Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

MODULE 11
COMPLETING THE AUDIT
PSA-BASED QUESTIONS

1. Which of the following matters do auditors need not communicate to the audit
committee of a public company?

A. All critical accounting policies

B. Compensation arrangements related to the chief executive officer
C. Schedule of unadjusted differences
D. Management letter comments

2. Analytical procedures are required to be performed during the

A. Planning and substantive test stage

B. Substantive test and overall review stages
C. Planning and overall review stages
D. Planning stage only

3. Which of the following factors would least influence an auditor’s consideration of the
reliability of data for purposes of analytical procedures?

A. Whether the data are processed in a computer system or in a manual accounting

system
B. Whether sources within the entity are independent of those who are responsible
for the amount being audited
C. Whether the data are subjected to audit testing in the current or prior year
D. Whether the data are obtained from independent sources outside the entity or
from sources within the entity

4. Analytical procedure are

A. substantive tests designed to evaluate a system of internal control

B. tests of control procedures designed to evaluate the validity of management’s
representation letter.
C. substantive tests designed to evaluate the reasonableness of financial
information
D. tests of control procedures designed to detect errors in reported financial
information

5. The auditor notices significant fluctuations in key element of the company’s financial
statements, if management is unable to provide an acceptable explanation, the
auditor should

A. consider the matter as a scope limitation

B. perform additional audit procedures to investigate the matter further.
C. Intensify the examination with the expectation of detecting management fraud.
D. Withdraw from the engagement

6. Who is responsible for establishing the process and controls for preparing accounting
estimates?

A. The independent auditor

B. The internal auditor
C. The management
D. The controller

7. The auditor should adopt one or combination of the following approaches in the audit
of an accounting estimate:

I. Review and test the process used by management to develop the estimate
II. Use an independent estimate for comparison with what the management
prepares.
III. Review subsequent events which confirm the estimate made.

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 A. Any of them.
B. None of them
C. Either I or II
D. I only

8. Which of the following is not one of the primary approaches that the auditors may
use when evaluating the reasonableness of accounting estimates?

A. Review and test management’s process of developing estimates.

B. Confirm estimates directly with outsiders.
C. Independently develop an estimate of the amount to be compared to
management’s estimate.
D. Review subsequent events or transactions that have been bearing on the
estimate.

9. The auditor should normally concentrate on the key factors and assumptions used by
management including all of the following except those that are

A. Insignificant to the accounting estimates

B. Sensitive to variations
C. Deviations from historical patterns
D. Susceptibility to misstatements and biases

10. In evaluating the assumptions on which the estimate is based, the auditor would
need to pay particular attention to assumptions which are

A. Reasonable in light of actual results in prior periods.

B. Consistent with those used for other accounting estimates.
C. Consistent with management’s plans which appear appropriate.
D. Subjective or susceptible to material misstatement.

11. Subsequent events refer to

A. Only significant events that occur between the balance sheet date and the date
of the auditor’s report which have been discovered by the auditor during the
same period.
B. Only significant events that occur between the balance sheet date and the date
of the auditor’s report irrespective of the date they have been discovered by the
auditor.
C. Only significant events that occur between the balance sheet date and the date
the audited financial statements have been released to the client, irrespective of
the date of their discovery by the auditor.
D. All significant events that occur after the balance sheet date.

12. Which of the following is not correct concerning a type I and type II subsequent
event?

A. A type I may require adjustments to financial statements while a type II would

not.
B. Both a type I and a type II subsequent event may require note disclosure
C. A type I is an event that occurred prior to year end, but was discovered after,
while a type II is one that arises subsequent to year end.
D. A type II event may require adjustment to the financial statements and a type I
may require note disclosure.

13. Which of the following statements that relates to subsequent events is

inappropriately described?

A. The auditor is expected to conduct a continuing review of all matters to which

previous applied procedures have provided satisfactory conclusions.
B. The auditor should consider the effect of subsequent events on the financial
statements and on the auditor’s report.
C. The procedures to identify events that may require adjustments of, or disclosure
in, the financial statements would be performed as near as practicable to the date
of the auditor’s report.
D. The procedures that are designed to obtain sufficiently appropriate audit
evidence that all events up to the date of the audit report that may require

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 adjustment of, or disclosure in, the financial statements are in addition to routine
procedures which may be applied to specific transactions.

14. The auditor’s formal review of subsequent events normally should be extended
through the date of the

A. Auditor’s report
B. Next formal interim financial statements
C. Delivery of the audit report to client
D. Mailing of the financial statements to the stockholders.

15. Which of the following appropriately describes the auditor’s procedures with respect
to subsequent events?

A. The procedures to identify events that may require adjustments of, or disclosure
in, the financial statements would be performed as early as practicable.
B. Those routine procedures that are applied to specific transactions occurring after
the period ends are designed to obtain sufficient appropriate audit evidence that
all events up to the date of the audit report have been identified.
C. When a component is audited by another CPA, the auditor would consider the
other auditor’s procedures regarding events after period end and the need to
inform the other auditor of the planned date of the audit report.
D. The auditor is responsible to inquire regarding the financial statements after the
date of the auditor’s report.

16. Which of the following is least likely a procedure that would be performed by the
auditor near the auditor’s report date?

A. Reading the minutes of the meetings of shareholders, the board of directors and
adult executive committees held throughout the audit year.
B. Reading the entity’s latest available interim financial statements.
C. Inquiring of the client’s legal counsel concerning litigations and claims.
D. Reviewing the procedures that management has established to ensure that
subsequent events are identified.

