1.

The person responsible for the audit engagement and its performance, and for the auditor’s
report that is issued in behalf of the firm is the
Engagement partner
2. Identify the following as financial audit (FA), compliance audit (CA), and operational audit (OA).
 A supervisor is not carrying out his assigned responsibilities.
 A company’s tax return does not conform to income tax laws and regulations.
 A municipality’s financial statements correctly show actual cash receipts and
disbursements.
 A company’s receiving department is inefficient.
OA, CA, FA, OA
3. Which of the following is an example of fraudulent financial reporting?
Company management changes inventory count tags and overstates ending
inventory, while understating cost of goods sold
4. Risk in auditing means that the auditor accepts some level of uncertainty in performing the
audit function. An effective auditor will
Recognize that risks exist and deal with it in an appropriate manner
5. Which of the following best describes the objective of an audit of financial statements?
To express an opinion whether the financial statements are prepared, in all
material respect, in accordance with an identified financial reporting framework.
6. Which of the following is not an essential component of quality control?
Policies and procedures to ensure that the firm personnel are actively engaged
in marketing strategies
7. In developing the preliminary level of materiality in an audit, the auditor will
Rely primarily on professional judgment to determine the materiality level
8. Which of the following statements pertains to analytical procedures?
It consist of the analysis of significant ratios and trends including the resulting
investigation of fluctuations and relationships that are inconsistent with other
relevant information or deviate from predicted amounts.
9. Which of the following statements concerning the audit of financial statements is incorrect?
In representing that the financial statements in accordance with the applicable
financial reporting framework, management only explicitly but not implicitly makes
assertions regarding the recognition, measurement, presentation and disclosure of
the various elements of financial statements and related disclosures.
10. Which of the following circumstances most likely would cause an auditor to consider whether
material misstatements exist in an entity’s financial statements?
Significant, unusual, or highly complex transactions, especially those close to an
entity’s financial year-end that pose difficult substance over form questions.
11. Analytical procedures performed in the planning stage of an audit suggest that several
accounts have unexpected relationships. The results of these procedures most likely would
indicate that:
Additional tests of details are required
12. The assessment of the risks of material misstatement at the financial statement level is
affected by the auditor’s understanding of the control environment. Weaknesses in the control
environment ordinarily will lead the auditor to
Modify the nature of audit procedures to obtain more persuasive audit evidence
13. The fourth generally accepted auditing standard of reporting requires an auditor to render a
report whenever an auditor’s name is associated with financial statements. The overall purpose
of the fourth standard of reporting is to require that reports:
Indicate the character of the auditor’s examination and the degree of
responsibility assumed by the auditor
14. Which of the following is true of the report based on agreed-upon procedures?
The report is restricted to those parties who have agreed to the procedures to
be performed
15. Which of the following best describes why an independent auditor reports on financial
statements?
Competing interests may exist between management and the users of the
statements
16. Discussions with the owner-manager of an audit client reveal to the auditor that the
company is more concerned with minimizing their income tax payments than maximizing
income. Based on this information, which management assertion will the auditor be most
concerned about verifying with regard to sales revenue?
Completeness
17. Audit risk components consist of inherent, control and detection risk. Which of them is (are)
the dependent variable(s)?
Detection risk
18. Which of the following statements concerning compilation engagement is incorrect?
The procedures employed in a compilation engagement enable the accountant
to express a moderate level of assurance on the compiled financial information.
19. The following are fraud risk factors relating to management’s characteristics and influence
over the control environment, except
Lack of mandatory vacations for employees performing key control functions
20. Which of the following statements is correct with respect to the auditor’s use of analytical
procedures?
Analytical procedures are required to be used during the planning and
completion phases of the audit
21. Which of the following procedures is a practitioner least likely to perform during a review
engagement?
Observing the safeguards over access to and use of assets and records
22. The auditor does not normally send new engagement letter every year for recurring audits.
However, the following factors may cause the auditor to send a new engagement letter, except
An increase in the number of the newly accepted clients of the auditing firm.
23. Which of the following is incorrect about a compilation engagement?
The CPA uses his auditing expertise to collect, classify and summarize the
financial information
24. When planning the audit, the auditor should make inquiries of management. Such inquiries
should address the following, except
Management’s consideration of how an element of unpredictability will be
incorporated into the nature, timing and extent of the audit procedures to be
performed.
25. Which of the following would not create a threat to independence?
A deposit made by the firm or a member of the assurance team with an
assurance client that is a bank and such deposit is held under normal commercial
terms.
26. Which of the following statements best describes an auditor’s responsibility to detect errors
and fraud?
An auditor should assess the risk that errors and fraud may cause the financial
statements to contain material misstatements and should design the audit to provide
reasonable assurance of detecting errors and fraud that are material to the financial
statement.
27. Which of the following quality control policies and procedures does not relate to human
resources and assignment?
Emphasize independence of mental attitude in training programs and in
supervision and review of the audits
28. The term “error” refers to unintentional misrepresentation of financial information. Examples
of errors are when 
I. Assets have been misappropriated 
 II. Transactions without substance have been recorded
III. Records and documents have been manipulated and falsified
IV. The effects of the transactions have been omitted from the records
All of the above statements are false
29. The following statements pertain to evidence are correct, except
The amount and kind of audit evidence to be obtained by the auditor is
mandated and specifically provided by PSA and there will be no room for professional
judgment.
30. Which of the following best describes the function of Auditing and Assurance Standards
Council (AASC)?
To promulgate auditing standards, practices and procedures that shall be
generally accepted by the accounting profession in the Philippines. 
31. Which of the following pertains to intimidation threat?
It occurs when a member of the assurance team may be deterred from acting
objectively and exercising professional judgment by threats, actual or perceived, from
the directors, officers or employees of an assurance client.
32. Indicate the level of assurance provided by audit and related services.

