CPA REVXEW SCHOOL OF THE PHILIPPINES

Manila

AUDITING THEORY JULY 27,20L3

FIRST PREBOARD EXAMINATIOII SATURDAY, 3:30PM - 5:00PM

SET A
INSTRUCTIONS: CHOOSE THE BESI"ANSWER FOR EACH OF THE FOLLOWING. FULLY
SHADE ONLY ONE BOX FOR EACH ilEM, STRITI-LY NO ERASURES ALLOWED.

D 1. The primary reason for an audit by ar, lndeperrdent, external audit firm is to
A. Relieve management of responsii:ili*y for ihe financial staternents
B. Guarantee thlt there are no missurternents the financial statements and ensure that
any fraud will be discovered.
C. Satisff government regulatory requlrernents.
D. providelncreased assurance to users as to the fairness of the financial statements'

D 2. An independent auditor must have whicir of the following?

A. A pie-existing and well-informed point of view with respect to the audit.
B. A background in many different disciplines.
C. Fxperience in taxatiorr that is sufficiei"rt to comply with Philippine Standards on
Auditing.
D. Technical qualifications to peform an engagement.

D 3. Which of the following statemenLs applies to consultation services engagements?

A. A practitioner should obtain an understaniJing of the internal control to assess control
risk.
B. A practitioner is not permitted to compile a financial forecast.
C. A practitioner is to maintain an appearance of independence.
D. A practitioner should obtain sufficient relevant data to complete the engagement'

C 4. Upon discovering material misstaterienLs in a client's financial statements that the client
would not revise, a predecessor auditor withdretv from the engagement' If asked by the
auditor about the termination of the engagement, the predecessor auditor should
A. Indicate that a misunderstanding occurred'
B. State that he/she found material misstatements that the client would not revise.
C. Suggest that the auditor obtain the ellentk permission to discuss the reasons.
D. Suggct that the auditor ask the client.
D 5. An auditor is planning an audit engagrment for a new client in a business unfamiliar to
the aud'rtor. Which G tne least useful sotrrce of information for the auditor during the
preliminary planning stage when the aui";!:or is trying to obtain an understanding of the
entity and its environment?
A. Inquiries of intemal auditing personnel.
B. Observation of the entity's activities.
C. Inspections of documented buslness plans.
D. Results of performing substantive proredttrer.
6. According to professional standards, analyl-ical procedures are least likely to be applied to
C
A. Plan an audit and assist in the finai revit'u,;.
B" Test disclosures about rcportable operatinc segments.
C. Compile financial statements.
D. Review financial statements or int-erin: fiirancial informatlon.

Page 1" of 1 2 Pages

 cPA REVIEV\I SCHOOL OF THE PFITUPPINES (CPAR) * MANitA FTRST PR"EBOARD EHMIT{ATIOI{
AUDMI{G THEORY JULY 27. 2013/ SATURDAY I 3:30PM - 5:00PM

B 7. Three conditions are generally present in the clientt organizaUon when fraud occurs.
Those conditions include each of the following except a/an
A. Incentive or pressure to commit fraud"
B. Professional skepticism about the likelihood of fraud.
C. Attitude or rationalization about the act of ftaud.
D. Opportunity to commit fraud.

A 8. Internal auditing can affect the scope of the external auditor's audit of financial
statements by
A. Decreasing the external auditor's need to perforrn detailed tests.
B. Eliminating the need to be on hand during the physical count of inventory.
C. Limiting direct testing
Hindi ka the external
by pwedeng ar:ditor
magrely to assertions
TOTALLY dun sa mganot directly
natest tested
na ng by
Internal Auditor,
internal audiUng. pero pwedeng LESS DETAILED na lang yung gawin mo.
D. Allowing the external auditor to limit hislher audit to substantive testing.

B 9. Which of the following is an unusual procedure that may be deemed necessary to discover
the effect of a related-parlry transactir.,n?
A. Inspect or confirrr the trcnsferabriify and value of collateral.
B. Confirm or discuss significant information with intermediaries, such as banks,
guarantors, or agents.
C. Examine invoices and other pertinent docrrments such a receiving or shipping reports.
D. Determine whether the transaction has bten approved by the board of directors or
other appropriate officials.

B 10. In evaluating the reasonableness of an aecriunting estimate, an auditor is rnost likely to

concentrate on key factors and assumptions that are
A. Consistent with prior periods.
B. Deviations from historical pattems.
C. Similar to industry guidelines.
D. Objective and not susceptible to bias.

