Auditing Theory

1. The auditor communicate the results of his work through the medium of the
a. Engagement letter
b. Audit report
c. Management letter
d. Fnancial statements

2. Which of the following types of auditing is performed most commonly by CPA's on a

contractual basis?
a.Internal auditing
b. Income tax auditing
c. Government auditing
d. External auditing

3. An examinationof part of an organizatio's procedures and methods for the purpose of

evaluating efficiency and effectiveness is what type of audit/
a. Operational audit
b. Compliance audit
c. Fiancial statements audit
d. Production audit

4.Independent external auditing can best be described as a

a. Professional activity that measures and comunicates financial accounting data
b. Subset of accounting
c. Professional activity that attests to the fair presentation of financial statements.
d. Regulatory activity that prevents the issuance of misleading financial information

5. Which of the following has the primary responsibility for the fairness of the presentations
made in the financial statements?
a. Client's management
b. Audit committee
c. Independent auditor
d. Board of Accountancy

6. By providing high level of assurance on audit reports on financial statements, the auditor
a. Guarantees the fair presentation of the financial statements
b. Confirms the accuracy of the financial statements
c. Enhances the credibility of the financial statements
d. Assures the readers that fraudulent activities of employees have been detected

7. Which of the following is one of the limitation of an audit/

a. The possibility that management may prevent the auditor from performing the necessary
audit procedures.
b. The likelihood that the auditor may not be able to detect material mistatements in the financial
statementsbecause the auditor engaged only after year-end
c. The fact the most of audit eveidence is persuasive rather than conclusive in nature
d. The risk that the auditor may not possess the training and proficiency required by the
engagement

8. The need for independent audits of financial statements can be attributed to all of the
following conditions except:
a. Remoteness
b. Consequence
c. Complexity of subject matter
d. Validity

9. Which of the following is one of the limitations of an audit/

a. Nature of evidence obtained
b. Inadequacy of accounting record
c. Confedentiality of information
d. Scope limitations imposed by the entity

10.The procedures deemed necessary in the circumtances to achieve the objective of a

financial statement audit shall be determined by the
a. Client management
b. Independent auditor
c. Internal auditor
d. Those charged with governance

11. Requirements for training independence and due professional care are included in which
group of generally accepted auditing standards/
a. Fieldwork
b. General
c. Reporting
d. Quality control

12. Under GAAS, which of the following reflects a concept from the general group?
a. The confirmation of account receivable
b. Completing an internal control questionnaire
c. The initial planning of the audit with the audit partner , manager, senior, staff and client
personnel
d. The assignment of audit personnel to an engagement where they have no financial interest

13. What is the general character of the three generally accepted auditing standards classified
as general standards?
a. Criteria for competence, independence, and professional care of individuals performing the
audit.
b. Criteria of evidence gathering.
c. Criteria for the content of the auditors' report on financial statements and related footnote
disclosures.
d. The requirements for the planning of the audit and supervision of assistants, if any.

14. Which of the following does not pertain to the standards of fieldwork?
a. Adequate planning and supervision.
b. Obtaining sufficient competence evidential matter.
c. Proper study and evaluation of internal control as a basis for reliance thereon.
d. Technical training and proficiency.

15. The standard of due audit care requires the auditor to

a. Make perfect judgement decisions in all cases.
b. Ensure that the financial statements are free from error.
c. Possess skills clearly above the average for the profession.
d. Apply judgement in a conscientious manner, carefully weighing the relevant factors before
reaching a decision.

16. The third standard of field work states that sufficient competent evidential matter may in part
be obtained through the following methods except
a. Inspection
b. Observation
c. Confirmation
d. Reconciliation

17. The third generally accepted standard in auditing refers to

a. Whether financial statements are presented in conformity with GAAP.
b. Whether accounting principles have been consistently observed.
c. Adequacy of disclosures.
d. An expression of opinion on the financial statements taken as a whole.

18. The auditor is not liable to his client for

a. Negligence
b. Fraud
c. Dishonesty
d. Errors in application of judgment.

19. An auditor need not abide with a specific requirements of PSA if the auditor believes that:
a. The amount is insignificant.
b. The requirement of the PSA is impractical to perform.
c. The requirement of the PSA is impossible to perform.
d. Any of the given three choices is correct.

20. Based on the structure of AASC pronouncements, related services include?

a. Assurance-Yes; Review-Yes; Agreed upon procedures-No; Compilation-No
b. Assurance-No; Review-No; Agreed upon procedures-Yes; Compilation-Yes
c. Assurance-Yes; Review-Yes; Agreed upon procedures-Yes; Compilation-No
d. Assurance-No; Review-Yes; Agreed upon procedures-Yes; Compilation-Yes

21. The failure of the auditor to meet the requisites of PSA is

a. An accepted practice.
b. A suggestion of negligence.
c. An evidence of negligence.
d. Tantamount to criminal behavior.

