REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

CHAPTER 1: Fundamental Principles of Assurance Services

Problem 1-1
TRUE 1. Assurance services help enhance the reliability of financial information
throughout the capital markets.
TRUE 2. Assurance refers to the practitioner's contentment that the information made by
an entity is reliable.
FALSE 3. Assurance services refer to engagements in which a practitioner expresses a
conclusion designed to enhance the degree of confidence of the practitioner
about the outcome of the evaluation of a subject matter.
FALSE 4. The practitioner must be independent of the responsible party and the public.
TRUE 5. The responsible party may not be from the same organization as the intended
users but may be one of the intended users.
FALSE 6. The intended users must have at least one responsible party to constitute an
assurance engagement.
FALSE 7. Subject matter information relates to the nature of assertion with which the
practitioner gathers sufficient evidence.
FALSE 8. A subject matter is considered appropriate if it can be subjected to audit
procedures on a test basis.
TRUE 9. The criteria serve as the yardstick to measure or evaluate the subject matter.
FALSE 10. The criteria used to evaluate a subject matter must be included in anY
document that contains the assurance report issued on such subject matter.
FALSE 11. Review reports are normally dated as of the client's balance sheet date.
FALSE 12. A review is an engagement in which the accountant undertakes to present in
the form of financial statements, information that is the representation of
management.
FALSE 13. A professional accountant must be independent to issue a compilation report.
TRUE 14. A professional accountant must be independent to issue a review report.
TRUE 15. The accountant is not required to obtain an understanding of the client's
internal control in a compilation engagement.

Problem 1-2
FALSE 1. Sufficiency and appropriateness of evidence are interrelated factors and, as
such, are considered complements.
FALSE 2. The determination of materiality is a mathematical exercise that is a vital
process in planning the nature, timing, and extent of assurance engagement
Procedures.
FALSE 3. Inherent risk refers to the susceptibility of the subject matter information to
misstatements before consideration of controls.
FALSE 4. A practitioner may consider a procedure not applicable if it would entail a high
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

level of costs to the assurance service.

TRUE 5. The more the practitioner intends to exhibit the attitude of professional
skepticism, the more engagement procedures will be required.
TRUE 6. A practitioner is not expected to be an expert in the verification of the
authenticity of documentation of audit evidence.
FALSE 7. Generally, evidence that is generated internally is more reliable than those from
independent sources when the related controls are effective.
TRUE 8. Only limited procedures are performed by the practitioner on limited assurance
engagements as a basis for a negative form of conclusion.
TRUE 9. Audits and reviews are assurance-based engagements as both the subject matter
information and the practitioner's assurance report are available to the intended
users.
FALSE 10. The three-party relationship still exists in non-assurance engagements which
include the practitioner, the responsible party, and the public.
TRUE 11. IAASB sets high-quality international standards for assurance engagements
and enhances quality control that promote public confidence in the accountancy
profession.
FALSE 12. Engagement standards are issued to provide interpretative guidance and
practical assistance to professional accountants that promote good practice in
performing assurance engagements.
FALSE 13. The report issued on non-assurance engagements must be expressed in a
negative form.
TRUE 14. Procedures to be done in performing audits and reviews are exclusively
determined by the auditor.
FALSE 15. Only a moderate level of assurance is provided in management advisory
services.

Problem 1-3
B 1. The Philippine Framework for Assurance Engagements
A. Contains basic principles, essential procedures, and related guidancefor the
performance of assurance engagements.
B. Defines and describes the elements and objectives of an assurance engagement,
and identifies engagements to which PSAS, PSRES, and PSAES apply.
C. Provides a frame of reference for CPAs in public practice when performing
audits, reviews, and compilations of historical financial information.
D. Establishes standards and provides procedural requirements for the
performance of assurance engagements

A 2. The Philippine Standards on Assurance Engagements (PSAES) are to be applied in

A. Assurance engagements dealing with subject matters other than historical
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

financial information.
B. Compilation engagements and agreements to apply agreed-upon
procedures to information.
C. The audit or review of historical financial information.
D. Assurance engagements dealing with historical financial information.

D 3. Practitioners who perform assurance engagements are governed by the following,

except:
A. Code of Ethics for Professional Accountants in the Philippines
B. The Framework to Assurance Engagements
C. Philippine Standards on Quality Control
D. Philippine Financial Reporting Standards

C 4. Assurance services can be best described as

A. Is broader than attestation but lesser in scope than an audit
B. Processes that measure and communicate financial data to intended users
C. Independent professional services intended to enhance the credibility of information
to meet the needs of an intended user
D. Engagement is designed to enable an independent practitioner to express an opinion
as to the fairness of historical financial information

C 5. The independent auditor lends credibility to client financial statements by

A. Stating in the auditor's management letter that the examination was made in
accordance with PSAS
B. Maintaining a clear-cut distinction between the management's and the auditor's
Representations
C. Attaching an auditor's opinion to the client's FSS
D. Testifying under oath about client financial information

A 6. Which of the following statements best describes assurance services?

A. Independent professional services that are intended to enhance the credibility of
information to meet the needs of an intended user
B. Services designed to express an opinion on the fairness of historical financial
statements based on the results of an audit
C. The preparation of financial statements or the collection, classification, and
summarization of other financial information
D. Services designed for the improvement of operations, resulting in better outcomes
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C 7. The risk that the information presented may be materially false and misleading is
referred to as the
A. Business risk
B. Client risk
C. Information risk
D. Risk assessment

C 8. Which of the following statements is/are correct?

I. Assurance engagement means an engagement in which a practitioner expresses a
conclusion designed to enhance the degree of confidence of the intended users other
than the responsible party about the outcome of the evaluation or measurement of a
subject matter against criteria.
II. Assurance refers to the practitioner's satisfaction with the reliability of an assertion
being made by one party for use by another party.

A. I only
B. Il only
C. Both I and II
D. Neither I nor II

B 9. Financial statements need to be prepared in accordance with one, or a combination of:

International Other authoritative
Philippine Financial or comprehensive GAAP in
Standards Reporting financial reporting the
on Auditing Standards framework Philippines
A. Yes Yes Yes Yes
B. No Yes Yes Yes
C. No Yes No Yes
D. Yes No No No

D 10. Assurance engagements include the following, except

A. An engagement is conducted to provide a high level of assurance that the subject
matter conforms in all material respects with identified suitable criteria.
B. An engagement is conducted to provide a moderate level of assurance that the
subject matter is plausible in the circumstances.
C. An engagement in accordance with the Philippine Standard on Assurance
Engagement(s) issued by the Auditing and Assurance Standard Council approved
by the Board Accountancy/Professional Regulation Commission.
D. An engagement to perform agreed-upon procedures
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C 11. The single feature that most clearly distinguishes auditing, attestation, and assurance
is:
A. Type of service
B. CPA's approach to the service
C. Scope of services
D. Training required to perform the service

D 12. Which of the following criteria is unique to the independent auditor's attest function?
A. General competence
B. Familiarity with the particular industry of each client
C. Due professional care
D. Independence

C 13. The primary goal of the CPA in performing the attest function is to
A. Detect fraud
B. Examine individual transactions so that the auditor may certify their validity
C. Determine whether the client's assertions are fairly stated
D. Assure the consistent application of correct accounting procedures

C 14. The three types of attestation services are:

A. Audits, reviews, and compilations
B. Audits, compilations, and other attestation services
C. Audits, reviews, and other attestation services
D. Reviews, compilations, and other attestation services

D 15. Not all engagements performed by professional accountants are assurance

engagements. Other engagements frequently performed by professional accountants
that are not assurance engagements include the following, except
A. Agreed-upon procedures
B. Compilation of financial or other information
C. Management consulting
D. Examination of prospective financial information

Problem 1-4
D 1. Which of the following is not an assurance engagement?
A. Audit of prospective financial statements
B. Review of interim historical financial statements
C. Comprehensive audit
D. Preparation of tax returns that use estimates
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C 2. Which statement does not accurately describe an assurance engagement?

A. The objective of an assurance engagement is for a professional accountant to
evaluate or measure a subject matter that is the responsibility of another party
against identified suitable criteria, and to express a conclusion that provides the
intended user with a level of assurance about that subject matter
B. Not all engagements performed by professional accountants are assurance
engagements
C. A particular engagement, to be an assurance engagement, depends upon whether it
exhibits all the following elements: a two-party relationship, a subject matter,
suitable criteria, and a conclusion
D. An engagement in form of agreed-upon procedures results in the expression of
factual findings

C 3. A practitioner should accept an assurance engagement only if

A. The subject matter is in the form of financial information.
B. The criteria to be used are not available to the intended users.
C. The practitioner's conclusion is to be contained in a written report.
D. The subject matter is the responsibility of either the intended users or the
practitioner.

B 4. Independence is required for which of the following types of engagements?

I. Compilation
II. Review

A. I only
B. II only
C. Both I and II
D. Neither I nor II

C 5. Which of the following is incorrect regarding the practitioner?

A. The term practitioneris broader than the term auditor.
B. The practitioner is governed by ethical requirements (e.g. professional competence)
regarding the conduct of the engagements.
C. The practitioner must be independent to the responsible party but not necessarily to
the intended users.
D. The practitioner is responsible for determining the nature, timing or extent of
procedures required by the engagement.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A 6. Indicate the level of assurance provided by audit and related services.

A B C D
Audit High High Negative Absolute
Review Moderate None Moderate High
Agreed-upon procedures None None None Limited
Compilation None None None None

D 7. There is a broad range of engagements to provide a high or moderate level of

assurance. Such engagements may include
I. Engagements to report on a broad range of subject matters covering financial and
non-financial information
II. Attest and direct reporting engagements
III. Engagements to report internally and externally
IV. Engagements in the private and public sector

A. II only
B. I and II only
C. I, II and III
D. I, II, II and IV

B 8. Unlike consulting services, assurance services:

A. Make recommendations to management
B. Report on quality information
C. Report on how to use information
D. Are two-party contracts

D 9. Which of the following may be under the scope of the Framework for. Assurance
Engagement?
A Agreed-upon procedures engagements and compilation of financial and other
information.
B. Preparation of tax returns where no conclusion conveying assurance is expressed.
C. Consulting (or advisory) engagements, such as management and tax consulting.
D. Preparation of tax returns where a conclusion conveying assurance is expressed.

B 10. Which of the following is true about assurance services?

A. All assurance services are financial statement audits
B. An assurance engagement must have five fundamental elements
C. A fundamental element for an assurance engagement is engagement fee
D. A review of historical financial statements is not an assurance service
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A 11. Which of the following does not appropriately pertains to the elements of assurance
engagement?
A. A three-party relationship involving an auditor, the management, and intended
users
B. Suitable criteria
C. Sufficient appropriate evidence
D. A written assurance report in the form appropriate to a reasonable assurance
engagement or a limited assurance engagement.

D 12. Assurance engagements should exhibit the following elements, except:

A. A subject matter.
B. Suitable criteria.
C. Sufficient appropriate evidence.
D. Appropriate professional fees.

C 13. The following relates to intended users, choose the exception:

A. Intended users are the person/s for whom the practitioner prepares the assurance
report
B. Intended users may be identified by agreement between the practitioner and the
responsible party or engaging party, or by law
C. Intended users may include either the practitioner or the responsible party.
D. In case of broad range of interests by the readers of assurance report, intended user
may be limited to major stockholders with significant and common interests.

B 14. Evaluate the following statements.

I. The term auditor is broader than the term practitioner.
II. The responsible party may or may not be from the same organization with the
intended users.
III. The intended users may be identified by agreement between the practitioner and
the responsible party or engaging party, or by law.

A. Only one statement is correct

B. Only two statements are correct
C. All statements are correct
D. All statements are incorrect

D 15. The subject matter of an assurance engagement may include

A. Financial information
B. Compliance with regulation
C. Internal controls
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D. All of these

Problem 1-5
B 1. According to the framework for assurance engagement, the criteria must be
A. Sufficient and appropriate
B. Suitable and available to intended users
C. Sufficient or appropriate
D. Suitable or available to intended users

C 2. Which of the following is not suitable criteria in the context of audit?

A. IFRS
B. PFRS for SME
C. PSA
D. GAAP

C 3. Suitable criteria are required for reasonably consistent evaluation or measurement of

the subject matter of an assurance engagement. Which of the following statements
concerning the characteristics of suitable criteria is correct?
A. Reliable criteria contribute to conclusions that are clear, comprehensive, and not
subject to significantly different interpretations.
B. Relevant criteria allow reasonably consistent evaluation or measurement of the
subject matter including, where relevant, presentation and disclosure, when used in
similar circumstances by similarly qualified practitioners.
C. Neutral criteria contribute to conclusions that are free from bias.
D. Criteria are sufficiently caplete when they contribute to conclusions that are clear,
comprehensive, and not subject to different interpretations.

D 4. The following cannot be a suitable criterion for an assurance engagement; except?

A. Practitioner's own expectations
B. Practitioner's judgment
C. Practitioner's experience
D. Agreement between the responsible party and the intended users

C 5. Characteristics of suitable criteria do not include

A Neutrality
B. Understandability
C. Comparability
D. Relevance
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A 6. For the criteria to be suitable, it shall possess several characteristics. Which of the
following is incorrect?
A. Relevant criteria allow reasonably consistent evaluation or measurement of the
subject matter including, where relevant, presentation and disclosure, when used in
similar circumstances by similarly qualified practitioners.
B. Criteria are sufficiently complete when relevant factors that could affect the
conclusions in the context of the engagement circumstances are not omitted.
Complete criteria include, where relevant, benchmarks for presentation and
disclosure.
C. Criteria contribute to conclusions that are free from bias.
D. Criteria shall contribute to conclusions that are clear, comprehensive, and not
subject to significantly different interpretations.

A 7. The sufficiency and appropriateness of evidence shall be determined by the

I. Practitioner
II. Responsible party
III. Intended users

A. I only
B. II only
C. I and II
D. I, II and III

A 8. Which of the following statements is true concerning evidence in an assurance

engagement?
A. Sufficiency is the measure of the quantity of evidence.
B. Appropriateness is the measure of the quality of evidence, that is, its reliability and
persuasiveness.
C. The reliability of evidence is influenced not by its nature but by its source.
D. Obtaining more evidence may compensate for its poor quality.

C 9. Which is incorrect concerning evidence?

A. The higher the risk of material misstatement involved, the more is required.
B. The better the quality, the less is required.
C. The volume of evidence can compensate for its poor quality.
D. The reliability of evidence is influenced by its source and its nature.

B 10. Which is incorrect?

A. Consistent evidence obtained from various sources or of different nature is more
reliable
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

B. It is generally more difficult to obtain assurance about subject matter information

at a point in time than about subject matter information covering a period of time.
C. When it is cost prohibitive or difficult to obtain an evidence, the auditor may shift
to obtain from other alternatives.
D. The practitioner considers the relationship between cost of obtaining the evidence
and the usefulness of the information.

B 11. Which is correct concerning the concept of professional skepticism

A. An assumption that the responsible party is dishonest
B. A critical assessment, with a questioning mind on the validity of evidence
obtained
C. An assumption that responsible party is trustworthy
D. Disregarding contradicting information against several of consistent evidence

C 12. Professional skepticism means that

I. The practitioner makes a critical assessment, with a questioning mind, of the
validity of evidence obtained and is alert to evidence that contradicts or brings
into question the reliability of documents or representations by the responsible
party.
II. the benefits that will be derived from obtaining the evidence should exceed the
cost of obtaining it.
III. The practitioner plans and performs an assurance engagement recognizing that
circumstances may exist that cause the subject matter information to be
materially misstated.

A. I and II
B. II and III
C. I and III
D. I, II and III

A 13. Below statements relate to generalizations about reliability of evidence may be useful.
Which is incorrect?
A. Evidence is more reliable when it is obtained from sources inside the entity.
B. Evidence that is generated internally is more reliable when the related controls are
effective.
C. Evidence is more reliable when it exists in documentary form, whether paper,
electronic, or other media.
D. Evidence provided by original documents is more reliable than evidence provided
by photocopies or facsimiles.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C 14. Select the incorrect statement from the following generalization on the reliability of
evidence.
A. Evidence is more reliable when it is obtained from independent sources outside the
entity.
B. Evidence that is generated internally is more reliable when the related controls are
effective.
C. Evidence obtained directly by the practitioner is more reliable than when obtained
indirectly, even if the source is not competent.
D. Evidence provided by original documents is more reliable than evidence provided
by photocopies or facsimiles.

A 15. Which of the following statements exemplifies positive assurance?

A. "In our opinion internal control is effective, in all material aspects, based on XYZ
criteria."
B. "Based on our work described in this report, nothing has come to our attention that
causes us to believe that internal control is not effective, in all material respects,
based on XYZ criteria."
C. Both A and B
D. Neither A nor B

Problem 1-6
D 1. Which of the following statements correctly defines the term reasonable assurance?
A. A substantial level of assurance to allow an auditor to detect a material
misstatement.
B. A significant level of assurance to allow an auditor to detect a material
misstatement.
C. An absolute level of assurance to allow an auditor to delet a material misstatement.
D. A high, but not absolute, level of assurance to allow an auditor to detect a material
misstatement.

C 2. Under this engagement, the objective is a reduction in assurance engagement risk to an

acceptably low level in the circumstances of the engagement as the basis for a positive
form of expression of the practitioner's conclusion.
A Absolute assurance engagement
B. Limited assurance engagement
C. Reasonable assurance engagement
D. Non-assurance engagement
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C 3. These are assurance engagements that the practitioner either directly performs the
evaluation or measurement of the subject matter, or obtains a representation from the
responsible party that has performed the evaluation or measurement that is not
available to the intended users in the assurance reports.
A. Assertion-based engagements
B. Limited assurance engagement
C. Direct reporting engagements
D. Reasonable assurance engagement

C 4. Which set of standards apply to assurance engagements dealing with subject matter
other than historical financial information?
A. Philippine Standards on Auditing (PSAs)
B. Philippine Standards on Review Engagements (PSRES)
C. Philippine Standards on Assurance Engagements (PSAEs)
D. Philippine Standards on Related Services (PSRSS)

D 5. This document defines the elements and objectives of an assurance engagement, but
does not, by itself, establish standards or provide procedural requirements for the
performance of assurance engagements.
A. Philippine Standards on Related Services (PSRS)
B. Philippine Standards on Review Engagements (PSRE)
C. Philippine Standards on Assurance Engagements (PSAE)
D. Philippine Framework for Assurance Engagements (PFAE)

C 6. Which is correct concerning the framework for assurance engagements?

A. It provides a frame of reference against which audit engagements are evaluated
B. It establishes specific guidelines and procedural requirements for the performance
of assurance engagements
C. It provides a frame of reference for accountants in public practice when performing
assurance engagements
D. It is tended for reference of public accountants only

D 7. An engagement conducted to provide: (a) a high level of assurance that the subject
matter conforms in all material respects with identified suitable criteria; or (b) a
moderate level of assurance that the subject matter is plausible in the circumstances.
A. Audit engagement
B. Reasonable assurance
C. Review engagement
D. Assurance engagement
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C 8. The auditor's satisfaction as to the reliability of an assertion being made by one party
for use by another is called:
A. Reliance factor
B. Materiality
C. Assurance
D. Precision

D 9. Which of the following statements is incorrect?

A. Assurance services report on the quality of information
B. Assurance engagements encompass attestation engagements
C. Not all engagements performed by professional accountants are assurance
engagements
D. Non-assurance engagements include agreed upon procedures, compilation of
financial or other information, preparation of tax returns where no conclusion is
expressed, tax consulting and review engagements.

B 10. Assurance services differ from consulting services that they

I. Focus on providing advice
II. Involve monitoring of one party by another

A. I only
B. Both I and II
C. I only
D. Neither I nor II

D 11. What is the type of assurance engagement that has as its subject matter non-historical
financial information?
A. Audit of financial statements
B. Review of financial statements
C. Agreed-upon procedures
D. Prospective financial information

C 12. A public accounting firm's primary role in performing non-attest services is to:
A. Hedge against declines in the firm's audit practice
B. Establish the firm as a consultant
C. Provide advice valuable to a client's effectiveness
D. Acclimate staff members to the clients business and industry
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D 13. Which of the following is not one of major categories of practitioner's assurance
services?
A. Assurance engagements on subject matters other than historical financial
information
B. Audit and reviews of historical financial information
C. Review of historical financial information
D. Compilation engagement

C 14. When performing a compilation engagement, the accountant is required to

A. Assess internal controls.
B. Verify matters and explanations.
C. Obtain a general knowledge of the business and operations of the entity.
D. Make inquiries of management to assess the reliability an completeness of the
information provided.

A 15. Which of the following services, if any, may a practitioner who is not independent
provide?
A. Compilations but not reviews
B. Reviews but not financial statement audits
C. Reviews but not compilations
D. Agreed-upon procedures but not compilations

Problem 1-7
B 1. Professional accountants not in public practice such as internal auditor who applies the
Framework and refer the Framework, PSAS, PSRES or PSAEs in their report but are
not independent of the entity in respect of which the engagement is performed are
required to do the following, except
A. Disclose the nature of the relationship
B. Not to restrict the purpose and users of the report
C. Disclose the lack of independence
D. The report shall not indicate the word "independent" in the title

B 2. The objective of a review of financial statements

A. Is to enable the auditor to express an opinion whether the financial statements are
prepared, in all material respects, in accordance with an identified financial
reporting framework.
B. Is to enable an auditor to state whether, on the 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 material respects, in accordance with an identified financial
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

reporting framework.
C. Is to carry out those procedures of an audit nature to which the auditor and the
entity and any appropriate third parties have agreed and to. report on factual
findings.
D. Is to use accounting expertise as opposed to auditing expertise to collect, classify
and summarize financial information.