A 11. Directors, management, external auditors, and interrral auditors all play important roles in
creating proper control processes. Senior rnanagement is primarily responsible for
A. Establishing risk management and conftol processes.
B. Implementing and monitoring controls clesigned by the board of directors.
C. Ensuring that external and internal auditors oversee the administration of risk
management and control processes.
D. Reviewing the reliability and integrity of financial and operational information.
B L2. Why do auditors generally use a sampline appr<iacl-r to evidence gathering?
A. Auditors are eryerts and do not neecr to loo( at much to know whether the financial
statements are correct or not.
B. Auditors must balance the cost of the audit tt'ith the need for precision.
C. Auditors must limit their exposure to their client to maintain Independence.
D. The auditor's relationship with the cllent is generally adversarial, so the auditor will not
have access to all of the financial inforrnation of the company.

A 13. An investor is reading the financial statements cf the Staquio Corporation and observes
that the statements are accompanied by arr auditor's unmodified report. From this, the
investor may conclude that
A" Any disputes over significant accounting issues have been settled to the auditor's
satisfaction.
B. The auditor is satisfied that Staquio will be hlghly profitable in the future.
C. The auditor is certain that Staquls's financial statements have been prepared
accurately and that all account balances are nrecisely correct.
D. The auditor has determined that Staquro's rnanagement is not qualified to lead the
company.
 cpA REVTEW SCHtr;L iir rHE pHIUppINES (CPAR) - MANIIS FrRST PR.EBOAR.D EXAi'll1{ATrOt{
lUOmtte tXeonv JULY 27' 2013 / SATURDAY I 3:30PM - 5:00PM

B 14. With regard t0 detecting fraud, auditing standards require auditors to

A. perform procedurei designed to deteet af! instances of fraud that rnight affect the
financial statements.
B. Provide reasonable assu!'ance that the financial statements are not materially
misstated hecause of fraud"
C. Issue an unmodifled opinion only when the auditor is satisfled that no instances of
fraud have occurred.
D. Design the audit program to meet financial staternent users' expectations concerning
fraud.

C 15. Internal control is a function of manaEement and effective control is based upon the
concept of charge and discharge of resfionsibility and duty. Which of the following is one
overriCing principics cf internal control?
of the _______ principal/chief
A. Responsibrliiy' for accounting and financial duties should be assigned to one
responr;ible o.fflcer.
B. Responslbilitr,,fcr the accgunting duties must be borne by the audit committee.
c. Responsibilfi"y for the performance of each duty must be fixed.
D. Responsibitity for accounting must be assigned only to honded ernployees'
D 16. When engageri to compile the financiai statements of an entity, an accountant is required
i
to possesi ievel of kncwledge of the entity's accounting principles and. practices. This
requirement n;cst likely will inctude obtaining a general understanding of the
A. Internal control awareness of the entity'.s senior management.
B. Risk factors relating to misstaten'lents arising from lllegal acts'
C. Design of the entity's internal controls innplemented.
D. Nature of the entity's business transactions, the form of its accounting records and the
accounting basis on which the tinancial inforrnation is to be presented'

C L7, Which of the foltowing procedures

'an would a CPA ordinarily perform when reviewing the
financial statement* of entity 'in accordance with Philippine Standards on Review
Engagenrents (PSRES)?
-Document
A. whethen control risk is assessed at or below the maximum levei.
B. Obtain an unierskrnding of the entity's internal control components.
c. compare the fir.lancial statements with budEets or forecasts.
D. Apply '/ear-encl cutoff tests for the sales and purchasing functions.

D 18. In an assurancf; engagement, the responsible pafi and the intended users
A, Should L're from different entities.
B. Should be from the same entity.
C. Are both responsible for determining the nature, timing and extent of the procedures
to be perf<lrmed.
D. May be frocn the same entity or different entities.

D 19. The following statements relate to the performance of an assurance engagement other
than an auclit or review of historical financial information iovered by PSAs and PSRES.
Which is incorrcd?
A. Those persons who are to perform the engagement should collectively possess the
necessary professional contpetence.
B. The assurance repolt should be in writing anri should contain a clear expression of the
practitioner's concllision about the subjerl matter information.
C. The practitioner should consider nraieriality and assurance engagement risk when
planning and performirrg an assurance engaqement.
D. The prJditiorrer is pn:ciuded from using thi work of persons from other professional
disciplines"

D zCI. The repori on an lgreed-upon pnocerlures engagerTlent should contain ''

A. An expre,ssioli .if positive assurance based'on the specific procedures performed.
B. A statement that the auditor is independent of the entity.
 cPA REVrn^/ SCHOOL OFTHE pHTUppINES (CPAR) * MANIT A EIRST PREBOARD EXAHITIATIO]I
AUDmNGJHEoRY ___:__ JiJty2Z 2013 { sATURDAyliJopM -i:00pM

C. A general description of the procedures performed.

D. Identification of the purpose for which the agreed-upon procedures were performed.

C 21. which of the following statements best descriSes a,ssurance services?

