INTERNAL AUDIT

Question 1

1. Theoretically, it is possible to provide an infinite range of
   assurance from a very low level of assurance to an absolute level of
   assurance in practice, the professional accountants cannot provide
   absolute assurance because of the following, except:
   A. The professional accountants employ testing process.
   B. The internal control has its inherent limitations.
   C. The use of judgments in gathering evidence and drawing conclusions
   based on that evidence.
   D. The lack of expertise of the professional accountants in doing a
   systematic engagement process.

Answer 1

D. The lack of expertise of the professional accountants in doing a
systematic engagement process.

Question 2

2. The practitioner‘s report on an assurance engagement should always
   include the following, except:
   A. A description of the engagement and identification of the subject
   matter.
   B. Identification of the standards under which the engagement was
   conducted.
   C. Reference to the work of an expert.
   D. Identification of the criteria.

Answer 2

C. Reference to the work of an expert.

Question 3

3. Assurance services involve all the following except:
   A. Improving the quality of information for decision purposes.
   B. Improving the quality of the decision model used.
   C. Improving the relevance of information.
   D. Implementing a system that improves the processing of information.

Answer 3

D. Implementing a system that improves the processing of information.

Question 4

4. Competence as a certified public accountants includes all of the
   following except
   A. Having the technical qualifications to perform an engagement.
   B. Possessing the ability to supervise and evaluate the quality of staff
   work.
   C. Warranting the infallibility of the work performed.
   D. Consulting others if additional technical information is needed.

Answer 4

C. Warranting the infallibility of the work performed.

Question 5

5. Close family includes the following except:
   A. Parent
   B. Sibling
   C. Non-dependent child
   D. Spouse

Answer 5

D. Spouse

Question 6

6. Firm includes the following except
   A. A sole practicing professional accountant.
   B. An entity that controls a partnership of professional accountants.
   C. An entity controlled by a partnership of professional accountants.
   D. A sole practitioner, partnership or corporation of professional
   accountants.

Answer 6

D. A sole practitioner, partnership or corporation of professional
accountants.

Question 7

7. The term professional accountant in public practice includes the
   following except:
   A. A sole proprietor providing professional services to a client.
   B. Each partner or person occupying a position similar to that of a
   partner staff in a practice providing professional services to a client.
   C. Professional accountants employed in the public sector having managerial responsibilities.
   D. A firm of professional accountants in public practice.

Answer 7

C. Professional accountants employed in the public sector having managerial responsibilities.

Question 8

8. The term receiving accountant includes the following except:
   A. A professional accountant in public practice to whom the existing has
   referred tax engagement.
   B. A professional accountant in public practice to whom the client of
   the existing accountant has referred audit engagement.
   C. A professional accountant in public practice who is consulted in order
   to meet the needs of the client.
   D. A professional accountant in public practice currently holding an
   audit appointment or carrying out accounting, taxation, consulting or
   similar professional services for a client.

Answer 8

D. A professional accountant in public practice currently holding an
audit appointment or carrying out accounting, taxation, consulting or
similar professional services for a client.

Question 9

9. Related entity is an entity that has any of the following
   relationships with the client, except:
   A. An entity that has direct or indirect control over the client provided
   that the client is material to such entity.
   B. An entity with a direct financial interest in the client even though
   such entity has no significant influence over the client provided the
   interest in the client is material to such entity.
   C. An entity over which the client has direct or indirect control.
   D. An entity which is under common control with the client (referred to
   as a “sister entity”) provided the sister entity and the client are both
   material to the entity that controls both the client and sister entity.

Answer 9

B

Question 10

10. Safeguards created by the profession, legislation or regulation,
    include the following, except:
    A. Educational, training and experience requirements for entry into the
    profession.
    B. Continuing education requirements.
    C. Legislation governing the independence requirements of the firm.
    D. Policies and procedures that emphasize the assurance client‘s
    commitment to fair financial reporting.

Answer 10

D. Policies and procedures that emphasize the assurance client‘s
commitment to fair financial reporting.

Question 11

11. Professional accountants may encounter problem in identifying
    unethical behavior or in resolving an ethical conflict. When faced with
    significant ethical issues, professional accountants should do the
    following except
    A. Follow the established policies of the employing organization to seek
    a resolution of such conflict.
    B. Review the conflict problem with the immediate superior if the
    organization‘s policies do not resolve the ethical conflict.
    C. If the problem is not resolved with the immediate superior and the
    professional accountant determines to go to the next higher managerial
    level, the immediate superior need not be notified of the decision.
    D. Seek counseling and advice on a confidential basis with an independent
    advisor or the applicable professional accountancy body or regulatory
    body to obtain an understanding of possible courses of action.

Answer 11

C. If the problem is not resolved with the immediate superior and the
professional accountant determines to go to the next higher managerial
level, the immediate superior need not be notified of the decision.

Question 12

12. As a resolution of the conflict in the application of fundamental
    principles, the auditor, after considering the ethical issues and
    relevant facts may do any of the following except:
    A. Must immediately resign from the engagement or the employing entity.
    B. Should weigh the consequences of each possible course of action.
    C. Should consult with other appropriate persons within the firm or
    employing organization foe help to finally resolve the matter.
    D. The professional accountant may wish to obtain professional advice
    from the relevant professional body without breaching confidentiality
    if significant conflict cannot be resolved.

Answer 12

A. Must immediately resign from the engagement or the employing entity.

Question 13

13. The professional accountant has a professional duty or right to
    disclose confidential information in each of the following, except
    A. To comply with technical standards and ethics and requirements.
    B. To disclose to BIR fraudulent scheme committed by the client on
    payment of income tax.
    C. To comply with the quality of review of a member body or professional
    body.
    D. To respond to an inquiry or investigation by a member body or
    regulatory body.

Answer 13

B. To disclose to BIR fraudulent scheme committed by the client on
payment of income tax.

Question 14

14. Safeguards within the firm’s own systems and procedures, include the
    following, except:
    A. Firm leadership that stresses the importance of independence and the
    expectation that members of assurance teams will act in the public
    interest.
    B. External review of a firm’s quality control system.
    C. Policies and procedures to implement and monitor quality control of
    assurance engagements.
    D. Policies and procedures that will enable the identification of
    interests or relationships between the firm or members of the assurance
    team and assurance clients.

Answer 14

B. External review of a firm’s quality control system.

Question 15

15. Safeguards within the assurance client, include the following, except
    A. Professional standards and monitoring and disciplinary processes.
    B. The assurance client has competent employees to make managerial
    decisions.
    C. Internal procedures that ensure objective choices in commissioning
    non-assurance engagements.
    D. A corporate governance structure, such as an audit committee, that
    provides appropriate oversight and communications regarding a firm’s
    services.

Answer 15

A. Professional standards and monitoring and disciplinary processes.

Question 16

16. In determining estimates of fees, an auditor may take into account
    each of the following, except the:
    A. Value of the service to the client.
    B. Degree of responsibility assumed by undertaking the engagement.
    C. Skills required in performing the service.
    D. Attainment of specific findings.

Answer 16

D. Attainment of specific findings.

Question 17

17. Which of the following is incorrect regarding engagement period?
    A. The period of the engagement starts when the assurance team begins
    to perform assurance services and ends when the assurance report is
    issued, except when the assurance engagement is of a recurring nature.
    B. If the assurance engagement is expected to recur, the period of the
    assurance engagement ends with the notification by either party that the
    professional relationship has terminated or the issuance of the final
    assurance report, whichever is earlier.
    C. In the case of an audit engagement, the engagement period includes
    the period covered by the financial statements reported on by the firm.
    D. When an entity becomes an audit client during or after the period
    covered by the financial statements that the firm will report on, the
    firm should consider whether any threats to independence may be created
    by previous services provided to the audit client.

Answer 17

B. If the assurance engagement is expected to recur, the period of the
assurance engagement ends with the notification by either party that the
professional relationship has terminated or the issuance of the final
assurance report, whichever is earlier.

Question 18

18. The following self-interest threat created would be so significant
    no safeguard could reduce the threat to an acceptable level, except
    A. If a firm, or a network firm, has a direct financial interest in an
    audit client of the firm.
    B. If a fir, or a network firm, has a material indirect financial interest
    in an audit client of the firm.
    C. If a firm, or a network firm, has a material financial interest in
    an entity that has a controlling interest in an audit client.
    D. If the retirement benefit plan of a firm, or network firm, has a
    financial interest in an audit client

Answer 18

D. If the retirement benefit plan of a firm, or network firm, has a
financial interest in an audit client

Question 19

19. The following loans and guarantees would not create a threat to
    independence, except:
    A. A loan from, or a guarantee thereof by, an assurance client that is
    a bank or a similar institution, to the firm, provided the loan is made
    under normal lending procedures, terms and requirements and the loan is
    immaterial to both the firm and the assurance client.
    B. A loan from, or a guarantee thereof by, an assurance client that is
    a bank or a similar institution, to a member of the assurance team or
    their immediate family, provided the loan is made under normal lending
    procedures, terms and requirements.
    C. Deposits made 1* or brokerage accounts of, a firm or a member of the
    assurance team with an assurance client that is a bank, broker or similar
    institution, provided the deposit or account is held under normal
    commercial terms.
    D. If the firm, or a member of the assurance team, makes a loan to an
    assurance client that is not a bank or similar institution, or guarantees
    such an assurance clients‘ borrowings

Answer 19

D. If the firm, or a member of the assurance team, makes a loan to an
assurance client that is not a bank or similar institution, or guarantees
such an assurance clients‘ borrowings

Question 20

20. When a firm or a member of the assurance team and the audit client
    or one of its officers hold interest in a closely-held entity, a threat
    to independence is not created, except:
    A. The relationship is clearly insignificant to the member of the
    assurance team and the audit client.
    B. The relationship is other than insignificant acceptable for indirect
    financial interest.
    C. The interest held is immaterial to the investors or group of
    investors.
    D. The interest does not give the investor, or group the ability to
    control the closely-held entity.

Answer 20

B. The relationship is other than insignificant acceptable for indirect
financial interest.

Question 21

21. The following activities would generally create self-interest or
    self-review threats that are so significant and that only avoidance of
    the activity or refusal to perform the assurance engagement would reduce
    the threats to an acceptable level, except
    A. Authorizing, executing or consummating a transaction, or otherwise
    exercising authority on behalf of the assurance client, or having the
    authority to do so.
    B. Determining which recommendation of the firm should be implemented.
    C. Reporting, in a management role, to those charged with governance.
    D. Providing technical assistance and advice on accounting principles
    for audit clients.

Answer 21

D. Providing technical assistance and advice on accounting principles
for audit clients.

Question 22

22. If firm, or network firm, personnel providing such assistance make
    management decisions, the self-review threat created could not be reduced
    to an acceptable level by any safeguards. Examples of such managerial
    decisions include the following, except
    A. Determining or changing journal entries, or the classifications for
    accounts or transactions or other accounting records without obtaining
    the approval of the audit clients
    B. Authorizing or approving transactions.
    C. Preparing source documents or originating data (including decisions
    on evaluation assumptions), or making changes to such documents or data.
    D. Assisting an audit client in resolving account reconciliation
    problems.

Answer 22

D. Assisting an audit client in resolving account reconciliation
problems.

Question 23

23. The following services are considered to be a normal part of the
    audit process and do not, under circumstances, threaten independence,
    except
    A. Analyzing and accumulating information for regulatory reporting.
    B. Assisting in the preparation of consolidated financial statements.
    C. Drafting disclosures items.
    D. Having custody of an assurance client’s assets.

Answer 23

D. Having custody of an assurance client’s assets.

Question 24

24. The safeguards necessary to reduce the threat created by providing
    accounting and bookkeeping services to an audit client that is not a
    listed entity to an acceptable level might include the following, except:
    A. Making arrangements so that such services are not performed by a
    member of the assurance team.
    B. Implementing policies and procedures to prohibit the individual
    providing such services from making any managerial decisions on behalf
    of the audit client.
    C. Requiring the source data for the accounting entries to be originated
    by the assurance team
    D. Obtaining audit client approval for any proposed journal entries or
    other changes affecting the financial statements.

Answer 24

C. Requiring the source data for the accounting entries to be originated
by the assurance team

Question 25

25. The provision of accounting and bookkeeping services of a routine
    or mechanical nature to divisions or subsidiaries of listed audit clients
    would not be seen as impairing independence with respect to the audit
    client provided that the following conditions are met, except:
    A. The services do not involve the exercise of judgment.
    B. The divisions or subsidiaries for which the service is provided are
    collectively immaterial to the audit client.
    C. The services provided are collectively immaterial to the division or
    subsidiary.
    D. The fees to the firm, or network firm, from such services are
    collectively significant.

Answer 25

D. The fees to the firm, or network firm, from such services are
collectively significant.

Question 26

26. The following would generally create a significant threat to
    independence, except:
    A. When a firm, or a network firm, performs a valuation service for an
    audit client for the purpose of making a filing or return to a tax
    authority
    B. The firm provides formal taxation opinions and assistance in the
    resolution of tax disputes to an audit client.
    C. The firm renders internal services involving an extension of the
    procedures required to conduct an audit in accordance with Philippine
    Standards on Auditing to an audit client.
    D. When a firm, or a network firm, provides assistance in the performance
    of a client’s internal audit activities or undertakes the outsourcing
    of some of the activities.

Answer 26

D. When a firm, or a network firm, provides assistance in the performance
of a client’s internal audit activities or undertakes the outsourcing
of some of the activities.

Question 27

27. The lending of staff by a firm to a financial statement audit client
    may be made only on the understanding that the firm’s personnel will not
    be involved in the following, except:
    A. Assembling the annual financial statements based recorded
    transactions.
    B. Making management decisions.
    C. Approving or signing agreements or other similar documents.
    D. Exercising discretionary authority to commit the client.

Answer 27

A. Assembling the annual financial statements based recorded
transactions.

Question 28

28. When independence is threatened by litigation between the member of
    the assurance team and the client management, the following safeguards
    that can reduce the effect to an acceptable level may be applied, except:
    A. Involve an additional professional accountant in the firm who is not
    a member of the assurance team to review the work done.
    B. Disclose to the audit committee, or others charged with governance,
    the extent and the nature of the litigation.
    C. Remove the particular member of the assurance team who is involved
    in litigation hum cite engagement.
    D. Submit a new engagement letter.

Answer 28

D. Submit a new engagement letter.

Question 29

29. The objectives of the Philippine Accountancy Act of 2004 are the
    following except:
    A. The standardization and regulation of accounting education.
    B. Examination for registration of certified public accountants.
    C. Supervision, control, and regulation of the practice of accountancy.
    D. Integration of accountancy profession.

Answer 29

D. Integration of accountancy profession.

Question 30

30. The following is deemed a practice of accountancy, except:
    A. Appointment to a position in the government that requires a CPA
    license as a prerequisite.
    B. Employment as budget officer in a local government unit regardless
    of the officer being a holder of a CPA license or not.
    C. Teaching professional subjects in a collegiate program leading to the
    degree of Bachelor of Science in Accountancy.
    D. Representing his clients before government agencies on tax and other
    matters related to accounting.

Answer 30

B. Employment as budget officer in a local government unit regardless
of the officer being a holder of a CPA license or not.

