POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

COLLEGE OF ACCOUNTANCY AND FINANCE

Manila

AUDITING THEORY

P R A C T I C E E X A M I N A T I O N I I I

Choose the only thing that matters. Leave others behind.

“Choose Me” – Best Answer

1. In assessing whether to accept a client for an audit engagement, and auditor should consider

a. Client's business risk

b. Auditor's business risk
c. Neither I and II
d. Both I and II

2. Which of the following most likely would cause an auditor to decline a new audit engagement to decline a
new audit engagement

a. Inability to perform preliminary analytical procedures

b. Lack of Management Integrity
c. Inadequate understanding of the entity's internal control
d. The engagement was offered after the end of the entity's reporting period

3. Which of the following would permit an independent auditor to accept an engagement after the end of the
reporting period

a. Expectation of the operating effectiveness of controls

b. Receipt of an assertion from the predecessor auditor that the entity will be able to continue as a going
concern
c. Issuance of a disclaimer opinion as a result of inability to conduct certain tests required by PSAs due to
timing of the acceptance of the engagement
d. Remedy the limitations resulting from accepting the engagement after the end of the reporting period,
such as those relating to the existence of physical inventory.

4. BB Corp. orally engaged MM, CPA to audit its financial statements. BB informed MM that it suspected that the
accounts receivable were materially overstated. Although the financial statements that MM audited did, in
fact, include a materially overstated accounts receivable balance, MM issued a standard unqualified report. If
BB sues MM for negligence in failing to discover the overstatement, MM’s best defense would be that:

a. MM had signed no engagement letter.

b. MM did not perform the audit recklessly or with intent to deceive.
c. MM was not in privity of contract with BB’s customers.
d. MM performed the audit in accordance with PSAs.

5. According to PSA 201, one of the hard and fast rules regarding terms of audit engagements is that:

a. The agreed terms would always need to be recorded in an audit engagement letter.
b. The auditor and the client should agree on the terms of the engagement.
c. The engagement letter should be sent before the commencement of the engagement.
 PHILIPPINE STANDARDS ON AUDITING
EVERYONE IS A GENIUS
300, 315, 320, 330

d. The form and content of audit engagement letters should never deviate from the illustrative example
provided in PSA 210.

6. Elmer, CPA, is planning the time budget for the audit of Shindengen, Inc., a medium-sized manufacturing
concern with less than one hundred (100) shareholders. Which one of the following areas would require the
most amount of audit time?

a. Balance sheet
b. Assets.
c. Liabilities.
d. Owners’ Equity.

7. As the materiality level is set at a lower amount, audit risk ________, while the amount of substantive tests
________.

a. Increases, decreases
b. Decreases, increases
c. Increases, increases
d. Decreases, decreases

8. Supervision includes (select the exception):

a. Tracking the progress of the engagement.

b. Identifying matters for consultation or consideration by more experienced engagement team members
during the engagement.
c. Addressing all issues arising during the engagement and modifying the planned approach appropriately.
d. Considering the capabilities and competence of individual members of audit personnel.

9. An audit team’s responsibility would not include:

a. Designing an effective internal control structure.

b. Documentation of understanding of internal control structure.
c. Communicating reportable conditions on internal control structure.
d. An evaluation of existing internal control structure.

10. Audit risk has three components: inherent risk, control risk, and detection risk. Which of the following
statements which pertain to these components is incorrect?

a. The acceptable level of detection risk is inversely related to the combined assessed level of inherent risk
and control risk.
b. The higher the assessment of inherent and control risks, the lower the detection risk that can be accepted
by the auditor.
c. Detection risk cannot be changed at the auditor’s discretion.
d. The auditor considers the combined assessments of inherent and control risk in order to determine the
level of detection risk which may be accepted.
 PHILIPPINE STANDARDS ON AUDITING
EVERYONE IS A GENIUS
300, 315, 320, 330

11. The responsibility for the preparation of the financial statements and the accompanying footnotes belong to

a. management
b. auditor
c. both management and the auditor equally
d. management for the statements and the auditor for the notes

12. Which assertion addresses whether all transactions that should be included in the financial statements are in
fact included

a. occurrence
b. rights and obligations
c. existence
d. completeness

13. An assertion that transactions are recorded in the proper accounting period

a. cutoff
b. classification
c. accuracy
d. occurrence

14. It is a procedure used when the auditor examines supporting evidence for amounts posted to account
balances with documentary evidence

a. inquiry
b. vouching
c. confirmation
d. physical examination

15. When the auditor uses tracing as an audit procedure for tests of transactions, the auditor is primarily
concerned with which audit objective

a. occurrence
b. cut-off
c. classification
d. completeness

16. Which of the following would an auditor least likely perform as part of the auditor's preliminary engagement
activities?