22. Which of the following is one of the elements of a CPA firm's quality control system?
a. Leadership responsibilities.
b. Computer assisted audit techniques.
c. Control activities.
d. Control environment.

23. A quality control policy that requires personnel in the firm to adhere to independence,
integrity, objectivity, confidentiality and professional behavior, relates to
a. Ethical Requirements
b. Human resources
c. Assignment
d. Consultation

24. In pursuing a CPA firm's quality control objectives, a CPA firm may maintain records
indicating which partners or employees of the CPA firm were previously employed by the CPA
firm's clients. Which quality control element would this be most likely to satisfy?
a. Monitoring
b. Assignment
c. Independence
d. Skills and competence

25. A procedurein which a quality control partner periodically tests the application of quality
control procedures is most directly related to which quality control element?
a. Engagement performance
b. Independence, integrity, and objectivity
c. Monitoring
d. Personnel management

26. Maintaining or providing access to adequate reference libraries and other authoritative
sources is a procedure that is most likely performed to comply with the policy of
a. Monitoring
b. Skills and competence
c. Consultation
d. Assignment

27. In compliance with the element of human resources, the firm should address issues relating
to
a. Engagement performance
b. Assignment of engagement teams
c. Consulation
d. Differences of opinion

28. In connection with the elements of assignment, a CPA firm's system of quality control should
ordinarily establish procedures that
a. Provide adequate supervision at all levels, considering the training, ability and experience of
the personnel assigned.
b. Encourage personnel to use authoritative sources on complex or unusual matter.
c. Require preparation of time budgets for audits to determine manpower requirements and to
schedule the audit work.
d. Establish qualifications deemed necessary for various levels of responsibility within the firm.

29. It involves a study or appraisal by the Board or its duly authorized representatives, of the
quality of audit of financial statements through an evaluation of the quality control measures
instituted by the CPA firm to ascertain compliance with ethical and technical standards of public
practice.
a. Quality review
b. Peer review
c. Compliance audit
d. External audit

30. Which of the following is responsible for establishing auditing standards that will become
generally accepted in the Philippines?
a. Securities and Exchange Commission
b. Financial Reporting Standards Council
c. Commission on Audit
d. Auditing and Assurance Standards Council

31. The level of assurance provided by an audit of detecting a material misstatement is referred
to as:
a. Reasonable assurance.
b. Moderate assurance.
c. Absolute assurance.
d. Negative assurance.

32. Which of the following statements best describes the auditor's responsibility regarding the
detection of material errors and frauds?
a. The auditor is responsible for the failure to detect material errors and frauds only when such
failure results from the misapplcation of PSA.
b. The audit should be designed to provide reasonable assurance that material errors and
frauds will be detected.
c. The auditor is responsible for the failure to detect material errors and fraud only when the
auditor fails to confirm receivables or observe inventories.
d. Extended auditing procedures are required to detect unrecorded transactions even if there is
no evidence that material errors and frauds may exist.

33. Which of the following is an example of an error?

a. Defalcation
b. Suppression or omission of the effects of transactions from the records or documents.
c. Recording of transactions without substance.
d. Misapplication of accounting policies.

34. Which one of the following terms relates to the embezzling of receipts?
a. Manipulation
b. Misrepresentation
c. Misappropriation
d. Misapplication

35. If several employees collude to falsify documents, the chance a normal audit would uncover
such acts is:
a. Very low.
b. Very high.
c. Zero.
d. None of the above.

36. Individuals who commit fraud are ordinarily able to rationalize the act and also have an
a. Incentive-Yes ; Opportunity-Yes
b. Incentive-Yes ; Opportunity-No
c. Incentive-No ; Opportunity-Yes
d. Incentive-No ; Opportunity-No

37. What is an auditor's responsibility who discovers that management is involved in a

potentially immaterial fraud?
a. Report the fraud to the audit committee.
b. Report the fraud to the SEC.
c. Report the fraud to a level of management at least one level below those involved in the
fraud.
d. Determine that the amounts involved are immaterial, and if so, there is no reporting
responsibility.

38. Which of the following statements about noncompliance is incorrect?

a. An audit in accordance with PSA cannot be expected to detect all noncompliance with laws
and regulations.
b. It is management's responsibility to ensure that entity's operations are conducted in
accordance with laws and regulations.
c. An auditor cannot be held responsible for preventing noncompliance.
d. The determination of whether a particular act constitutes noncompliance is ultimately based
on the judgment of the auditor.

