Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

UNIT III

THE FINANCIAL STATEMENT AUDIT

1. Audit engagement letters generally include references to the following except

a. Objective of the audit of financial statements.
b. Management responsibility for the financial statements.
c. Scope of the audit
d. Identification of the audit team members.
2. When a professional accountant is the auditor of a present entity and also the auditor of its subsidiary, branch or division,
which of the following factors need not be considered in deciding whether to send the separate engagement letter to the
component?
a. Who appoints the auditor of the component.
b. Whether a separate audit report is to be issued on the component.
c. Legal requirements.
d. Number of reports to be prepared during the peak audit season.
3. On recurring audit, the auditor may decide not to send a new engagement letter each period. N which of the following
situations will there be no need to send a new letter?
a. Revision of special terms of the engagement.
b. Significant change in nature or size of the clients business.
c. Recent change of middle management and rank and file organizations structure.
d. Indication of misunderstanding of the objective and scope of the audit.
4. Which of the following will not necessarily lead the client to request for the auditor to change the engagement to one which
provides a lower level assurance?
a. Restrictions on the scope of the engagement, whether imposed by management or caused by circumstances.
b. Misunderstanding as to the nature of an audit or related service originally requested.
c. Recent changes in senior management, board of directors or ownership.
d. Change in circumstances affecting the need for the service.
5. For initial engagements, the auditor should obtain sufficient appropriate audit evidence for the following except.
a. That the opening balances do not contain misstatement that materially affect the current periods financial statements.
b. That the prior periods closing balances have been correctly brought forward to the current period, or when appropriate
have been restated.
c. That appropriate accounting policies are consistently applied or changes in accounting policies have been properly
accounted for or adequately disclosed.
d. That the client has informed the predecessor auditor of his appointment as the new auditor.
6. Before accepting an engagement to audit a new client, an auditor is required to
a. Make inquiries of predecessor auditor after obtaining the consent of the prospective client.
b. Obtain the prospective clients signature to the engagement letter.
c. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan.
d. Discuss the management representation letter with the prospective clients audit committee.
7. Which of the following is not one of the three main reasons why the auditor should properly plan engagement?
a. To help keep audit costs reasonable.
b. T o avoid misunderstandings with the clients.
c. To enable the auditor to obtain sufficient competent evidence.
d. To enable proper on the job training of employees.
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 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

8. One of the major parts of audit planning is preplanning. Which of the following is not involved during the preplannig phase?
a. Deciding whether to accept or continue this clients..
b. Obtaining information about clients legal obligations.
c. Selecting staff for the engagement.
d. Obtaining an engagement letter.
9. Which of the following would not be consideration of a CPA firm in deciding whether to accept a new client?
a. Clients probability of achieving an unqualified opinion.
b. Clients financial ability.
c. Clients relation with its previous CPA firm.
d. Clients standing in the business community.
10. Where client is changing auditors, PSA requires communication between predecessor and successor auditors. The burden of
initiating the communication rests with the.
a. Predecessor.
b. Client
c. Successor
d. SEC
11. The purpose of an engagement letter is to.
a. Reduce the terms to writing in order to minimize misunderstandings.
b. Reduce the CPA firms responsibility to external users of the audited financial statements.
c. Satisfy the statute of frauds which requires that the contracts for professional service must be in writing to be
enforceable.
d. Notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated.
12. The engagement letter will do one, or all of the following:
1. State whether the CPA will perform audit, review, or compilation services.
2. State whether the CPA will perform tax or management advisory or other services.
3. State any restriction to be imposed on the CPA’s work.
4. Identify deadlines for completing the work.
5. State the amount and type of work to be done by clients personnel in generating auditors work papers.
6. State the CPA’s fees for the engagement.
7. Inform the client that the CPA does not have responsibility for detecting fraud.

The engagement letter will do

a. Numbers 1, 2, 4, and 6.
b. Numbers 1, 2, 3, 4, and 6.
c. Numbers 1, 3, 5, and 7.
d. All seven of the above stated items.
13. The engagement letter
a. Does effect the CPA firm’s responsibility to external users of audited financial statements.
b. Can affect legal responsibilities to the client.
c. Can be used to alter the auditor’s responsibilities under the standards on auditing.
d. Is useful only if it is in engagement, but has no effect for review or compilation services.
14. After preliminary audit arrangement have been made, an engagement confirmation letter should be sent to the client. The
letter usually would not include.
a. A reference to the auditors responsibility for the detection of errors or irregularities.
b. An estimation of the time to be spent on he audit work by audit staff and management.

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 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

c. A statement that management advisory services would be made available upon request.
d. A statement that the management letter will be issued outlining comments and suggestions as to any procedures
requiring the clients attention.
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.
16. In an audit situation, communication between the successor and predecessor auditors should be
a. Authorized in an engagement letter.
b. Acknowledge in a representation letter
c. Either written or oral
d. Written and included in the working papers.
17. Which of the following topics is not normally included in an engagement letter?
a. The auditor’s preliminary assessment of internal control.
b. the auditors estimate of the fee for the engagement .
c. limitations on the scope of the engagement
d. a description of responsibility for the detection of fraud.
18. Preliminary arrangements agreed to by the auditors and the client should be reduced to writing by the auditors . the best
please to set forth these arrangements is in
a. A memorandum to be placed in the permanent section of the auditing working papers.
b. The successor auditors should obtain permission from the prospective client to contact the predecessor
c. A client representation letter
d. A confirmation letter attaches to the construction services letter
19. Which statement is correct relating to the potential successors auditors responsibility for communicating with the predecessor
auditors in connection with a prospective new audit client?
a. The successors auditors have no responsibility to contact the predecessor auditors.
b. The successors auditors should obtain permission from the prospective client to contact the predecessor auditors.
c. The successors auditors should contact the predecessors regardless of whether the prospective client authorize
contact.
d. The successor auditors need not contact the predecessors if the successor are aware of all available relevant facts.
20. An auditors who accepts an audit engagement and does not possess the industry expertise of the business entity, should
a. Engage financial experts familiar with 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.
21. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor
regarding the predecessor’s
a. Awareness of the consistency in the application of financial reporting standards between periods.
b. Evaluation of all matters of continuing accounting significance.
c. Opinion of any subsequent events occurring since the predecessors audit report was issued.
d. Understanding as to reasons for the change auditors.
22. An auditor who has been invited to submit a proposal for an audit engagement is a
a. Predecessor auditor
b. Successor auditor
c. Principal auditor