A 3. How does the related services framework differ from the assurance framework?
A. Related services engagements do not result in an opinion.
B. Related services im compliance with PSAE.
C. Related services enhance the degree of confidence intended users can have.
D. Related services claim compliance with PSA.

B 4. Which of the following is not one of five elements exhibited by all assurance
engagements?
A. The subject matter
B. A multi-party relationship involving a practitioner, a responsible party, those in
charge with governance, and the intended users
C. Suitable criteria
D. Evidence

D 5. An engagement to perform agreed-upon procedures may involve the auditor in

performing certain procedures concerning
I. Individual items of financial data.
II. A single financial statement.
III. A complete set of financial statements.

A. I and II only
B. II and III only
C. I and III only
D. I, II and III

C 6. A practitioner should accept an assurance engagement only if

A. The subject matter is in the form of financial information.
B. The criteria to be used are not available to the intended users.
C. The practitioner's conclusion is to be contained in a written report.
D. The subject matter is the responsibility of either the intended users or the
practitioner.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C 7. According to the IAASB Glossary of terms, this refers to a professional accountant in

public practice
A. Auditor
B. Professional
C. Practitioner
D. Public accountant

A 8. Who is responsible for determining the nature, timing, extents of assurance

procedures?
A. Practitioner
B. Practitioner and Responsible Party
C. Practitioner and Intended User
D. Practitioner, Responsible Party, and Intended User

C 9. The person or person who in a direct reporting engagement, is responsible for the
subject matter; or in an assertion-based engagement, is responsible for the subject
matter information (the assertion), and may be responsible for the subject matter.
A. General public
B. Audit committee
C. Responsible party
D. Intended users

D 10. A responsible party does each of the following except:

A. Engages the practitioner
B. Selects the criteria
C. Determines the subject matter
D. Selects the audit procedures

B 11. Which is not true of the intended user?

A. The intended user is the person or class of persons for whom the professional
accountant prepares the report for a specific use or purpose
B. The intended user(s) is (are) always limited to the addressee of the professional
accountant's report
C. The responsible party may also be one of the intended users
D. The intended user(s)

A 12. Subject matter and subject matter information of an assurance engagement can take
all the following forms except:
A. Litigation planning
B. Physical characteristics
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C. Non-financial performance or conditions

D. Financial performance or conditions

B 13. "Subject matter information" as used in the Framework to Assurance Engagement

shall mean
A. The subject which is to be measured against a suitable criteria
B. Outcome of the evaluation or measurement of a subject matter
C. The assertion of the responsible party
D. Any data relating to the subject matter to be measured against the criteria

C 14. Which of the following is not true about the subject matter of an assurance
engagement?
A. It is the topic about which the assurance is conducted.
B. It could be information such as financial statements, statistical information and
non-financial performance indicators.
C. It could be International Financial Reporting Standards.
D. It could be systems and processes or behavior.

A 15. Which of the following is an example of a formal criterion(a)?

I. Philippine Public Sector Accounting Standards
II. Number of times a committee meets in a year

A. I only
B. II only
C. Both I and II
D. Neither I nor II
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

CHAPTER 2: Introduction to Audit Services and Financial Statements Audit

PROBLEM 2-1

TRUE 1. Auditors serve numerous parties, but most importantly is the public, as
exemplified by investors, creditors, and other stakeholders.

FALSE 2. External auditors enhance the credibility of information by helping the

management in preparing the financial statements and designing and
implementing internal controls.

TRUE 3. Assertions are representations made by an audit client, explicit or otherwise,

about economic actions and events.

FALSE 4. Providers of external audits and internal audits are both independent of the
management which allows them to perform financial statements audits.

FALSE 5. The overall objective of the auditor in a financial statements audit is to have an
opinion on whether the financial statements are prepared, in all material
respects, in accordance with the criteria.

FALSE 6. The opinion to be expressed by the auditor must pertain individually and
separately to each financial statement presented by management.

FALSE 7. Comparability means that different knowledgeable and independent observers

could reach a consensus.

FALSE 8. Financial statements should not favor one user over another, as such, the
interest of the users must have no conflicts.

TRUE 9. External audit benefits the public by lending credibility to the items presented
in the financial statements.

FALSE 10. Financial information is more reliable when the internal controls of the entity
are effective, as such, external auditors also express an opinion over the
effectiveness of these controls.

TRUE 11. The auditor's opinion does not assure the future viability of the audit client nor
the efficiency and effectiveness of its operations.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

FALSE 12. The preparation of the financial statements requires the auditor to exercise
judgment in making accounting estimates that are reasonable in the
circumstances.

FALSE 13. The opinion expressed by the auditor is on whether the financial statements
are prepared, in all material respects, in accordance with the generally
accepted auditing standards.

FALSE 14. All financial data are verifiable through the existence of supporting documents
and records.

FALSE 15. There should be no conflict, whether short-term or long-term, should exist
between the auditor and the client's management.

PROBLEM 2-2 TRUE OR FALSE

FALSE 1. The auditor is expected to detect both fraud and error during the course of
performing external audits.

TRUE 2. The financial statements must be adequately supported by records and

documents to be considered an appropriate subject matter.

TRUE 3. The applicable financial reporting framework used as criteria in performing the
audit is driven by the information needs of its users.

TRUE 4. The opinion to be expressed by the auditor depends on the materiality of

non-compliance from the framework and the pervasiveness of the related
effects of such non-compliance.

FALSE 5. Depending on the magnitude of audit procedures, the level of assurance

provided by auditors ranges from high to absolute levels.

FALSE 6. The accumulation of persuasive evidence leads to the establishment of

conclusive evidence in detecting material misstatements.

FALSE 7. Inherent limitations of an audit arise due to the auditor's exposure to inherent
risks, control risks, and detection risks.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

TRUE 8. External audits provide value to organizations through reduction of information

risk that may lead to lower cost of capital.

FALSE 9. The high demand for audits is present because it is required by law.

TRUE 10. One of the ways to reduce information risk is to share such risk with the
preparer of the information.

TRUE 11. The auditor is not, and cannot, be held responsible for fraud and error.

FALSE 12. The audit of financial statements relieves the management and/or those
charged with governance of their responsibilities with the financial statements.

TRUE 13. An audit, when carried out, may act as a deterrent for fraud and error.

FALSE 14. When the auditor is unable to gather sufficient appropriate evidence, he or she
ordinarily selects between qualified and adverse opinion.

FALSE 15. An auditor may provide an absolute level of assurance in extremely rare
circumstances.

PROBLEM 2-3

D 1. Which of the following statements refers to the definition of auditing?

A. A service activity which function is to provide quantitative information primarily
financial in nature about economic entities that is intended to be useful in making
economic decisions.
B. The art of recording, classifying and summarizing in a significant manner and in terms
of money, transactions and events which are in part at least of a financial character and
interpreting the results thereof.
C. The process of identifying, measuring and communicating economic information to
permit informed judgment and decisions by users of the information.
D. A systematic process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence
between these assertions and established criteria and communicating the results thereof.

D 2. Which of the following is not among the characteristics of auditing?

A. A systematic process
B. It involves objectively obtaining and evaluating evidence about assertions.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C. It ascertains the degree of correspondence between assertions and established criteria

D. It includes communication of the results to the management

A 3. The predominant type of attestation service performed by CPAs is

A. Audit B. Review
C. Compilation D. Management consulting

D 4. Which of the following types of auditing is performed most commonly by CPAs on a

contractual basis?
A. Internal auditing
B. Government auditing
C. BIR auditing D. External auditing

C 5. These audits are similar in most respects.

A. Operational and compliance
B. Operational and government
C. Financial and compliance
D. Financial and operational

D 6. Which is incorrect regarding internal auditing?

A. It encompasses both financial and operational auditing.
B. An internal audit department reports to the audit committee and senior management.
C. It aids primarily to management and those charged with governance.
D. It can be performed only by internal auditors.

A 7. To operate effectively, an internal auditor must be independent of

A. The line functions of the organizations
B. The entity
C. The employer-employee relationship which exists for other employees in the
organization
D. All of the above

A 8. To provide for the greatest degree of independence in performing internal auditing

functions, an internal auditor most likely should report to
A. Board of Directors.
B. Corporate Controller.
C. Vice-President for Finance.
D. Corporate Stockholders.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A 9. The scope and objectives of internal auditing vary widely and depend on the size and
structure of the entity and the requirements of management. Ordinarily, internal auditing
activities include one or more of the following:
A. B. C. D.
Review of the accounting and internal control systems Yes Yes Yes Yes
Examination of financial and operating information Yes Yes Yes No
Review of the economy, efficiency and effectiveness Yes Yes No No
of operations
Review of compliance with laws, regulations and Yes No No No
other external requirements

C 10. Which statement is correct regarding the relationship between internal auditing and the
external auditor?
A. Some judgments relating to the audit of the financial statements are those of the
internal auditor.
B. The external audit function's objectives vary according to management's requirements.
C. Certain aspects of internal auditing may be useful in determining the nature, timing
and extent of external audit procedures.
D. The external auditor is responsible for the audit opinion expressed, however that
responsibility may be reduced by any use made of internal auditing.

B 11. This type of audit involves a review of an organization's procedures and methods for the
purpose of evaluating efficiency and effectiveness of operations, identifying areas for
improvement, and making recommendations to improve performance.
A. Financial statement audit
B. Operational audit
C. Compliance audit
D. Internal audit

A 12. Operational auditing is primarily oriented toward

A. Future improvements to accomplish the goals of management.
B. The accuracy of data reflected in management's financial records.
C. The verification that a company's financial statements are fairly presented.
D. Past protection provided by existing internal control.

A 13. An objective of operational audit is to assess whether

A. Specific units of the entity are functioning effectively and efficiently
B. Financial statements fairly reflect the results of operations
C. An organization's procedure adheres to specific procedures, rules or regulations set by
an authoritative body
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D. Internal control structure is designed and implemented

C 14. AAA Corp. has engaged a public accounting firm to issue a report on the accuracy of
product quality specifications included in trade sales agreements. This is an example of a
(an):
A. Financial statement audit
B. Attestation service
C. Compliance audit
D. Operational audit

C 15. Which of the following terms best describe the audit of a taxpayer's return by a BIR
auditor?
A. Operational audit
B. Internal audit
C. Compliance audit
D. Government audit

PROBLEM 2-4

C 1. Which of the following types of audits uses as its criteria laws and regulations?
A. Operational audit
B. Financial statement audit
C. Compliance audit
D. Financial audit

C 2. An operational audit has as one of its objectives to:

A. determine whether the financial statements fairly present the entity's operations.
B. evaluate the feasibility of attaining the entity's operational objectives.
C. make recommendations for improving performance.
D. report on the entity's relative success in attaining profit maximization.

D 3. Which of the following best describes the operational audit?

A. It requires the constant review by internal auditors of administrative controls as they
relate to operations of the company.
B. It concentrates on implementing financial and accounting control in a newly organized
company.
C. It attempts and is designed to verify the fair presentation of a company's results of
operations.
D. It concentrates on seeking out aspects of operations in which waste would be reduced
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

by the introduction of controls.

A 4. What is the proper organizational role of internal auditing?

A. To serve as an independent, objective assurance and consulting activity that adds value
to operations.
B. To assist the external auditor in order to reduce external audit fees.
C. To perform studies to assist in the attainment of more efficient operations.
D. To serve as the investigative arm of the audit committee of the board of directors.

D 5. Internal auditing often extends beyond examinations leading to the expression of an

opinion on the fairness of financial presentation and includes audits of efficiency,
effectiveness, and
A. Internal control.
B. Evaluation.
C. Accuracy.
D. Compliance.

C 6. The best description of the scope of internal auditing is that it encompasses

A. Primarily operational auditing.
B. Primarily financial auditing.
C. Both financial and operational auditing.
D. Primarily the safeguarding of assets and verifying the existence of such assets.

A 7. To maximize independence, the director of internal auditing should report to the

A. Audit committee.
B. Controller.
C. Chief financial officer.
D. Director of information systems.

C 8. Governmental auditing beyond examinations leads to the expression of opinion on the

fairness of financial presentation and includes audits of efficiency, economy, effectiveness,
and also
A. Accuracy B. Evaluation
C. Compliance D. Internal control

C 9. Which one of the following is more difficult to evaluate objectively?

A. Presentation of financial statements in accordance with generally accepted accounting
principles.
B. Compliance with government regulations.
C. Efficiency and effectiveness of operations.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D. All three of the above are equally difficult.

A 10. Which of the following audits can be regarded as generally being a compliance audit?
A. BIR examiners' examinations of taxpayer return.
B. COA auditor's evaluation of the computer operations of governmental units.
C. An internal auditor's review of a company's payroll authorization procedures.
D. A CPA firm's audit of the local school district.

A 11. The overall objectives of the auditor in conducting an audit of financial statements are
I. To obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether caused by fraud or error.
II. To report on the financial statements.
III. To obtain conclusive rather than persuasive evidence.
IV. To detect all misstatements, whether due to fraud or error.

A. I and II only
B. II and IV only
C. I, II and III only
D. I, II, III and IV

A 12. The objective of the ordinary audit of financial statements is the expression of an opinion
on:
A. the fairness of the financial statements. B. the accuracy of the annual report.
C. the accuracy of the financial statements. D. the balance sheet and income statement.

D 13. Which of the following best describes the objective of an audit of financial statements?
A. To express an opinion whether the financial statements are prepared in accordance
with prescribed criteria.
B. To express an assurance as to the future viability of the entity whose financial
statements are being audited.
C. To express an assurance about the management's efficiency or effectiveness in
conducting the operations of entity.
D. To express an opinion whether the financial statements are prepared, in all material
respect, in accordance with an identified financial reporting framework.

A 14. In "auditing" accounting data, the concern is with

A. Determining whether recorded information properly reflects the economic events that
occurred during the accounting period.
B. Determining if fraud has occurred.
C. Determining if taxable income has been calculated correctly.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D. Analyzing the financial information to be sure that it complies with government

requirements.

B 15. Third-party users of the audit report expect the auditor to do all of the following except:
A. To evaluate measurements and disclosures made by management
B. To provide a biased evaluation of the FSS
C. To determine whether financial statements are presented in accordance with GAAP
D. To gather sufficient evidence to support their opinion

PROBLEM 2-5

C 1. If the auditor believes that the financial statements are not fairly stated or is unable to
reach a conclusion because of insufficient evidence, the auditor:
A. should withdraw from the engagement.
B. should request an increase in audit fees so that more resources can be used to conduct
the audit.
C. has the responsibility of notifying financial statement users through the auditor's report.
D. should notify regulators of the circumstances.

C 2. The term that describes the role of persons entrusted with the supervision, control and
direction of an entity is
A. Management
B. Administration
C. Governance
D. Government

C 3. Management of a company is responsible for

A. Hiring the auditor
B. The audit workpapers
C. Preparing the financial statements
D. Independence and obtaining evidence

A 4. The auditor's best defense when material misstatements are not uncovered is to have
conducted the audit:
A. in accordance with auditing standards.
B. as effectively as reasonably possible.
C. in a timely manner.
D. only after an adequate investigation of the management team.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A 5. The concept of reasonable assurance indicates that the auditor is:

A. not an insurer of the correctness of the financial statements.
B. not responsible for the fairness of the financial statements.
C. responsible only for issuing an opinion on the financial statements.
D. responsible for finding all misstatements.

B 6. Absolute assurance cannot be provided in an audit because of: (Choose the exception)
A. Human errors in judgment
B. The need to obtain conclusive evidence
C. The employment of test procedures
D. Limitations inherent in the client's internal controls

D 7. The need for an independent audit arises due to the following reasons.. (Choose the
expectation)
A. Expertise of auditors
B. Competing interests
C. Remoteness of users
D. Complexity of decision-making

D 8. Which of the following is incorrect regarding the general principles of an audit?

A. The auditor should comply with the "Code of Ethics for Professional Ethics for
Certified Public Accountants" promulgated by the Philippine Professional Regulation
Commission.
B. The auditor should conduct an audit in accordance with PSAs.
C. The auditor should plan and perform an audit with an attitude of professional
skepticism recognizing that circumstances may exist that cause the financial statements
to be materially misstated.
D. The auditor would ordinarily expect to find evidence to support management
representations and assume they are necessarily correct.

D 9. Which of the following statements does not describe a condition that creates a demand for
auditing?
A. Conflict between an information preparer and a user can result in biased information.
B. Information can have substantial economic consequences for a decision-maker.
C. Expertise is often required for information preparation and verification.
D. Users can directly assess the quality of information.

B 10. Which is not a theoretical postulate framing an audit?

A. Financial data can be subjected to verification.
B. Long-term conflict between the auditor and client may exist.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C. An audit benefits the public.

D. The auditor is independent of the client.

B 11. Auditing assumes that the financial data are verifiable. Data are verifiable when two or
more qualified individuals,
A. Working together, can prove, beyond doubt, the accuracy of the data.
B. Working independently, each reach essentially similar conclusions.
C. Working independently, can prove, beyond reasonable doubt, the truthfulness of the
data.
D. Working together, can agree upon the accuracy of the data.

D 12. An audit of historical financial statements most commonly includes the:

A. Statement of Cash Flows, the Statement of Financial Position, and the Retained
Earnings Statement.
B. Statement of Financial Position, the Statement of Comprehensive Income, and the
Statement of Cash Flows.
C. Statement of Comprehensive Income, the Statement of Cash Flows, and the Statement
of Net Working Capital.
D. Statement of Financial Position, the Statement of Comprehensive Income, the
Statement of Cash Flows, and the Statement of Changes in Equity.

D 13. The auditor is required to comply with all PSAs relevant to the audit of an entity's
financial statements. A PSA is relevant to the audit when
I. The PSA is in effect.
II. The circumstances addressed by the PSA exist

A. I only
B. II only
C. Either I or II
D. Both I and II

D 14. An audit of historical financial statements is most often performed to determine whether
the:
A. organization is operating efficiently and effectively.
B. entity is following specific procedures or rules set down by some higher authority.
C. management team is fulfilling its fiduciary responsibilities shareholders.
D. none of the other choices
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D 15. Which of the following is/are correct?

Statement 1: The financial statements most commonly audited by external auditors are
the Statement of Financial Position, the Statement of Comprehensive Income, and the
Statement of Changes in Retained Earnings.
Statement 2: Only companies that file annual statements with the Securities and
Exchange Commission are required to have an annual external audit.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

PROBLEM 2-6

D 1. It refers to the audit procedures deemed necessary in the circumstances to achieve the
objective of the audit.
A. Reasonable assurance
B. Objective of an audit
C. Audit program
D. Scope of an audit

A 2. The auditor's opinion

A. Enhances the credibility of the financial statements.
B. is an assurance as to the future viability of the entity.
C. Is an assurance as to the efficiency with which management has conducted the affairs
of the entity, but not effectiveness.
D. Certifies the correctness of the financial statements.

A 3. When the auditor issues an erroneous opinion as the result of an underlying failure to
comply with the requirements of generally accepted auditing standards, it results in
I. Audit failure
II. Audit risk
III. Business failure

A. I only
B. I and II
C. II and III
D. I, II and III
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D 4. Primary responsibility for the assertions in financial statements rests with the:
A. Audit partner assigned to the engagement
B. Senior auditor in charge of field work
C. Staff auditor who drafts the statements
D. Client's management

C 5. The auditor communicates the results of his or her work through the medium of the
A. Engagement letter
B. Management letter
C. Audit report
D. Financial statements

A 6. Which of the following statements does not properly describe a limitation of an audit?
A. Many financial statement assertions cannot be audited.
B. Many audit conclusions are made on the basis of examining a sample of evidence.
C. Some evidence supporting peso representations in the financial statements must be
obtained by oral or written representations of management.
D. Fatigue and carelessness can cause auditors to overlook pertinent evidence.

D 7. Absolute assurance is rare in practice due to limitations of assurance engagement. Which

of the following does not describe such limitation?
A. Use of selective testing
B. Inherent limitation of internal controls
C. The fact that most evidence are merely persuasive
D. The procedures applied to reasonable assurance engagement are usually comprehensive

B 8. The market for auditing services is driven by

A. The regulatory authority of the Securities and Exchange Commission.
B. A demand by external users of financial statements.
C. Pronouncements issued by the Auditing Standards Board.
D. Congress at the federal level and elected legislative bodies at the state level.

D 9. Financial statement users often receive unreliable financial information from companies.
Which of the following is not a common reason for this?
A. Complex business transactions.
B. Large amounts of data.
C. Lack of firsthand knowledge about the business.
D. Each of these choices is a common reason for unreliable financial information.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D 10. The risk that the client's financial statements may be materially false and misleading is
referred to as the
A. Business risk
B. Risk assessment
C. Client risk
D. Information risk

B 11. Which of the following can be significantly affected by an audit?

A. Business risk.
B. Information risk.
C. The risk-free interest rate.
D. Inherent risk.

C 12. Which of the following best describes the reason why an independent auditor reports on
financial statements?
A. A poorly designed internal control system may be in existence.
B. A management fraud may exist and it is more likely to be detected by independent
auditors.
C. Different interest may exist between the company preparing the statements and the
persons using the statements.
D. A misstatement of account balances may exist and is generally corrected as the result
of the independent auditor's work. The underlying conditions that create demand by users
for reliable

D 13. information include the following, except

A. Transactions that are numerous and complex
B. Users separated from accounting records by distance and time.
C. Financial decisions that are important to investors and users
D. Decisions are not time sensitive

D 14. There are four conditions that give rise to the need for independent audits conditions is
consequence. In this of financial statements. One of these context, consequence means
that the:
A. Users of the statements may not fully understand the consequences of their actions.
B. Auditor must anticipate all possible consequences of the report issued.
C. Impact of using different accounting methods may not be fully understood by the
users of the statements.
D. Financial statements are used for important decisions.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C 15. Which of the following statements does not properly describe an element of the
theoretical framework of auditing?
A. The data to be audited can be verified.
B. Short-term conflicts may exist between managers who prepare data and auditors who
examine the data.
C. Auditors act on behalf of management.
D. An audit benefits the public.

