MODULE 1

MULTIPLE CHOICE QUESTION:

Write the letter of your answer before the number.

1. Recording, classifying and summarizing economic events in a logical manner for the purpose of
providing financial information for decision making is commonly called:
a) Finance c. auditing
b) Accounting d. economics

2. In “auditing” financial accounting data, the primary concern is with:

a. Determining whether recorded information properly reflects the economic events that occurred
during the accounting period.
b. Determining if fraud has occurred.
c. Determining if taxable income has been calculated correctly
d. Analyzing the financial information to be sure that it complies with government requirements
3. An audit of financial statements is conducted to determine if the:
a. Organization is operating efficiently and effectively
b. Auditee is following specific procedures or rules set down by some higher authority
c. Overall financial statements are stated in accordance with the applicable financial reporting
framework.
d. Client’s internal control is functioning as intended.

4. In determining the primary responsibility of external auditor for an audit of a company’s financial
statements, the auditor owes primary allegiance to:
a. Stockholders, creditors and the investing public.
b. The management of the audit client because the auditor is hired and paid by the management.
c. The Auditing and Assurance Standards Council, because it determines auditing standards and
auditor’s responsibility.
d. The audit committee of the audit client because that committee is responsible for coordinating and
reviewing all audit activities within the company.

5. Most of the independent auditor’s work in formulating an opinion on financial statements consists of:
a. Obtaining and examining evidence
b. Examining cash transactions
c. Comparing recorded accountability with assets
d. Studying and evaluating internal control

6. An audit that involves obtaining and evaluating evidence about the efficiency and effectiveness of an
entity’s operating activities in relation to specified objectives is a(n):
a. External audit c. operational audit
b. Compliance audit d. financial statement audit

7. Which of the following types of audit uses laws and regulations as its criteria?
a. Operational audit c. compliance audit
b. Financial statement audit d. performance audit

8. Which of the following best describes an operational audit?

a. It attempts of verifying the fair presentation of a company’s results of operations.
 b. It concentrates on implementing financial and accounting control in a newly organized company
c. It concentrates on seeking out aspects of operations in which waste would be reduced by the
introduction of controls.
d. It requires a constant review of the administrative controls by internal auditors as they relate to
operations of the company.

9. An audit designed to provide reasonable assurance of detecting violations of specific provisions of

contracts or agreements would be called a(n):
a. Performance audit c. operational audit
b. Management audit d. compliance audit

10. Independent external auditing can best be described as a:

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

11. Which of the following has the primary responsibility for the fairness of the representations made in the
financial statements?
a. Client’s management c. independent auditor
b. Audit committee d. board of accountancy

12. The primary purpose of an independent financial statement audit is to:

a. Provide a basis for assessing management’s performance.
b. Comply with government regulatory requirement
c. Assure management that the financial statements are unbiased and free from material error.
d. Provide users with an unbiased opinion about the fairness of information reported in the financial
statements.

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

14. The reason an independent auditor gathers evidence is to:

a. Form an opinion on the financial statements
b. Detect fraud
c. Evaluate management’s performance
d. Evaluate the entity’s internal control

15. Which of the following is not one of the limitations of an audit?

a. The use of testing
b. Limitations imposed by client
c. Human error
d. Nature of evidence that the auditor obtains.

16. Which of the following statements does not properly describe a limitation of an audit?
a. Many audit conclusions are made on the basis of examining a sample of evidence.
 b. Some evidence supporting peso representation in the financial statements must be obtained by oral
or written representation of management.
c. Fatigue can cause auditors to overlook pertinent evidence
d. Many financial statement assertions cannot be audited

17. Which of the following is one of the limitations of an audit?

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

18. The primary reason for an audit by an external audit firm is:
a. To satisfy governmental regulatory requirements
b. To guarantee that there are no misstatements in the financial statements
c. To provide increased assurance to users as to the fairness of the financial statements
d. To ensure that any fraud will be discovered.