17. Which of the following procedures would an auditor most likely perform to obtain
evidence about the occurrence of subsequent events?

A. Confirming a sample of material accounts receivable established after year-end.

B. Comparing the financial statements being reported on with those of the prior
period.
C. Investigating personnel changes in the accounting department occurring after
year-end.
D. Inquiring as to whether any unusual adjustments were made after year-end.

18. Which of the following should the auditor do least when, after the financial
statements have been issued, the auditor becomes aware of a fact that existed at
the date of the auditor’s report?

A. Consider whether the financial statements need revisions.

B. Discuss the matter with the management.
C. Take the action appropriate in the circumstance
D. Inform those users who are currently relying on the financial statements about
the fact that has been discovered.
19. If subsequent to the issuance of the audited financial statements, the auditor
becomes aware of material misstatements in the financial statements that exist prior
to the date of the audit report, the auditor should

A. Notify the parties who are currently relying on the financial statements.
B. Discuss the matter with the management, and should take the action appropriate
in the circumstance.
C. Document such information in the audit plan for succeeding audit.
D. Submit revised copies of the financial statements and audit report stockholders.

20. If, after the audited financial statements have been issued, the auditor becomes
aware that some information included in the statements is materially misleading, he
or she has

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 A. No obligation to disclose it, assuming he or she acted in good faith and without
negligence in arriving at the audit opinion.
B. An obligation to inform the board of directors of the misleading statements.
C. An obligation to inform all users who are relying on her financial statements.
D. An obligation to make certain that users who are relying on the financial
statements are informed.

21. When a new audit report is issued on financial statements because of subsequent
discovery of material misstatements on previously issued financial statements, the
audit report should include

A. No modification
B. Qualified opinion because of scope limitation
C. Qualified opinion because of inadequate disclosure.
D. Emphasis of a matter paragraph that refers to a note to the financial statements
that more extensively discusses the reason for the revision of the previously
issued financial statements.

22. When a fact, that existed before the date of the report is discovered and the
management revises the previously issued audited financial statements, the
following are appropriate except the:

A. New auditor’s report should include an emphasis of a matter paragraph that

refers to a note to the financial statements that discusses the reason for the
revision of the financial statements and to the earlier report issued by the auditor.
B. New auditor’s report should contain the original date.
C. Performance of the procedures that are designed to obtain sufficient evidence as
to subsequent events would ordinarily be extended to the date the revised
financial statements are approved by the entity’s management.
D. Auditor is permitted to restrict the audit procedures regarding the financial
statements to the effects of the subsequent event that necessitated the revision.

23. The management should assess those events that may cast significant doubt about
the entity’s ability to continue as a going concern for at least

A. Two years from the balance sheet date.

B. Two years from the date of the audit report.
C. One year from the balance sheet date
D. One year from the date of the audit report.

24. Which of the following is incorrect about the management’s responsibility to make an
assessment of an entity’s ability to continue as a going concern?

A. In assessing whether the going concern assumption is appropriate, the

management takes into account all the available information for the foreseeable
future, which should be at least twelve months from the balance sheet date.
B. Through there is a history of a profitable operations and a ready access to
financial resources, management must make its assessment with detailed
analysis.
C. Management’s assessment of the going concern assumption involves making a
judgment, at a particular point of time, about the future outcomes of events or
conditions which are inherently uncertain.
D. Management should make explicit assessment of its ability to continue as a
going-concern entity.

25. Which of the following least likely indicate a potential going-concern problem of an
entity?

A. Historical negative operating cash flows

B. Failure to comply with loan covenants
C. Refinancing of large short-term obligation with a medium-term loan
D. Pending regulatory proceedings against the entity.

26. Which of the following is correct about the auditor’s responsibility with respect to the
entity’s ability to continue as going-concern?

A. The auditor is responsible to make an assessment of the entity’s ability to

continue as a going concern.

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 B. The auditor’s responsibility is to consider the appropriateness of the
management’s use of the going concern assumption in the preparation of the
financial statements.
C. The auditor can predict future events or conditions that may cause an entity to
discontinue as a going concern.
D. The auditor may allow the management to make an assessment of its ability to
continue as a going concern if the management is believed to be objective in
doing such an assessment.

27. In evaluating the management’s assessment of the entity’s ability to continue as a

going concern, he should consider the following except:

A. The independence of the management

B. The process that the management has followed to make its assessment.
C. The assumptions on which the assessment is based and management’s plan for
future action.
D. Whether the assessment of which the author is aware of as a result of the audit
procedure.

28. Which of the following is an appropriate procedure to test for an indication of events
or conditions that cast significant doubt on the entity’s ability to continue as going
concern beyond the period assessed by management?

A. Inspection
B. Inquiry
C. Observant
D. Analysis

29. When events or conditions have been identified to cast significant doubt on the
entity’s ability to continue as a going concern, the auditor should

A. Consider reassessing control risk at the maximum

B. Consider the issuance of disclaimer of opinion due to scope of limitation
C. Review management plans for future actions based on its going-concern
assessments.
D. Report the matter to the board of directors and stockholders.

30. Which of the following audit procedures would most likely assist an auditor in
identifying conditions and events that may indicate that there could be substantial
doubt about an entity’s ability to continue as going concern?