PROBLEM 2-7

A 1.Which of the following is a correct statement relating to the theoretical framework of

auditing?
A. The financial data to be audited can be verified.
B. Short-term conflicts do not exist between managers who prepare data and auditors who
examine data.
C. Auditors do not necessarily need independence.
D. An audit has a benefit only to the owners.

A 2. The auditor's judgment concerning the overall fairness of the presentation of financial
position, financial performance, and changes in financial position is applied within the
framework of
A. Philippine Financial Reporting Standards
B. Philippine Standards on Auditing
C. Internal control
D. Information systems control

D 3. The purpose of governmental effectiveness or program results auditing is to determine if

the desired results of a program are being achieved. The first step in conducting such an
audit should be to
A. Evaluate the system used to measure results.
B. Determine the time frame to be audited.
C. Collect quantifiable data on the program's success or failure.
D. Identify the legislative intent of the program being audited.

C 4. This involves the application of relevant training, professional knowledge, skill, and
experience commensurate with the facts and circumstances, considering the nature and
scope of the particular professional activities, and the interests and relationships involved.
A. Professional skepticism
B. Professional mindset
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C. Professional judgment
D. Professional accountant

B 5. Which of the following statements is not a distinction between independent auditing and
internal auditing?
A. Independent auditors represent third party users external to the auditee entity, whereas
internal auditors report directly to management.
B. Although independent auditors strive for both validity and relevance of evidence,
internal auditors are concerned almost exclusively with validity.
C. Internal auditors are employees of the auditee, whereas independent auditors are
independent contractors.
D. The internal auditor's span of coverage goes beyond financial auditing to encompass
operational and performance auditing.

B 6. Which of the following is/are correct?

Statement 1: The primary purpose of a compliance audit is to determine whether the
financial statements are prepared in compliance with generally accepted accounting
principles.
Statement 2: Results of compliance audits are typically reported to someone within the
organizational unit being audited rather than to a broad spectrum of outside users.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

C 7. The word auditing comes from the Latin audire, which means:
A. To see
B. To test
C. To hear
D. To detect

C 8. Which of the following is an incorrect phrase?

A. Auditing is a systematic process.
B. Auditing objectively obtains and evaluates evidence.
C. Auditing evaluates evidence regarding assurance.
D. Auditing communicates results to interested users.

D 9. The trait that distinguishes auditors from accountants is the:

A. auditor's ability to interpret accounting principles generally accepted in the Philippines.
B. auditor's education beyond the Bachelor's degree.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C. auditor's ability to interpret accounting and auditing standards.

D. auditor's accumulation and interpretation of evidence related to a company's financial
statements.

C 10. Which of the following types of audits is performed to determine whether an entity's
financial statements are fairly stated in conformity with generally accepted accounting
principles?
A. Operational audit
B. Compliance audit
C. Financial statement audit
D. Performance audit

C 11. An auditor's overall objective in a financial statement audit is to

A. Determine that all individual accounts and footnotes are fairly presented.
B. Employ the audit risk model.
C. Express an opinion on the fair presentation of the financial statements in accordance
with generally accepted accounting principles.
D. Detect all errors and fraud.

C 12. In the audit of historical financial statements, which of the following accounting bases is
the most common?
A. Regulatory accounting principles.
B. Cash basis of accounting.
C. Generally accepted accounting principles.
D. Liquidation basis of accounting.

C 13. The overall objective of the independent auditor in conducting financial statement audits
is:
A. To prove accuracy and reliability of financial statements
B. To prepare and present financial statements in accordance with PFRS
C. To obtain reasonable assurance about whether the financial statements are free from
material misstatements, due to fraud and error
D. To report on the financial statements and communicate as required by PAS

A 14. The auditor's judgment concerning the overall fairness of the presentation of financial
position, results of operations, and changes in financial position is applied within the
framework of
A. Generally accepted accounting principles.
B. Generally accepted auditing standards.
C. Internal control.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D. Information systems control.

B 15. Which of the following best describes what is meant by generally accepted auditing
standards?
A. Acts to be performed by the auditor.
B. Measures of the quality of an auditor's performance.
C. Procedures used to gather evidence to support financial statements.
D. Audit objectives generally determined on audit engagements.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

CHAPTER 3: Practice and Regulation of Accountancy Profession

Problem 3-1

TRUE 1. The accountancy act governs the accountancy education, examination

registration and practice of accountancy in the Philippines.
FALSE 2. It is the primary duty of PRC, with the support of BOA, to effectively
enforce or implement the provisions of the accountancy act.
FALSE 3. An employee in an accounting or auditing firm is considered to be in the
practice of public accountancy.
TRUE 4. The chief financial officer (CFO) of a private sector company with retained
earnings of five million pesos and an annual revenue of fifteen million pesos is
required to be a duly registered CPA.
FALSE 5. The dean of a college that offers business and management programs, including
the BSA program, must be a registered CPA.
FALSE 6. The chairman and members of BOA are all appointed by the President of
PICPA.
FALSE 7. If a person has served the board of accountancy for more than 12 years, he shall
be eligible for reappointment until the lapse of 1 year.
TRUE 8. Tampering of CPALE grades is a ground for suspension or removal of any
member of the board.
FALSE 9. A CPA candidate must be a natural-born citizen and resident of the Philippines.
FALSE 10. The certificate of registration of CPAs is renewable every three years of the
month and day of his birthday.
TRUE 11. 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.
TRUE 12. Any person may bring before the Commission, Board, or the aforementioned
officers of the law, cases of illegal practice or violations of RA 9298 and its
implementing Rules and Regulations.
FALSE 13. Any person who shall violate any of the provisions of RA. 9298 or any of its
implementing rules and regulations as promulgated by the Board subject to the
approval of the Commission, shall, upon conviction, be punished by a fine of not
less than fifty thousand pesos ar by imprisonment for a period exceeding two
years or both.
TRUE 14. It shall be the primary duty of the Commission and the Board to effectively
enforce the provisions of R.A. 9298
TRUE 15. The Secretary of Justice or his duly designated representative shall act as legal
adviser to the Commission and the Board and shall render legal assistance as
may be necessary in carrying out the provisions of R.A. 9298
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

Problem 3-2

TRUE 1. Violation of the CPA's code of ethics is a ground for suspension and revocation
of a practitioner's certificate of registration and professional identification card.
FALSE 2. Three years of work in public practice are considered meaningful experience as
prescribed by RA 9298.
FALSE 3. Working papers are confidential, privileged and property of the audit client.
TRUE 4. Competence refers to an ability that extends beyond the possession of
knowledge and skills, which include cognitive, functional, personal and ethical
competence.
TRUE 5. Non-formal learning refers to learning that has been acquired in addition to
formal learning, which may be structured and made more flexible according to
educational and training arrangements.
FALSE 6. The Financial Reporting Standards Council must be composed of members.
FALSE 7. The chairman of the Auditing and Assurance Standards Council must have
been or at present a senior practitioner in any of the scope of accounting
practice.
FALSE 8. The Education Technical Council was established to assist the Board of
Accountancy in continuously upgrading the accountancy education in the
Philippines to make Filipino CPAs locally competitive.
TRUE 9. The Quality Review Committee and Education Technical Council shall be both
composed of seven members.
FALSE 10. PICPA shall have a full-time or part-time career Executive Director who shall
implement the policies promulgated by the PICPA Board of Directors to
maintain its recognition as APO
TRUE 11. The body tasked to monitor the implementation of the CPD program is the
called CPD Council.
FALSE 12. COA has the power, authority and the duty to examine, audit, and settle all
accounts pertaining to the management of funds of the government excluding
government-owned and controlled corporations.
TRUE 13. SEC can issue cease and desist orders to prevent fraud or injury to the
investing public.
TRUE 14. BIR also prescribes additional requirements for audited financial statement
that accompany tax returns of entities.
TRUE 15. The insurance commission has the function of verifying the financial
condition and methods of doing business of entities engaged in insura
business, pre-need, mutual benefit associations, trusts for charitable uses and
HMO companies.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

Problem 3-3

C 1. Competent, virtuous, productive and well-rounded accountants are developed and

nurtured through
I. Inviolable, honest, effective and credible licensure examinations
II. Regulatory measures, programs and activities
III. Penalties and fines

A. I only
B. II only
C. I and II only
D. I, II and III

A 2. It is the act regulating the practice of accountancy in the Philippines, appropriating

funds therefor and for other purposes
A. RA 9298
B. PD 692
C. RA 10912
D. RA 8981

A 3. Statement 1: The state recognizes the importance of accountants in nation building

and development.
Statement 2: The state shall develop and nurture competent, virtuous, productive and
well-rounded professional accountants:
Statement 3: Professional growth and development of accountants are fostered through
credible licensure examinations and regulatory measures, programs and activities.
A. True, True, True
B. True, False True
C. False, True, False
D. True, False, False

B 4. The objectives of RA 9298 include:

I. The standardization and regulation of accounting education
II. The examination for registration of CPAs
III. The integration of the practice of accountancy
IV. The supervision, control, and regulation of the practice of accountancy

A. I, II and III
B. I, II and IV
C. II, III and IV
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D. I, II, III and IV

B 5. The area of practice of accountancy namely public accountancy, commerce and

industry, academe/education, and government.
A. Scope of practice
B. Sector
C. Areas
D. Fields of expertise

C 6. Which of the following is not considered a sector of the practice of accountancy?

A. Education or academe
B. Government
C. Private accountancy
D. Commerce and industry

C 7. This shall constitute in a person involved in decision making requiring professional

knowledge in the science of accounting, or when such employment or position requires
that the holder thereof must be a certified public accountant.
A. Practice in the government
B. Practice in public accountancy
C. Practice in commerce and industry
D. Practice in academe or education

A 8. Positions in the private sector that require extensive financial reporting roles and
responsibilities shall be occupied by a CPA if the business has
A. Paid-up capital of at least 5M and/or annual revenue of at least 10M
B. Paid-up capital of at least 10M and/or annual revenue of at least 5M
C. Total assets of at least 10M and/or annual net income of at least 5M
D. Total assets of at least 5M and/or annual net income of at least 10M

B 9. Which of the following doesn't constitute as practice of public accountancy?

A. A partner or as a staff member in an accounting or auditing firm, holding out
himself/herself as one skilled in the knowledge, science and practice of accounting,
and as a qualified person to render professional services as a certified public
accountant.
B. Offering or rendering activities that require expertise on the field of financial
reporting, auditing, taxation, management accounting. business laws in exchange for
compensation.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C. Preparation, signing, or certification for clients of reports of audit, balance sheet, and
other financial, accounting and related schedules, exhibits, statements or reports which
are to be used for publication or for credit purposes, or to be filed with a court or
government agency, or to be used for any other purpose
D. Represents clients before government agencies on tax and other matters related to
accounting or renders professional assistance in matters relating to accounting
procedures and the recording and presentation of financial facts or data

C 10. Statement 1: Only Certified Public Accountants are allowed to teach technically
related subjects in the BSA program.
Statement 2: Practice in the academe shall constitute in a person in an educational
institution which involve technically related subjects.
A. True, True
B. True, False
C. False, True
D. False, False

B 11. Statement 1: The dean of the College of Accountancy that exclusively offers the BSA
Program must be a CPA.
Statement 2: The dean of the College of Business, Accountancy and Management
shall be a CPA.
Statement 3: The program chair of the BSA program must be a CPA.
A. True, True, True
B. True, False, True
C. False, True, True
D. True, False, False

A 12. This shall constitute in a person who holds, or is appointed to, a position in an
accounting professional group in government or in a government-awned and/or
controlled corporation:
A. Practice in the government
B. Practice in public accountancy
C. Practice in commerce and industry
D. Practice in academe or education

A 13. It is the regulatory body for the practice of accountancy in the Philippines:
A. Board of Accountancy
B. Public Company Accounting Oversight Board
C. Securities and Exchange Commission
D. Bangko Sentral ng Pilipinas
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A 14. The Professional Regulatory Board of Accountancy shall be composed of

A. Chairman and six members
B. Six members with a chairman
C. Seven members and a chairman
D. Seven members with a chairman

D 15. Statement 1: The vice-chairman shall preside in all meetings of the Board.
Statement 2: The majority of the members of BOA must be from the public
accountancy sector.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Problem 3-4

B 1. Which of the following correctly relates to the appointment process of the members of
the board?
I. The members are appointed by the President of the Philippines
II. The Commission submits 3 recommendees to the President based on a list of
nominees
III. 6 nominees for each position will be submitted by PICPA to the Commission

A. Only one statement is correct

B. Only two statements are correct
C. All statements are correct
D. All statements are incorrect

B 2. PICPA shall submit its Board member nominations with complete documentation to
PRC not later than term of the incumbent chairman or member. prior to the expiry of
the
A. 30 days
B. 60 days
C. 90 days
D. 120 days

A 3. The vice-chairman of BOA shall have a term of

A. 1 year
B. 2 years
C. 3 years
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D. 4 years

C 4. A member of the Board shall, at the time of his/her appointment, posses the following
qualifications, except .
A. Must be a natural-born citizen and a resident of the Philippines
B. Must be a duly registered Certified Public Accountant with at least ten (10) years
of work experience in any scope of practice of accountancy
C. Must be associated to at least one educational institution
D. Must be of good moral character and must not have been convicted of crimes
involving moral turpitude

A 5. Jamil, CPA was appointed as the BOA Chairman in 2022. After serving 1 complete
term, in what year is he eligible for reappointment?
A. 2025
B. 202
C. 2028
D. He is no longer eligible for reappointment.

D 6. Which of the following is not a power and/or function of BOA?

A. To prescribe and adopt the rules and regulations necessary for carrying out the
provisions of RA 9298
B. To supervise the registration, licensure and practice of accountancy
C. To administer oaths in connection with the administration of RA9298
D. To ensure, in coordination with the Department of Education (DepEd) that all higher
educational institutions offering accountancy shall comply with its policies

C 7. The President of the Philippines may suspend or remove any member of the Board on
the following grounds, except
A. Neglect of duty or incompetence
B. Violation or tolerance of any violation of this Act and its implementing rules and
regulations or the CPA's Code of Ethics and the technical and professional standards of
practice for CPAs
C. Suspected of crimes involving moral turpitude D. Manipulation or rigging of the
CPA's licensure examination results

C 8. The annual report of the Board shall be

I. Submitted to the President of the Philippines every end of each calendar year
II. Give detail account of its proceedings and accomplishments during the year
III. Make recommendations for the adoption of measures that will improve the practice of
accountancy
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A. Only one statement is correct

B. Only two statements are correct
C. All statements are correct
D. All statements are incorrect

A 9. Which of the following statements is/are correct?

A. BOA shall be under the supervision of PRC.
B. All records of BOA, including exam questions and answer sheets, shall be under the
custody of PRC
C. BOA shall designate its own secretary
D. None of the above.

B 10. The administration and conduct of CPA licensure examinations shall be facilitated in
accordance with the rules and regulations set out in
A. RA 9298
B. RA 8981
C. RA 10912
D. RA 10968

A 11. Which of the following is not a qualification of applicants for the CPA licensure
examinations?
A. A natural born citizen and resident of the Philippines
B. Is of good moral character
C. Is a holder of the degree of Bachelor of Science in Accountancy conferred by a school,
college, academy or institute duly recognized and/or accredited by the CHED
D. Has not been convicted of any criminal offense involving moral turpitude.

D 12. The following documents shall be submitted by applications of CPA licensure

examinations, except
A. Certificate of Live Birth
B. College diploma and transcript of records
C. National Bureau of Investigation clearance
D. Certificate of good moral character from an educational institution

B 13. Which of the following is not a subject in the CPA licensure examinations?
A. Advance Financial Accounting and Reporting
B. Business Law and Taxation
C. Management Advisory Services
D. Auditing
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

Use the following to answer the next two questions An examinee obtained the following
ratings during the May 2022 CPA licensure examinations:
Auditing 99
Financial Accounting and Reporting 90
Advance Financial Accounting and Reporting 88
Regulatory Framework for Business Transactions 74
Taxation 76
Management Advisory Services 64

C 14. Based on the information, what is the examinees status in the D licensure
examinations?
A. Passed
B. Failed
C. Conditional
D. Topnotcher

B 15. Based on the information, the examinee should retake the following subjects in the
removal exam
A. Management Advisory Services
B. Regulatory Framework for Business Transactions and Management Advisory Services
C. None since the examinee is considered passed
D. All subjects since the examinee is considered failed

Problem 3-5

B 1. BOA may revise the licensure examination subjects and syllabi

A. Every 2 years
B. Every 3 years
C. Every 5 years
D. As needed

A 2. As required by RA 9298, the Board shall submit to PRC the ratings obtained by each
candidate within
A. 10 calendar days
B. 10 working days
C. 10 weeks
D. The period determined by BOA

B 3. Prior to entering the practice of the profession, successful candidates ant required to
A. Answer an evaluation form
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

B. Take an oath of profession

C. Teach accountancy courses in their alma mater
D. Take another set of CPA examinations

B 4. Evaluate the following

I. All successful candidates in the examination shall be required to take an oath of
profession
II. The oath shall be taken before any BOA authorized by PRC or by law member or
government official
III. An oath is not required for CPAs admitted in the practice accountancy under
reciprocity or international agreements

A. Only one statement is correct

B. Only two statements are correct
C. All statements are correct
D. All statements are incorrect

A 5. Any candidate who fails in two (2) complete CPA Board Examinations shall be
disqualified from taking another set of examinations unless he/she submits evidence to
the satisfaction of the Board that he/she enrolled in and completed
A. At least twenty-four (24) units of subject given in the licensure examinations
B. At least twenty-four (24) units of subject in the BSA program
C. A review course in any CPA review centers in the Philippines
D. Refresher course is no longer required

D 6. The certificate of registration of successful examinees

A. Shall be issued to every registrant and renewable every three years
B. Shall bear the signature of the President of the Philippines and the chairman and
members of the Board
C. Shall be stamped with the official CPA seal of the registrant
D. Shall remain in full force and effect until withdrawn, suspended or revoked

B 7. A Professional Identification Card shall be issued to every registrant renewable every

A. 2 years
B. 3 years
C. 5 years
D. 10 years

C 8. Whenever a CPA signs any document in connection with the practice of the profession,
(s)he is required to indicate the following, except
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A. Certificate of registration number

B. Date of issuance and validity of his identification card
C. Tax identification number
D. Professional tax receipt number

B 9. Who has the power to suspend or revoke the practitioner's certificate of registration
and professional identification card?
A. PRC
B. BOA
C. PICPA
D. AASC

C 10. The Board shall not register and issue a certificate of registration and professional
identification card to any successful examinee who is
I. Convicted by a court of competent jurisdiction of a criminal offense involving moral
turpitude
11. Convicted for a political offense
III. Any person of unsound mind
A. I and II
B. II and III
C. I and III
D. I, II and III
B 11. The certificate of registration of Juan, CPA was revoked by the Board as l was
convicted of a crime involving moral turpitude. When can the Boar reinstate the validity
of his certificate?
A. After he successfully passed another set of CPA board examination
B. After 2 years from the date of revocation
C. After 3 years from the date of revocation
D. He is no longer allowed to reinstate his certificate

D 12. A person is allowed to practice the accountancy profession if (s)he

I. Received a certificate of registration
II. Be issued a professional identification card
III. Issued a valid temporary/special permit
A. I and II
B. II and III
C. I and III
D. I, II and III

B 13. Certified public accountants registered at the time RA9298 took effect shall
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A. Take a new set of CPA licensure examinations

B. Automatically be registered as CPAs
C. Renew their certificate of registration
D. Take an oath of profession

A 14. Which of the following is incorrect regarding meaningful experience?

A. At least two years as audit assistant and at least one year as auditor in charge of audit
engagement covering full audit functions
B. Teaching for at least three (3) trimesters or two (2) semesters subjects in technically
related subjects with a cumulative experience of at least 3 school years
C. Significant involvement in general accounting, budgeting, tax administration, internal
auditing, liaison with the Commission on Audit or any other related functions
D. Significant involvement in general accounting, budgeting, tax administration, internal
auditing, liaison with external auditors representing his/her employer before government
agencies on tax and matters related to accounting or any other related functions

C 15. Statement 1: A certificate of registration shall be issued to certified public

accountants in public practice only upon showing that such registrant has acquired a
minimum of three (3) years meaningful experience. Statement 2: The Securities and
Exchange Commission shall not register any corporation organized for the practice of
public accountancy.
A. True, True
B. True, False
C. False, True
D. False, False

Problem 3-6:

C 1. Statement 1: All working papers made by a CPA shall be treated confidential and
privileged and shall remain property of his/her client
Statement 2: The workings papers shall be provided to the authorities if required through
a subpoena issued by any court, tribunal or government regulatory or administrative
body.
A. True, True
B. True, False
C. False, True
D. False, False

C 2. The one and only registered and accredited national professional organization of
registered and licensed certified public accountants.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A. ACPAPP
B. NACPAE
C. PICPA
D. JPIA

B 3. Evaluate the following statements.