Question 31

31. The following are represented both to the Financial Reporting
    Standards Council (FRSC) and Auditing and Assurance Standards Council
    (AASC), except:
    A. Bangko Sentral ng Pilipinas
    B. Securities and Exchange Commission
    C. Bureau of Internal Revenue
    D. Board of Accountancy

Answer 31

C. Bureau of Internal Revenue

Question 32

32. All of the following are represented to the Financial Reporting
    Standards Council, except:
    A. Commission on Higher Education
    B. Board of Accountancy
    C. Securities and Exchange Commission
    D. Bureau of Internal Revenue

Answer 32

A. Commission on Higher Education

Question 33

33. The Philippine Accountancy Act of 2004 provides that all working
    papers made during an audit shall be the property of the auditor. These
    working papers shall include the following, except:
    A. Working papers prepared by the CPA and his staff.
    B. Analysis and schedule prepared and submitted to the auditor by his
    client’s staff.
    C. Excerpts or copies of documents furnished to the auditor.
    D. Any report submitted by the auditor to his client.

Answer 33

D. Any report submitted by the auditor to his client.

Question 34

34. A professional accountant has a professional duty or right to
    disclose confidential information in each of the following, except:
    A. To comply with technical standards and ethics requirements.
    B. To disclose to the Bureau of Internal Revenue any fraudulent scheme
    committed by the client on payment of income tax.
    C. To comply with the quality review of a member body or professional
    body.
    D. To respond to an inquiry or investigation by a member body or
    regulatory body.

Answer 34

B. To disclose to the Bureau of Internal Revenue any fraudulent scheme
committed by the client on payment of income tax.

Question 35

35. The CPA must not subordinate his or her professional judgment to
    that of others in every
    A. engagement.
    B. audit engagement.
    C. engagement except tax services.
    D. engagement except management advisory services.

Answer 35

A. engagement.

Question 36

36. A CPA firm issues an unqualified opinion on financial statements
    that were not prepared in accordance with GAAP. The CPA firm would have
    acted with fraud or its equivalent in all the following circumstances
    except where the firm
    A. intentionally disregards the truth.
    B. has actual knowledge of fraud.
    C. negligently performs auditing procedures.
    D. intends to gain monetarily by concealing the fraud.

Answer 36

C. negligently performs auditing procedures.

Question 37

37. The auditor‘s report may be addressed to any of the following, except
    the client‘s
    A. Stockholders
    B. Chief executive officer
    C. Board of directors
    D. Partners

Answer 37

B. Chief executive officer

Question 38

38. The standard audit report explains that a financial audit includes
    all of the following except
    A. Examining support for the amounts and disclosure in the financial
    statements
    B. Assessing the level of control risk
    C. Assessing the accounting principles used and significant estimates
    made by the management
    D. Evaluating the overall financial statement presentation

Answer 38

B. Assessing the level of control risk

Question 39

39. Which of the following is ordinarily true of a modification of the
    audit report by adding an emphasis of matter paragraph?
    A. The modification by adding an emphasis of matter paragraph is an
    “except for” qualification of opinion
    B. The emphasis of matter paragraph is a “subject to qualification of
    opinion
    C. The emphasis of matter paragraph would ordinarily refer to the fact
    that the auditor’s opinion is not qualified
    D. The emphasis of matter paragraph is presented before the opinion
    paragraph

Answer 39

C. The emphasis of matter paragraph would ordinarily refer to the fact
that the auditor’s opinion is not qualified

Question 40

40. An explanatory paragraph may be added to the audit report while at
    the same time issuing an unqualified opinion in all cases except when:
    A. the client has changed an accounting principle with the agreement of
    the auditor
    B. there is an immaterial departure from GAAP to ensure fair presentation
    with the agreement of the auditor
    C. the audit opinion is partly based on the work of another auditor
    D. the audit work has been significantly limited by management.

Answer 40

D. the audit work has been significantly limited by management.

Question 41

41. An explanatory paragraph or modified wordings may be added to the
    audit report while at the same time issuing an unqualified opinion in
    all cases except when:
    A. the client has changed an accounting principle with the agreement of
    the auditor
    B. there is an immaterial departure from PFRS to ensure fair presentation
    with the agreement of the auditor
    C. the audit opinion is partly based on the work of another auditor
    D. the audit work has been materially limited by management.

Answer 41

D. the audit work has been materially limited by management.

Question 42

42. When there is a limitation in the scope of the audit that results
    to a disclaimer of opinion, the following paragraphs are modified,
    except:
    A. Introductory paragraph
    B. Management’s responsibility for the financial statements
    C. Auditor’s responsibility
    D. Auditor’s opinion.

Answer 42

B. Management’s responsibility for the financial statements

Question 43

43. If an amendment is necessary in the other information and the entity
    refuses to make the amendment, the auditor, depending on particular
    circumstance, may do any of the following, except:
    A. Describe the material inconsistency as an emphasis of matter in a
    paragraph following the opinion paragraph
    B. The auditor may not issue the auditor’s report.
    C. The auditor may withdraw from the engagement
    D. The auditor to issue either a qualified or adverse opinion.

Answer 43

D. The auditor to issue either a qualified or adverse opinion.

Question 44

44. If a principal auditor decides to assume responsibility for another
    auditor’s work, the principal auditor should consider performing all of
    the following procedures except:
    A. Performing a peer review of the other auditor.
    B. Reviewing the audit program of the other auditor.
    C. Reviewing the working papers of the other auditor
    D. Discussing the audit procedures and the results of the audit with
    other auditor.

Answer 44

A

Question 45

45. .Management‘s integrity affects all of the following risks except:
    a. Enterprise risk
    b. Financial reporting risk
    c. Engagement risk
    d. All of the above risks are affected

Answer 45

d. All of the above risks are affected

Question 46

46. To obtain an understanding of the relevant policies and procedures
    of internal control, the auditor performs all of the following except:
    a. Make inquiries
    b. Make observations
    c. Inspect documents and records
    d. Design substantive tests

Answer 46

d. Design substantive tests

Question 47

47. The understanding of internal control that relates to a financial
    statement assertion should be used to do all of the following except:
    a. Determine inherent risk for that assertion.
    b. identify types of potential misstatements for that assertion.
    c. Consider factors that affect the risk of material misstatement for
    that assertion and assess control risk.
    d. Design substantive tests that correspond with the assessment of
    control risk.

Answer 47

a. Determine inherent risk for that assertion.

Question 48

48. Tests of controls are concerned primarily with each of the following
    questions except:
    a. How were the controls applied?
    b. Why were the controls applied?
    c. Were the necessary controls consistently performed?
    d. By whom were the controls applied?

Answer 48

b. Why were the controls applied?

Question 49

49. In considering the evidence needed to assess control risk during the
    period from interim to year-end, all of the following should be
    considered except the:
    a. Significance of the assertion being tested.
    b. Specific internal control policies and procedures tested during the
    interim period.
    c. Degree to which the policies and procedures were tested and the test results.
    d. Control risk on other assertions.

Answer 49

d. Control risk on other assertions.

Question 50

50. The assessment of control risk can be made at any of the following
    times except:
    a. Immediately after obtaining an understanding of internal control.
    b. After some tests of controls are performed concurrently with obtaining
    an understanding.
    c. After the performance of additional tests of controls designed to
    further lower the assessment of control risk.
    d. After performing all the necessary substantive tests.

Answer 50

d. After performing all the necessary substantive tests.

Question 51

51. To be competent, evidence must be all of the following except:
    A. Sufficient
    B. Reliable
    C. Relevant
    D. Unbiased

Answer 51

A. Sufficient

Question 52

52. Although the validity of evidential matter is dependent on the
    circumstances under which it is obtained, there are three general
    presumptions that have some usefulness. The situations given below
    indicate the relative reliability that a CPA has placed on two types of
    evidence obtained in different situations. Which of these is an exception
    to one of the general presumptions?
    A. The CPA places more reliance on the balance in the scrap sales account
    at Plant A, where the CPA has made limited tests of transactions because
    of effective controls, than at Plant B where the CPA has made extensive
    tests of transactions because of ineffective controls.
    B. The CPA places more reliance on the CPAs computation of interest
    payable on outstanding bonds than on the amount confirmed by the trustee.
    C. The CPA places more reliance on the report of an expert on an inventory
    of precious gems than on the CPAs physical observation of the gems.
    D. The CPA places more reliance on a schedule of insurance coverage
    obtained from the company‘s insurance agent than on one prepared by the
    internal audit staff.

Answer 52

C. The CPA places more reliance on the report of an expert on an inventory
of precious gems than on the CPAs physical observation of the gems.

Question 53

53. Each of the following might, by itself, form a valid basis for an
    auditor of deciding to omit a test except for the:
    A. Difficulty and expense involved in testing a particular item
    B. Assessment of control risk at a low level
    C. Inherent risk involved
    D. Relationship between the cost obtaining evidence and its usefulness

Answer 53

A. Difficulty and expense involved in testing a particular item

Question 54

54. Financial statement assertions include all of the following except:
    A. Occurrence
    B. Presentation and disclosure
    C. Consistency and comparability
    D. Completeness

Answer 54

C. Consistency and comparability

Question 55

55. In using the work of a specialist, an understanding should exist
    among the auditor, the client, and the specialist as to the nature of
    the work to be performed by the specialist. Preferably, the understanding
    should be documented and would include all of the following except
    A. The objectives and scope of the specialist‘s work
    B. The specialist‘s representations as to his relationship, if any, to
    the client
    C. The specialist‘s understanding of the auditor‘s corroborative use of
    the specialist‘s findings in relation to the representations in the
    financial statements
    D. A statement that the methods or assumptions to be used are not
    inconsistent with those used by the client

Answer 55

D. A statement that the methods or assumptions to be used are not
inconsistent with those used by the client

Question 56

56. Determining whether amounts are in conformity with GAAP addresses
    the proper measurement of assets, liabilities, revenues, and expenses
    which includes all of the following except:
    A. The reasonableness of management‘s accounting estimates
    B. Proper application of valuation principles
    C. Proper application of matching principle
    D. The reasonableness of management‘s accounting policies

Answer 56

D. The reasonableness of management‘s accounting policies

Question 57

57. Each audit program should have a column for all of the following
    except:
    A. Audit procedures to be performed
    B. The initials of the auditor who performs each procedure
    C. The date that the performance of the procedure is performed and
    completed
    D. The test of controls related to each procedure

Answer 57

D. The test of controls related to each procedure

Question 58

58. When evaluating the planned level of substantive tests for each
    significant assertion, the auditor will consider the evidence obtained
    from all of the following except:
    A. Procedures to understand the business and industry and related
    analytical procedures that have been completed.
    B. Evidence about the effectiveness of internal controls gained while
    obtaining an understanding of internal control structure.
    C. The assessment of detection risk.
    D. Evidence of effectiveness of computer control procedures and related
    follow-up.

Answer 58

C. The assessment of detection risk.

Question 59

59. Choices about audit evidence are influenced by all of the following
    except:
    A. The auditor‘s understanding of the business and industry
    B. Assessment of inherent and control risk
    C. Comparisons of the auditor‘s expectation of the financial statements
    with the client‘s books and records
    D. Decisions about immaterial risk factors

Answer 59

D. Decisions about immaterial risk factors

Question 60

60. If the auditor is concerned that a population may contain exceptions,
    the determination of a sample size sufficient to include at least one
    such exception is a characteristic of
    A. Discovery sampling
    B. Variables sampling
    C. Random sampling
    D. Monetary-unit sampling

Answer 60

A. Discovery sampling

Question 61

61. In a variable sampling plan, an auditor must generally consider each
    of the following except
    A. variation within the population
    B. acceptable risk of incorrect acceptance
    C. tolerable error
    D. population

Answer 61

D. population

Question 62

62. When sampling methods are used in a substantive test, all of the
    following factors must be considered in determining an optimum sample
    size, except the
    A. variation in the population
    B. risk levels that the auditor is willing to accept
    C. deviation occurrence rate that the auditor expects to exist in the
    sample
    D. tolerable misstatement

Answer 62

C. deviation occurrence rate that the auditor expects to exist in the
sample

Question 63

63. To gather evidence regarding the balance per bank in a bank
    reconciliation, an auditor would examine all of the following except:
    A. cutoff bank statement
    B. year-end bank statement
    C. bank confirmation
    D. general ledger

Answer 63

D. general ledger

Question 64

64. The negative form of accounts receivable confirmation request is
    particularly useful except when
    A. control procedures surrounding accounts receivable are considered to
    be effective
    B. a large number of small balances are involved
    C. the auditor has reason to believe the persons receiving the requests
    are likely to give them consideration
    D. individual account balances are relatively large

Answer 64

D. individual account balances are relatively large

Question 65

65. An auditor confirms a representative number of open accounts
    receivable as of December 31, 2010, and investigates respondents’
    exceptions and comments. By this procedure which of the following would
    the auditor most likely learn of?
    A. One of the cashiers has been covering a personal embezzlement by
    lapping.
    B. One of the sales clerks has not been preparing charge slips for credit
    sales to family and friends.
    C. One of the computer department’s staff has been removing all sales
    Invoices applicable to his account from the data file.
    D. The credit manager has misappropriated remittances from customers
    whose accounts have been written off

Answer 65

A. One of the cashiers has been covering a personal embezzlement by
lapping.

Question 66

66. The accounts payable department receives a purchase order form to accomplish all of the following except
    A. comparing invoice price to purchase order price
    B. ensuring that the purchase had been properly authorized
    C. ensuring that the goods had been received by the party requesting the goods
    D. comparing quantity ordered to quantity purchased

Answer 66

C. ensuring that the goods had been received by the party requesting the goods

Question 67

67. Client’s inventory instructions should include all the following
    except
    A. names of client personnel responsible for the count.
    B. instructions for recording accurate description.
    C. instructions for auditors’ test counts.
    D. plans for controlling movement of goods.

Answer 67

C. instructions for auditors’ test counts.

Question 68

68. In auditing plant assets and accumulated depreciation for proper
    valuation, the auditor should do all of the following, except:
    A. recalculate depreciation expense on a test basis
    B. physically inspect major plant assets additions
    C. vouch major additions by reference to underlying documentation
    D. vouch repairs and maintenance expense on a test basis

Answer 68

B. physically inspect major plant assets additions

Question 69

69. Controls over making estimates include all of the following except
    A. management communication of the need for proper accounting estimates
    B. comparison of prior estimates with subsequent results
    C. consideration of whether estimates are consistent with the company’s
    operational plans
    D. ensuring the effects of the estimate are in line with analysts’
    forecasts

Answer 69

D. ensuring the effects of the estimate are in line with analysts’
forecasts

Question 70

70. When verifying dividend amounts paid, an auditor will typically do
    all except which of the following?
    A. Determine dates and amounts of dividends paid
    B. Send confirmations to shareholders to verify payments
    C. Examine arrearages of preferred stock dividends.
    D. Examine treatment of unclaimed dividends.