A. Review compliance with the terms of debt agreements

B. Confirm account receivable from principal customers
C. Reconcile interest expense with debt outstanding
D. Confirm bank balance

31. The auditor relies on the client representation letter to:

A. Confirm written representation given to the auditor.

B. Document the continuing materiality of client representations
C. Guarantee the absence of management fraud.
D. Reduce the possibility of misunderstanding concerning management’s
representations.

32. The auditors are required to obtain a letter of representation from their clients. Which
of the following statements regarding the letter of representation is correct?

A. A letter of representation should impress upon management its responsibility for

the assertions in the financial statements.
B. A letter of representation should be signed by a company’s financial officials and
attorneys.
C. A letter of representation documents the responses from the management to
inquiries about various aspects of the audit.
D. A letter of representation is a written statement from a non-independent party
and as such should not be regarded as valid evidence.

33. A purpose of a management representation letter is to reduce

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 A. Audit risk to an aggregate level of misstatement that could be considered
material.
B. An auditor’s responsibility to detect material misstatements only to the extent
that the letter is relied on.
C. The possibility of misunderstanding concerning management’s responsibility for
the financial statements.
D. The scope of an auditor’s procedures concerning related party transactions and
subsequent events.

34. Which of the following statements is true with respect to management

representations?

A. Management representations are dated as of the balance sheet date.

B. Management representations may serve as a substitute for various types of
substantive procedures.
C. Management representations are signed by the auditor and delivered to client’s
officers.
D. Management representations are used to corroborate information obtained during
the audit.
35. When considering the use of management’s written representations as audit
evidence about the completeness assertions an auditor should understand that such
representations

A. Complement, but do not replace substantive tests designed to support the

assertion.
B. Constitute sufficient evidence to support the assertion when considered in
combination with a sufficiently low assessed level of control risk.
C. Are not part of the evidence considered to support the assertion.
D. Replace a low assessed level of control risk as evidence to support the assertion.

36. The auditor should obtain evidence that the management acknowledges its
responsibility for the fair representation of the financial statements in accordance
with PFRS, and has approved the financial statements. The auditor can obtain
evidence of management’s acknowledgement of such responsibility and approval

I. From relevant minutes of meetings of the board of directors or similar body.

II. By obtaining a written representation from the management
III. By obtaining a signed copy of the financial statements.

A. Any of the given procedures

B. Either I or II
C. I only
D. None of the procedure given

37. A management representation letter would ordinarily be dated as of the

A. Date the report is delivered to the entity audited.

B. Date the financial statements were approved by the client managements.
C. Balance sheet date of the latest period reported on.
D. Date a letter of audit inquiry is received from the entity’s attorney of record.

38. A written representation from a client’s management that, among other matters,
acknowledges its responsibility for the fair presentation of the financial statements,
should normally be signed by the

A. Chief executive officer and the chief financial officer

B. Chief financial officer and the chair of the board of directors.
C. Chair of the audit committee of the board of directors.
D. Chief executive officer, the chair of the board of directors, and the client’s lawyer.

39. If the management refuses to furnish certain written representations that the auditor
believes are essential. Which of the following is appropriate?

A. The auditor can rely on oral evidence relating to the matter as a basis for an
unqualified opinion.
B. The client’s refusal does not constitute a scope limitation that may lead to a
modification of the opinion.

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 C. The client’s refusal may have an effect on the auditor’s ability to rely on other
representations of the management.
D. The auditor should express an adverse opinion because of management’s refusal.

40. For which of the following matters should an auditor obtain written management
representations?

A. Management’s cost-benefit justifications for not correcting internal control

weaknesses.
B. Management’s knowledge of future plans that may affect the price of the entity’s
stock.
C. Management’s compliance with contractual agreements that may affect the
financial statements.
D. Management’s acknowledgement of its responsibility for employee’s violation of
laws.

41. A written management representation letter is most likely to be an auditor’s best

source of corroborative information of a client’s intention to

A. Terminate an employee pension plan

B. Make a public offering of its common stock.
C. Settle an outstanding lawsuit for an amount less than the accrued loss
contingency.
D. Discontinue a line of business.

42. Which of the following matters would an auditor most likely include in a management
representation letter?

A. Communications with the committee concerning weaknesses in the internal

control structure.
B. The completeness and availability of minutes of stockholders and directors’
meetings.
C. Plans to acquire or merge with other entities in the subsequent year.
D. Management’s acknowledgment of its responsibility for the detection of employee
fraud.

QUIZZERS

1. Which of the following is not among the characteristics of the procedures being
performed in completing the audit?

A. They are optional since they have only an indirect impact on the opinion to be
expressed.
B. They involve a lot of subjective judgment by the auditor.
C. They do not pertain to specific transaction cycles or accounts.
D. They are usually performed by the audit managers or other senior members of
the audit team who have extensive audit experience with the client.

2. Before teaching a final decision on the opinion to be issued, a conference generally is

held with the client. At this meeting, all of the following may be expected, except:

A. An oral report of the auditor’s major findings.

B. The auditor’s rationale for proposed adjustments or additional disclosures.
C. An agreement between the auditor and the client on the changes to be made in
the financial statements.
D. The delivery of the management letter.
3. Which of the following activities is ordinarily performed prior to year-end?

A. Audit documentation review

B. Interim testing
C. “Roll-forward” work
D. Subsequent event review

4. Which of the following statement is true?

A. It is more difficult to discover unrecorded transactions or events than to verify

recorded information.