I. PICPA shall have a creditable plan to enlist into active membership within three (3)
years, at least a majority of the CPAs in the practice of accountancy
II. PICPA shall only have fifteen (15) national directors
III. PICPA is duly registered as a stock corporation or association by the Securities and
Exchange Commission (SEC)
A. Only one statement is correct
B. Only two statements are correct
C. All statements are correct
D. All statements are incorrect

C 4. The PICPA shall renew its Certificate of Accreditation once every

A. Year
B. 2 years
C. 3 years
D. 5 years

D 5. The following are grounds for the cancellation of the certificate of accreditation of
PICPA, except
A. It no longer serves the best interest of the CPAs
B. Failure to sustain membership of a significant portion of CPAs
C. It has not submitted the required audited financial statements
D. It served the best interest of professional accountants

B 6. Individual practitioners and partnerships engaged in the practice of public accountancy

shall register with PRC and BOA. The registration is required to be renewed
A. Every 2 years
B. Every 3 years
C. Every 5 years
D. The registration shall remain in full force and effect until withdrawn, suspended or
revoked

B 7. After becoming a sole proprietor, a partner surviving the death withdrawal of all the
other partners in a Partnership may continue to practice under the Partnership name for
A. 1 year
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

B. 2 years
C. 3 years
D. Not allowed.

D 8. How many CPE credit units must be accumulated by a registered accounting

professional within the 3-year period starting 2019?
A. 60 credit units
B. 80 credit units
C. 100 credit units
D. 120 credit units

D 9. Which statement is correct regarding CPE (Continuing Professional Education)

requirements for renewal of professional license?
A. The total CPE credit units required for CPAs shall be sixty (60) units for three (3)
years provided that a minimum of fifteen (15) credit units shall be earned in each year.
B. A registered professional shall be permanently exempted from CPE requirements upon
reaching the age of 65 years old.
C. A registered professional who is working abroad shall be temporarily exempted from
compliance with CPE requirement during his/her stay abroad, provided that he/she has
been out of the country for at least one (2) year immediately prior to the date of renewal.
D. Senior citizens are not exempted from CPD requirements.

A 10. Which of the following describes masteral degree?

A. Shall refer to a graduate degree in accountancy, business or related field from a
recognized school, college or university.
B. Shall refer to a post graduate degree in accountancy, business of related field from a
recognized school, college or university.
C. Shall mean training or specialization at the post graduate level for a minimum period
of one (1) week.
D. None of the above

D 11. As a participant, one credit hour of Continuing Professional Development program,

activity or source shall be equivalent to
A. 5 credit units
B. 3 credit units
C. 2 credit units
D. 1 credit unit

C 12. As a condition to register or renew the certificate of accreditation, BOA shall require
the applicant to undergo
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A. Inspection
B. Audit
C. Quality review
D. Practice review

B 13. Which of the following is correct regarding the Quality Review Committee?
I. Conduct quality review on applicants for registration to practice private accountancy
II. Recommend the revocation of the certificate of registration and PIC of applicants who
has not observed the quality control measures
III. BOA may conduct the required quality review.
A. I and II
B. II and III
C. I and III
D. I, II and III

B 14. The death or disability of an individual CPA and dissolution or liquidation of a firm
or partnership shall be reported to BOA not later than
A. 10 days
B. 30 days
C. 60 days
D. 120 years

C 15. Statement 1: Only CPAs in academe/education shall abide by the requirements, rules
and regulations on continuing professional education (CPE).
Statement 2: A CPE council has been created to implement the CPE program.
A. True, True
B. True, False
C. False, True
D. False, False

Problem 3-7

A 1. Which of the following is an objective of the CPE program?

I. To provide and ensure the continuous education of a registered professional with the
latest trends in the profession
II. To raise and maintain the professional's capability for delivering professional services
III. To make the professional locally competitive
A. I and II
B. II and III
C. I and III
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D. I, II and III

D 2. Which of the following is not a function of the Chairperson of the PRC CPE council?
A. To preside council meetings
B. To submit annual reports
C. To issue certificate of registration to CPE providers
D. To prescribe the code of ethics for professional accountants

B 3. The PRC CPE Council may delegate the processing of applications and keeping of all
records for CPE providers and their respective programs and credit units earned by each
CPA to
A. NACPAE
B. PICPA
C. ETC
D. CHED

D 4. Which of the following is a requirement to be accredited as a CPE provider)

I. Must be a duly registered organization, firm, institution or agency, or professional of
good standing and has never been convicted of a crime
II. Shall have an established mechanism and updated instruction materials to carry out the
CPE programs and activities
III. Shall have instructors, lecturers, trainers and resource speakers with good moral
character, technical competence, facilitation skills and are holders of current CPA
licenses.
A. I and II
B. II and III
C. I and III
D. I, II and III

C 5. Statement 1: CPE programs shall be relevant, related and limited to the practice of the
profession.
Statement 2: CPE programs shall upgrade and update knowledge and skills for the
practice of the profession brought about by modernization and advancements in the
profession.
A. True, True
B. True, False
C. False, True
D. False, False

D 6. The seal of licensed CPA shall bear the following, except

REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A. Registrant's name
B. Registration number
C. Title "CPA"
D. The word "independent"

D 7. Auditor's reports shall have the following, except

A. Stamp of the seal of the licensed CPA
B. Professional Tax Receipt number
C. Date/place of payment of professional tax
D. Tax Identification Number of the CPA

C 8. Statement 1: Subjects or citizens of foreign countries may be allowed to practice

Accountancy in the Philippines.
Statement 2: A foreign CPA may practice accountancy in the Philippines if (s)he can
prove that his/her home country allows Filipino CPAs to practice accountancy without
limitation.
A. True, False
B. False, True
C. True, True
D. False, False

D 9. A special or temporary permit may be issued to foreign CPAs if

I. Called for consultation or for a specific purpose which is essential for the development
of the country
II. Engaged as professor, lecturer or critic in fields essential to accountancy education in
the Philippines
III. S(he) is an internationally recognized expert or with specialization in any branch of
accountancy
A. I and II
B. II and III
C.I and III
D. I, II and III

A 10. Upon conviction, violators of RA 9298 shall be punished by

A. Fine of not less than 50,000 pesos or imprisonment for a period not exceeding two (2)
years or both
B. Fine not exceeding 50,000 pesos or imprisonment for a period not exceeding two (2)
years or both
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C Fine of at least 50,000 pesos or imprisonment for a period not less than two (2) years or
both D. Fine not exceeding 50,000 pesos or imprisonment for a period not less than two
(2) years or both

C 11. Who has the primary duty to enforce RA 9298?

I. BOA
II. PRC
A. I only
B. II only
C. Both I and II
D. Neither I nor II

B 12. Who acts as the legal adviser of PRC and BOA in carrying out the provisions of RA
9298?
A. Public Attorney's Office
B. Secretary of Justice
C. Integrated Bar of the Philippines
D. Philippine Bar Association

C 13. Which of the following does not have representation in the Financial Reporting
Standards Council (FRSC)?
A. Philippine Institute of CPAs
B. Bureau of Internal Revenue
C. Board of Investments
D. Board of Accountancy

C 14. Who appoints the members of the COA?

A. The commissioner of the Professional Regulatory Commission
B. The Chairman of the Professional Board of Accountancy
C. The President, with the concurrence of the Commission on Appointments
D. The Chairman of the Auditing and Assurance Standards Council

15. Which of the following is not one of the functions of ETC?

A. Determine a minimum standard curriculum for the study of accountancy to be
implemented in all schools offering accountancy as an undergraduate degree.
B. Establish teaching standards, including the qualifications: of members of the faculty of
schools and colleges of accountancy.
C. Monitor the progress of the program on the study of accountancy and undertaking
measures for the attainment of a high quality of accountancy education in the country.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D. Recommend to the Board the revocation of the Certificate of Registration and the
professional identification card of an individual CPA or firm including any of their staff
members who has not observed the quality control measures and who has not complied
with the standards of quality prescribed for the practice of public accountancy.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

CHAPTER 4: Overview of the Audit Process and Preliminary Activities

Problem 4-1
TRUE 1. The audit process is a structured series of steps taken by the auditor to achieve
achieve his objectives.
TRUE 2. Assertions relating to classes of transactions generally relate to line items
presented in the statement of financial performance while assertions relating to
account balances generally relate to line items presented in the statement of
financial position.
FALSE 3. Management has the responsibility for the preparation and presentation of the
face of financial statements which allows the auditor to prepare the related
disclosures.
FALSE 4. Management has the responsibility to provide the auditor with unrestricted
access to any information maintained by them.
TRUE 5. Audit evidence serve as the basis for expressing the opinion required by the
audit of financial statements.
FALSE 6. Risk assessment procedures are performed to obtain an understanding of the
entity that leads to the identification of the risk of material misstatements at the
assertion level.

FALSE 7. Substantive procedures are designed to detect material misstatements at the

financial statement level.
TRUE 8. Observation consists of looking at a process or procedure being performed by
others.
FALSE 9. Confirmation is a specific type of inquiry to obtain a representation of
information or of an existing condition from management.
TRUE 10. The audit process is comprised of two sub-phases namely, the investigative
phase and reporting phase.
FALSE 11. The successor auditor has no responsibility to contact the predecessor auditor.
TRUE 12. The successor auditor should obtain permission from the prospective client
to contact the predecessor auditor.

TRUE 13. The auditor will not ordinarily initiate discussion with the audit committee
concerning the details of the procedures the auditor intends to apply.
FALSE 14. Recalculation pertains to the auditor's independent execution of procedures or
controls that were originally performed as part of the entity's internal control.

TRUE 15. Auditing standards require that the audit report must be titled and the title
must include the word "independent."
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

Problem 4-2
TRUE 1. When there is a substantial risk of intentional misapplication of accounting
principles, it is an indicator that the entity's management lacks integrity.
FALSE 2. Preliminary engagement activities help eliminate the likelihood of being
associated with a client whose management lacks integrity.
FALSE 3. If the results of the study and evaluation of internal control support its
operating effectiveness, the auditor proceeds with the completion of the audit
and expression of opinion.
FALSE 4. An auditor may accept an engagement that is beyond his capacity and
capability provided that relevant training and expertise will be obtained during
the performance of the audit.
FALSE 5. The corporate treasurer normally signs the engagement letter for an audit of a
private company.
TRUE 6. The auditor and the client should agree on the terms of the engagement. Such
an agreement may be in the form of the audit engagement letter or other
suitable forms of contract.
TRUE 7. Even in those countries where the scope of the audit is established by law,
an engagement letter may be informative for the client.
FALSE 8. In an audit engagement, the audit engagement team must be independent of the
client which excludes the auditor's expert.
FALSE 9. Engagement letter that documents and confirms the auditor's acceptance of the
engagement would normally be sent to the client after the audit report is issued.
TRUE 10. Matters to be discussed with the previous auditor include the reason for
change and disagreements with management.
FALSE 11. The auditor must obtain the acknowledgment by management of its
responsibility to design, implement and monitor internal controls during the
investigative phase of the audit.
TRUE 12. The agreement of the audit terms before the commencement of the audit help
avoid misunderstandings between the entity and the auditor.
FALSE 13. The form and content of engagement letters are prescribed by the engagement
standards.
FALSE 14. To comply with ethical requirements, the audit fee and its basis computation
must be excluded from the engagement letter.
TRUE 15. The auditor must determine if there is a reasonable justification change in the
audit engagement prior to its completion.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

Problem 4-3
B 1. Set the following phases in proper order:
i. Pre-Engagement
ii. Internal Controls
iii. Evidence-Gathering
iv. Planning
v. Post-Audit Responsibilities
vi. Reporting

A. i, ii, iii, iv, v, vi

B. i, iv, ii, iii, vi, v
C. i, iv, iii, ii, v, vi
D. i, iv ,ii, iii, v, vi

C 2. The four major steps in conducting an audit are:

I. Testing internal controls
II. Audit report
III. Planning
IV. Testing transactions and balances
The proper sequence in applying the above steps is:

A. I, IV, III, II
B. II, III, IV, I
C. III, I, IV, II
D. III, IV, I, II

C 3. The definition of auditing contained within A Statement of Basic Auditing

Concepts recognizes that auditing includes both a(an)
A. Documentation process and an evaluation process.
B. Evaluation process and a reporting process.
C. Investigative process and a reporting process.
D. Documentation process and a reporting process.

A 4. The audit process is

A. A special application of the scientific method of inquiry.
B. Regulated by the AICPA.
C. The only service a CPA is allowed to perform by law.
D. Performed only by CPAs.

B 5. Assertions about account balances at the period-end include completeness,

REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

which means that

A. Assets, liabilities and equity interest exist.
B. All assets, liabilities and equity interests that should have been recorded
have been recorded.
C. Assets, liabilities and equity interests are included in the financial statements
at appropriate amounts and any resulting valuation or allocation adjustments
are appropriately recorded.
D. The entity holds or controls the rights to assets, and liabilities are the
obligations of the entity.

C 6. Preliminary engagement activities include:

A. Setting materiality.
B. Evaluating internal controls.
C. Determining engagement team requirements.
D. Assessing audit risk at the account balance level.

A 7. Ultimately, the decision about whether or not an auditor is independent must be

made by
A. Auditor
B. Public
C. Client's management
D. Audit committee

D 8. In deciding whether to accept or reject an engagement, the auditor's firm should

consider the following,
I. Its competence and independence
II. Its ability to serve the client properly
III. The integrity of the prospective client's management

A. I and II
B. II and III
C. I and III
D. I, II, and III

A 9. On an audit engagement performed by a CPA firm with one office, at the

minimum, knowledge of the relevant professional accounting and a standards
should be held by:
A. The auditor with final responsibility for the audit.
B. All professionals working upon the audit.
C. All professionals working upon the audit and the partner in charge the CPA
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

firm.
D. All professionals working in the office.

D 10. Which is not considered in deciding whether to accept an engagement?

A. Competence of the audit team
B. Ethical considerations
C. Potential client's reputation
D. Type of opinion to be issued

B 11. An auditor who accepts an audit engagement and does not possess the
industry expertise of the business entity, should
A. Engage financial experts familiar with the nature of the business entity.
B. Obtain knowledge of matters that relate to the nature of the entity's
business.
C. Refer a substantial portion of the audit to another CPA who will act as the
principal auditor.
D. First inform management that an unqualified opinion cannot be issued.

C 12. A CPA who has never audited a commercial bank

A . May not accept such an engagement.
B. May accept the engagement only if the accounting firm specializes in the
audit of commercial banks.
C. May accept the engagement after attaining a suitable level of understanding
of the transactions and accounting practices unique to commercial banking.
D. May accept the engagement because training as a CPA transcends unique
industry characteristics.

C 13. An auditor may most likely decide not to accept a new audit engagement
when
A. The prospective client's system is highly automated and the auditor lacks
understanding of such a system
B. The prospective client's CEO is also the chairman of the governing board
C. The CPA has knowledge of the prospective client's disregard of its
responsibilities concerning internal controls
D. The CPA has knowledge that the prospective client has too many related-party
transactions

C 14. The primary purpose of establishing quality control policies and procedures
for deciding whether to accept a new client is to
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A. Enable the CPA firm to attest to the integrity of the client management.
B. Satisfy the CPA~firm^{\prime}s duty to the public concerning the
acceptance of new clients.
C. Minimize the likelihood of association with clients whose management
lacks integrity.
D. Anticipate before performing any fieldwork whether an unmodified
opinion can be expressed.

C 15. When one auditor succeeds another, the proposed auditor should request the
A. Client to instruct its attorney to send a letter of audit inquiry concerning the
status of the prior year's litigation, claims, and assessments.
B. Previous auditor to submit a list of internal control weaknesses that
have not been corrected.
C. Client to authorize the previous auditor to respond to inquiries.
D. Previous auditor to update the prior year's report to the date of the change of
auditors.

Problem 4-4
D 1. The assertion of accuracy means that:
A. Transactions and events have been recorded in the proper accounts
B. All transactions and events that should have been recorded are recorded
C. Transactions and events have been recorded in the correct accounting period
D. Amounts and other data relating to recorded transactions and events have
been recorded appropriately

C 2. Which description refers to the classification and understandability assertion?

A. All disclosures that should have been included in the financial statements
have been included.
B. Disclosed events, transactions and other matters have occurred and pertain
to the entity.
C. Financial information is appropriately presented and described, and
disclosures are clearly expressed.
D. Financial and other information are disclosed fairly and at appropriate amounts.

B 3. Which of the following is not one of the three categories of assertions?

A. Assertions about classes of transactions and events for the period
under audit
B. Assertions about financial statements and correspondence to GAAP
C. Assertions about account balances at period end
D. Assertions about presentation and disclosure
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D 4. Which of the following is not a financial statement assertion relating to

Account balances?
A. Completeness.
B. Existence.
C. Rights and obligations.
D. Valuation and competence.

D 5. If a short-term note payable is included in the accounts payable balance on the

financial statement, there is a violation of the:
A. completeness assertion.
B. cutoff assertion.
C. existence assertion
D. classification and understandability assertion.

C 6. A proposed auditor makes specific inquiries of the previous auditor, prior to

engagement acceptance, to
A. Have knowledge whether PFRS has been consistently applied
B. Inquire or significant subsequent events with respect to the prior period
C. Gain understanding on the reasons for the change of auditor
D. Compare audit fee

C 7. Communication with a predecessor auditor is initiated by:

A. Management
B. The audit committee of the board of directors
C. The successor auditor
D. The chair of the board of directors

D 8. Which of the following should an auditor obtain from the previous auditor prior
to accepting an audit engagement?
A. Analysis of balance sheet accounts.
B. Analysis of income statement accounts.
C. All matters of continuing accounting significance.
D. Facts that might bear on the integrity of management.

D 9. Before accepting an engagement to audit a new client, a CPA is required to

obtain
A. An understanding of the prospective client's industry and business.
B. The prospective client's signature to the engagement letter.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C. A preliminary understanding of the prospective client's control environment.

D. The prospective client's consent to make inquiries of the previous auditor, if
any.

B 10. Which of the following factors most likely would influence an auditor's
determination of the auditability of an entity's financial statements?
A. The complexity of the accounting system.
B. The adequacy of the accounting records.
C. The existence of related-party transactions.
D. The operating effectiveness of control procedures.

C 11. Auditors must not only decide whether to accept new clients; they also should
periodically review their list of current clients and remove those clients the
firm no longer wants to be associated with. Reasons for discontinuing clients
might include the following, except:
A. Difficulty in working with client personnel.
B. Inability to negotiate an acceptable increase in the audit fee.
C. Evidence indicating a client's management has integrity.
D. Client needs specialized services the current firm is unable or unwilling to
provide.

D 12. Which of the following factors most likely would cause a CPA to not accept
a new audit engagement?
A. The prospective client has already completed its physical inventory count.
B. The CPA lacks an understanding of the prospective client's operations and
industry.
C. The CPA is unable to review the predecessor auditor's audit documentation.
D. The prospective client is unwilling to make all financial records available to
the CPA.

C 13. Which of the following factors most likely would lead a CPA to conclude that
a potential audit engagement should be rejected?
A. The details of most recorded transactions are not available after a specified
period of time.
B. Internal control activities requiring the segregation of duties are subject to
management override.
C. It is unlikely that sufficient appropriate evidence is available to support an
opinion on the financial statements.
D. Management has a reputation for consulting with several accounting firms
about significant accounting issues.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

B 14. If permission from the client to discuss its affairs with the proposed auditor is
denied by the client, the predecessor auditor should:
A. Keep silent of the denial
B. Disclose the fact that the permission to disclosure is denied by the client
C. Disclose adequately to proposed auditor all noncompliance made by the
client
D. Seek legal advice before responding to the proposed auditor

D 15. A firm has obtained information that would have caused it to decline an
engagement had the information been available earlier. Actions available to the
auditor would include the following, except:
A. Reporting the information and its implications to the person/s who
appointed the CPA
B. Withdraw from the engagement
C. Withdraw from the client relationship
D. Issue a disclaimer of opinion

Problem 4-5
C 1. Acts to be performed in order to obtain audit evidence.
A. Audit standards
B. Audit program
C. Audit procedures
D. Audit strategy

A 2. Which of the following does not describes further audit procedures?

I. These procedures test the operating effectiveness of controls in preventing,
or detecting and correcting, material misstatements at the assertion level.
II. These procedures are used to detect material misstatements at the assertion
level.
III. These procedures include tests of details of classes of transactions, account
balances, and disclosures and analytical procedures.
IV. These are procedures for obtaining an understanding of the entity and its
environment, including its internal control, to assess the risks of material
misstatement at the financial statement and assertion levels.

A. I, II and III
B. I, III and IV
C. II, III and IV
D. I, II, III and IV
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A 3. Audit procedures performed to obtain an understanding of the entity and its

environment, including its internal control, and to assess the risks of material
misstatements at the financial statement and assertion levels.
A. Risk assessment procedures
B. Tests of control
C. Substantive procedures
D. Analytical procedures

B 4. Audit procedures to test the operating effectiveness of controls in preventing or

detecting and correcting material misstatements at the assertion level.
A. Risk assessment procedures
B. Tests of control
C. Substantive procedures
D. Analytical procedures

C 5. An auditor may achieve audit objectives related to particular assertions by

A. Adhering to a system of quality control.
B. Increasing the level of detection risk.
C. Performing analytical procedures.
D. Preparing audit documentation.

C 6. It is the use by management of an acceptable financial reporting framework

(e.g. PFRS) in the preparation of the financial statements and the agreement of
management and, where appropriate, those charged with governance to the
premise on which an audit is conducted.
A. Engagement letter
B. Written representation
C. Preconditions for an audit
D. Fair presentation

C 7. According to PSA 210, the auditor and the client should agree on the terms of
engagement. The agreed terms would need to be recorded in a(n)
A. Client representation letter
B. Memo placed in the permanent section of the working papers
C. Engagement letter
D. Comfort letter
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C 8. The primary purpose of the engagement letter is to:

A. Satisfy the requirements of the CPA's liability insurance policy
B. Remind management that the primary responsibility for the financial
statements rests with management
C. Provide a written record of the agreement with the client as to the services to
be provided
D. Provide a starting point for the auditor's preparation of the preliminary audit
program

C 9. An engagement letter is best described as

A. A letter from the company to the auditors specifying management's
expectations for completion of the audit on a timely basis and the fees.
B. A letter from the auditors to company management specifying that
management is responsible for the financial statements, and the auditors will
issue an opinion on the financial statements.
C. A letter from the auditors to company management that specifies the
responsibilities of both the company and the auditors in completing the audit
and the timing for its completion.
D. A letter from the Board of Directors' audit committee to the auditor that
indicates the auditor has been engaged to perform the audit and the fees to be
paid.