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 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

d. Interim auditor
23. Legacy commercial Inc. engages the services of Mr, Dimalanta, CPA to make a project study on the expanded food vending
operation of the corporation with the corresponding staffing and compensation package for its executive staff. Dimalanta,
however, has primarily auditing expertise and only on general merchandising operations. Mr. Dimalnta may properly
a. Accept the engagement and carry it out consistent with the standards on auditing.
b. Accept the engagement but exercise due professional care.
c. Accept the engagement and acquire the necessary competence or consult with the establish authorities.
d. Decline the engagement for the lack of experience or competence in an entirely new line of specialization.
24. Engagements are widely used in practice for professional engagement of all types. The primary purpose of the engagement
letter is to
a. Remind management that the primarily responsibility for the financial statements rests with management.
b. Satisfy the requirements of the CPA’S liability insurance policy
c. Provide a starting point for the auditors preparation of the preliminary audit program.
d. Provide a written record of the agreement with the client as to services to be provided.
25. In making arrangements for an audit, there should be a clear understanding between the auditor and client as to the following
except
a. The types of audit to be performed
b. Terms of settlement for audit sevices
c. Assurance of auditors independence
d. Official to whom audit report shall be addressed
26. When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor.
This procedure is necessary because the predecessor may be able to provide the successor with information that will assist the
successor in determining
a. Whether the predecessor’s work should be utilized
b. Whether the company follows the policy of rotating its auditors
c. Whether in the predecessor’s opinion, internal control of the company has been satisfactory
d. Whether the engagement should be accepted
27. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor
regarding
a. Disagreement of the predecessor had with the client concerning auditing procedures and accounting principles.
b. The predecessor’s evaluation of matters of continuing accounting significance.
c. The degree of cooperation the predecessor received concerning the inquiry of the clients lawyer.
d. The predecessor’s assessments of inherent risk and judgments about materiality.
28. The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be
limited to stating that no information will be provided when
a. Predecessor auditor has poor relations with successor auditor.
b. Client is dissatisfied with predecessor’s works
c. There are legal problems between client and predecessor
d. Predecessor believes that client lacks integrity.
29. Aquino, CPA, requested permission to communicate with the predecessor auditors of a prospective client. The prospective
client’s refusal to permit this will bear directly on Aquino’s decision concerning the
a. Adequacy of the preplanned audit program
b. Ability to establish consistency in application of accounting principles between years
c. Apparent scope limitation.
d. Integrity of management.
30. Which of the following most accurately summarizes what is meant by the term “ material misstatement”?

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 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

a. Fraud and direct effect illegal act

b. Fraud involving senior management and material fraud
c. Material error, material fraud, and certain illegal acts
d. Material error and material illegal acts
31. Which of the following statements Is correct relating to the auditor’s consideration of fraud?
a. The auditor’s interest in fraud consideration relates to fraudulent acts that causes a material misstatement of
financial statements.
b. A primary factor that distinguishes fraud from error is that fraud is always intentional, while errors are generally, but
not always intentional.
c. Fraud always involves a pressure or incentive to commit fraud, and a misappropriation of assets.
d. While an auditor should be aware of the possibility of fraud, management, and not the auditor, is responsible for
detecting fraud.
32. Which of the following factors or conditions is an auditor least likely to plan an audit to discover?
a. Financial pressures affecting employees.
b. High turnover of senior management .
c. Inadequate monitoring of significant controls
d. Inability to general positive cash flows from operations.
33. Management attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely
would significantly influence an entity’s control environment when
a. External policies established by parties outside the entity affect its accounting practices.
b. Management is dominated by one individual who is also a shareholder.
c. Internal auditors have direct access to the board of directors and the entity management.
d. The audit committee is active in overseeing the entitys financial reporting policies.
34. Which of the following is least likely to be required on an audit?
a. Test appropriateness of journal entries and adjustments
b. Review accounting estimates for biases.
c. Evaluate the business rationale for significant unusual transactions
d. Make a legal determination of whether fraud has occurred.
35. Which of the following factors would most likely heighten an auditors 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 entities in the same industry.
c. Financial management participation in the initial selection of accounting principles
d. An overly complex organizational structure involving unusual lines of authority.
36. An auditors who discovers that clients employees have paid small bribes to public officials most likely would withdraw from
the engagement if the ‘
a. Client receives financial assistancerom government agency.
b. Evidential matter that is necessary to prove that the illegal acts were committed does not exist.
c. Employees actions affect the auditors ability to rely on management representation.
d. Notes to the financial statements fail to disclose the employees actions.
37. Which of the following illegal acts should an audit be designed to obtain reasonable assurance of detecting?
a. Securities purchased by relatives of management based on knowledge of inside information.
b. Accrual and billing of an improper amount of revenue under government contracts.
c. Violations of anti-trust laws.
d. Price fixing.

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 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

38. Which of the following relatively small misstatements most likely could have a material effect on an entity’s financial
statements?
a. An illegal payment to a foreign official that was not recorded.
b. A piece of absolute office equipment that was not retired.
c. A petty cash fund disbursement that was not properly authorized.
d. An uncollectible account receivable that was not written off.
39. The most likely explanation why the auditors examination cannot reasonably be expected to bring all illegal acts by the client
to the auditors attention is that
a. Illegal acts are perpetrated by management override of internal control.
b. Illegal acts by clients often relate to operating aspects rather than accounting aspects.
c. The clients internal controls may be so strong that the auditor performs only minimal substantive testing.
d. Illegal may be perpetrated by the only persons in the clients organization with access to both assets and the
accounting records.
40. Which of the following factors would most likely cause CPA to decide not to accept a new audit engagement?
a. The CPA’s lack of understanding of the prospective clients internal auditor’s computer assisted audit techniques.
b. Management disregard of its responsibility to maintain an adequate internal control environment.
c. The CPA’s inability to determine whether related party transactions were consummated in terms equivalent to arm’s
length transactions.
d. Managements refusal to permit CPA to perform substantive tests before the year end.
41. Which of the following is most likely to require special planning considerations related to asset valuation?
a. Inventory is comprised of diamond rings.
b. The clients has recently purchased an expensive copy machine.
c. Assets costing less than P250 are expensed even when the expected life exceeds one year.
d. Accelerated depreciation methods are used for amortizing the costs of factory equipment.
42. To obtain an understanding of a continuing clients business in planning an audit, an auditor most likely would
a. Perform tests of details of transactions and balances.
b. Review prior year working papers and the permanent file for the client.
c. Read specialized industry journals.
d. Reevaluate the clients internal control environment.
43. Which of the following matters is generally included in an auditor’s engagement letter?
a. Management responsibility for the entity’s compliance with laws and regulations.
b. The factors to be considered in setting preliminary judgments about materiality.
c. Management vicarious liability for illegal acts committed by its employees.
d. The auditors responsibility to search for significant internal control deficiencies.
44. A listing of all the things which the auditor will use to gather sufficient competent evidence is the
a. Audit procedure
b. Audit plan
c. Audit program
d. Audit risk model
45. Tests of controls are directed towards the controls
a. Efficiency
b. Effectiveness
c. Efficiency and effectiveness
d. Cost benefit ratio
46. Which one of these is not a type of evidence that would be used for both obtaining an understanding of the control structure
and testing the controls?

