QE: AUDITING

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1
For questions 1-5:

How much is the net loss on disposal of trucks in 2017?

(1 Point)

P510,000

P430,000
P590,000

P230,000
2
What is the loss trade-in of truck 1?
(1 Point)

P410,000

P290,000

P250,000

P150,000
3
What is the adjusted balance of the Delivery Equipment account as of December
31, 2018?
(1 Point)

P4,170,000

P2,650,000

P3,170,000

P3,370,000
4
The 2018 depreciation expense is understated by::
(1 Point)

P372,000

P352,000
P92,000

P292,000
5
Which of the following procedures would least likely lead the auditor to detect
unrecorded fixed asset disposals?
(1 Point)

Examine insurance policies

Review repairs and maintenance expense

Review property tax files

Scan invoices for fixed asset additions

6
Questions 6-10:

Q6. Payment for merchandise purchases in 2018

(1 Point)
P2,586,000

P2,436,000

P2,646,000

P3,246,000
7
Q7. Collections from sales in 2018
(1 Point)
P3,720,000

P4,320,000

P3,000,000

P4,920,000
8
Q8. Net income for the year ended December 31, 2018:
(1 Point)

P1,770,000

P1,620,000

P1,560,000

P960,000
9
Q9. Shareholders’ equity as of December 31, 2018
(1 Point)

P9,390,000

P9,240,000

P9,180,000

P8,580,000
10
Q10. 1. Total assets as of December 31,2018
(1 Point)

P9,583,200
P9,540,000

P9,390,000

P9,450,000
11
You were asked by something corporation to audit its financial statements for the
years ended December 31, 2017 and [Link] reviewing the entity’s record for
2017 and 2018, You discovered that no adjustments have yet been made for the
items listed below.
Item No. 1
Insurance premiums of 300,000 for three year period beginning January 1 2017
had been paid in fully expensed in 2017.
Item No. 2
The merchandise inventories at the end of2017 and 2018 did not include
merchandise that was then in transit and to which the company had title. These
shipments of 50,000 and 30,000 were recorded as purchases in January 2018
and 2019, respectively.
Item No. 3
Rental of 60,000 on an equipment, Applicable for six months, what's received
on November 12017. The entire amount was reported as income upon receipt.
Item No. 4
The entity purchased a machine on January 2,2017, at a cost of 120,000. An
additional 50,000 was spent for installation, but this amount was charged
erroneously the repairs expense. the machine has a useful life of five years and
a residual amount of 20,000.
Item No. 5
The entity received 360,000 from a customer at the beginning of 2017 for
services that it is to perform evenly over a 3-yearperiod beginning in 2017. None
of the amount received was reported as unearned revenue at the end of 2017.
Based on the above and the result of your audit, answer the following:

In relation to Item No. 1, Which of the following is correct?

(1 Point)

The 2017 profit is overstated

The 2018 profit is overstated

The December 31 2017 retailed earnings is correctly stated.

The December 31 2018 retailed earnings is correctly stated.

12
In the relation to Item No. 2, Which of the following is incorrect?
(1 Point)

The 2017 profit is understated.

The 2018 profit is correctly stated

December 31 2017 retained earnings is correctly stated

December 31 2018 retained earnings is correctly stated.

13
In relation to Item No. 3, which of the following is correct?
(1 Point)

The 2017 profit is overstated by P60,000.

The 2018 profit is understated by P60,000

The 2018 profit is understated by P40,000

December 31 2017 retained earnings is correctly stated.

14
In relation to Item No. 5, Which of the following is incorrect?
(1 Point)

The 2017 profit is overstated by P240,000

The 2018 profit is understated by P120,000

The December 31 2017 retained earnings is overstated by 240,000

The December 31 2018 retained earnings is correctly stated

15
In relation to Item No. 4, Which of the following is correct?
(1 Point)

Retained earnings, at December 31, 2018, was Understated by P30,000 and 2018 income was
overstated by P6,000.

Retained earnings at December 31, 2018, was understated by P38,000 and 2018 income was
overstated by P6,000.

Retained earnings at December 31, 2018, was understated by P30,000 and 2018 income was
overstated by P10,000.