33. Who shall initiate the communication between a successor and predecessor auditor in case
there is change in the auditor of a company?
Successor auditor upon obtaining permission from the client
34. The CPA profession deemed it necessary to establish a Code of Professional Ethics and a
mechanism for its mechanism for its enforcement because
Acceptance of responsibility to the public is a distinguishing mark of a
profession.
35. Of the following procedures, which one is not considered a part of “obtaining an
understanding of the client’s environment?”
Confirming customer accounts receivable for existence and valuation
36. Why is the risk of not detecting a material misstatement resulting from fraud higher than the
risk of not detecting material misstatements resulting from error?
Because fraud may involve sophisticated and carefully organized schemes
designed to conceal it.
37. Which of the following is not correct?
It would be a violation of the completeness assertion if the management would
record a sale that did not take place.
38. The following are quality control procedures related to engagement performance, except
The firm is to be staffed by personnel who have attained and maintained the
technical standards and professional competence required to enable them to fulfill
their responsibilities.
39. The following are correct concerning the auditor’s responsibility for detection of fraud and
error, except
When the auditor believes that material error or fraud exists which makes the
financial statements materially misstated, he should request the management to
revise the financial statements. Otherwise, the auditor will express a qualified or
disclaimer opinion.
40. The following are the considerations before accepting an audit engagement, except
To determine the appropriate opinion to be issued.
41. The main purpose of risk assessment procedures is to
 Obtain an understanding of the entity and its environment, including its
internal control, to assess the risks of material misstatement at the financial
statement and assertion levels
42. Which of the following is appropriately included in an audit engagement letter?
I. Because of the test nature and other inherent limitations of an audit, together with the
inherent limitations of any accounting and internal control system, there is an unavoidable
risk that even some material misstatements may remain undiscovered.
II. The audit will be made with the objective of expressing an opinion on the financial
statements.
III. An audit also includes assessing the accounting procedures used and significant
estimates made by management.
I and II
43. Which of the following statements is not correct?
Gathering evidence and minimizing costs are equally important considerations
that affect the approach the auditor selects.
44. What is the primary objective of a review of financial statements engagement?
To state whether anything has come to the auditor’s attention that indicates
that the financial statements are not fairly stated.
45. The following are fraud risk factors relating to industry conditions, except
Management commits to analysts, creditors and other third parties to achieving
what appear to be unduly aggressive or clearly unrealistic forecasts.
46. An audit plan is
Document that provides an overview of the company and a general plan for the
audit work to be accomplished, timing of the work, and other matters of concern to
the audit
47. As used in auditing, which of the following statements best describes "assertions"?
Assertions are the representations of management as to the fairness of the
financial statements.
48. In which of the following order would the auditor perform the following steps?
Set materiality; determine audit risk; assess control risk; determine detection
risk
49. In considering materiality for planning purposes, an auditor believes that misstatements
aggregating P 100,000 would have a material effect on an entity’s income statement, but those
misstatements would have to aggregate P 200,000 to materially affect the balance sheet.
Ordinarily, it would be appropriate to design auditing procedures that would be expected to
detect misstatements that aggregate.
P 100,000
50. The following are correct concerning the auditor’s responsibility for detection of
noncompliance, except
The auditor should design audit procedures to obtain sufficient appropriate
audit evidence about compliance with those laws and regulations even without an
effect on the determination of material amounts and disclosures in the financial
statements.
51. Which of the following primary assertions is satisfied when an auditor observes the client’s
physical count of inventory?
Existence
52. The auditor of a parent is also the auditor of its component. Which of the following factors
may influence the auditor’s decision whether to send a separate engagement letter to the
entity’s component?
Whether a separate auditor’s report is to be issued on the component
53. When an immediate family member of a member of the assurance team is a director, an
officer, or an employee of the assurance client in a position to exert direct and significant
influence over the subject matter information of the assurance engagement, or was in such a
position during the period covered by the engagement, the threats to independence can only be
reduced to an acceptable level by
Removing the individual from the assurance team.
54. Which of the following statements would least likely appear in an auditor's engagement
letter?
After performing our preliminary procedures, we will discuss with you the other
procedures we consider necessary to complete engagement.
55. After evaluating the significance of the threat created by an actual or threatened litigation,
the following safeguards should be applied to reduce the threat to an acceptable level, except
Withdraw from, or refuse to accept, the assurance engagement
56. The Code of Ethics of Professional Accountant states that a CPA shall not disclose any
confidential information obtained in the course of a professional engagement except with the
consent of his client. In which of the following situations given below would a CPA be in violation
of the principle of confidentiality?
Disclosing confidential information to another accountant interested in
purchasing the CPA's practice
57. Which of the following statements is most correct regarding the primary purpose of audit
procedures?
a. To detect all errors of fraudulent activities as well as illegal activities
b. To comply with the SEC
c. To gather corroborative audit evidence about management’s assertions
regarding the client’s financial statements
d. To determine the amount of errors in the balance sheet accounts in order to adjust
the accounts to actual
58. Below are the types of test which auditors use to determine whether financial statements are
fairly stated. Which three are substantive tests?
1. Risk assessment procedures
2. Tests of controls
3. Tests of transactions
4. Analytical procedures
5. Tests of details of balances
a. 1,2, and 3
b. 3,4 and 5
c. 2,3 and 5
d. 2,3 and 4
59. In the context of an audit of financial statements, 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 transactions, direct tests of financial balances, or
analytical tests
d. Will increase proportionately with the auditor’s assessment of control risk
60. Evidence is usually more persuasive for balance sheet accounts when it is obtained:
a. As close to the balance sheet date as possible
b. Only from transactions occurring on the balance sheet date
c. From various times throughout the client’s year
d. From the time period when transactions in that account were most numerous during
the fiscal period
61. Often, auditor procedures results in significant differences being discovered by the auditor.
The auditor should investigate further if
Significant differences are not Significant differences are expected but
expected but do exists do not exist
a Yes Yes
b No No
 c Yes No
d No Yes