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 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

a. Inquiries
b. Inspection
c. Observation
d. Reperformance
47. A procedure designed to test for peso errors or irregularities directly affecting the correctness of financial statement balances
is a
a. Substantive test
b. Compliance test
c. Test of controls
d. Definition of peso unit sampling
48. Tests to determine whether the accounting transactions have been properly authorized, correctly recorded and summarized in
the journals and correctly posted to subsidiary ledgers and the general ledger are
a. Tests of controls
b. Substantive tests of transactions
c. Substantive tests of balances
d. Analytical procedures
49. Tests of controls for efficiency, are frequently done at the same time as
a. Analytical procedures
b. Compliance tests
c. Substantive tests of transactions
d. Substantive tests of balances
50. The primary emphasis in most test of details of balances Is on the
a. Balance sheet account’
b. Income statement account
c. Cash flow statement accounts
d. Three statement above
51. Analytical procedures are defined in the statement of auditing standards as
a. Compliance tests
b. Substantive tests
c. Tests of controls
d. Helpful procedures not possessing the validity of other tests available to the auditor
52. More types of evidences are obtained by using this test than by using any other type of tests
a. Tests of controls
b. Tests of transactions
c. Tests of balances
d. Analytical procedures
53. This type of evidence can be gathered with every type of audit test
a. Inquiries of client personnel
b. Inspection of documents and records
c. Observation of application of policies and procedures
d. Reperformance of procedures
54. Which of the following audit tests is usually the most costly to perform?
a. Analytical procedures
b. Tests of controls
c. tests of balances
d. substantive test of transactions

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 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

55. which of the following tests is usually the least costly to perform?
a. Analytical procedures
b. Tests of controls
c. Tests of balances
d. Substantive tests of transactions
56. At what stage in the audit are the analytical procedures performed?
a. In the planning stage
b. In conjunction with tests of transactions and tests of details of balances
c. Near the end
d. During all three stages
57. When planning tests of details of balances, the auditor forecasts the results of tests of controls , substantive tests of
transactions, and analytical procedures. The prediction for these three areas is usually that there will be
a. No exception
b. Few or no exceptions
c. An average number of exceptions
d. Many exceptions
58. Which of the following statements is not true?
a. Tests of transactions are often performed several months prior to the balance sheet date.
b. It is common to use analytical procedures at any time during the audit
c. When controls are not considered effective, or when control deviations are discovered, substantive tests will be
eliminated and replaced with tests of details of balances
d. Tests of details of balances are normally done last.
59. Auditors should request that an audit client send a letter of inquiry to those attorneys who have been consulted concerning
litigation, claims, or assessments. The primary reason for this request is to provide
a. Information concerning the progress of cases to date
b. Corroborative evidential matter
c. An estimate of the peso amount of the probable loss
d. An expert opinion as to whether a loss is possible probably or remote
60. A written client representation letter most likely would be an auditors best source of corroborative information of a clients
plans to
a. Terminate an employee pension plan
b. Make a publis offering of its common tock
c. Settle an outstanding lawsuit for an amount less than the accrued loss contingency
d. Of Discontinue a line of business
61. An auditor concludes that the omission of a substantive procedures considered necessary at the time of the examination may
impair auditor’s present ability to support the previously expressed opinion. The auditor need not apply the omitted procedure
if
a. The risk of adverse publicity litigation is low.
b. The results of other procedures that were applied tend to compensate for the procedures omitted .
c. The auditors opinion was qualified because of a departure from financial reporting standards
d. The results of the subsequent periods test of control make the omitted procedures least important.
62. Which of the following documentation is required for an audit in accordance with the standards on audit?
a. An internal control questionnaire
b. A client engagement letter
c. A planning memorandum or checklist
d. A client representation letter

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 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

63. The purpose of tests of compliance is to provide reasonable assurance that the
a. Accounting treatment of transactions and balances is valid and proper
b. Accounting control procedures are functioning as intended
c. Entity has complied with disclosure requirements of financial reporting standards
d. Entity has complied with requirements of quality control.
64. The reliance placed on substantive tests in relation to the reliance placed on internal control varies in a relationship that is
ordinarily
a. Parallel
b. Inverse
c. Direct
d. Equal
65. Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with
a reasonable basis for the expression of an opinion?
a. The audit program
b. The auditors judgments
c. Philippines standards on auditing
d. The auditors working papers
66. After performing a study and evaluation of the clients system of internal control an auditor as concluded that the system is
will designed and is functioning as anticipated. Under circumstances the audit would most likely
a. Cease to performed further substantive test
b. Not increase the extent of predetermined substantive test
c. Increase the extent of anticipated analytical review procedures
d. Perform all compliance tests to the extent outline in the preplanned audit program.
67. Test of compliance are concerned primarily with each of the following question except
a. How were the procedures are performed ?
b. Why were the procedures are performed?
c. Were the necessary procedures performed?
d. By whom were the procedures performed?
68. With respect to the auditors planning of a year-end examination, which of the following statements is always true?
a. An engagement should not be accepted after the fiscal year ends
b. An inventory count must be observed at the balance sheet date.
c. The clients audit committee should not be told of the specific audit procedures which will be performed
d. It is an acceptable practice to carry out substantial parts of the examination at interim dates.
69. The actual operations of an internal control system may be most objectively evaluated by
a. Completing a questionnaire and flowchart related to the accounting system and the year under audit
b. Review of the previous audit work papers to update the report of internal control evaluatoin’
c. Selection of items processed by the system and determination of the presence or absence or errors and compliance
deviations
d. Substantive test of accounts balances based on the auditors assessment of internal control strength.
70. At interim dates an auditors evaluates a clients internal accounting control procedures and finds them to be effective. The
auditors then performs a substantial part of the audit engagement on a continuous basis throughout the year. At a minimum,
the auditors year-end audit procedures must include
a. Determination that clients internal accounting control procedures are still effective at year end.
b. Confirmation of those year-ends accounts that were examined at interim dates.
c. Tests of compliance with internal control in the same manner as those tests made at the interim dates.
d. Comparison of the responses the auditors internal control questionnaire with a detailed flowchart at year ends.

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 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

71. In the context of an audit of financial statement, substantive tests are audit procedures that
a. May be eliminated under certain conditions.
b. Are designed to discover significant subsequent events.
c. May be either tests of transaction, direct tests of financial balances, or analytical test
d. Will increase proportionality with the auditor reliance on internal controls
72. Which of the following might, in itself, form a valid bases for an auditor to decide to omit a test except the
a. Relative risk involved
b. Relationship between the cost of obtaining evidence and its usefulness
c. Difficulty and expense involved in testing a particular item.
d. Degree of reliance on the relevant internal controls.
73. Which of the following is ordinarily designed to detect possible materials peso errors on the financial statements?
a. Compliance testing
b. Analytical review.
c. Computer controls
d. Post audit working papers review.
74. Audit programs are modified to suit the circumstances on particular engagements. A complete audit program for an
engagement generally should be developed.
a. Prior to beginning the actual audit work.
b. After the auditor has completed an evaluation of the existing internal accounting records and procedures.
c. After reviewing the client’s accounting records and procedures.
d. When the audit engagement letter is prepared.
75. Which of the following audit tests would be regarded as a test of “compliance”?
a. Test of the specific items making up the balance in a given general ledger account.
b. Tests of the inventory pricing to vendors invoices.
c. Tests of the signatures on canceled checks to board of directors authorizations.
d. Test of the additions to property, plant, and equipment by physical inspection.
76. An auditor evaluates the existing system of internal control in order to.
a. Determine the extent of substantive tests which must be performed
b. Determine the extent of compliance tests which must be performed
c. Ascertain whether irregularities are probable
d. Ascertain whether any employees have incompatible functions
77. After finishing the review phase of the study and evaluation of internal control in an audit engagement, the auditors should
compliance tests on
a. Those controls that the auditors plans to rely on
b. Those controls in which materials weaknesses were identified
c. Those controls that have a material effect upon the financial statement balances
d. A random sample of the controls that were reviewed
78. Reasons to evaluate internal controls would not include
a. Basis for planning the audit
b. Determining the nature, timing, and extent of audit procedures
c. Basis for type of opinion to be rendered
d. Formulating constructive suggestions for improvements.
79. An audit team’s responsibility would not include
a. Designing an effective controls structure
b. Documentation of understanding of internal control structure
c. Communicating reportable conditions on internal controls structure