2017 income was understated by P50,000

16
c
Based on the above and the result of your audit, determine the following:
31. Number of units sold during 2018
(1 Point)

P18,900

18,400

8,268
8,768
17
Accounts payable balance at December 31 2018
(1 Point)

400,000

380,200

150,000

383,500
18
Inventory amount at December 31, 2018
(1 Point)

385,900

1,055,183

352,500

1,022,483
19
Which of the following audit procedures would provide the least reliable evidence
that the client has legal title to inventories?
(1 Point)

confirmation of inventories at locations outside the client's facilities.

Observation of physical inventory counts.

Examination of paid vendors’ invoices

Analytical review of inventory balances compared to purchasing and sales activities
20
An auditor generally tests physicalsecurity controls over inventory by
(1 Point)

Test counts and cut off procedures

Examination and reconciliation

Inquiry and observation

Inspection and recomputation

21

Question 21-25

Share Capital is ____________________

(1 Point)
21,400,000

21,300,000

14,800,000

21,250,000
22
Share premium is
(1 Point)
4,627,500

3,007,500

4,632,500

4,592,500
23
Total retained earning is ____________
(1 Point)

600,000

565,000

557,000

560,000
24
Total equity is
(1 Point)

26,397,500

25,932,500

26,492,500

25,445,000
25
An auditor usually obtains evidence of shareholders’ equity transactions by
reviewing the entity’s
(1 Point)
a. Cancelled stock certificates

b. Transfer agent’s record

c. Treasury stock certificate book.

d. Minutes of board of directors meetings.

26
On January 1, 2009,WIZARDS CORPORATION issued 2,000 of its 5-year,
P1,000 face value 11% bonds date January 1 at an effective annual interest rate
(yield) of 9%. Interest is payable each December 31. Wizards uses the effective
interest method of amortization. On December 31, 2010. The 2,000 bonds were
extinguished early through acquisition on the Open Market by Wizard for
P1,980,000 plus accrued interest. On July 1, 2009,Wizards issued 5,000 of its
P1,000 face value, 10% convertible bonds at pat. Interest is payable every June
30 and December 31. On the date of issue, the prevailing market interest rate for
similar debt without the conversion option is 12%. On July 1, 2010, an investor in
Wizards convertible bonds tendered 1,500 bonds for conversion into 15,000
shares of Wizards common stock, which had a fair value of P105 and a par value
of P1 atthe date of conversion.

Based on the above and the result of your audit,determine the

following: (Round off present value factors to four decimalplaces.)

The issue price on the 2,000 5-year, P1,000 face value bonds in January 1, 2009
is
(1 Point)

2,155,500

2,000,000

1,844,500
2,147,800
27
The carrying value of the 2,000 5-year, P1,000 face value bonds on December
31, 2009 is
(1 Point)

1,898,400

2,129,500

2,000,000

2,121,100
28
The gain on early retirement of bonds on December 31, 2010 is
(1 Point)

20,000

112,000

121,200

0
29
The carrying value of the 5,000 6 year, P1,000 face value bonds on December
31, 2009 is
(1 Point)

4,605,800

5,000,000

4,732,875
4,615,400
30
Theconversion of the 1,500 6-years, P1,000 face value bonds on July 1, 2010
will increase APIC by
(1 Point)

1,485,000

1,374,000

1,415,054

1,377,697
31
Carrying value of bonds payable at December 31, 2010 is __________________

(1 Point)

831,110
800,000

1,151,583

921,266
32
Loss on bond redepmtion is ________________
(1 Point)

4,683

19,683

15,000

34,683
33
Accrued interest on bonds at December 31, 2010 _____________
(1 Point)

75,000

135,000

60,000

52,500
34
Bond Interest Expense for the year ended December 31, 2010
(1 Point)

150,000

1,398,174
69,745

160,826
35
Q35-37.

Compute the adjusted deposit in transit as of December31, 2008.

(1 Point)

157,725

112,725

202,725
112,500
36
Compute the adjusted outstanding checks as of December 31, 2008.
(1 Point)

222,075

235,350

255,564

175,311
37
Compute the adjusted cash to be presented in the balance sheet as at Dec. 31,
2008.
(1 Point)

211,914

225,414

238,914

279,414
38

Q38-39

Some of the information you gathered in the auditof the financial statement of
CYNDY CORP. are:
1. Thepresident is to receive a bonus consisting of a basic amount
equivalent to 5%of the company’s net income before deduction of bonus but after
deduction ofcorporate income tax.
2. Inaddition, the basic bonus will be increased by the company’s tax
savingsbecause the total amount of bonus is deductible in computing the
company’staxable income. The tax savings is thedifference between the income
tax the company would have paid if there were nobonus and the taxes the
company must pay after deducting the bonus.
3. CYNDYCORPORATION reported a net income of P280,000 in 2007
before deduction of thepresident’s bonus and the corporate income tax.
4. Thecompany is subject to a corporate income tax of 35% of its net
income afterdeducting the president’s bonus.