19. Financial statement users often receive unreliable financial information from companies. Which of the following is
not a common reason for this?
a. Complex exchange transactions
b. Voluminous data
c. Bias in the preparation of financial statements
d. Each of these choices is common reason for unreliable financial information

20. Which of the following is not among the conditions that give rise to a demand by external users for independent
audits of financial statements?
a. Remoteness of users
b. Complexity of making economic decisions
c. Potential conflict of interest between users and preparers of the statements
d. Consequence for making decisions

21. Which of the following is not one of the reasons why auditors provide only reasonable assurance on the financial
statements?
a. The auditor commonly examines a sample, rather than the entire population of transactions.
b. Accounting presentations contain complex estimates which involve uncertainty
c. Fraudulently prepared financial statements are often difficult to detect
d. Auditors believe that reasonable assurance is sufficient in the vast majority of cases.

22. Auditors accumulate evidence to:

a. Defend themselves in the event of lawsuit
b. Justify the conclusions they have otherwise reached
c. Satisfy the requirements of the Securities Acts of 1933 and 1934
d. Enable them to reach conclusions about the fairness of the financial statements and issue an appropriate
audit report.

23. Which of the following is one of the limitations of an audit?

a. Nature of evidence obtained
b. Inadequacy of the accounting records
c. Confidentiality of information
d. Scope limitations imposed by the entity
 24. Which of the following is one of the limitations of an audit?
a. Nature of evidence obtained.
b. Inadequacy of the accounting records
c. Confidentiality of information
d. Scope and limitations imposed by the entity

25. The assumption underlying an audit of financial statements is that they will be used by:
a. Different groups for different purposes.
b. The general public in making investment decisions
c. The board of directors as basis of declaring cash dividends
d. The regulatory agencies to verify information that is relevant to their supervisory functions

MODULE 2
MULTIPLE CHOICE QUESTION:

Write the letter of your answer before the number.

1. Material misstatement may emanate from all of the following, except:

a. Fraud c. noncompliance with laws and regulations
b. Error d. inadequacy of accounting records

2. The level of assurance provided by an audit of detecting a material misstatement is referred to as:
a. Reasonable assurance c. absolute assurance
b. Moderate assurance d. negative assurance

3. The responsibility for detection and prevention of errors, fraud and noncompliance with laws and regulations rests
with:
a. Auditor c. client management
b. Client’s legal counsel d. internal auditor

4. The responsibility for adopting sound accounting policies, maintaining adequate internal control, and making fair
representation in the financial statements rests:
a. With the management
b. With the independent auditor
c. Equally with management and the auditor
d. With the internal audit department

5. The management responsibility to detect and prevent fraud and error is accomplished by:
a. Implementing adequate quality control system.
b. Having an annual audit of financial statements.
c. Implementing adequate accounting and internal control system
d. Issuing a representation letter to the auditor.

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

7. The factor which distinguishes an error from fraud is: INTENT

a. Materiality c. whether it is a peso amount or process
b. Non-compliance d. whether it is caused by the auditor or the client

8. Which of the following statements best identifies the two types of fraud?
a. Theft of assets and employee fraud c. management fraud and employee fraud.
b. Misappropriation of asset and defalcation d. fraudulent financial reporting and management fraud

9. Which of the following is true?

a. It is usually easier for the auditor to uncover fraud than errors
b. It is usually easier for the auditor to uncover errors than fraud.
c. It is usually equally difficult for the auditor to uncover errors or fraud.
d. Usually, none of the above statements is true.

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

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

11. Which of the following is an “error” as distinguished from “fraud”?

a. Embezzlement of company’s fund
b. Window dressing
c. Clerical mistakes in the processing of transactions
d. Lapping

12. “the auditor should not assume that management is dishonest, but the possibility of dishonesty must be
considered.” This is an example of:
a. Unprofessional behavior c. Due diligence
b. An attitude of professional skepticism d. reasonable assurance

13. Professional skepticism dictates that when management makes a statement to the auditors, the auditor should:
a. Require that the statement be out in writing
b. Disregard the statement because it ranks low of the evidence quality scale
c. Corroborate the evidence with other supporting documentation whenever possible
d. Believe on the statement in order to maintain the professional client-auditor relationship.