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 B. It is more difficult to verify recorded information than to discover unrecorded
transactions or events.
C. It is equally difficult to verify recorded information and to discover unrecorded
transactions or events.
D. None of the given choices is true.

5. Upon completion of the audit, the auditor needs to consider uncorrected

misstatements because:

A. The aggregate of the uncorrected misstatements, when considered, makes the

financial statements materially misstated.
B. There is a need to revise the financial statements after their issuance.
C. They are basis of whether the auditor needs to redocument internal control.
D. The aggregate of uncorrected misstatements is the basis of the auditor to
reassess materiality level.

6. What should a prudent auditor do when the aggregate of uncorrected misstatements

approaches the materiality level?

A B C D

Perform additional procedures YES NO NO YES

Request management to adjust
financial statements for identified YES YES NO YES
misstatements
Request management to adjust
financial statements for projected YES NO YES NO
misstatements

7. If based on the aggregate of uncorrected misstatements the auditor believes there

may be material misstatements, the auditor should perform additional procedure. If
the client refuses to adjust the financial statements and the auditor is not able to
conclude that the aggregate of uncorrected misstatements is not material, the
auditor should:

A. Issue a standard opinion

B. Consider resigning from the engagement
C. Appropriately modify the audit report
D. Obtain additional representation letter covering uncorrected misstatements.

8. Which of the following communications is ordinarily signed by the auditor?

A. Attorney’s letter
B. Management representation letter
C. Internal control deficiency letter
D. All of these are signed by the auditor

9. They involve analysis of significant ratios and trends including the resultant
investigation of fluctuations and relationships that are inconsistent with their relevant
information or expectation:

A. Inquiry
B. Analytical procedures
C. Account analysis
D. Inspection

10. Analytical procedures performed in the overall review stage of an audit suggest that
several accounts have unexpected relationships. The result of these procedures most
likely indicate that

A. Unaccounted effects of irregularities exist.

B. Internal control activities are not operating effectively.
C. Additional tests of details are required.
D. The communication with the audit committee should be revised.

11. When substantive tests are performed before the balance sheet date, at a minimum
the auditors should, at or after the balance sheet date:

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 A. Changes occurred in the account balances between the two dates.
B. Perform analytical procedures, including comparison of the account balances at
the two dates.
C. Reconfirm all balances that were confirmed at interim date.
D. Confirm all balances that were not confirmed at interim date.

12. An assumption underlying analytical procedures is that

A. These procedures cannot replace tests of balances and transactions.

B. Statistical tests of financial information may lead to the discovery of material in
the financial statements.
C. The study of financial ratios is an acceptable alternative to the investigation of
unusual fluctuations.
D. Relationships among data may reasonably be expected to exist and continue in
the absence of known conditions to the contrary.

13. An auditor suspects that fictitious sales may have been recorded during the year.
Which of the following analytical review results would most likely indicate that
fictitious sales were recorded?

A. Uncollectible account write-offs increased by 10 percent sales increased by 10

percent, and accounts receivable increased by 10 percent.
B. Gross margin decreased from 40 to 35 percent.
C. The number of day’s sales in accounts receivable decreased from 64 to 38.
D. Accounts receivable turnover decreased from 7.1 to 4.3.

14. Auditors apply analytical procedures on client’s operations on order to identify

A. Improper separation of accounting and other financial duties.

B. Weaknesses of a material nature in the client’s internal control.
C. Unusual transactions.
D. Noncompliance with prescribed control procedures.

15. Of the following procedures, which one does not produce analytical evidence?

A. Compare revenue, cost of sales, and gross profit with the prior year and
investigate significant variations.
B. Examine monthly performance reports and investigate significant revenue and
expenses variances.
C. Confirm customer’s accounts receivable and clear all material exceptions.
D. Compare sales trends and profit margins with industry averages and investigate
significant differences.

16. The extent to which analytical procedures provide useful substance evidence
depends on

A. The effectiveness of client’s internal control system.

B. The integrity and training of client’s personnel.
C. Their reliability in the circumstances.
D. The experience of the auditor using them.

17. Analytical procedures:

A. Are required to be performed in the planning phase of the audit.

B. Are often done during examination’s testing stage.
C. Are required to be done during the completion phase of the audit.
D. All of them.

18. An important benefit from industry comparison is:

A. An aid to understanding the client’s business.

B. An indicator of errors.
C. An indicator of irregularities.
D. A least-cost indicator for audit procedures.

19. A benefit obtained from comparing client’s data with industry average is that it
provides

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 A. An indication of the likelihood of financial failure.
B. An indication where errors exist in the statements.
C. A benchmark to be used in evaluating client’s budget.
D. A comparison of “what is” with “what should be”.

20. When the current year’s unaudited trial balance is compared to the prior year’s
audited trial balance,

A. Errors are identified.

B. Discrepancies are discovered.
C. Irregularities become apparent.
D. Changes are highlighted.

21. When a higher than normal ration of long-term debt to net worth is coupled with a
lower than average ratio of profits to total assets, the company

A. is highly successful.
B. is comparable with industry standards.
C. has a high risk of financial failure.
D. has a liquidity problem.

22. Which of the following discoveries through the use of analytical procedures would
indicate a relatively high risk of financial failure?

A. A decline in gross margin percentages.

B. An increase in the balance of fixed assets.
C. A higher than normal ration of long term debt to net worth as well as a lower than
average ratio of profits to total assets.
D. An increase in the ratio of allowance for uncollectible accounts to gross accounts
receivable, while at the same time accounts receivable turnover also decreased.