Answer 70

B. Send confirmations to shareholders to verify payments

Question 71

71. The auditor should normally concentrate on the key factors and
    assumptions used by management including all of the following except
    that those that are
    A. insignificant to the accounting estimates.
    B. sensitive to variations.
    C. deviations from historical patterns.
    D. susceptible to misstatements and biases

Answer 71

A. insignificant to the accounting estimates.

Question 72

72. When a fact, that existed before the date of the report is discovered
    and the management revises the previously issued audited financial
    statements, the following are appropriate except the:
    A. new auditor’s report should include an emphasis of a matter paragraph
    that refers to a note to the financial statements that discusses the
    reason for the revision of the financial statements and to the earlier
    report issued by the auditor.
    B. new auditor‘s report should contain the original date.
    C. performance of the procedures that are designed to obtain sufficient
    evidence as to subsequent events would ordinarily be extended to the
    date the revised financial statements are approved by the entity’s
    management.
    D. auditor is permitted to restrict the audit procedures regarding the
    financial statements to the effects of the subsequent event that
    necessitated the revision.

Answer 72

B. new auditor‘s report should contain the original date.

Question 73

73. In evaluating the management’s assessment of the entity’s ability
    to continue as a going concern, he should consider the following, except
    A. the independence of the management.
    B. the process that the management has followed to make its assessment.
    C. the assumptions on which the assessment is based and management‘s
    plan for future action.
    D. whether the assessment has taken into account all relevant information
    of which the auditor is aware of as a result of the audit procedures.

Answer 73

A. the independence of the management.

Question 74

74. Before reaching a final decision on the opinion to be issued, a
    conference is generally is held with the client. At this meeting, all
    of the following may be expected, except:
    A. an oral report of the auditor’s major findings.
    B. the auditor’s rationale for proposed adjustments or additional
    disclosures.
    C. an agreement between the auditor and the client on the changes to be
    made in the financial statements
    D. the delivery of the management letter.

Answer 74

D. the delivery of the management letter.

Question 75

75. Analytical procedures enable the auditor to predict the balance or
    quantity of an item under audit. Information to develop this estimate
    can be obtained from all of the following except
    A. tracing transactions through the system to determine whether
    procedures are being applied as prescribed.
    B. comparison of financial data with data for comparable prior periods,
    anticipated results (e.g., budgets and forecasts), and similar data for
    the industry in which the entity operates.
    C. study of the relationships of elements of financial data that would
    be expected to conform to a predictable pattern based upon the entity’s
    experience.
    D. study of the relationships of financial data with relevant
    nonfinancial data.

Answer 75

A. tracing transactions through the system to determine whether
procedures are being applied as prescribed.

Question 76

76. An auditor should obtain evidential matter relevant to each of the
    following actors concerning third-party litigation against a client
    except the
    A. period in which the underlying cause for legal action occurred.
    B. probability of an unfavorable outcome.
    C. jurisdiction in which the matter will be resolved.
    D. existence of a situation indicating an uncertainty as to the possible
    loss.

Answer 76

C. jurisdiction in which the matter will be resolved.

Question 77

77. When performing an operational audit, the auditor would normally be
    concerned with all of the following except
    A. calculation of earnings per share.
    B. investigation of budget variance.
    C. follow up on inventory shortages.
    D. reasons for idle equipment.

Answer 77

A. calculation of earnings per share.

Question 78

78. The benefits of an operational audit generally include all of
    following except
    A. increased revenue.
    B. increased reliability of the financial statements.
    C. increases productivity.
    D. decreased costs.

Answer 78

B. increased reliability of the financial statements.

Question 79

79. In a review of interim financial information of a publicly-held
    company, the CPA is expected to have an understanding of all of the
    following except the:
    A. industry in which the client operates
    B. client’s internal control structure
    C. nature of the entity’s organization
    D. entity’s accounting practices

Answer 79

B. client’s internal control structure

Question 80

80. Matters to be agreed in an agreed-upon procedures engagement include
    the following, except:
    A. stated purpose of the engagement
    B. limitations on distribution of the report of factual findings
    C. anticipated form of the report and the level of assurance to be
    provided
    D. nature, timing and extent of the specific procedures to be applied

Answer 80

C. anticipated form of the report and the level of assurance to be
provided

Question 81

81. Reports on compilation engagements should contain the following,
    except:
    A. a statement that the engagement was performed in accordance with the
    PSAs applicable to compilation engagements
    B. identification of the financial information indicating that it is
    based on information provided by the management
    C. a statement that the management is responsible for the financial
    information compiled by the accountant
    D. a statement that the accountant does not express an opinion but
    expresses only a limited assurance on the financial statements

Answer 81

D. a statement that the accountant does not express an opinion but
expresses only a limited assurance on the financial statements

Question 82

82. A compilation report should include all of the following except:
    A. a statement that the compilation has been performed in accordance
    with the Philippine Standards on Related Services applicable to
    compilation
    B. a statement that the financial statements are the representation of the management
    C. a statement that adequate disclosure has been made concerning accounting policy and practice
    D. a statement that the financial statement have not been audited or
    reviewed

Answer 82

C. a statement that adequate disclosure has been made concerning accounting policy and practice

Question 83

83. A comprehensive basis of accounting comprises a set of criteria used
    in preparing financial statements which applies to all material items
    and which has substantial support. Other comprehensive financial
    reporting frameworks may include the following, except
    A. a conglomeration of accounting conventions devised to suit individual preference
    B. that one used by an entity to prepare its income tax return
    C. the cash receipts and disbursements basis of accounting
    D. the financial reporting provisions of a government regulatory agency

Answer 83

A. a conglomeration of accounting conventions devised to suit individual preference

Question 84

84. Assurance services involve allot the following except:
    A. Improving the quality of information for decision purposes.
    B. Improving the quality of the decision model used
    C. Improving the relevance of information.
    D. Implementing a system that improves the processing of information.

Answer 84

D. Implementing a system that improves the processing of information.

Question 85

85. The following are factors that a professional accountant should use
    the basis of his acceptance of an assurance engagement, except:
    A. The auditor believes that a conclusion based on suitable criteria can be expressed.
    B. The subject matter is identifiable.
    C. The conclusion can be meaningful to the intended user of the report of the practitioner.
    D. The likelihood that the conclusion to be expressed always support, the assertion of the responsible party.

Answer 85

D. The likelihood that the conclusion to be expressed always support, the assertion of the responsible party.

Question 86

86. Auditors test management’s estimates of an asset’s impaired value
    through reference to all of the following except:
    A. inquiry of fixed asset personnel
    B. evidence of fair market value
    C. estimated cash flow
    D. financial plans

Answer 86

A. inquiry of fixed asset personnel

Question 87

87. The application of due professional care means that the auditor work
    conforms with all of the following except:
    A. Current auditing standards as promulgated by Auditing and Assurance
    Standards Council.
    B. The work that a reasonably prudent auditor would have performed in
    the same situation.
    C. The work that would have been performed by a reasonable person who was not necessarily trained in auditing.
    D. The work is at least equal to that which had been performed on the
    audit engagement during the preceding year.

Answer 87

C. The work that would have been performed by a reasonable person who was not necessarily trained in auditing.

Question 88

88. The second standard of fieldwork requires the auditor to do all of
    the following except
    A. Understand the business and its environment.
    B. Understand the risks related to financial reporting
    C. Perform analytical procedures to identify potential misstatements in
    the financial statements
    D. Obtain an understanding of internal control and potential ‘weaknesses in controls.

Answer 88

C. Perform analytical procedures to identify potential misstatements in
the financial statements

Question 89

89. Financial statement assertions include ail of the following except:
    A. occurrence.
    B. presentation and disclosure.
    C. consistency and comparability.
    D. completeness.

Answer 89

C. consistency and comparability.

Question 90

90. In a financial statement audit, management is responsible for the
    following except:
    A. the financial statements.
    B. for establishing and maintaining internal control.
    C. for meeting budget projections.
    D. for assuring compliance with laws and regulations.

Answer 90

C. for meeting budget projections.

Question 91

91. Engagement risk is, influenced by the risks associated with the
    following, except:
    A. The sufficiency and appropriateness of the evidence likely to be available.
    B. The nature and extent of the process used to collect and evaluate evidence.
    C. The identified user of the assurance engagement report.
    D. The nature and form of the subject matter.

Answer 91

C. The identified user of the assurance engagement report.

Question 92

92. Fraudulent companies will prepare financial statements that
    materially misleading by doing all of the following except
    A. understate revenues and assets:
    B. understate expenses and liabilities.
    C. show financial performance better than industry average.
    D. have performance exactly meet announced targets.

Answer 92

A. understate revenues and assets:

Question 93

93. Before the practitioners rely on the work of the expert, he should
    obtain sufficient appropriate evidence that the work of the expert is adequate by considering the following, except:
    A. the reasonableness and significance of the expert’s findings in relation to the objective of the engagement and the conclusion on the subject matter
    B. the professional competence, experience and objectivity of the expert
    C. the findings of the expert support the assertion issued by the party
    responsible to the subject matter
    D. the reasonableness of the assumptions, methods and source data used by the expert

Answer 93

C. the findings of the expert support the assertion issued by the party

Question 94

94. The auditor should perform the following risk assessment procedures
    to obtain an understanding of the entity and its environment, including
    its internal control, except:
    A. inquiries of management and others within the entity
    B. inquiries of the entity‘s external legal counsel or of valuation
    experts that the entity has used
    C. analytical procedures
    D. observation arid inspection

Answer 94

B. inquiries of the entity‘s external legal counsel or of valuation

Question 95

95. When the auditor considers that the service organization activities
    are significantly relevant to the audit and he concludes that it would
    be efficient to obtain evidence from tests of controls, such evidence
    may be obtained by, except:
    A. visiting the service organization
    B. performing tests of the client‘s control over activities of the
    service organization
    C. reviewing the service contract between the client and the service
    organization
    D. obtaining a service organization auditor‘s report that expresses an
    opinion as to the operating effectiveness of the service organization‘s accounting and internal control systems for the processing applications and internal control systems for the processing applications relevant
    to the audit

Answer 95

C. reviewing the service contract between the client and the service
organization

Question 96

96. An audit program should be sufficiently detailed to provide all of
    the following except:
    A. Evidential support for the audit opinion.
    B. An outline of the work to be done.
    C. A record of the work performed.
    D. A basis for controlling the audit

Answer 96

A. Evidential support for the audit opinion.

Question 97

97. Each of the following might, by itself, form a valid basis for an
    auditor to decide to omit a test except for the
    A. Difficulty and expense involved in testing a particular item
    B. Assessed level of control risk.
    C. Relative risk involved.
    D. Relationship between the cost of obtaining evidence and its
    usefulness.

Answer 97

A. Difficulty and expense involved in testing a particular item

Question 98

98. The objectives of the Philippine Accountancy Act of 2004 are the
    following, except:
    a. Standardization and regulation of accounting education
    b. Integration of accountancy profession
    c. Examination for registration of certified public accountants.
    d. Supervision, control and regulation of the practice of accountancy.

Answer 98

B

Question 99

99. If the auditor is concerned that a population may contain exceptions,
    the determination of a sample size sufficient to include at least one
    such critical exception is a characteristic of:
    a. Random sampling
    b. Variable sampling
    c. Discovery sampling
    d. Probability-proportional-size sampling

Answer 99

c. Discovery sampling

Question 100

100. The following statements relate to audit evidence, except:
     A. The competence of audit is likely improved by selecting a larger
     sample size or different population items.
     B. The evidence obtained from a source outside the client entity is more
     persuasive than that one obtained from within.
     C. When a client’s accounting and internal controls are effective, the
     internal evidence obtained is more reliable.
     D. The evidence obtained directly by the auditor through physical
     examination, computation, observation, or confirmation is more competent
     than the information that is obtained indirectly.

Answer 100

A. The competence of audit is likely improved by selecting a larger
sample size or different population items.

Question 101

101. An objective evidence is more reliable than evidence that requires
     considerable judgment to determine whether an assertion is correct. The
     following are examples of objective evidence, except:
     A. Confirmation replies.
     B. Physical count of cash and securities.
     C. Replies from client’s legal counsel.
     D. Adding a list of accounts payable.

Answer 101

C. Replies from client’s legal counsel.

Question 102

102. In performing a financial statement audit, which of the following
     would an auditor least likely consider?
     A. Internal control
     B. Compliance with GAAP
     C. Quality of managements‘ business decisions
     D. Fairness of the financial statement amounts

Answer 102

C. Quality of managements‘ business decisions

Question 103

103. Which of the following is least likely an objective of an assurance
     engagement?
     A. The engagement is intended to prevent the issuance of materially
     misleading information.
     B. The engagement is intended to enhance the credibility of information
     about a subject matter.
     C. An assurance engagement is intended for a professional accountant to
     express a conclusion that provides the intended users with a level of
     assurance about the subject matter.
     D. The engagement is intended to provide a level of assurance to be
     issued by a professional accountant about the information of being in
     conformity, in all material respects, with suitable criteria.

Answer 103

A. The engagement is intended to prevent the issuance of materially
misleading information.

Question 104

104. Which of the following is least likely a subject matter of an
     assurance engagement?
     A. Data.
     B. System and processes.
     C. Compliance and regulations.
     D. Degree of loyalty of employees to their employer.

Answer 104

D. Degree of loyalty of employees to their employer.

Question 105

105. Which of the following is least likely the basis of determining
     audit fees?
     A. The skill and knowledge required for the type of work involved.
     B. The degree of responsibility ad urgency that the work entails.
     C. The expected outcome of the engagement.
     D. The required level of training and experience of the persons engaged
     on the work.

Answer 105

C. The expected outcome of the engagement.

Question 106

106. Which of the following is least likely an indication that the CPA
     violates the Integrity principle? The CPA is associated with reports or
     information that:
     A. The CPA issues a qualified opinion due to scope limitation because he fails to arrive at a clear-cut conclusion.
     B. Contains a materially false or misleading statement.
     C. Omits or obscures information required to be included when such
     omission or obscurity would make the information misleading
     D. Contains statements or information furnished recklessly.

Answer 106

A. The CPA issues a qualified opinion due to scope limitation because he fails to arrive at a clear-cut conclusion.

Question 107

107. Which of the following is least likely create “self-interest
     threat”?
     A. Undue dependence on total fees from an assurance client.
     B. Concern about the possibility of losing the engagement.
     C. Having a close business relationship with an assurance client.
     D. Pressure to reduce inappropriately the extent of work performed in order to reduce fees.

Answer 107

D. Pressure to reduce inappropriately the extent of work performed in order to reduce fees.

Question 108

108. Examples of circumstances that may create self-review threat least
     likely include
     A. preparation of original data used to generate financial statements
     or preparation of other records that are the subject matter of the
     assurance engagement.
     B. a member of the assurance team being, or having recently been, an
     employee of the assurance client in a position to exert direct and
     significant influence over the subject matter of the assurance
     engagement.
     C. potential employment with an assurance client.

Answer 108

C

Question 109

109. Family and personal relationships between a member of the assurance
     team and a director, an officer or certain employees, depending on their
     role, of the assurance client, least likely create
     A. self-interest threat
     B. self-review threat
     C. intimidation threat
     D. familiarity threat

Answer 109

B. self-review threat

Question 110

110. A director, an officer or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement has been a member of the assurance team or partner of the firm. This situation least likely create
     A. self-interest threat
     B. advocacy threat.
     C. intimidation threat.
     D. familiarity threat.