A. Services designed to express an opinion on the fairness of historical financial
statements based on the results nf an aqrdit.
B. The preparation of financial statements or the collection" classification, and
surnmarization of other fi nancial information.
Independent professional services that are intended to enhance the credibility of
information to meet the needs of an Intended user.
D. SeEvices desiEned for the improvement of operations, resulting in better outcomes.

C Which of the following is not an overall objective of il're audltor in the aur"lit of revenues?
A. To identifu and interpret significant trenrls and variaUons in the arnounts of various
categories of revenue.
B. To veriff that earnecl re'renue has been recorded and recorderj revenue has been
earned.
C. To verify cash deposited during the year.
D. To obtain an understanding of internei
':ontrol and assess the risk of material
misstatement with particular emphasis cn the use of accrual accounting to record
revenue,

B 23. PSA 500 describes five qener".liizailrrns ccncerning the i'eliahil;ly of evidence. The
situations given below indicate the relative degrees of assurance provided by two Vpes of
evidence obtained in different sitrrations. Which descrlbes an exr:eptrsn tc one of the
genera!izations?
4.. The schedule of insurance coverage obtained frorn the company's insurance agent
provides greater assurance than one pi'epared by ttre intenral arldit staff"
B. The report of an expert regardinE the valuation of a collection of paintings held as an
investrnent provides greater assurance than &e euditor's physical obseryafion of the
paintings. Mas reliable kung directly sa auditor talaga. Kahit pa vs expert.
C. The auditor's computation of interest payable on outstanding boncls provides greater
assurance than reliance on the clienfs calculation"
D. The auditor has obtained greater assurance abrout tfre balance of sales at Plant A
where he/she has rnade limited tesG cf traneactiCIr,s berause of effective intemal
ccrntrol than at Plant B where he/she has nraCe .:xtr:nsive tes*; of t.an*ictions because
of lnerTective intemal controi.

D 24. In confirming accounts receivable, an auditor decide.d tn crrniirm r:ustorners' account

balances rather than indivlC*al invcices, ttuhieh +f :"lie firlicra:inq nnost likely will be
included wrth tlte .,::lienfs cr.rnfirntation leiter?
A. An auditor-prepared letter expleininq tiat e rtcnresl)onse rnay cause an inference that
the account balance is correct.
B' A client-prepared letter reminding the :u.;tonrer that a nonresflosrse will cause a
second request to be senr.
C. An auditor-prepared letter requesting the customer to supply rnissing and incorrect
inforrnatiorr direcfiy to *re alrriltor. Most likely, i-a-understate ng customer yun.
D. A client-prepared statement of accourit shcwirrg the detaiiu of the customer's account
balance.

A 25. Which of the following is usually included or shown in the.audit docu,'nentaUon?

A. The manner in which exceptions and unusual matters disclosecl by the audito/s
procedures were resolved or treated.
B. The procedures used by the audltor to verifu the persc,nal fi*anclal stafus of members
of the clienfs managernent team.
C. Analyses that are <lesigried to be a pard: of, or a subsxittite fcr, tlr* clieinfs accounting
records.
 - l',i{NILA FIRST PREBOARD EX/IMIiIATXOI{
Xffi;iirfl;#ffii -'
'-"-*
cPA REVIn/V SCHOOL OF THE PHIUPPINES (CPARj
'-
- - -^ --, JULY 27' 20131sAruRDAY / 3:3oPM - s:00PM

D. Excerpts from authoritative pronouncernents that support the underlying generally

accep:ted accounting principles used in preparing the financial statements.

26. A company has computerized sales ancl cash receipts journals. The computer
A programs
for these journals have been properly debugged. The auditor discovered that the total of
the accounts receivable subsidiary accr:unts differs materially from the accounts receivable
control account. This discrepancy could indicate.
A. Credit memoranda being improperly recorded,
B. Lapping of receivable;s.
C. Receivables not being properly aged.
D, Statements being intercepted pr;or to mailing.
B 27. An auditor is reviewing a corporate client's statement of cash flows. The auditor should
expect the cash flows to be classifled according to
A. Operating activities, sources, and ures.
B. Investing, financing, and operatlng activlties.
C. Fund inflows and fund outflows.
D. Cash inflows and cash outflows.