23. “unusual fluctuations” occur when

A. Significant differences are not expected but do exist.

B. Significant differences are expected but do not exist.
C. There is a material accounting error or irregularity.
D. Any one of the given three situations may occur.

24. Which method of analytical procedure is most useful because many expenses, such
as cost of goods sold, might be expected to bear a predictable relationship to net
sales?

A. Horizontal analysis
B. Trend analysis
C. Vertical analysis
D. Reasonable analysis

25. One type of analytical procedure is trend analysis. Which of the following is the best
example of trend analysis?

A. Comparison of company financial ratios to that of its competitors.

B. Comparison of accounting records to budgeted amounts.
C. Comparison of inventory levels over the past 3 years.
D. Comparison of interest expenses to outstanding loan balances.

26. Analytical procedures are those that

A. Evaluate the accuracy of the account balances

B. Assess the overall reasonableness of transactions and balances.
C. Review the effectiveness of internal control procedures.
D. Analyze the effect of management procedures on the accounting system.

27. Analytical procedures enable the auditor to predict the balance or quantity of an item
under audit. Information to develop this estimate can be obtained from all of the
following except

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 A. Trending transactions through the system to determine whether procedures are
being applied as prescribed.
B. Comparison of financial data with data for comparable prior periods, anticipated
results (e.g budgets and forecasts), and similar data for the industry in which the
entity operates.
C. Study of the relationships of elements of financial data that would be expected to
conform to a predictable pattern based upon the entity’s experience.
D. Study of the relationships of financial data with relevant nonfinancial data.

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

A. Analytical procedures usually involve comparisons of ratios developed from

recorded amounts with assertions developed by the management.
B. Analytical procedures used in planning an audit ordinarily use data aggregated at
a high level.
C. Analytical procedures can replace tests of controls in gathering evidence to
support the assessed level of control risk.
D. Analytical procedures are more efficient, but not more effective, than tests of
details and transactions.

29. Which of the following items tend to be the most predictable for purposes of
analytical procedures applied as substantive tests?

A. Relationships involving balance sheet accounts

B. Transactions subject to management discretion
C. Relationships involving income statement accounts
D. Data subject to audit testing in the prior year.

30. According to professional standards, analytical procedures are least likely to be

applied to:

A. Test disclosure about reportable operating segments.

B. Review the financial statements or interim financial information.
C. Compile the financial statements.
D. Plan an audit and assist in the final review.

31. Which of the following is not a typical analytical procedure?

A. Study of relationships of financial information with relevant nonfinancial

information.
B. Comparison of financial information with similar information regarding the
industry in which the entity operates.
C. Comparison of recorded amounts of major disbursements with appropriate
invoices.
D. Comparison of recorded amounts of major disbursements with budgeted
amounts.

32. Which of the following would be at least likely to be comparable between similar
corporations in the same industry line of business?

A. Earnings per share

B. Return on total assets before interest and taxes
C. Accounts receivable turnover
D. Operating cycle

33. Sales commissions as a percentage of sales declined significantly during the year
under audit. Of the following possible causes, the most likely is

A. Sales increased during the year.

B. The sales force was reduced at the end of the year.
C. Sales commission rates were increased at the beginning of the year.
D. Fictitious sales were recorded at year-end to initiate earnings. Commissions were
not recorded on these sales.

34. In evaluating the effectiveness of a company’s credit and collection policies, the ratio
most likely to be used by an auditor is

A. Quick ratio

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 B. Accounts receivable turnover
C. Working capital turnover
D. Return on sales

35. During an audit of the accounts receivable function, you found that the accounts
receivable turnover rate had fallen from 7.3 to 4.3 over the last three years. What is
the most likely cause of the decrease in the turnover rate?

A. An increase in the discount offered for early payment.

B. A more liberal credit policy.
C. A change from net 30 to net 25.
D. Greater cash sales.

36. Significant unexpected fluctuations identified by analytical procedures will usually

necessitate a(an)

A. Consistency qualification
B. Review of internal control
C. Explanation in the representation letter.
D. Auditor investigation.

37. An auditor compares 2010 revenues and expenses with those of the prior year and
investigates all changes exceeding 10%. By this procedure the auditor would be most
likely to learn that

A. An increase in property tax rates has not been recognized in the client’s accrual.
B. The 2010 provision for uncollectible accounts is inadequate because of worsening
economic conditions.
C. Fourth quarter payroll taxes were not paid.
D. The client changed its capitalization policy for small tools in 2010

38. Of the following procedures, which is the most important that an auditor should use
when performing an analytical review of the income statement?

A. Select sales and expense items and trace their amounts to related supporting
documents.
B. Compare actual revenues and expenses with the corresponding figures of the
previous year and investigate significant differences.
C. Obtain from the proper client representatives, inventory certificates for the
beginning and ending inventory amounts that were used to determine cost of
sales.
D. Ascertain that the net income amount in the statement of changes in financial
position (statement of cash flows) agrees with the net income amount in the
income statement.

39. The auditor’s analytical procedures will be facilitated if the client

A. Uses a standard cost system that produces variance reports.

B. Segregates obsolete inventory before the physical inventory count.
C. Corrects material weaknesses in internal control before the beginning of the
audit.
D. Reduces inventory balances to the lower of cost or market.