Computefor the total amount of bonus the president should receive in 2007:
(1 Point)

9,100

9,352

14,387

14,136
39
Compute for the net profit for 2007 after deducting the president’s bonus and the
corporate income tax.
(1 Point)

172,649

170,886

170,798

172,900
40
40-41

CONCORD CO. purchased real property for P3,225,000which included P67,500

for realty tax arrears for prior years. A mortgage of P1,500,000 was assumed
byCONCORD CO. on the purchase. Twentypercent of the purchase price should
be allocated to the land and the balanceto the building.

In order to make the building suitable for the useof CONCORD CO., remodeling
costs had to be incurred in the amount ofP337,500. This however necessitated
thedemolition of a portion of the building, which resulted in recovery of
salvagematerial sold for P11,250 cash.

Landscaping and parking lot cost thecompany a total of P120,000 while repairs in
the main hall were P16,875.

The cost of the land __________________

(1 Point)

631,500

645,000

765,000

945,000
41
The cost of the building was________________
(1 Point)

2,467,500

2,923,125

2,906,250
4,123,125
42
On July 01, 2007, one of FLOYD INC.'S delivery trucks was destroyed in an
accident. On that date, the truck's book value was P900,000. On July 15, 2007,
FLOYD INC. received and recorded a P42,000 invoice for a new engine installed
in the truck in May 2007 and another P6,000 invoice for various repairs.

What amount should FLOYD INC. use to determine the gain or loss on disposal
of the truck?
(1 Point)

900,000

942,000

948,000

936,000
43
BRAND CO. reported P9,000 of net income for 2007. The correct net income
however was P11,000. It was determined that the ending inventory was
overstated by P1,000.
The only other error was with the beginning inventory which must have been:
(1 Point)

Understated by P1,000

Overstated by P1,000

Understated by P3,000

Overstated by P3,000no
44
On December 30, 2007, SWIFT CO. shipped to a customer merchandise with
selling price of P37,500; terms net 30, FOB Shipping Point. The sale which is
125% of cost was recorded in January 2007 when the check was received from
the customer. Ending inventory was determined by physical count on December
31, 2007.
As a result of the above transactions, SWIFT CO.’s cost of goods sold for the
year ended December 31, 2007 was:
(1 Point)

Understated by P3,000

Overstated by P37,500

Overstated by P30,000

Correctly stated45
PRIME Co. received from a customer a one year,P500,000 note bearing annual
interest of 8%. After holding the note for six months, PRIME discounted the note
atAsian Bank at an effective interest rate of 10%.
At the date of discounting, PRIME should recognize
(1 Point)

P 40,000 interest revenue

P13,000 interest revenue

P23,810 interest revenue

P 4,762 interest expense

46
Information pertaining to Trace Company for themonth of August appears below:
Balance per bank statement P 310,000
Balance per books 187,500
Deposit in transit 70,000
Service charges 2,500
Note collected by bank 75,000
Outstanding checks ?

An analysis of the cancelled checks returned withthe bank statement reveals the
following:
a. Checkfor the purchase of merchandise was drawn for P155,000 but was
recorded as P150,000.
b. Themanagement wrote a check for traveling expenses of P25,000 while
out oftown. The check was not recorded.
What is the amount of outstanding checks on August31, 2006?
(1 Point)

150,000

140,000

125,000

230,000
47
The inventory on hand on December 31, 2006 ofLEISA CORP. is valued at a
cost of P300,000. The following items were not included in the inventory:
a. Purchasedgoods in transit shipped FOB Destination, with price of P30,000
which includedfreight charge of P5,000.
b. Goodsheld on consignment by LEISA CORP. at a sales price of P10,000,
excluding a 20%commission on the sales price. Freightpaid by LEISA CORP.
was P1,000.
c. Goodssold in transit FOB Destination with invoice price of P49,000 which
includedfreight charge of P4,000 to deliver the goods.
d. Purchasedgoods in transit FOB Shipping Point with invoice price of P60,000.
Freight costs amount to P6,000.
Goods out on consignment with sales priceof P30,000. Shipping costs
amounts toP3,000.
What is the correct inventory on December 31, 2006assuming LEISA’s selling
price is 150% of costs?
(1 Point)