39. An auditor who discovers that client has not complied with laws and regulations that has a
material effect on the financial statements most likely would withdraw from the engagement if
the
a. Noncompliance was a violation of PFRS.
b. Client does not take remedial action that the auditor considers necessary.
c. Noncompliance was committed last year when financial statements were not audited.
d. Auditor has already assessed control risk at the maximum level.

40. Which of the following procedures would assist the auditor in identifying noncompliance with
laws and regulations?
a. Inquiring from the client's lawyers.
b. Inspecting correspondence with relevant regulatory agencies.
c. Inquire of management concerning entity's policies and procedures regarding compliance
with laws and regulations.
d. Discuss with the client management the policies or procedures adopted for identifying,
evaluating and accounting for litigation, claims and assessments.

41. The responsibility for the preparation of the financial statements and the accompanying
footnotes belongs to:
a. The auditor.
b. Management.
c. Both management and the auditor equally.
d. Management for the statements and the auditor for the notes.

42. This assertion addresses whether all transactions that should be included in the financial
statements are in fact included.
a. Occurence
b. Completeness
c. Rights and obligations
d. Existence

43. In resting for cutoff, the objective is to determine:

a. Whether all of the current period's transactions are recorded.
b. Whether transactions are recorded in the correct accounting period.
c. The proper cutoff between capitalizing and expensing expenditures.
d. The proper cutoff between disclosing items in footnotes or in account balances.

44. When auditors use documentation to support recorded transactions and amounts, the
process is usually called:
a. Tracing
b. Confirmations
c. Vouching
d. Reperformance

45. Which of the following is the correct order of steps in the audit process?
A. Perform tests of control
B. Develop an overall strategy for the expected conduct and scope of the audit
C. Obtain client's written representation
D. Prepare engagement letter
E. Perform substantive tests

a. D,A,B,E,C
b. D,B,A,E,C
c. D,B,C,A,E
d. D,B,E,A,C

46. Before accepting an engagement to audit a new client, a CPA is required to obtain
a. An understanding of the prospective client's industry and business.
b. The prospective client's signature to the engagement letter.
c. A preliminary understanding of the prospective client's control environment.
d. The prospective client's consent to make inquiries of the predecessor auditor, if any.

47. An incoming auditor should request the new client to authorize the predecessor auditor to
allow a review of the predecessor's
a. Engagement letter-Yes ; Working Paper-Yes
b. Engagement letter-Yes ; Working Paper-No
c. Engagement letter-No ; Working Paper-Yes
d. Engagement letter-No ; Working Paper-No

48. Which of the following matters is generally included in an auditor's engagement letter?
a. Management's responsibility for the entity's compliance with laws and regulations
b. The factors to be considered in setting preliminary judgments about materiality
c. Management's explicit liability for illegal acts committed by its employees
d. The auditor's responsibility to search for significant internal control deficiencies

49. An engagement letter would not normally include

a. Billing arrangement
b. Arrangement concerning client's assistance
c. Details of the procedure that will be performed
d. Expectation of receiving a representation letter from management

50. When the auditor of a parent entity is also the auditor of its subsidiary, branch or division
(component); which of the following factors would least likely influence the auditor's decision to
send separate letter to a component of a parent entity?
a. Geographical location of the component.
b. Legal requirements.
c. Degree of ownership by parent.
d. Degree of independence of component's management.

51. For assurance engagements regarding historical financial information, reasonable

assurance engagements are called
a. Audits
b. Reviews
c. Compilations
d. Examinations

52. Criteria that are embodied in laws or regulations, or issued by authorized or recognized
bodies of experts that follow a transparent due process are called
a. Suitable criteria
b. Established criteria
c. Specifically developed criteria
d. General criteria

53. The following are components of assurance engagement risk, except

a. Inherent risk
b. Control risk
c. Detection risk
d. Business risk

54. Which of the following standards are to be applied, as appropriate, in the audit of historical
financial information?
a. PSREs
b. PSAEs
c. PSRSs
d. PSAs
55. The Philippine Standars on Quality Control (PSQC's) are to be applied to
a. Assurance engagements only.
b. Review engagements only.
c. Compilation and review engagements only.
d. All services that fall under the AASC's engagement standards.