40. Which of the following is not a purpose served by the application of analytical
procedures?

A. As part of audit planning to assist in locating significant changes in revenues and

expenses.
B. To provide a basis for lowering materiality thresholds where significant earnings
inflation is indicated.
C. To determine the economic substance of related party transactions.
D. As part of audit review to determine that all significant abnormalities have been
resolved to the auditor’s satisfaction.

41. Auditors sometimes use comparison of ratios as audit evidence. For example, an
unexplained decrease in the ration of gross profit to sales may suggest which of the
following possibilities?

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 A. Unrecorded purchases
B. Unrecorded sales
C. Merchandise purchases being charged to selling and general expense
D. Fictitious sales

42. In applying analytical procedures, the auditor discovered that gross profit as a
percent of sales declined sharply during the current year. A possible cause might be
A. The client has significant amount of obsolete inventory carried at full cost
B. A significant quantity of finished goods located in a distant warehouse was
inadvertently omitted from the ending inventory.
C. Recorded sales included goods that were shipped the following year.
D. Depreciation of office equipment was overstated.

43. An abnormal fluctuation in gross profit that might suggest the need for extended
audit procedures for sales and inventories would most likely be identified in the
planning phase of the audit by the use of

A. Tests of transactions and balances

B. A preliminary review of internal control
C. Specialized audit programs
D. Analytical procedures

44. What form of analytical review might uncover the existence of obsolete
merchandise?

A. Inventory turnover rates

B. Decrease in the ratio of gross profit to sales
C. Ratio of inventory to accounts payable
D. Comparison of inventory values to purchase invoices.

45. What is ordinarily the primary concern when auditing the income statement?

A. Overstatement of revenues, expenses and net income

B. Overstatement of revenues and expenses, and overstatement of net income.
C. Overstatement of net income and understatement of revenues and expenses.
D. Overstatement of revenue and net income and understatement of expenses.

46. Compared to balance sheet accounts, the audit of income statement accounts
generally relies more heavily on:

A. Tests of details of transactions

B. Tests of details of balances
C. Analytical procedures.
D. Tests of controls.

47. What audit procedure is not ordinarily used to examine selling, general, and
administrative expenses?

A. Analytical procedures
B. Use of budgets to identify unexpected differences
C. Confirmations of amounts paid with advertising agencies
D. Detailed tests of balances

48. Which of the following income statement accounts is least likely to be subject to
extensive detailed tests of balances?

A. Legal and professional fees

B. Contributions
C. Cost of sales
D. Officers’ salaries

49. Which of the following procedures is normally not considered if the auditor’s
substantive procedures for revenue and expense accounts?

A. Evaluate evidence gathered in the audit of balance sheet accounts and

examination of transaction cycles.
B. Individually confirm significant transactions with third parties.

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 C. Perform analytical procedures to verify the overall reasonableness of revenue and
expense accounts.
D. Examine “miscellaneous”, “other” and “clearing” accounts that are classified as
revenues and expenses.

50. The auditors best course of action with respect to “other financial information”
included in a client prepared annual report containing the auditor’s report is to:

A. Indicate in the auditors’ report that the “other financial information” is unaudited.
B. Consider whether the “other financial information is accurate by performing a
review.
C. Obtain written representations from the management as to the material accuracy
of the “other financial information”
D. Read and consider the manner of presentation of the “other financial information”

51. Which of the following events in the subsequent period is an example of type 2
subsequent event?

A. Realization of recorded year-end receivables at a different amount than what is

recorded.
B. Settlement of recorded year-end estimated product warranty liabilities at an
amount different from what is recorded.
C. Purchase of a business
D. Purchase of a machine

52. Which of the following statements best expresses the auditor’s responsibility with
respect to events occurring in the subsequent period?

A. The auditor has no responsibility for events occurring in the subsequent period
unless these events affect transactions recorded on or before the balance sheet
date.
B. The auditor’s responsibility is to determine that transactions recorded on or
before the balance sheet date actually occurred.
C. The auditor is fully responsible for events occurring in the subsequent period and
should extend all detailed procedures through the last day of the field work.
D. The auditor is responsible for determining that a proper cutoff has been made
and for performing a general review of events occurring in the subsequent period.

53. An auditor concludes that the omission of a substantive procedure necessary at the
time of the audit may impair the auditor’s current ability to support the opinion that
had been previously issued. The auditor need not apply the omitted procedure if the

A. Risk of adverse publicity or litigation is low.

B. Results of other procedures that were applied tend to compensate for the omitted
procedure.
C. Auditor’s opinion is qualified because of a departure from generally accepted
accounting principles.
D. Results of the subsequent period’s tests of controls make the omitted procedure
less important.

54. Which of the following procedures can be performed only in the subsequent period?

A. Examination of data to determine that a proper cutoff had been made.

B. Tests of details of balances
C. Tests of the details of transactions
D. Reading of the minutes of the board of directors’ meetings.

55. A major customer of an audit client suffers a fire just prior to completion of year-end
fieldwork. The audit client believes that this event could have a significant direct
effect on the financial statements. The auditor should:

A. Advise the management to disclose the event in notes to the financial

statements.
B. Disclose the event in the auditor’s report.
C. Withhold submission of the auditor’s report until the extent of the direct effect on
the financial statements is known.
D. Advise the management to adjust the financial statements.

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56. An auditor is concerned with completing various phases of the audit after the balance
sheet date. This subsequent period extends to the date of the

A. Auditor’s report.
B. Final review of the financial statements.
C. Public issuance of the financial statements.
D. Delivery of the auditor’s report to the client.