14. If an auditor conducted an audit in accordance with auditing standards, which of the following would the auditor
likely detect?
a. Unrecorded transactions
b. Errors in postings of recorded transactions
c. Counterfeit signatures on paid checks
d. Fraud involving collusion

15. If an auditor was engaged to discover errors and fraud and the auditor performed extensive detail work, the
auditor is expected to detect:
a. Omitted transactions c. non-compliance with laws and regulations
b. Misclassification of account d. misappropriation of assets
16. The risk of not detecting material misstatement resulting from fraud is greater than the risk of not detecting a
material misstatement arising from error, because:
a. The auditor designs only procedures to detect material error but no procedures are designed to detect
material fraud.
b. Fraud ordinarily involves acts designed to conceal it, such as collusion, forgery, or deliberate failure to record
transaction
c. The professional standards do not require the auditor to discover information that is indicative of fraud.
d. It is the responsibility of the management to detect fraud and the auditor’s responsibility is confined only to the
detection of material errors.

17. Which of the following is a category of risk factors that should be considered when assessing risk of
misstatements arising from misappropriation of assets?
a. Condition of internal control
b. Management characteristics
c. Financial stability of the entity
d. Industry condition

18. If the auditor believes that the fraud or error has a material effect on the financial statements but the client is not
willing to correct the misstatement, the auditor would most likely issue a(n):
a. Unmodified report
b. Qualified or adverse opinion
c. Qualified or disclaimer of opinion.
d. Unmodified opinion with emphasis of matter paragraph

19. If the auditor is precluded by the entity from obtaining evidence to evaluate whether fraud or error that may be
material to the financial statements has occurred, the auditor should issue a report that contains:
a. An adverse opinion c. either qualified or adverse opinion
b. An unmodified opinion d. either qualified or disclaimer of opinion

20. All of the following conditions are indicators of possible pressures on an entity except:
a. The industry in which the entity operates is declining.
b. There is inadequate working capital due to declining profits or too rapid expansion.
c. The client is heavily dependent on one or a few products or customers
d. There is a significant and prolonged understaffing of the accounting department.

21. These are acts of omission or commission by the entity being audited, either intentional or unintentional, which
are contrary to the prevailing laws and regulations.
a. Fraud c. noncompliance
b. Misappropriation d. defalcation

22. When the auditor knows that a non-compliance with laws and regulation has occurred, the auditor must:
a. Issue and adverse opinion
b. Withdraw from the engagement
c. Consider the effects on the financial statements, including the adequacy of disclosure
d. Report the matter to the proper government authorities.

23. Which of the following is the auditor least likely to do when aware of non-compliance?
a. Discuss the matter with the client’s legal counsel
b. Obtain evidence about the potential effect of the noncompliance on the financial statements
c. Contact the local law enforcement officials regarding potential criminal wrongdoing
d. Consider the impact of the noncompliance on the relationship with the company’s management.

24. When planning the audit, if the auditor has no reason to believe that non-compliance exists, the auditor should:
a. Include audit procedures which have a strong probability of detecting non-compliance
 b. Still include some audit procedures designed specifically to uncover non-compliance
c. Ignore the topic
d. Make inquiries of management regarding their policies for detecting and preventing non-compliance and
regarding their knowledge of violations, and then rely on normal audit procedures to detect errors, fraud and
illegalities.

25. Which of the following procedures would an auditor be unlikely to perform when obtaining a general
understanding about the laws and regulations affecting the client’s business?
a. Inquire of management concerning the entity’s policies and procedures regarding compliance with laws and
regulations
b. Inquire of management as to the laws or regulations that may be expected to have a fundamental effect on
the operations of the entity.
c. Discuss with management the policies or procedures adopted for identifying, evaluating and accounting for
litigation claims and assessments
d. Obtain a representation letter from the client’s legal counsel.