a. Obtain understanding of the legal and regulatory framework applicable to the entity
b. Perform procedures regarding continuance of the client relationship and the specific audit engagement
c. evaluate compliance with ethical requirements including independence
d. establish understanding of the terms of the engagement
 PHILIPPINE STANDARDS ON AUDITING
EVERYONE IS A GENIUS
300, 315, 320, 330

17. Engagement Letters

a. may be either oral or written

b. must be written and notarized
c. must be written if the client is regulated by the SEC
d. must be written

18. Which of the following would be least likely to be included in the auditor's engagement letter

a. Type of opinion to be issued

b. forms of the report
c. extent of his responsibilities
d. objectives and scope of the audit

19. Initial audit planning involves four matters. Which of the following is not one of these?

a. Develop an overall audit strategy

b. Schedule engagement staff and audit specialists
c. Request that bank balances be confirmed
d. Identify the client's reason for the audit

20. The following are usually included in the auditor's engagement letter, except

a. the financial statements are the responsibility of the company's management

b. A reference to PRFS
c. list of audit procedures to be used in inventory observation
d. A reference to PSAs

21. Planning and audit involves

a. Establishing the overall audit strategy for the engagement

b. Developing an audit plan
c. Both A and B
d. Neither A and B

22. Which of the following statements concerning audit planning is incorrect?

a. planning is a continual and iterative process

b. In a recurring audit, planning often begins shortly after the completion of the previous audit and
continues until the completion of the current audit engagement
c. Planning is a discrete phase of an audit
d. in planning the audit, the auditor considers the timing of certain planning activities and audit procedures
that are to be completed prior to the performance of further audit procedures

23. Which of the following is the least likely procedure to be performed in planning a financial statement audit?

a. coordinating the assistance of entity personnel in data preparation

b. reading the current year's interim financial statements
 PHILIPPINE STANDARDS ON AUDITING
EVERYONE IS A GENIUS
300, 315, 320, 330

c. discussing matters that may affect the audit with firm personnel responsible for non-audit services to the
entity
d. selecting a sample of sales invoices for comparison with shipping documents

24. Which of the following should be included in the audit plan?

a. The nature of timing and extent of planned risk assessment procedures

b. The nature of timing and extent of planned further audit procedures at the assertion level
c. Both I and II
d. Neither I and II

25. In the planning stage, the auditor is required to perform audit procedures to obtain an understanding of the
entity and its environment, including its internal control. These procedures are called

a. substantive testing
b. tests of controls
c. dual-purpose test
d. risk assessment procedures

26. The auditor should consider materiality when

a. Determining the nature, timing, and extent of audit procedures

b. Evaluating the effect of misstatements
c. Both I and II
d. Neither I and II

27. It is an appraisal activity established within and entity

a. external auditing
b. governmental auditing
c. Internal auditing
d. internal control

28. PSA 315 requires the auditor to perform risk assessment procedures at

a. the financial statements level only

b. assertion level only
c. Both I and II
d. Either I and II

29. The auditor's risk assessment procedures should always include the following, except

a. Inquiries of management and of others within the entity

b. analytical procedures
c. observation and inspection
d. substantive test procedures and tests of control
 PHILIPPINE STANDARDS ON AUDITING
EVERYONE IS A GENIUS
300, 315, 320, 330

30. The auditor's risk assessment procedures

a. by themselves, do not provide sufficient appropriate audit evidence on which to base the audit opinion
b. should not consider information obtained from the auditor's previous experience with the entity
c. are designed to detect material misstatements at the assertion level
d. are designed to test the effectiveness of the entity's controls

31. Which of the following statements concerning the entity's business risk is incorrect?

a. business risk is broader than the risk of material misstatement

b. an understanding of the business risk facing the entity increases the likelihood of identifying risks of
material misstatement
c. business risk may arise from the development of new products or services that may fail
d. the auditor has a responsibility to identify or assess all business risk

32. The risk that an auditor may give an inappropriate opinion when the financial statements are materially
misstated is called

a. audit risk
b. detection risk
c. business risk
d. inherent risk

33. The risk that an auditor's substantive procedures will lead to the conclusion that a material misstatement does
not exist in an account balance or transaction class when, in fact, such misstatement does exist is

a. control risk
b. detection risk
c. inherent risk
d. audit risk

34. 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. preliminary judgments about materiality levels
c. assurance provided by substantive tests
d. risk of misapplying audit procedures