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 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

d. An evaluation of existing internal control structure

80. The functional responsibilities that should be performed by different people would not include
a. Authorization to execute transactions.
b. Recording of transactions
c. Custody of assets involved in the transactions
d. Reporting of a recorded amounts.
81. A set of characteristics that defines good control working relationships in the company is referred to as
a. Controls objectives
b. Control environment
c. Control risk assessment
d. Functional responsibilities.
82. Controls intended to ensure that transactions are recorded in the right accounts are designed to achieve the objective of
a. Validity
b. Completeness
c. Authorization
d. accounting
83. The financial statement assertion of a existing and occurrence would not be related to internal control objective
a. Validity
b. Completeness
c. Authorization.
d. Proper period
84. The obtaining-an-understanding’’ work phase of internal control evaluation would not give auditors and overall acquaintance
with the
a. Controls environment
b. Flow of transaction
c. Effectiveness of control procedures
d. Control risk assessment
85. The basic standards flowchart symbol would not include
a. Display
b. Input /output
c. Process
d. Flow line
86. Control strength and weaknesses should be documented in workpapers, sometimes called
a. Questionnaires, narrative, flowchart
b. Bridge working papers
c. Communications of reportable condition.
d. Internal control letter
87. The internal control in small business is highly dependent on the
a. Segregation of functional responsibilities
b. Complexity of the internal
c. Owner-manger’s competence and integrity
d. Bonding of employees
88. PSA 300 (revised), planning and audit of financial statements, which states that work is to be adequately planned, and
assistants, if any, are to be properly supervised, recognizes that.
a. Early appointment of the auditor is advantageous to the auditors and the client.
b. Acceptance of an audit engagement after the close of the clients fiscal year is generally not permissible.

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 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

c. Acceptance of an audit engagement after the close of the client’s fiscal year requires a disclaimer of opinion.
d. Performance of substantial parts of the examination is necessary at interim dates.
89. Which of the following is an effective audit planning and control procedure that helps prevents misunderstanding and
inefficient use of audit personnel?
a. Arrange to make copies, for inclusion in the working papers, of those client supporting documents examined by the
auditors.
b. Arrange to provide the client with copies of the audit programs to be used during the audit.
c. Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information.
d. Arrange to have the auditors prepare and post any necessary adjusting or reclassification entries prior to final closing.
90. Senior auditors typically perform all of the following tasks, except
a. Supervise staff assistants
b. draft the audit report
c. sign the audit report
d. review the working papers prepared by staff assistances.
91. .in planning an audit engagement, which of the following is a factor that affects the independent auditor judgments as to the
quantity, type and content of working papers?
a. The estimated occurrence rate of attributes .
b. The preliminary evaluation based upon initial substantive te3stings.
c. The contents of the clients representation letter
d. The anticipated nature of the auditor’s report.
92. Audit programs are modified to suit the circumstances of a particular engagement. A final audit program for an engagement
generally should be developed
a. Prior to beginning the actual audit work
b. After the auditors have completed their consideration of the existing internal control
c. After reviewing the clients accounting records and procedures.
d. When the audit engagement letter is prepared
93. An audit committee’s responsibilities normally would not include
a. Discussing the meaning and significance of audited financial statements
b. Discussing problems and experience with independent auditors in completing the audit of annual financial statements
c. Nominating the independent auditors.
d. Discussing the audit programs of the independent auditors
94. If, during an audit examination, the successor auditor becomes aware of information that may indicate that financial
statements reported on by the predecessor auditor may require revision, the successor auditor should
a. Ask the client to arrange a meeting among the three parties to discuss the information and attempt to resolve the
matter.
b. Notify the client and the predecessor auditor of the matter and ask them to attempt to revise the statements.
c. Notify the predecessor auditor who may be required to revise the previously issued financial statements and auditors
report,
d. Ask the predecessor auditor to arrange a meeting with the client to discuss and resolve the matter,
95. Wald, CPA, is preparing unaudited financial statement for Zaikin Company. During the engagement, Wald becomes aware
that the statement area misleading. Wald shoul
a. Disclaim an opinion
b. Insist that the statement be corrected
c. Issue an adverse opinion
d. Insist that the statement be audited.

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Marawi City

96. When management refuses to disclose illegal activities which are identified by the independent auditor, the independent
auditor may be charged with violating the code of Professional Ethics for
a. Withdrawing with the engagement
b. Issuing a disclaimer of opinions
c. Failure to uncover the illegal activities during prior audit
d. Reporting these activities to the audit committee.
97. CPAs may send a formal management letter to clients in order that such a letter may provide
a. A summary of the CPA’s observation arising out of his study of the clients internal control system
b. A written record of discussion between the auditor and the client concerning the formers observation and suggestions
for improvements in financial management.
c. A permanent record of the review of the internal control work accomplish by the auditor during the course of his
engagement .
d. Evidence as to the adequacy or inadequacy of the operating internal control system.
98. It is an accepted practice for an external auditors to request letter of representation from their clients. A principal purpose of a
letter of representation from the client is to.
a. Discharge the auditor from legal liability of his examination.
b. Confirm in writing managements approval of limitations on the scope of audit
c. Serve as an introduction to companys personnel and authorization to examined the records
d. Remind management for its primary responsibility for financial statements.
99. The auditors opinion on the financial statement of his clients should be dated as of the date of
a. Submittal of the report to het client
b. Receipt of client letter of representation
c. Completion of all important procedure
d. Closing of the clients book
e. Close of the period under audit
100.The primary duifference between an audit of the balance sheet and an audit of the income statement lies in the fact that the
audit of income statement deals with the verification of
a. Transaction
b. Authorization
c. Costs
d. Cut-off
101.Which of the following is not considered among the benefits of the audit planning?
a. Audit planning helps coordinate the work to be done by auditors of components other parities such as experts,
specialist., etc.
b. Audit planning helps insure that the audit is properly organize, management and perform in effective and efficient
manner.
c. Audit planning aids in insuring the examination of financial statements can be performed without problem and
defficulties.
d. Audit planning helps insured that appropriate attention is devoted to important areas of the audit.
102.Which of the following procedures is not undertaking by the auditor at the beginning of the current audit engagements?
a. Determines whether ethical requirements including independence are complied with.
b. Established an understanding of the terms of the engagements.
c. Determines whether the relationship with client can be continued or not .
d. Determines the types of opinion that should be expressed on the financial statements.
103.Which of the following is not considered by the auditor when established the scope of the engagement?
a. The financial reporting framework on which the financial information to be audited has been prepared.