62. Auditors may decide to replace tests of details with analytical procedures when possible
because the:
a. Analytical procedures are more reliable
b. Analytical procedures are considerably less expensive
c. Analytical procedures are more persuasive
d. Tests of details are more difficult to interpret
63. Which of the following is most correct with respect to the use of analytical procedures
a. Analytical procedures may be used in evaluating balances in the testing phase as long
as the auditor also uses them in assessing the going concern assumption
b. Analytical procedures must be used throughout the audit\
c. Analytical procedures used in the testing phase of the audit are primarily used to
direct an auditor’s attention so that the auditor’s understanding of the business is
improved
d. Analytical procedures are performed by studying plausible relationships
between financial and nonfinancial data
64. Of the following procedures, which does not produce analytical evidence?
a. Compare revenue, cost of sales, and gross profit with the prior year and investigate
significant variations
b. Examine monthly performance reports and investigate significant revenue and
expense variances
c. Confirm customers’ accounts receivable and clear all material exceptions
d. Compare sales trends and profit margins with industry averages and investigate
significant differences
65. Which of the following analytical procedures, should be applied to the income statement?
a. Select sales and expense items and trace amounts to related supporting documents
b. Ascertain that new income account in the statement of cash flows agrees with the net
income amount in the income statement
c. Obtain from the 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 differences
66. Auditors try to identify predictable relationships when using analytical procedures.
Relationships involving transactions from which of the following accounts most likely would yield
the highest level of evidence?
a. Accounts payable
b. Advertising expense
c. Accounts receivable
d. Interest expense
67. Which result of an analytical procedure suggests the existence of obsolete merchandise?
a. Decrease in the inventory turnover rate
b. Decrease in the ratio of gross profit to sales
c. Decrease in the ratio of inventory to accounts payable
d. Decrease in the ratio of inventory to accounts receivable
68. Which of the following would not be classified as an analytical procedure?
a. Benchmarking in the company’s profitability ratios against others in the industry
b. Variance analysis of actual versus budgeted amounts for production
c. Reperforming the client’s depreciations expense during the client’s accounting
policies for capital expenditures made during the year
d. Reconciling fixed asset disposition with the fixed asset ledger
69. An auditor compares this year’s revenue and expenses with those of the prior year and
investigates all changes exceeding 10%. By this procedure the auditor would most to likely learn
that
a. An increase in property tax rates has not been recognized in the client’s accrual
b. This year’s provision for uncollectible account is inadequate because of worsening
economic conditions
c. December payroll taxes were not paid
d. The client changed its capitalization policy for small tools during the year
70. Confirmations would almost always be used, assuming all the accounts below are material,
for:
a. Individual transactions between organizations, such as sales transactions
b. Bank balances and accounts receivable
c. Fixed assets additions
d. Payroll expenses
71. The practice of auditing firms to spread work throughout the year by carrying out as many
auditing procedures as practicable before the balance sheet date, in order to minimize the load
during the peak period. This is called
a. Test of recorded transactions
b. Confirmation of receivable and payables
c. Observation and test-check of inventories
d. Interim work
72. In order to promote audit efficiency the auditor considers cost in selecting audit tests to
perform. Which of the following audit tests would be the most costly?
a. Analytical procedures
b. Risk assessment procedures
c. Tests of controls
d. Tests of details of balances
73. Which of the following is considered further audit procedures that may be designed after
assessing of the risk of material misstatement?
Substantive test of details Risk assessment procedures
a Yes Yes
b Yes No
c No Yes
d no No