35. Which is false?

a. There is an inverse relationship between detection risk and the combined level of inherent and control
risks
b. When inherent and control risk are high, the acceptable level of detection risk needs to be low to reduce
audit risk to an acceptably low level
c. The assessed level of inherent and control risks can be sufficiently low to eliminate the need for the
auditor to perform any substantive procedures
d. When inherent and control risks are low, and auditor can accept a higher detection risk and still reduce
audit risk to an acceptably low level
 PHILIPPINE STANDARDS ON AUDITING
EVERYONE IS A GENIUS
300, 315, 320, 330

36. 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 materiality levels

b. decrease substantive testing
c. increase inherent risk
d. decrease detection risk

37. Which of the following statements concerning analytical procedures is true?

a. analytical procedures are more efficient, but not more effective, than tests of details of transactions
b. analytical procedures used as risk assessment procedures use data aggregated at a high level
c. analytical procedures can replace test of control in gathering audit evidence to support the assessed level
of control risk
d. analytical procedures usually involve comparisons of ratios developed from recorded amounts with ratios
developed by management

38. Analytical procedures used in planning an audit should focus on

a. evaluating the adequacy of evidence gathered concerning unusual balances

b. identifying significant deficiencies in internal control
c. testing individual account balances that depend on accounting estimates
d. enhancing the auditor's understanding of the client's business

39. 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 objectives

a. internal control
b. internal auditing
c. business strategy
d. accounting process

40. Which is incorrect?

a. Internal control is effected by people

b. Internal control is geared to achieving objectives in the overlapping categories of financial reporting,
compliance, an operations.
c. internal control is a process
d. internal control is expected to provide absolute assurance

41. The following are components of internal control, except

a. Control Activities
b. Entity's risk assessment process
c. Business Risk
d. Control Environment
 PHILIPPINE STANDARDS ON AUDITING
EVERYONE IS A GENIUS
300, 315, 320, 330

42. This internal control is the foundation for all other components.

a. Control Activities
b. Monitoring of controls
c. Control Environment
d. Entity's risk assessment process

43. 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. Entity's risk assessment process

44. Which of the following internal control components relates to entity's process for identifying and responding
to business risks

a. Control Activities
b. Monitoring of controls
c. Control Environment
d. Entity's risk assessment process

45. The following are subcomponents of control environment, except

a. Adequate separation of duties

b. Management Philosophy and operating style
c. Organizational structure
d. Commitment to Competence

46. When obtaining and understanding of controls that are relevant to the audit, the auditor is required to

a. Evaluate the design of those controls

b. Evaluate the design of those controls and determine whether they have been implemented
c. Determine whether those controls have been implemented
d. Evaluate the design of those controls and determine whether they have been implemented by performing
tests of controls

47. Inherent risk is __________ related to detection risk and ______ related to the amount of audit evidence.

a. Directly, inversely
b. Directly, directly
c. Inversely, inversely
d. Inversely, directly
 PHILIPPINE STANDARDS ON AUDITING
EVERYONE IS A GENIUS
300, 315, 320, 330

48. The best way for an auditor to obtain evidence about segregation of duties is to

a. Observe personnel performing their duties

b. Re-perform the task
c. Inspect documents and records to ensure and independent check has been performed
d. Discuss the performance of duties within the company with the internal auditor

49. An auditor must assess control risk as high when he/has

a. Decided not to test the internal control system

b. Decided on a high level of detection risk
c. Assessed inherent risk to be high
d. Found no significant deficiencies in the internal control system

50. Control Activities relate to the following except

a. Segregation of duties
b. Performance reviews
c. An internal audit function
d. Authorization

51. Which of the following is a reason to establish internal control?

a. To provide reasonable assurance that the entity's objectives are achieved

b. To safeguard the resources of the organization
c. To encourage compliance with the organizational objectives
d. To ensure the accuracy, reliability, and timeliness of information

52. Which of the following most likely would not be considered an inherent limitations of internal control

a. Management override
b. Mistakes in judgement
c. Incompatible functions
d. Collusion among employees

53. In obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not
required to

a. Determine whether the controls have been implemented

b. Perform procedures to evaluate the design of controls
c. Search for significant deficiencies in the operation of internal control
d. Document the understanding of the entity's internal control components

54. Which of the following determines the extent of the auditor's tests of controls

a. Auditor's knowledge
b. Resources available to the auditor
c. Auditor's initial assessment of control risk
d. Management's desire to help the auditor
 PHILIPPINE STANDARDS ON AUDITING
EVERYONE IS A GENIUS
300, 315, 320, 330

55. Test of controls are concerned primarily with each of the following questions, except

a. Why were the controls applied?

b. By whom were the controls applied?
c. Were the necessary controls consistently performed?
d. How were the controls applied?

