_____ 1.

Which of the following best describes the main reason that independent
auditors report on management's financial statements?

A. Management fraud may exist, and it is likely to be detected by independent auditors.

B. The management that prepares the statements and the persons who use the statements
may have conflicting interests.
C. Misstated account balances may be corrected as the result of the independent audit
work.
D. The management that prepares the statements may have a poorly designed system of
internal control.

_____ 2. Which of the following best describes assurance services?

A. Independent professional services that report on the client's financial statements.
B. Independent professional services that improve the quality of information for
decision makers.
C. Independent professional services that report on specific written management
assertions.
D. Independent professional services that improve the client's operations.

_____ 3. Which of the following are elements of a CPA firm's quality control that
should be considered in establishing its quality control policies and procedures?
Human Resources Monitoring Engagement Performance
A. Yes Yes No
B. Yes Yes Yes
C. No Yes Yes
D. Yes No Yes

_____ 4. Statement 1: Giving an opinion on a prize promoter's claims about the amount
of sweepstakes prizes awarded in the past is considered an assurance engagement.
Statement 2: In an attestation engagement, a CPA practitioner is engaged to give expert
testimony in court on particular facts in a corporate income tax controversy.
Statement 3: A determination of cost savings obtained by outsourcing cafeteria services
is most likely to be an objective of financial auditing.
A. All of the statements are true. C. Two of the statements are true.
B. Two of the statements are false. D. All of the statements are false.

_____ 5. Under the ethical standards of the profession, which of the following
investments in a client is not considered to be a direct financial interest?
A. An investment held through a nonclient regulated mutual fund.
B. An investment held through a nonclient investment club.
C. An investment held in a blind trust.
D. An investment held by the trustee of a trust.

_____ 6. In properly designed internal control, the same employee should not be
permitted to
A. Sign checks and cancel supporting documents.
B. Receive merchandise and prepare a receiving report.
C. Prepare disbursement vouchers and sign checks.
D. Initiate a request to order merchandise and approve merchandise received.

_____ 7. An auditor considers internal control to:

A. Determine whether assets are safeguarded
B. Suggest improvements in internal control
C. Plan audit procedures
D. Express an opinion

_____ 8. Ey-ey-ow Corp. has engaged a public accounting firm to issue a report on the
accuracy of product quality specifications included in trade sales agreements. This is
an example of an
A. Financial statement audit
B. Attestation service
C. Compliance audit
D. Operational audit

_____ 9. The current Chairperson of the Commission on Audit is

A. John Carlos Wee

B. Jose Calida
C. Roland Pondoc
D. Gamaliel Cordoba

_____ 10. Which of the following elements is not part of an entity’s internal control?
A. Control activities
B. The accounting system
C. The control environment
D. Control risk
Consider the following information for items 11 to 15:
You are an audit senior of GIA & Co and have worked on the external audit of MJ Co, an
unlisted company, since your firm was appointed external auditor two years ago.

MJ owns a chain of nine restaurants and is a successful company. MJ has always been
subject to national hygiene regulations, especially in relation to the food preparation
process. Non-compliance can result in a large fine or closure of the restaurant
concerned.

_____ 11. Despite running a successful company, MJ’s Board have often needed to be
reminded of some fundamental principles and you often have to explain key concepts.

Which of the following statements best defines the external audit?

A. The external audit is an exercise carried out by auditors in order to give an
opinion on whether the financial statements of a company are fairly presented.
B. The external audit is an exercise carried out in order to give an opinion on the
effectiveness of a company's internal control system.
C. The external audit is performed by management to identify areas of deficiency within
a company and to make recommendations to mitigate those deficiencies.
D. The external audit provides negative assurance on the truth and fairness of a
company's financial statements.

_____ 12. The Board has also struggled to differentiate between their responsibilities
and those of the external auditor in circumstances such as the prevention and detection
of fraud and error, and compliance with regulations.