B Zg. What is the general character of the work conducted in performing a forensic audit for a
company?
A. Rroviding assurance that the finar*cial statenlents are not materially misstated,
B. Detecting or deterring ftaudulent acilvity.
C. ffieringln opinion in tf,. reliabilitr ctthe specific assertions made by management.
D. Identiffing the causes of an entit/'s financial difficulties.
C 29. which of the following characteristics most likely would heighten an auditor's concern
about the risk of intentional manipulatinrr of financial statements?
A. Turnover of senior acccunting personnel is low.
B. Insiders recently purchased acJditional shares of the entity's stock.
C. Management places substantial ernphasis on meeting earnings projections.
D. The rate of change in the entity-s industry is slow.
B 30. Which of the following would an auditor nnost likely use in determining the auditor's
planning ;:nateriality?
A. The anticipated sample size for slanned substantive procedures.
B. The entity's annualized interim (i.e. qurartertry) financial statements.
C. The results of the intemai contrc! questionttaire.
D. The contents of the management represeniation letter.
A 31. Which of the following procedures wcuicl he$- detect a liability omission by rnanagement?
A. Review purchase contracts and other" legal cocuments.
B. Review articles of incorporation and colporate bylaws.
C. Review and check mathematical accuratry of financial statements.
D. Inquiry of senior support staff and recenfly depafted employees'
A 32. In an audit of other assets, ail of the foliowing are done except
A. Determining that the asset is written off cn a periodic basis.
B. Determining whether the asset is fairiy presented in the financial statements.
C. Confirming that the asset exicts'
D. Determining the basis of the car"r"ryinq amount of the asset'
C 33. In connection with an audit of the prepairl insurance account, which of the following
procedures is usually not perfiormerl by tire autiitor?
A. Recompute the portion of the premiilryr that expired during the year.
B. Prepare excerpts of insurance pclici*s for audit documentation.
c. confirm premium rates with an i*dependent insurance broker.
D. Examine support for premium pa;rnrant^e.
 EXAIIII{ATIOI{ \
cPA REVIEW SCflOOL OF THE PFIIUPPINES (CPAR) - MANiI-q FIRST PREBOARD
AtlLIIItrGlH -_- IULY 27- 2013 / SATURDAY / 3:30PM - 5:00PM

D 34. On January 20,2014, before the Balview Co. released its financial statements for the year
ended December 31, 2013, it settled a long-standing lawsuit. A material loss resulted and
no prior liability had been recorded. Hcw should this loss be disclosed or recognized?
A. The loss should be disclosed in notes to the financial statements, but the financial
statements themselves need not he adiusted"
B. The loss should be disclosed iR en emphasis of rnatter paragraph in the auditot's
report.
C. No disclosure or recognition is rer;uired.
D. The financial statements should be adjusted to recognize the loss.

A 35. Each time an auditor draws a concluslon based cn evidence from a sample, an additional
rislq sampling ris( is introduced. An example of sanrpling risk is
A. Drawing an erroneous conclusion ftorn sample data.
B. Improperly applying a proper audit pr*cedure to sample data.
C. Properly applying an improper audit procedure to sample data.
D. Projecting the results of sampling beyon.d the population tested.
B 36. If finaircial statements are to meet the requirernents of adequate disclosure,
A, All information pertaining to the company must be disclosed in the statements or
related notes, even though sornc cf the disclosures are potentially detrimental to the
company or its shareholders.
B. All information believed by the auditor to be essential to the fair presentation of the
financial statements must be dlsclosed, no matter how confidential management
believes the data to be.
C. A statement note must clearll. deGil any deficiencies contained in the financial
statements themselves.
D. Statement notes should be u;ritten in rr€ty technical language to avoid
misinterpretation by the reader.

C 37. The risk of material misstatement differs frorn detection risk in that it
A. Arises from the misapplication of aucliting procedures.
B. May be assessed in either quantiiative or qualitative terms.
C, Exists independently of the actions of ths auditor.
D. Can be changed at the auditor's dis:tetion.
C 38. Whlch of the following procedures would mert be used to obtain an understanding of the
entity and its environment?
A. Obserye entrty operations.
B. Reper:1'r:rnn e;rtity processss.
C. Verifl7 proper valuation of inventory subject to technological obsolescence.
D. Review prior year's audit documentittion-
D 39. Which of the following is not an irnpertant consideration in an auditor's evaluation of an
entity's business risk?
A. The specific business risks an entity faces that may result in financial statement errors
and fraud.
Going Concern <= B. Business risk factors that impact the abliity cf the entity to be profitable and sulive.
pwedeng emphasis C. Audit standards include many er:ti\i hrisin*ss risk factors that identiff circumstances
of mather kasi yun. that increase the likelihood of rnatr.riai i"vtisstaternents.
D. Audit standards require the auditar t,ei e'raluate the entity's business risk in order to
provide suggestions to impror.,e thc r:nUS's profihbility. Auditor ka, NOT CONSULTANT.