419,000

416,000

410,000

17,500
48
On July 1, 2007, Marcus Company purchased 4,000 of the P1,000 face amount ,
8% bonds of Olay Corporation for P3,692,000 to yield 10% per annum. The
bonds which mature on July 1, 2010, pay interest semiannually on January 1 and
July 1. Marcus Company classifies the securities as held to maturity.

What is the investment carrying value at December 31, 2007?

(1 Point)

3,975,400

3,741,200

3,716,600

3,667,400
49
The following data are taken from theshareholders’ equity section of the balance
sheet of FLOOD CORP.
12.31.06 12.41.07
Ordinary shares (P100 par value) 625,000 637,500
Share premium in excess of par 312,500 362,500
Retained earnings 625,000 653,750
During 2007, the company declared and paid cash dividend of P93,750 and also
declared and issued a stock dividend. There were no other changes in stock
issued and outstanding during 2007.
Net income for 2006 is:
(1 Point)

28,750

122,500

135,000

185,000
50
In analyzing the shareholders’ equity section of the PEARSON CORP. The
following information was abstracted from the accounts at December 31, 2007:

Total income since incorporation P 7,875,000

Total cash dividends paid 2,437,500
Proceeds from sale of donated stock 843,750
Total value of stock dividends distributed 562,500
Excess of proceeds over cost of treasury stock sold 131,250

What should be the balance of the Retained earnings account as of December

31, 2007?
(1 Point)

4,875,000

6,218,750

7,031,250

10,031,250
51
While performing services for their clients, professionals have a duty to provide a
level of care which is
(1 Point)

Free from judgment errors

Greater than average

Reasonable

Superior
52
“Absence of reasonable care that can beexpected of a person in a set of
circumstances” is the definition of
(1 Point)

Constructive fraud

Fraud

Gross negligence

Ordinary negligence
53
The main purpose of implementing quality control policies and procedures is:
(1 Point)

To have a favorable peer review.

To comply with regulatory agency.

To standardize the policies and procedures of the audit firms.

To provide reasonable assurance that audit will be conducted in accordance with PSA.
 54
A firm should establish and maintain a system of quality control to provide it with
reasonable assurance that:
I. The firm and its personnel comply with professional standards and applicable
legal and regulatory requirements.
II. Reports issued by the firm or engagement partners are appropriate in the
circumstances.
(1 Point)

I only

II only l

both I and II

neither I nor II
55
. Which of the following quality controlobjectives would be least important to the
auditor?
(1 Point)

Determination of audit fee

Hiring personnel

Professional advancement

Review and supervision

56
In financial statement audits , the audit process should conform with
(1 Point)

The audit program

The auditor’s judgment

Philippine Standards on Auditing

Philippine Financial Reporting Standards

57
An audit of financial statements is conducted todetermine whether the
(1 Point)

Organization is operating efficiently and effectively

Entity is following specific procedures or rules set down by some higher authority

Members of the management team are fulfilling their fiduciary responsibilities to shareholders.

None of the above

58
The essence of financial statement audit is to
(1 Point)

Detect fraud

Determine whether the client’s financial statements are fairly stated

Assure the consistent application of correct accounting procedures

Examine individual transactions so that the auditor may certify as to their validity
59
The objective of an audit of financial statementis ...
(1 Point)

To enable the auditor to express an assurance that there is unassailed credibility of financial
statements.
To enable the auditor to express an opinion whether the financial statements are prepared, in
all material respects, in accordance with generally accepted auditing standards.

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.

To enable the auditor to state whether on the basis of procedures, 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 reporting framework.
60
The objective of an audit of financialstatements is
(1 Point)

To assist an entity in the preparation of financial statements.

To guarantee that all material misstatements in the financial statements are detected.

To express an opinion whether the financial statements are prepared, in all material respects, in
accordance with an identified financial reporting framework.