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Marawi City

b. Industry-specific reporting requirements.

c. Expected audited coverage including the number and locations of components to be included.
d. Expected nature and timing of communications among engagement team members including the nature and timing of
team meetings and timing of the revoew of work performed.
104.Which of the following should be considered by the auditor when ascertaining the reporting objectives of the engagement,
the timing of the audit and the nature of communications required?
a. Availability of client personnel and data.
b. Effect of information technology on the audit procedures.
c. Audit areas where there is a higher risk of material misstatement.
d. The entity’s timetable of reporting such as at interim and final stages.
105.The auditor should plan the nature, timing and extent of direction and supervision of engagement team members and review
of their work. Which of the following factors need not be considered by the auditor in preparing this plan?
a. Size and complexity of the entity.
b. The reporting currency to be used, including any need for currency translation for the financial information audited.
c. The capabilities and competence of personnel performing the audit work.
d. The risk of material misstatement.
106.For initial audit, additional matters the auditors may consider in the overall audit strategy and audit plan include the following
except
a. Confirmation of material accounts receivable balance at the end of the year.
b. Planned audit procedure to obtain sufficient appropriate audit evidence regarding opening balances.
c. Assignment of firm personnel with appropriate levels of capabilities and competence to respond to anticipated
significant.
d. Major issues including the application of accounting principles or any auditing and reporting standards discussed
with management.
107.In determining the number of people who will be assigned to an engagement, an auditor normally considers the following
except
a. Audit’s size and complexity.
b. The availability of the work of internal auditors and the extent of the auditor’s potential reliance on such work.
c. Availability and experience of personnel.
d. The necessity for special expertise.
108.In considering the work to be performed by other auditors, the following should be taken into account except
a. The involvement of experts.
b. The number of locations.
c. The involvement of other auditors in the audit of components such as subsidiaries, branches, and divisions.
d. The expected use of audit evidence obtained in prior audits.
109.PSA requires auditors to evaluate whether substantial doubt exists about an entity’s ability to continue as a going concern.
Which of the following items will not signify that a material uncertainty exists?
a. Substantial operating losses or significant deterioration in the value of assets used to generate cash flows.
b. Change from cash-on-delivery to transactions with suppliers.
c. Withdrawal of financial support by creditors for essential new product development.
d. Adverse key financial ratios.
110.A time budget is an estimate of the total hours an audit is expected to take. The following are among the factors to be
considered in developing this budget, except
a. Location of client facilities.
b. Client’s size as indicated by its gross assets, sales, number of employees.
c. The competence and experience of available staff.

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Marawi City

d. Whether the audit is performed during the interim or at a year end.

111.As the audit progresses and additional information about the client is obtained, the acceptable level of audit risk
a. may be modified.
b. may not be reduced because it would become statistically invalid, but it may be increased.
c. may not be increased because it would become statistically invalid, but it may be reduced.
d. may not be modified.
112.Which of the following is not a consideration when the auditor is attempting to assess the inherent risk?
a. Nature of client’s business.
b. Existence of related parties.
c. Frequency and intensity of top management’s review of the accounting transactions and records.
d. Susceptibility to defalcation.
113.Which of the following is an example of the concept of inherent risk?
a. Humans make more errors than computers, therefore a manual accounting system is riskier than a computerized
system.
b. Accounting system with vouchers have many more controls built in, so the risk there will be errors on the financial
statement is reduced.
c. Loans receivable for a finance company are less likely to be collectible than those of a bank.
d. Audits with larger sample sizes are less risky than those with smaller sample sizes.
114.Which of the following discoveries by the auditor would not raise the red flag of increase inherent risk?
a. Management bonuses are based on percentage of net income.
b. A bond indentures requires a current ratio of at least three to one.
c. Client makes extensive use of notes receivable and notes payable rather than buying and selling on open account.
d. Client is a parent company with a subsidiary.
115.Inherent risk is reduced where the likelihood of defalcation is low. This would be true for an account such as
a. Inventory
b. Marketable securities
c. Cash
d. Accounts receivable
116.Both control risk and inherent risk are set by auditor. On a typical engagement the auditor would not set of these for
a. The overall audit.
b. each cycle.
c. each account.
d. each objective.
117.Because control risk and inherent risk vary from cycle to cycle, account to account , or objective to objective,
a. Acceptable audit risk must remain a constant.
b. Detection risk and required audit evidence will also vary.
c. Detection risk will vary but audit evidence will remain constant.
d. Detection risk will remain constant but audit evidence will vary.
118.After obtaining an understanding of an entity’s internal control structure and assessing control risk, an auditor may next
a. Perform tests of controls to verify management’s assertions that are embodied in the financial statements.
b. Consider whether evidential matter is available to support a further reduction in the assessed level of control risk.
c. Apply analytical procedures as substantive tests to validate the assessed level of control risk.
d. Evaluate whether the internal control structure policies and procedures detected material misstatement in the financial
statements.
119.An auditor may compensate for a weakness in the internal control by increasing the
a. Level of detection risk.

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Marawi City

b. Extent of tests of controls (compliance tests).

c. Preliminary judgment about audit risk.
d. Extent of analytical procedures.
120.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.
121.When an independent auditor’s examination of financial statements disclose 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 the 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.
122.The audit risk against which the auditors requires reasonable protection is a combination of two separate risks. The first of
these is that material errors will occur in the accounting process by which the financial statements are developed, and the
second is that
a. A company system of internal control is not adequate to detect errors and irregularities.
b. Those errors that occur will not be detected in the auditor’s examination.
c. Management may possess an attitude that lacks integrity.
d. Evidential matter is not competent enough the auditor to form an opinion based on reasonable assurance.
123.A CPA may reduce the audit work on a first time audit by reviewing the working papers of the predecessor auditor. The
predecessor should permit the successor to review the working papers relating to matters of continuing accounting
significance such as those that relate to
a. Extent of reliance on the work of specialists.
b. Fee arrangements and summaries of payments
c. Analysis of contingencies
d. Staff hours requires to complete the engagement
124.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. Tests of controls
d. Designing an audit program.
125.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.
126.Which of the following is not generally considered a financial statement audit risk factor?
a. Management operating and financing decision 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.

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

127.The risk that the auditor’s 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.
128.Which of the following statements is correct regarding the auditor’s determination of materiality?
a. The planning level of materiality will normally be the larger of the amount considered for the balance sheet vs. the
income statement.
b. The auditor’s planning level of materiality may be disaggregated into smaller “tolerable misstatements” for the
various account.
c. Auditors may use various rules of thumb to arrive at an evaluation level materiality, but not for determining the
planning level of materiality.
d. The amount used for planning will equal that used for evaluation.
129.The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes is:
a. The auditor’s preliminary estimate of the largest amount of the error that would be material to any client’s financial
statements.
b. The auditor’s preliminary estimate of the smallest amount of error that would be material to any one of the client’s
financial statements.
c. The auditor’s preliminary estimate of the amount of error 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.
130.The systems approach to an audit is least likely to be appropriate for:
a. Clients with weak internal control.
b. Clients that are large in size.
c. Clients in specialized industries.
d. Clients that are publicly held.

131. Which of the following is not an assertion that is made in the financial statements by management concerning each major
account and class transaction?

a. Completeness.
b. Rights and obligations.
c. Legality.
d. Presentation and disclosure.

132. Which of the following income statements is least likely to be verified in conjunction with the audit of a balance sheet
account?

a. Depreciation expense.
b. Interest revenue.
c. Travel and entertainment.
d. Uncollectible accounts expense

133. Tests for unrecorded assets typically involve tracing from:

a. Source documents to recorded journal entries.

b. Source documents to observations.

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Marawi City

c. Recorded journal entries to documents.

d. Recorded journal entries to observations.

134. Tracing from source documents forward to ledgers is most likely to address which assertion related to posted entries:

a. Completeness.
b. Existence.
c. Rights.
d. Valuation.

135. Determining that receivables are presented at net-realizable value is most directly related to which management assertion?

a. Existence or occurrence.
b. Rights.
c. Valuation or allocation.
d. Presentation and disclosure.

136. Which of the following is not a general objective for the audit of asset accounts?

a. Establishing existence of assets.

b. Establishing proper valuation of assets.
c. Establishing proper safeguarding of assets.
d. Establishing the completeness of assets.