MODULE 3
Multiple Choice Questions:

1. The objective of the ordinary audit of financial statements is the expression of an opinion on:
a. The fairness of the financial statements in all material respects
b. The accuracy of the financial statements
c. The accuracy of the annual report
d. The accuracy of the balance sheet and income statement

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

3. Auditors accumulate evidence to:

a. Defend themselves in the event of a lawsuit
b. Justify the conclusions they have otherwise reached
c. Satisfy the requirements of the Securities and Exchange Commission
d. Enable them to reach conclusions about the fairness of the financial statements

4. Which of the following is not one of the five broad categories of management assertions?
a) General or specific transaction objectives
b) Existence or occurrence
c) Valuation or allocation
d) Presentation and disclosure

5. This assertion addresses whether all transactions that should be included in the financial statements are in
fact included.
a. Occurrence c. rights and obligation
b. Completeness d. existence

6. Which of the following statements is not correct?

 a. It would be a violation of the completeness assertion if management would record a sale that did not
take place.
b. The completeness assertion deals with matters opposite from those of the existence assertion
c. The completeness assertion is concerned with the possibility of omitting items from the financial
statements that should have been included
d. The existence assertion is concerned with inclusion of amount that should not have been.

7. Which of the following assertion does not relate to balances at period end?
a. Existence c. valuation or allocation
b. Occurrence d. rights and obligation

8. Which of the following management assertions is not associated with transaction-related audit objectives?
a. Occurrence c. accuracy
b. Existence CLASSIFICATION AND UNDERSTANDABILITY d. completeness

9. An assertion that transactions are recorded in the proper accounting period is:
a. Classification c. accuracy
b. Occurrence d. cut-off
10. The auditor is determining that the recorded sales are for the amount of goods shipped are correctly billed
and recorded. The auditor is gathering evidence about which transaction related objective?
a. Occurrence *c. accuracy
b. Completeness d. cut-off

11. When the auditor examines the client’s documents and records to substantiate information on the financial
statements, it is commonly referred to as:
a. Inquiry c. vouching
b. Confirmation d. physical examination

12. When the auditor uses tracing as an audit procedure for tests of transactions, the auditor is primarily
concerned with which audit objective?
a. Occurrence c. completeness
b. Cut-off d. classification

13. When the auditor used the audit procedure vouching, the auditor is primarily concerned with which of the
following audit objectives when testing classes of transactions?
a. Occurrence c. authorization
b. Completeness d. classification

14. Which of the following is an example of vouching?

a. Trace inventory purchases from the acquisitions journal to supporting invoices
b. Trace selected sales invoices to the sales journal
c. Trace details of employee paychecks to the payroll journal
d. All of the above are examples of vouching

15. Traditionally, confirmations are used to verify:

a. Individual transactions between organizations, such as sales transactions
b. Bank balances and accounts receivables
c. Fixed asset additions
d. All three of the above
16. In performing your audit for a privately-held firm, your inquiries have yielded that one of the company’s
owner’s primary motivation is to pay the least amount of income tax that is possible. Based on this
observation which audit objective for ending inventory would the auditor be most concerned about
ascertaining?
a. Completeness* c. accuracy
b. Rights and obligation d. existence

17. Which of the following statements is incorrect regarding inquiry?

a. Responses to inquiries may provide the auditor with information not previously possessed or with
corroborative audit evidence.
b. Responses to inquiries might provide information that differs significantly from other information that the
auditor has obtained.
c. Responses to inquiries may provide a basis for the auditor to modify or perform additional audit
procedures
d. Inquiry alone is sufficient to test the operating effectiveness of controls.

18. Observation
a. Consists of looking at a process or procedure being performed by others
b. Consists of seeking information of knowledgeable persons, both financial and non-financial, throughout
the entity or outside the entity
c. Is the process of obtaining a representation of information or of an existing condition directly from a
third party.
d. Is the auditor’s independent execution of procedures or controls that were originally performed as part
of the entity’s internal control.

19. The sequence of steps in gathering evidence as the basis of the auditor’s opinion is:
a. Substantive tests, documentation of control structure, and test of controls
b. Documentation of control structure, test of controls, and substantive tests.
c. Documentation of control structure, substantive tests and tests of control
d. Tests of controls, documentation of control structure, and substantive tests.