57. Which of the following procedures should an auditor ordinarily perform regarding
subsequent events?

A. Compare the latest available interim financial statements with the financial
statements being audited.
B. Send second requests to client’s customers who failed to respond to the first
accounts receivable confirmation requests.
C. Communicate material weaknesses in internal control to the client’s audit
committee.
D. Review the cutoff bank statements for several months after the year-end.

58. Which of the following events occurring after the issuance of an auditor’s report most
likely would cause the auditor to make further inquiries about the previously issued
financial statements?

A. A technological development that could affect the entity’s future ability to

continue as going concern.
B. The discovery of information regarding a contingency that existed before the
financial statements were issued.
C. The entity’s sale of a subsidiary that accounts for 30% of the entity’s consolidated
sales.
D. The final resolution of a lawsuit which is adequately explained in a separate
paragraph of the auditor’s report.

59. After issuing a report, an auditor has no obligation to make continuing inquiries or
perform other procedures concerning the audited financial statements, unless

A. An information which existed at the report date that affects the report, comes to
the auditor’s attention.
B. The control environment changes after the issuance of the report.
C. An information about an event that occurred after the end of field work comes to
the auditor’s attention.
D. The final determinations or resolutions are made of contingencies that had been
disclosed in the financial statements

60. Subsequent to the issuance of the auditor’s report, the auditor became aware of facts
existing at the report date that would have affected the report had the auditor then
been aware of such facts. After determining that the information is reliable, the
auditor should next

A. Notify the board of directors that the auditor’s report must no longer be
associated with the financial statements.
B. Determine whether there are persons relying or likely to rely on the financial
statements who would attach importance to the information.
C. Request the management to disclose the effects of the newly discovered
information by adding a footnote to subsequently issued financial statements.
D. Issue a revised set of pro-forma financial statements that consider the newly
discovered information.

61. On March 15, 2010, Kiel, CPA, expressed an unqualified opinion on a client’s audited
financial statements for the year ended December 31, 2009. On May 4, 2010, Kiel’s
internal inspector program disclosed that engagement personnel failed to observe
the client’s physical inventory. Omission of this procedure impairs Kiel’s current
ability to support unqualified opinion. If the shareholders are currently relying on the
opinion, Kiel should first

A. Advise the management to disclose to the shareholders that his unqualified

opinion should not be relied on.
B. Undertake to apply alternative procedures that would provide a satisfactory basis
for an unqualified opinion.

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 C. Reissue the auditor’s report and add an explanation paragraph describing the
departure from PFRS.
D. Compensate for the omitted procedure by performing tests of controls to reduce
audit risk to a sufficiently low level.

62. Six months after issuing an unqualified opinion on audited financial statements, an
auditor discovered that the engagement personnel failed to confirm several of the
client’s material accounts receivables balances. The auditor should first

A. Request permission of the client to undertake the confirmation of accounts

receivable.
B. Perform alternative procedures to provide a satisfactory basis for an unqualified
opinion.
C. Assess the importance of the omitted procedures to the auditor’s ability to
support the previously issued opinion.
D. Inquire whether there are persons currently relying or likely to rely, on the
unqualified opinion.

63. When a fact is discovered after the date of the report but before the financial
statements are issued and the client amends the financial statements, would the
following procedures or actions be necessary?

A B C D
Procedures to obtain evidence with respect to
subsequent events are extended. YES YES NO NO

An emphasis of a matter paragraph is required YES NO NO YES

64. The auditor’s primary means of obtaining corroboration of management’s information

concerning litigation is a

A. Letter of audit inquiry to the client’s lawyer.

B. Letter of corroboration from the auditor’s lawyer upon review of the legal
documentation.
C. Confirmation of claims and assessments from other parties to the litigation.
D. Confirmation of claims and assessments from an office of the court presiding over
the litigation.

65. Which of the following is not a procedure to discover unasserted claims or contingent
liabilities?

A. Review of Board of Director minutes

B. Sending a letter of inquiry to the client’s attorney
C. Substantive testing of company accounts receivable
D. Searching newspapers and other periodicals for stories about the client and its
industry

66. Which of the following concerning litigation, claims, and assessments which were
extracted from a letter from a client’s lawyer, is most likely to cause the auditor to
request clarification?

A. “ I believe that the possible liability to the company is nominal in amount”

B. “ I believe that the action can be settled for less than the damages claimed”
C. “I believe that the plaintiff’s case against the company is without merit”
D. “I believe that the company will be able to defend this action successfully”

67. In evaluating whether there is a sufficiently low probability of material misstatement

in the financial statements, the auditors accumulate:

A. Likely misstatements in the financial statements

B. Known misstatements in the financial statements.
C. Known, projected and other estimated misstatements in the financial statements.
D. Known, projected and potential misstatements in the financial statements.

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68. Which of the following is typically the auditor’s initial procedure to be performed to
identify litigation, claims and assessments?

A. Perform analytical procedures

B. Confirm litigation, claims, and assessments with third-party litigants.
C. Obtain a letter from the client’s legal counsel
D. Inquire of the client regarding the existence of litigation, claims, and assessments

69. The auditors should request that an audit client sends a letter of inquiry to those
attorneys who have been consulted concerning litigation, claims, or assessments.
The primary reason for this request is to provide:

A. An information concerning the progress of cases to date

B. Corroborative evidential matter
C. An estimate of the peso amount of the probable loss.
D. An expert opinion regarding whether a loss is possible, probable, or remote.