Evidence
74. The information obtained by the auditor in arriving at the conclusions on which the audit
opinion is based is called:
a. Audit working papers
b. Audit assertions
c. Audit evidence
d. Audit standards
75. Which of the following is the best example of a corroborating evidence?
a. General journal
b. Worksheet cost allocation
c. Vendor’s invoice
d. Cash receipt journal
76. Which of the following is correct about the appropriateness of evidence?
a. Audit evidence from external sources is more relevant than evidence generated
internally
b. Audit evidence is more persuasive when items of evidence from different sources or
of different nature are not consistent
 c. Audit evidence generated internally is more reliable when the related
accounting and internal control systems are effective
d. Sufficiency refers to the amount of evidence needed
77. Evidence is generally considered appropriate when:
a. It has been obtained by random selections
b. There is enough of it to afford a reasonable basis for an opinion on financial
statements
c. It has the qualities of being relevant, objective, and free from known bias
d. It consists of written statements made by managers of the enterprise under audit
78. Appropriateness of evidence is a measure of the:
a. Quantity of evidence
b. Quality of evidence
c. Sufficiency of evidence
d. Meaning of evidence
79. The sufficiency and appropriateness of evidential matter ultimately is based on the
a. Availability of the corroborating data
b. Philippine Standards on Auditing
c. Pertinence of the evidence
d. Judgment of the auditor
80. An example of an external document that provides reliable information for the auditor is:
a. Employees’ time report
b. Banks statements
c. Purchase order for company purchases
d. Carbon copies of check

81. Which of the following is the most reliable type of evidence?

a. A written representation signed by the entity’s CFO
b. The physical count of securities and cash
c. Inquiries of the credit manager about the collectability of the noncurrent accounts
receivable
d. Observation of cobwebs on some inventory bins
82. For audit evidence to be compelling to the auditor it must be sufficient and appropriate.
Which statement below does not relate to the appropriateness of audit evidence?
a. The more effective the internal control system, the more assurance it provides the
auditor about the reliability of financial reporting by the client
b. An auditor’s opinion, to be economically useful and profitable to the auditing
firm needs to be formed within a reasonable time and based on evidence
obtained that assures profits for the auditing firm
c. Evidence obtained from independent sources outside the entity is generally more
reliable than evidence secured solely within the entity
d. The independent auditor’s direct personal knowledge, obtained through inquiry,
observation and inspection, is generally more persuasive than information obtained
indirectly
83. Which of the following forms of evidence would be least persuasive in forming the auditor’s
opinion about trading securities and other investments held by the company?
a. Responses to auditor’s questions by the president and controller regarding the
investments account
b. Correspondence with a stockbroker regarding the quantity of client’s investment held
by the broker
c. Minutes of the board of directors authorizing the purchase of stock as an investment
d. The auditor’s count of marketable securities
84. Which of the following statements is not a correct use of the terminology in relation to audit
evidence?
 a. Evidence obtained from an independent source outside the client organization is
more reliable than that obtained from within
b. Documentary evidence is more reliable when it is received by the auditor
indirectly rather than directly
c. Documents that originate outside the company are considered more reliable that
those that originate within the client’s organization
d. External evidence, such as communications from banks, is generally regarded as
more reliable than answers obtained from inquiries of the client
85. Which of the following types of audit evidence is the least persuasive?
a. Prenumbered purchase order forms
b. Bank statements obtained from the client
c. Test counts of inventory performed by the auditor
d. Correspondence from the client’s attorney about litigation