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

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

21. Which of the following would an auditor least likely perform as part of the auditor’s preliminary engagement
activities?
a. Perform procedures regarding the continuance of the client relationship and the specific audit
engagement
b. Evaluate compliance with ethical requirements, including independence
c. Establish an understanding of the terms of the engagement
 d. Obtain understanding of the legal and regulatory framework applicable to the entity.

22. Which of the following is not one of the reasons why auditor should perform preliminary engagement
activities?
a. To ensure that the auditor maintains the necessary independence and ability to perform the
engagement
b. To help ensure that there are no issues with management integrity that may affect the auditor’s
willingness to continue the engagement
c. To ensure that there is no misunderstanding with the client as to the terms of the engagement
d. To ensure that sufficient appropriate evidence will be obtained to support the auditor’s opinion on the
financial statements

23. Which of the following is not normally performed in the preplanning or pre-engagement phase?
a. Deciding whether to accept or reject an audit engagement
b. Inquiring from predecessor auditor
c. Preparing an engagement letter
d. Making a preliminary estimate of materiality

24. In making a decision to accept or continue with a client, the auditor should consider:
a. b. c. d.
Its competence YES YES YES YES
Its independence YES NO YES NO
Its ability to serve the client properly YES YES YES NO
The integrity of client’s management YES YES NO YES

25. Before accepting an engagement to audit a new client, a CPA is required to obtain:
a. A preliminary understanding of the prospective client’s industry and business*
b. The prospective client’s signature to the engagement letter
c. An understanding of the prospective client’s control environment
d. A representation letter from the prospective client.

26. Preliminary knowledge about the client’s business and industry must be obtained prior to the acceptance of
the engagement primarily to:
a. Determine the degree of knowledge and expertise required by the engagement
b. Determine the integrity of the management
c. Determine whether the firm is independent with the client
d. Gather evidence about the fairness of the financial statements.

27. Prior to the acceptance of an audit engagement with a client who has terminated the services of the
predecessor auditor, the CPA should
a. Contact the predecessor auditor without advising the prospective client and request a complete report
of the circumstance leading to the termination with the understanding that all information disclosed will
be kept confidential.
b. Accept the engagement without contacting the predecessor auditor since the CPA can include audit
procedures to verify the reason given by the client for the termination.
c. Not communicate with the predecessor auditor because this would in effect be asking the auditor to
violate the confidential relationship between the auditor and the client
d. Advise the client of the intention to contact the predecessor auditor and request permission for the
contact.
28. The purpose of the requirement in having communication between the predecessor and successor auditors
is to:
a. Allow the predecessor to disclose information which would otherwise be confidential
b. Help the successor auditor evaluate whether to accept the engagement
c. Help the client by facilitating the change of auditors
d. Ensure the predecessor collects all unpaid fees prior to a change in auditor.

29. An incoming auditor most likely would make specific inquiries of the predecessor auditor regarding:
a. Specialized accounting principles of the client’s industry
b. The competency of the client’s internal audit staff
c. The uncertainty inherent in applying sampling procedures
d. Disagreements with the management as to auditing procedures

30. The purpose of an engagement letter is to:

a. Document the CPA firm’s responsibility to external users of the audited financial statements
b. Document the terms of the engagement
c. Notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated
d. Emphasize management’s responsibility for approving the audit program
31. If an auditor believes that an understanding with the client has not been established, he or she should
ordinarily:
a. Perform the audit with increased professional skepticism
b. Decline to accept or perform the audit
c. Assess the control risk at the maximum level and perform a primarily substantive audit
d. Modify the scope of the audit to reflect an increased risk of material misstatement due to fraud.