137. Which of the following is not used by auditors to establish the completeness of recorded assets?

a. Assessing control risk.

b. Tracing from source documents to entries in the accounting records.
c. Performing analytical procedures.
d. Vouching transactions.

138. To test for unsupported entries in the journals, the direction of audit testing should be the:

a. Ledger entries.
b. Journal entries.
c. Original source documents.
d. Financial statements.

139. The auditors will not ordinarily initiate discussion with the audit committee concerning the:

a. Extent to which the work of internal auditors will influence the scope of the examination.
b. Extent to which change in the company’s organization will influence the scope of the examination.
c. Details of potential problems which the auditors believe might cause a qualified opinion.
d. Details of the procedures which the auditors intend to apply.

140. When planning an examination, an auditor should:

a. Consider whether the extent of substantive tests may be reduced based on the results of the internal control
questionnaire.

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Marawi City

b. Make preliminary judgments about materiality levels for audit purposes.

c. Conclude whether changes in compliance with prescribed control procedures justify reliance on them.
d. Prepare a preliminary draft of the management representation letter.

141. With respect to the auditor’s planning of the year-end examination, 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 our parts of the examination at interim dates.

142. Santos requested permission to communicate with the predecessor’s auditor and review certain portions of the predecessor
auditor’s working papers. The prospective client’s refusal to permit this will bear directly on Santos’ decision concerning the:

a. Adequacy of the preplanned audit program.

b. Ability to establish consistency in application of accounting principles between years.
c. Apparent scope limitation.
d. Integrity of management.

143. The auditor faces a risk that the examination will not detect material misstatements in the financial statements. In regard to
minimizing this risk, the auditor primarily relies on:

a. Substantive tests.
b. Tests of controls.
c. Internal control.
d. Statistical analysis.

144. 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. Tests of transaction and balances.

b. An assessment of internal control.
c. Specialized audit programs.
d. Analytical procedures.

145. As the acceptable level of detection risk decreases, the assurance directly provided from:

a. Substantive tests should increase.

b. Substantive tests should decrease.
c. Tests of controls should increase.
d. Tests of controls should decrease.

146. As the acceptable level of detection risk decreases, an auditor may change the:

a. Timing of substantive tests by performing them at an interim date rather than at year-end.
b. Nature of substantive tests from a less effective to a more effective procedure.
c. Timing of tests of controls by performing them at several dates rather than at one time.
d. Assessed level of inherent risk to a higher amount.

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Marawi City

147. Which of the following audit risk may be assessed in non-quantitative terms?
Inherent risk Control risk Detection risk

a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes

148. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are

a. elements of audit risk while detection risk is not.

b. changed at the auditor’s discretion while detection risk is not.
c. considered at the individual account-balance level while detection risk is not.
d. functions of the client and its environment while detection risk is not.

149. Which of the following elements underlies the application of the standards on auditing, particularly the standards of field
work and reporting?

a. Internal control.
b. Corroborating evidence.
c. Quality control.
d. Materiality and relative risk.

150. Which of the following procedures would an auditor least likely perform in planning a financial statement audit?

a. Coordinating the assistance of entity personnel in data preparation.

b. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity.
c. Selecting a sample of vendors’ invoices for comparison to receiving reports.
d. Reading the current year’s interim financial statements.

151. One of the first things that the auditor will do after accepting a new client is

a. tour client’s facilities.

b. contact client’s attorney to discover legal obligation.
c. study client’s internal control structure.
d. communicate with predecessor auditor.

152.Which of the following is not a document or record that should be examined early in engagement?

a. Corporate charter and bylaws.

b. Management letter.
c. Minutes of board directors’ and stockholders’ meeting.
d. Contracts.

153. Which of the following would not be found in the corporate charter?

a. The date of incorporation.

b. The kinds and amounts of capital stock authorized.
c. The rules and procedures adopted by the stockholders.

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d. The types of business activity that the corporation is allowed to conduct.

154. During the planning phase when the auditor is examining the contracts of the client, the primary attention should focus on

a. large peso value items.

b. any aspect of the agreement affecting financial disclosure.
c. tracing the information to verify correct journal entries.
d. the discovery of related party transactions.

155. Which of the following is the most likely the first step an auditor would perform 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. Tour the client’s facilities and review the general records.
d. Consult with and review the work of the predecessor auditor prior too discussing the engagement with the client
management.

156. A CPA is conducting the first examination of a non-publicly company’s financial statements. The CPA hopes to reduce the
audit work by consulting with the predecessor auditor and reviewing the predecessor working papers. This procedure is

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

b. acceptable if the CPA in the audit report to reliance upon the predecessor auditor’s work.
c. required if the CPA is to render an unqualified opinion.
d. unacceptable because the CPA should bring an independent viewpoint to a new engagement.

157. The auditors will not ordinarily initiate discussion with the audit committee concerning the

a. extent to which the work of internal auditors will influence the scope of the examination.
b. extent to which change in the company’s organization will influence the scope of the examination.
c. details of potential problems which the auditors believe might cause a qualified opinion.
d. details of the procedures which the auditors intend to apply.

158. Which of the following is an effective audit planning and control procedure that helps prevent misunderstandings and
inefficient use of audit personnel?

a. Make copies, for inclusion in the working papers, of those client supporting documents examined by the auditor.
b. Arrange to provide the client with copies of the audit programs to be used during the audit.
c. Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information.
d. Arrange to have the auditor prepare and post any necessary adjusting or reclassification entries prior to final closing.

159. The auditor should carefully consider the competence of the auditee’s employees because their competence deals directly
and importantly upon the

a. cost/benefit relationship of the system of internal control.

b. achievement of the objectives of the systems of internal control.
c. comparison of recorded accountability with assets.
d. timing of the tests to be performed.

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DEPARTMENT OF ACCOUNTANCY
Marawi City

160. In considering materiality for planning purposes, an auditor believes that misstatements aggregating P10, 000 would have a
material effect on an entity’s income statement, but that misstatements would have to aggregate P20, 000 to materially affect the
balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements
that aggregate

a. P10, 000.
b. P15, 000.
c. P20, 000.
d. P30, 000.

161. Analytical procedure used in planning an audit should focus on

a. evaluating the adequacy of evidence gathered concerning unusual balances.

b. testing individual account balances that depend on accounting estimates.
c. enhancing the auditor’s understanding of the client’s business.
d. identifying material weaknesses in the internal control structure.

162. Analytical procedures

a. are required to be performed in the planning phase of the audit.

b. are often done during the completion phase of the audit.
c. are required to be done during the completion phase of the audit.
d. may be performed at any of three times during the engagement.

163. A benefit obtained from comparing client’s data with industry averages is that it provides

a. an indication of the likelihood of financial failure.

b. an indication where errors exist in the statements.
c. a benchmark to be used in evaluating client’s budget.
d. a comparison of “what is” with “what should be”.

164. If most companies in the industry use FIFO inventory valuation and straight-line depreciation, and the audit client uses
weighted-average and double-declining balance comparisons of client and industry data

a. will be meaningful highlight of the result of these differences in accounting methods.

b. will enable the auditor to spot errors but not irregularities.
c. will enable the auditor to spot the irregularities but not errors.
d. may no be meaningful.