Answer 110

B. advocacy threat.

Question 111

111. A former officer, director or employee of the assurance client
     serves as a member of the assurance team. This situation will least
     likely create
     A. self-interest threat.
     B. self-review threat.
     C. intimidation threat.
     D. familiarity threat.

Answer 111

C. intimidation threat.

Question 112

112. Which of the following will least likely impair independence?
     A. 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 of the
     assurance engagement.
     B. A member of the assurance team participates in the assurance
     engagement while knowing, or having reason to believe, that he or she
     is to, or may, join the assurance client in the future.
     C. A partner or employee of the firm serves as an officer or as a director
     on the board of an assurance client.
     D. A partner or employee of the firm or a network firm serves as Company Secretary for an audit client, the duties and functions undertaken are limited to those of a routine and formal administrative nature as such as the -preparation of minutes and. maintenance of statutory returns.

Answer 112

D. A partner or employee of the firm or a network firm serves as Company Secretary for an audit client, the duties and functions undertaken are limited to those of a routine and formal administrative nature as such as the -preparation of minutes and. maintenance of statutory returns.

Question 113

113. Examples of circumstances that may create familiarity threat least likely include
     A. a member of the assurance team having an immediate family member or close family member who is a director or officer of the assurance client.
     B. a member of the assurance team having an immediate family member or
     close family member who, as an employee of the assurance client, is in a position to exert direct and significant influence over the subject matter of the assurance engagement.
     C. a former partner of the firm being a director, officer of the assurance client or an employee in a position to exert direct and significant influence over the subject matter of the assurance engagement.
     D. dealing in, or being a promoter of, share or other securities in an
     assurance client.

Answer 113

D. dealing in, or being a promoter of, share or other securities in an
assurance client.

Question 114

114. When a member of the assurance team knows that his or her close family member has a direct financial interest or a material indirect financial interest in the assurance client, a self-interest threat maybe created. Safeguards least likely include:
     A. The close family member disposing of all or a sufficient portion of the financial interest at the earliest practical date.
     B. Discussing the matter with those charged with governance, such as the audit committee.
     C. Involving a professional accountant who took part in the assurance engagement to review the work done by the member of the assurance team with the close family relationship or otherwise advice as necessary
     D. Removing the individual from the assurance engagement.

Answer 114

C. Involving a professional accountant who took part in the assurance engagement to review the work done by the member of the assurance team with the close family relationship or otherwise advice as necessary

Question 115

115. Examples of close business relationships that may create selfinterest and intimidation threat least likely include:
     A. Having a material financial interest in director, officer or assurance client or a controlling owner, director, officer or other individual who performs senior managerial functions for that client.
     B. Arrangements to combine one or more services or products of the firm with one or more sees or products of the assurance client and to market the package with reference to both parties.
     C. Distribution or marketing arrangements under which the firm acts as a distributor or marketer of the assurance client’s products or services, or the assurance client acts as the distributor or marketer of the products or services of the firm.
     D. The purchase of goods and services from an assurance client by the firm (or from an audit client by a network firm) or a member of the assurance team, provided the transaction is in the normal course of business and on an arm’s length basis.

Answer 115

D. The purchase of goods and services from an assurance client by the firm (or from an audit client by a network firm) or a member of the assurance team, provided the transaction is in the normal course of business and on an arm’s length basis.

Question 116

116. If a member of the assurance team, partner or former partner of the firm has joined the assurance client, the significance of the self interest, familiarity or intimidation threats created is least likely affected by.
     A. The position the individual has taken at the assurance client.
     B. The amount of any involvement the individual will have with the member of the assurance team.
     C. The length of time that the individual was a member of the assurance team or firm.
     D. The former position of the individual within the assurance team or firm.

Answer 116

C. The length of time that the individual was a member of the assurance team or firm.

Question 117

117. Using the same senior personnel on an assurance engagement over a long period of time may create a familiarity threat. The significance of the threat will least likely depend upon.
     A. The length of time that the individual has been a member of the assurance team.
     B. The role of the individual on the assurance team.
     C. The structure of the client.
     D. The nature of the assurance engagement.

Answer 117

C. The structure of the client.

Question 118

118. The firm, or a network firm, may provide an audit client that is
     not a listed entity with accounting and bookkeeping services, including
     payroll services, of a routine or mechanical nature, provided any selfreview threat created is reduced to an acceptable level. Examples of
     such services least likely include:
     A. Recording transactions for which the audit client has determined or
     approved the appropriate account classification.
     B. Posting coded transactions to the audit client’s general ledger.
     C. Preparing financial statements based on information in the trial
     balance.
     D. Determining and posting journal entries without obtaining the approval of the audit client.

Answer 118

D. Determining and posting journal entries without obtaining the approval of the audit client.

Question 119

119. Which of the following may least likely create a self-review threat?
     A. The lending of staff by a firm to the financial Statement audit
     client.
     B. The firm provides internal audit services to the financial statement
     audit client.
     C. The firm renders litigation support services to the financial
     statement audit.
     D. Recruitment of senior manager for the financial statement audit
     client.

Answer 119

D. Recruitment of senior manager for the financial statement audit
client.

Question 120

120. Which of the following is least likely considered to create a threat
     to independence?
     A. The provision of services by a firm or network firm to an audit client which involve either the design or the implementation of financial
     information technology systems that are used to generate information forming part of a client’s financial statements.
     B. The provision of services in connection with the assessment, design and implementation of internal accounting controls and risk management controls.
     C. The lending of staff by a firm, or network firm, to an. audit client
     when the individual is in a position to influence the preparation of a
     client’s accounts or financial statements.
     D. The provision of litigation support services to an audit client which include the estimation of the possible outcome and thereby affects the amounts or disclosures to be reflected in the financial statements.

Answer 120

B. The provision of services in connection with the assessment, design and implementation of internal accounting controls and risk management controls.

Question 121

121. Which of the following is least likely to create a threat to
     independence?
     A. The fees generated by the assurance client represent a large
     proportion of the revenue of an individual partner.
     B. The firm charges a contingent fee to an assurance client.
     C. Accepting gifts or hospitality, the value of which is clearly
     insignificant, from an assurance client.
     D. When litigation takes place, or appears likely, between the firm or
     a member of the assurance team and the assurance client.

Answer 121

C. Accepting gifts or hospitality, the value of which is clearly
insignificant, from an assurance client.

Question 122

122. When litigation takes place between the firm and the assurance client, the firm and the client management may be placed in adversarial positions and the firm may face a self-interestthreat. Which of the
     following is least likely a factor in determining the Significance of
     the threat created by this litigation?
     A. The nature of the-assurance engagement.
     B. Whether the litigation relates to a prior assurance engagement.
     C. The materiality of the amount involved on litigation.
     D. The likelihood of the firm winning the litigation.

Answer 122

D. The likelihood of the firm winning the litigation.

Question 123

123. Which of the following threats to independence is least likely
     considered a result of the firm’s service of recruiting senior managers
     for an assurance client?
     A. Self-interest threat
     B. Familiarity threat
     C. Intimidation threat
     D. Self-review threat

Answer 123

D. Self-review threat

Question 124

124. Which of the following is least likely an application of maintaining
     an attitude of professional skepticism?
     A. The auditor does not consider representations from management as substitute for obtaining sufficient appropriate audit evidence to be
     able to draw reasonable conclusions on which to base the audit opinion.
     B. In planning and performing an audit, the auditor assumes that
     management is dishonest.
     C. The auditor is alert to audit evidence that contradicts or brings
     into question the reliability of documents or management
     representations.
     D. The auditor makes a critical assessment, with a questioning mind, of the validity of audit evidence obtained.

Answer 124

B. In planning and performing an audit, the auditor assumes that
management is dishonest.

Question 125

125. PSA 800, “The Independent Auditor‘s Report on Special Purpose Audit Engagements” least likely applies to auditor‘s report issued as a result of an audit of:
     A. compliance to royalty engagement
     B. a component of a complete set of general purpose financial statements wherein the opinion of the auditor is unqualified
     C. complete set of general purpose financial statements where the auditor is prohibited from observing the inventory count
     D. summarized financial statements

Answer 125

C. complete set of general purpose financial statements where the auditor is prohibited from observing the inventory count

Question 126

126. Which of the following is least likely considered by the auditor
     when he has to evaluate the fair presentation of the financial
     statements?
     A. Whether the financial statements, after any adjustments made by the management as a result of audit process, are consistent with the
     auditor‘s understanding of the entity and its environment
     B. Whether the financial statements, including the disclosures faithfully represent the underlying transaction and events in a manner
     that gives a true and fair view of, in all material respects, the
     information conveyed in the financial statements within the context of the financial reporting framework
     C. Whether the results of analytical procedures performed at or near the end of the audit help to corroborate conclusion formed during the audit
     D. Whether the financial statements are approved by the client‘s board
     of directors

Answer 126

D. Whether the financial statements are approved by the client‘s board
of directors

Question 127

127. Which of the following situations, the effect of which is
     significant, least likely require a decision of whether to issue a
     qualified or adverse opinion?
     A. Any disagreement with entity management regarding the acceptability
     of the accounting policies selected by the management
     B. Limitation on the scope of the auditor’s work
     C. Inadequate disclosures of financial information
     D. Unjustified changes in accounting policies

Answer 127

B. Limitation on the scope of the auditor’s work

Question 128

128. Which of the following circumstances least likely result to either a qualified opinion or an auditor disclaiming his opinion?
     A. The auditor is unable to carry out an audit procedure believed to be
     desirable; the auditor carried out alternative audit procedures to
     support the management’s assertion
     B. The auditor believed the client’s accounting records are inadequate
     C. A client-imposed scope limitation with respect to the audit of
     inventory
     D. Circumstances did not permit the auditor to perform certain required audit procedure.

Answer 128

A. The auditor is unable to carry out an audit procedure believed to be
desirable; the auditor carried out alternative audit procedures to
support the management’s assertion

Question 129

129. Which of the following least likely requires an expression of
     unqualified opinion with modified wordings or an emphasis of the matter paragraph?
     A. The financial statements of prior period, which are presented for
     comparative purposes, were audited by as ‘Gillet CPAs
     B. The auditors have substantial doubt about the ability of the entity
     to continue as a going concern
     C. The entity changed the measurement of certain significant transaction from one GAAP to another GAAP
     D. The auditors failed to observe physical inventory count. However, the auditor was satisfied that the inventory amount was fairly presented by doing alternative audit procedures.

Answer 129

D. The auditors failed to observe physical inventory count. However, the auditor was satisfied that the inventory amount was fairly presented by doing alternative audit procedures.

Question 130

130. In which of the following conditions is an unqualified audit opinion least likely issued?
     A. The auditor believes that a substantial doubt about the entity’s
     ability to continue as a going concern exists
     B. The auditor believes that inventory is valued at market values that accurately reflect market conditions and materially exceed cost
     C. The audit is conducted with no circumstance or imposed scope
     limitation
     D. PFRS are not consistently applied from year to year

Answer 130

B. The auditor believes that inventory is valued at market values that accurately reflect market conditions and materially exceed cost

Question 131

131. Which of the following subsequent events will be least likely to result to an adjustment on the financial statements?
     A. Culmination of events affecting the realization value of accounts
     receivable owned as of the balance sheet date.
     B. Culmination of events affecting the realization of inventories owned
     as of the balance sheet date.
     C. Material changes in the settlement of liabilities which were estimated as of the balance sheet date.
     D. Material changes in the quoted market prices of listed investment
     securities since the balance sheet date.

Answer 131

D. Material changes in the quoted market prices of listed investment
securities since the balance sheet date.

Question 132

132. Which of the following statement would least likely appear in an auditor‘s engagement letter?
     a. The fees for our serviced are based on our regular per diem rates, plus travel and other out-of-pocket expenses
     b. During the course of our audit, we may observe opportunities for
     economy in, or improved controls over, your operations
     c. Our engagement is subject to the risk that material errors, fraud,
     and defalcations, if they exist, will not be detected
     d. After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement

Answer 132

d. After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement

Question 133

133. Which of the following is least likely included in an auditor‘s
     inquiry of management while obtaining information to identify the risks of material misstatement due to fraud?
     a. Are financial reporting operations controlled by and limited to one
     location
     b. Does it have knowledge of fraud or suspect or fraud
     c. Does it have programs to mitigate fraud risks
     d. Has it reported to the audit committee the nature of the company‘s internal control

Answer 133

a. Are financial reporting operations controlled by and limited to one
location

Question 134

134. The auditor should determine overall responses to address the risks of material misstatement at the financial statement level. Such responses least likely include
     a. Emphasizing to the audit team the need to maintain professional
     skepticism in gathering and evaluating audit evidence
     b. Assigning more experienced staff or those with special skills or using
     experts
     c. Incorporating additional elements of unpredictability in the
     selection of further audit procedures to be performed
     d. Performing substantive procedures at an interim date instead of at period end

Answer 134

d. Performing substantive procedures at an interim date instead of at period end

Question 135

135. Which of the following is least likely 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

Answer 135

a. Management operating and financing decisions are dominated by top management

Question 136

136. Which of the following will an auditor least likely discuss with
     the former auditors of a potential client prior to acceptance of an audit engagement?
     a. Integrity of the management
     b. Fees charges for the services
     c. Disagreements between the predecessor auditor and the management regarding accounting principles
     d. Reasons for changing audit firms

Answer 136

b. Fees charges for the services

Question 137

137. Which of the following does an auditor least likely perform in
     assessing audit risk?
     a. Gather audit evidence in support of recorded transactions
     b. Obtain an understanding of the client‘s system of internal control
     c. Understand the economic substance of significant transactions completed by the client
     d. Understand the entity and the industry in which it operates

Answer 137

a. Gather audit evidence in support of recorded transactions

Question 138

138. Which of the following is least likely required in an audit?
     a. Test appropriateness of journal entries and adjustment
     b. Review accounting estimates for biases
     c. Evaluate the business rationale for significantly unusual
     transactions
     d. Make a legal determination of whether fraud has occurred

Answer 138

D

Question 139

139. Which of the following is least likely to be an evidence of
     effectiveness of controls?
     a. Cancelation of supporting document.
     b. The policy of documenting the usage of computer program
     c. Confirmation of bank balances.
     d. Signatures on authorization forms.

Answer 139

c. Confirmation of bank balances.

Question 140

140. When an organization has strong internal control, management can
     expect various benefits. The benefit least likely to occur is
     a. a reduced cost of an external audit
     b. an elimination of employee fraud
     c. the availability of reliable data for decision-making purposes and
     protection of important documents and records.
     d. an assurance of compliance to applicable laws and regulations

Answer 140

b. an elimination of employee fraud

Question 141

141. An auditor is least likely to test for on internal control that
     provides for
     a. segregation of the functions of recording disbursements and
     reconciling the bank account.
     b. comparison of receiving reports and vendors‘ invoices with purchase orders
     c. approval of the purchase and sale at marketable securities.
     d. classification of revenue and expense transactions by product

Answer 141

d. classification of revenue and expense transactions by product

Question 142

142. Auditors can use several types of audit procedures to test controls.
     Which of the following type of audit procedures is least likely to be
     used during tests of controls?
     a. Physical examination of assets
     b. Inquiries of client personnel
     c. Examination of documents, records, and reports
     d. Observation of control-related activities.