32. Which of the following matters is generally included in an not one of the gement letter?
a. Management’s responsibility for the entity’s compliance with laws and regulations
b. The factors to be considered in setting preliminary judgments about materiality
c. Management’s explicit liability for illegal acts committed by its employees
d. The auditor’s responsibility to search for significant internal control deficiencies

33. Which of the following would least likely to be included in the auditor’s engagement letter?
a. Forms of the report
b. Extent of his responsibilities to his client
c. Objectives and scope of the audit
d. Type of opinion to be issued

34. Which of the following is not one of the principal contents of an engagement letter?
a. Objective of the financial statements
b. Unrestricted access to records and documents
c. Limitations of the engagement
d. Management’s responsibility for the financial statements

35. An engagement letter would not normally include:

a. Billing arrangement
b. Arrangement concerning client’s assistance
c. Details of the procedure that will be performed
d. Expectation of receiving a representation letter from management
MODULE 4
MULTIPLE CHOICE QUESTION:

Write the letter of your answer before the number.

1. This involves developing an overall strategy for the expected conduct and scope of the examination; the nature,
extent and timing of which vary with the size and complexity, and experience with and knowledge of the entity.
a) Audit planning c. audit program
b) Audit procedure d. audit working papers

2. Adequate planning of the audit work helps ensure that:

Appropriate attention is All misstatements will be Potential problems are The work is completed
devoted to important areas detected identified expeditiously
a) YES YES YES YES
b) NO YES NO YES
c) YES NO YES YES
d) YES NO YES NO

3. Which of the following is ily performed in the planning stage of the audit?
a) Develop an overall audit strategy
b) Request that bank balances be confirmed
c) Schedule engagement staff and audit specialists
d) Identifying the client’s reason for the audit.

4. Which of the following procedures would a CPA ordinarily perform during audit planning?
a) Obtain understanding of the client’s business and industry.
b) Review the client’s bank reconciliation
c) Obtain client’s representation letter
d) Review and evaluate client’s internal control

5. In developing the overall audit plan for a new client, factor not to be considered is:
a. Materiality levels
b. The client’s business, including the structure of the organization and accounting system used.
c. The amount of estimated audit fee.
d. The audit risks and procedures to be performed to achieve audit objectives.

6. The audit team gathers information about a new client’s business and industry in order to obtain:
a. An understanding of the clients internal control system for financial reporting.
b. An understanding of how economic events and transactions affect the company’s financial statements.
c. Information about engagement risk
d. Information regarding whether the company is engaging in financial statement fraud.

7. Each of the following may be relevant to an auditor when obtaining knowledge about the client’s business and
industry except:
a. Discussion with people within or outside the entity
b. Reading publications related to the industry
c. Visits of the entity’s premises
d. Performing tests of control

8. Information about the client’s business appropriately assists the auditor in:
Assessing risks and identifying Planning and performing the audit Evaluating audit evidence
potential problems effectively and efficiently
a) YES YES YES*
b) YES NO YES
 c) NO YES YES
d) YES YES NO

9. About nary judgment about materiality and the amount of audit evidence accumulated are _______ related.
a) Directly c. not
b) Indirectly d. inversely

10. If an auditor establishes a relatively high level for materiality, then the auditor will:
a) Accumulate more evidence than if a lower level had been set.
b) Accumulate less evidence than if a lower level had been set.
c) Accumulate approximately the same evidence as would be the case were materiality lower.
d) Accumulate an undetermined amount of evidence.

11. Which of the following statements is not correct consideriality?

a. The concept of materiality recognizes that some matters are important for fair presentation of financial statements
in conformity with the applicable financial reporting framework, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of largest aggregate level of misstatements that
could be material to any one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative
and qualitative judgments.
d. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable
person who will rely on the financial statements.

12. In developing the preliminary level of materiality in an audit, the auditor will
a) Look to audit standards for specific materiality guidelines
b) Increase the level of materiality if fraud is suspected
c) Rely primarily on professional judgment to determine the materiality level.
d) Use the same materiality level as that used for different clients in the same industry

13. Considering materiality for planning purposes, an auditor believes that misstatements aggregating P100,000 would
have a material effect on an entity’s income statement, but those misstatements would have to aggregate P200,000 to
materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be
expected to detect misstatements that aggregate
a) P100,000 c. P150,000
b) P200,000 d. P300,000

14. The relationship between materiality and risk is ordinarily

a. Direct c. inverse
b. Parallel d. none

15. When assessing materiality levels for audit purposes, the auditor should consider the
Amount involved Nature of misstatement
a) YES YES
b) YES NO
c) NO NO
d) NO YES