A 40. A practitioner's repoft on agree,J-iJpon pio{::edures related to an entityt compliance with

specified requirements should contain
A. A statement of restrictions on the use of the repoft.
B. An acknowledgment of responsibrllty f*r the sufficiency of the procedures.
C. Negative assurance on compliance.
 cpA REVIEW SCHOOL OF fiE pHIUppINES (CPAR) - MANILA FIRST PREBOARD EHI'trNATXOil
AUDITITG THEORY IULY 27' 2013 / SATURDAY I 3:30PM - 5:00PM

D. An opinion about whether the entity complied, in all material respects, with specified
requirements. Agreed-upon procedures ka lang, NO OPINION expressed.

D 4L. Internal auditing rs a dynemic profession, Which of the foltowing best describes the scope
of Internal auditirrE as it iras developed to date?
A. Internal ouditing involves evaluating the effectiveness and efficiency with which
resources are ernPloYed.
B. Internal audltin_q'hai evolved to veriffing the existence of assets and reviewing the
means of safeguarding assets.
C. Intemal auditing involves evaluatinE compliance with laws, regulations, and contracts. .
D. Internal auditiig has evolved td evaiuating all risk management, control, and
governance processes.

B 42. Which of the fcrllowing statements reflects an auditor's responsibility for detecting fraud?
A, An auditor is responsible for detecting employee errors and simple fraud, but not for
discovering fraudulent acts involving ehpbyee collusion or management override.
B. An auditoishould design the arrdit to provide reasonable assurance of detecting errors
and fraud that are material to the financial statements.
C. An auditor is not responsible for detecting fraud unless the application of auditing
standards would result in such detection.
D. An auditor should ptan the audit to deted fraud caused try departures from PFR.S.

A 43. An auditor discovers a iixely ftaud during an audit but concludes that the overall effect of
the fraud is not sufficiently rnaterial io affect the audit opinion. The auditor should
probably
A. Disciose the fl"aud to the appropriate levei of ttte client's management.
B. Disclose the fraud to appropriate authorities external to the client.
C. Discuss with the client ihe additionpl audit procedures that will be needed to identifu
the exaet amourtt of the fraud.
D. Modiff the ieudit program to inclucJe tests specificatly designed to identifu the fraud
and its impact on the financial statennents.

A 44. In testing plant and equipngnt baiances, an ai*ditor may physically inspect new additions
listed 9n1he $:tmmary'of plant and equiprnent transactions for the year. This procedure is-
.evidence
designed to obtain concel'ning managennenfs asseftions about classes of
transactions and events, and specifically, which assertion?
A. Occurrence.
B. Cutoff.
C. Authorization.
D. Oassification.
D 45. Ih designing written audit prograrns, an auditor shoutd plan specific audit procedures to
test
A. TiminE of audit procedures.
B. Cost-benefit of gathering evidence.
C. Selected audit i:cctrniclues.
D. Management asseftions.

B 46. Which staternent concerning audit evidence is neit valid?

A. The auditor is seldom convinced heyorrd all cJoubt with respect to all aspects of the
fi nancial statements being audited.
conrrincinE evidence that the financial statements
B. The auditor performs tests to collect________
are not misstated. persuasive
C. The auditor weighs the cost of obtaining evidence witlt its usefulness'
D. The auditor conliders the am,:unt of risk present in decldinE the nature and extent of
evidence to be collected.
 CpA REVIEITI/ SCH@L OF THE PTIIUPPINES (C"AR) - MANIT-A. FIRST PREETOARD EXAilIllATIOll
AUDMI{G THEORY IULY 27. 20L3 / SATi.iRLIAY I 3:30FM - 5:00PM

A 47. Which of the following statements is generally corect alrout the appl'c'prifit.€n'l:is ';f audit
evidence?
A. The more effective the internat conFol, the more assurance it provides about the
reliability of the accounting data and "4nancial statements.
B. Appropriateness of audit evidence refers to the amount of cc:'roborative evidence
obtained.
C. Information obtained indirectly frort independent outside sources is more Bemuasive
than the auditor's clirect persona! knowledge obtained through observation and
inspection.
D. Appropriateness of aurllt evidence refers only to audit eviclence obtained from outside
the entity.

D ,18. Audit documentati6n

A. Must be in electronic fonn.
B. Must be in paperfonn only.
C. Is not required, but is strongly recommended.
D. May be in paper, elecfionic, or some oiher form.