Answer 142

a. Physical examination of assets

Question 143

143. Tests of controls least likely include:
     a. Inquiries of appropriate client vendors.
     b. Reperformance of a control.
     c. Observation of the application of an accounting procedure.
     d. Inspection of documents

Answer 143

a. Inquiries of appropriate client vendors.

Question 144

144. The results of the considerations of internal control least likely
     affect the auditor‘s decisions pertaining to:
     a. The use of analytical procedures.
     b. The assessment of control risk.
     c. The assessment of inherent risk.
     d. Detailed tests of ending balances.

Answer 144

c. The assessment of inherent risk.

Question 145

145. Which of the following terms includes the concept that least likely
     to have a likelihood of occurrence?
     a. Material Weakness–Yes; Reportable Condition—Yes
     b. Material Weakness–Yes; Reportable Condition—No
     c. Material Weakness–No; Reportable Condition—Yes
     d. Material Weakness–No; Reportable Condilion—No

Answer 145

a. Material Weakness–Yes; Reportable Condition—Yes

Question 146

146. An auditor would least likely use computer software to:
     A. Access client date fails
     B. Prepare spreadsheets
     C. Assess EDP controls
     D. Construct parallel simulations

Answer 146

C. Assess EDP controls

Question 147

147. Which of the following is least likely a risk characteristic
     associated with CIS environment?
     A. Error embedded in an application‘s program logic maybe difficult to manually detect on a timely basis
     B. The separation of functional responsibilities diminishes in a
     computerized environment
     C. Initiation of changes in the master file is exclusively handled by
     respective users
     D. The potential unauthorized access to data or to alter them without visible evidence maybe greater

Answer 147

C. Initiation of changes in the master file is exclusively handled by
respective users

Question 148

148. The auditor‘s working papers will least likely include documentation showing how the
     A. Schedules are prepared by the client personnel.
     B. Engagement is planned
     C. Understanding of the client‘s internal control is obtained and control rise was assessed.
     D. Unusual matters are resolved

Answer 148

A. Schedules are prepared by the client personnel.

Question 149

149. Which of the following analyses appearing in a predecessor‘s working
     papers would the successor auditor least likely review?
     A. Analysis of noncurrent balance sheet accounts
     B. Analysis of current balance sheet accounts
     C. Analysis of contingencies
     D. Analysis of income statement accounts

Answer 149

D. Analysis of income statement accounts

Question 150

150. Which of the following assertions is least likely to be tested
     exclusively at an interim date?
     A. Existence for inventory
     B. Completeness for accounts receivable
     C. Existence for equipment
     D. Valuation for marketable securities

Answer 150

D. Valuation for marketable securities

Question 151

151. Assuming a low assessed level of control risk, which of the
     following audit procedures is least likely to be performed?
     A. Physical inspection of a sample of inventory
     B. Search for unrecorded cash receipts
     C. Obtaining a client representation letter
     D. Confirmation of accounts receivable

Answer 151

B. Search for unrecorded cash receipts

Question 152

152. The competence of evidence available to an auditor is least likely
     affected by
     A. The relevance of such evidence to the financial statement assertion
     being investigated
     B. The relationship of the source of such an evidence to the entity being
     audited
     C. The timeliness of the audit evidence obtained
     D. The sampling method employed by the auditor to obtain a number of samples as evidence

Answer 152

D. The sampling method employed by the auditor to obtain a number of samples as evidence

Question 153

153. An auditor would be least likely to use confirmations in connection
     with the examination of
     A. Inventories
     B. Long-term debt
     C. Property, plant, and equipment
     D. Stockholders‘ equity

Answer 153

C. Property, plant, and equipment

Question 154

154. Which of these assignments of duties would least likely lead to an
     embezzlement or theft?
     A. Inventory warehouse manager has responsibility for making the physical inventory observation and reconciling the discrepancies to the perpetual inventory records.
     B. The cashier prepares the bank deposit, endorses the checks with a
     company stamp, takes the cash and checks to the bank for deposit, and
     reconciles the bank statement.
     C. Accounts receivable clerk opens customer payments so he could make entries in the customers’ accounts receivable subsidiary accounts.
     D. Financial vice president receives the checks payable to suppliers and
     the supporting invoices, signs the checks, and mails them to the payees.

Answer 154

D. Financial vice president receives the checks payable to suppliers and
the supporting invoices, signs the checks, and mails them to the payees.

Question 155

155. Which of the following procedures least likely helps the auditors to assess the adequacy of management’s accounting estimate of the allowance for doubtful accounts?
     A. Investigate confirmation exceptions for any indication of amounts in dispute.
     B. Review the accounts which have been written off as uncollectible prior to year-end.
     C. Investigate credit ratings for large accounts receivable.
     D. Discuss with the credit manager the current status of doubtful
     accounts.

Answer 155

B. Review the accounts which have been written off as uncollectible prior to year-end.

Question 156

156. Which of the following procedures is least likely to alert the
     auditors to unrecorded accounts payable?
     A. Confirmation of accrued liabilities.
     B. Reconcile recorded liabilities with monthly statements from
     creditors.
     C. Examine disbursement transactions recorded following year-end.
     D. Analytical procedures involving year-end accounts payable.

Answer 156

A. Confirmation of accrued liabilities.

Question 157

157. Which of the following least likely serves as a substitute for
     performing other audit procedures?
     A. The physical observation of the counting of company inventory.
     B. Sending letters to debtors or creditors of the company to confirm amount the company owes or is owed, respectively.
     C. Tracing an amount on the financial statements back through the accounting system to the underlying supporting documentation.
     D. Obtaining a representation letter signed by top management.

Answer 157

D. Obtaining a representation letter signed by top management.

Question 158

158. The auditors are least likely to learn of retirements of equipment
     through which of the following?
     A. Review of the purchase returns and allowances account.
     B. Review of depreciation.
     C. Analysis of the debits to the accumulated depreciation account.
     D. Review of insurance policy riders.

Answer 158

A. Review of the purchase returns and allowances account.

Question 159

159. Which of the following is least likely to be included in the audit
     program for debenture bonds?
     A. Examine security pledged relating to the loan
     B. Confirm
     C. Review bonds paid during the period
     D. Perform analytical procedures

Answer 159

A. Examine security pledged relating to the loan

Question 160

160. Which of the following is least likely a procedure that would be
     performed by the auditor near the auditor’s report date?
     A. Reading the minutes of the meetings of shareholders, the board of directors and audit executive committees held throughout the audit year.
     B. Reading the entity’s latest available interim financial statements
     C. Inquiring of the client’s legal counsel concerning litigations and
     claims.
     D. Reviewing the procedures that management has established to ensure that subsequent events are identified.

Answer 160

A. Reading the minutes of the meetings of shareholders, the board of directors and audit executive committees held throughout the audit year.

Question 161

161. Which of the following least likely indicate a potential goingconcern problem of on the entity?
     A. Historical negative operating cash flows
     B. Failure to comply with loan covenants
     C. Refinancing of large short-term obligation with a medium-term loan
     D. Pending regulatory proceedings against the entity

Answer 161

C. Refinancing of large short-term obligation with a medium-term loan

Question 162

162. According to professional standards, analytical procedures are
     least likely to be applied to:
     A. test disclosures about reportable operating segments.
     B. review the financial statements or interim financial information.
     C. compile the financial statements.
     D. plan and audit and assist in the final review.

Answer 162

C. compile the financial statements.

Question 163

163. Which of the following would be least likely to be comparable
     between similar corporations in the same industry line of business?
     A. Earnings per share
     B. Return on total assets before interest and taxes
     C. Accounts receivable turnover
     D. Operating cycle

Answer 163

A. Earnings per share

Question 164

164. Which of the following income statement accounts is least likely
     to be subject to extensive detailed tests of balances?
     A. legal and professional fees
     B. Contributions
     C. Cost of sales
     D. Officers’ salaries

Answer 164

C. Cost of sales

Question 165

165. Which of the following is least likely an action that may mitigate
     an entity’s difficulty to continue as a going concern?
     A. Increased cash dividends
     B. Retirement of outstanding capital stock in order to improve earnings
     per share
     C. Retirement of long-term debt in order to improve profitability
     D. Disposal of property in a sale-leaseback arrangement

Answer 165

D. Disposal of property in a sale-leaseback arrangement

Question 166

166. Independence of the internal auditors would be least likely achieved
     if internal auditors report to the?
     A. President
     B. Controller
     C. Audit Committee
     D. The Board of Directors

Answer 166

B. Controller

Question 167

167. Engagement letter for review of financial statements least likely
     includes
     A. the objective of the service being performed
     B. the fact that the engagement cannot be relied upon to disclose errors,
     illegal acts or other irregularities, for example, fraud or defalcations
     that may exist
     C. a statement that an audit is not being performed and that an audit
     opinion will not be expressed
     D. the fact that 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 same material misstatements may remain undiscovered

Answer 167

D. the fact that 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 same material misstatements may remain undiscovered

Question 168

168. Which of the following is least likely done by the auditor in
     conducting a review of financial statements?
     A. Study of the relationships of the elements of the financial statements
     B. Comparison of the financial statements with those statements of prior periods
     C. Comparison of the financial statements with anticipated results and financial position
     D. Comparison of inventory listing with physical inventory count

Answer 168

D. Comparison of inventory listing with physical inventory count

Question 169

169. The auditor’s report on summarized financial statements least likely include
     A. an identification of the audited financial statements from which the
     summarized financial statements were derived
     B. a reference to the date of the audit report on the general-purpose financial statements and the type of opinion given in that report
     C. an opinion as to whether the information in the summarized financial statements is presented fairly, in all material respects
     D. a statement which indicates that for a better understanding of an
     entity’s financial performance and position and of the scope of the audit performed, the summarized financial statements should be read in conjunction with the general purpose financial statements and the audit
     report thereon

Answer 169

C. an opinion as to whether the information in the summarized financial statements is presented fairly, in all material respects

Question 170

170. Which of the following least likely affects the nature, timing, and
     extent of the procedures performed by the auditor to obtain an understanding of the accounting and internal control system of an audit client
     A. Materiality considerations
     B. The expected level of detection risk
     C. The auditor‘s assessment of inherent risk
     D. The complexity of the accounting process

Answer 170

B. The expected level of detection risk

Question 171

171. Which of the following is least likely a risk characteristic
     associated with CIS environment?
     A. Error embedded in an application’s program logic maybe difficult to
     manually detect on a timely basis.
     B. The separation of functional responsibilities diminishes in a
     computerized environment
     C. Initiation of changes in the master file is exclusively handled by
     respective users
     D. The potential unauthorized access to data or to alter them without visible evidence maybe greater

Answer 171

C. Initiation of changes in the master file is exclusively handled by
respective users

Question 172

172. Which of the following least likely affect the sufficiency of the
     appropriate audit evidence?
     A. Nature of the accounting and internal control systems
     B. Materiality of the item being examined
     C. Source and reliability of information available
     D. The type of sampling approach - statistical or judgmental

Answer 172

D. The type of sampling approach - statistical or judgmental

Question 173

173. Which of the following subsequent events will be least likely to
     result an adjustment to the financial statements?
     A. Culmination of events affecting the realization of accounts receivable
     owned as of the balance sheet date.
     B. Culmination of events affecting the realization of inventories owned
     as of the balance sheet date.
     C. Material changes in the settlement of liabilities which were estimated
     as of the balance sheet date.
     D. Material changes in the quoted market price of listed investment
     securities since the balance sheet date.

Answer 173

D. Material changes in the quoted market price of listed investment
securities since the balance sheet date.

Question 174

174. Which of the following would an auditor least likely discuss with
     the former auditors of a potential client prior to acceptance?
     A. Integrity of management
     B. Fees charged for services
     C. Predecessor’s disagreements with management regarding the use of
     accounting principles
     D. Reasons for changing audit firms

Answer 174

B. Fees charged for services

Question 175

175. In which of the following situations would materiality be least likely considered critical?
     A. A decision of whether the auditor has to obtain a representation
     letter from the management.
     B. In determining the nature, timing and extent of audit procedures.
     C. A decision of whether to modify the audit opinion.
     D. Evaluating the effect of misstatements.

Answer 175

A. A decision of whether the auditor has to obtain a representation
letter from the management.

Question 176

176. Which of the following is least likely entitled to the report of
     the service organization auditor on the suitability of internal control
     design and operating effectiveness of the service organization?
     A. Service organization management
     B. Service organization stockholders
     C. Service organization‘s customer
     D. Client auditors.

Answer 176

B. Service organization stockholders

Question 176

177. Which of the following is least likely included in an audit
     engagement letter?
     a. The responsibility of the auditor to third party users statements
     b. Management responsibility for the financial statements
     c. The form of any reports or other communication of the results of the
     engagement
     d. Arrangement concerning the involvement of other experts in some
     aspects of the audit

Answer 176

a. The responsibility of the auditor to third party users statements

Question 177

178. Which of the following least likely influence the auditor’s decision to send a separate engagement letter to a component of parent entity client?
     a. Legal requirements
     b. Degree of ownership by parent
     c. Reporting requirements of the component entity
     d. Who appoints the auditor of the component

Answer 177

c. Reporting requirements of the component entity

Question 178

179. The auditor should determine overall responses to address the risks of material misstatement at the financial statement level. Such responses least likely include
     a. Emphasizing to the audit team the need to maintain professional
     skepticism in gathering and evaluating audit evidence.
     b. Assigning more experienced staff or those with special skills or using
     experts
     c. incorporating additional elements of unpredictability in the
     selection of further audit procedures to be performed.
     d. Performing substantive procedures at an interim date instead of at period end.

Answer 178

d. Performing substantive procedures at an interim date instead of at period end.

Question 179

180. Which of the following procedures is least likely to be performed before the balance sheet date?
     a. Observation of Inventory
     b. Search for unrecorded liabilities
     c. Testing internal control over cash
     d. Confirmation of receivables

Answer 179

b. Search for unrecorded liabilities

Question 180

181. The audit report of the incoming auditor least likely include an indication
     a. That the financial statements of the prior period were audited by
     another CPA.
     b. The type of report issued by the predecessor auditor
     c. The division of responsibility between the successor and the
     predecessor auditor.
     d. The date of the predecessor auditor’s report.

Answer 180

d. The date of the predecessor auditor’s report.

Question 181

182. Which of the following least likely affect the persuasiveness of
     audit evidence that the auditor obtains?
     A. The source of the audit evidence.
     B. The consistency of evidence obtained from different sources.
     C. The number of audit evidence from a group of sources.
     D. The effectiveness of accounting and internal control of the client
     entity.

Answer 181

C. The number of audit evidence from a group of sources.

Question 182

183. A summary of findings rather than assurance is most likely to be
     issued in which engagement?
     A. Agreed-upon
     B. Compilation
     C. Examination
     D. Review

Answer 182

A. Agreed-upon

Question 183

184. A summary of findings rather than assurance is most likely to be
     included in a(n):
     A. Agreed-upon procedures report
     B. Compilation report
     C. Examination report
     D. Review report

Answer 183

A. Agreed-upon procedures report

Question 184

185. When performing an engagement to review a nonpublic entity‘s financial statements, an accountant most likely would:
     A. Obtain an understanding of the entity‘s internal control.
     B. Limit the distribution of the accountant‘s report.
     C. Confirm a sample of significant accounts receivable balances.
     D. Ask about actions taken a board of directors meetings.