16. When tolerable misstatement is exceeded by _________ the auditor should request the client to adjust their account
balance.
I. Known misstatement
II. Projected misstatement
a) I only c. I and II*
b) II only d. None of the above
17. A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the
audit is completed and an unqualified opinion has been issued is the:
a. Inherent risk c. statistical risk
b. Acceptable audit risk d. financial risk

18. A measure of the auditor’s assessment of the likelihood that there are material misstatements in account before
considering the effectiveness of the client’s internal control is:
a) Control risk c. statistical risk
b) Acceptable audit risk d. inherent risk

19. The risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by internal
control is:
a) Detection risk c. inherent risk
b) Control risk d. audit risk

20. The probability that an auditor’s procedure leading to the conclusion that a material error does not exist in an account
balance when, in fact, such error does exist is referred to as:
a. Prevention risk c. control risk
b. Inherent risk d. detection risk

21. Audit risk consists of all but the following components:

a) Inherent risk c. detection risk
b) Substantive risk d. control risk

22. The risk that the audit will fail to uncover a material misstatement is eliminated
a. If a client has strong internal control
b. If a client is not public accountable entity
c. When the auditor has complied with the Philippine Standard on Auditing
d. Under no circumstances

23. The audit risk model is used primarily

a. For planning purposes in determining how much evidence to accumulate
b. To test the effectiveness of controls
c. To determine the type of opinion to express
d. To evaluate the evidence which has been gathered.

24. The risk of material misstatement, which is the risk that the auditor cannot control but can only assess are:
a) Control risk and acceptable audit risk
b) Inherent risk
c) The combination of inherent risk and control risk
d) Inherent risk and audit risk.

25. As the risk of material misstatement increases, detection risk should:

a) Increase c. stay the same
b) Decrease d. increase or decrease depending on materiality level

26. Inherent risk and control risk differ from detection risk in that inherent and control risks:
a) Arise from the misapplication of auditing procedures
b) May be assessed in either quantitative or non-quantitative terms
c) Exists independently of the financial statement audit, meaning, they are beyond the control of the auditor.
d) Can be changed at the auditor’s discretion

27. The acceptable level of detection risk is inversely related to the:

 a) Assurance provided by substantive tests
b) Risks of misapplying auditing procedures
c) Preliminary judgment about materiality levels
d) Risks of failing to discover material misstatements

28. Relationship between control risk and detection risk is ordinarily

a) Parallel c. inverse
b) Direct d. equal

29. Which of the following conditions supports an increase in detection risk?

a. Internal control over cash receipts is excellent
b. Application of analytical procedures reveals a significant increase in sales revenue in December, the last month of
fiscal year
c. Internal control over shipping, billing and recording revenue is weak
d. Study of the business reveals that the client recently acquired a new company in an unrelated industry.

30. Which of the following is not a primary consideration when assessing inherent risk?
a) Nature of client’s business c. degree of separation of duties
b) Existence of related parties d. susceptibility to defalcation

31. The auditor uses the assessed level of control risk to

a. Evaluate the effectiveness of the entity’s internal control policies and procedures
b. Identify transactions and account balances where inherent risk is at a high level
c. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high
d. Determine the acceptable level of detection risk for financial statements

32. What is the magnitude of audit risk if inherent risk is 0.50, control risk 0.40, and detection risk 0.10?
a) 0.20 c. 0.10
b) 0.04 d. 0.02

33. Which of the following would be considered the most conservative settings for inherent risk and control risk?
Inherent risk Control risk
a) 100% 100%
b) 100% 0%
c) 0% 0%
d) 50% 50%

34. As the acceptable level of detection risk decreases, an auditor may change the
a. Timing of substantive tests by performing them at an interim rather than at year-end
b. Nature of substantive tests from a less effective to a more effective procedure
c. Timing of tests of controls by performing them at several dates rather than at one time
d. Assessed level of inherent risk to a higher level

