At Without Answers

 Preface to the Philippine Standards on Quality Control, Auditing Review, Other Assurance and
Related Services
 Philippine Framework for Assurance Engagements
 Objective and General Principles governing an Audit of Financial Statements(PSA 200 <amended
as a result of PSA 700 (revised)>)
1. The preface to the Philippine Standards on Quality Control, Auditing, Other Assurance and Related
Services is issued to facilitate understanding of the
I Objectives and operating procedures of the Auditing and Assurance Standards Council
(AASC).
II Scope and authority of the documents issued by the AASC.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
2. Its mission is the promulgation of auditing standards, practices and procedures which shall be
generally accepted by the accounting profession in the Philippines.
A. Financial Reporting Standards Council (FRSC).
B. Auditing and Assurance Standards Council (AASC).
C. International Federation of Accountants (IFAC).
D. Philippine Institute of Public Accountants (PICPA).
3. Which of the following are collectively referred to as “Engagement Standards”?
A. PSAs and PSREs
B. PSAs, PSREs and PSAEs
C. PSAs, PSREs, PSAEs and PSRSs
D. PSAs, PSREs, PSAEs, PSRSs and PSQCs
4. Which of the following Philippine Standards are to be applied to compilation engagements,

engagements to apply agreed-upon procedures to information and other related services engagements
as specified by the AASC?
A. PSAs
B. PSAEs
C. PSRSs
D. PSREs
5. These are issued to provide interpretive guidance and practical assistance to professional
accountants in implementing PSAs and to promote good practice.
A. PAPSs
B. Practical Statements
C. PRSPSs
D. PAEPSs
6. Professional accountants should be aware of and consider Practice Statements applicable to the
engagement.
A professional accountant who does not consider and apply the guidance included in a relevant Practice
Statement need not explain how the basic principles and essential procedures in the Engagement
Standard(s) addressed by the Practice Statement have been complied with.
A. Both statements are true.
B. Both statements are false.
C. True; False
D. False; True
7. The Philippine Framework for Assurance Engagements defines and describes the elements and
objectives of an assurance engagement, and identifies engagements to which PSAs, PSREs and PSAEs
apply.
The Philippine Framework for Assurance Engagements is not itself establish standards or provide
procedural requirements for the performance of assurance engagements.
C. True; False
D. False; True
8. Which of the following statements best describes assurance services?
A. Independent professional services that are intended to enhance the credibility of
information to meet the needs of an intended user.
B. Services designed to express an opinion on the fairness of historical financial
statements based on the results of an audit.
C. The preparation of the financial statements or the collection, classification, and
summarization of other financial information.
D. Services designed for the improvement of operations, resulting in better outcomes.

9. The following statements relate to the two types of assurance engagements that a practitioner is
permitted to perform: reasonable assurance engagement and limited assurance engagement.
Statement 1
The objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an

acceptably low level in the circumstances of the engagement as a basis for a positive form of expression
of the practitioner’s conclusion.
Statement 2
The objective of a limited assurance engagement is a reduction in assurance engagement risk to a level
that is acceptable in the circumstances of the engagement, but where the risk is greater than for a
reasonable assurance engagement, as the basis for a positive of expression of the practitioner’s
conclusion.
Statement 3
The objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an

acceptably low level in the circumstances of the engagement as the basis for a negative form of
expression of the practitioner’s conclusion.
Statement 1 Statement 2 Statement 3
A. False True True
B. True False False
C. True True False
D. False False True
10. A practitioner who is engaged to perform an assurance engagement other than an audit or a review
of historical financial information should comply with which of the following standards?
A. PSAEs
B. PSAEs and PSAs
C. PSAs and PSREs
D. PSAEs, PSREs and PSAs
11. Assurance engagements encompass the following types of services, except
A. Attestation services
B. Review engagements
C. Audit of historical financial statements
D. Management consulting
12. Assurance services differ from consulting services in that they
I Focus on providing advice.
II Involve monitoring of one party by another.
A I only
B. II only
C. Both I and II
D. Neither I nor II
13. Assurance engagements involve
A. Two separate parties: a professional accountant and an intended user.
B. Two separate parties: a professional accountant and a responsible party.
C. Two separate parties: a responsible party and an intended user.
D. Three separate parties: a professional accountant, a responsible party and an
intended user.
14. An assurance engagement should have which of the following elements?
I A three party relationship involving a practitioner, a responsible party and
intended users.
II An appropriate subject matter.
III Suitable criteria.
IV Sufficient appropriate evidence.
V A written assurance report.
A. I, II, and III only
B. II, III, IV and V only
C. I, II, III and IV only
D. I, II, III, IV and V.
15. The subject matter of an assurance engagement may include
A. Historical or prospective financial information.
B. An entity’s internal control or IT system.

C. Compliance with regulations.
D. All of the above.
16. These are the benchmarks used to evaluate or measure the subject matter of an assurance
engagement.
A. Criteria
B. GAAP
C. Assertions
D. Conclusions
17. Suitable criteria should have which of the following characteristics?
I Relevance IV Neutrality
II Completeness V Understandability
III Reliability
A. I, II, and III only
B. II, III, IV and V only
C. I, II, III and IV only
18. In an assurance engagement, the person or persons, either as individuals or representatives of an

entity, responsible for the subject matter is the
A. Intended user
B. Responsible party
C. Practitioner
D. Client
19. In an assurance engagement, the person or class of persons for whom the professional accountant
prepares the report for a specific use or purpose is the
A. Intended user
B. Responsible party
C. Management
D. Client
20. An assurance engagement risk is the risk that the practitioner expresses an inappropriate conclusion
when the subject matter information is materially misstated.
An assurance engagement risk is the risk that the practitioner expresses an inappropriate conclusion
when the subject matter information is not materially misstated.
A. True; False
B. Both statements are true
C. False; True
D. Both statements are false.
21. What level of assurance is provided by the auditor in an audit engagement?
A. Absolute
B High, but not absolute
C. Moderate
D. No assurance
22. What level of assurance is provided by the auditor in a review engagement?
A. No assurance
B. High, but not absolute
C. Reasonable
D. Moderate
23. What assurance is provided by the auditor in an agreed-upon procedures engagement?
A. Reasonable
B. Absolute
C. Moderate
D. No assurance
24. In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to
auditing expertise to collect, classify, and summarize financial information. What type of assurance is
provided by the accountant when he/she performs this engagement?
A. Positive assurance
B. Negative assurance
C. No assurance
D. Limited assurance
25. The following statements relate to a review of financial statements. Which is incorrect?
A. The objective of a review of financial statements is to enable an auditor to state whether,
on the basis of procedures which do not provide all the evidence that would be required
in an audit, anything has come to the auditor’s attention that causes the auditor to believe that
the financial statements are not prepared, in all material respects, in accordance with an
identified financial reporting framework.
B. A review comprises inquiry and analytical procedures which are designed to review the
reliability of an assertion that it is the responsibility of one party for use by another party.
C. A review ordinarily involves an assessment of accounting and internal control systems, tests of
records, and of responses to inquiries by obtaining corroborating evidence through inspection,
observation, confirmation, and computation.
D. The level of assurance provided in a review report is less than that given in an audit report.
26. In an engagement to perform agreed-upon procedures, an auditor is engaged to
A. Carry out those procedures of an audit nature to which the auditor and the entity
and any appropriate third parties have agreed and to report on factual findings.
B. Use accounting expertise as opposed to auditing expertise to collect, classify, and summarize
financial information.
C. Provide a moderate level of assurance that the information is free of material misstatement.
D. Provide a high, but not absolute, level of assurance that the information is free of material
misstatement.
27. Which of the following statements concerning compilation engagement is incorrect?
A. In a compilation engagement, the accountant is engaged to use accounting expertise as

opposed to auditing expertise to collect, classify, and summarize financial information.
B. The procedures employed in a compilation engagement enable the accountant to express a

moderate level of assurance on the compiled financial information.
C. Users of the compiled financial information derive some benefit as a result of the accountant’s
involvement because the service has been performed with due professional skill and care.
D. A compilation engagement ordinarily entails reducing detailed data to a manageable and