D 10. Engagement letters are widely used in practice for:

A. Audits only
B. Related services only
C. Assurance engagements only
D. Professional engagements of all types

D 11. The form and content of audit engagement letters may vary for each client but
they would generally include reference to:
I. The objective and scope of the audit of the financial statements
II. The responsibilities of the auditor and management
III. Identification of the applicable financial reporting framework for the
preparation of the financial statements

A. I and II
B. II and III
C. I and II
D. I, II and III
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D 12. The auditor may also wish to include in the engagement letter the following,
except
A. Basis in which fees are compute 30 of 38ing arrangements
B. Expectation of receiving representation letter
C. Acknowledgment of management of terms of agreement
D. Description of specific procedures to be performed during the audit

A 13. Which of the following matters is generally included in an auditor's

engagement letter?
A. Management's responsibility for the entity's compliance with laws and
regulations.
B. The factors to be considered in setting preliminary judgments about
materiality.
C. Management's vicarious liability for illegal acts committed by its
employees.
D. The auditor's responsibility to search for significant internal control
deficiencies.

D 14. Which of the following statements would least likely appear in an auditor's
engagement letter?
A. Fees for our services are based on our regular per diem rates, plus travel
and other out-of-pocket-expenses.
B. Management is responsible for making all financial records and related
information available to us.
C. Our engagement is subject to the risk that material errors or fraud, if they
exist, will not be detected.
D. After performing our preliminary analytical procedures, we will discuss
with you the other procedures we consider necessary to complete the
engagements.

D 15. The terms of the audit engagement shall include: (choose the exception)
A. The objective of the audit
B. The scope of the audit
C. The responsibilities of the auditor
D. The overall audit strategy

Problem 4-6
D 1. An auditor understands the client's business primarily to
A. Make suggestions on how to improve internal control
B. Assess the level of control risk
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C. Develop a questioning attitude during the audit

D. Identify transactions that may impact the financial statements

D 2. Which of the following statements appropriately describes inquiry?

A. Physical examination of the assets.
B. Consists of looking at a process or procedures being performed by others.
C. Examining records or documents, whether internal or external, in paper form,
electronic form, or other media.
D. Consists of seeking information from knowledgeable persons, both financial and
nonfinancial, within the entity or outside the entity.

B 3. Which of the following statements appropriately describes reperformance?

A. The process of obtaining a representation of information or of an existing condition
directly from third party. It is a specific type of inquiry.
B. Auditor's independent execution of procedures or controls that were originally
performed as part of the entity's internal control.
C. Evaluation of financial information made by study of plausible relationships among
both financial and non-financial data.
D. Consists of checking the mathematical accuracy of documents or records.

D 4. If a company's external auditor expresses an unqualified opinion as a result of the

audit of the company's financial statements, readers of the audit report can assume that
A. The external auditor found no fraud
B. The company is financially sound and the financial statements are accurate
C. Internal control is effective
D. All material disagreements between the company and the auditor about the
application of accounting principles were resolved in the satisfaction of the external
auditor.

A 5. Auditing standards require that the audit report must be titled and that the title must:
A. include the word "independent."
B. indicate if the auditor is a CPA.
C. indicate if the auditor is a proprietorship, partnership, or incorporate
D. indicate the type of audit opinion issued.

A 6. A B C D
• CPA's responsibilities Yes Yes Yes No
• Client's responsibilities Yes No No No
• Limitations of engagement Yes Yes No No
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A 7. Assuming a recurring audit, in which of the following situations would the auditor be
unlikely to send a new engagement letter to the client?
A. A recent change in partner and/or staff involved in the audit engagement.
B. A change in the terms of engagement.
C. A recent change of client management.
D. A significant change in the nature or size of the client's business.

C 8. The auditor should document the understanding established with a client through a(n)
A. Oral communication with the client.
B. Written or oral communication with the client.
C. Written communication with the client.
D. Completely detailed audit plan.

C 9. Which of the following helps prevent misunderstandings during audit planning?

A. Auditor involvement in the preparation of the client's financial records.
B. Client involvement in determining specific audit planning issues.
C. A preliminary meeting conference with the client to discuss fees, timing, client
assistance and related issues.
D. Involvement of the client's internal auditors in setting materiality levels and
determining the scope of audit tests.

D 10. Which of these circumstances would normally lead to a change in engagement?

A. Restrictions imposed by management
B. Auditor's inability to gather evidence
C. Financial statements departing from GAAP
D. Misunderstanding as to the nature of the engagement

D 11. While performing procedures for the audit engagement, the auditor asked to change
the engagement to review. Assuming the change is no justifiable, which of these
statements does not concur?
A. The auditor continues to perform audit procedures.
B. The auditor withdraws from the audit engagement.
C. The auditor communicates the matter to an appropriate level of
management.
D. The auditor provides negative assurance on the new report.

A 12. If a change in the type of engagement from higher to lower of assurance is not
justified, the auditor should:
A. Qualify the report on the original engagement.
B. Continue with the revised engagement, but make explicit reference about the
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

original engagement.
C. Refuse to agree to management's request on the change of engagement and
continue with the original engagement.
D. Withdraw from the engagement.

C 13. If a change in the type of engagement from higher to lower of assurance is not
justified, the auditor should:
A. Qualify the report on the original engagement.
B. Continue with the revised engagement, but make explicit reference about the
original engagement.
C. Refuse to agree to management's request on the change of engagement and continue
with the original engagement.
D. Withdraw from the engagement.

C 14. An auditor who, before the completion of the engagement, is requested to

change the engagement to one which provides lower level of assurance,
should
A. Withdraw and consider whether there is any obligation to report to other parties the
circumstances necessitating the withdrawal.
B. Issue a report that includes reference to the original engagement and any
procedures that may have been performed in the original engagement.
C. Not agree to a change of engagement where there is reasonable justification for
doing so..
D. Consider the change reasonable if it relates to information that is incorrect,
incomplete or otherwise unsatisfactory.

D 15. One of the first things that the auditor will do after accepting a new client is:
A. Communicate with the predecessor auditor.
B. Contact the client's attorney to discover legal obligations.
C. Study the client's internal control structure.
D. Tour the client's facilities.

Problem 4-7
B 1. When an independent auditor is approached to perform an audit for the first time, he or
she should make inquiries of the predecessor auditor. Inquiries are necessary because
the predecessor may be able to provide the successor with information that will assist
the successor in determining whether
A. The company rotates auditors
B. The engagement should be accepted
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C. The predecessor's work should be used

D. In the predecessor's opinion, control risk is less than high

B 2. Before accepting an audit engagement, a successor auditor should make specific

inquiries of the predecessor auditor regarding the predecessor's:
A. Opinion of any subsequent events occurring since the predecessor's audit report was
issued.
B. Understanding as to the reasons for the change of auditors.
C. Awareness of the consistency in the application of PFRS between periods.
D. Evaluation of all matters of continuing accounting significance.

D 3. Prior to acceptance of the engagement, a CPA firm is not likely to

A. Make inquiries of previous auditor
B. Make inquiries of the proposed client's legal counsel
C. Review financial statements of proposed client
D. Review the personnel practices of the proposed client

A 4. Early appointment of the auditor enables preliminary work to be performed by the

auditor, which benefits the client in that it permits the examination to be performed in
A. A more efficient manner.
B. A more thorough manner.
C. Accordance with quality control standards.
D. Accordance with generally accepted auditing standards.

B 5. What is the responsibility of a successor auditor to communicate with the predecessor

auditor in connection with a prospective new client?
A. The successor auditor has no responsibility to contact the predecessor auditor.
B. The successor auditor should obtain permission from the prospective client to
contact the predecessor auditor.
C. The successor auditor should contact the predecessor auditor client authorizes
contact.
D. The successor auditor need not contact the predecessor successor is aware of all
available relevant facts.

D 6. Prior to beginning the fieldwork on a new audit engagement in which a CPA does not
possess expertise in the industry in which the client operates the CPA should
A. Reduce audit risk by lowering the preliminary levels of materiality.
B. Design special substantive tests to compensate for the lack of industry expertise.
C. Engage financial experts familiar with the nature of the industry.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D. Obtain knowledge of matters that relate to the nature of the entity's business.

A 7. One means of informing the client that the auditor is not responsible for the discovery
of all acts of fraud is the:
A. Engagement letter.
B. Representation letter.
C. Responsibility letter.
D. Client letter.

B 8. Which of the following normally signs the engagement letter for an audit of
a public company?
A. Corporate treasurer.
B. Chief financial officer.
C. Chairman of the board of directors.
D. Audit committee.

B 9. The purpose of an engagement letter is to:

A. Document the CPA firm's responsibility to external users of the audited financial
statements.
B. Document the terms of the engagement in writing to minimize misunderstandings.
C. Notify the audit staff of an upcoming engagement so that personnel scheduling can
be facilitated.
D. Emphasize management's responsibility for approving the audit program.

D 10. Which of the following normally signs the engagement letter for an audit of
a public company?
A. Corporate treasurer.
B. Chief financial officer.
C. Chairman of the board of directors.
D. Audit committee.

A 11. An auditor's engagement letter most likely would include a statement regarding:
A. Management's responsibility to provide certain written representations to the
auditor.
B. Conditions under which the auditor may modify the preliminary judgment about
materiality.
C. Internal control activities that would reduce the auditor's assessment of risk.
D. Materiality matters that could modify the auditor's preliminary assessment of fraud
risk.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

B 12. In making arrangements for an audit, there should be a clear understanding between
the auditor and the client as to the following except:
A. The type of audit to be performed
B. Assurance of auditor's independence
C. Terms of settlement for audit services
D. Official to whom audit report shall be addressed

A 13. Which of the following statements is/are correct?

Statement 1: On recurring audits, the auditor should consider whether circumstances
require the terms of the engagement to be revised and whether there is a need to
remind the client of the existing terms of engagement.
Statement 2: The auditor should send a new engagement letter each year to an
established client.

A. Only statement 1 is correct

B. Only statement 2 is correct

C. Both statements are correct

D. Both statements are incorrect

D 14. On recurring audit engagements, the auditor may decide not to send a new
engagement letter each period. In which of the following situations will there be no
need to send a new letter?
A. Revisions or special terms of the engagement
B. Significant change in nature or size of the client's business
C. Indications of misunderstanding of the objective and scope of the audit
D. Recent change of middle management and rank and file organizational structure

D 15. An understanding of a client's business and industry and knowledge about operations
are essential for performing an adequate audit. For a new client, most of this
information is obtained:
A. From the predecessor auditor.
B. From the securities and exchange commission.
C. From the permanent file.
D. At the client's premises.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

CHAPTER 5: Planning an Audit of Financial Statements

Problem 5-1
FALSE 1. Audit effectiveness is the primary objective of the auditor in engagement
planning which results in the utilization of the least amount of resources.
TRUE 2. Audit planning helps the auditor properly organize and manage the audit
engagement.
TRUE 3. For recurring audits, members of the previous year's engagement team are
advised to participate in the planning of the current year's audit.
FALSE 4. Audit planning helps in achieving effective and efficient audits which must
be completed before the performance of further audit procedures.
FALSE 5. The audit plan sets the scope, timing, and direction of the audit which leads
to the establishment of the overall audit strategy.
TRUE 6. Risk assessment procedures enable the auditor to understand the entity and its
environment and identify and assess risks of material misstatement.
TRUE 7. Risk assessment procedures help in specifically identifying the applicable
further audit procedures to respond to identified risks.
FALSE 8. Inquiry consists of seeking both financial and non-financial information
from knowledgeable persons within the entity.
FALSE 9. Observation consists of looking at a process or audit procedure.
TRUE 10. Physical verification of the entity's premises and plant facilities is considered
an inspection procedure.
FALSE 11. Analytical procedures are seldom used for planning an audit engagement
because they are substantive procedures.
FALSE 12. Preliminary arrangements with clients should be set forth in the management
letter.
FALSE 13. An audit plan includes a detailed listing of the audit procedures to be
performed in the verification of items in the financial statements.
TRUE 14. Risks of material misstatement are assessed at the assertion level in order to
determine the nature, timing, and extent of further audit procedures necessary
to obtain sufficient appropriate audit evidence.
TRUE 15. Inherent risk and control risk should be assessed separately.

Problem 5-2
TRUE 1. Analytical procedures enable the auditor to conclude if the fluctuations and
relationships in the entity's financial information make sense.
FALSE 2. Preliminary analytical review is only required for new or unusual business
transactions entered by the entity during the period under audit.
TRUE 3. Industry benchmarks or averages may be used to develop expectations
regarding financial statements.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

TRUE 4. Only planning and concluding analytical review are required to be performed in
an audit.
FALSE 5. Test of details obtains corroborative evidence for a particular assertion as
compared to substantive analytical procedures which doesn't.
FALSE 6. Materiality is an absolute concept as prescribed by the engagement standards.
FALSE 7. Misstatements, including omissions, are considered to be material if
individually they could reasonably be expected to influence the economic
decisions of users.
FALSE 8. The determination of materiality is a mathematical exercise with a prescribed
formula that differs depending on the industry of the entity.
TRUE 9. The auditor should revise the overall materiality should he become aware of
information during the audit that would lead to a different amount.
TRUE 10. The identification and assessment of risks of material misstatements are both
done at the financial statement and assertion levels.
TRUE 11. Detection risk is determined and controlled by the auditor.
TRUE 12. The results of preliminary engagement activities are also considered when
establishing the overall audit strategy.
FALSE 13. When the work of an expert is involved in the audit, the auditor's
responsibility for the audit opinion is shared with the expert.
TRUE 14. To comply with ethical requirements, the current year auditor shall
communicate with the previous auditor for initial engagements.
FALSE 15. Establishing an overall audit strategy and plan for audits of small entities need
to be complex but not time-consuming.

Problem 5-3
B 1. Which of the following statements is/are correct?
Statement 1: The client should plan the audit work so that the audit will be performed
in an effective manner.
Statement 2: The auditor should conduct the audit with an attitude of professional
skepticism.
Statement 3: The auditor should develop and document an overall audit plan
describing the scope and conduct of the audit.

A. Only one statement is correct

B. Only two statements are correct
C. All statements are correct
D. All statements are incorrect

D 2. The auditors plan should

I. Precede action
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

II. Be flexible
III. Be cost-beneficial

A. I and II
B. II and III
C. I and III
D. I, II and III

A 3. Adequate planning benefits the audit of financial statements in several ways, including
the following, except
A. Helping the auditor to devote appropriate attention to less important areas of the
audit
B. Helping the auditor identify and resolve potential problems on a timely basis
C. Helping the auditor properly organize and manage the audit engagement so that it is
performed in an effective and efficient manner
D. Assisting in the selection of engagement team members with appropriate levels of
capabilities and competence to respond to anticipated risks, and the proper
assignment of work to them

D 4. Which of the following statements is incorrect?

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

A 5. Which of the following statements is/are correct?

Statement 1: According to PSA 300, the auditor may discuss elements of planning
with those charged with governance and the entity's management.
Statement 2: The audit plan sets the scope, timing, and direction of the audit and
guides the development of the more detailed overall audit strategy.
Statement 3: The overall audit strategy is more detailed than the audit plan and
includes the nature, timing and extent of audit procedures to be performed engagement
team members to obtain sufficient appropriate audit evidence to reduce audit risk to an
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

acceptably low level.

A. Only 1 statement is correct

B. Only 2 statements are correct
C. All statements are correct
D. All statements are incorrect

C 6. An initial (first-time) audit requires more audit time to complete than a recurring audit.
One of the reasons for this is that
A. New auditors are usually assigned to an initial audit.
B. Predecessor auditors need to be consulted.
C. The client's business, industry, and internal control are unfamiliar to the auditor and
need to be carefully studied.
D. A larger proportion of customer accounts receivable need to be confirmed on an
initial audit.

C 7. An auditor should design the audit plan so that

A. All material transactions will be selected for substantive testing.
B. Substantive tests prior to the balance sheet date will be minimized.
C. The audit procedures selected will achieve specific audit objectives.
D. Each account balance will be tested under either tests of controls or tests of
transactions.

D 8. In developing an overall audit strategy, an auditor should consider:

A. Whether the allowance for sampling risk exceeds the achieved upper precision
limit.
B. Findings from substantive tests performed at interim dates.
C. Whether the inquiry of the client's attorney identifies any litigation, claims, or
assessments not disclosed in the financial statements.
D. Preliminary evaluations of materiality, audit risk, and internal control.

D 9. An understanding of a client's business and industry and knowledge about operations

are essential for performing an adequate audit. For a new client, most of this
information is obtained:
A. from the predecessor auditor.
B. from the Securities and Exchange Commission.
C. from the permanent file.
D. at the client's premises.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C 10. Which of the following is most likely to occur at the beginning of an initial audit
engagement?
A. Prepare a rough draft of the financial statements and of the auditor's report.
B. Study and evaluate the system of internal administrative control.
C. Determine the client's reason for an audit.
D. Consult with and review the work of the predecessor auditor prior to discussing
the engagement with the client management.

C 11. While assessing the risks of material misstatement auditors identify risks, relate risk
to what could go wrong, consider the magnitude of risks and
A. Assess the risk of misstatements due to illegal acts.
B. Consider the complexity of the transactions involved.
C. Consider the likelihood that the risks could result in material misstatements.
D. Determine materiality levels .

D 12. The extent of audit planning will vary according to the

I. Size of the entity
II. Complexity of the audit
III. Auditor's experience with the entity and knowledge of the business

A. I and II
B. II and III
C. I and III
D. I, II and III

A 13. Which of the following is not one of the three main reasons why the auditor should
properly plan engagements?
A. To enable proper on-the-job training of employees.
B. To enable the auditor to obtain sufficient appropriate evidence.
C. To avoid misunderstandings with the client.
D. To help keep audit costs reasonable.

D 14. With respect to the auditor's planning of a year-end audit, which of the following
statements is always true?
A. An engagement should not be accepted after the fiscal year-end.
B. An inventory count must be observed at the balance sheet date.
C. The client's audit committee should not be told of any specific audit procedures
which will be performed.
D. It is an acceptable practice to carry out parts of the examination at interim dates.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D 15. Early appointment of the independent auditor will enable:

A. a more thorough examination to be performed.
B. a proper study and evaluation of internal control to be performed.
C. sufficient competent evidential matter to be obtained.
D. a more efficient examination to be planned.

Problem 5-4
A 1. If it is probable that the judgment of a reasonable person would have been changed or
influenced by the omission or misstatement of information, then that information is:
A. Material.
B. Insignificant.
C. Significant.
D. Relevant.

B 2. The preliminary judgment about materiality is the amount by which the auditor
believes the statements could be misstated and still not affect the decisions of
reasonable users.
A. Minimum
B. Maximum
C. Mean average
D. Median average

D 3. Auditors are responsible for determining whether financial statements are materially
misstated, so upon discovering a material misstatement they must bring it to the
attention of:
A. no one in particular.
B. regulators.
C. the audit firm's managing partner.
D. the client's management.

C 4. The definition of materiality emphasizes what class of financial statement users?

A. Regulators.
B. Informed investors.
C. Reasonable persons.
D. Potential investors.

D 5. When auditors allocate the preliminary judgment about materiality to account

balances, the materiality allocated to any given account balance is referred to as:
A. the materiality range.
B. the error range.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C. tolerable materiality.
D. tolerable misstatement.

B 6. Which of the following statements concerning materiality is incorrect?

A. Aggregate materiality thresholds are a function of the auditor's preliminary
judgments concerning audit risk.
B. In general, the more misstatements the auditor expects, the higher should be the
aggregate materiality threshold.
C. The smallest aggregate level of errors or fraud that could be considered material to
any one of the financial statements is referred to as a "materiality threshold."
D. Materiality thresholds may change between the planning and review stages of the
audit. These changes may be due to quantitative and/or qualitative factors.

C 7. It is a threshold calculated as a certain percentage of overall materiality in order to

capture any uncorrected misstatements, the total amount of which may exceed overall
materiality.
A. Overall materiality
B. Scoping materiality
C. Performance materiality
D. Tolerable misstatement

D 8. Amounts involving fraud are usually considered _________ important than

unintentional errors of equal peso amounts.
A. Less
B. No less
C. No more
D. More

B 9. Statement 1: The benchmark to be used in determining materiality could either be an

element or component of the financial statements
Statement 2: In practice, the benchmark commonly used for profit. Oriented
companies is profit from continuing operations before tax (PBT).
Statement 3: Specific materiality is the amount set by the auditor for particular
elements or components, well though higher than overall materiality could influence
decision-making.

A. Only one statement is correct

B. Only two statements are correct
C. All statements are correct
D. All statements are incorrect
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D 10. The preliminary judgment about materiality and the amount of aud evidence
accumulated are, related.
A. Directly
B. Indirectly
C. Not
D. Inversely

D 11. After the preliminary judgment about materiality has been established, auditors may:
A. not adjust it.
B. adjust it downward only.
C. adjust it upward only.
D. adjust it either downward or upward.

C 12. In an audit area that has a lower inherent risk, it would be prudent to:
A. increase the amount of audit evidence gathered.
B. assign more experienced staff to that area.
C. increase the tolerable misstatement for the area.
D. expand planning procedures.