Answer 184

D. Ask about actions taken a board of directors meetings.

Question 185

186. Which of the following factors most likely would cause a CPA to
     decline a new audit engagement? A. The CPA does not understand the
     entity‘s operations and industry.
     B. Management acknowledges that the entity has had recurring operating losses.
     C. The CPA is unable to review he predecessor auditor‘s working papers.
     D. Management is unwilling to permit inquiry of its legal counsel.

Answer 185

D. Management is unwilling to permit inquiry of its legal counsel.

Question 186

187. If the firm is involved in the preparation of accounting records
     or financial statements and those financial statements are subsequently the subject matter of an audit engagement of the firm, this will most likely create
     A. self-interest threat
     B. self-review threat
     C. intimidation threat
     D. familiarity threat

Answer 186

B. self-review threat

Question 187

188. The provision of services by a firm or network firm to an audit
     client that involve the design and implementation of financial
     information technology systems that are used to generate information
     forming part of a client’s financial statements may most likely create
     A. self-interest threat.
     B. self-review threat.
     C. intimidation threat.
     D. familiarity threat.

Answer 187

B. self-review threat.

Question 188

189. Which of the following relationships is most likely to impair a CPA’s independence with respect to a particular audit client on which
     the CPA works as a member of the engagement team?
     A. A close relative has a material investment in that client of which
     the CPA is not aware.
     B. A cousin has an immaterial investment in that client of which the CPA is not aware.
     C. The CPA’s father is the president of the audit client.
     D. The CPA’s spouse participates in a savings plan sponsored by the
     client.

Answer 188

C. The CPA’s father is the president of the audit client.

Question 189

190. A small CPA firm provides audit services to a large local company. Almost 80 percent of the CPA firm’s revenues come from this client. Which statement is most likely to be true?
     A. Appearance of independence may be lacking.
     B. The small CPA firm does not have proficiency to perform a larger
     audit.
     C. The situation is satisfactory if the auditor exercises due skeptical
     negative assurance care in the audit.
     D. The auditor should provide an “emphasis of a matter his audit report adequately disclosing information and then it may issue an unqualified
     opinion.

Answer 189

A. Appearance of independence may be lacking.

Question 190

191. If the firm is involved in the preparation of accounting records
     or financial statements and those financial statements are subsequently the subject matter of an audit engagement of the firm, this will most likely create
     A. Self-interest threat
     B. Intimidation threat
     C. Self-review threat
     D. Familiarity threat

Answer 190

C. Self-review threat

Question 191

192. The provision of legal services to financial statement audit clients
     most likely is a(an).
     A. Familiarity threat
     B. Self-interest threat
     C. Advocacy threat
     D. Intimidation threat

Answer 191

C. Advocacy threat

Question 192

193. Which of the following combination of threats to independence is most likely to occur as a result of the provision of corporate finance
     services advice or assistance to an assurance client?
     A. Advocacy and self-review threats
     B. Self-review and familiarity threats
     C. Familiarity and advocacy threats
     D. Self-review and self-interest threats

Answer 192

A. Advocacy and self-review threats

Question 193

194. An auditor who finds that the client has committed noncompliance with laws and regulations would most likely withdraw from the engagement when the
     A. noncompliance with laws and regulations affects the auditor’s ability to rely on management representations.
     B. noncompliance with laws and regulations has material financial
     statement implications.
     C. noncompliance with laws and regulations has received widespread publicity.
     D. auditor cannot reasonably estimate the effect of the noncompliance with laws and regulations on the financial statements.

Answer 193

A. noncompliance with laws and regulations affects the auditor’s ability to rely on management representations.

Question 194

195. A violation of the ethical standards would most likely have occurred when a CPA
     A. made arrangement with a bank to collect notes issued by a client in
     payment of fees due.
     B. joined an accounting firm made up of three non-CPA practitioners.
     C. issued an unqualified opinion on the 2009 financial statements when
     fees for the 2008 audit were unpaid.
     D. purchased a bookkeeping firm’s practice of monthly write-ups for a
     percentage of fees received over a three-year period.

Answer 194

C. issued an unqualified opinion on the 2009 financial statements when
fees for the 2008 audit were unpaid.

Question 195

196. In which circumstance is a CPA firm’s independence most likely to
     be impaired?
     A. A member of the engagement team has a close relative who is a
     receptionist for the client.
     B. The father of the audit senior holds a material financial interest
     in the client of which the senior is unaware.
     C. The spouse of a member of the audit team has an immaterial common
     stock investment in the audit client.
     D. The partner in charge of the office’s compensation is affected by
     office profitability, a portion of which arises from this audit.

Answer 195

C. The spouse of a member of the audit team has an immaterial common

Question 196

197. The auditor’s defense of contributory negligence is most likely to prevail when
     A. third party injury has been minimal.
     B. the auditor fails to detect fraud resulting from management override of the control structure.
     C. the client has privately held as contrasted with a public company.
     D. undetected errors have resulted in materially misleading financial
     statements.

Answer 196

B. the auditor fails to detect fraud resulting from management override of the control structure.

Question 197

198. A CPA will most likely be negligent when he fails to:
     A. Correct errors discovered in the CPA’s previously issued audit
     reports.
     B. Detect all of a client’s fraudulent activities.
     C. Include a: negligence disclaimer in the CPA’s engagement letter.
     D. Warn a client’s customers of embezzlement that may be perpetuated by the client’s employees.

Answer 197

A. Correct errors discovered in the CPA’s previously issued audit
reports.

Question 198

199. If the scope of the auditors procedures in conducting an audit is significantly restricted by the client management, the audit opinion will most likely be a(n):
     A. Adverse opinion
     B. Qualified opinion
     C. Unqualified with explanatory paragraph
     D. Disclaimer of opinion.

Answer 198

D. Disclaimer of opinion.

Question 199

200. The auditor would most likely disclaim his opinion because of
     A. the client’s failure to present supplementary information required by the FRSC
     B. inadequate disclosure of material information
     C. the qualification of an opinion by the other auditor of a subsidiary
     where there is a division of responsibility
     D. a client-imposed scope limitation.

Answer 199

D. a client-imposed scope limitation.

Question 200

201. An audit report contains the following paragraph: “Because of the inadequacies in the company’s accounting records during the year ended June 30, 2008, it was not practicable to extend our auditing procedures to the extent necessary to enable us to obtain certain evidential matter as it relates to classification of certain items in the consolidated statements of operations.” This paragraph most likely describes
     A. A material departure from PFRS requiring a qualified audit opinion
     B. An uncertainty that should not lead to a qualified opinion
     C. A matter that the auditor wishes to emphasize and that does not lead to a qualified audit opinion
     D. A material scope restriction requiring a qualification of the audit
     opinion.

Answer 200

D. A material scope restriction requiring a qualification of the audit
opinion.

Question 201

202. Francis and Company, CPAs, acted as the principal auditor. However, since Francis and Company, CPAs, did not have the resources, it hired other CPA firm to audit a subsidiary of the client located in Bukidnon. If Francis is willing to take the responsibility for the work of other CPA firm, which type of audit report is Francis and Company most likely to issue?
     A. Standard unqualified report.
     B. Unqualified with explanatory language.
     C. Qualified with explanatory language.
     D. Disclaimer of opinion.

Answer 201

A. Standard unqualified report.

Question 202

203. Which of the following conditions most likely requires the auditor to consider issuing a going concern modification?
     A. A decrease in profitability as compared to the previous year.
     B. A loss contingency related to a lawsuit.
     C. Default on a loan agreement.
     D. A material related-party transaction.

Answer 202

C. Default on a loan agreement.

Question 203

204. A departure from PFRS with a material effect on the financial
     statements is most likely to result in a (n):
     A. Disclaimer of opinion.
     B. Qualified opinion.
     C. Standard unqualified opinion.
     D. Unqualified opinion with explanatory language.

Answer 203

B. Qualified opinion.

Question 204

205. In which circumstance would an auditor be most likely to express
     an adverse opinion?
     A. The chief executive officer refuses the auditor’s access to minutes of the board of directors’ meetings.
     B. Tests of controls show that the client’s internal control is so
     ineffective that it cannot be relied upon.
     C. The financial statements are not in conformity with the FRSC
     Statements regarding the capitalization of leases.
     D. Information comes to the auditor’s attention than raises substantial doubt about the client’s ability to continue as a going concern.

Answer 204

C. The financial statements are not in conformity with the FRSC
Statements regarding the capitalization of leases.

Question 205

206. The adverse effects of events causing an auditor to believe there
     is substantial doubt about an entity’s ability to continue as a going concern would most likely be mitigated by evidence relating to the
     A. ability to expand operations into new product lines in the future.
     B. feasibility of plans to purchase leased equipment at less than market value.
     C. marketability of assets that management plans to sell.
     D. committed arrangements to convert preferred stock to long-term debt.

Answer 205

C. marketability of assets that management plans to sell.

Question 206

207. Which of the following events occurring after the issuance of an
     auditor’s report most likely would cause die auditor to make further
     inquiries about the previously issued financial statements?
     A. A technological development that could affect the entity’s future
     ability to continue as a going concern.
     B. The discovery of information regarding a contingency that existed before the financial statements were issued.
     C. The entity’s sale of a subsidiary that accounts for 30 per cent of
     the entity’s consolidated sales.
     D. The final resolution of a lawsuit that was fully explained in a
     footnote.

Answer 206

B. The discovery of information regarding a contingency that existed before the financial statements were issued.

Question 207

208. A principal auditor decides not to refer to the audit by another
     CPA who audited a subsidiary of the principal auditor’s client. After
     making inquiries about the other CPA’s professional reputation and
     independence, the principal auditor most likely would
     A. add an explanatory paragraph to the auditor’s report indicating that
     the subsidiary’s financial statements are not material to the
     consolidated financial statements.
     B. document in the engagement letter that the principal auditor assumes no responsibility for the other CPA’s work and opinion.
     C. obtain written permission from the other CPA to omit the reference
     in the principal auditor’s report.
     D. contact the other CPA and review the audit programs and working papers pertaining to the subsidiary.

Answer 207

D. contact the other CPA and review the audit programs and working papers pertaining to the subsidiary.

Question 208

209. An auditor is unable to determine the amounts associated with illegal acts committed by a client. The auditor would most likely issue
     A. either a qualified opinion or a disclaimer of opinion.
     B. an adverse opinion.
     C. either a qualified opinion or an adverse opinion.
     D. a disclaimer of opinion.

Answer 208

A. either a qualified opinion or a disclaimer of opinion.

Question 209

210. Which of the following characteristics most likely would heighten an auditor‘s concern about the risk of intentional manipulation of financial statements?
     a. Turnover of senior accounting personnel is low
     b. Insiders recently purchase additional shares of the entity‘s stock
     c. Management places substantial emphasis on meeting earning projections
     d. The rate of change in the entity‘s industry is low

Answer 209

c. Management places substantial emphasis on meeting earning projections

Question 210

211. Which of the following is most likely to be an overall response to
     fraud risks identifies in an audit?
     a. Supervise members of the audit team less closely and rely more upon judgment
     b. Use less predictable audit procedures
     c. Use only certified public accountants on the engagement
     d. Place increased emphasis on the audit of objective transactions rather
     than subjective transactions

Answer 210

b. Use less predictable audit procedures

Question 211

212. Inquiries directed towards those charged with governance may most likely
     a. Related to their activities concerning the design and effectiveness of the entity‘s internal control and whether management has satisfactorily responded to any finding from these activities
     b. Help the auditor understand the environment in which the financial
     statements are prepared
     c. Relate to changes in the entity‘s marketing strategies, sales trends,
     or contractual arrangement with its customers
     d. Help the auditor in evaluating the appropriateness of the selection
     and application of certain accounting policies

Answer 211

b. Help the auditor understand the environment in which the financial
statements are prepared

Question 212

213. Which of the following is most likely to be considered a risk factor
     relating to fraudulent financial reporting?
     a. Low turnover of senior management
     b. Extreme degree of competition within the industry
     c. Capital structure including various operating subsidiaries
     d. Sales goals in excess of any of the preceding three years

Answer 212

b. Extreme degree of competition within the industry

Question 213

214. Which of the following factors most likely would heighten an
     auditor‘s concern about the risk of fraudulent financial reporting?
     a. Large amounts of liquid assets that are easily convertible into cash
     b. Low growth and profitability as compared to other entity‘s in the
     same industry
     c. Financial management‘s participation in the initial selection of accounting principles
     d. An overly complex organizational structure involving unusual lines
     of authority

Answer 213

d. An overly complex organizational structure involving unusual lines
of authority

Question 214

215. Which of the following is most likely to be an overall response to
     fraud risks identified in an audit?
     a. Only use certified public accountants on the engagement
     b. Place increased emphasis on the audit of objective transactions rather than subjective transactions
     c. Supervise members of the audit team less closely and rely more upon judgment
     d. Use less predictable audit procedures

Answer 214

d. Use less predictable audit procedures

Question 215

216. The element of the audit planning process most likely to be agreed upon with the client before the implementation of audit strategy is the determination of the
     a. Method of statistical sampling to be used in confirming accounts
     receivable
     b. Pending legal matters to be included in the inquiry of the client‘s attorney
     c. Evidence to be gathered to provide a sufficient basis for the
     auditor‘s opinion
     d. Schedules and analyses to be prepared by the client‘s staff

Answer 215

d. Schedules and analyses to be prepared by the client‘s staff

Question 216

217. What is the most likely course of action to be taken by an auditor
     in assessing management integrity?
     a. Tour the plant
     b. Review the minutes of the board of directors
     c. Research the background and histories of officers
     d. Review the bank reconciliation statements

Answer 216

c. Research the background and histories of officers

Question 217

218. A successor auditor would most likely make specific inquiries of the predecessor auditor regarding
     a. Specialized accounting principle being used by the client‘s industry
     b. The competency of the client‘s internal audit staff
     c. The uncertainty inherent in applying sampling procedures
     d. Disagreements with management as to auditing procedures

Answer 217

d. Disagreements with management as to auditing procedures

Question 218

219. The auditor is most likely to presume that a high risk of
     irregularities exists if
     a. The client is a multinational company that does business in numerous foreign countries
     b. The client does business with several related parties
     c. Inadequate segregation of duties places an employee in a position to
     perpetrate and conceal thefts
     d. Inadequate employee training results in lengthy EDP exception reports each month

Answer 218

c. Inadequate segregation of duties places an employee in a position to
perpetrate and conceal thefts

Question 219

220. 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:
     a. Irregularities exist among the relevant account balances
     b. Additional tests of details are required
     c. Internal control activities are not operating effectively
     d. The communication with the audit committee should be revised

Answer 219

b. Additional tests of details are required

Question 220

221. Auditors try to identify predictable relationship when using
     analytical procedures. Which of the following accounts would most likely yield the highest level of evidence regarding relationships that involve transactions?
     a. Accounts payable
     b. Accounts receivable
     c. Payroll expense
     d. Advertising expense

Answer 220

c. Payroll expense

Question 221

222. In which of the following would the auditor most likely find
     information about compensation of corporate officers?
     a. Corporate charter
     b. Corporate by-laws
     c. Corporate minutes
     d. Audit engagement letter

Answer 221

c. Corporate minutes

Question 222

223. The element of the audit planning process most likely to be agreed with the client before the implementation of the audit strategy is the determination of the
     a. Timing of inventory observation procedure 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.