165.Two analytical procedures available to the auditor are

1). Compare current year’s balances with the preceding year.
2). Compare detail of a total balance with the preceding year.
Shortcomings of these two procedures are that

a. the first fails to consider growth or decline in business activity and the second ignores relationships of data to other data.
b. the first ignores relationships of data to other data and the second fails to consider growth or decline in business activity.
c. both fail to consider growth or decline in business activity and ignore relationships of data.
d. it is difficult, time consuming, and therefore costly to perform these procedures.

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Marawi City

166. A common comparison occurs when the auditor calculates the expected balance and compares it with actual balance. The
auditor’s expected account balance may be determined by

a. using industry standards.

b. using Dan and Bradstreet reports.
c. relating it to some other balance sheets or income statement account or accounts.
d. inquiry of client.

167. The first step in applying analytical procedures is to

a. set the objectives.

b. apply the decision rules.
c. conduct the tests.
d. Determine what would be relevant data to use.

168. The design of the specific analytical procedures depends upon

a. the objectives the auditor’s sets.

b. the data available.
c. the decision rules which apply.
d. the conclusion to be reached.

169. When analytical procedures are being designed, the auditor should evaluate whether the relationships among data are both
plausible and predictable. Which one of the following statements is not true?
a. As a general rule, relationships in a stable environment are more predictable than those in an unstable or dynamic
environment.
b. If the relationships among data are plausible when there is a clear cause and effect relationship among them.
c. Relationships are plausible when there is a clear cause and effect relationship among them.
d. Once plausibility has been verified, then predictability can be presumed.

170. Which one of the following statements regarding use of appropriate data is not true?

a. For comparisons to be useful, the data used must be relevant to the objectives involved.
b. It is of questionable value to compare current-year unaudited data with data that is unreliable.
c. To determine trends that enable meaningful analysis, comparisons should be made of at least four periods for each ratio
and percentage used.
d. Analytical procedures performed on disaggregated data are not as effective as those applied to the financial statement
data.

171. Many auditors believe that the most important aspect of analytical procedures are

a. making the calculations based on design of the test.

b. Classifying the results according to the decision rule.
c. Performing follow-up procedures.
d. All the three of the above.

172. the most common statistical technique used with analytical procedures is

a. Disaggregated data.
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Marawi City

b. Regression analysis.
c. A decision rule table.
d. Comparison of current-year with prior-year data, looking for large peso or large percentage changes.

173. Where an unusual fluctuation is indicated by analytical procedures and management is unable to provide a satisfactory
explanation, the auditor must assume that there is a high probability that an error or irregularity exist. In this case, the auditor
must

a. Issue either a qualified or an adverse opinion.

b. Issue a disclaimer.
c. Issue either a qualified opinion or a disclaimer.
d. Design other appropriate audit procedures to determine if such errors do exist.

174. One feature which is common to all microcomputer-based audit software is

a. The ability to input client’s general ledger into the auditor’s computer system.
b. The ability to decision-rule tables
c. The ability to download data from client’s mainframe into the auditor’s microcomputer system.
d. The ability to record adjusting journal entries into client’s system directly from the auditor’s system.

175. Which of the following ratios is not an indicator of client’s short-term debt-paying ability?

a. Current ratio.
b. Debt to equity ratio.
c. Quick ratio.
d. Cash ratio.

176. If a company does not have sufficient cash and cash-like items to meet its obligations

a. it is bankrupt.
b. it is insolvent.
c. the key to its debt-paying ability will be the length of time it takes the company to convert less liquid current assets into
cash.
d. the key to its debt-paying ability is the line of credit which it has available from banks.

177. To help plan the nature, timing and extent of substantive auditing procedures, preliminary analytical procedures should focus
on

a. enhancing the auditor’s understanding of the client’s business and event that have occurred since the last audit date.
b. developing plausible relationships that corroborate anticipated results with a measurable amount of precision.
c. applying ratio analysis to externally generated data such as published industry statistics nor price indices.
d. comparing recorded financial information to the results of other tests of transaction and balances.

178. In connection with the examination of financial statements by an independent auditor, the client suggests the members of the
internal audit staff be utilized to minimized audit costs. Which of the following tasks could appropriately be delegated to the
internal audit task?

a. Selection of accounts receivable for confirmation, based upon the internal auditor’s judgment as to how many accounts
and to which accounts will provide sufficient coverage.
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b. Preparations of schedules for negative accounts receivable responses.

c. Evaluation of the internal control of accounts receivables and sales.
d. Determination of the adequacy of the allowance of doubtful accounts.

179. Reportable conditions are matters that come to an auditor’s attention, which should be communicated to an entity’s audit
committee because they represent

a. material irregularities or illegal acts perpetrated by high-level management.

b. significant deficiencies in the design or operation of the internal control structure.
c. flagrant violations of the entity’s documented conflict-of interest policies.
d. Intentional attempts by client’s personnel to limit the scope of the auditor’s field work.

180. An auditor searching for related party transaction should obtain an understanding of each subsidiary’s relationship to the
total entity because

a. this may permit the audit of intercompany account balances to be performed as of concurrent dates.
b. intercompany transactions may have been consummated on terms equivalent to arm’s-length transactions.
c. this may reveal whether particular transactions would have taken place if the parties had not been related.
d. The business structure may be deliberately designed to obscure related party transactions.

181. A basic premise underlying analytical procedures is that

a. these procedures cannot replace tests balances and transactions.

b. statistical tests of financial information may lead to the discovery of material errors in the financial statements.
c. the study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations.
d. Relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the
contrary.

182. 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. tests of transactions and balances.

b. a preliminary review of the internal control.
c. specialized audit programs.
d. Analytical procedures.

183. An example of an analytical procedure is the comparison of

a. financial information with similar information regarding the industry which the entity operates.
b. recorded amounts of major disbursements with appropriate invoices.
c. results of the statistical samples with the expected characteristics of the actual populations.
d. EDP generated data with similar data generated by a manual accounting system.

184. Before applying principal substantive tests to the details of assets and liability accounts at an interim date, the auditor should

a. assess the difficulty in controlling incremental audit risk.

b. investigate significant fluctuations that have occurred in the asset and liability accounts since the previous balance-sheet
date.
c. select only those accounts which can effectively be sampled during year-end audit work.
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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

d. consider the tests of controls that must be applied at the balance sheet date to extend the audit conclusions reached at the
interim date.

185. For which of the following balances are substantive tests of details least likely to be performed unless analytical procedures
indicate the need to extend detail testing?

a. Payroll expense.
b. Marketable securities.
c. Research and development cost.
d. Legal expense.

186. An auditor should examine minutes of board of directors meetings

a. through the date of his report.

b. through the date of the financial statements.
c. on a test basis.
d. Only at the beginning of the audit.

187. One reason why the independent auditor makes the analytical review of the client’s operations is to identify probable

a. weaknesses of the material nature in the system of internal control.

b. Non-compliance with prescribed control procedures.
c. Improper separation of accounting and other financial duties.
d. Unusual transactions.

188. Which of the following ratios would be the least useful in reviewing the overall profitability of a manufacturing company?

a. Net income no net worth.

b. Net income to total assets.
c. Net income to sales.
d. Net income to working capital.

189. Which of the following best describes the most important stage of an auditor’s statistical analysis of significant ratios and
trends?

a. Computation of significant ratios and trends.

b. Interpretations of significant variations and unusual relationships.
c. Reconciliation of statistical data to the client’s accounting records.
d. Comparison of statistical data to prior-year statistics and to similar data published by governmental and private sources.