86. Given the audit procedures below, which one provides the most reliable evidence about the
validity of accounts receivable balance?
a. Confirmations
b. Recalculation
c. Reperformace
d. Observations
87. To be considered reliable evidence confirmations must be controlled by:
a. A client employee responsible for accounts receivable
b. A financial statement auditor
c. A client’s internal audit department
d. A client’s controller or CFO
88. When making decisions about evidence for a given audit, the auditor’s goal is to obtain a
sufficient amount of timely, reliable evidence that is relevant to the information being verified. In
addition, the goal of audit efficiency is to gather and evaluate the information:
a. No matter the cost involved in obtaining such evidence
b. Even if cost is irrelevant to the auditor, because they bill the client for costs incurred
c. At the lowest possible total cost
d. At the cost suggested in the engagement letter

Working papers
89. Which of the following best describe one of the primary objectives of audit documentation?
a. Defend against claims of deficient audit
b. Provide a principal support for the income tax return
c. Provide documentation that the audit was conducted in accordance with
auditing standards
d. Provide additional support of recorded amounts to client
90. Which of the following statements is incorrect about the working papers prepared by the
auditor?
a. The auditor should record in the working papers information on planning the audit
work, the nature, timing and extent of the audit procedures performed, the results
thereof, and the conclusions reached from the audit evidence obtained
b. The extent of working paper documentation is a matter of professional judgement
c. Working papers should be in the form of data stored on paper
d. Working papers should be designed and organized to meet the circumstances and
the auditor’s need for each individual audit
91. Which of the following is not one of the primary purposes of working papers?
a. To assist in planning and performance of the audit
b. To assist in the supervision and review of work
 c. To record the audit evidence resulting from audit work performed to support the
auditor’s opinion
d. To substitute the client’s accounting records
92. Which of the following statements concerning working papers is incorrect?
a. An auditor may support an opinion by other means in addition to working
papers
b. The form of working papers should be designed to meet the circumstances of a
particular engagement
c. An auditor’s working papers may not serve as a reference source for the client
d. Working papers should show that the internal accounting control system has been
studied and evaluated to the degree necessary
93. Which of the following is not a factor that affects the independent auditor’s judgment as to
the quantity, type and content of the working papers?
a. The timing and the number of personnel to be assigned to the engagement
b. The nature of the engagement
c. The need for supervision of the engagement
d. Forms of the report
94. Due care in the matter of audit documentation required that the audit documentation of the
evidence gathered by the auditor meets which of the following criteria?
a. Workpapers be indexed to the general ledger accounts and include both a permanent
file and a general file
b. The content be sufficient to provide support for the auditors opinion, including
the auditor’s representation as to compliance with auditing standards
c. Audit evidence is principally gathered to determine if the client’s financial statements,
as prepared by management, can be relied upon to make managerial decisions about
the firm
d. Audit evidence as displayed in the workpapers is primarily performed to protect the
auditing firm in the case of a lawsuit by investors
95. Which of the following statements about working papers is correct?
a. Working papers are not permitted to be used as a reference source by the client
b. The auditor should document the understanding of the client’s internal control
obtained to plan the audit
c. Working papers may be regarded as a substitute for the client’s accounting records
d. When reporting on comparative financial statements, the independent auditor may
discard working papers after two years.
96. Working papers would not include
a. Information concerning the legal and organizational structure of the entity
b. Letters of representation received from the entity
c. Copies of the financial statements and the auditor’s report
d. Documentation showing how the client’s schedules are prepared
97. Although the quantity and content of the audit working papers vary with each particular
engagement, an auditor’s permanent files most likely include
a. Schedules that support the current year’s adjusting entries
b. Prior year’s account receivable confirmations that were classified as exceptions
c. Documentation indicating that the audit work was adequately planned and
supervised
d. Analyses of capital stock and other owners’ equity account