understandable form without a requirement to test the assertions underlying that information.
28. The auditor should conduct an audit in accordance with Philippine Standards on Auditing.
The auditor should plan and perform the audit with an attitude of professional skepticism.
A. Both statements are true
B. True; False
C. Both statements are false.
D. False; True
29. The primary reason for a financial statement audit by an independent CPA is to
A. Provide increased assurance to users as to the fairness of the financial statements.
B. Guarantee that there are no misstatements in the financial statements and ensure that any
fraud will be discovered.
C. Satisfy governmental regulatory requirements.
D. Relieve management of responsibility for the financial statements.
30. Independent auditing can best be described as
A. A branch of accounting.
B. A professional activity that measures and communicates financial and business data.
C. A discipline which attest to the results of accounting and other functional operations and data.
D. A regulatory function that prevents the issuance of improper financial information.
31. Which of the following statements is correct concerning an auditor’s responsibilities regarding
financial statements?
A. An auditor’s responsibilities for audited financial statements are confined to the expression of
the auditor’s opinion.
B. The fair presentation of audited financial statements in conformity with GAAP is an implicit part
of the auditor’s responsibilities.
C. Making suggestions that are adopted about the form and content of an entity’s financial
statements impairs an auditor’s independence.
D. The auditor’s report should provide an assurance as to the future viability of the entity.
32. What is the proper organizational role of internal auditing?
A. To serve as an independent, objective assurance and consulting activity that adds value to
operations.
B. To assist the external auditor to reduce external audit fees.
C. To perform studies to assist in the attainment of more efficient operations.
D. To serve as the investigative arm of he of the audit committee of the board of directors.
33. Which of the following best describes the scope of internal auditing as it has developed to date?
A. Internal auditing involves appraising the economy and efficiency with which resources are
employed.
B. Internal auditing has evolved to verifying the existence of assets and reviewing the means of
safeguarding assets.
C. Internal auditing has evolved to more of an operational orientation from a strictly financial
orientation.
D. Internal auditing has evolved to verifying the existence of assets and reviewing the means of
safeguarding assets.
34. Which of the following is considered a primary reason for creating an internal audit department?
A. To evaluate and improve the effectiveness of control processes.
B. To ensure the accuracy, reliability, and timeliness of financial and operating data used in
management’s decision making.
C. To relieve management of the responsibility for establishing effective controls.
D. To safeguard resources entrusted to the organization.
35. In conducting an appraisal of the economy and efficiency with which company resources are used,
an internal auditor’s responsibility is to
A. Verify the accuracy of asset valuation.
B. Review the reliability of operating information.
C. Verify the existence of assets.
D. Determine whether operating standards have been established.
36. Operational audits generally have been conducted by internal and COA auditors, but may be
performed by certified public accountants. A primary purpose of an operational audit is to provide
A. A measure of management performance in meeting organizational goals.
B. The results of internal examinations of financial and accounting matters to a company’s top-
level management.
C. Aid to the independent auditor, who is conducting the examination of the financial statements.
D. A means of assurance that internal accounting controls are functioning as planned.
37. Governmental auditing often extends beyond examinations leading to the expression of opinion on
the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also
A. Accuracy
B. Compliance
C. Evaluation
D. Internal Control
38. A governmental audit may extend beyond an audit leading to the expression of opinion on the
fairness of financial presentation to include
Program Results Compliance Economy and Efficiency
A. Yes Yes Yes
B. Yes Yes No
C. Yes No Yes
D. No Yes Yes
39. An objective of a performance audit is to determine whether an entity’s
A. Operational information is in accordance with government auditing standards.
B. Specific operating units are functioning economically and efficiently.
C. Financial statements present fairly the results of operations.
D. Internal control is adequately operating as designed.
40. In comparison to the independent auditor, an internal auditor is more likely to be concerned with
A. Legal and regulatory compliance.
B. Cost accounting procedures.
C. Operational auditing.
D. Internal control system.
41. A pervasive characteristics of a CPA’s role in a consulting services engagement is that of being a (an)
A. Independent practitioner.
B. Computer expert.
C. Confidential reviewer.
D. Objective advisor.
42. Which of the following statements concerning consulting services is false?
A. The performance of consulting services for audit clients does not, in and of itself, impair the
auditor’s independence.
B. Consulting services differ fundamentally from the CPA’s function of attesting to the assertions of
other parties.
C. Consulting services ordinarily involve external reporting.
D. Most CPAs, including those who provide audit and tax services, also provide consulting services
to their clients.
43. Which of the following are considered consulting services?
Advisory Services Transaction Services Assurance Services
A. No Yes Yes
B. Yes Yes No
C. Yes No Yes
D. Yes Yes Yes

44. Reyes, CPA, has been asked to perform a consulting services engagement concerning the analysis of
a potential merger. She has little experience with the industry involved. What is his most appropriate
action?
A. Accept the engagement and perform it in accordance with PSAs.
B. Accept the engagement and perform additional research or consult with others to obtain
sufficient competence.
C. Accept the engagement and issue a report vouching for the achievability of the results of the
merger.
D. Decline the engagement because he lacks sufficient knowledge.
45. Which of the following statements applies to consultation services engagements?
A. A practitioner should obtain an understanding of the internal control to assess control risk.
B. A practitioner is not permitted to compile a financial forecast.
C. A practitioner should obtain sufficient relevant data to complete the engagement.
D. A practitioner is to maintain an appearance of independence.
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 PSQC1 Quality Control for Firms that Perform Audits and Reviews of Historical
Financial Information, and Other Assurance and Related Services
 PSA 220 (revised) Quality Control for Audits of Historical Financial

 PSA 210 (amended by PSA 700 revised) Terms of Audit Engagements
1. One of a CPA firm’s basic objectives is to provide professional services that comply with professional
standards and regulatory and legal requirements. Reasonable assurance of achieving this basic objective
is provided through
A. A system of quality control.
B. Continuing professional education.
C. Compliance with generally accepted reporting standards.
D. Compliance with the fundamental principles of the Philippine Code of Ethics.
2. Which of the following are elements of a CPA firm’s quality control that should be considered in
establishing its quality control policies and procedures?
Human Resources Monitoring Engagement Performance
A. Yes Yes No
B. Yes Yes Yes
C. No Yes Yes
D. Yes No Yes
3. Quality control policies and procedures should provide the firm with reasonable assurance that the
policies and procedures relating to the other elements of quality control are being effectively applied.
This statement defines the quality control element of
A. Acceptance and continuance of client relationships and specific engagements.
B. Ethical requirements.
C. Monitoring.
D. Leadership responsibility for quality within the firm.
4. A CPA firm should establish procedures for conducting and supervising work at all organizational
levels to provide reasonable assurance that the work performed meets the firm’s standards of quality.
To achieve this goal, the firm most likely would establish procedures for
A. Evaluating prospective and continuing client relationships.
B. Reviewing engagement working papers and reports.
C. Requiring personnel to adhere to the applicable independence rules.
D. Maintaining personnel files containing documentation related to the evaluation of
personnel.
5. The primary purpose of establishing quality control policies and procedures for deciding whether to
accept a new client is to
A. Enable the CPA firm to attest to the reliability of the client.
B. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients.
C. Minimize the likelihood of association with clients whose management lacks integrity.
D. Anticipate before performing any field work whether an unqualified opinion can be expressed.
6. A CPA firm’s quality control procedures pertaining to the acceptance of a prospective audit client
would most likely include
A. Inquiry of management as to whether disagreements between the predecessor auditor and the
prospective client were resolved satisfactorily.
B. Consideration of whether sufficient appropriate evidential matter may be obtained to afford a

reasonable basis for an opinion.
C. Inquiry of third parties, such as the prospective client’s bankers and attorneys, about
information regarding the prospective client and its management.
D. Consideration of whether internal control is sufficiently effective to permit a reduction in the

extent of required substantive tests.
7. According to PSQC 1, a firm should establish policies and procedures to provide it with reasonable
assurance that the policies and procedures relating to the system of quality control are relevant,
adequate, operating effectively and complied with in practice. Such policies and procedures should
include an ongoing consideration and evaluation of the firm’s system of quality control, including a
periodic inspection of a selection of completed engagements is ordinarily performed on a cyclical basis.
Engagements selected for inspection include
A. At least one engagement for each engagement partner over an inspection cycle, which
ordinarily spans no more than 2 years.
B. At least one engagement for each engagement partner over an inspection cycle, which
ordinarily spans no more than 1 year.
C. At least 3 engagement for each engagement partner over an inspection cycle, which ordinarily
spans no more than 5 years
D. At least one engagement for each engagement partner over an inspection cycle, which
ordinarily spans no more than 3 years.
8. Under PSQC 1, the firm should communicate the results of the monitoring of its quality control
system to engagement partners and other appropriate individuals within the firm at least
A. Monthly
B. Weekly
C. Quarterly
D. Annually
9. As defined in PSQC 1, it is a process designed to provide an objective evaluation, before the report is
issued, of the significant judgments the engagement team made and the conclusions they reached in
formulating the report.
A. Engagement quality control review.
B. Engagement performance.
C. Monitoring.
D. Continuing professional education.
10. PSA 220 (revised) requires the engagement partner to consider whether members of the
engagement team have complied with the ethical requirements relating to audit engagements of the
Philippine Code. The Philippine Code establishes the fundamental principles of professional ethics,
which include
I Integrity
II Objectivity
III Professional competence and due care
IV Confidentiality
V Professional behavior
A. I, II, IV, and V only.
B. II, III, IV, and V only.
C. I, III, IV, and V only.

11. For audits of financial statements of listed entities, the engagement partner should
A. Determine that an engagement quality control reviewer has been appointed.
B. Discuss significant matters arising during the audit engagement, including those
identified during the engagement quality control review, with the engagement quality reviewer.
C. Not issue the auditor’s report until the completion of the engagement quality control review.
12. An engagement quality control review should include an objective evaluation of
I. The significant judgments made by the engagement team.
II The conclusions reached in formulating the auditor’s report.
A. I only
B. II only
C. Both I and II.
D. Neither I nor II.
13. A firm’s system of quality control should ordinarily provide for the maintenance of
A. A file of minutes of staff meetings.
B. Updated personnel files.
C. Documentation to provide evidence of the operation of each element of its system of quality
control.
D. Documentation to demonstrate compliance with regulatory requirements.
14. The audit work performed by each assistant should be reviewed to determine whether it was
adequately performed and to evaluate whether the
A. Auditor’s system of quality control has been maintained at a high level.
B. Results are consistent with the conclusions to be presented in the auditor’s report.
C. Audit procedures performed are approved in the professional standards.
D. Audit has been performed by persons having adequate technical training and proficiency as
auditors.
15 The nature and extent of a CPA firm’s quality control policies and procedures depend on
The CPA The Nature of the Cost- Benefit
Firm’s Size CPA Firm’s Practice Considerations