190. The auditor generally gives most emphasis to ratio and trend analysis in the examination of the statement of
a. Retained earnings.
b. Income.
c. Financial position.
d. Cash flows.

191. A not-for-profit organization published a monthly magazine that had 30,000 subscribers on January 2, 2011. The number of
subscribers increased steadily throughout the year end at December 31, 2011, there were 32, 400 subscribers. The annual

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

magazine subscription cost was P10 on January 1, 2011, and was increased to P12 for new members in April 1, 2011. An auditor
would expect that the receipts for subscription for the year ended December 31, 2011 would be approximately
a. P358,800.
b. P343,200.
c. P328,800.
d. P327,600.

192. Audit programs are modified to suit the circumstances on particular engagements. A complete audit program for an
engagement generally should be developed
a. prior to beginning the actual audit work.
b. after the auditor has completed an evaluation of the existing internal accounting control.
c. after reviewing the client’s accounting records and procedures.
d. When the audit engagement letter is prepared.

193. Which of the following is an aspect of scheduling and controlling the audit engagement?
a. Include in the audit program a column for estimated and actual time.
b. Perform audit work only after the client’s book if accounts have been closed for the period under examination.
c. Write a conclusion on individual working paper indicating how the results thereon will affect thereon will affect the
auditor’s report.
d. Include in the engagement letter an estimate of the minimum and maximum audit fee.

194. Which of the following analytical review procedures should be applied to income statement?
a. Select sales and expense items and trace amounts to review supporting documents.
b. Ascertain that the new income amount in the statement and the changes in financial position agree with the net income’s
amount in the income statement.
c. Obtain from the proper client representatives, the beginning and ending inventory amounts that were used to determine
costs of sales.
d. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate
significant difference.

195. Audit programs generally include procedures necessary to test the actual transactions and resulting balances. These
procedures are primarily designed to
a. detect irregularities that result in misstated financial statements.
b. test the adequacy of internal control.
c. gather corroborative evidence.
d. obtain information of informative disclosures.

196. An auditor uses analytical review during the course of an audit. The most important phase of this review is the
a. computation of key ratios such as inventory turnover and gross profit percentages.
b. investigation of significant variations and unusual relationships.
c. comparison of client-computed statistics with industry data on a quarterly and full-year basis.
d. examinations of the client data that generates the statistics that are analyzed.

197. Which of the following is not a typical analytical review procedure?

a. Study of relationships of the financial information with relevant on-financial information.
b. Comparison of the financial information with similar information regarding the industry in which the entity operates.

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

c. Comparison of the recorded amounts of major disbursements with appropriate invoices.

d. Comparison of the financial information with budgeted amounts.

198. Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross
profit to sales may suggest which of the following possibilities?
a. Unrecorded purchases.
b. Unrecorded sales.
c. Merchandise purchases being charged to selling and general expense.
d. Fictitious sales.

199. The risk of the material misstatement occurring in an account, assuming an absence of internal control is referred to ad
a. Account risk.
b. Control risk.
c. Detection risk.
d. Inherent risk.

200. Which of the following is not generally 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.

201. The predecessor auditor is required to respond to the request of the successor auditor for information will be provided when
a. predecessor auditor had poor relations with successor auditor.
b. client is dissatisfied with predecessor’s work.
c. there are legal problems between client and predecessor.
d. predecessor believes that client lacks integrity.

202. The systems approach to an audit is least likely to be appropriate for

a. clients with weak internal control.
b. clients that are large in size.
c. clients in specialized industries.
d. clients that are publicly held.

203. Which of the following is an aspect of scheduling and controlling the audit engagement?
a. Include in the audit program for estimated and actual time.
b. Perform audit work only after the client’s books of account have been closed for the period under the examination.
c. Write a conclusion in individual working papers indicating how the results of the audit will affect the auditor’s report.
d. Include in the engagement letter in estimate of the mini-audit fee.

204. An audit program provides proof that

a. Sufficient competent evidential matter was obtained.
b. the work was adequately planned.
c. there was compliance with generally accepted with generally accepted standards of reporting.
d. there was a proper study and evaluation of internal control.

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

205. Audit programs are modified to suit the circumstances on particular engagements. A complete audit program for an
engagement generally should be developed
a. prior to beginning the actual audit work.
b. after the auditor has completed an evaluation of the existing internal accounting period.
c. after reviewing the client’s records and procedures.
d. when the audit engagement letter is prepared.

206. Client acceptance and retention policies and procedures do not include
a. evaluating firm’s independence with potential client.
b. obtaining and reviewing information about company.
c. permission of the predecessor auditor.
d. considering whether engagement requires special skill.

207. The probability that an auditor will give an inappropriate opinion on financial statements is
a. audit risk.
b. Inherent risk.
c. Control risk.
d. Detection risk.

208. Auditors would appear not to exhibit due audit care if there was a
a. High audit risk.
b. Low detection risk.
c. High inherent risk.
d. Low control risk.

209. An auditor who believes that a material irregularity may exist should initially
a. Withdraw from the engagement.
b. Discuss the matter with the higher level of management.
c. Discuss the matter with those believed to be involved in the perpetration of the material irregularity.
d. Consult legal counsel.

210. If the independent auditor decides that the work performed by the internal auditor may have a bearing on their own
procedures, they should consider the internal auditor’s
a. Training and supervisory skills.
b. Efficiency and experience.
c. Competence and objective.
d. Independence and review skills.

211. The auditors are planning an audit engagement for a new client in a business that is unfamiliar to the auditors. Which of the
following would be the most useful source of information for the auditors during the preliminary planning stage when they are
trying to obtain a general understanding of audit problems that might be encountered?
a. Client manuals of accounts and charts of accounts.
b. Industry Audit Guides.
c. Prior-year working papers of the predecessor auditors.
d. Latest annual and interim financial statements issued by the client.

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

212. Which of the following situations would most likely require special audit planning by the auditor?
a. Some items of the factory and office equipment do not bear identification numbers.
b. Depreciation methods used on the client’s tax return differ from those used in the books.
c. Assets costing less than P500 are expensed even though expected life exceeds one year.
d. Inventory is comprised of precious stones.

213. The element of the audit planning process most likely to be agrees upon with the client before implementation of the audit
strategy is the determination of the
a. Timing of inventory observation procedures to be performed.
b. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
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.

214. Investigation of new clients and reevaluation of existing ones is an essential part of deciding
a. Inherent risk.
b. Acceptable audit risk.
c. Statistical risk.
d. Financial risk.

215. An extensive understanding of the client’s business and industry and knowledge about the company’s operations are
essential for doing an adequate audit. For a new a 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.

216. Research has indicated several factors which affect business risk and therefore acceptable risk. Which of the following dies
not affect business risk?
a. The degree to which external users rely on the statements.
b. The likelihood that client will have financial difficulties after the audit report is issued.
c. The integrity of management.
d. Weaknesses in client’s internal control structures.

217. The audit risk against which the auditor requires reasonable protection is a combination of two separate risks. The first of
these is that material errors will occur in the accounting process by which the financial statements are developed, and the second
is that
a. A company’s of internal control is not adequate to detect errors and irregularities.
b. Those errors that occur will not be detected in the auditor’s examination.
c. Management may possess an attitude that lacks integrity.
d. Evidential matter is not competent enough for the auditor to form an opinion based on reasonable assurance.

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

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