Which of the following statements best describes GIA & Co.’s responsibility regarding
MJ’s compliance with hygiene regulations, in line with PSA 250 Consideration of laws
and regulations in an audit of financial statements?
A. GIA & Co should actively prevent and detect non-compliance with the regulations.
B. GIA & Co should perform specific audit procedures to identify possible non-
compliance.
C. GIA & Co should obtain sufficient appropriate audit evidence about MJ's compliance
with the regulations as they have a direct effect on the financial statements.
D. GIA & Co does not have any responsibility as the hygiene regulations do not have a
direct effect on the financial statements.

_____ 13. The Board of MJ have recently notified you that the national hygiene
regulations have been updated and are now much more stringent and onerous than before.

With this in mind, the Board have asked your firm to conduct a review of MJ’s
compliance with hygiene regulations, in order to allow the Board to assess whether the
appropriate processes have been implemented at each of the nine restaurants. The review
is not expected to include the provision of accounting advice or the preparation of
figures in the financial statements.

This work is likely to be very lucrative. Your firm has sufficient experience to
undertake the above review engagement. The partner responsible for this review has
informed you that the engagement is an assurance engagement.

Which of the following would NOT have been relevant to the partner in forming this
opinion?
A. The existence of a three-party relationship
B. The existence of suitable criteria
C. The determination of materiality
D. The subject matter

_____ 14. The partner responsible for this review engagement has asked you to tell him
what level of assurance you believe GIA & Co should provide, and also what type of
opinion the firm should give. What is the level of assurance and type of opinion that
can be provided on this review engagement?
Level of assurance Report wording
a. Reasonable Positive
b. Reasonable Negative
c. Limited Positive
d. Limited Negative

_____ 15. The audit partner has told you that the independence threats arising from GIA
& Co performing the review engagement should be monitored carefully. Which of the
following is likely to cause the audit partner most concern?
A. According to the Code of Ethics, GIA & Co is prohibited from providing other
assurance services to an audit client.
B. The review engagement is likely to give rise to a self-review threat, as the
outcomes of the review could form the basis of the financial statements which the
audit team will audit.
 C. The lucrative nature of the review engagement may make the external audit team less
inclined to require management to make adjustments or to issue a modified audit
opinion, for fear of losing the review engagement.
D. If the new review engagement causes GIA & Co.’s fee income from MJ to exceed 15% of
the firm’s total fees, the Code of Ethics states that the new engagement must be
turned down.

_____ 16. The primary responsibility for an organization's financial statements rests
with
A. The internal auditors. C. The SEC.
B. Management. D. The external auditors.

_____ 17. The term “error” refers to unintentional misrepresentation of financial

information. Examples of errors are when
I. Assets have been misappropriated.
II. Transactions without substance have been recorded.
III. Records and documents have been manipulated and falsified.
IV. The effects of the transactions have been omitted from the records.

A. All of the above C. II and IV only

B. I and III only D. None of the above

_____ 18. Inquiries of warehouse personnel concerning possible obsolete or slow-moving

inventory items provide assurance about management’s assertion of
A. Valuation. C. Presentation and disclosure
B. Completeness. D. Existence

_____ 19. Which of the following threats to independence would most likely be created
by a financial interest in an assurance client?
A. Advocacy threat C. Self-interest threat
B. Intimidation threat D. Self-review threat

_____ 20. If the auditor is precluded by the entity from obtaining sufficient
appropriate audit evidence to evaluate whether non-compliance may be material to the
financial statements, has, or is likely to have, occurred, the auditor should express
A. Qualified/adverse opinion C. Unqualified opinion
B. Qualified/disclaimer of opinion D. Adverse/disclaimer of opinion

_____ 21. Which of the following analytical audit findings would MOST likely indicate a
possible problem?
A. A material decrease in the receivables turnover.
B. A material increase in inventory turnover.
C. A material decrease in days’ sales outstanding.
D. A material increase in the acid test ratio.