D 13. Which of the following is least likely to be appropriate as the basis for determining
the preliminary judgment about materiality in the audit of financial statements?
A. Net income before taxes.
B. Current assets.
C. Owners' equity.
D. Inventory.

C 14. Auditing standards, that the basis used to determine the preliminary judgment about
materiality be documented in the audit files.
A. Permit
B. do not allow
C. require
D. strongly encourage

B 15. Which of the following statements is correct regarding the auditor's determination of
materiality?
A. The planning level of materiality should normally be the larger of the amount
considered for the balance sheet versus the income statement.
B. The auditors' planning level of materiality may be disaggregated into smaller
"tolerable misstatements" for the various accounts.
C. Auditors may use various rules of thumb to arrive at an evaluation level of
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

materiality, but not for determining the planning level of materiality.

D. The amount used for the planning should equal that used for evaluation.

Problem 5-5
B 1. The auditors must consider materiality in planning an audit engagement. Materiality
for planning purposes is:
A. The auditors' preliminary estimate of the largest amount of misstatement that would
be material to any one of the client's financial statements.
B. The auditors' preliminary estimate of the smallest amount of misstatement that
would be material to any one of the client's financial statements.
C. The auditors' preliminary estimate of the amount of misstatement that would be
material to the client's balance sheet.
D. An amount that cannot be quantitatively stated since it depends on the nature of the
item.

D 2. Which of the following situations would most likely require special audit planning by
the auditors?
A. Some items of factory and office equipment do not bear identification numbers.
B. Depreciation methods used on the client's tax return differ from those used on the
books.
C. Assets costing less than $500 are expensed even though the expected life exceeds
one year.
D. Inventory is comprised of precious stones.

A 3. The auditor's analytical procedures will be facilitated if the client

A. Uses a standard cost system that produces variance reports.
B. Segregates obsolete inventory before the physical inventory count.
C. Reduces inventory balances to the lower of cost or net realizable value.
D. Corrects material weaknesses in internal control before the beginning of the audit.

D 4. Analytical procedures are performed in the planning stage because

A. These procedures replace test of balances and transactions that exceed scoping
materiality.
B. The study of financial ratios is an acceptable alternative to investigate unusual
fluctuations that lead to audit efficiency
C. Statistical tests of financial information may lead to the discovery of material errors
in the financial statements
D. Plausible relationships among information are expected and continue in the absence
of opposing conditions
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

B 5. An abnormal fluctuation in gross profit that might suggest the need for extended audit
procedures for sales and inventories would most likely be identified in the planning
phase of the audit by the use of:
A. Specialized audit programs.
B. Analytical procedures.
C. Tests of transactions and balances.
D. An assessment of internal control

B 6. Which of the following statements is not correct with respect to analytical procedures?
A. Auditing standards emphasize the need for auditors to develop and use
expectations.
B. Analytical procedures must be performed throughout the audit.
C. Analytical procedures may be performed at any time during the audit.
D. Analytical procedures use comparisons and relationships to assess whether\
account balances appear reasonable.

D 7. Which of the following is correct with respect to the use of analytical procedures?
A. Analytical procedures may be used in evaluating balances in the testing phase as
long as the auditor also uses them in assessing the going concern assumption.
B. Analytical procedures must be used throughout the audit.
C. Analytical procedures used in the testing phase of the audit are primarily used to
direct an auditor's attention so that the auditor's understanding of the business is
improved.
D. Analytical procedures are performed by studying plausible relationships between
financial and non-financial data

D 8. The most widely used profitability ratio is the:

A. quick ratio.
B. profit margin.
C. return on assets.
D. earnings per share.

C 9. Which of the following ratios is best used to assess a company's ability to meet its
long-term debt obligations?
A. Quick ratio.
B. Return on common equity.
C. Debt to equity.
D. Current ratio.

B 10. Which of the following statements is not correct?

REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A. Analytical procedures used in the planning phase of the audit are primarily
directed at understanding the client's business and directing the auditor's attention
to areas that may contain possible misstatements.
B. Analytical procedures used in the completion phase are primarily aimed at
assessing going concern and secondarily aimed at directing the auditor's attention
to areas that may contain possible misstatements.
C. Analytical procedures must be used in the planning and completion phases of the
audit, and are optional in the testing phase.
D. Analytical procedures used in the completion phase are primarily aimed at
directing the auditor's attention to areas that may contain possible misstatements
and secondarily aimed at assessing going concern.

D 11. When are auditors likely to encounter judgment problems in the use of analytical
procedures?
A. Whenever the auditor places reliance on management's explanations for unusual
fluctuations in account balances without first developing independent
expectations.
B. Whenever the auditor allows unaudited balances to unduly influence his/her
expectations of current balances.
C. Whenever the auditor fails to consider the pattern reflected by several unusual
fluctuations when trying to explain what caused them.
D. The auditor is likely to encounter judgment problems in each of the above
instances.

A 12. The major concern when using nonfinancial data in analytical procedures is the:
A. accuracy of the nonfinancial data.
B. source of the nonfinancial data.
C. type of nonfinancial data.
D. presence of multiple sources of nonfinancial data.

C 13. In using the information on the statement of cash flows while obtaining an
understanding of a profitable, growing company, which of the following would
ordinarily be least surprising to an auditor?
A. Decreases in accounts payable.
B. Decreases in accounts receivable.
C. Negative cash flows from investing.
D. Negative operating cash flows.

B 14. If the business environment is experiencing a recession, the auditor most likely would
focus increased attention on which of the following accounts?
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A. Purchase returns and allowances.

B. Allowance for doubtful accounts.
C. Common stock.
D. Noncontrolling interest of a subsidiary purchased during the year.

C 15. Which of the following procedures is not performed as a part of planning an audit
engagement?
A. Reviewing the working papers of the prior year.
B. Performing analytical procedures.
C. Confirmation of all major accounts.
D. Designing an audit program.

PROBLEM 5-6

D 1. An audit approach that allocates proportionately more audit resources to areas of high
audit risk is referred to as a _________ audit.
A. Controls based approach
B. Substantive approach
C. Data driven approach
D. Risk-based approach

A 2. These are audit procedures performed to obtain an understanding of the entity and its
environment, including the entity's internal control, to identify and assess the risks of
material misstatement, whether due to fraud or error, at the financial statement and
assertion levels.
A. Risk assessment procedures
B. Further audit procedures
C. Test of operating effectiveness of controls
D. Preliminary analytical procedures

D 3. Which component of the audit risk model may be expressed in qualitative terms?
I.Inherent Risk
II.Control Risk
III.Detection Risk

A. I and II
B. II and III
C. I and III
D. I, II and III
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D 4. The risk of a material misstatement occurring in an account, assuming an absence of

internal control, is referred to as:
A. Account risk. B. Control risk.
C. Detection risk. D. Inherent risk.

C 5. The risk that the auditors' procedures will lead them to conclude that a material
misstatement does not exist in an account balance when in fact such a misstatement does
exist is referred to as:
A. Account risk. B. Control risk.
C. Detection risk. D. Inherent risk.

A 6. It is easier and more common to implement increased evidence accumulation for inherent
risk than for acceptable audit risk because:
A. inherent risk can usually be isolated to specific accounts.
B. inherent risk applies to the entire audit.
C. acceptable audit risk and sample sizes are set statistically.
D. acceptable audit risk does not impact on the amount of evidence which must be
accumulated.

A 7. Which of the following is least likely to be considered a financial statement audit risk
factor?
A. Management operating and financing decisions are dominated by top management.
B. A new client with no prior audit history.
C. Rate of change in the entity's industry is rapid.
D. Profitability of the entity relative to its industry is inconsistent.

B 8. When inherent risk is high, there will need to be:

I. A lower assessment of audit risk
II. More evidence accumulated by the auditor
A. I only
B. II only
C. Both I and II
D. Neither I nor II

B 9. Which of the following is not a potential effect of an auditor's decision that a lower
acceptable audit risk is appropriate?
A. More evidence is accumulated.
B. Less evidence is accumulated.
C. Special care is required in assigning experienced staff.
D. Review of audit documentation is performed by personnel not assigned to the
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

engagement.

B 10. Which of the following is not an example of a likely adjustment in the auditors' overall
audit approach when significant risk is found to exist?
A. Apply increased professional skepticism about material transactions.
B. Increase the assessed level of detection risk.
C. Assign personnel with particular skill to areas of high risk.
D. Obtain increased evidence about the appropriateness of management's selection of
accounting principles.

C 11. After evaluating the risks of material misstatements, the auditor determines detection risk
A. As the complement of overall audit risk.
B. By performing substantive audit tests.
C. At a level that equates the joint probability of inherent risk, control risk, and detection
risk with overall audit risk.
D. As a product of further study of the business and industry and application of analytical
procedures as part of performing risk assessment procedures to properly plan the audit in
an effective manner

A 12. Which of the following conditions supports an increase in detection risk?

A. Internal control over cash receipts is excellent.
B. Internal control over shipping, billing, and recording of sales revenue is weak.
C Application of analytical procedures reveals a significant increase in sales revenue in
December, the last month of the fiscal year.
D. Study of the business reveals that the client recently acquired a new company in an
unrelated industry.

B 13. In a financial statement audit, audit risk represents the probability that
A. Internal control fails and the failure is not detected by the auditor's procedures.
B. The auditor unknowingly fails to modify an opinion on materially misstated financial
statements.
C. Inherent and control risk cause errors that could be material to the financial statements.
D. The auditor is not retained to conduct a financial statement audit in the succeeding
year.

B 14. Audit programs are designed to

A. Ensure that all audit work may be completed as of interim date
B. Gather sufficient and appropriate evidence to support the opinion
C. Inherent risk may be assessed at a low level
D. Identify constructive and value-adding suggestions to the client
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D 15. Which of the following is not typically included in initial audit planning?
A. Client acceptance/continuation decisions.
B. Determination of the purpose of the audit.
C. Obtain an understanding with the client.
D. Perform analytical procedures as substantive tests.

PROBLEM 5-7

A 1. The auditor faces a risk that the audit will not detect material misstatements in the financial
statements. In regard to minimizing this risk, the auditor primarily relies on:
A. Substantive procedures.
B. Tests of controls.
C. Internal control.
D. Statistical analysis.

B 2. When planning an audit, an auditor should:

A. Consider whether the extent of substantive procedures may be reduced based on the
results of the internal control questionnaire.
B. Make preliminary judgments about materiality levels for audit purposes.
C. Conclude whether changes in compliance with prescribed control procedures justifies
reliance on them.
D. Prepare a preliminary draft of the management representation letter.

B 3. Which of the following is least likely to be required on an audit?

A. Evaluate the business rationale for significant, unusual transactions.
B. Make a legal determination of whether fraud has occurred.
C. Review accounting estimates for biases.
D. Test appropriateness of journal entries and adjustments.

B 4. An auditor who accepts an audit engagement and does not possess the industry expertise of
the business entity, should:
A. Engage financial experts familiar with the nature of the business entity.
B. Obtain a knowledge of matters that relate to the nature of the entity's business.
C. Refer a substantial portion of the audit to another CPA who will act as the principal
auditor.
D. First inform management that an unqualified opinion cannot be issued.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C 5. Which of the following appropriately relates to the auditor's objective in planning the
audit?
A.The auditor plans the audit to ensure that only Certified Public Accountants will
carry-out the audit procedures.
B. The auditor plans the audit to determine the planned audit opinion to be issued on the
financial statements.
C. The auditor plans the audit so that it will be performed in an effective manner.
D. The auditor plans the audit so that it will be performed in an effective and efficient
manner.

B 6. Which of the following statements inappropriately relates on how adequate planning

benefits the audit of financial statements?
A. Helps the auditor to devote appropriate attention to important areas of the audit
B. Helps the auditor plan the level of risks of material misstatements present in the audit
C. Helps the auditor identify and resolve potential problems on a timely basis
D. Helps the auditor properly organize and manage the audit engagement so that it is
performed in an effective and efficient manner

B 7. Which of the following is considered a required documentation in planning an audit?

A. A flowchart or narrative of the accounting system to describe the recording and
classification of transactions for financial reporting
B. An audit program setting forth in detail the necessary procedures to be performed
during the engagement
C. A planning memorandum establishing the timing of the audit procedures and
coordinating the assistance of human resources of the entity
D. An internal control questionnaire identifying policies and procedures that assure
specific objectives will be achieved.

B 8. Inquiries directed towards those charged with governance may most likely
A. Relate to their activities concerning the design and effectiveness of the entity's internal
control and whether management has satisfactorily responded to any findings from these
activities
B. Help the auditor understand the environment in which the financial statements are
prepared
C. Relate to changes in the entity's marketing strategies, sales trends, or contractual
arrangements with its customers
D. Help the auditor in evaluating the appropriateness of the selection and application of
certain accounting policies.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

B 9. An auditor should inspect minutes of the meeting of BOD

A. through the date of the financial statements.
B. through the date of the audit report.
C. only at the beginning of the audit.
D. on a test basis.

B 10. The element of the audit planning process most likely to be agreed upon with the client
before implementation of the audit strategy is the determination of the
A. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.
B. Timing of inventory observation procedures to be performed.
C. Procedures to be undertaken to discover litigation, claims, and assessments.
D. Pending legal matters to be included in the inquiry of the client's attorney.

B 11. Which of the following is not a factor that affects the auditor's professional judgment, =
during audit planning, as to the quantity, type, and content of working papers?
A. The auditor's preliminary assessment of control risk.
B. The type of report to be issued by the auditor.
C. The nature of the client's business.
D. The auditor's preliminary evaluation of inherent risk based on discussions with the
client.

C 12. How can the audit program best be described at the beginning of the audit process?
A. Comprehensive. B. Conclusive.
C. Tentative. D. Cohesive.

C 13. In connection with the planning phase of an audit engagement, which of the following
statements is always correct?
A. Final staffing decisions must be made prior to completion of the planning stage.
B. Observation of inventory count should be performed at year-end.
C. A portion of the audit of a continuing audit client can be performed at interim dates.
D. An engagement should not be accepted after the client's financial year- end

C 14. A retailing entity uses the Internet to execute and record its purchase transactions. The
entity's auditor recognizes that the documentation of details of transactions will be
retained for only a short period of time. To compensate for this limitation, the auditor
most likely would:
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C 15. The auditor should plan the nature, timing and extent of direction and supervision of
engagement team members and review their work. Which of the following statements is
incorrect regarding direction, supervision and review?
A. The auditor plans the nature, timing, and extent of direction and supervision of
engagement team members based on the assessed risk of material misstatement.
B. As the assessed risk of material misstatement increases, for the area of audit risk, the
auditor ordinarily increases the extent and timeliness of direction and supervision of
engagement team members.
C. As the assessed risk of material misstatement decreases, for the area of audit risk, the
auditor performs a more detailed review of their work.
D. The auditor plans the nature, timing and extent of the review of the team's work based
on the capabilities and competence of the individual team members performing the audit
work.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

CHAPTER 6: Study and Evaluation of Internal Control

PROBLEM 6-1

TRUE 1. Internal control is implemented by those charged with governance,

management, and other personnel.

TRUE 2. Most controls are directed at routine or standard transactions which impose a
limitation affecting their effectiveness.

FALSE 3. Accounting controls promote operational efficiency and adherence to

managerial policies.

FALSE 4. All controls adopted by management of an entity to assist in achieving

management's objectives must be considered in the audit.

TRUE 5. A common control is uniformly designed and is implemented consistently

across a single entity or location or at different entities or locations.

TRUE 6. Control environment is the basis on which an effective system of internal

control is built and operated in an organization.

FALSE 7. The tone at the top regarding the relevance of internal control, including ethical
requirements, is established by management.

TRUE 8. The organizational structure also establishes the flow of information between
levels in an entity.

FALSE 9. The auditor shall identify the business risks relevant to the financial reporting
objectives of the entity and decide on how to manage those risks.

TRUE 10. Communication and information are vital in making all relevant parties
understand internal control responsibilities and the importance of internal
control in achieving objectives.

TRUE 11. Internal control is concerned with the reliability of financial information.

TRUE 12. Incompatible duties exist when an employee is in a position to perpetuate and
conceal errors or fraud.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

FALSE 13. Internal auditors should preferably report to the chief accounting officer of the
company.

FALSE 14. The auditors' communication of internal control significant deficiencies

should be addressed only to senior management of the company.

FALSE 15. If the auditors' assessment of the design of internal control reveals that it
cannot be relied upon, the auditors are not required to prepare any
documentation of internal control for their working papers.

PROBLEM 6-2

FALSE 1. Control activities are designed to detect risks at different levels of the
organization to ensure the achievement of its objectives.

FALSE 2. At least majority of the five components of internal control must be

implemented and be operated effectively to ensure attainment of objectives.

FALSE 3. Segregation of duties over cash receipts and recording is an example of an

entity-wide control.

FALSE 4. After assessing the inherent risk, the auditor may judge to proceed directly in
performing substantive procedures without consideration of internal control.

FALSE 5. In order to test the controls, their design and implementation are being
evaluated.

TRUE 6. Business process narratives, process maps, and risk and control matrices are
some of the commonly used forms of control documentation.

TRUE 7. A gap in internal control may be identified through an effective internal control
questionnaire that highlights strengths and weaknesses of the system through a
structured series of questions.

FALSE 8.If the results of inquiry of entity personnel show no changes in the entity's
processes, the prior year's documentation of controls may be carried forward.

TRUE 9. Test of controls are designed to obtain sufficient and appropriate evidence as to
the operating effectiveness of relevant controls.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

FALSE 10. If an understanding of the design and implementation of control is obtained,

its operating effectiveness must likewise be evaluated.

FALSE 11. Inquiry alone is not enough to test the operating effectiveness of controls.

FALSE 12. If the control risk assessment is set at the maximum level, the auditor is
required to document the basis for such judgment.

FALSE 13. A material weakness in internal controls is present when a deficiency or

combination of deficiencies in internal control is of sufficient importance to
merit the attention of those charged with governance.

TRUE 14. If a significant deficiency in internal control has been identified, the auditor
shall communicate those in writing to management or to those charged with
governance.

FALSE 15. Obtaining an understanding as to the design and implementation of controls

would lead to a conclusion as to their operating effectiveness.

PROBLEM 6-3

C 1. A process, effected by an entity's board, management, and other personnel, designed to

provide reasonable assurance regarding the achievement of objectives relating to
operations, reporting and compliance.
A. Quality Control
B. Quality Management
C. Internal Control
D. Risk management

D 2. Which of the following is not one of the essential concepts of internal controls?
A. It is a process
B. It is implemented by those charged with governance, management, and other personnel
in an entity
C. It is a means or tool used by management to achieve the entity's
D. It can be expected to provide absolute assurance regarding that the objectives
achievement of the entity's objectives

D 3. Internal control is not primarily designed to achieve objectives with regard to

A. Reliability of financial reporting
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

B. Compliance with laws and regulations

C. Effectiveness and efficiency of operations
D. Quality of audits

B 4. Key concepts that underlie management's design and implementation of internal control
are:
A. costs and materiality.
B. inherent limitations and reasonable assurance.
C. absolute assurance and costs.
D. collusion and materiality.

A 5. Which of the following most likely would not be considered an inherent limitation of the
potential effectiveness of an entity's internal control?
A. Incompatible duties.
B. Management override.
C. Mistakes in judgment.
D. Collusion among employees.

D 6. Which of the following statements does not properly describe the reason why control risk
cannot be reduced to zero?
A. Management may override controls however effective the controls are implemented at
the lower level.
B. The cost of designing and implementing controls should not exceed their benefits.
C. People and personnel subject of the controls are prone to errors and mistakes in
judgment.
D. Some accounts and transactions are more susceptible to misstatement (whether due to
fraud or error) than other accounts and balances.

C 7. The basic concept of internal control which recognizes that the cost of internal control
should not exceed the benefits expected to be derived is known as
A. Management by exception
B. Management responsibility
C. Reasonable assurance
D. Limited liability

C 8. An internal control system that is working effectively

A. Eliminates risk and potential loss of to the entity
B. Cannot be circumvented by management
C. Reduces the need for management the review exception reports on a day-to-day basis
D. Is unaffected by changing circumstances and conditions encountered by the entity
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A 9. Internal controls can never be considered as absolutely effective because:

A. their effectiveness is limited by the competency and dependability of employees.
B. not all organizations have internal audit departments.
C. controls are designed to prevent and detect only material misstatements.
D. internal controls prevent separation of duties.

A 10. A secondary objective of the auditor's study and evaluation of internal control is that the
study and evaluation provide
A. A basis for constructive suggestions concerning improvements in internal control.
B. A basis for reducing the auditor's assessed level of control risk below the maximum
level.
C. An assurance that the records and documents have been maintained in accordance with
existing company policies and procedures.
D. A basis for determination of the resultant extent of the tests to which auditing
procedures are to be restricted.

D 11. Which of the following statements about internal control is correct?

A. Properly maintained internal controls reasonably assure that collusion among
employees cannot occur.
B. Establishing and maintaining internal control is the internal auditor's responsibility.
C. Exceptionally strong control allows the auditor to eliminate substantive tests of details.
D. The cost-benefit relationship should be considered in designing internal controls.

A 12. Which of the following would be least likely to be considered a benefit of effective
internal control?
A. Eliminating all employee fraud.
B. Restricting access to assets.
C. Detecting ineffectiveness.
D. Ensuring authorization of transactions.

D 13. Of the following statements about internal control, which one is not valid?
A. No one person should be responsible for the custodial responsibility and the recording
responsibility for an asset.
B. Transactions must be properly authorized before such transactions are processed.
C. Because of the cost/benefit relationship, a client may apply control procedures on a
test basis.
D. Control activities reasonably insure that collusion among employees cannot occur.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

B 14. Controls are not designed to provide assurance that:

A. Transactions are executed in accordance with management's authorization.
B. Fraud will be eliminated.
C. Access to assets is permitted only in accordance with management's authorization.
D. The recorded accountability for assets is compared with the existing assets at
reasonable intervals.