To enable auditor to state whether, on the basis of the procedures performed, 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 reporting
framework.n 4
61
Preliminary arrangements agreed to by the auditor and the client should be
reduced to writing by the auditor . The best place to set forth these arrangements
is in
(1 Point)

An engagement letter

A client representation letter

A confirmation letter attached to the constructive services letter

A memorandum to be placed in the permanent section of the auditing working papers.

 62
The purpose of an engagement letter is to
(1 Point)

Document the terms of engagement to writing in order to minimize understandings

Document the CPA firm’s responsibility to external users of the audited financial statements

Notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated

All of the above

63
Which of the following is not one of theprincipal contents of an engagement letter
?
(1 Point)

Limitations of the engagement

Objectives of the financial statements

Unrestricted access to records and documents

Management‘s responsibility for the financial statements

64
The auditor would most likely withdraw from the engagement if
(1 Point)

There are multiple uncertainties affecting the financial statements

The auditor discovers material misstatement in the client‘s financial statement

There is substantial doubt about entity’s ability to continue as a going concern

The auditor is unable to agree to a change of the engagement and is not permitted to continue
the original engagement
65
An extensive understanding of theclient‘s business and industry and knowledge
about the company‘s operations areessential for doing an adequate [Link] a
new client ,most of thisinformation is obtained.
(1 Point)

At the client‘s premises

From the permanent file

From the predecessor auditor

From the Securities and Exchange Commission

66
The audit risk model is useful
(1 Point)

While doing test of controls.

In planning an audit engagement

To determine the type of opinion to express.

To evaluate the evidence which has been gathered

67
A CPA is conducting the first examination of aclient‘s financial statements . The
CPA hopes to reduce the audit work byconsulting with the predecessor auditor
and reviewing the predecessor‘s [Link] procedure is
(1 Point)

required if CPA is to render an unqualified opinion.

acceptable if the client and the predecessor auditor agree to it.

acceptable if the CPA refers in the audit report to reliance upon the predecessor auditor‘s work.

unacceptable because the CPA should bring an independent viewpoint to a new engagement
68
Each of the following procedures requires theassistance of an expert except
(1 Point)

interpreting major contracts

determining the value of works of art

determining the physical condition or quantity of underground mineral

determining the adequacy of disclosure in the notes to the financial statements

69
Material misstatements may emanate from all ofthe following except
(1 Point)

Fraud

Errors

Limitations of the audit

Non-compliance with laws and regulations (all are false) kindly ask if tama ang choices hihihi
70
The term “error” refers to unintentionalmisrepresentation of financial
[Link] of errors are when
I．assets have beenmisappropriated
II．transactions withoutsubstance have been recorded
III．records and documents havebeen manipulated and falsified
IV．theeffects of the transactions have been omitted from the records
(1 Point)

Only statements I and III are true

Only statements II and IV are true

All of the above statements are true

All of the above statements are true

71
Which of the following statements most appropriately defines fraud in a financial
statement auditing context?
(1 Point)

Fraud is an intentional misstatement of the financial statements.

Fraud is an unintentional misstatement of the financial statements

Fraud is either an intentional or unintentional misstatement of the financial statements.

None of the above correctly defines fraud

72
Which of the following is a false statement concerning fraud?
(1 Point)

Fraud involves actions of management but excludes the actions of employees or third parties.

An audit rarely involves the authentication of documentation; thus‘ fraud may go undetected by
the auditorOption 2

Two types of misstatements relevant to the auditor include material misstatements arising from
misappropriation of assets

Fraud generally involves incentive or pressure to commit fraud,a perceived

73
When comparing misstatements with a measurement base, the auditor must
consider the pervasiveness of the misstatement. An example of a pervasive
misstatement would be
(1 Point)
An understatement of inventory, caused by miscounting

A misclassification of notes payable as a long-term liability when it should be current

An understatement of retained earnings, caused by a miscalculation of dividends payable

A misclassification of salary expense as a selling expense when it should be allocated equally

to both selling and administrative expense
74
Which of the following does not properlydescribe an auditor‘s specific response
to the assessment of risk of materialof material misstatement resulting from
fraud?
(1 Point)

Request that inventories be counted before year-end

Perform substantive analytical procedures at a detailed level

Visit locations or perform certain tests on a surprise or unannounced basis

Perform detailed review of the entity’s quarter end or year-end adjusting entries
75
Which of the following statements about fraud orerror is incorrect?
(1 Point)

The likelihood of detecting fraud is ordinarily higher than that of detecting error.