B 49. Based on cc,nversations with the ovJner-'manager of an audit client, the auditor
ascertained that the cornpany's prirnary moflwatisn is to arloid pi:ving irrr:o,me taxes. Based
on this motivation, which account balanc* assei'ticn fdr enrJino inventoty vrrili the auditor
be most concemed abor.rt veriffing?
A. Existence or o€curence.
B. Completeness.
C. Rights and obligations.
D. Observation.
B 50. An auditor's conslderation of the risk of rnaterial misstatement due to fraud and tie
results of audit tests indicate a significant" nsk of fraird. "f,Fre aurlitor" orciinafily shot"lld
A. Express either a qualified oi'an ad'yEersc cpinicn.
B. Consider withdrawing from the engagernent antJ communiceting the reasons for
withdrawal to the audit committee.
C. Inform proper authorities outside the entity.
D. Express only an adverse opinion beeause oi Sre strong possittlli$, fraud.
C 51. When an outside expert (sBecialist) has assumed full responsihiiit'y for taking the clienYs
physical inventory reliance on the experfs report is acceptahie i'i
A. The auditor is satisfied through application of apprcprlate procedures as to the
reputation and cornpetence of the expert.
B. Circumstarrces rnade it ir"npracticable or imposslble for tire aurliter to either do the
work perconally or observe the work done by the in'ventory fin:i
C. The auditor conducted the same audit tests anrl procedures as would have been
applicable if ttre client eniployees tool( $re nhysical intertt,iry.
D. The auditor's report contains a reference ts the ass;rnpiion of fuil :esoonsiDility.

A 52. Internal control can provide only reasanable assurancc ot achieving enti$ obje$ives. One
fact"or limitlng the likelitiood of achieving those obiecttues in a srnalf entity is that
A. Effective separation of duties may not be feasibie.
B. The aurJitor/s primary responsibility is the deteeXion of fiaud"
C. The board of directors is active and intlependent.
D. Management monitorc internal conh'ol.
D 53. An abnonnal fluctuatlon in gross income timt miglrt sugge* the nexd f,:r extended audit
procedures for sales and inventories w*uld rnost likely be identJfietl in t-he planning phase
of the audit by the use of
A. Tests of transactions and balances"
B. A prelirninary review of internal controis"
C. Specialized audit programs.
 CpA REVIEW SCHOOL OF THE PHIUPPINES (CiAF\i
* t4ANIlS FIRST PRf;IOARD EXAIiII{ATION
AUDITII{G THEORY- IULY 27, 2013 / SATURD-AY I 3:30PM - 5:00PM

D. Analytical procedures.
B 54. An auditor is required to establish an understanding with a client regarding the
responsibilities for each engagement.'This understanding generally includes
h
A. Managemenfs responsibil,ty gua::antee that there are no material misstatements
due to frauci.
to plan and perform the audit to provide reasonable, but
B. The auditor's responsibility,'detecting
not absolute, assurance of rnaterial errors or fraud.
C. Managemeni's ,esponsibility for prJ,,iding the auditor with an assessment of the risk of
material misstatement due to fraud.
D. The auditor's responsibility for the fairness of the financial statements.
C 55. Analytical procedures performed in the overall review stage oi ?n audit suggest that
procedures most
several accounh; have'unexpected relationships. The results of these
likely would indlcate that
A. Fraud exists within the relevant accounts.
B. Internal control activiUes are not operating effiectively'
C. AdcJitional tests of details are required.
D. The communication with the audit comrnittee should be revised.
D 56. The audit client's board of directors and audit committee refused to take any action with
respect to an immaterial illegal act which was brought to their attention by
the auditor'
Because of their failure to a&, the auditor withdrew-from the engagement'
The auditor's
decision to withdraw was prirnarily due te doubts concerning
A. Adequate financial statement disclosures.
E. Compliance with the statutory laws and regulations.
C. Scope limitatlcns resulting from their inaction.
D. The integrity of management.
A 57. An entity's financial statements were misstated over a period o! .V9ars due to large
amounts of revenue being recorded in journal entries that involved debits and credlts
to
-fhe auditor could most likely have been alefted to
an illogical combination of accounts.
this fraud iry
A, Scanning the generaljournal for unusual entries.
B. Perforrning a revenue cutoff test at year-end.
C. Tracing a sample of journal entries to the general ledger'
D. ExamiiinE documenlary evidence of saies returns and allowances recorded after year-
end.