56. Which of the following procedures are performed by an auditor who wants to detect material misstatements
at the assertion level

a. Compliance tests
b. Tests of controls
c. Dual-purpose test
d. Substantive tests

57. These are risk of material misstatements that require special audit consideration, such as those that involve
fraud or complex transactions

a. Business risks
b. Audit Risks
c. Significant risks
d. Material Risks

58. Which of the following is not a source document for the revenue cycle

a. Receiving report
b. Sales order
c. Credit Memo
d. Delivery Receipt

59. To ensure proper segregation of duties, who should make decisions concerning issuance of credit memos

a. Warehouse manager
b. Credit manager
c. cashier
d. Credit Manager

60. 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 pre-numbered 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
 PHILIPPINE STANDARDS ON AUDITING
EVERYONE IS A GENIUS
300, 315, 320, 330

61. For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also
approve

a. Cash disbursement
b. Granting of credit to customers
c. Employee overtime wages
d. Write-offs of customer accounts

62. Which of the following controls is often lacking in a retail cash sales environment

a. Monitoring
b. Segregation of functions
c. Competent personnel
d. Access to assets limited to authorized personnel

63. Which of the following tests of controls would most likely be performed by an auditor to obtain evidence
about management's assertion concerning the completeness of sales transactions?

a. Inspect the entity's reports of pre-numbered shipping documents that have not been recorded in the
sales journal
b. Inquiries about the entity's credit granting policies and whether credit checks are consistently applied
c. Compare prices on pre-numbered sales invoices to the entity's authorized price list
d. Verify that extensions and footings on sales invoices and monthly statements of customers' accounts have
been checked

64. Which of the following is probably the most effective control for the prevention of kickbacks to purchasing
agents

a. review of vendor performance

b. purchasing from approved vendors
c. good supervision in the purchasing area
d. A corporate policy to prohibit purchasing agents from accepting kickbacks

65. Which of the following procedures would best discourage the resubmission of vendor invoices after they have
been paid?

a. Cancellation of vouchers by accounting personnel

b. Cancellation of vouchers by treasurer personnel
c. The mailing of payments directly to payees by accounts payable department personnel
d. A requirement for double endorsement of checks

66. In a well-designed internal control, the same employee may be permitted to

a. Prepare receiving reports and also approve purchase orders

b. Approve vouchers for payment and also have access to unused purchase orders
c. Mail signed checks and also cancel supporting documents
d. Mail signed checks and also prepare bank reconciliations
 PHILIPPINE STANDARDS ON AUDITING
EVERYONE IS A GENIUS
300, 315, 320, 330

67. Which of the following is at 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

68. 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

69. A properly designed internal control should require that defective merchandise returned by customers be
presented initially to the

a. Receiving clerk
b. Purchasing clerk
c. Billing clerk
d. Inventory control clerk

70. Why is PPE typically considered to be one of the accounts least susceptible to fraud?

a. Internal control on this accounts is inherently effective

b. The depreciated values are always smaller than cost
c. The inherent risk of PPE is usually low
d. For most companies, the recorded amounts of PPE are immaterial

71. Which of the following is not a proper control over investment securities?

a. Separation of custodial and treasury functions

b. Employing an independent trust agent
c. Proper authorization of transactions
d. Storage in a safe-deposit box

72. A potential threat to the payroll processing activity is theft or fraudulent distribution of payroll checks. One
control that can be implemented to help prevent paychecks being issued to "ghost" employees is

a. Use of a payroll clearing account

b. Periodic reconciliation of the payroll bank account
c. Paychecks should be physically distributed by someone who does not authorize or record payroll
d. The cashier should sign all payroll checks
 PHILIPPINE STANDARDS ON AUDITING
EVERYONE IS A GENIUS
300, 315, 320, 330

73. Which of the following departments most likely approves changes in pay rates and deductions from
employees’ salaries?

a. Payroll
b. Personnel
c. Controller
d. Treasurer

74. Proper internal control over the cash payroll function mandates which of the following?

a. A separate checking account for payroll should be maintained

b. Each employee should be asked to sign a receipt
c. The payroll clerk should fill the envelopes with cash and a computation of the net pay
d. Unclaimed pay envelopes should be retained by the paymaster

75. Which of the following are not elements of assurance engagement?

a. A three-party relationship involving a practitioner, a responsible party, and intended users;
b. An appropriate subject matter;
c. Suitable criteria;
d. Sufficient appropriate evidence; and
e. An oral assurance report in the form appropriate to a reasonable assurance engagement or a limited
assurance engagement.

I AM CPA: CHRIST’S PURPOSE ACCOUNTANT

WE ARE RIGHT HERE IN THIS EXACT PLACE BECAUSE GOD SAYS SO