The auditor is not and cannot be held responsible for the prevention of fraud and error.

The responsibility for the prevention and detection of fraud and error rests with management.

The auditor should plan and perform the audit with an attitude of professional skepticism ,
recognizing that conditions or events may be found that fraud or error may exist.
76
Internal control is a function ofmanagement,and effective control is based upon
the concept of change anddischarge of responsibility or [Link] of the
following is one of theoverriding principles of internal control?
(1 Point)

Responsibility for the performance of each duty must be fixed.

Responsibility for accounting and financial duties should be assigned to one responsible officer.

Responsibility for accounting duties must be borne by the audit committee of the company.

Responsibility for accounting activities and duties must be assigned only to employees who are
bonded.
77
Internal controls can never be regarded as completely effective. Even if company
personnel could design an ideal system, its effectiveness depends on the
(1 Point)

Adequacy of the computer system

B、Proper implementation by management

C、Ability of the internal audit staff to maintain it

D、Competency and dependability of the people using it

78
“Control Activities” include proceduresthat pertain to physical controls over
access to and use of assets and records.A departure from the purpose of such
procedure is that: only storeroom personnel and line supervisors have access to the raw
material storeroom
(1 Point)
79
Which of the following comes CLOSEST tooutlining the auditor‘s responsibility for
internal control on all financialstatements audits?
(1 Point)
When tests of controls have been performed, control risk must be assessed at a level less than
the maximum.

The auditor must obtain an understanding of each of the five internal control elements sufficient
to plan the audit.

An understanding of the control environment and the accounting system is necessary ; an

understanding of the control procedures is necessary for areas in which the auditor is
performing test of controls.

Zero income now.

80
An understanding of the control environment is necessary, but not of the
accounting system or controlproc edures unless control risk is to be assessed at
a level less than themaximum.

(1 Point)

Evaluate the design of those controls.

Determine whether those controls have been implemented.

Evaluate the design of those controls and determine whether those controls have been
implemented.

Evaluate the design of those controls and determine whether those controls have been
implemented by performing tests controls.
81
. Which of the following statements about theexistence and completeness
objectives is not true?
(1 Point)

The completeness objective deals with unrecorded transactions

The existence and completeness objectives emphasize opposite audit concerns

Existence deals with overstatements and completeness deals with understatements

Existence deals with understatements and completeness deals with overstatements

Option 2
82
The reliability of data is influenced byits source and by its nature and is
dependent on the circumstances under whichit is obtained. Which of the
following should the auditor consider indetermining whether the data is reliable
for purposes of designing substantiveanalytical procedures?
I．Source of the informationavailable.
II．Comparability of theinformation available.
III．Nature and relevance ofthe information available.
IV．Controlsover the preparation of the information
(1 Point)

I,III, and IV only

II,III, and IV only

,II, and III only

I,II,III, and IV
83
Substantive procedures are tests performed to obtain audit evidence to detect
material misstatements in the financial statements. These include
(1 Point)

Substantive analytical procedures

Test of details of balances

Test of details of transactions

All of the above
84
The auditor traces items from the source documents to the journal order to
satisfy the
(1 Point)

Completeness objective

Ownership objective

Validity objective

Valuation objective
85
Which one of the following statements is true indeciding on substantive test of
transactions ?
(1 Point)

The materiality of the item will not influence the choice of procedures used.

Results obtained in the prior year’s audit will not affect the procedures used this year.

Some procedures are commonly employed on every audit regardless of the circumstances.

All procedures are dependent on the adequacy of the controls and the results of the tests of
controls.
86
The following are the purposes of analytical procedures , except:
(1 Point)

As an overall review of the financial statements in the final review stage of the audit.

Assist the auditor in planning the nature , timing and extent of other audit procedures.
As a test to obtain audit evidence about the suitability of design and effective operation of
internal controls.