56. The auditor's satisfaction as to reliability of an assertion being made by one party for use by
another partyy is called
a. Opinion
b. Assurance
c. Examination
d. Verification

57. 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

58. What level of assurance is provided by the practitioner in a review management?

a. No assurance
b. High, but not absolute
c. Reasonable
d. Moderate

59. 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

60. Which of the following groups could be involved in an operational audit?

a. CPA Firms-Yes ; Internal Auditors-Yes ; Government Auditors-Yes
b. CPA Firms-Yes ; Internal Auditors-No ; Government Auditors-No
c. CPA Firms-No ; Internal Auditors-No ; Government Auditors-Yes
d. CPA Firms-Yes ; Internal Auditors-Yes ; Government Auditors-No

61. A firm should establish and maintain a system of quality control to provide it with reasonable
assurance that:
I. The firm and its personnel comply with professional standards and applicable
legal and regulatory requirements.
II. Reports issued by the firm or engagement partners are appropriate in the
circumstances.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

62. 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?
a. Ethical Requirements-No ; Human Resources-Yes ; Engagement Performance-No
b. Ethical Requirements-Yes ; Human Resources-No ; Engagement Performance-No
c. Ethical Requirements-Yes ; Human Resources-Yes ; Engagement Performance-Yes
d. Ethical Requirements-No ; Human Resources-No ; Engagement Performance-Yes

63. As defined in PSQC 1, ________ is a process comprising an ongoing consideration and

evaluation of the firm's system of quality contro;, including a periodic inspection of a selection of
completed engagements, designed to provide the firm with reasonable assurance that its
system of quality control is operating effectively.
a. Monitoring
b. Inspection
c. Engagement quality control review
d. Supervision

64. Which element of a system of quality control is addressed by the establishment of policies
and procedures designed to provide the firm with reasonable assurance that it has sufficient
personnel with the competence, capabilities, and commitment to ethical principles?
a. Monitoring
b. Leadership responsibilities for quality within the firm
c. Human resources
d. Engagement performance

65. In pursuing a firm's quality control objectives, a firm should adopt policies and procedures to
enable it to identify and evaluate circumstances and relationships that create threats to
independence, and to take appropriate action to eliminate those threats or reduce them to an
acceptable level by applying safeguards, or, if considered appropriate, to withdraw from the
engagement. Which qality control element would this be most likely to satisfy?
a. Ethical requirements
b. Monitoring
c. Human resources
d. Leadership responsibilities

66. The nature, timing, and extent of an audit firm's quality control policies and procedures
depend on
a. The CPA Firm's Size-Yes ; The Nature of the CPA Firm's Practice-Yes ; Appropriate
Cost-Benefit Considerations-No
b. The CPA Firm's Size-Yes ; The Nature of the CPA Firm's Practice-Yes ; Appropriate
Cost-Benefit Considerations-Yes
c. The CPA Firm's Size-No ; The Nature of the CPA Firm's Practice-No ; Appropriate
Cost-Benefit Considerations-No
d. The CPA Firm's Size-Yes ; The Nature of the CPA Firm's Practice-No ; Appropriate
Cost-Benefit Considerations-Yes

67. For audits of financial statements of listed entities, the engagement partner should not issue
the auditor's report until the completion of the
a. Engagement Quality Control Review
b. Management Review
c. Engagement Team Review
d. Engagement Partner Review

68. Who should take responsibility for the overall quality on each audit engagement?
a. Engagement quality control reviewer
b. Engagement partner
c. Engagement team
d. CPA firm

69. The engagement partner should take responsibility for the direction, supervision, and
performance of the audit engagement in compliance with professional standards and regulatory
and legal requirements, and for the auditor's report that is issued to be appropriate in the
circumstances. Supervision includes the following, except
a. Tracking the progress of the audit engagement.
b. Addressing significant issues arising during the audit engagement, considering their
significance, and modifying the planned approach appropritely.
c. Informing the members of the engagement team of their responsibilities.
d. Identifying matters for consultation or consideration by more experienced engagement team
members during the audit engagement.

70. PSA 220 requires the engagement partner to consider whether remembers of the
engagement team have complied with the ethical requirements relating to audit engagements.
The Code of Ethics 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
d. I, II, III, IV, and V

71. 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 control reviewer.
c. Not issue the auditor's report until the completion of the engagement quality control review.
d. All of the above.

72. The implementation of quality control procedures that are applicable to the individual audit
engagement is the responsibility of the
a. CPA firm
b. Engagement quality control reviewer
c. Engagement team
d. Expert contracted by the firm in connection with the audit engagement

73. A firm's system of quality control should ordinarily rovide for the maintenance of
a. A file of minutes 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.

74. 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.

75. The following statements relate to the engagement partner's responsibility to conduct timely
reviews of the audit documentation to be satisfied that sufficient appropriate evidence has been
obtained to support the coclusions reached and for the auditor's report to be issued. Which is
false?
a. The engagement partner's review of the audit documentation allows significant matters to be
resolved on a timely basis to his/her satisfaction before the auditor's report is issued.
b. The engagement partner should review all audit documentation.
c. The engagement partner should document the extent and timing of the reviews.
d. The reviews cover critical areas of judgment, especially those relating to difficult or
contentious matters identified during the course of the engagement, significant risks, and other
areas the engagement partner considers important.