Answer 222

a. Timing of inventory observation procedure to be performed

Question 223

224. After studying and evaluating a client’s existing internal control,
     an auditor has concluded that the policies and procedures are well
     designed and functioning as intended. Under these circumstances, the
     auditor would most likely
     a. Perform further control tests to the extent outlined in the audit
     program.
     b. Determine the control policies and procedures that should prevent or
     detect errors and fraud.
     c. Set acceptable detection, risk at a higher level than would be set
     under conditions of weak internal control.
     d. set acceptable detection risk at a lower level than would be set under
     conditions of weak internal control.

Answer 223

c. Set acceptable detection, risk at a higher level than would be set
under conditions of weak internal control.

Question 224

225. Which of the following factors most likely would lead a CPA to
     conclude that a potential audit engagement should not be accepted?
     a. There are significant related party transactions that management claims occurred in the ordinary course of business.
     b. Internal control activities requiring the segregation of duties are subject to management override.
     c. Management continues to employ an inefficient system of information technology to record financial transactions
     d. It is unlikely that sufficient evidence is available to support an
     opinion on the financial statements.

Answer 224

d. It is unlikely that sufficient evidence is available to support an
opinion on the financial statements.

Question 225

226. An auditor would most likely .be concerned with internal control
     policies and procedures that provide reasonable assurance about:
     a. The efficiency of management’s decision-making process
     b. Appropriate prices that the entity should charge for its products.
     c. Methods of assigning production tasks to employees
     d. The entity’s ability to process and summarize financial data.

Answer 225

d. The entity’s ability to process and summarize financial data.

Question 226

227. Which of the following audit techniques would most likely provide an auditor with the most assurance about the effectiveness of the operation of an internal control procedure?
     a. Inquiry of client personnel
     b. Recomputation of an account balance
     c. Observation of client personnel
     d. Confirmation of balances or transactions with outside parties

Answer 226

c. Observation of client personnel

Question 227

228. An auditor wishes to perform tests of controls on a client’s cash
     disbursements procedures. If the controls leave no audit trail of
     documentary evidence; the auditor most likely will test the procedures
     by
     a. confirmation and observation
     b. analytical procedures and confirmation
     c. observation and inquiry
     d. inquiry and analytical procedures

Answer 227

c. observation and inquiry

Question 228

229. Management’s 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. The audit committee is active in overseeing the entity’s financial
     reporting policies.
     b. external policies established by parties outside the entity affect
     its accounting practices
     c. Management is dominated by one individual who is also a shareholder.
     d. Internal auditors have direct access to the board of directors and
     entity management.

Answer 228

c. Management is dominated by one individual who is also a shareholder.

Question 229

230. An entity’s internal control consists of policies and procedures
     established to provide reasonable assurance that specific entity
     objectives will be achieved. Only some of these objectives, policies and procedures are relevant to a financial statement audit. Which of the following would most likely be considered in an audit of financial
     statements?
     a. Timely reporting and review of quality control
     b. Maintenance of control over unused checks.
     c. Marketing analysis of sales generated by advertising projects
     d. Maintenance of statistical production analyses.

Answer 229

b. Maintenance of control over unused checks.

Question 230

231. Which of the following questions would an auditor most likely include in an internal control questionnaire for notes payable?
     a. Are assets that collateralize notes payable critically needed for the
     entity‘s continued existence?
     b. Are two or more authorized signatures required on checks that repay notes payable?
     c. Are the proceeds from notes payable used for the purchase of
     noncurrent assets?
     d. Are direct borrowings on notes payable authorized by the board of
     directors?

Answer 230

d. Are direct borrowings on notes payable authorized by the board of
directors?

Question 231

232. A procedure that would most likely be used by on auditor in
     performing tests of control regarding segregation of functions on which no audit trail is available:
     a. inspection.
     b. Observation
     c. Reprocessing
     d. Reconciliation

Answer 231

b. Observation

Question 232

233. Which of the following procedures most likely would be included as part of an auditor’s tests of control procedures?
     a. Inspection
     b. Reconciliation
     c. Confirmation
     d. Analytical procedures

Answer 232

a. Inspection

Question 233

234. After obtaining an understanding of internal control and assessing control risk, an auditor decides not perform additional tests of
     controls. The auditor most likely concludes that the
     a. additional evidence to support a further reduction in control risk
     is not costbeneficial to obtain
     b. Assessed level of inherent risk exceeds the assessed level of control risk.
     c. internal control is property designed and can be relied on
     d. Evidence obtainable through tests of controls would not support an increased assessment of control risk.

Answer 233

A

Question 234

235. After considering a client’s internal control, the auditor has
     concluded that the system is well designed and is functioning as
     anticipated. Under these circumstances, the auditor would most likely
     a. cease to perform further substantive tests.
     b. not increase the extent of planned substantive tests
     c. increase the extent of anticipated analytical procedures.
     d. perform all tests of controls to the extent outlined in the preplanned audit program.

Answer 234

b. not increase the extent of planned substantive tests

Question 235

236. After obtaining an understanding of internal control and assessing control risk, an auditor decided to perform tests of controls. The auditor most likely decided that:
     a. It would be efficient to perform tests of controls that would result
     in a reduction in planned substantive tests.
     b. Additional evidence to support a further reduction in control risk
     is not available
     c. An increase in the assessed level of control risk is justified for
     certain financial statement assertions.
     d. There were many internal control weaknesses that could allow errors
     to enter the accounting system.

Answer 235

a. It would be efficient to perform tests of controls that would result
in a reduction in planned substantive tests.

Question 236

237. Which of the following most likely represents a disadvantage for
     an entity that maintains computer data files rather than manual files?
     A. It‘s usually more difficult to detect transposition errors.
     B. Transactions are usually authorized before they are executed and recorded.
     C. It‘s usually easier for unauthorized persons to access and alter the files.
     D. Random error is more common when similar transactions are processed in different ways

Answer 236

C. It‘s usually easier for unauthorized persons to access and alter the files.

Question 237

238. Which of the following most likely represents a significant
     deficiency in the internal control structure?
     A. The systems analyst review applications of data processing and
     maintains systems documentation.
     B. The systems programmer design systems for computerized application and maintains output control.
     C. The control clerk establishes control over data received by the EDP department and reconciles control totals after processing.
     D. The accounts payable clerk prepares data for computer processing and
     enters the data into the computer.

Answer 237

B. The systems programmer design systems for computerized application and maintains output control.

Question 238

239. Which of the following activities would most likely be performed in the EDP department?
     A. Initiation of changes to master records.
     B. Conversion of information to machine-readable form.
     C. Correction of transactional errors.
     D. Initiation of changes to existing applications

Answer 238

B. Conversion of information to machine-readable form.

Question 239

240. Which of the following controls most likely would assure that an
     entity can reconstruct its financial records?
     A. Hardware controls are built into the computer by the computer
     manufacturer.
     B. Backup diskettes or tapes of files are stored away from originals.
     C. Personnel who are independent of data input and output operations.
     D. System flowcharts provide accurate description of input and output operations.

Answer 239

B. Backup diskettes or tapes of files are stored away from originals.

Question 240

241. Mill Co. uses a batch processing method to its sales transactions. Data on Mill‘s sales transactions tape are electronically checks in preparing its invoice, sales journals, and updated customer account balance. One of the direct outputs of the creation of the tape most likely would be a
     A. Report showing exceptions and control totals.
     B. Printout of the updated inventory records.
     C. Report show overdue accounts receivable
     D. Printout of the sakes price master file

Answer 240

A. Report showing exceptions and control totals.

Question 241

242. To obtain evidence that online access controls are properly
     functioning an auditor most likely would
     A. Create checkpoints of periodic intervals after live data processing
     to test for unauthorized use of the system.
     B. Examine the transaction log to discover whether any transactions were lost or entered twice due to a system malfunction
     C. Enter invalid identification numbers or passwords to ascertain whether the system rejects them.
     D. Vouch a random sample of processed transactions to assure proper
     authorization.

Answer 241

C. Enter invalid identification numbers or passwords to ascertain whether the system rejects them.

Question 242

243. Suppose that the computer operators are also programmers and have access to computer programs and data files, in which of the following
     general controls will the auditor most likely conclude to have a
     weakness?
     A. Processing controls.
     B. Back-up and contingency planning
     C. Systems development
     D. Segregation of computer professional duties

Answer 242

D. Segregation of computer professional duties

Question 243

244. The possibility of losing a large amount of information stored in
     computer files most likely would be reduced by the use of
     A. Back-up files.
     B. Check digits.
     C. Completeness tests.
     D. Conversion verification.

Answer 243

A. Back-up files.

Question 244

245. An auditor would most likely be concerned with which of the
     following controls in a distributed data processing system?
     A. Hardware controls
     B. Systems documentation controls
     C. Access controls
     D. Disaster recovery controls

Answer 244

C. Access controls

Question 245

246. To obtain evident that user identification and password control
     procedures are functioning as designed, an auditor would most likely
     A. Attempt to sign on to the system using invalid user identifications
     and passwords
     B. Write a computer program that simulates the logic of the client‘s
     access control software
     C. Extract a random sample of processed transactions and ensure that the transactions were appropriately authorized
     D. Examine statements signed by employees stating that they have not divulged their user identifications and passwords to any other person

Answer 245

A. Attempt to sign on to the system using invalid user identifications
and passwords

Question 246

247. Which of the following audit techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of an internal control procedure?
     A. Inquiry of client personnel
     B. Recomputation of account balance amounts
     C. Observation of client personnel
     D. Confirmation with outside parties

Answer 246

C. Observation of client personnel

Question 247

248. An auditor most likely would introduce test data into a computerized payroll system to test internal controls related to the
     A. Existence of unclaimed payroll checks held by supervisors
     B. Early cashing of payroll checks by employees
     C. Discovery of invalid employee I.D. numbers
     D. Proper approval of overtime by supervisors

Answer 247

C. Discovery of invalid employee I.D. numbers

Question 248

249. An auditor who is testing EDP controls in a payroll system would
     most likely use test data that contain conditions such as
     A. Deductions not authorized by employees
     B. Overtime not approved by supervisors
     C. Time tickets with valid job numbers
     D. Payroll checks with unauthorized signatures

Answer 248

C. Time tickets with valid job numbers

Question 249

250. Which of the following factors most likely affects the auditor‘s
     judgment about the quantity, type and content of the working papers?
     A. The assessed level of control risk
     B. The content of the client‘s representation letter
     C. The timing of substantive tests completed prior to the balance sheet date
     D. The usefulness of the working papers as a reference source for the client

Answer 249

A. The assessed level of control risk

Question 250

251. A CPA, who is performing an independent audit, would most likely use recalculation as a substantive test for which of the following expense-related accounts?
     A. Purchases of supplies
     B. Interest expense
     C. Advertising expense
     D. Repairs and maintenance expense

Answer 250

B. Interest expense

Question 251

252. Although the quantity and content of 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 years‘ accounts receivable confirmations that are classified
     as exceptions.
     C. Documentation indicating that the audit work is adequately planned and supervised.
     D. Analysis of capital stock and other owners‘ equity accounts.

Answer 251

D. Analysis of capital stock and other owners‘ equity accounts.

Question 252

253. During the working paper review, an audit supervisor finds that the auditor‘s reported findings are not adequately cross-referenced to the supporting documentation. The supervisor will most likely instruct the auditor to
     A. Prepare a working paper to indicate that the full scope of the audit was carried out
     B. Familiarize himself with the sequence of working papers so that he will be able to answer questions about the conclusions stated in the
     report
     C. Eliminate any cross-references to other working papers since the
     system is unclear
     D. Provide a working paper indexing system that shows the relationship between findings, conclusions, and the related facts.

Answer 252

D. Provide a working paper indexing system that shows the relationship between findings, conclusions, and the related facts.

Question 253

254. The permanent file section of the working papers that is kept for
     each audit client most likely contains
     A. Review notes pertaining to questions and comments regarding the audit work performed
     B. A schedule of time spent on the engagement by each individual auditor
     C. Correspondence with the client‘s legal counsel concerning pending
     litigation
     D. Narrative descriptions of the client‘s internal control policies and
     procedures

Answer 253

D. Narrative descriptions of the client‘s internal control policies and
procedures

Question 254

255. When unable to obtain sufficient competent evidential matter to determine whether certain client management‘s acts are non-compliance to laws and regulations, the auditor would most likely issue
     A. An unqualified opinion with a separate explanatory paragraph
     B. Either a qualified opinion or an adverse opinion
     C. Either a disclaimer of opinion or a qualified opinion
     D. Either an adverse opinion or a disclaimer of opinion

Answer 254

C. Either a disclaimer of opinion or a qualified opinion

Question 255

256. If an auditor conducts an audit of financial statements in
     accordance with generally accepted auditing standards, which of the
     following will the auditor most likely detect?
     A. Misposting of recorded transactions
     B. Forgery
     C. Unrecorded transactions
     D. Collusive fund

Answer 255

A. Misposting of recorded transactions

Question 256

257. An auditor is examining the detailed debut and credit entries in
     an account. The auditor is most likely performing
     A. Analytical procedures
     B. Test of details of balances
     C. Test of details of transactions
     D. Test of controls

Answer 256

C. Test of details of transactions

Question 257

258. The auditor is performing substantive tests several months before the end of the year. This most likely means that
     A. Inherent risk is set at moderate to high
     B. Detection risk is set at moderate to high
     C. Control risk is set at maximum
     D. Detection risk is set at low to very low

Answer 257

B. Detection risk is set at moderate to high

Question 258

259. If an auditor, in planning to use statistical sampling, is concerned
     with the number of a client’s sales invoices that contain mathematical
     errors, he would most likely utilize
     A. random sampling with replacement
     B. sampling for attributes
     C. sampling for variables
     D. stratified random sampling

Answer 258

B. sampling for attributes

Question 259

260. An auditor samples cash disbursement records for significant errors of P5, 000 or more. Upon finding ‘one such error, these records are
     scheduled for a complete review. This conclusion is most likely based
     on a
     A. Cluster sample.
     B. Discovery sample.
     C. Systematic sample.
     D. Stratified sample.

Answer 259

B. Discovery sample.

Question 260

261. Which one is most likely to have more serious consequences,
     assessing control risk as too high or too low, and why?
     A. Too high, because too much reliance will be put on weak controls, increasing overall audit risk.
     B. Too high, because of audit inefficiency and consequently audit
     reliability will be inhibited.
     C. Too low, because too much reliance will be put on weak controls,
     increasing overall audit risk.
     D. Too low, because audit efficiency and consequently audit reliability
     will be inhibited.

Answer 260

C. Too low, because too much reliance will be put on weak controls,

Question 261

262. Which of the following courses of action would an auditor most
     likely follow in planning a sample of cash disbursements if the auditor
     is aware of several unusually large cash disbursements?
     A. Increase the sample size to reduce the effect of the unusually large disbursements.
     B. Continue to draw new samples until all the unusually large
     disbursements appear in the sample.
     C. Set the tolerable rate of deviation at a lower level than originally
     planned.
     D. Stratify the cash disbursements population so that .the unusually
     large disbursements are selected.

