledgments did not occur within a
reasonable length of time. What risk was
the company attempting to address by this
practice?

- Transmission of EDI transactions to

trading partners may sometimes fail.

An ITF would be appropriate when the

auditor needs to