C 58. In conecl order, general types of audit tests include

A. Substantive'piocedures, tests of controls, and risk assessment procedures.
B. Substantive procedures, risk assessment procedures, and tests of controls.
C. Risk assessmerrt procedures, tests of controls, and substantive procedures.
D. Risk assessrnent prr:cedures, substantive procedures, and tests of controls'

B 59. In connection with the examirration of fin.lncial statements by an independent auditor, the
client suggests that members of the internal audit staff be utilized to minimize audit costs.
Which of the foltovring tasks could most appropriately be delegated to the intemal audit
stafP
A. Selectiorr of accounts receivable fbr corrfirrnation, base.d upon the internal auditor's
judgnient as Lo how many accounts and which accounts will provide sufficient
covere{]e.
B. Preparution of schedules for negative accounts receivable responses'
C. Evaluation of the internal control for accounts receivable and sales.
D. Determination of the adequacy of the allowance for doubtful accounts'
 CPA REVIEI , SCHOOL OF THE PHIUPPINES (CPAR) - MANII,A. $TBST PREBOAR,D HXAITIIilATIOII I
AUDmilG TIIEORY JULY 27.20L3 TSATURDAY 1 3:30PM - 5:00PM

B 60. Alfonso Company uses its sales invaices for posting Eerpetual lnventory records.
Inadequate control activities over the lnvoicing function allow goods Eo be invoiced that
are not shipped. The inadequate control activities could cause afi
A. Understatement of revenues, receivahles, and inventory.
S" Overstatement of revenues and receivables and an undersLaternent of inventory.
C. Understatement of revenues and receivables and an overstatement of inventory.
D. Overstatement of revenues, receivables, and inventrrry.
A 61. Auditors are more concerned with the occu!'rence assertion for revenues than the
completeness assertion because
A, Ciients are more likely to overstate than undemtate revenues.
B. Clients are more likely tcr understatr, th,tn ove'state revenues"
C. It is difEcult to detennine when services have b,een pefformed.
D. The allowance for doubtful accounB often is understated.
B 62. Which of the fnllowinq activities r":,o::t likely would detect whetl,er payroll data are
accurately' pr*cessed?
A. Monitor authorized distribution of data control sheets.
B. [.lse test data to verifo the accurate perfrrnance of payroll processinE.
C. Examine source documenb for approval by superuisors.
D. Segregate duties between approval of hereiware and software specifications.
D 63. The cutcff assertion for prepard insurar:ce
A. Is never tested beCause amounE; atysays are inrrnaterial.
B. Is best tested as part sf the testing of propefry and equipment purchasing.
C. Is best tested exclusively by sending eonfinnations to venciors.
B, is best tested by recomputing the unexpiretl portion of insurance policies in effect.
D ffi. Due to a vreakness observed in rnt*mal eenEol over recordlnq retrrements r:f eguipment,
the auditor rnay decide to
A. Inspecr certain items of equipnrent in the plant and h'ace those items to the
accountlnE records.
B. Rerrlevr the subsidiary ledger to ascertain wh,,r$er depre:iatiein was taken on each
item of equipment during the year.
C. Trace additions to the "other assets" account to search fer e,quipment that is still on
hand but no longer is being ursecl.
D" S,elect certain items of equipment fronr the accci.rnting reccrdr; ancl locate them in the
plant.

C 65. An auditor testing long-term investrnenis wo,.lld rrrdlnarlly use suLrstantive analytical
proceclures as the pnrrrary au'Jlt eviilerr,€ lo support the reasonable:ress of the
f'. Vaiuatisn of marketable equity securities.
B. Classification of gairrs and losses on the disposal of seeurities.
C. Completeness of recorded investment income.
D. Existence and ownership of invesffirents.

B 66. When a question arises abourt an entity's continued existenc;e, tire auditor should consider
factors tending to mitigate the significnnce of negatirie inrorrnation conceming the entity's
means for maintaining adequate eash flow. An exarnple of such a factos" is the
A" Possibility of purchasinE ceftain assets rafher ti\an leasing ther,.
B. Capability of exten-ding *re elue elates of existlng debt.
C. Appropriateness of changing deprccleiion methods ftosrr double declining balance to
straight line.
D. Marketability of property and equiprnenrt that riranagenierrt plan* Lo keep.
A 67. Con'rpilations provide which of the following typ€s uf assurance ahout file fair presentation
af fi narrciai statemenE?
A. I{o assurance.
 CpA REVIEW SCHOOL r?;j THE PHIUPPINES (CPAR)
.- MANILA EIRST PREBOARD EXA1iI]{ATION
IUOmXG TXrORY JULY 27' 2013 / SATURDAY ' 3:30PM - 5:00PM

B. Negative assurance.
C. Limited assurance.
D. Reasonable assurance.

B 68. The party responsible for assurnptlcns identified in the preparation of prospective financial
statements is usual$
A. A third-party lending institution"
B. The client's management.
C. The repofting accountant.
D. The client's indepenrJent auditor.