Answer 261

D. Stratify the cash disbursements population so that .the unusually
large disbursements are selected.

Question 262

263. When are the ratio estimation and difference estimation techniques most likely to be preferable to the mean-per-unit estimation method?
     A. The choice between any of the methods is irrelevant, since they all
     provide similar results.
     B. When differences between book and audited values are infrequent.
     C. When differences between book and. audited values are frequent.
     D. When differences between book and projected misstatement is estimated to be small.

Answer 262

C. When differences between book and. audited values are frequent.

Question 263

264. Which of the following control procedures would most likely assure that access to shipping, billing, inventory control, and accounting records is restricted to personnel authorized by management?
     A. Segregate the responsibilities for authorization, execution, and
     recording, and pre-number and control the custody of documents.
     B. Establish the cash receipts function in a centralized location and require a daily reconciliation of cash, receipts records with deposit
     slips.
     C. Establish policy and procedures manuals, organization charts, and
     supporting documentation.
     D. Periodically substantiate and evaluate the recorded account balances.

Answer 263

A. Segregate the responsibilities for authorization, execution, and
recording, and pre-number and control the custody of documents.

Question 264

265. Which of the following internal control procedures most likely would deter lapping of collections from customers?
     A. Independent internal verification of dates of entry in the cash
     receipts journal with dates of daily cash summaries.
     B. Authorization of write-offs of uncollectible accounts by a supervisor who is independent of credit approval.
     C. Segregation of duties between receiving cash and posting collections to the accounts receivable ledger.
     D. Supervisors comparison of the daily cash summary with the sum of the cash receipts journal entries.

Answer 264

C. Segregation of duties between receiving cash and posting collections to the accounts receivable ledger.

Question 265

266. Which of the following is most likely to provide management with
     incentives to overstate earnings?
     A. Projected quarterly dividends.
     B. Issuance of preferred stock.
     C. Unbudgeted increase in materials prices.
     D. A projected stock split.

Answer 265

C. Unbudgeted increase in materials prices.

Question 266

267. Which of the following is most likely to indicate a fraud?
     A. Several overpayments are made for goods received from a supplier.
     B. The yearend cash balance does not include cash in transit to the
     company at year-end.
     C. A check received after year end is inadvertently recorded us if
     received before year-end.
     D. A documented loan to an officer of the company.

Answer 266

A. Several overpayments are made for goods received from a supplier.

Question 267

268. Which of the following audit procedures is most likely to detect a
     cash balance that is restricted as to withdrawal?
     A. Review the cutoff bank statement.
     B. Prepare an interbank transfer schedule.
     C. Make inquiries of management.
     D. Compare cash balance with cash budget.

Answer 267

C. Make inquiries of management.

Question 268

269. An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the
     A. check register for the last month is reviewed
     B. cutoff bank statement is reconciled
     C. bank confirmation is reviewed
     D. search for unrecorded liabilities is performed

Answer 268

B. cutoff bank statement is reconciled

Question 269

270. When scheduling audit work, the auditors are most likely to confirm
     accounts receivable balances at an interim date if:
     A. negative confirmations are being used
     B. internal control is weak
     C. internal control is strong
     D. there is a simultaneous examination of cash and accounts payable

Answer 269

C. internal control is strong

Question 270

271. During the process of confirming receivables as of December 31, 2009, a positive confirmation was returned indicating that the “balance
     owed as of December 31 was paid by a customer on January 9, 2010.” The auditor would most likely
     A. determine whether there were any changes in- the account between January 1 and January 9, 2010
     B. determine whether a customary trade discount was taken by the customer
     C. reconfirm the zero balance as of January 10, 2010
     D. verify that the amount was received

Answer 270

D. verify that the amount was received

Question 271

272. Which of the following analytical audit findings would most likely indicate a possible problem?
     A. A material decrease in the receivables turnover.
     B. A material increase in inventory turnover.
     C. A material decrease in days’ sales outstanding.
     D. A material increase in the acid test ratio.

Answer 271

A. A material decrease in the receivables turnover.

Question 272

273. Which of the following analytical audit findings would most likely indicate a possible problem?
     A. A material decrease in the receivables turnover.
     B. A material increase in inventory turnover.
     C. A material decrease in days’ sales outstanding.
     D. A material increase in the acid test ratio.

Answer 272

A. A material decrease in the receivables turnover.

Question 273

274. Which of the following procedures would an auditor most likely rely on to verify management’s assertion of completeness?
     A. Review standard bank confirmations for indications of kiting.
     B. Compare a sample of shipping documents to related sales invoices.
     C. Observe the client‘s distribution of payroll checks.
     D. Confirm a sample of recorded receivables by direct communication with
     the debtors

Answer 273

B. Compare a sample of shipping documents to related sales invoices.

Question 274

275. Which account balance is most likely to be misstated if an aging
     of accounts receivable is not performed?
     A. Sales revenue.
     B. Sales returns and allowances.
     C. Accounts receivable.
     D. Allowance for bad debts.

Answer 274

D. Allowance for bad debts.

Question 275

276. Confirmation is most likely to be a relevant form of evidence with
     regard to assertions about accounts receivable when the auditor has
     concerns about the receivables
     A. valuation
     B. classification
     C. existence
     D. completeness

Answer 275

C. existence

Question 276

277. An auditor reconciles the total of the accounts receivable
     subsidiary ledgers to the general ledger control account balance, as of December 31, 2008. Which of the following would the auditor most likely learn?
     A. An October invoice was improperly computed.
     B. An October check from a customer was posted in error to the account of another customer with a similar name.
     C. An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.
     D. An account balance is past due and should be written off.

Answer 276

C. An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.

Question 277

278. In the confirmation of accounts receivable, the auditor would most likely
     A. request confirmation of a sample of the inactive accounts
     B. seek to obtain positive confirmations for at least 50% of the total amount of the receivables
     C. require confirmation of all receivables from government agencies
     D. require that confirmation requests be sent a month before year-end

Answer 277

A. request confirmation of a sample of the inactive accounts

Question 278

279. The auditors may use positive’ and/or negative forms of confirmation requests for accounts receivable. An auditor most likely will use
     A. the positive form to confirm all balances, regardless of size
     B. a combination of the two forms, with the positive form used for large balances and the negative form for small balances
     C. a combination of the two forms, with the positive form used for trade receivables and the negative form for other receivables
     D. the positive form when the control structure related to receivables are satisfactory, and the negative form when controls are unsatisfactory

Answer 278

B. a combination of the two forms, with the positive form used for large balances and the negative form for small balances

Question 279

280. An auditor’s purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management’s assertions about
     A. valuation or allocation
     B. presentation and disclosure
     C. existence or occurrence
     D. rights and obligations

Answer 279

A. valuation or allocation

Question 280

281. A client erroneously recorded a large purchase twice. Which of the following control procedures would most likely detect this error in a timely and efficient manner?
     A. Footing the purchase journal.
     B. Reconciling vendors’ monthly statements with subsidiary payable
     ledger accounts.
     C. Tracing totals from the purchases journal to the ledger accounts.
     D. Sending written quarterly confirmations to all vendors.

Answer 280

B. Reconciling vendors’ monthly statements with subsidiary payable
ledger accounts.

Question 281

282. When the auditors discover an overstatement of accounts payable,
     they would most likely expect to find an overstatement of:
     A. accrued liabilities
     B. inventory
     C. retained earnings
     D. revenues

Answer 281

B. inventory

Question 282

283. An auditor usually examines receiving reports that support entries in the:
     A. voucher register and sales returns journal
     B. sales journal and sales returns journal
     C. voucher register and sales journal
     D. check register and sales journal

Answer 282

A. voucher register and sales returns journal

Question 283

284. Which of the following transactions would an auditor most likely repose an adjustment to the financial statements?
     A. Inventory is included on the balance sheet at year-end, but the check for payment has not been paid until January 12.
     B. An order for office supplies that has not been recorded because the
     goods have neither been received nor paid for by year-end.
     C. Purchase of P5,000 of office furniture that was ordered on December 22 with a P1,000 deposit being made with an entry debiting “deposit on furniture” for P1,000 and a credit to cash for P1,000. The office furniture was received on January 5.
     D. Shop supplies are included on the balance sheet at year-end, but the payable and subsequent cash disbursements are not recorded until after year-end.

Answer 283

D. Shop supplies are included on the balance sheet at year-end, but the payable and subsequent cash disbursements are not recorded until after year-end.

Question 284

285. Only one of the following four statements which compare confirmation of accounts payable with suppliers and confirmation of accounts receivable with customers is true. The true statement is that
     A. confirmation of accounts payable with suppliers is a more widely
     accepted auditing procedure than is confirmation of accounts receivable
     with customers
     B. it is less likely that the confirmation request sent to the supplier will show the amount owed him or her than that the request sent to the customer will show the amount due from him or her
     C. statistical sampling techniques are more widely ‘accepted in the
     confirmation of accounts payable than in the confirmation of accounts receivable
     D. compared to the confirmation of accounts payable, the confirmation
     of accounts receivable will tend to emphasize accounts with zero balances at the balance sheet date

Answer 284

B. it is less likely that the confirmation request sent to the supplier will show the amount owed him or her than that the request sent to the customer will show the amount due from him or her

Question 285

286. In testing cutoff for purchases and payables at December 31, an
     auditor is confronted with the following four scenarios. Which of the four most likely represents a cutoff error, requiring that the auditor propose an adjusting journal entry?
     A. Shipping terms are FOB shipping point. Goods were shipped on December 31. The purchase was recorded on December 31.
     B. Shipping terms are FOB destination. Goods were shipped on December 31. The purchase was recorded on December 31.
     C. Shipping terms are FOB shipping point. Goods were shipped on January 2. The purchase was recorded on January 4.
     D. Shipping terms are FOB destination. Goods were shipped on December 31. The purchase was recorded on January 2.

Answer 285

B. Shipping terms are FOB destination. Goods were shipped on December 31. The purchase was recorded on December 31.

Question 286

287. Unrecorded liabilities are most likely to be found during the review
     of which of the following documents?
     A. Unpaid bills
     B. Bills of lading
     C. Shipping records
     D. Unmatched sales invoices

Answer 286

A. Unpaid bills

Question 287

288. An inventory turnover analysis most likely helps the auditors to
     detect:
     A. inadequacies in inventory pricing
     B. methods of avoiding cyclical holding cost
     C. optimum automatic reorders points
     D. obsolete merchandise

Answer 287

D. obsolete merchandise

Question 288

289. When performing an, audit of the property, plant, and equipment
     accounts, an auditor should expect which of the following to be most
     likely to indicate a departure from generally accepted accounting
     principles?
     A. A gain was recognized when .a new asset was acquired at a price lower than its listed retail price.
     B. Interest has been capitalized for self-constructed equipment.
     C. Assets have been acquired from affiliated corporations with the
     related transactions recorded and described in the financial statements.
     D. The cost of freight-in on an acquisition has been capitalized.

Answer 288

A. A gain was recognized when .a new asset was acquired at a price lower than its listed retail price.

Question 289

290. Which of the following accounts would most likely be reviewed by the auditor to gain reasonable’ assurance that additions to the equipment
     account are not understated?
     A. Repairs and maintenance expense.
     B. Depreciation expense.
     C. Gain on disposal of equipment.
     D. Accounts payable.

Answer 289

A. Repairs and maintenance expense.

Question 290

291. An auditor has calculated the interest paid on a company’s recorded bonds and found the interest paid was 10%; in examining the bonds he notes that they are 8% bonds sold without a premium or a discount. Which of the following is most likely?
     A. Understated debt outstanding.
     B. Understated interest expense.
     C. Overstated common stock.
     D. Overstated accrued interest receivable.

Answer 290

A. Understated debt outstanding.

Question 291

292. Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
     A. Confirming a sample of material accounts receivable established after year-end.
     B. Comparing the financial statements being reported on with those of the prior period.
     C. Investigating personnel changes in the accounting department
     occurring after year-end.
     D. Inquiring as to whether any unusual adjustments were made after yearend.

Answer 291

D. Inquiring as to whether any unusual adjustments were made after yearend.

Question 292

293. Which of the following audit procedures would most likely assist
     an auditor in identifying conditions and events that may indicate that
     there could be substantial doubt about an entity’s ability to continue
     as a going concern?
     A. Review compliance with the terms of debt agreements
     B. Confirm accounts receivable from principal customers
     C. Reconcile interest expense with debt outstanding
     D. Confirm bank balances

Answer 292

A. Review compliance with the terms of debt agreements

Question 293

294. A written management representation letter is most likely to be an auditor‘s best source of corroborative information of a client’s intention to
     A. terminate an employee pension plan.
     B. make a public offering of its common stock.
     C. settle an outstanding lawsuit for an amount less than the accrued
     loss contingency.
     D. discontinue a line of business.

Answer 293

D. discontinue a line of business.

Question 294

295. Which of the following matters would an auditor most likely include in a management representation letter?
     A. Communications with the audit committee concerning weaknesses in the internal control structure.
     B. The completeness and availability of minutes of stockholders’ and
     directors’ meetings.
     C. Plans to acquire or merge with other entities in the subsequent year.
     D. Management’s acknowledgment of its responsibility for the detection of employee fraud.

Answer 294

B. The completeness and availability of minutes of stockholders’ and
directors’ meetings.

Question 295

296. Analytical procedures performed in the overall review stage of on audit suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate that
     A. unaccounted effects of irregularities exist.
     B. internal control activities are not operating effectively.
     C. additional tests of details are required.
     D. the communication with the audit committee should be revised.

Answer 295

C. additional tests of details are required.

Question 296

297. An auditor suspects that fictitious sales may have been recorded during the year. Which of the following analytical review results would most likely indicate that fictitious sales were recorded?
     A. Uncollectible account write-offs increased by 10 percent, sales
     increased by 10 percent and accounts receivable increased by 10 percent.
     B. Gross margin decreased from 40 to 35 percent.
     C. The number of days’ sales in accounts receivable decreased from 64 to38.
     D. Accounts receivable turnover decreased from 7.1 to 4.3.

Answer 296

D. Accounts receivable turnover decreased from 7.1 to 4.3.

Question 297

298. Sales commissions as a percentage of sales declined significantly during the year under audit. Of the following possible causes, the most likely is
     A. sales increased during the year.
     B. the sales force was reduced at the end of the year.
     C. sales commission rates were increased at the beginning of the year
     D. fictitious sales were recorded at year-end to inflate earnings.
     Commissions were not recorded on these sales.

Answer 297

D. fictitious sales were recorded at year-end to inflate earnings.
Commissions were not recorded on these sales.

Question 298

299. In evaluating the effectiveness of a company‘s credit and collection
     policies, the ratio most likely to be used by an auditor is
     A. quick ratio.
     B. accounts receivable turnover.
     C. working capital turnover.
     D. return on sales.

Answer 298

B. accounts receivable turnover.

Question 299

300. During an audit of the accounts receivable function, you found that the accounts receivable turnover rate had fallen from 7.3 to 4.3 over the last three years. What is the most likely cause of the decrease in the turnover rate?
     A. An increase in the discount offered for early payment.
     B. A more liberal credit policy.
     C. A change from net 30 to net 25.
     D. Greater cash sales.

Answer 299

B. A more liberal credit policy.