As a substantive procedure when their use can be more effective or efficient than tests of
details in reducing detection risks for specific financial statements assertions.
87
An example of an analytical procedure is the comparison of:
(1 Point)

Recorded amounts of major disbursements with appropriate invoices

EDP-generated data with similar data generated by a manual accounting system

Results of statistical sample with the expected characteristics of the actual population

Financial information with similar information regarding the industry in which the entity operates
88
Which of the following analytical procedures ,should be applied to the income
statement?
(1 Point)

Select sales and expense items and trace amounts to related supporting documents

Obtain from the client representatives, the beginning and ending inventory amounts that were
used to to determine cost of sales

Ascertain that the new income amount in the statement of cash flows agrees with the net
income amount in the income statement

Compare the actual revenues and expenses with the corresponding figures of the previous year
and investigate significant differences
89
When analytical procedures identifysignificant fluctuations or relationships that
are inconsistent with otherrelevant information or that deviate from predicted
amounts , the auditorshould investigate and obtain explanations and appropriate
corroborative auditevidence. The auditor‘s investigation of unusual fluctuations
and relationshipsordinarily begins with inquiries of management followed by
I．Corroboration ofmanagement‘s responses.
II．Consideration of the needto apply other audit procedures based on the results of such
inquiries,ifmanagement is unable to provide an explanation or if the explanation is
notconsidered adequate.
(1 Point)

I only

II only

Both I and II

Neither I or II
90
Auditors may use positive and/or negative forms of confirmation requests. An
auditor most likely will use
(1 Point)

The negative form for small balances.

The positive form to confirm all balances regardless of size.

A combination of the two forms, with the positive form used for trade balances and the negative
form for other balances.

The positive form, when the combined assessed level of inherent and control risk for related
assertions is acceptably low and the negative form when it is unacceptably high.
91
To reduce the risk associated with accepting fax responses to request for
confirmations of accounts receivable ,an auditor most likely would
(1 Point)

Verify the sources and contents of the faxes in telephone calls to the senders.
Examine the shipping documents that provide evidence for the existence assertion.

Consider the faxes to be non responses and evaluate them as unadjusted differences.

Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are
noted.
92
The physical count of inventory of are tailer was higher than shown by the
perpetual records. Which of the following could explain the difference?
(1 Point)

Credit memos for several items returned by customers had not been recorded.

No journal entry had been made on the retailer‘s books for several items returned to its
suppliers.

An item purchased “F.O.B. Shipping point” had not arrived at the date of the inventory count
and had not been reflected in the perpetual records.

Inventory items had been counted but the tags placed on the items had not been taken off the
items and added to the inventory accumulation sheets.
93
Which of the following statements is incorrect about accounting estimates?
(1 Point)

The risk of material misstatement is greater when accounting estimates are involved.

Management is responsible for making accounting estimates included in the financial

statements.

When evaluating accounting estimates,the auditor should pay particular attention to

assumptions that are objective and are consistent with predictable patterns.

The evidence available to support an accounting estimates will often be more difficult to obtain
and less conclusive than evidence available to support other items in the financial statements.
94
Subsequent events refer to events thatoccur after the date of the financial
statements and are:
(1 Point)

Favorable to the entity being audited.

Unfavorable to the entity being audited.

Either favorable or unfavorable to the entity being audited.

Neither favorable nor unfavorable to the entity being audited.

95
Which of the following material events occurringsubsequent to the balance sheet
date would require an adjustment to thefinancial statements before they are
issued?
(1 Point)

Loss of a plant as a result of flood

Sale of long-term debt or capital stock.

Major purchase of a business which is expected to double sales volume.

Sale of an equipment for an amount significantly lower than its carrying value.
96
When conditions and events have beenidentified which may cause significant
doubt on the entity‘s ability tocontinue as a going concern, the auditor should
consider performing thefollowing procedures except
(1 Point)

express a report that contains a disclaimer of opinion.

review management plans for future actions based on going concern assessment.
seek written representations from management regarding its plans for future actions.

gather sufficient appropriate evidence to confirm or dispel whether or not a material uncertainty
exist by carrying out procedures such as considering the effect of management plans and other
mitigating factors.
97
After issuance of the auditor‘s report,the auditor has no obligation to make any
further inquiries with respect to audited financial statements covered by an
auditor‘s report unless a
(1 Point)

Contingency is resolved.

Material defalcation ensues

History of significant non-arms-length related party transactions is discovered

Development occurs which may affect the client‘s ability to continue as a going concern
98
Which of the following events occurringafter the issuance of an auditor’s report
most likely would cause the auditorto make further inquiries about the previously
issued financial statements ?
(1 Point)

A subsidiary is sold that accounts for 25% of the entity’s consolidated net income.