For a prar.titioner i:c examine rnanagement's asseftions ahout the effectiveness of

B internal
69.
controls, sll of ti:* following conditions are necessry except
A. Suffici+nt ctirnpetent evidence can be developed to support the evaluation.
B" The practitioner must have already concluded that the financial statements are fairly
presented in accordance with the applicable accounting framework.
'ihe eni:ity's management accepts'iesponsibility for the effectiveness of its
intemal
C.
control.
D" AII of the conditions above arft necessary.

D 74. Absoiute assurance is provldeo for in

A. An audit engagement.
B. A compilation engagement.
C. A review engsgement,
D. None ofthe above.
C 7L, Which of the following statements about the study of auditing is not trule?
A. The study of aud"iting can be valuable to future accountants and business decision
makers whether or not they plan to become auditors.
B. The study of auditing focuies on learning the analytical and logical skills necessary to
evaluate the relevance and reliabiliQr of informaUon.
C. The study r:f auditing focuses on learninE the rules, techniques, and computations
requirecl to analyze financial statements.
D, T5g $udy uf auditing begins with the understanding of a coherent logical framework
and technitrues us"fu] for gathering and analping evidence about others' assertions.

C 72. The basic pi.it"pose of a financia! statement audit is to

i: ffi13':,,:L;iduat transactions so that the auditor may certify as to their validitv'
C,, provide assurance regarding whether the clienfs financial statements are fairly stated'
D. Assure the consistent appticatien of correct accounting procedures.

B 73. An auditor who accepts an audit enEagement and does not possess expeftise with respect
to the business entity's industry, should
A. Engage financial experE familiar with the nature of the business entity.
B. OUtain a knowledge of matters that relate to the nature of the entity's business.
C. Refer a substantiil portlon of the audit to another CPA, who will act as the principal
auditor.
D. First inform management that an unmodified opinion cannot be issued.
C 74. Which of the follrwing hest describes why an independent auditor is asked to express an
opinion oir i;he fair presentation of financial statements?
A. It is cifficult t* prepare financial statements that fairly present a company's financial
positiqn and casir flbws without the expertise of an independent auditor.
B. It is nranagement's responsibility to seek available independent aid in the appraisal of
the firiancial information shown in its financial statements.
C. The opir:ion of an independent party is needed because a company is not llkely to be
considered objective with resgrect to lts own financial *atements.
 cPA REVIEW SCHOOL OFTHE pHIl_IppINES (CPAR) - h,tANIrA FIRST pil,EABARD EXAifrrATrOIl
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D. It is a customary couftesy that ail shareholders of a company receive an independent
report on management's stewardship in managing the affairs of the business.

A 75. Before accepting an engagement to audit a ne-w client, an auditsr is required to

A. Make inquiries of the predecessor auditor.
B. Tel! the client wheilier or not the audrtor;s rarllling to issue a "clean" opinion.
C. Prepare a memorandum setting forth the stafhng requirements and documenting the
prelimlnary audit plan.
D. Become a member of the client's board of directorc"

B 76. Enqagernent lefters include all of the following *<cept

A. A tist of additional services that will be provided.
B. A list of adjusting joumal entries.
C. Inforrnation about the auclit fbe.
D. Arrangements invohring the use of experts.
A 77. All of the following refer to an inLer'na! auditoi"'s com$eitence except
A. The party in the entity tn whicli the internal auditor reports.
ts. The quality of internal audit documents and iepot'cs.
C. Professicnal certification.
D. Supervision and review of lnternal audit activities.
C 78. Which of the following is no* a typlca! analytical pr":cedure?
A. Study of relationshirs or the financlal information with relevant nonfinancial
infornratian.
B. Connparison of the financial inforrratian with sirnilar informatSon regarding the industry
in which ihe entity operates.
C. Comparison of recorded arnounts of majur disbursements with appropriate lnvoices.
D. Cornparison of the financiat informatiorr with budgeted anroatnts.

B 79. Reviewing notes paid or renewed after the balance sheet date, to determine if there are
unrecorded iiahilitles at'7ear*end can hre used tcl test the assertion of
A. Existence.
B. Cq:mr:leteness.
C. Rights and obligations.
D. Valuatlon and ailocation.
A 80. A substantive strategy is ffpically used to audit stockholders'equity because
A. The nunnber of ti'ansactions is snrall.
B. Controls ever stockhclders' equity transaetions typically are weak.
C. A relianr:e strategy is rn,,:st efficient.
D. A substrantive strateqy likcly was used ln prior years"
-.END OF EX,AMINATION--