_____ 22. Audit evidence can come in different forms with different degrees of
persuasiveness. Which of the following is the LEAST persuasive type of evidence?
A. Documents mailed by outsiders to the auditor.
B. Correspondence between the auditor and vendors.
C. Sales invoices inspected by the auditor.
D. Computations made by the auditor.

_____ 23. An auditor may use confirmations of accounts receivable. Which of the
following statements is incorrect with respect to the confirmation process when applied
to accounts receivable?
A. The confirmation requests should be mailed to respondents by the CPAs.
B. A combination of positive and negative request forms must be used if receivables are
significant.
C. Confirmations address existence more than they address completeness.
D. Absent a few circumstances, there is a presumption that the auditor will confirm
accounts receivable.

_____ 24. Auditors often observe the counting of their clients’ inventories. Which of
the following statements is incorrect with respect to the inventory observation?
A. With strong internal control, the inventory count may be at the end of the year or
at other times.
B. When a client has many inventory locations, auditors ordinarily need not be present
at each location.
C. When the client manufactures a product, direct labor and overhead ordinarily become
a part of inventory item costs.
D. At the completion of the count, an auditor will ordinarily provide the client with
copies of his or her inventory test counts to help assure inventory accuracy.

_____ 25. Which audit procedure is most effective in testing credit sales for
overstatement?
A. Trace a sample of postings from the sales journal to the sales account in the
general ledger.
B. Vouch a sample of recorded sales from the sales journal to shipping documents.
C. Prepare an aging of accounts receivable.
D. Trace a sample of initial sales orders to sales recorded in the sales journal.

_____ 26. ________ tests are for omitted transactions, while ________ tests are for
nonexistent transactions.
A. Tracing, vouching C. Verifying, tracking
B. Vouching, tracing D. Tracking, verifying

_____ 27. The permanent file of an auditor’s working papers generally would not include
A. Bond indenture agreements C. Working trial balance
B. Lease agreements D. Flowchart of internal control

_____ 28. When using confirmations to provide evidence about the completeness assertion
for accounts payable, the appropriate population most likely would be
A. Vendors with whom the entity has previously done business.
B. Amounts recorded in the accounts payable subsidiary ledger.
C. Payees of checks drawn in the month after the year-end.
D. Invoices filed in the entity’s open invoice file.

_____ 29. Which of the following would not be considered an analytical procedure?
A. Estimating payroll expense by multiplying the number of employees by the average
hourly wage rate and the total hours worked.
B. Projecting an error rate by comparing the results of a statistical sample with the
actual population characteristics.
C. Computing accounts receivable turnover by dividing credit sales by the average net
receivables.
D. Developing the expected current year sales based on the sales trend of the prior
five years.

_____ 30. To be appropriate, evidence must be all of the following except:

A. Sufficient C. Relevant
B. Reliable D. Unbiased

IDENTIFICATION: Write the word/phrase described by the statements on the space provided
for before each number.

_____________ 31. An auditor should comply with the relevant laws and regulations and
should avoid any action that discredits the profession.

_____________ 32. Any information used by the auditor to determine whether the
information being audited is stated in accordance with established criteria

_____________ 33. This threat may occur when a previous judgment needs to be re-
evaluated by the professional accountant responsible for that judgment.

_____________ 34. It consists of evaluations of plausible relationships among financial

and nonfinancial data.

_____________ 35. This contains data of a historical or continuing nature.

_____________ 36. The state of mind that permits the expression of a conclusion without
being affected by influences that compromise professional judgment, thereby allowing an
individual to act with integrity, and exercise objectivity and professional skepticism

_____________ 37. The auditor’s independent execution of procedures or controls that

were originally performed as part of the entity’s internal control

_____________ 38. It determines the specific auditing procedures that are necessary in
the circumstances to afford a reasonable basis for an opinion.

_____________ 39. This quality control element is most closely associated with the
requirement to promote a culture of quality.

_____________ 40. The level of assurance provided by the practitioner in a review

engagement.