98. The current file of the auditor’s papers generally should include
a. A flowchart of the internal accounting controls
b. A copy if the financial statements
c. Organization charts
d. Copies of bond and note indentures
99. For what minimum period should audit working papers be retained by the independent CPA?
a. For the period during which the entity remains a client of the independent CPA
b. For the period during which an auditor-client relationship exists but not more than six
years
c. For the statutory period within which legal action may be brought against the
independent CPA
d. For as long as the CPA is in public practice
100. Which statement is correct concerning the deletion of the audit documentation?
a. Superseded audit documentation should always be deleted from the audit file
b. After the audit file has been completed, the auditor should not delete or discard audit
documentation
c. Auditors should use professional skepticism in determining which audit
documentation should be deleted
d. Audit documentation should never be deleted from the audit file
101. What client information is needed by auditors in creating lead schedules?
a. Interim statements prepared by the client
b. General ledger information, including unadjusted ending
c. A schedule of adjusting entries made by the client for all balance sheet accounts
d. Detailed transactions information that may explain the changes in balance sheet
accounts for the current year under audit
102. The main advantage of properly indexed working papers is to
a. Reduce the size of the file
b. Better organize the working papers
c. Allow division of labor within the audit team
d. Facilitate the efficient use of audit staff
103. The principal purpose for cross-indexing audit working papers is to
a. Give the working papers a professional appearance
b. Explain the use of tick marks
c. Provide explanation of the audit steps performed
d. Provide a trail for the auditor and the reviewer

Accounting estimates
104. It is an approximation of the amount of an item in the absence of a precise means of
measurement
a. Accounting estimate
b. Audit sampling
c. Materiality
d. Audit risk
105. In evaluating an entity’s accounting estimates, one of an auditor’s objective is to determine
whether the estimates are:
a. Not subject to bias
b. Consistent with industry guidelines
c. Based on objective assumptions
d. Reasonable in the circumstances
106. In evaluating the assumptions on which the estimate is based, the auditor would need to
pay particular attention to assumptions which are
a. Reasonable in light of actual results in prior periods
b. Consistent with those used for other accounting estimates
c. Consistent with management’s plans which appear appropriate
d. Subjective or susceptible to material misstatement
107. Which of the following would an auditor generally perform to obtain assurance that
accounting estimates are properly accounted for and disclosed?
a. Inquiry of management
 b. Make an independent estimate for comparison with client’s estimate
c. Review subsequent events
d. Obtain knowledge about applicable financial reporting standards related to the
accounting estimates
108. Which of the following procedures would an auditor ordinarily perform first in evaluating
management’s accounting estimates for reasonableness?
a. Develop independent expectations of management’s estimates
b. Consider the appropriateness of the key factors or assumption used in preparing the
estimates
c. Test the calculations used by the management in developing the estimates
d. Obtain an understanding of how management developed its estimates

Related parties
109. The primary concern of the auditor regarding related party transactions is that
a. They are reported to proper regulatory authorities because they are illegal
b. Their form be emphasized rather than their economic substance
c. Their existence and significance adequately disclosed
d. Their effects are eliminated from the financial statements
110. Most auditors assess inherent risk as high for related parties and related-party transactions
because:
a. Of the unique classification of related-party transactions required on the balance
sheet
b. Of the lack of independents between the parties
c. Of the unique classification of related-party transactions required on the income
statement
d. It is required by PFRS
111. Which of the following is most likely to indicate the existence of related parties?
a. Writing down obsolete inventory just before year-end
b. Failing to correct previously identified internal control deficiencies
c. Depending on a single product for the success of the entity
d. Borrowing money at an interest rate significantly below the market rate
112. Which of the following auditing procedures is most likely to assist an auditor in identifying
related party transactions?
a. Retesting ineffective controls previously reported to the audit committee
b. Sending second requests for unanswered positive confirmations of accounts
receivable
c. Reviewing information provided by management identifying related parties
and being alert for other material related party transactions
d. Inspecting communications with law firms for evidence of unreported contingent
liabilities
113. After determining that a related party transaction has in fact occurred, an auditor should
a. Add a separate paragraph to the auditor’s standard report to explain the transactions
b. Perform analytical procedures to verify whether similar transactions occurred, but
were not recorded
c. Obtain an understanding of the business purpose of the transactions
d. Substantiate that the transaction was consummated on terms equivalent to an arm’s
length transactions

Expert
114. A person or firm possessing special skill, knowledge and experience in a particular field
other than accounting and auditing is called a/an
a. Professional
b. Consultant
 c. Expert
d. Assistant
115. During an audit, the auditor may need the assistance of an expert in obtaining sufficient
appropriate evidence. A common example is
a. Evaluating the potential financial statement effect of an employee fraud
b. Determination of the amounts using actual computations
c. Evaluating the integrity of management
d. Determining the sufficiency and appropriateness of evidential matter obtained
116. An expert whose expertise is used by the entity in preparing financial statements is called
a(n):
a. Financial expert
b. Management expert
c. Auditor’s expert
d. Specialist