B 15. Which of the following factors would most likely be considered an inherent limitation to
an entity's internal control?
A. The complexity of the information processing system.
B. Human judgment in the decision-making process.
C. The ineffectiveness of the board of directors.
D. The lack of management incentives to improve the control environment.

Problem 6-4

D 1. Which of the following is not an element of an entity's internal control?

A. The control environment.
B. The information system
C. Control activities.
D. Control risk.

B 2. Which of the following is not considered one of the five major components of internal
control?
A. Risk assessment.
B. Segregation of duties.
C. Control activities.
D. Monitoring.

B 3. Transaction authorization within an organization may be either specific or general. An

example of specific transaction authorization is the
A. Setting of automatic reorder points.
B. Approval of a construction budget for a new warehouse.
C. Establishment of a customer's credit limits.
D. Establishment of sales prices.

A 4. Proper segregation of functional responsibilities calls for separation of the functions of

A. Authorization, execution, and recording.
B. Authorization, execution, and payment.
C Custody, execution, and reporting
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D. Authorization, payment, and recording.

B 5. Evidence about segregation of duties is best obtained by

A. Inspecting documents that contain the initials of who performed control activities.
B. Direct personal observation of employees who perform control activities.
C. Preparing a flowchart of who performs the duties.
D. Making inquiries of coworkers about the employee who performs the duties.

C 6. Evidence of proper approval, review, and recording of transactions is provided by a

well-documented
A. Transaction flow
B. History log
C. Audit trail
D. General ledger

A 7. Control activities constitute one of the five components of internal control. Which of
the following is not included in this internal control component?
A. An internal audit function
B. Segregation of duties
C. Performance reviews
D. Authorization

B 8. In understanding the control environment, which of the following is not explicitly

Considered?
A. Integrity and ethical values
B. Information processing
C. Assignment of authority
D. Commitment to competence

B 9. Which of the following activities would be least likely to strengthen a company's

internal control?
A. Separating accounting from other financial operations.
B. Maintaining insurance for fire and theft.
C Fixing responsibility for the performance of employee duties.
D. Carefully selecting and training employees.

C 10. Which of the following contributes most to effective internal control

A. The company routinely transacts business with related parties.
B. The company does not have a centralized human resources function
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C. The company has an effective internal audit staff that monitors controls on a
continuous basis.
D. The audit committee consists of the president, two vice-presidents and the corporate
controller.

B 11. An auditor should consider the competence of a client's employees because their
competence bears directly and importantly on the
A. Cost-benefit relationship of internal control.
B. Achievement of the objectives of internal control.
C. Comparison of recorded accountability with assets on hand,
D. Timing of the tests to be performed.

C 12. What is the correct order of the following procedures?

I. Tests of internal control procedures.
II. Preparation of a flowchart depicting the client's internal control system.
III. Substantive tests.
A. I, II, III
B. I, III, II
C. II, I, III
D. II, II, I

C 13. The sequence of steps in gathering evidence as the basis of the auditor's opinion is:
A. Substantive tests, documentation of control structure, and tests of controls.
B. Documentation of control structure, substantive tests, and tests of controls.
C. Documentation of control structure, tests of controls, and substantive tests.
D. Tests of controls, documentation of control structure, and substantive tests.

A 14. The auditor should obtain an understanding of internal control sufficient to:
A. assess control risk.
B. provide reasonable protection against client fraud and defalcations by client
employees.
C. provide a basis for suggestions to the client for improving the accounting system.
D. provide a method for safeguarding assets, checking the accuracy and reliability of
accounting data, promoting operational efficiency, and encouraging adherence to
prescribed managerial policies.

D 15. The auditor shall obtain an understanding of whether the entity has a process for
I. Identifying and estimating the significance of business risks relevant to financial
reporting objectives
II. Assessing the likelihood of occurrence of business risks
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

III. Deciding about actions to address identified and assessed risks

A. I and II
B. II and III
C. I and III
D. I, II and III

Problem 6-5

C 1. The auditor shall obtain an understanding of the information system including the
related business processes, which include the following except
A. The classes of transactions in the entity's operations that are significant to the financial
statements
B. The procedures, within both information technology (IT) and manual systems, by
which those transactions are initiated, recorded processed, corrected as necessary,
transferred to the general ledger and reported in the financial statements
C. Controls related to the company's process for training and on-boarding its production
employees
D. How the information system captures events and conditions, other than transactions,
that are significant to the financial statements

B 2. Controls that enhance the reliability of the financial statements may be classified as
preventive controls and detective controls. Which of the following is primarily a
detective control?
A. Separation of duties between recording cash receipts and depositing cash.
B. Bank accounts are reconciled monthly by persons independent of cash recording and
cash custody.
C. The human resources department authorizes the hiring of only those persons for
accounting positions that meet the written job requirements specified by the corporate
controller.
D. An accounting manual, accompanied by a detailed chart of accounts, carefully and
clearly describes each type of transaction affecting the entity.

C 3. Which of the following procedures is essential to determining whether necessary

control activities were prescribed and are being followed?
A. Developing questionnaires and checklists.
B. Evaluating the entity's procedures for risk assessment.
C. Documenting and testing controls.
D. Observing employees and making inquiries.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C 4. Flowcharting as a means of internal control evaluation provides the following

advantage over the use of questionnaires and descriptive narratives:
A. Simplicity.
B. Ease of preparation.
C. Ease in following information flow.
D. Comprehensive coverage of controls.

D 5. Which of the following is not ordinarily a procedure for documenting an auditor's

understanding of internal control for planning purposes?
A. Checklist.
B. Flowchart.
C. Questionnaire.
D. Confirmation.

A 6. An auditor's flowchart of a client's internal controls is a diagram depicting the auditor's

A. Understanding of the internal controls.
B. Program for tests of controls.
C. Documentation of having considered the internal controls.
D. Understanding of the types of irregularities that are probable.

A 7. Evaluate the following statements:

I. Walkthrough precedes test of controls
II. Walkthrough's focus is the operating effectiveness of controls
A. True, False
B. False, True
C. True, True
D. False, False

B 8. Which of the following is not done by an auditor when obtaining an

understanding of an entity's internal controls?
A. Identify the types of potential misstatements that can occur.
B. Consider the operating effectiveness of the internal controls.
C. Design substantive tests.
D. Consider factors that affect the risk of material misstatements.

B 9. Which of the following comes closest to outlining the auditors' responsibility for
considering internal control in all financial statement audits?
A. An understanding of the control environment, information and communication, risk
assessment and monitoring is necessary; an understanding of control activities is only
necessary for areas in which the auditor is performing tests of controls.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

B. The auditor must obtain an understanding of each of the five internal control
components sufficient to assess the risks of material misstatement for the audit.
C. When tests of controls have been performed, control risk must be assessed at a level
less than the maximum.
D. An understanding of the control environment is necessary, but no understanding of the
other components is necessary unless control risk is to be assessed at a level less than the
maximum.

B 10. In the consideration of internal control, the operating effectiveness of controls is

tested by:
A. Flowcharts verification,
B. Tests of controls.
C. Substantive procedures.
D. Decision tables.

C 11. Which of the following statements is correct concerning the understanding of internal
control needed by auditors?
A. The auditors must understand the information system, not the accounting system.
B. The auditors must understand monitoring and all preliminary accounting controls.
C. The auditors must have a sufficient understanding to assess the risks of material
misstatement.
D. The auditors must understand the control environment, risk assessment, and all control
activities.

B 12. On financial statement audits, it is required that the auditor's obtain an understanding
of internal control, including:
A. Its operating effectiveness.
B. Whether it has been implemented (placed in operation).
C. Performing tests of controls for all material controls.
D. Its ability to provide reasonable assurance.

A 13. After documenting the client's prescribed internal control, the auditors will often
perform a walk-through of each transaction cycle. An objective of a walk-through is to:
A. Verify that the controls have been implemented (placed in operation).
B. Replace tests of controls.
C. Evaluate the major strengths and weaknesses in the client's internal control.
D. Identify weaknesses to be communicated to management in the management letter.

B 14. The scope of substantive procedures as compared to the scope of tests of controls
generally vary:
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A. In a parallel manner.
B. Inversely.
C. Directly.
D. Equally.

C 15. After obtaining an understanding of internal control and arriving at a preliminary

assessed level of control risk, an auditor decided to perform tests of controls. The auditor
most likely decided that:
A. Additional evidence to support a reduction in the assessed level of control risk is not
available.
B. An increase in the assessed level of control risk is justified for certain financial
statement assertions. in a
C. It would be efficient to perform tests of controls that would result in reduction in
planned substantive procedures.
D. There were many internal control deficiencies that would allow misstatements to enter
the accounting system.

PROBLEM 6-6

B 1. Which of the following is least likely to be evidence of operating effectiveness of

controls?
A. Canceled supporting documents.
B. Confirmations of accounts receivable.
C. Records documenting usage of computer programs.
D. Signatures on authorization forms.

C 2. Which of the following is ordinarily considered a test of internal control procedures?

A. Send confirmation letters to banks.
B. Count and list cash on hand.
C. Examine signatures on checks.
D. Obtain or prepare reconciliations of bank accounts as of the balance sheet date.

C 3. Which of the following audit tests would be a test of controls?

A. Tests of the specific items making up the balance in a financial statement account.
B. Comparing inventory prices to vendors' invoices.
C. Comparing signatures on canceled checks to board of directors' authorizations.\
D. Tests of the additions to property, plant, and equipment by physical inspections.

A 4. Which of the following would be least likely to be regarded as a test of a control?

A. Tests of the additions to property by physical inspection.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

B. Comparisons of the signatures on cancelled checks to the authorized check signer list.
C. Tests of signatures on purchase orders.
D. Recalculation of payroll deductions.

B 5. The effectiveness of controls is not generally tested by:

A. Inspection of documents and reports.
B. Performance of analytical procedures.
C. Observation of the application of accounting policies and procedures.
D. Inquiries of appropriate client personnel.

D 6. Tests of controls do not ordinarily address:

A. By whom a control was applied.
B. How a control was applied.
C. The consistency with which a control was applied.
D. The cost effectiveness of the way a control was applied.

A 7. What is the objective of testing the operating effectiveness of controls?

A. Provide a basis for reducing the assessed level of control risk below that which
resulted from the auditor's initial understanding of internal control.
B. Reduce the risk that errors or fraud which are not prevented or detected by internal
control are not detected by the independent audit.
C. Provide assurance that transactions are recorded as necessary to permit the preparation
of the financial statements in conformity with Philippine Financial Reporting Standards.
D. Provide assurance that transactions are executed in accordance with management's
authorization and accessed to assets is limited by a segregation of functions.

B 8. In the assessment of control risk, the auditor is basically concerned that the client's
internal control provides reasonable assurance that
A. Management cannot override the system.
B. Errors and fraud have been prevented or detected.
C. Controls have not been circumvented by collusion.
D. Operational efficiency has been achieved in accordance with management plans.

D 9. An auditor already tested controls as of and for the nine months ended September 30,
2018 (client yearend is December 31, 2018). Ordinarily, the auditor would
A. Rely on controls for the period under audit
B. Undertake a substantive approach
C. Undertake a reliance approach
D. Update his/her procedures for the remaining three months
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D 10. Which is most likely when the assessed level of control risk increases?
A. Change from performing substantive procedures at year-end to an interim date.
B. Perform substantive procedures directed inside the entity rather than tests directed
toward parties outside the entity.
C. Use the maximum number of dual-purpose tests.
D. Use larger sample sizes for substantive procedures.

D 11. A client's internal control appears strong, but the CPA has elected not to perform any
tests of controls. The planned assessed level of control risk is at what level?
A. Zero
B. Low.
C. Moderate.
D. Maximum.
B 12. When tests of controls reveal that controls are operating as anticipated, it is most
likely that the assessed level of control risk will
A. Be less than the preliminary assessed level of control risk.
B. Equal the preliminary assessed level of control risk.
C. Equal the actual control risk
D. Be less than the actual control risk.

B 13. An auditor has concluded that a client's internal controls are well designed and
functioning as expected. Under these circumstances the auditor would most likely
A. Cease to perform further substantive tests.
B. Not increase the extent of planned substantive tests.
C. Increase the extent of planned analytical procedures.
D. Perform all tests of controls to the extent outlined in the audit program.

D 14. Under which circumstance is it likely that the extent of substantive procedures will be
expanded beyond that anticipated in the audit plan?
A. The auditors have determined that controls have been implemented (placed in
operation) but, in accordance with the audit plan, have performed no tests of controls.
B. Certain controls do not leave a trail of documentary evidence.
C. Deviation rates were greater than zero and approached anticipated levels.
D. The operating effectiveness of certain controls was found to be less than expected,
although no material misstatements were identified.

D 15. If the auditors do not perform tests of controls for certain assertions:
A. They have performed a substandard audit.
B. They are not required to communicate significant deficiencies relating to those
accounts to management and the board of directors.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C. They must issue a qualified opinion.

D. They must assess control risk at the maximum level for those assertions.

Problem 6-7

D 1. In a financial statement audit performed by auditors, how frequently must an auditor

test operating effectiveness of controls that appear to function as they have in past years
and on which the auditor wishes to rely upon in the current year?
A. Monthly.
B. Each audit.
C. At least every second audit.
D. At least every third audit.

B 2. Which of the following is not a responsibility that should be assigned to company's

internal audit department?
A. Evaluating internal control.
B. Approving disbursements.
C. Reporting on the effectiveness of operating segments.
D. Investigating potential merger candidates.

B 3. The independent auditors might consider the procedures performed by the internal
auditors because:
A. They are employees whose work must be reviewed during substantive testing.
B. They are employees whose work might affect the independent auditors' work
C. Their work impacts upon the cost/benefit tradeoff in evaluating inherent limitations.
D. Their degree of independence may be inferred by the nature of their work.

C 4. In assessing the objectivity of a client's internal auditors, the CPA would be most likely
to consider internal auditor:
A. Education levels.
B. Experience.
C. Organizational status within the company.
D. Training and supervisory skills.

C 5. To provide for the greatest degree of independence in performing internal auditing

functions, an internal auditor most likely should report to the:
A. Financial vice-president.
B. Corporate controller.
C. Audit committee.
D. Corporate stockholders.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A 6. In assessing the competence of a client's internal auditor, an independent auditor most

likely would consider the
A. Internal auditor's compliance with professional internal auditing standards.
B. Client's policies that limit the internal auditor's access to management salary data.
C. Evidence supporting a further reduction in the assessed level of control risk.
D. Results of ratio analysis that may identify unusual transactions and events.

A 7. If the independent auditors decide that the work performed by the internal auditors
may have a bearing on their own procedures, they should consider the internal auditors':
A. Competence and objectivity.
B. Efficiency and experience.
C. Independence and review skills.
D. Training and supervisory skills.

A 8. Which of the following must the auditor communicate to the audit committee?
A. Significant deficiencies and material weaknesses.
B. Only significant deficiencies.
C. Only material weaknesses.
D. Neither significant deficiencies nor material weaknesses.

A 9. An auditor is required to communicate significant deficiencies in internal control to

A. Audit committee of the board of directors.
B. Creditors and board of directors.
C. Board of directors and internal auditors.
D. Internal auditors and senior management.

C 10. A deficiency in internal control exists when:

I. A control is designed, implemented or operated in such a way that it is unable to
prevent, or detect and correct, misstatements in the financial statements on a timely basis
II. A control necessary to prevent, or detect and correct, misstatements in the financial
statements on a timely basis is missing
A. I only
B. Il only
C. Both I and II
D. Neither I nor II

C 11. A deficiency is a deficiency or combination of deficiencies in internal control that, in

the auditor's professional judgment, is of sufficient importance to merit the attention of
those charged with governance.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

A. Control
B. Operating
C. Significant
D. Design

D 12. A significant deficiency:

A. Differs from a material weakness in that it involves internal control over operations
rather than internal control over financial reporting.
B. Involves an amount of discovered misstatements greater than the amount used as the
planning measure of materiality.
C. Is identical to a material weakness except that it need not be communicated to those
responsible for oversight of the company's financial reporting.
D. Is less severe than a material weakness.

C 13. Which of the following matters would an auditor most likely consider a significant
deficiency to be communicated to the audit committee?
A. Management's failure to renegotiate unfavorable long-term purchase commitments
B. Recurring operating losses that may indicate going concern problems
C. Evidence of a lack of objectivity by those responsible for accounting decisions.
D. Management's current plans to reduce its ownership equity in the entity.

A 14. The auditor shall communicate in writing significant deficiencies in internal control
identified during the audit to those charged with governance on a timely basis. This
communication shall include:
I. Description
II. Potential effects
IIl. Recommendations
A. I and II
B. II and III
C. I and III
D. I, II and III

B 15. Reportable conditions are matters that come to an auditor's attention and that should
be communicated to an entity's audit committee because they represent
A. Material irregularities or illegal acts perpetrated by management.
B. Significant deficiencies in the design or operation of internal control.
C. Flagrant violations of the entity's documented conflict-of-interest policies.
D. Intentional attempts by client personnel to limit the scope of the auditor's work.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

CHAPTER 9: Consideration of Fraud, Error, and Non-compliance

Problem 9-1

TRUE 1. The intention over an underlying action is the distinguishing factor between
fraud and error.
FALSE 2. Engaging in complex transactions may create pressure on employees that may
lead to the misappropriation of assets.
FALSE 3. Rationalization of a fraudulent act occurs when an individual thinks that
internal control can be overridden through knowledge of specific weaknesses in
internal control.
FALSE 4. The primary responsibility for the prevention of fraud is given to management
while its detection rests with those charged with governance.
TRUE 5. Fraud prevention and fraud deterrence are responsibilities of the management,
with the oversight of those charged with governance.
TRUE 6. One of the objectives of the auditor regarding fraud is the identification and
assessment of risks of material misstatement arising from fraud.
FALSE 7. The risk of not detecting a material misstatement resulting from error is higher
than the risk of not detecting a material misstatement resulting from fraud.
TRUE 8. The auditor should make inquiries to management as to their assessment of the
risk that the financial statements may be materially misstated.
FALSE 9. Fraud risk factors are events or conditions that indicate the rationalization of a
fraudulent act.
TRUE 10. In assessing the risks of material misstatement due to fraud, the auditor uses
professional judgment.
FALSE 11. Well-designed internal control will prevent all fraud by top management.
TRUE 12. Overstatement of financial results can involve failure to record a transaction.
FALSE 13. The lack of effective anti-fraud programs is always considered a material
weakness.
FALSE 14. If the auditors discover illegal acts by a client, they ordinarily must
immediately resign from the engagement.
FALSE 15. An audit should be designed to provide reasonable assurance of detecting all
illegal acts.

Problem 9-2
FALSE 1. Responses to risks of material misstatement due to fraud are only assessed at
the financial statement level as fraud always has pervasive effects.
TRUE 2. In responding to management override of controls, the auditor performs tests of
journal entries, reviews accounting estimates, and understands unusual business
transactions.
FALSE 3. Written representations from management relating to their responsibility for
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

fraud would lead to less extensive audit procedures to address risks of material
misstatements arising from fraud.
TRUE 4. Exceptional circumstances that affect the continuance of the audit include
concerns over the competence and integrity of management or those charged
with governance.
TRUE 5. Normally, the appropriate level of management for communication of
suspected fraud is at least one level higher than the parties involved.
FALSE 6. When the auditor identifies fraud involving management, the auditor has a
professional duty to report such fraud to regulatory authorities.
FALSE 7. If the auditor rebuts the presumption of risk of material misstatement due to
fraud on revenue recognition, the auditor should document the reasons for such
a conclusion.
FALSE 8. One of the similarities between fraud and non-compliance is that they are both
intentional acts.
FALSE 9. The responsibility for the prevention and detection of non-compliance rests
with the shareholders of a corporation.
TRUE 10. Monitoring of compliance of employees with the Code of Conduct is one of
the ways in preventing non-compliance with laws and regulations.
TRUE 11. The responsibilities of the audit committee include the oversight financial
reporting, monitoring of accounting policies, and discussion of policies to
mitigate risks with management.
FALSE 12. An audit committee must consist of outside directors and is headed by the
company's president.
FALSE 13. Performance of annual external audits is one of the ways in which
management prevents or detects fraud or suspected fraud.
TRUE 14. When non-compliance is identified or suspected, the auditor shall discuss the
matter with management or those charged with governance.
TRUE 15. Significant related-party transactions that are not in the ordinary course of
business with unaudited entities may be considered a fraud risk factor.

Problem 9-3
C 1. Which of the following most accurately summarizes what is meant by the term
"material misstatement"?
A. Fraud and direct-effect illegal acts
B. Fraud involving senior management and material fraud
C. Material error, material fraud, and certain illegal acts
D. Material error and material illegal acts

C 2. Which of the following acts are considered fraud?

I. Changing of records and documents
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

II. Misinterpretation of facts

III. Misappropriation of assets
IV. Recording of transactions without documentation
V. Clerical mistakes

A. I and II only
B. III only
C. I, III, and IV only
D. I, II, III, IV, and V

C 3. "Error" includes
A. Engaging in complex transactions that are structured to misrepresent the financial
position or financial performance of the entity.
B. Concealing, or not disclosing, facts that could affect the amounts recorded in the
financial statements.
C. An incorrect accounting estimate arising from oversight or misinterpretation of facts.
D. Intentional misapplication of accounting policies relating to amounts, classification,
manner of presentation, or disclosure.

B 4. Which of the following statements is correct?