A. Yes Yes Yes
B. Yes Yes No
C. Yes No Yes
D. No Yes Yes
16. The engagement letter documents and confirms the
A B C D
Auditor’s acceptance of the appointment Yes Yes Yes Yes
Objective and scope of the audit Yes No Yes Yes
Extent of the auditor’s responsibilities to the client No Yes No Yes
Form of any reports Yes No No Yes
17. An auditor’s document includes the following:
“We will conduct our audit in accordance with Philippine Standards on Auditing. Those Standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance whether the financial statements are free from material misstatement.”
The above passage is most likely from a/an
A. Emphasis-of-matter paragraph of a “subject to” qualified auditor’s report.
B. Love letter
C. Engagement letter.
D. Management representation letter.
18. Which of the following statements would least likely appear in an auditor’s engagement letter?
A. Fees for our services are based on our regular per diem rates, plus travel and other
out-of-pocket expenses.
B. Management is responsible for making all financial records and related information available to
us.
C. Our engagement is subject to the risk that material errors or fraud, if they exist, will not be
detected.
D. After performing our preliminary analytical procedures, we will discuss with you
the other procedures we consider necessary to complete the engagement.
19. The auditor of a parent entity who is also the auditor of its subsidiary, branch or division
(component) should send a separate engagement letter to the entity’s component.
On recurring audits, the auditor should send a new engagement letter each period.
C. True; False
D. False: True
20. An auditor who, before the completion of the engagement, is requested to change the engagement
to one which provides a lower level of assurance, should
A. Withdraw and consider whether there is any obligation to report to other parties the
circumstances necessitating the withdrawal.
B. Issue a report that includes reference to the original engagement and any procedures that may
have been perform in the original engagement.
C. Not agree to a change of engagement where there is no reasonable justification for doing so.
D. Consider the change reasonable if it relates to information that is incorrect, incomplete or
otherwise unsatisfactorily.
 PSA 300 (rev.) Planning an Audit of Financial Statements

 PSA 315 UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT
ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
1. According to PSA 300, it involves establishing the overall audit strategy for the engagement and
developing an audit plan in order to reduce audit risk to an acceptably low level.
A. Reporting
B. Planning
C. Field work
D. Organizing
2. Adequate planning of the audit work helps to ensure that
A B C D
Appropriate attention is devoted to important
areas of the audit Yes No Yes No
Potential problems are identified Yes Yes Yes No
The work is completed expeditiously No Yes Yes No

3. The auditor should plan the audit so that the audit will be performed in an effective manner. The
extent of planning will vary according to the
A B C D
Size of the entity Yes Yes No No
Complexity of the audit Yes No Yes No
Auditor’s experience with the entity and
knowledge of the business Yes Yes Yes No
4. Obtaining knowledge of the entity’s business is an important part of planning the audit work.
The auditor’s knowledge of the entity’s business assists in the identification of events, transactions and
practices which may have a material effect on the financial statements
C. True; False
D. False: True
5. According to PSA 300, the auditor may discuss elements of planning with those charged with
governance and the entity’s management.
The audit plan sets the scope, timing and direction of the audit guides the development of the more
detailed overall audit strategy.
The overall audit strategy is more detailed than the audit plan and includes the nature, timing and
extent of audit procedures to be performed by engagement team members to obtain sufficient
appropriate audit evidence to reduce audit risk to an acceptably low level.
A. False; False; True
B. True; True; False
C. True; False; False
D. False; True; False
6. Which of the following matters should be considered by the auditor in developing the overall audit
strategy?
A. Important characteristics of the entity, its business, its financial performance and its reporting
requirements including changes since the date of the prior audit.
B. Conditions requiring special attention, such as the existence of related parties.
C. The setting of materiality levels for audit purposes.

7. Audit risk has three components: inherent risk, control risk, and detection risk. Which of the
following statements is correct?
A. Detection risk is a function of the efficiency of an auditing procedure.
B. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
C. The risk that material misstatements will not be prevented or detected on a timely basis by
internal control can be reduced to zero by effective controls.
D. The existing levels of inherent risk, control risk, and detection risk can be changed at the
discretion of the auditor.
8. Which of the following audit risk components may be assessed in quantitative terms?
Inherent Risk Control Risk Detection Risk
A. Yes No Yes
B. Yes Yes Yes
C. No No No
D. No No Yes
9. Some account balances, such as those for retirement benefits and finance leases, are the results of
complex calculations. The susceptibility to material misstatements in these types of accounts is referred
to as
A. Audit risk
B. Detection risk
C. Inherent risk
D. Control risk
10. There is an inverse relationship that exists between the acceptable level of detection risk and the
A. Risk of failing to discover material misstatements.
B. Assurance provided by substantive tests.
C. Preliminary judgments about materiality levels.
D. Risk of misapplying audit procedures.
11. It is the process designed and effected by those charged with governance, management, and other
personnel to provide reasonable assurance about the achievement of the entity’s objectives.
A. Internal auditing
B. Internal control
C. Business strategy
D. Accounting process
12. This internal control component is the foundation for all other components. It sets the tone of the
organization, provides discipline and structure, and influences the control consciousness of employees.
A. Control activities
B. Monitoring of controls
C. Control environment
D. The entity’s risk assessment process.
13. Which of the following are considered control environment elements?
Commitment to Competence Detection RiskOrganizational Structure
A. No Yes No
B. Yes Yes Yes
C. Yes No Yes
D. No No Yes
14. Which of the following statements concerning the relevance of various types of controls to a
financial statements audit is correct?
A. All controls are ordinarily relevant to a financial statement audit.
B. Controls over safeguarding of assets and liabilities are of primary importance, while controls
over the reliability of financial reporting may also be relevant.
C. Controls over the reliability of financial reporting are ordinarily most directly relevant to a
financial statement audit, but other controls may also be relevant.
D. An auditor may ordinarily ignore a consideration of controls when a substantive audit
approach is taken.
15. Under PSA 315, monitoring of controls is an internal control component that involves a process of
assessing the quality of internal control performance of time. It involves assessing the design and
operations of control on a timely basis and taking necessary corrective actions. Monitoring of controls is
accomplished through ongoing monitoring activities, separate evaluations, or a combination of the two.
An entity’s ongoing monitoring activities often include
A. Periodic reporting by the entity’s internal auditors about the functioning of internal control.
B. Reviewing the purchasing function.
C. Periodic audits by the audit committee.
D. The audit of the annual financial statements.
16. Control activities constitute one of the five components of internal control. Which of the following is
not included in this internal control component?
A. Segregation of duties
B. Performance reviews
C. An internal audit function
D. Authorization
17. An internal control system that is working effectively
A. Eliminates risk and potential loss to the entity.
B. Cannot be circumvented by management.
C. Reduces the need for management to review exception reports on a day-to-day
basis.
D. Is unaffected by changing circumstances and conditions encountered by the entity.
18. When considering an entity’s system of internal control, one of the auditor’s major concerns is to
ascertain whether internal control is designed to provide reasonable assurance that
A. Financial statements are fairly presented.
B. The accounting manager reviews al accounting transactions.
C. Profit margins are maximized, and operational efficiency is optimized.
D. Corporate morale problems are addressed immediately and effectively.
19. When obtaining knowledge about an entity’s internal control, it is important for the auditor to
consider the competence of its employees, because their competence bears directly and importantly
upon the
A. Cost-benefit relationship of internal control.
B. Comparison of recorded accountability with assets.
C. Achievement of the objectives of internal control.
D. Timing of substantive tests to be performed.
20. Control activities are the policies and procedures that help ensure that management directives are
carried out. These include activities relating to authorization, performance reviews, information
processing, physical controls, and segregation of duties. There is proper segregation of duties when an
individual who
A. Records a transaction does not compare the accounting record of the asset with the asset itself.
B. Authorizes a transaction and records it.
C. Authorizes a transaction and maintains custody of the asset that resulted from the
transaction.
D. Maintains custody of an asset and has access to the accounting records for the asset.
21. An auditor should obtain sufficient knowledge of an entity’s information system, including the
related business processes relevant to financial reporting, to understand the
A. Policies used to detect the concealment of fraud.
B. Process used to prepare significant accounting estimates.
C. Safeguards used to limit access to computer facilities.
D. Procedures used to assure proper authorization of transactions.
22. The primary objective of procedures performed to obtain an understanding of internal control is to
provide an auditor with
A. Knowledge necessary to plan the audit.
B. A basis for modifying tests of controls.
C. Information necessary to prepare flowcharts.
D. Evidence to use in reducing detection risk.
23. In obtaining an understanding of internal control relevant to the audit, an auditor is required to
obtain knowledge about the
A. Effectiveness of controls that have been implemented.
B. Consistency with which controls are currently being applied.
C. Design of the controls pertaining to internal control components.
D. Controls related to each class of transactions and account balance.
24. The auditor uses the understanding of internal control to
I Identify types of potential misstatements.
II Consider factors that affect the risks of material misstatements.
III Design the nature, timing, and extent of further audit procedures.
A. I and II only.
B. I and III only.
C. II and III only
D. I, II, and III
25. Information about segregation of duties ordinarily is best obtained by
A. Performing tests of transactions that corroborate management’s financial statements

assertions.
B. Developing audit objectives that reduce control risk.
C. Observing employees as they apply specific controls.
D. Obtaining a flowchart of activities performed by entity personnel.

26. In conducting an audit in accordance with PSAs, the auditor is required to identify and assess the
risks of material misstatements at the financial statement level, and at the assertion level for classes of
transactions, account balances, and disclosures. Some of these risks, in the auditor’s judgment, require
special audit consideration, such as those that involve fraud or complex transactions. Such risks are
called
A. Business risks
B. Audit risks
C. Significant risks
D. Material risks
27. As a result of obtaining an understanding of an entity’s internal control system, the auditor may
become aware of material weaknesses in the design or implementation of internal control. The auditor
is required to communicate this matter to
A. Those charged with governance or management
B. Chief executive officer
C. Securities and Exchange Commission
D. Board of Accountancy
28. Which of the following controls most likely would provide reasonable assurance that all credit sales
transactions of an entity are recorded?
A. The accounting department supervisor controls the mailing of monthly statements
to customers and investigates any differences reported by customers.
B. The accounting department supervisor independently reconciles, on a monthly basis, the

accounts receivable subsidiary ledger to the accounts receivable control account.
C. The billing department supervisor matches prenumbered shipping documents with entries in
the sales journal.
D. The billing department supervisor sends copies of approved sales orders to the credit
department for comparison to authorized credit limits and current customer account balances.
29. A sound internal control procedure should require that defective merchandise returned by
customers be presented initially to the
A. Receiving clerk
B. Accounts receivable supervisor
C. Billing clerk
D. Shipping department supervisor
30. Macho Dancer Company uses its sales invoices for posting perpetual inventory records. Inadequate
internal control over the invoicing function allows goods to be shipped but not invoiced. The inadequate
controls could cause what type of misstatement in each of the following accounts?
Revenues Receivables Inventories

A. Understatement Understatement Understatement
B. Overstatement Overstatement Understatement
C. Understatement Understatement Overstatement
D. Overstatement Overstatement Overstatement
31. Which of the following control activities in an entity’s revenue/receipt cycle would provide
reasonable assurance that all billed sales are correctly posted to the accounts receivable ledger?
A. Each shipment of goods on credit is supported by a prenumbered sales invoice.
B. The accounts receivable subsidiary ledger is reconciled daily to the accounts receivable control
account in the general ledger.
C. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
D. Each sales invoice is supported by a prenumbered shipping document.
32. The auditor’s primary objective in obtaining an understanding of the client’s controls over the
purchasing function is to
A. Investigate the recording of unusual transactions regarding raw materials.
B. Determine the reliability of financial reporting by the purchasing function.
C. Observe the annual physical count.
D. Ascertain that raw materials paid for are on hand.
33. Effective controls relevant to purchasing of raw materials should usually include all of the following,
except
A. Determining the need for the raw materials prior to preparing the purchase order.
B. Systematic reporting of product changes that will affect raw materials.
C. Obtaining financial approval prior to making a commitment.
D. Obtaining third-party written quality and quantity reports prior to payment for the raw
materials.
34. Which of the following controls is not usually performed in the accounts payable department?
A. Indicating on the voucher the affected asset and expense accounts to be debited.
B. Approving vouchers for payment by having an authorized employee sign the vouchers.
C. Accounting for unused prenumbered purchase orders and receiving reports.
D. Matching the vendor’s invoice with the related purchase requisition, purchase order, and
receiving report.
35. The following are appropriate questions on an internal control questionnaire concerning purchase
transactions, except
A. Are all goods received in a centralized receiving department and counted, inspected, and
compared with purchase orders on receipt?
B. Are intact cash receipts deposited daily in the bank?
C. Are prenumbered purchase orders and receiving reports used and accounted for?
D. Are an approved purchase requisition and a signed purchase order required for each purchase?
36. Which of the following is of least concern to an auditor in assessing the risks of material
misstatement?
A. Signed checks are distributed by the controller to approved payees.
B. Checks are signed by one person.
C. Cash receipts are not deposited intact daily.
D. Treasurer does not verify the names and addresses of check payees.
37. Which of the following is an essential control procedure to ensure the accuracy of the recorded
inventory quantities?
A. Calculating unit costs and valuing obsolete or damaged inventory items in accordance
with inventory policy.
B. Testing inventory extensions.
C. Performing a gross profit test.
D. Establishing a cutoff for goods received and shipped.
38. Effective internal controls over inventories are designed and implemented for the following reasons,
except
A. Inventories typically represent a large component of an entity’s current assets.
B. Inventories are the most liquid assets.
C. Inventories directly affect the financial performance of an entity.
D. Inventories typically represent a large portion of an entity’s total assets.
39. Your client, a merchandising concern, has annual sales of P30,000,000 and a 40% gross profit rate.
Tests reveals that 2% of the peso amount of purchases do not get into inventory because of breakage
and inventory pilferage by employees. The company estimates that these losses could be reduced to
0.5% of purchases by designing and implementing certain controls costing approximately P350,000.
Should the controls be designed and implemented?
A. Yes, regardless of cost-benefit considerations, because the situation involves employee theft.
B. Yes, because the ideal system of internal control is the most extensive one.
C. No, because the cost of designing and implementing the added controls exceeds the projected
savings.
D. Yes, because the expected benefits to be derived exceed the cost of the added controls.
40. Which of the following controls most likely would be implemented to achieve the production cycle
control objective of maintaining accurate inventory records?
A. Periodic inventory counts are used to adjust the perpetual inventory records.
B. A just-in-time inventory ordering system keeps inventory levels to a desired minimum.
C. Perpetual inventory records are periodically compared with the net realizable value of individual
inventory items.
D. Purchase requisitions, receiving reports, purchase orders, and vendor invoices are
independently matched before payment is approved.
41. Which of the following is the most likely procedure an auditor would perform in obtaining an
understanding of a manufacturing entity’s internal control for inventory balances?
A. Perform test counts of inventory when observing the entity’s physical count.
B. Perform analytical procedures designed to identify significant cost variances.
C. Analyze the liquidity and turnover ratio of the inventory.
D. Review the entity’s description of inventory policies and procedures.
42. The following controls are appropriate for property, plant, and equipment (PPE), except,
A. Written policies for capitalization and expenditure and review of application of
depreciation methods.
B. Disposal of fully depreciated PPE items.
C. Proper authority for acquisition and retirement of PPE items.
D. Detailed PPE records and physical controls over PPE items.
43. An internal control objective concerning property, plant, and equipment (PPE) acquisitions is that
they be recorded at the correct amounts and in the proper period, and properly classified. In which of
the following conditions would an auditor most likely to assess a high level of risk of material
misstatements?
A. All material acquisitions of PPE are required to be approved by the board of directors.
B. Most additions are self-constructed by the entity.
C. Recently acquired loans include covenants that preclude further plant acquisitions for 5 years.
D. Gross PPE increased 30% during the current period.
44. Which of the following controls would an entity most likely used in safeguarding against the loss of
trading securities?
A. The independent auditor traces all purchases and sales of trading securities through the
subsidiary ledgers to the general ledger.
B. An independent trust company that has no direct contact with the employees who have record
keeping responsibilities has possession of the securities.
C. The internal auditor inspects the trading securities in the entity’s safe each year on the balance
sheet date.
D. A designated member of the board of directors controls the securities in a bank safe-
deposit box.
45. The following controls are designed to protect investment securities, except
A. Investment securities should be properly controlled physically in order to prevent unauthorized

usage.
B. Custody over investment securities should be limited to personnel having record-keeping

responsibility over the securities.
C. Securities should be registered in the entity’s name.
D. Access to securities should be vested in two individuals.
46. Effective controls over the payroll function may include
A. Custody of rate authorization records by the supervisor of the payroll department.
B. Preparation of payroll transaction journal entries by an employee who reports to the supervisor
of the personnel department.
C. Verification of agreement of job time tickets with employee clock card hours by a payroll
department employee.
D. Reconciliation of totals on job time tickets with job reports by employees responsible for
those specific job.
47. Organizational independence in the processing of payroll can be achieved by segregating the
functions of authorization, record-keeping, and custody of assets. Which one of the following functional
separations is not required for internal control purposes?
A. Separation of payroll preparation and paycheck distribution.
B. Separation of personnel function from payroll preparation.
C. Separation of timekeeping from payroll preparation.
D. Separation of payroll preparation and maintenance of year-to-date records.
48. Which of the following situations represents an internal control weakness in the payroll
department?
A. The timekeeping function is independent of the payroll department.
B. Payroll records are periodically reconciled with tax reports.
C. Paychecks are distributed by the employees’ immediate supervisor.
D. Payroll department personnel are rotated in their duties.

49. Which of the following personnel department procedures reduces the risk of payroll fraud and
represents an appropriate responsibility for the department?
A. Authorizing the addition or deletion of employees from the payroll.
B. Authorizing overtime hours.
C. Collection and retention of unclaimed paychecks.
D. Distributing paychecks.
50. Employees of a manufacturing entity are often required to use time cards and job time tickets.
Which of the following statements concerning the use of these documents is incorrect?
A. Time reported on job time tickets should be reconciled to time cards.
B. Payroll should be calculated based on job time tickets.
C. Each employee should have only one time card.
D. An employee may have one or many job time tickets in a day.
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 PSA 330 THE AUDITOR’S PROCEDURES IN RESPONSE TO ASSESSED

RISKS
1. In a financial statement audit, the auditor is required to perform tests of controls when
I. The auditor’s risk assessment includes an expectation of the operating

effectiveness of controls.
II. When substantive procedures alone do not provide sufficient appropriate

Audit evidence at the assertion level.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
2. Tests of controls are concerned primarily with each of the following questions, except
A. By whom were the controls applied?
B. Were the necessary controls consistently performed?
C. How were the controls applied?
D. Why were the controls?

3. Control risk should be assessed in terms of
A. Specific control procedures.
B. Types of potential fraud.
C. Financial statement assertions.
D. Control environment factors.
4. An auditor intends to perform tests of control on a client’s cash disbursements procedures. If the
control procedures leave no audit trail of documentary evidence, the auditor most likely will test the
procedures by
A. Inquiry and analytical procedures.
B. Inquiry and observation.
C. Analytical procedures and confirmation.
D. Confirmation and observation.
5. The following statements relate to the use of audit evidence when testing the operating
effectiveness of relevant controls. Which is false?
A. An auditor who obtains sufficient appropriate audit evidence about the operating effectiveness
of controls during the interim period should no longer obtain additional evidence of operating
effectiveness for the remaining period.
B. An auditor may plan to use audit evidence about the operating effectiveness of controls
obtained in prior audits.
C. If an auditor plans to rely on controls that have changed since they were last tested, the auditor
should test the operating effectiveness of such controls in the current audit.
D. Audit evidence pertaining only to appoint in time may be sufficient for the auditor’s purpose,
for example, when testing controls over an entity’s physical count of inventories at year-end.
6. After gaining an understanding of internal control and assessing the risks of material misstatement,
an auditor decided to perform tests of controls. The auditor most likely decided that
A. Additional evidence to support a further reduction in control risks is not available.
B. It is not possible or practicable to reduce the risks of material misstatement at the assertion
level to an acceptably low level with audit evidence obtained only from substantive test
procedures.
C. There were many internal control weaknesses that could allow misstatements to enter the
accounting system.
D. An increased in the assessed level of control risk is justified for certain financial statement
assertions.
7. An auditor may decide to assess control risk at the maximum level for certain assertions because the
auditor believes
A. Controls are unlikely to pertain to the assertions.
B. The entity’s control components are interrelated.

C. Sufficient appropriate audit evidence to support the assertions is likely to be available.
D. More emphasis on tests of controls than substantive tests is warranted.
8. Which of the following statements is correct concerning an auditor’s assessment of control risk?
A. Assessing control risk may be performed concurrently during an audit with
obtaining an understanding of the entity’s internal control.
B. Evidence about the operation of controls in prior audits may not be considered during the
current year’s assessment of control risk.
C. The basis for an auditor’s conclusions about the assessed level of control risk need not be
documented unless control risk is assessed at the maximum level.
D. The lower the assessed level of control risk, the less assurance the evidence must provide that
the controls are operating effectively.
9. According to PSA 330 (The Auditor’s Procedures in Response to Assessed Risks), an auditor who plans
to rely on controls that have not changed since they were last tested should test the operating
effectiveness of such controls at least once every
A. Second audit
B. Third audit
C. Fourth audit
D. Fifth audit
10. On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed
level of control risk from that originally planned. To achieve an overall audit risk level that is
substantially the same as the planned audit risk level, the auditor would
A. Increase inherent risk.
B. Increase materiality level.
C. Decrease inherent risk.
D. Decrease detection risk.
11. When an auditor increases the planned assessed level of control risk because certain controls were
determined to be ineffective, the auditor would most likely increase the
A. Extent of tests of details.
B. Level of inherent risk.
C. Extent of tests of controls.
D. Level of detection risk.
12. Regardless of the assessed level of control risk, an auditor would perform some
A. Tests of controls to determine the effectiveness of internal control policies.

B. Analytical procedures to verify the design of internal control procedures.
C. Substantive tests to restrict detection risk for significant transaction classes.
D. Dual-purpose tests to evaluate both the risk of monetary misstatements and preliminary control
risk.
13. When an accounting application is processed by computer, an auditor cannot verify the reliable
operation of programmed control procedures by
A. Manually comparing detail transaction files used by an edit program with the program’s
generated error listings to determine that errors were properly identified by the edit program.
B. Constructing a processing system for accounting applications and processing actual data from
throughout the period through both the client’s program and the auditor’s program.
C. Manually reperforming, as of a moment in time, the processing of input data and comparing the
simulated results with the actual results.
D. Periodically submitting auditor-prepared test data to the same computer process and
evaluating the results.
14. In performing tests of the operating effectiveness of an entity’s controls, an auditor selects from a
variety of techniques, including
A. Reperformance and observation.
B. Inquiry and analytical procedures.
C. Comparison and confirmation.
D. Inspection and verification.
15. An auditor intends to perform tests of control on a client’s cash disbursement procedures. If the
control procedures leave no audit trail of documentary evidence, the auditor most likely will test the
procedures by
A. Inquiry and analytical procedures.
B. Inquiry and observation.
C. Analytical procedures and confirmation.
D. Confirmation and observation.
16. Which of the following tests of controls most likely would help assure an auditor that goods shipped
are properly billed?
A. Scan the sales journal for sequential and unusual entries.
B. Examine shipping documents for matching sales invoices.
C. Compare the accounts receivable ledger to daily sales invoices.
D. Inspect unused sales invoices for consecutive prenumbering.

17. An auditor is least likely to test controls that provide for
A. Approval of the purchase and sale of trading securities.
B. Classification of revenue and expense transactions by product line.
C. Segregation of the functions of recording disbursements and reconciling the bank account.
D. Comparison of receiving reports and vendor’s invoices with purchase orders.
18. An auditor uses the knowledge provided by the understanding of internal control and the final
assessed level of control risk primarily to determine the nature, timing, and extent of the
A. Attribute tests
B. Compliance tests
C. Tests of controls
D. Substantive tests
19. When there are numerous property and equipment transactions during the year, an auditor who
plans to assess control risk at a low level usually performs
A. Tests of controls and extensive tests of property, plant and equipment balances at the end of
the year.
B. Analytical procedures for current year property and equipment transactions.
C. Tests of controls and limited tests of current year property and equipment
transactions.
D. Analytical procedures for property and equipment balances at the end of the year.
20. Which of the following procedures concerning accounts receivable would an auditor most likely to
perform to obtain evidential matter in support of an assessed level of controls risk below the maximum
level?
A. Observing an entity’s employee prepare the schedule of past due accounts receivable,
B. Sending confirmation request’s to an entity’s principal customers to verify the existence of

accounts receivable.
C. Inspecting an entity’s analysis of accounts receivable for unusual balances.
D. Comparing an entity’s uncollectible accounts expense to actual uncollectible accounts

receivable.
21. Tests of controls are least likely to be omitted with regard to
A. Accounts believed to be subject to ineffective controls.
B. Accounts representing few transactions.
C. Accounts representing many transactions.
D. Subsequent events.
22. Which of the following types of evidence would an auditor most likely examine to determine
whether controls are operating as designed?
A. Confirmations of receivables verifying account balances.
B. Letters of representations corroborating inventory pricing.
C. Attorney’s responses to the auditor’s inquiries.
D. Client records documenting the use of computer programs.
23. An internal control questionnaire indicates that an approved receiving report is required to
accompany every check request for payment of merchandise. Which of the following procedures
provides the greatest assurance that this control is operating effectively?
A. Select and examine receiving reports and ascertain that the related canceled checks are dated
no earlier than the receiving reports.
B. Select and examine receiving reports and ascertain that the related canceled checks are dated
no later than the receiving reports.
C. Select and examine cancelled checks and ascertain that the related receiving reports are dated
no earlier than the checks.
D. Select and examine cancelled checks and ascertain that the related receiving reports are dated
no later than the checks.
24. Based on observations made during an audit, the independent auditor should discuss with
management the effectiveness of the company’s controls that protect against the purchase of
A. Required supplies provided by vendor who offers no trade discounts.
B. Required supplies provided by vendor who offers no cash discounts.
C. Inventory items acquired based on an economic order quantity (EOQ) inventory management
concept.
D. Supplies individually ordered, without considering possible volume discounts.
25. In assessing control risk for the purchasing cycle, the auditor will be least influenced by
A. The effectiveness of the controls in other cycles, e.g., the sales-receivables-cash receipts cycle.
B. The existence within the purchasing cycle of internal control strengths that offset weaknesses.
C. The audit work performed in the purchasing cycle by the company’s internal auditor.
D. The availability of a company manual describing policies and procedures for the purchasing
cycle.
 PSA 320 AUDIT MATERIALITY

 PSA 520 ANALYTICAL PROCEDURES
 PSA 550 RELATED PARTIES
 PSA 610 CONSIDERING THE WORK OF INTERNAL AUDIT
 PSA 620 USING THE WORK OF AN EXPERT
1. Materiality should be considered by the auditor when determining the nature, timing and extent of
audit procedures.
There is an inverse relationship between materiality and the level of audit risk.
Materiality need not be considered when evaluating the effect of misstatements.
A. True; True; False
B. False; False; True
C. True; True; True
D. False; False; True
2. Which of the following would an auditor most likely use in determining the auditor’s preliminary
judgment about materiality.
A. The anticipated sample size of the planned substantive tests.
B. The entity’s annualized interim financial statements.
C. The results of the internal control questionnaire.
D. The contents of the management representation letter.
3. In evaluating the fair presentation of the financial statements, the auditor should assess whether the
aggregate of uncorrected misstatements that have been identified during the audit is material. The
aggregate of uncorrected misstatements comprises
I. Specific misstatements identified by the auditor including the net effect of uncorrected
misstatements identified during the audit of previous period.
II. The auditor’s best estimate of other misstatements which cannot be specifically identified.
A. I only
B. II only
C. Both I and II.
D. Neither I nor II.
4. A basic premise underlying analytical procedures is that
A. These procedures cannot replace tests of balances and transactions.

B. Statistical tests of financial information may lead to the discovery of material misstatements in
the financial statements.
C. The study of financial ratios is an acceptable alternative to the investigation of unusual

fluctuations.
D. Plausible relationships among data may reasonably be expected to exist and continue in the
absence of known conditions to the contrary.
5. For audits of financial statements made in accordance with PSAs, the use of analytical procedures is
required to some extent
In the Planning Stage As a Substantive Test In the Final Review Stage
A. No Yes Yes
B. Yes Yes No
C. Yes No Yes
D. No No No
6. Analytical procedures used in planning an audit should focus on
A. Reducing the scope of tests of controls and substantive tests.
B. Providing assurance that potential material misstatements will be identified.
C. Enhancing the auditor’s understanding of the client’s business and identifying areas of potential
risk.
D. Assessing the adequacy of the available evidential matter.
7. Which of the following statements concerning analytical procedures is true?
A. Analytical procedures may be omitted entirely for some financial statement audits.
B. Analytical procedures used in planning the audit should not use nonfinancial information.
C. Analytical procedures usually are effective and efficient for tests of controls.
D. Analytical procedures alone may provide the appropriate level of assurance for some assertions.
8. Which of the following would not be considered an analytical procedure?
A. Estimating payroll expense by multiplying the number of employees by the average hourly wage
rate and the total hours worked.
B. Projecting an error rate by comparing the results of a statistical sample with the actual
population characteristics.
C. Computing accounts receivable turnover by dividing credit sales by the average net receivables.
D. Developing the expected sales based on the sales trend of the prior five years.
9. Which of the following procedures would an auditor most likely to perform in planning a financial
statement audit?
A. Inquiring about the client’s legal counsel concerning pending litigation.
B. Comparing the financial statements with anticipated results.
C. Examining computer-generated exception reports to verify the effectiveness of internal control.
D. Searching for unauthorized transactions that may aid in directing unrecorded liabilities.
10. Which of the following items tend to be the most predictable for purposes of analytical procedures
applied as substantive tests?
A. Relationships involving balance sheet accounts.
B. Transactions subject to management discretion.
C. Relationships involving income statement accounts.
D. Data subject to audit testing in the prior period.
11. The primary objective of analytical procedures used in the overall review stage of an audit is to
A. Obtain evidence from details testing to corroborate particular assertions.
B. Identify areas that represent specific risks relevant to the audit.
C. Assist the auditor in assessing the validity of the conclusions reached.
D. Satisfy doubts when questions arise about a client’s ability to continue in existence.
12. Analytical procedures used in the overall review stage of an audit generally include
A. Considering unusual or unexpected account balances that were not previously identified.
B. Performing tests of transactions to corroborate management’s financial statement

assertions.
C. Gathering evidence concerning account balances that have not changed from the prior year.
D. Retesting controls that appeared to be ineffective during the assessment of control risk.
13. When auditing related party transactions, an auditor places primary emphasis on
A. Confirming the existence of the related parties.
B. Verifying the valuation of the related party transactions.
C. Evaluating the disclosure of the related party transactions.
D. Ascertaining the rights and obligations of the related parties.
14. Which of the following auditing procedures most likely would assist an auditor in identifying related
party transactions.
A. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.
B. Vouching accounting records for recurring transactions recorded just after the balance sheet
date.
C. Reviewing confirmations of loans receivable and payable for indications of guarantees.

D. Performing analytical procedures for indications of possible financial difficulties.
15. Which of the following most likely would indicate the existence of related parties?
A. Writing down obsolete inventory just before year-end.
B. Failing to correct previously identified internal control deficiencies.
C. Depending on a single product for the success of the entity.
D. Borrowing money at an interest rate significantly below the market rate.
16. After determining that a related party transactions has, in fact, occurred an auditor should
A. Substantiate that related party transactions were consummated on terms equivalent to those
that prevail in arm’s-length transactions.
B. Perform analytical procedures to verify whether similar transactions have occurred, but were
not recorded.
C. Obtain an understanding of the purpose of the transactions.
D. Determine whether a particular transaction would have occurred if the parties had not been
related.
17. The external auditor should obtain a sufficient understanding of the internal audit function because
A. The understanding of the internal audit function is an important substantive test to be

performed by the external auditor.
B. The audit programs, working papers, and reports of internal auditors may often be used as a
substitute for the work of the external auditor’s staff.
C. The procedures performed by the internal audit staff may eliminate the external auditor’s need
for considering internal control.
D. The work performed by internal auditors may be a factor in determining the nature, timing, and
extent of the external auditor’s procedures.
18. If the external auditor decides that it is efficient to consider how the work performed by the
internal auditors may affect the nature, timing, and extent of audit procedures, he/she should assess the
internal auditors’
A. Efficiency and experience
B. Independence and review skills
C. Training and supervisory skills
D. Competence and objectivity
19. In assessing the technical competence of an internal auditor, an external auditor most likely would
obtain information about the
A. Quality of working paper documentation, reports, and recommendations.
B. Organizational level to which the internal auditor reports.

C. Influence of management on the internal auditor’ duties.
D. Entity’s commitment to integrity and ethical values.
20. PSA 620 (Using the Work of an Expert) provides guidance on using the work of an expert as audit
evidence. According to this standard, an expert may be
A. Contracted by the auditor but never by the entity.
B. Contracted by the entity but never by the auditor.
C. Contracted but not employed by the entity.
D. Contracted or employed by the entity or auditor.
21. Which of the following statements is correct concerning the auditor’s use of the work of an expert?
A. The auditor is required to perform substantive test procedures to verify the expert’s
assumptions and findings.
B. The auditor should obtain an understanding of the methods and assumptions used by the
expert.
C. The should not have an understanding of the nature of the work to be performed by the expert.
D. The expert should not have an understanding of the auditor’s corroborative use of the expert’s
findings.
22. In using the work of an expert, an understanding should exist among the auditor, the entity and the
expert as to the nature, scope, and objective of the expert’s work. The documentation of this
understanding should cover
A. The conditions under which a division of responsibility may be necessary.
B. A statement that the expert assumes no responsibility to update the expert’s report for future
events or circumstances.
C. The intended use by the auditor of the expert’s work, including the possible communication to
third parties of the expert’s identity and extent of involvement.
D. The auditor’s disclaimer as to whether the expert’s findings corroborate the representations in
the financial statements.
23. Which of the following is not an expert upon whose work an auditor may rely?
A. Actuary
B. Engineer
C. Appraiser
D. Internal auditor
24. If the results of the expert’s work do not provide sufficient appropriate audit evidence or
are not consistent with other audit evidence, the auditor should
A. Report the matter to the appropriate regulatory agency of the government.
B. Resolve the matter.
C. Withdraw from the engagement.
D. Express an unqualified opinion with reference to the work of the expert.
25. When issuing an unmodified auditor’s report, the auditor
A. May refer to the work of an expert.
B. Should refer to the work of an expert to indicate a division of responsibility.
C. Should include in the auditor’s report the identity of the expert and the extent of the expert’s
involvement.
D. Should not refer to the expert’s work.
 PSA 500 (revised) Audit Evidence

 PSA 501 Audit Evidence – Additional Considerations on Specific Items
 PSA 505 External Confirmations
 PSA 230 (revised) Audit Documentation
1. Which of the following statements concerning audit evidence is correct?
A. To be appropriate, audit evidence should be either reliable or relevant, but it need not be
both.
B. The measure of the validity of audit evidence lies in the auditor’s judgment.
C. The difficulty and expense of obtaining audit evidence concerning an account balance is
a valid basis for omitting the test.
D. A client’s accounting records can be sufficient audit evidence to support the financial
statements.
2. The quantity of audit evidence needed is affected by the risk of misstatement and also by the quality
of such audit evidence.
The reliability of audit evidence is influenced by its source and by its nature and is dependent on the
individual circumstances under which it is obtained.
C. True; False
D. False; True
3. Which of the following is a false statement about audit objectives?

A. There should be one- to –one relationship between audit objectives and procedures.
B. Audit objectives should be developed in light of management assertions about the
financial statement components.
C. Selection of tests to meet audit objectives should depend upon the understanding of
internal control.
D. The auditor should resolve any substantial doubt about any of management’s material
financial statement assertions.
4. Management makes certain assertions that are embodied in financial statement components; for
example, two such categories of assertions are completeness and valuation and allocation. Which of the
following is not a broad category of management assertions?
A. Rights and obligations
B. Completeness
C. Existence
D. Errors or fraud
5. The objective of tests of details of transactions performed as substantive tests is to
A. Comply with generally accepted auditing standards.
B. Attain assurance about the reliability of the accounting system.
C. Detect material misstatements in the financial statements.
D. Evaluate whether management’s policies and procedures operated effectively.
6. In testing the existence assertion for an asset, an auditor ordinarily works from the
A. Financial statements to the potentially unrecorded items.
B. Potentially unrecorded items to the financial statements.
C. Accounting records to the supporting evidence.
D. Supporting evidence to the accounting records.
7. In determining whether transactions have been recorded, the direction of the audit testing should be
from the
A. General ledger balances
B. Adjusted trial balance
C. Original source documents
D. General journal entries
8. Which of the following statements concerning evidential matter is true?

A. Appropriate evidence supporting management’s assertions should be convincing rather
than merely persuasive.
B. Effective internal control contributes little to the reliability of the evidence created within the
entity.
C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what
evidence should be obtained.
D. A client’s accounting records cannot be considered sufficient evidence to support the financial
statements.
9. Which of the following is an example of “other information” that could be used by an auditor as
evidential matter supporting the financial statements.
A. Worksheets supporting cost allocations.
B. Confirmation of accounts receivable.
C. Special journals.
D. Accounting manuals.
10. Audit evidence can come in different forms with different degrees of persuasiveness. Which of the
following is the least persuasive type of evidence?
A. Bank statement obtained from the client.
B. Test counts of inventory made by the auditor.
C. Prenumbered purchase order forms.
D. Correspondence from the client’s attorney about litigation.
11. Which of the following types of audit evidence is the most persuasive?
A. Prenumbered purchase order forms.
B. Client worksheets supporting cost allocations.
C. Bank statements obtained from the client.
D. Client representation letter.
12. Which of the following generalizations does not relate to the appropriateness of evidence?
A. Audit evidence from external sources (for example, confirmation received from a third party) is
more reliable than the generated internally.
B. An auditor’s opinion, to be economically useful, is formed within reasonable time and based on
evidence obtained at a reasonable cost.
C. Audit evidence generated internally is more reliable when the related accounting and internal
control systems are effective.
D. Audit evidence obtained directly by the auditor is more reliable than that obtained from the
entity.
13. 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. Assessment of control risk at a low level.
C. Inherent risk involved.
D. Relationship between the cost of obtaining evidence and its usefulness.
14. Which of the following statements concerning audit evidence is correct?
A. An audit usually involves the authentication of documentation.
B. A given set of procedures may provide audit evidence that is relevant to certain assertions, but
not others.
C. Audit evidence obtained from an independent external source is always reliable.
D. An entity’s accounting records can be sufficient audit evidence to support the financial
statements.
15. PSA 500 requires the auditor to use assertions for classes of transactions, account balances, and
presentation and disclosures in sufficient detail to form a basis for the assessment of risks of material
misstatements and the design and performance of further audit procedures. Assertions about classes of
transactions include occurrence, completeness, accuracy, cutoff, and
A. Valuation and and allocation.
B. Rights and obligations.
C. Existence.
D. Classification.
!6. In which of the following circumstances would the use of the negative form of accounts receivable
confirmation most likely to be justified?
A. A substantial number of accounts may be in dispute and the accounts receivable balance
arises from sales to a few major customers.
B. A substantial number of accounts may be in dispute and the accounts receivable balance arises
from sales to many customers with small balances.
C. A small number of accounts may be in dispute and the accounts receivable balance arises
from sales to few major customers.
D. A small number of accounts may be in dispute and the accounts receivable balance arises from
sales to many customers with small balances.
17. Which of the following statements is correct concerning the use of negative confirmation requests?
A. Unreturned negative confirmation requests rarely provide significant explicit evidence.

B. Negative confirmation requests are effective when detection risk is low.
C. Unreturned negative confirmation requests indicate that alternative procedures are necessary.
D. Negative confirmation requests are effective when understatements of account balances are
suspected.
18. An auditor most likely would review an entity’s periodic accounting for the numerical sequence of
shipping documents and invoices to support management’s financial statement assertion of
A. Existence
B. Rights and obligations
C. Valuation and allocation
D. Completeness
19. Which of the following might be detected by an auditor’s review of the client’s sales cut-off?
A. Excessive goods returned for credit.
B. Unrecorded sales discounts.
C. Lapping of year-end accounts receivable.
D. Inflated sales for the year.
20. Cutoff tests designed to detect credit sales made before the end of the year that have been
recorded in the subsequent year provide assurance about management’s assertion of
A. Classification C. Rights and obligations.
B. Cutoff D. Existence
21. Which of the following most likely would give the most assurance concerning the valuation
and allocation assertion of accounts receivable?
A. Vouching amounts in the subsidiary ledger to details on shipping documents.
B. Comparing receivable turnover ratios with industry statistics for reasonableness.
C. Inquiring about receivables pledged under loan agreements.
D. Assessing the allowance for uncollectible accounts for reasonableness.
22. Confirmation is “the process of obtaining and evaluating a direct communication from a third party
in response to a request for information about a particular item affecting financial statement
assertions.” Two assertions for which confirmation of accounts receivable balances provides primary
evidence are
A. Completeness and valuation.
B. Valuation and rights and obligations.
C. Rights and obligations and existence

D. Existence and completeness
23. An auditor confirms a representative number of open accounts receivable as of December 31 and
investigates respondents’ exceptions and comments. By this procedure the auditor would be most likely
to learn of which of the following?
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 control clerks 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.
24. The auditor may consider confirming accounts receivable balances at an interim date if
A. Collections subsequent to year-end are to be reviewed
B. The assessed level of risk of material misstatement relative to financial statement assertions
about receivables is acceptably low.
C. Negative confirmations are to be used for a sample of accounts.
D. Cash and accounts receivable are audited at the same time.
25. When an auditor does not receive replies to positive requests for year-end accounts receivable
confirmations, the auditor most likely would
A. Inspect the allowance account to verify whether the accounts were subsequently written off.
B. Increased the assessed level of detection risk for the valuation and completeness assertions.
C. Send the customer a second confirmation.
D. Increase the assessed level of inherent risk for the revenue cycle.
26. The return of positive accounts receivable confirmation without an exception attests to the
A. Collectibility of the accounts receivable.
B. Accuracy of the aging of accounts receivable.
C. Accuracy of the receivables balance.
D. Accuracy of the allowance for bad debts.
27. Which of the following procedures would an auditor most likely to perform for year-end accounts
receivable confirmations when the auditor did not receive replies to second requests?
A. Review the cash receipts journal for the month prior to year-end.
B. Intensify the study of internal control concerning the revenue cycle.
C. Increased the assessed level of detection risk for the existence assertion.
D. Inspect the shipping records documenting the merchandise sold to the debtors.
28. Which of the following sets of information does an auditor usually confirm on one form?
A. Accounts payable and purchase commitments.
B. Cash in bank and collateral for loans.
C. Inventory on consignment and contingent liabilities.
D. Accounts receivable and accrued interest receivable.
29. The primary purpose of sending a standard confirmation request to financial institutions with which
the client has done business during the year is to
A. Detect kiting activities that may otherwise not be discovered.
B. Corroborate information regarding deposit and loan balances.
C. Provide data necessary to prepare proof of cash.
D. Request information about contingent liabilities and secured transactions.
30. Which of the audit procedures is the most appropriate when internal control over cash is weak or
when a client request for an investigation of cash transactions?
A. Proof of cash.
B. Bank reconciliation.
C. Cash confirmation.
D. Evaluate ratio of cash to current liabilities
31. The usefulness of the standard bank confirmation request may be limited because the bank
employee who completes the form may
A. Not believe that the bank is obligated to verify confidential information to third party.
B. Sign and return the form without inspecting the accuracy of the client’s bank reconciliation.
C. Not have access to the client’s cutoff bank statement.
D. Be unaware of all the financial relationships that the bank has with the client.
32. An auditor should test bank transfers for the last part of the audit period and first part of the
subsequent period to detect whether
A. The cash receipts journal was held open for a few days after year-end.
B. The last checks recorded before year-end were actually made by year-end.
C. Cash balances were overstated because of kiting.
D. Any unusual payments to or receipts from related parties occurred.
33. Which of the following procedures would an auditor most likely perform in auditing the statement
of cash flows?
A. Compare the amounts included in the statement of cash flows to similar amounts in the prior
year’s statement of cash flows.
B. Reconcile the cutoff bank statements to verify the accuracy of the year-end bank balances.
C. Vouch all bank transfers for the last week of the year and first week of the subsequent year.
D. Reconcile the amounts included in the statement of cash flows to the other financial
statements’ balances and amounts.
34. To gain assurance that all inventory items in a client’s inventory listing schedule are valid, an auditor
most likely would vouch
A. Inventory tags noted during the auditor’s observation to items listed in the inventory listing
schedule.
B. Inventory tags noted during the auditor’s observation to items listed in the receiving reports and
vendors’ invoices.
C. Items listed in the inventory listing schedule to inventory tags and the auditor’s recorded count
sheets.
D. Items listed in receiving reports and vendors’ invoices to the inventory listing schedule.
35. An auditor selected items for test counts while observing a client’s physical inventory. The auditor
then traced the test counts to the client’s inventory listing. This procedure most likely obtained evidence
concerning management’s assertion of
A. Rights and obligations
B. Completeness
C. Existence
D. Valuation and allocation
36. While observing a client’s annual physical inventory, an auditor recorded test counts for several
items and noticed that certain test counts were higher than the recorded quantities in the client’s
perpetual records. This situation could be the result of the client’s failure to record
A. Purchase discounts C. Sales
B. Purchase returns D. Sales returns
37. The primary source of information to be reported about litigation, claims, and assessments is the
A. Client’s lawyer C. Client’s management
B. Court records D. Independent auditor
38. Which of the following is an audit procedure that an auditor most likely would perform concerning
litigation, claims, and assessments?
A. Requests the client’s lawyer to evaluate whether the client’s pending litigation, claims, and
assessments indicate a going concern problem.
B. Examine the legal documents in the client’s lawyer’s possession concerning litigation, claims,
and assessment to which the lawyer has devoted substantive attention.
C. Discuss with management its policies and procedures adopted for evaluating and accounting for
litigation, claims, and assessments.
D. Confirm directly with the client’s lawyer that all litigation, claims, and assessments have been
recorded or disclosed in the financial statements.
39. Which of the following is not an audit procedure that the independent auditor would perform with
respect to litigation, claims, and assessments?
A. Inquire of and discuss with management the policies and procedures adopted for litigation,
claims, and assertions.
B. Obtain from management a description and evaluation of litigation, claims, and assessments
that existed at the balance sheet date.
C. Obtain assurance from management that it has disclosed all unasserted claims that the lawyer
has advised are probable of assertion and must be disclosed.
D. Confirm directly with the client’s lawyer that all claims have been recorded in the financial
statements.
40. The following are ordinarily excluded from audit documentation:
A B C D
Superseded drafts of working papers and financial
statements Yes No No Yes
Notes that reflect incomplete or preliminary thinking Yes Yes No No
Previous copies of documents corrected for
typographical or other errors Yes Yes Yes Yes
Duplicates of documents Yes No Yes No
41. The auditor should complete the assembly of the final audit file on a timely basis after the date of
the auditor’s report. As PSQC 1 indicates, _____ days after the date of the auditor’s report is ordinarily
an appropriate time limit within which to complete the assembly of he final audit file.
A. 30 C. 60
B. 90 D. 120
42. After the assembly of the final audit file has been completed, the auditor should not delete or
discard audit documentation before the end of its retention period. As PSQC 1 indicates, the retention
period for audit engagements ordinarily is no shorter than _____ years from the date of the auditor’s
report.
A. 5 C. 3
B. 7 D. 10
43. In documenting the nature, timing and extent of audit procedures performed, the auditor should
record
I. Who performed the audit work and the date such work was completed.
II. Who reviewed the audit work and the date and extent of such review.
A. I only C. Both I and II
B. II only D. Neither I nor II
44. The permanent (continuing) file of an auditor’s working papers most likely would include copies of
the
A. Lead schedules C. Bank statements
B. Attorneys’ letters D. Debt agreements
45. The current file of an auditor’s working papers most likely would include copy of the
A. Bank reconciliation C. Articles of incorporation
B. Pension plan contract D. Flowchart of the internal control activities
PSA 240 (revised 2005) The Auditor’s Responsibility to Consider Fraud in an Audit of Financial
Statements
PSA 250 Consider of Laws and Regulations in an Audit of Financial Statements
PSA 260 Communications of Audit Matters with those Charged with Governance
1. Misstatements in the financial statements can arise from fraud or error. The distinguishing
factor between fraud and error is whether the underlying action that results in the misstatement of the
financial statements is
I Intentional or unintentional
II Rational or irrational
A. I only C. Both I and II

B. II only D. Neither I nor II
2. ”Error” includes
A. Engaging in complex transactions that are structured to misrepresent the financial position or
financial performance of the entity.
B. Concealing, or not disclosing, facts that could affect the amounts recorded in the financial
statements.
C. An incorrect accounting estimate arising from oversight or misinterpretation of facts.
D. Intentional misapplication of accounting policies relating to amounts, classification, manner of

presentation, or disclosure.
3. Fraud involving one or more members of management or those charged with governance is referred
to as
A. Management fraud C. Fraudulent financial reporting.
B. Employee fraud. D. Misappropriation of assets.
4. The auditor is concerned with fraud that causes a material misstatement in the financial statements.
There are two types of intentional misstatements that are relevant to the auditor: misstatements
resulting from fraudulent financial reporting and misstatements resulting from
A. Management fraud.
B. Employee fraud.
C. Misappropriation of assets.
D. Collusion within the entity or with third parties.
5. Fraudulent financial reporting involves intentional misstatements including omissions of amounts or

disclosures in financial statements to deceive financial statement users. It may be accomplished in a
number of ways, including
A. Embezzling receipts.
B. Stealing physical assets or intellectual property.
C. Using an entity’s assets for personal use.
D. Manipulation, falsification, or alteration of accounting records or supporting documentation

from which the financial statements are prepared.
6. Which of the following conditions are generally present when misstatements due to fraud occur?
I Incentive or pressure.
II Perceived opportunity.
III Rationalization.
A. I and II only.
B. II and III only.
C. I and III only
D. I, II, and III
7. The primary responsibility for the prevention and detection of fraud rests with
A. Those charged with governance of the entity.
B. Management of the entity.
C. Both those charged with governance of the entity and management.
D. The auditor.
8. Which of the following statements best describes an auditor’s responsibility regarding

misstatements?
A. An auditor should obtain reasonable assurance that the financial statements taken as a whole
are free from material misstatement, whether caused by fraud or error.
B. An auditor should obtain absolute assurance that material misstatements in the financial
statements will be detected.
C. An auditor is responsible to detect material errors but has no responsibility to detect material
fraud that is concealed through employee collusion or management override of internal control.
D. An auditor’s failure to detect a material misstatement resulting from fraud is an indication of

noncompliance with the requirements of the Philippine Standards on Auditing (PSAs).
9. When obtaining an understanding of the entity and its environment, including its internal control, the
auditor may identify events or conditions that indicate an incentive or pressure to commit fraud or
provide an opportunity to commit fraud. Such events or conditions are referred to as
A. Fraud conditions C. Fraudulent activities.
B. Fraud risk factors. D. Fraud environment.
10. The following are examples of fraud risk factors relating to misstatements arising from
misappropriation of assets, except
A. Recurring negative cash flows from operating activities while reporting earnings and earnings
growth.
B. Inadequate physical safeguards over cash, investments, inventory, or fixed assets.
C. Inadequate segregation of duties or independent checks.
D. Adverse relationship between the entity and employees with access to cash or other assets
susceptible to theft created by recent changes made to employee compensation or benefit
plans.
11. Opportunities to misappropriate assets increase when there are
A. Known or anticipated future employee layoffs.

B. Promotions, compensation, or other rewards inconsistent with expectations.
C. Recent or anticipated changes to employee compensation or benefit plans.
D. Inventory items that are small in size, of high value, or in high demand.
12. Which of the following conditions or events may create incentives/pressures to commit fraud?
A. Inadequate system of authorization and approval of transactions.
B. Lack of mandatory vacations for employees performing key control functions.
C. Excessive pressure on management or operating personnel to meet financial targets established

by those charged with governance, including sales or profitability incentive goals.
D. Inadequate access controls over automated records.
13. Because of the risk of material misstatement, an audit of financial statements in accordance with
PSAs should be planned and performed with an attitude of
A. Impartial conservatism.
B. Objective judgment.
C. Independent integrity.
D. Professional skepticism.
14. When planning the audit, the auditor should make inquiries of management. Such inquiries should
address the following, except
A. Management’s assessment of the risk that the financial statements maybe misstated due to
fraud.
B. Management’s process for identifying and responding to the risks of fraud in the entity.
C. Management’s consideration of how an element of unpredictability will be incorporated into

the nature, timing, and extent of the audit procedures to be performed.
D. Management’s communication, if any, to those charged with governance regarding its processes
for identifying and responding to the risks of fraud in the entity.
15. When the auditor identifies a misstatement in the financial statements, the auditor should consider
whether such a misstatement may be indicative of fraud and if there is such an indication, the auditor
should
A. Consider the implications of the misstatements in relation to other aspects of the audit.
B. Withdraw from the engagement.
C. Communicate the information to regulatory and enforcement authorities.
D. Report the matter to the person or persons who made the audit appointment.
16. PSA 230 (Documentation) requires the auditor to document matters which are important in
providing evidence to support the audit opinion, and states that the working papers include the
auditor’s reasoning on all significant matters which require the auditor’s judgment, together with the
auditor’s conclusion thereon. Which of the following should be documented by the auditor?
A. Fraud risk factors identified as being present during the auditor’s risk assessment process.
B. Auditor’s responses to identified fraud risk factors.
C. Both fraud risk factors identified as being present during the auditor’s risk assessment process
and the auditor’s response to any such factors.
D. The standard does not require documentation of the identified fraud risk factors and the
auditor’s responses to them.
17. The following statements relate to communication of misstatements resulting from fraud to
management and to those charged with governance. Which is false?
A. The auditor need not bring to the attention of those charged with governance any material
weaknesses in internal control related to the prevention and detection of fraud.
B. If the auditor has identified a fraud, whether or not it results in a material misstatement in the
financial statements, the auditor should communicate these matters to the appropriate level of
management on a timely basis, and consider the need to report such matters to those charged
with governance.
C. If the auditor has obtained evidence that indicates that fraud may exist (even if the potential
effect on the financial statements would not be material), the auditor should communicate
these matters to the appropriate level of management on a timely basis, and consider the need
to report such matters to those charged with governance.
D. The auditor’s communication with those charged with governance may be made orally or in
writing.
18. As used in PSA 250 (Consideration of Laws and Regulations in an Audit of Financial Statements), this
term refers to acts of omission or commission by the entity being audited, either intentional or
unintentional, which are contrary to prevailing laws or regulations.
A. Noncompliance C. Erotic acts
B. Illegal acts D. Unforgivable acts
19. According to PSA 250, the term “noncompliance” as used in the standard refers to acts of omission
or commission by the entity being audited, either intentional or unintentional, which are contrary to the
prevailing laws or regulations. Such acts do not include
A. Transactions entered into by the entity.
B. Transactions entered into in the name of the entity.
C. Transactions entered into on the entity’s behalf by its management or employees.
D. Personal misconduct (unrelated to the entity’s business activities) by the entity’s management
or employees.
20. The responsibility for the prevention and detection of noncompliance rests with
A. The auditor. C. The auditor’s lawyer.

B. Management. D. The client’s lawyer.
21.

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 Preface to the Philippine Standards on Quality Control, Auditing Review, Other Assurance and

II Scope and authority of the documents issued by the AASC.

A. Financial Reporting Standards Council (FRSC).

B. Auditing and Assurance Standards Council (AASC).

C. International Federation of Accountants (IFAC).

D. Philippine Institute of Public Accountants (PICPA).

3. Which of the following are collectively referred to as “Engagement Standards”?

A. PSAs and PSREs

B. PSAs, PSREs and PSAEs

C. PSAs, PSREs, PSAEs and PSRSs

D. PSAs, PSREs, PSAEs, PSRSs and PSQCs

4. Which of the following Philippine Standards are to be applied to compilation engagements,

A. Both statements are true.

B. Both statements are false.

A. Both statements are true.

B. Both statements are false.

8. Which of the following statements best describes assurance services?

A. Independent professional services that are intended to enhance the credibility of

information to meet the needs of an intended user.

B. Services designed to express an opinion on the fairness of historical financial

statements based on the results of an audit.

C. The preparation of the financial statements or the collection, classification, and

summarization of other financial information.

D. Services designed for the improvement of operations, resulting in better outcomes.

The objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an

The objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an

Statement 1 Statement 2 Statement 3

A. False True True

B. True False False

C. True True False

D. False False True

B. PSAEs and PSAs

C. PSAs and PSREs

D. PSAEs, PSREs and PSAs

11. Assurance engagements encompass the following types of services, except

C. Audit of historical financial statements

I Focus on providing advice.

II Involve monitoring of one party by another.

13. Assurance engagements involve

A. Two separate parties: a professional accountant and an intended user.

B. Two separate parties: a professional accountant and a responsible party.

C. Two separate parties: a responsible party and an intended user.

D. Three separate parties: a professional accountant, a responsible party and an

14. An assurance engagement should have which of the following elements?

I A three party relationship involving a practitioner, a responsible party and

II An appropriate subject matter.

III Suitable criteria.

IV Sufficient appropriate evidence.

V A written assurance report.

A. I, II, and III only

B. II, III, IV and V only

C. I, II, III and IV only

D. I, II, III, IV and V.

15. The subject matter of an assurance engagement may include

A. Historical or prospective financial information.

B. An entity’s internal control or IT system.

D. All of the above.

17. Suitable criteria should have which of the following characteristics?

A. I, II, and III only

B. II, III, IV and V only

C. I, II, III and IV only

D. I, II, III, IV and V.

18. In an assurance engagement, the person or persons, either as individuals or representatives of an

B. Both statements are true