70. In an audit of contingent liabilities, which of the following procedures would be least
effective?

A. Reviewing a bank confirmation letter

B. Examining the customer confirmation replies
C. Examining the invoices for professional services
D. Reading the minutes of the board of directors meetings

71. An attorney, responding to an auditor as a result of the client’s letter of audit inquiry,
may appropriately limit the response to

A. Items which have high probability of being resolved to the client’s detriment.
B. Asserted claims and pending or threatened litigation.
C. Legal matters subject to unsettled points of law, uncorroborated information, or
other complex judgments.
D. Matters to which the attorney has given substantial attention I the form of legal
consultation or representation.

72. The primary reason why an auditor requests that letters of inquiry be sent to the
client’s legal; counsel is to provide the auditor with

A. A description and evaluation of litigation, claims, and assessments that existed at

the balance sheet date of.
B. An expert opinion as to whether a loss is possible, probable, or remote.
C. The opportunity to examine the documentation concerning litigation, claims, and
assessments.
D. Corroboration of the information furnished by the management concerning
litigation, claims, and assessments.

73. An auditor should obtain evidential matter relevant to each of the following factors
concerning third-party litigation against a client except the

A. Period in which the underlying cause for legal action occurred.

B. Probability of an unfavorable outcome
C. Jurisdiction in which the matter will be resolved.
D. Existence of a situation indicating an uncertainty as to the possible loss.

74. The primary source of information about litigation, claims, and assessments is the:

A. Board of directors
B. Client’s attorneys
C. Management
D. Reply through direct confirmation with the other party involved.

75. The letter of audit inquiry to the client’s lawyer(s) is the auditor’s primary means of
obtaining:

A. Corroboration of the information on litigation claims, and assessments provided

by the auditor’s attorneys.
B. Corroboration of the information on litigation claims, and assessments provided
by management.

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 C. Corroboration of the information on litigation claims, and assessments provided
by the other party to the matter.
D. Initial information about litigation claims, and assessments.

76. A lawyer’s refusal to respond to a letter of audit inquiry normally requires the auditor
to issue a(n):
A. Qualified opinion or a disclaimer of opinion
B. Unqualified opinion with an explanatory paragraph
C. Qualified or adverse opinion
D. Standard three-paragraph unqualified opinion

77. Which of the following auditing procedures is ordinarily performed last?

A. Reading of the minutes of the directors’ meetings held subsequent to balance

sheet date
B. Confirming accounts payable
C. Obtaining a management representation letter
D. Testing of the purchasing function

78. When litigation or claims have been identified or when the auditor believes they may
exist, the auditor should

A. Seek direct communication with the entity’s lawyers.

B. Disclose the litigation and claims in the auditor’s report.
C. Issue unqualified opinion with explanatory paragraph.
D. Issue qualified or adverse opinion.

79. When an audit is made in accordance with the Philippine Standard on Auditing, the
auditor should always

A. Document the understanding of the client’s internal control and the basis for all
conclusions about the assessed level of control risk for financial statement
assertions.
B. Employ analytical procedures as substantive tests to obtain evidence about
specific assertions related to account balances.
C. Obtain appropriate representations from the management.
D. Observe the taking of physical inventory on the balance sheet date.

80. Written management representationobtained by the auditor in connection with a

financial statement audit should include

A. A summary of all corrected misstatements.

B. Management’s belief that the effects of uncorrected misstatements are not
material.
C. A summary of all uncorrected misstatements.
D. Management’s belief that any uncorrected misstatements are in fact not
misstatements.

81. An auditor accepted an engagement to audit the 2009 financial statements of DRL.
Corporation and began the field work on September 30, 2009. DRL gave the auditor
the 2009 financial statements on January 7, 2010. The auditor completed the
fieldwork and simultaneously obtains approval of the financial statements by the
management on February 10, 2010. The management representation letter should
normally be dated:

A. December 31, 2009

B. January 17, 2010
C. February 10, 2010
D. February 16, 2010

82. Which of the following is least likely an action that may mitigate an entity’s difficulty
to continue as a going concern?

A. Increased cash dividends

B. Retirement of outstanding capital stock in order to improve earnings per share
C. Retirement of long-term debt in order to improve profitability
D. Disposal of property in a sale-leaseback arrangement

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83. Road, CPA, believes there is substantial doubt about the ability of Kennon Company
to continue as a going concern for a reasonable period of time. In evaluating
kennon’s plan for dealing with the adverse effects of future conditions and events,
Road most likely would consider, as a mitigating factor, kennon’s plans to:

A. Make the credit terms for sales on account more lenient

B. Strengthen internal controls over cash disbursements.
C. Purchase the production facilities currently being leased for a related party.
D. Postpone those expenditures for research and development projects.

84. The auditor is most likely to discover omitted audit procedure during:

A. Preparation of the management letter

B. Follow-up procedures performed in compliance with generally accepted auditing
standards.
C. A post engagement review performed as part of the firm quality control
inspection program.
D. The final review of the working papers.

85. Which of the following types of audit documentation review is focused on ensuring
that the quality of audit work and reporting is consistent with the quality standards of
the firm?

A. Review of staff work by audit supervisor

B. Review of staff work by audit manager
C. Review of work by audit manager and audit partner
D. Review of work by second (reviewing) partner.

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