A contingency is resolved that have been disclosed in the audited financial statements.

New information is discovered concerning undisclosed lease transactions of the audited period.

An uninsured natural disaster occurs that may affect the entity‘s ability to continue as a going
concern.
99
The characteristics that distinguishcomputer processing from manual processing
include the following
I．Computer processinguniformly subjects like transactions to the same instructions.
II．Computer systems alwaysensure that complete transaction trails useful for audit
purposes are preservedfor indefinite periods.
III．Computer processingvirtually eliminates the occurrence of clerical errors normally
associated withmanual processing.
IV．Control procedures as tosegregation of functions may no longer be necessary in
computer environment.
(1 Point)

Only statements (1) and (3) are true.

Only statements (2) and (4) are true. Use

All of the above statements are true.

All of the above statements are false.

100
The most important output control is
(1 Point)

Logic tests which verify that no mistakes were made in processing.

Control totals which are used to verify that the computer‘s results are correct.

Review of the data for reasonableness by someone who knows what the output should look
like.

Distribution control which assures that only authorized personnel receives the reports
generated by the system.

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for questions 51 to 75

51. While performing services foe their clients professionals have a duty to provide a level of
care which is

Reasonable

[Link] of reasonable care that can be expected of a person in a set of circumstances is

the definition of
Ordinary Negligence

[Link] main purpose of implementing quality control policies and procedures is:

To provide reasonable assurance that audit will be conducted in accordance with PSA.

54. A firm should establish and maintain a system of quality control to provide it
with reasonable assurance that:
I. The firm and its personnel comply with professional standards and applicable
legal and regulatory requirements.
II. Reports issued by the firm or engagement partners are appropriate in the
circumstances.

both I and II

[Link] of the following quality controlobjectives would be least important to the

auditor?

Determination of audit fee

56. In financial statement audits , the audit process should conform with

Philippine Standards on Auditing

57. An audit of financial statements is conducted todetermine whether the

None of the above

58. The essence of financial statement audit is to
Determine whether the client’s financial statements are fairly stated
59. The objective of an audit of financial statementis

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.

60. The objective of an audit of financialstatements is

To guarantee that all material misstatements in the financial statements are detected.

[Link] agreed to by the auditor and the client should be

reduced to writing by the auditor . The best place to set forth these arrangements
is in
An engagement letter
62. The purpose of an engagement letter is to
Document the terms of engagement to writing in order to minimize understandings
63. Which of the following is not one of theprincipal contents of an engagement
letter ?
Objectives of the financial statements

64. The auditor would most likely withdraw from the engagement if
The auditor is unable to agree to a change of the engagement and is not permitted to continue the
original engagement
[Link] extensive understanding of theclient‘s business and industry and
knowledge about the company‘s operations areessential for doing an adequate
[Link] a new client ,most of thisinformation is obtained.
At the client‘s premises
[Link] audit risk model is useful
To evaluate the evidence which has been gathered
67.A CPA is conducting the first examination of aclient‘s financial statements .
The CPA hopes to reduce the audit work byconsulting with the predecessor
auditor and reviewing the predecessor‘s [Link] procedure is
acceptable if the client and the predecessor auditor agree to it.
[Link] of the following procedures requires theassistance of an expert except
determining the adequacy of disclosure in the notes to the financial statements
[Link] misstatements may emanate from all ofthe following except
Limitations of the audit
[Link] term “error” refers to unintentionalmisrepresentation of financial
[Link] of errors are when
All of the above statements are true
[Link] of the following statements most appropriately defines fraud in a
financial statement auditing context?
Fraud is an intentional misstatement of the financial statements.

[Link] of the following is a false statement concerning fraud?

Fraud involves actions of management but excludes the actions of employees or third parties.
[Link] comparing misstatements with a measurement base, the auditor must
consider the pervasiveness of the misstatement. An example of a pervasive
misstatement would be
An understatement of inventory, caused by miscounting
[Link] of the following does not properlydescribe an auditor‘s specific
response to the assessment of risk of materialof material misstatement resulting
from fraud?
Visit locations or perform certain tests on a surprise or unannounced basis
[Link] of the following statements about fraud orerror is incorrect?

The likelihood of detecting fraud is ordinarily higher than that of detecting error.

T
76. A

he main purpose of implementing quality control policies and procedures is: