JPIA CUP 6: The AUDITING THEORY of Everything

EASY

1. The independent auditor’s plan for an audit in accordance with generally accepted auditing standards is
influenced by the possibility of material errors. The auditor will therefore conduct the examination with
an attitude of
a. Professional skepticism.
b. Subjective mistrust.
c. Objective indifference.
d. Professional responsiveness. (AICPA ADAPTED)

Answer: A

2. Which of the following is not an assurance service?

a. Examination of prospective financial information
b. Audit of historical financial statements
c. Review of financial statements
d. Compilation of financial information

Answer: D

Services performed by professional accountants that are not assurance engagements include the
following:

1. Agreed-upon procedures
2. Compilation of financial or other information
3. Preparation of tax returns where no conclusion is expressed, and tax consulting
4. Management consulting
5. Other advisory services

3. What assurance is provided by the auditor in an agreed-upon procedures engagement?

a. Reasonable
b. Absolute
c. Moderate
d. No assurance

Answer: D

In an agreed-upon procedures engagement, the auditor simply provides a report of the factual
findings and expresses no assurance in his/her report. Users of the report make an assessment of the
procedures and findings reported by the auditor and draw their own conclusions form the auditor’s work.

4. Republic Acts No. ___________, also known as “______________________”, shall provide for and
govern the standardization and regulation of accounting education; the examination for registration of
CPAs; and the supervision, control, and regulation of the practice of accountancy.
a. No. 9892, Philippine Accountancy Act of 2004
b. No. 9298, Philippine Accountancy Act of 2004
c. No. 9298, Philippine Accountancy Act of 2002
d. No. 9892, Philippine Accountancy Act of 2002

Answer: B
5. Fill in the blank.
Section 4 of RA 9298 provides that the practice of accountancy shall include, but not limited to, the
following:
1. Practice of Public Accountancy
2. Practice in ____________ and _____________
3. Practice in Education/Academe
4. Practice in Government

Answer: Commerce, Industry

5. The following are components of internal control, except

a. Control activities
b. The entity’s risk assessment process
c. Control environment
d. Business risk

Answer: D

The five components of internal control are:

1) The control environment

2) The entity’s risk assessment process
3) The information system
4) Control activities
5) Monitoring control

6. The one responsible for the registration of corporations and partnerships, as well as monitoring of
compliance with the Corporation Code, Civil Code provisions on partnerships, Foreign Investments Act,
and other related laws.
Answer: Securities and Exchange Commission (SEC)

7. The firm shall establish policies and procedures designed to provide it with reasonable assurance that
the firm and its personnel comply with relevant ethical requirements. The Code of Ethics for Professional
Accountants in the Philippines established the fundamental principles of professional ethics which include
the following, except:
a. Integrity
b. Objectivity
c. Professional behavior
d. Relevance

Answer: D

The Code of Ethics for Professional Accountants in the Philippines establishes the fundamental principles
of professional ethics, which include:

a. Integrity
b. Objectivity
c. Professional competence and due care
d. Confidentiality
e. Professional behavior
8. In designing written audit programs, an auditor should establish specific audit objectives that relate
primarily to the
a. Selected audit techniques.
b. Cost-benefit of gathering audit evidence.
c. Timing of audit procedures.
d. Financial statement assertions.

Answer: D

The audit procedures included in the audit program should enable the auditor to gather sufficient
appropriate audit evidence about management representations embodied in the entity’s financial
statements. Such management representations are called management assertions. Hence, in designing
written audit programs, the auditor develops specific audit objectives in light of those management
assertions.

9. The QAR program covers all CPAs in

a. Public Accounting
b. Government
c. Commerce and Industry
d. Education/Academe

Answer: A
Section 15 provides that the QAR program covers all CPAs in public accounting, whether as an individual
practitioner, a firm or a partnership.

10. Which of the following fundamental ethical principles requires a professional accountant to be
straightforward and honest in all professional and business relationship?
a. Objectivity
b. Professional behavior
c. Professional competence and due care
d. Integrity

Answer: D
 AVERAGE

1. ____________ is the measure of the quantity of evidence.

Answer: Sufficiency
Sufficiency is the measure of the quantity of evidence. The quantity of evidence needed is affected by
the quality of such evidence (the higher the quality, the less may be required). However, merely obtaining
more evidence may not compensate for its poor quality.

2. Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit
engagement?
a. Analysis of balance sheet accounts.
b. Analysis of income statement accounts.
c. All matters of continuing accounting significance.
d. Facts that might bear on the integrity of management. (AICPA ADAPTED)

Answer: D

3. ____________ is the measure of the quality of evidence.

Answer: Appropriateness
Appropriateness is the measure of the quality of evidence, that is, its relevance and its reliability. The
reliability of evidence is influenced by its source and by its nature.

4. The powers and functions of the BSP shall be exercised by the

a. Board of Directors
b. Monetary Board
c. Board of Trustees
d. BSP Governor

Answer: B

5. Which of the following threats to compliance with the fundamental principles may occur as a result of
the financial or other interests of a professional accountant or of an immediate or close family member?
a. Familiarity
b. Advocacy
c. Self-interest
d. Self-review

Answer: C

Self-interest threat is the threat that a financial or other interest will inappropriately influence the
professional accountant’s judgment or behavior.

6. Which of the following is not a contingent fee?

a. A fee that is dependent upon the approval of the assurance client’s loan application.
b. An audit fee that is based on 5% of the client’s adjusted net income for the current year.
c. A fee that is fixed by a court or other public authority.
d. An arrangement whereby no fee will be changed unless specified finding or result is attained.

Answer: C
 As defined in the Code, a contingent fee is “a fee calculated on a predetermined basis relating to the
outcome of a transaction or the result of the services performed by the firm.” A fee that is established
by a court or other public authority is not a contingent fee.

7. These are procedure performed in order to detect material misstatements at the assertion level, including
tests of details of account balances, classes of transactions, and disclosures, and substantive analytical
procedures.

Answer: Substantive tests

8. Opportunities to misappropriate assets to 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.

Answer: D

Fraud risk factors are classified according to the three conditions generally present when fraud exists:
(1) incentives/pressures, (2) opportunities, and (3) attitudes/rationalizations.

Opportunities to misappropriate assets increase when there are:

 Inventory items that are small in size, of high value, or in high demand.
 Large amounts of cash on hand.
 Easily convertible assets, such as bearer bonds, computer chips, or diamonds.
 Fixed assets which are small in size, marketable, or lacking observable identification of
ownership.

Answers A, B, and C are incorrect because they may create adverse relationships between the entity and
employees that may motivate them to misappropriate the entity’s assets.

9. In determining whether the work of the internal auditors is likely to be adequate for purposes of the
audit, the external auditor shall evaluate the internal auditors
a. Competence and objectivity
b. Independence review skills
c. Efficiency and experience
d. Training and supervisory skills

Answer: A

10. The responsibility for the prevention and detection of noncompliance rests with
a. The auditor
b. Management
c. The auditor’s lawyer
d. The client’s lawyer

Answer: B

PSA 250 states that it is management’s responsibility to ensure that the entity’s operations are conducted
in accordance with laws and regulations
 DIFFICULT

1. 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

Answer: A

Tests of controls ordinarily include inquiry, observation, inspection, and reperformance of policy or
procedure that pertains to assertion.

Answers B, C, and D are incorrect because they include procedures which are more closely associated
with substantive testing – namely, analytical procedures, comparison, confirmation, and verification

2. A candidate who obtains the rating of seventy-five percent (75%) and above in at least a majority of the
subjects shall receive a conditional credit for the subjects passed. He/she shall take an examination in
the remaining subjects within how many years from the preceding examination? ____ years
Answer: 2

3. The Professional Identification Card issued to successful examinees

a. Is renewable every three years.
b. Is renewable every five years.
c. Shall remain in full force and effect until withdrawn, suspended or revoked in accordance with RA
9298.
d. Shall bear the signature of the PRC Chairperson and the Chairman and Members of the Board of
Accountancy.

Answer: A

Section 20 of the IRR provides that a Professional Identification Card bearing the registration number,
date of issuance, expiry date, duly signed by the Chairperson of the PRC, shall be issued to every
registrant. It provides further that the reissuance or renewal of the said card shall be subject to payment
of the annual registration fees for another and every after three (3) years thereafter.

4. The auditor should perform the following risk assessment procedures to obtain an understanding of the
entity and its environment, including its internal control, except:
a. Inquiries of management and others within the entity.
b. Inquiries of the entity’s external legal counsel or of valuation experts that the entity has used.
c. Analytical procedures.
d. Observation and inspection.

Answer: B

5. As defined in Annex “C” of the IRR, this refers to the inculcation, assimilation and acquisition of
knowledge, skills, proficiency and ethical moral values, after the initial registration of a professional that
raise and enhance the professional’s technical skills and competence.

Answer: Continuing Professional Education

6. Which of the following is an example of engagement-specific safeguards in the work environment?
a. Advising partners and professional staff of those assurance clients and related entities from which
they must be independent.
b. Disclosing to those charged with governance of the client the nature of services provided and extent
of fees charged.
c. A disciplinary mechanism to promote compliance with the firm’s policies and procedures.
d. Published policies and procedures to encourage and empower staff to communicate to senior levels
within the firm and issue relating to compliance with the fundamental principles that concerns them.

Answer: C

A, B and D are all firm-wide safeguards.

7. Independence in ______________ is the avoidance of facts and circumstances that are so significant
that a reasonable and informed third party, would be likely to conclude, weighing all the specific facts
and circumstances, that a firm’s, or a member of the audit team’s, integrity, objectivity or professional
skepticism had been compromised.
Answer: Appearance
The other one is the independence in mind which is the state of mind that permits expression of a
conclusion without being affected by influences that compromise professional judgment, thereby allowing
an individual to act with integrity, and exercise objectivity and professional skepticism.

8. When the auditor identifies a misstatement in the financial statements, the auditor should consider
whether such misstatement may be indicative of fraud and if there is such an indication, the auditor
should.
a. Consider the implications of the misstatement 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.

Answer: A

PSA 240 requires the auditor to consider the implications of the misstatement in relation to other aspects
of the audit, particularly the reliability of management representations.

9. If the auditor concludes that the noncompliance has a material effect on the financial statements, and
has not been properly reflected in the financial statements, the auditor should express
a. A qualified or an adverse opinion
b. A qualified opinion or a disclaimer of opinion
c. A disclaimer of opinion
d. An unmodified opinion

Answer: A

10. Due professional care requires

a. A critical review of the work done at every level of supervision.
b. The examination of all corroborating evidence available.
c. The exercise of error-free judgment.
d. A consideration of internal control structure that includes tests of controls.

(AICPA ADAPTED)

Answer: A
 FINAL ROUND

1. If the auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate
whether non-compliance that may be material to the financial statements, has, or is likely to have,
occurred, the auditor should express
a. A qualified opinion or an adverse opinion
b. A qualified opinion or a disclaimer of opinion
c. An unmodified opinion
d. An adverse opinion or a disclaimer of opinion

Answer: B

2. The auditor’s understanding of the entity and its environment consists of an understanding of
the following aspects:
I. Industry, regulatory, and other external factors, including the applicable financial reporting
framework.
II. Nature of the entity, including the entity’s selection and application of accounting policies.
III. Objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements.
IV. Internal control.
V. Measurement and review of the entity’s financial performance.

Answer: I, II, III, IV and V

3. Which of the following controls is often lacking in a retail cash sales environment?
a. Segregation of functions
b. Competent personnel
c. Monitoring
d. Access to assets limited to authorized personnel

Answer: A

In a retail cash sales environment, the sales clerk ordinarily authorizes and records the transactions and
has custody of assets. But the apparent lack of proper segregation of functions is compensated by
controls such as close supervision of the cash receipts function, the use of cash registers that limits
access to assets, and an effective internal recording function that maintains control over cash receipts.

4. Which of following most likely would not be considered an inherent limitation of internal control?
a. Management override
b. Incompatible functions
c. Mistakes in judgment
d. Collusion among employees

Answer: B

The performance of incompatible functions is not an inherent limitation of internal control but a failure
to segregate functional responsibilities properly

5. Safeguards created by the profession, legislation or regulation include the following, except
a. Continuing professional development requirements.
b. Professional standards
c. Firm-wide and engagement specific safeguards
d. Educational, training and experience requirements for entry into the profession

Answer: C
 Firm-wide and engagement specific safeguards are safeguards in the work environment.

6. Inherent risk and control risk differ from detection risk in that they
a. Arise from the misapplication of auditing procedures.
b. May be assessed in either quantitative or nonquantitative terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditor’s discretion.
Answer: C
7. The relationship between acceptable level of detection risk and the combined level of inherent
and control risk is
a. Direct b. Inverse c. Parallel d. Independent

Answer: B

8. Which of the following is incorrect regarding PSA 315?

a. The purpose of this PSA is to establish standards and to provide guidance on obtaining an
understanding of the entity and its environment, including its internal control, and on assessing the
risks of material misstatement in a financial statement audit.
b. This PSA requires the auditor to make risk assessments at the financial statement and assertion
levels based on an appropriate understanding of the entity and its environment, including its internal
control.
c. The requirements and guidance of this PSA are to be applied in conjunction with the requirements
and guidance provided in other PSAs.
d. This PSA discusses the auditor’s responsibility to determine overall responses and to design and
perform further audit procedures whose nature, timing, and extent are responsive to the risk
assessments.

Answer: D

9. Give the audit risk model.

Answer: AR = IR x CR x DR

10. The audit risk model consists of: AR = IR x CR x DR

The detection risk is the dependent variable. What is the acceptable level of detection risk if the assessed
level of Inherent risk is High and the Control risk is Low?
a. Highest b. Medium c. Lower d. Higher

Answer: B
 CLINCHER

1. Tracing bills of lading to sales invoices provides evidence that billed sales were shipped. (FALSE)
2. Assessing control risk below maximum involves concluding that controls are ineffective. (FALSE)
3. Because of the cost/benefit relationship, tests of controls may be applied on a test basis in some
circumstances. (TRUE)
4. Vendors’ statements and vendors’ invoices are both relatively reliable evidence because they originate from
a third party. (TRUE)
5. When a company has changed auditors, the predecessor auditor has no responsibility to initiate contact with
the successor auditor, even when the predecessor is aware of matters bearing on the integrity of
management. (TRUE)
6. Which of the following has the power to conduct an oversight into the quality of audits of financial
statements through the review of the quality control measures instituted by auditors?
a. Bureau of Internal Revenue
b. Securities and Exchange Commission
c. Board of Accountancy
d. Insurance Commission

Answer: C

Under RA 9298, BOA has the power to conduct an oversight into the quality of audits of financial
statements through a review of quality control measures instituted by auditors in order to ensure
compliance with the accounting and auditing standards and practices

7. In the financial statement audit of listed entities, the engagement partner and the individual responsible for
the engagement quality control review should be rotated after serving in either capacity, or a combination
thereof, for a pre-defined period, normally no more than
a. 5 years
b. 7 years
c. 10 years
d. 6 years

Answer: A

The Code states that such an individual rotating after a pre-defined period should not participate in the
audit engagement until a further period of time, normally two years, has elapsed.

8. The operation of the Quality Assurance Review Department (QARD) of the PICPA shall be supervised by
a/an
a. Executive Committee
b. Supervisory Board
c. Oversight Committee
d. Accountability Board

Answer: A

Section 5 provides, “ The Executive Committee shall have the full power and authority to set policies and
to supervise the operation of QARD.”
9. Which of the following is not a function of the Bangko Sentral ng Pilipinas?
a. Recommend measures to improve the efficiency and effectiveness of government operations
b. Supervise banks and exercise regulatory powers over non-bank institutions performing quasi-bank
functions
c. Determine the exchange rate policy of the Philippines
d. Extend discounts, loans, and receivables to banking institutions for liquidity purposes

Answer: A

To recommend measures to improve the efficiency and effectiveness of the government operations is one
of the principal duties of COA

10. The BSP Monetary Board is composed of seven (7) members appointed by the President of the Philippines
for a term of
a. 6 years
b. 5 years
c. 7 years
d. 3 years

Answer: A

Sec. 6 of the New Central Bank Act (RA 7653) states that the powers and functions of the BSP shall be
exercised by the BSP Monetary Board composed of seven members appointed by the President of the
Philippines for a term of six (6 years)

11. Which of the following would an auditor most likely use in determining a preliminary judgment about
materiality?
a. The contents of the management representation letter
b. The anticipated sample size of the planned substantive tests.
c. The entity’s annualized interim financial statements.
d. The results of internal control questionnaire

Answer: C

The measurement of the preliminary materiality level usually relates to an annual figure.

12. 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

Answer: D

The standard prohibits the auditor to refer to the expert’s work when issuing an unmodified auditor’s
report because such a reference might be misunderstood to be a qualification of the auditor’s opinion or
division of responsibility, neither of which is intended
13. It is the process designed, implemented and maintained by those charged with governance, management,
and other personnel to provide reasonable assurance about the achievement of the entity’s objective
a. Internal Auditing
b. Internal control
c. Business strategy
d. Accounting process

Answer: B

PSA 315 states that internal control is designed and implemented to achieve the entity’s objectives with
regard to:

 Reliability of financial reporting

 Effectiveness and efficiency of operations
 Compliance with applicable laws and regulations

14. Which of the following internal control components relates to an entity’s process for identifying and
responding to business risks?
a. Control activities
b. Information and communication
c. Risk assessment
d. Monitoring of controls

Answer: C

PSA 315 states that the entity’s risk assessment process forms the basis for how the management
determines the risks to be managed

15. 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.

Answer: A

Sound internal control procedures dictate that all receipts of merchandise should be initially handled by
receiving department personnel. Receiving reports must be prepared for all goods received.