A. Errors in the financial statements can be ignored because they are intentional.
B. Errors in the financial statements require adjustment of the client's accounting
records.
C. Fraud requires the attention of the auditor, but errors do not.
D. Fraud has serious implications only because of its monetary effect on the financial
statements.

A 5. What is the primary determinate of the difference between fraud and errors in financial
statement reporting?
A. Intent to deceive
B. Type of transaction affected
C. Level of management involved
D. Materiality of the mistatement

B 6. Which of the following best defines fraud in a financial statement auditing context?
A. Fraud is an unintentional misstatement of the financial statements.
B. Fraud is an intentional misstatement of the financial statements.
C. Fraud is either an intentional or unintentional misstatement of the financial
statements, depending on materiality.
D. Fraud is either an intentional or unintentional misstatement of the financial
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

statements, depending on consistency.

D 7. Which of the following statements reflects an auditor's responsibility for detecting

fraud?
A. An auditor is only responsible for detecting fraudulent financial reporting.
B. An auditor is not responsible for detecting fraudulent acts involving employee
collusion.
C. The auditor should be planned to detect fraud caused by departures from generally
accepted accounting principles.
D. An auditor should design the audit to provide reasonable assurance of detecting
errors and fraud that are material to the financial statements.

A 8. Who is/are primarily responsible for the prevention, detection, correction of fraud and
error?
I. Management
II. Those Charged with Governance
III. Auditor

A. I and II
B. II and III
C. I and III
D. I, II and III

C 9. Management is responsible for:

I. Identifying and measuring fraud risks
II. Taking steps to mitigate identified risks

A. I only
B. II only
C. Both I and II
D. Neither I nor II

C 10. Which of the following parties is responsible for implementing internal controls to
minimize the likelihood of fraud?
A. External auditors
B. Audit committee members
C. Management
D. Committee of Sponsoring Organizations

D 11. Audits of financial statements are designed to obtain reasonable assurance of

REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

detecting material misstatements due to:

I. Errors
II. Misappropriation of assets
III. Fraudulent financial reporting

A. I and II
B. II and III
C. I and III
D. I, II and III

A 12. The most effective way to prevent and deter fraud is to:
A. implement programs and controls that are based on core values embraced by the
company.
B. hire highly ethical employees.
C. communicate expectations to all employees on an annual basis.
D. terminate employees who are suspected of committing fraud.

A 13. Statement 1: The auditor is not and cannot be held responsible for the prevention of
fraud and error.
Statement 2: Annual audits may be carried out which may not act as a
deterrent.

A. Only statement 1 is correct

B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

A 14. Which of the following is least likely to uncover the fraud?

A. External auditors
B. Internal auditors
C. Internal controls
D. Management

C 15. Which of the following is one of the conditions for fraud?

I. Attitudes/rationalization
II. Risk Factors
III. Opportunities

A. I and II
B. II and III
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C. I and III
D. I, II and III

Problem 9-4
B 1. In the fraud triangle, fraudulent financial reporting, and misappropriation of assets:
A. share little in common. factors.
B. share the same three conditions.
C. share most of the same risk
D. share most of the same conditions.

C 2. Individuals who commit fraud are ordinarily able to rationalize the act and also have
an:
I. Incentive or pressure
II. Connivance with a third party
III. Opportunity to commit the act

A. I and II
B. II and III
C. I and III
D. I, II and III

B 3. Which of the following is a factor that relates to incentives or pressures to commit

fraudulent financial reporting?
A. Significant accounting estimates involving subjective judgments.
B. Excessive pressure for management to meet debt repayment requirements.
C. Management's practice of making overly aggressive forecasts.
D. High turnover of accounting, internal audit, and information technology staff.

C 4. Which of the following is a factor that relates to attitudes or rationalization to commit

fraudulent financial reporting?
A. Significant accounting estimates involving subjective judgments.
B. Excessive pressure for management to meet debt repayment requirements.
C. Management's practice of making overly aggressive forecasts.
D. High turnover of accounting, internal audit, and information technology staff.

A 5. Where is the segregation of incompatible duties most related to, in with the fraud
triangle?
A. Opportunity
B. Motivation
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C. Rationalization
D. Capability

B 6. The risk of not detecting a material misstatement resulting from fraud is ______ than
the risk of not detecting one resulting from the error.
A. Lower
B. Higher
C. Equal
D. Smaller

B 7. Which of the following statements is correct?

A. It is usually easier for the auditor to uncover irregularities than errors
B. It is usually easier for the auditor to uncover errors than irregularities
C. It is usually equally difficult for the auditor to uncover errors irregularities.
D. None of the given statements is correct.

C 8. I. The risk of the auditor not detecting a material misstatement resulting from
management fraud is greater than for employee fraud
II. An auditor conducting an audit in accordance with PSAs is responsible for obtaining
reasonable assurance that the financial statements taken as a whole are free from
material misstatement, whether caused by fraud or error.

A. True, False
B. False, True
C. True, True
D. False, False

C 9. Evaluate the following statements:

I. Assign and supervise personnel taking account of the knowledge, skill and ability of
the individuals to be given significant engagement responsibilities
II. Undertake more effective and more extensive procedures during year end testing.

A. Both are general responses

B. Both are assertion level responses
C. I is a general-level response while II is an assertion-level response
D. I is an assertion-level response while II is an assertion level response

D 10. The auditor's best defense when existing material misstatements in the financial
statements are not uncovered in the audit is:
A. the audit was conducted in accordance with generally accepted accounting
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

principles.
B. the financial statements are the client's responsibility.
C. the client is guilty of contributory negligence.
D. the client is guilty of fraudulent misrepresentation.

C 11. Auditing standards make distinction(s) between the auditor's responsibilities for
searching for errors and fraud.
A. Little
B. A significant
C. no
D. various

B 12. Which of the following statements is accurate about "fraud risk factors" considered
when conducting an audit?
A. Factors whose presence indicates that fraud exists.
B. Factors whose presence often has been observed in circumstances
where frauds have occurred.
C. Factors whose presence will require modification to planned audit procedures.
D. Factors obtained during the audit that led to required communications with the
audit committee.

D 13. Which of the following factors most likely would heighten an auditor's concern about
the risk of fraudulent financial reporting?
A. Large amounts of liquid assets that are easily convertible into cash.
B. Low growth and profitability as compared to other entity's in the same industry.
C. Financial management's participation in the initial selection of accounting
principles.
D. An overly complex organizational structure involving unusual lines of authority.

B 14. With respect to fraudulent financial reporting, most frauds involve:

I. Inventory or liquid asset theft
II. Intentional misstatements of amounts

A. I only
B. II only
C. Both I and II
D. Neither I nor II

D 15. Fraudulent financial reporting may be accomplished through the manipulation of:
I. assets.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

II. revenues.
III. liabilities.

A. I and II
B. II and III
C. I and III
D. I, II and III

Problem 9-5
C 1. Who is most likely to perpetrate fraudulent financial reporting?
A. The internal auditors
B. Production employees
C. Management of the company
D. Members of the board of directors

B 2. It involves deliberate actions taken by management to meet earnings objectives.

A. Expenditure management
B. Earnings management
C. Top-line management
D. Management-by-objective

C 3. It is a form of earnings management in which revenues and expenses are shifted

between periods to reduce fluctuations in earnings.
A. Fraudulent financial reporting
B. Expense smoothing
C. Income smoothing
D. Misappropriation of assets

C 4. Which of the following is not a factor that relates to opportunities to commit fraudulent
financial reporting?
A. Lack of controls related to the calculation and approval of accounting estimates.
B. Ineffective oversight of financial reporting by the board of directors.
C. Management's practice of making overly aggressive forecasts.
D. High turnover of accounting, internal audit, and information technology staff.

B 5. The most common technique used by management to misstate financial information is:
A. overstatement of expenses.
B. improper revenue recognition.
C. understatement of liabilities.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D. understatement of assets.

A 6. Which of the following would heighten an auditor's concern about the risk of
fraudulent financial reporting?
A. Inability to generate positive cash flows from operations, while reporting large
increases in earnings.
B. Management's lack of interest in increasing the dividend paid on common stock.
C. Large amounts of liquid assets that are easily convertible into cash.
D. Inability to borrow necessary capital without obtaining waivers on debt covenants.

A 7. Which of the following is an example of fraudulent financial reporting?

A. Company management falsifies inventory count tags thereby overstating ending
inventory and understating the cost of goods sold.
B. An employee diverts customer payments to his personal use, concealing his actions
by debiting an expense account, thus overstating expenses.
C. An employee steals inventory and the "shrinkage" is recorded in the cost of goods
sold.
D. An employee "borrows" tools from the company and neglects to return them; the
cost is reported as a miscellaneous operating expense.

B 8. Which of the following is most likely to be considered a risk factor relating to

fraudulent financial reporting?
A. Low turnover of senior management.
B. Extreme degree of competition within the industry.
C. Capital structure including various operating subsidiaries.
D. Sales goals in excess of any of the preceding three years.

D 9. Which of the following circumstances would an auditor most likely consider a risk
factor relating to misstatements arising from fraudulent financial reporting?
A. Several members of management have recently purchased additional
shares of the entity's stock.
B. Several members of the board of directors have recently sold shares of the entity's
stock.
C. The entity distributes financial forecasts to financial analysts that predict
conservative operating results.
D. Management is interested in maintaining the entity's earnings trend by using
aggressive accounting practices.

C 10. A type of fraud that involves the theft of an entity's assets.

A. Fraudulent financial reporting
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

B. A "cookie jar" reserve

C. Misappropriation of assets
D. Income smoothing

B 11. Misappropriation of assets is normally perpetrated by:

A. members of the board of directors.
B. employees at lower levels of the organization.
C. management of the company.
D. the internal auditors.

C 12. Which of the following conditions identified during the audit increases the risk of
employee fraud?
A. Large amounts of cash in the bank.
B. Existence of a mandatory vacation policy for employees performing functions.
C. Inventory items of small size, but high value.
D. Presence of reconciling items on a client prepared year-end proof of cash.

B 13. Which of the following is the most common type of fraudulent financial reporting?
A. Deferring service revenue until it's delivered to customers.
B. Including as sales inventory sold with the right of return.
C. Excluding a contingent liability that has been settled.
D. Capitalizing major overhauls to operating equipment.

C 14. When comparing the auditor's responsibility for detecting employee fraud and for
detecting errors, the profession has placed the responsibility:
A. more on discovering errors than employee fraud.
B. more on discovering employee fraud than errors.
C. equally on discovering either one.
D. on the senior auditor for detecting errors and on the manager for detecting
employee fraud.

D 15. Which of the following best represents an example of fraud utilizing the lapping
technique?
A. An employee transfers cash on the last day of the year in order to double record it
in the bank accounts.
B. An employee creates a fictional vendor and requests payment to a personal address.
C. An employee opens the mail to cover up payroll fraud received on a fictional
person.
D. An employee covers up the stealing of receipts by posting to the wrong customer
accounts.
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

Problem 9-6
C 1. When conducting an audit, errors that arouse suspicion of fraud should be given
greater attention than other errors. This is an example of applying the criterion of
A. Reliability of evidence
B. Materiality
C. Risk
D. Dual-purpose testing

B 2. Well-designed internal control that is functioning effectively is most likely to detect a

fraud arising from:
A. The fraudulent action of several employees.
B. The fraudulent action of an individual employee.
C. Informal deviations from the official organization chart.
D. Management fraud.

B 3. Which of the following most accurately defines professional skepticism as it is used in

auditing standards?
A. It either assumes management is honest or slightly dishonest, but neither all the
time.
B. It neither assumes that management is dishonest nor assumes unquestioned honesty
C. It assumes management is honest most of the time.
D. It assumes that management is dishonest in only rare instances.

B 4. After fraud risks are identified and documented, the auditor should evaluate factors
that fraud risk before developing an appropriate response to the risk of fraud.
A. Enhance
B. Reduce
C. increase
D. increase or decrease

A 5. Auditors may identify conditions during fieldwork that change or support a judgment
about the initial assessment of fraud risks. Which of the following is not a condition
which should alert an auditor that the initial assessment should be changed?
A. The auditor's lack of independence
B. Discrepancies in the accounting records
C. Unusual relationships between the auditor and management
D. Missing or conflicting evidence
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

C 6. When the auditor's regular examination leading to an opinion on the financial

statement discloses specific circumstances that make him suspect that fraud may exist
and he concludes that the results of such fraud, if any, could not be so material as to
affect his opinion, he should
A. Make a note in his working papers of the possibility of fraud immaterial amount to
pursue the matter next year.
B. Reach an understanding with the client as to whether the aud the client, subject to
auditor's review, is to make the investig necessary to determine whether fraud has
occurred and, if so, amount thereof.
C. Refer the matter to the appropriate representatives of the clients with the
recommendations that are to be pursued to a conclusion.
D. Immediately extends his audit procedures to determine if fraud has occurred and, if
so, the amount thereof.

D 7. When an independent auditor's examination of financial statements discloses special

circumstances that make the auditor suspect that material errors and irregularities may
exist, the auditor's initial course of action. should be to
A. Recommend that the client pursue the suspected fraud to a conclusion that is
agreeable to the auditor.
B. Extend normal audit procedures in an attempt to detect the full extent of the
suspected fraud.
C. Reach an understanding with the proper client representative as to whether the
auditor or client is to make the investigation necessary to determine if fraud has in
fact occurred.
D. Decide whether the fraud, if in fact, it should exist, might be of such a magnitude as
to affect the auditor's report on the financial statements.

C 8. When the auditor suspects that fraud may be present, PSA requires the auditor to:
A. terminate the engagement with sufficient notice given to the client.
B. issue an adverse opinion or a disclaimer of opinion.
C. obtain additional evidence to determine whether material fraud has occurred.
D. re-issue the engagement letter.

B 9. PSA requires auditors to document which of the following matters related to the
auditor's consideration of material misstatements due to fraud?
A. Reasons supporting a conclusion that there is not a significant risk of material
improper expense recognition.
B. Procedures performed to obtain information necessary to identify and assess the
risks of material fraud.
C. Results of the internal auditor's procedures performed to address the risk of
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

management override of controls.

D. Discussions with management regarding separation of duties.

B 10. Which of the following is correct concerning the required documentation in the
working papers of the performance of the assessment of the risk of material
misstatements due to fraud?
A. All risk factors considered should be documented and the response to each
documented.
B. Those risk factors identified and the auditor's response to them should be
documented.
C. The major categories of risk factors must be identified, but the particular responses
to risk factors identified need not be documented.
D. No specific documentation is required.

D 11. Which of the following is most likely to be an overall response to fraud risks
identified in an audit?
A. Only use certified public accountants on the engagement.
B. Place increased emphasis on the audit of objective transactions rather than
subjective transactions.
C. Supervise members of the audit team less closely and rely more upon judgment.
D. Use less predictable audit procedures.

C 12. Which of the following is not a required source of information for the auditors'
assessment of fraud risk?
A. Discussion among audit team members.
B. Fraud risk factors.
C. Results of tests of controls.
D. Inquiry of management and others.

A 13. Which of the following is least likely to be included in an auditor's inquiry of

management while obtaining information to identify the risks of material misstatement
due to fraud?
A. Are all financial reporting operations at one location?
B. Does it have knowledge of fraud or suspect fraud?
C. Does it have programs to mitigate fraud risks?
D. Has it reported to the audit committee the nature of the company's internal control?

B 14. Auditors must assess fraud risk on every audit and respond to the risks that are
identified. Which of the following is not a procedure required to further address the
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

fraud risk of management override of internal control?

A. Reviewing accounting estimates for biases.
B. Examining physical controls over assets.
C. Evaluating the business rationale for significant unusual transactions.
D. Examining journal entries and other adjustments for evidence of fraud.

A 15. Which of the following is correct concerning requirements about auditor

communications about fraud?
A. Fraud that involves senior management should be reported directly to the audit
committee regardless of the amount involved.
B. All fraud with a material effect on the financial statements should be reported
directly by the auditor to the Securities and Exchange Commission.
C. Fraud with a material effect on the financial statements should ordinarily be
disclosed by the auditor through the use of an "emphasis of a matter" paragraph
added to the audit report.
D. The auditor has no responsibility to disclose fraud outside the entity under any
circumstances.

Problem 9-7
A 1. Who is responsible for ensuring that the entity's operations are conducted in
accordance with the provisions of laws and regulations, including compliance with the
provisions of laws and regulations that determine the reported amounts and disclosures
in an entity's financial statements?
I. Management
II. Those Charged with Governance
III. Auditor

A. I and II
B. II and III
C. I and III
D. I, II and III

B 2. Non-compliance is defined as
A. Acts of omission or commission by the entity, that are intentional, which are
contrary to the prevailing laws or regulations
B. Acts of omission or commission by the entity, either intentional or unintentional,
which are contrary to the prevailing laws or regulations
C. Acts of omission or commission by the entity, either intentional or unintentional,
which are contrary to the prevailing laws or regulations including personal
misconduct of those charged with governance, management, or employees
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

D. Acts of omission or commission by the entity, either intentional or unintentional,

which are contrary to the prevailing laws or regulations including personal
misconduct of those charged with governance, management but not employees

C 3. A violation of laws or governmental regulations by the audited entity or its

management or employees acting on behalf of the entity is called
A. An error
B. Fraud
C. An illegal act
D. Fraudulent financial reporting

A 4. Which of the following statements is/are correct?

I. The auditor is responsible for obtaining reasonable assurance that the financial
statements, taken as a whole, are free from misstatement, whether caused by fraud
or error
II. It is the responsibility of those charged with governance, with the oversight of
management, to ensure that the entity's operations are conducted in accordance with
the provisions of laws and regulations
III. Non-compliance with laws and regulations may result in fines, litigation, or other
consequences that may have a material effect on the financial statement

A. Only one statement is true

B. Only two statements are true
C. All statements are true
D. None of the statements are true

D 5. The auditor should obtain sufficient and appropriate evidence of compliance with laws
and regulations:
A. That has a direct or indirect effect on material or immaterial amounts on the
financial statements
B. That has a direct effect on material or immaterial amounts on the financial
statements
C. That has an indirect effect on material amounts on the financial statements
D. That has a direct effect on material amounts on the financial statements

B 6. If the auditor becomes aware of information concerning instances of non- compliance

or suspected non-compliance, the auditor shall
A. Report the matter to relevant licensing or regulatory authorities
B. Obtain an understanding of its nature and further information on the effects
C. Extrapolate the financial effect of the noted non-compliance to the whole audit
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

population
D. Obtain evidence regarding the effectiveness of controls over noncompliance with
laws and regulations

C 7. If specific information comes to an auditor's attention that implies non- compliance

with laws that could result in a material, but indirect effect on the financial statements,
the auditor should next
A. Discuss the evidence with the client's audit committee or others with equivalent
authority and responsibility.
B. Seek the advice of an informed expert qualified to practice law as to possible
contingent liabilities.
C. Apply audit procedures specifically directed to ascertaining whether
non-compliance has occurred.
D. Report the matter to an appropriate level of management at least one level above
those involved.

C 8. Which of the following are procedures of the auditor related to other laws and
regulations that may have a material effect on the financial statements:
I. Inquiring of management and, where appropriate, those charged with governance, as
to whether the entity is in compliance with such laws and regulations
II. Inspecting correspondence, if any, with the relevant licensing or regulatory
authorities

A. I only
B. II only
C. Both I and II
D. Neither I nor II

C 9. When a possible non-compliance is identified, the auditor would:

I. Understand the nature of the act and the circumstances in which it has occurred
II. Obtain further information to evaluate the possible effect on the financial
statements

A. I only
B. II only
C. Both I and II
D. Neither I nor II

C 10. When the auditor believes that some of those charged with governance are involved
in the non-compliance, what should s/he do?
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

I. Inform the audit committee and supervisory board, if any,

II. Seek legal advice

A. I only
B. II only
C. Both I and II
D. Neither I nor II

A 11. Which of the following statements is correct with respect to the auditor's
responsibilities relative to the detection of indirect-effect illegal acts?
A. The auditor has no responsibility for searching for indirect-effect illegal acts.
B. The auditor has the same responsibility for searching for indirect-effect illegal acts
as any other potential misstatement that may occur.
C. Auditors have responsibility for searching for any illegal activity, whether
direct-effect or indirect-effect.
D. Discovery of indirect-effect illegal acts is usually easier than the discovery of
fraud.

D 12. When planning the audit, if the auditor has no reason to believe that illegal acts exist,
the auditor should:
A. Include audit procedures that have a strong probability of detecting illegal acts.
B. still includes some audit procedures designed specifically to uncover illegalities.
C. ignore the issue.
D. make inquiries of management regarding their policies for detecting and
preventing illegal acts and regarding their knowledge of violations, and then relies
on normal audit procedures to detect errors, irregularities, and illegalities.

D 13. An auditor concludes that a client has committed an illegal act that has not been
properly accounted for or disclosed. The auditor should withdraw from the
engagement if
A. Auditor is precluded from obtaining sufficient competent evidence about the
illegal act.
B. Illegal act has an effect on the financial statements that are both material and
direct.
C. Auditor cannot reasonably estimate the effect of the illegal act on the financial
statements
D. Client refuses to accept the auditor's report as modified for the illegal act.

C 14. If the auditor concludes that the non-compliance has a material effect on the financial
statements, and has not been adequately reflected in the financial statements, the
REVIEWER IN AUDITING AND ASSURANCE PRINCIPLES

auditor shall express

A Unmodified opinion
B. Adverse opinion
C. Qualified or adverse opinion
D. Qualified or disclaimer of opinion

A 15. If an auditor uncovers an illegal act at a public company, the auditor must notify:
I. local law enforcement officials.
II. the audit committee.
III. the Securities and Exchange Commission.

A. I and II
B. II and III
C. I and III
D. I, II and III