117. When may the auditor refer to an expert’s work in the audit report?
Only if the expert’s report results in a Only when the expert assisted in the audit
modification of the audit of criteria account in the financial
statement
a Yes Yes
b No No
c Yes No
d No Yes

118. When the auditor has to determine the need to use the work of an expert, he would least
likely consider:
a. The cost of using the services of an expert
b. The quantity and quality of other audit evidence available
c. The materiality of the financial statement item being considered
d. The risk of misstatements based on the nature and complexity of the matter being
considered

Internal auditors
119. External auditors must obtain evidence regarding what attributes of an internal auditors
intend to rely on internal auditor’s work?
a. Integrity
b. Objectivity
c. Competence
d. All of the above
120. Which of the following statements about the internal auditor and the external auditor is not
correct?
a. The role of internal auditing is determined by management and its objectives differ
from those of the external auditor who is appointed to report independently on the
financial statements
b. The external auditor has the sole responsibility for the audit opinion expressed and
that responsibility is not reduced by any use made of internal auditing
c. Internal auditors should exercise the same degree of independence as required
of the external auditor
d. All judgment relating to the audit of the financial statements are those of the external
auditor
121. When obtaining an understanding and performing preliminary assessment of the internal
audit function, the important criteria includes organization status, scope of function, technical
competence and due professional care. Which of the following statements relates to the criteria
of due professional care?
a. The internal auditor should be free to communicate fully with the external auditor
b. The management should act on internal audit recommendations
c. There should be appropriate policies for hiring and training the internal audit staff
d. There should be adequate audit manuals, work programs and working papers
122. When obtaining an understanding and performing a preliminary assessment of the internal
audit function, the auditor should consider the internal auditors’
Organization status Scope of function Technical competence
and due care
a Yes Yes Yes
b Yes No Yes
c Yes No No
d No Yes No
123. To assess the objectivity of the internal auditors, an independent auditor would most likely
a. Consider the professional qualifications and experience of the internal auditor
b. Consider the organizational level to which the internal auditors report the
results of their work
c. Consider proper planning, supervision and documentation of internal auditor’s work
d. Consider the nature and extent of the internal auditors’ assignment
124. Auditors who prefer statistical sampling to non-statistical sampling may do so because
statistical sampling helps the auditor
Eliminate subjectivity in the evaluation of sampling results.
125. If all other factors in a sampling plan are held constant, changing the measure of tolerable
error to a smaller value would cause the sample size to be:
Larger
126. Which of the following sampling plans would be designed to estimate a numerical
measurement of a population, such as a peso value?
Sampling for variables.
127. Which of the following factors does an auditor generally need to consider in planning a
particular audit sample for a control test?
Tolerable error.
128. An advantage of statistical over non-statistical sampling is that statistical sampling:
Enables auditors to objectively measure the reliability of their sample results.
129. Attribute sampling, as applied to control testing, can assist the auditor in several ways.
Which of the following tasks is not enhanced by sampling?
Examining the documents.
130. Which of the following is an element of sampling risk?
Choosing a sample size that is too small to achieve the sampling objective.
131. Which of the following statements concerning sample size is true?
The higher the expected occurrence rate, other factors remaining unchanged,
the larger will be the sample size
132. In the examination of the financial statements of Delta Company, the auditor determines
that in performing a test of internal control effectiveness, the rate of error in the sample does
not support the auditor's preconceived notion of a tolerable occurrence rate when, in fact, the
actual error rate in the population does meet the auditor's notion of effectiveness. This situation
illustrates the risk of
Over assessment of control risk.
133. An auditor performs a test to determine whether all merchandise for which the client was
billed was received. The population for this test consists of all
Vendors' invoices.
134. . Although mathematically based, statistical sampling does not replace audit judgment. In
utilizing statistical sampling techniques, the auditor must apply judgment in all but which of the
following tasks?
Calculating the actual error rate.
135. Which of the following statements regarding statistical sampling in auditing is true?
Sampling methods are used by auditors in both control testing and substantive
testing
136. The application of statistical sampling techniques is least related to which of the following
generally accepted auditing standards?
In all matters relating to the assignment, an independence in mental attitude is
to be maintained by the auditor or auditors.
137. 14. The major weakness of nonstatistical (judgmental) sampling is it
Does not allow sampling risk to be objectively measured.
138. As a result of tests of controls, an auditor underassessed control risk and decreased
substantive testing. This underassessment occurred because the true occurrence rate in the
population was
More than the occurrence rate in the auditor's sample.
139. Which of the following factors is generally not considered in determining the sample size for
a test of controls?
Population size.
140. Which of the following statements is correct concerning statistical sampling for control
testing?
The population size has little or no effect on determining sample size except for
very small populations.
141. Management has asked the internal auditing staff to evaluate the efficiency of the accounts
payable system, particularly whether it would be economically feasible to reduce the number of
discounts lost through slow payment. The audit staff decides that it needs to determine the
amount currently being lost and can do so by taking a sample from payments made in the last
six months, examining each, and recording the amount, if any, of the discount lost. This
information can be used to project the total amount of discounts lost for the period. This
proposed plan is an example of
Variables sampling.
142. . During an audit involving testing of accounts receivable balances, an auditor decides to
specify a precision interval of P100,000 instead of the P200,000 precision interval that was called
for in the sampling plan contained in the audit program. Which of the following would be a result
of the auditor's decision to narrow the precision interval?
An increase in the required sample size.
143. Sample size
Increases with the use of higher confidence levels.
144. In a variables sampling application, which of the following will result when the confidence
level is changed from 90% to 95%?
Sample size will increase.
145. . In conducting a substantive test of an account balance, an auditor hypothesizes that no
material error exists. The risk that sample results will support the hypothesis when a material
error actually does exist is the risk of
Incorrect acceptance.
146. . Which of the following statements concerning alpha and beta risk is true?
As inherent risk and/or control risk increase, beta risk should decrease.
147. A number of factors influences the sample size for a substantive test of details of an
account balance. All other factors being equal, which of the following would lead to a larger
sample size?
Smaller measure of tolerable error.
148. For variables sampling purposes, changes in certain parameters affect sample size
positively while changes in others have a negative effect. In this regard, which of the following
statements is true?
An increase in beta risk reduces sample size
149. In assessing sample risk, alpha risk relate to the
Efficiency of the audit
150. In performing substantive tests, the auditor is concerned with two risks or errors of
sampling; the alpha error and the beta error
The beta error is of greater concern to the auditor than the alpha error
151. Correspondence is established between the random number table and the population by:
Deciding the number of digits to use in the random number table and their
association with the population numbering system
152. When auditors wish to evaluate a sample statistically, an acceptable selection method is:
Systematic sample selection
153. Which of the following statements regarding block sampling is least likely to be true?
It is acceptable to use block sampling for tests of transactions only if a
reasonable number of blocks is used
154. When the auditor goes through a population and selects items without regard to their size,
source, or other distinguishing characteristics, it is called:
Haphazard selection
155. . In examining cash disbursement, an auditor plans to choose a sample using systematic
selection with a random start. The primary advantage of such a systematic selection is
population items
Do not have to be prenumbered in order for the auditor to use the technique
156. What is the primary objective of using stratification as a sampling method in auditing?
To decrease the effect of variance in the total population
157. An auditor is testing internal control procedures that are evidenced on an entity’s voucher
by matching random numbers with voucher numbers. If a random number matches the number
of a voided voucher, that voucher ordinarily should be replaced by another voucher in the
random sample if the voucher
Has been properly voided
158. An auditor plans to examine a sample of 20 purchase orders for proper approvals as
prescribed by the client’s control procedures. One of the purchase orders in chose sample of 20
cannot be found, and the auditor is unable to use alternative procedures to test whether that
purchase order was properly approved. The auditor should
Treat the missing purchase order as a deviation for the purpose of evaluating
the sample
159. . Using statistical sampling to assist in verifying the year-end accounts payable balance, an
auditor has accumulated the following data: Nature of accounts Book balance Balance
determined by the auditor Population 4,100 P5,000,000 ? Sample 200 P 250,000 P 300,000 Using
the ratio estimation technique, the auditor’s estimate of year-end accounts payable balance
would be
P 6,000,000
160. An auditor uses monetary unit sampling with a sampling interval of P20,000 and detects an
item with a recorded amount of P10,000 with an audited value of P4,000. The projected
misstatement of the sample is:
P 12,000
161. . In the evaluation of the results of an attributes sample, the fact that the deviation rate in
the sample was 2% rather than the estimated population deviation rate of 4% would cause the
computed upper deviation rate to:
Be less than the tolerable deviation rate
162. . The appropriate assumption to make regarding the overall percent of error in those
population items containing an error is:
Based on the auditor’s personal judgment in the circumstances