35. As the acceptable level of detection risk decreases, an auditor may

a) Reduce substantive testing by relying on the assessments of inherent risk and control risk
b) Postpone the planned timing of substantive tests from interim dates to the year-end
c) Eliminate the assessed level of inherent risk from consideration as a planning factor
d) Lower the assessed level of control risk
36. Inherent risk is _______ related to detection risk and _________ related to the amount of audit evidence
a) Directly, inversely c. inversely, inversely
b) Directly, directly d. inversely, directly

37. On the basis of the audit evidence gathered and evaluated, 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) Decrease substantive testing c. decrease detection risk
b) Increase inherent risk d. increase materiality levels

38. Which of the following statements is not true?

a) Inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related to
the amount of audit evidence required
b) Inherent risk is directly related to the evidence where as detection risk is inversely related to the amount of
audit evidence required
c) Inherent risk is the susceptibility of the financials statements to material error, assuming no internal controls
d) Inherent risk and control risk are assessed by the auditor and function independently of the financial
statement audit.

39. The auditor should obtain sufficient understanding of the entity and its environment, including internal control in order
to:
Identify and assess the risk of material misstatement Design appropriate audit procedures
a. YES YES
b. YES NO
c. NO NO
d. NO YES

40. Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal
controls, represent the auditor’s:
a. Audit strategy c. risk assessment procedures
b. Test of controls d. test of transactions

41. Risk assessment procedures would include all of the following except:
a. Inquiries of management and others within the entity
b. Analytical procedures
c. Observation and inspection
d. Reperformance

42. Which of the following is least likely to be considered a risk assessment procedure?
a) Analytical procedures c. inspection of documents
b) Confirmation of ending accounts receivable d. observation of the performance of certain procedures

43. The main purpose of risk assessment procedure is to:

a) Obtain an understanding of the entity and its environment, including its internal control; and to assess the risks of
material misstatement at the financial statement and assertion level
b) Test the operating effectiveness of controls preventing, or detecting and correcting, material misstatements at the
assertion level
c) Detection of material misstatements at the assertion level
d) All of the given choices are main purposes of risk assessment procedures

44. Why do auditors establish a preliminary judgment about materiality?

a. To determine the appropriate level of staff to assign to the audit
b. So that the client can know what records to make available to the auditor
c. To plan the appropriate audit evidence to accumulate and develop an overall audit strategy
d. To finalize the control risk assessment.
45. The main reason why auditors make a preliminary assessment of materiality and risk is to:
a) Determine the type of opinion to express
b) Determine the scope of the audit procedures to be performed
c) Evaluate the integrity of client’s management
d) Have a basis for constructive suggestions to clients

46. At what point in the audit are tests of details most appropriately designed?
 a) Engagement evaluation c. testing
b) Planning* d. any of the above

47. These consist of the analysis of significant ratios and trends including the resulting investigation of fluctuations and
relationship that are inconsistent with other relevant information or deviate from predictable amount.
a) Financial statement analysis c. analytical procedures
b) Variance analysis d. regression analysis

48. The purpose of analytical procedures during the audit planning stage is to:
a. Aid in planning the observation of physical inventory
b. Identify unusual circumstances that the auditor may need to investigate further
c. Flag individual transactions for further review
d. Determine whether sales transactions are approved.

49. A basic premise underlying analytical procedure 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 misstatements in the financial
statements
c) The study of financial ratios is an acceptable alternative to the investigation of usual fluctuations
d) Plausible relationships among data may reasonably be expected to exist and continue in the absence of known
conditions to the contrary.

50. Analytical procedures are used for the following purposes except:
a. To assist the auditor in planning the nature, timing and extent of other auditing procedures
b. As a substantive test to obtain evidential matter about particular assertion related to account balances or classes
of transactions
c. As an overall review of financial information in the final review stage of the audit
d. To evaluate the effectiveness of the client’s internal control*

MODULE 5

Assessment:

1. The primary responsibility for establishing and maintaining an internal control rests with:
a. External auditors c. Management and those charged with governance
b. Internal auditors d. the controller or the treasurer
2. The fundamental purpose of an internal control is to:
a. Safeguard the resources of the organization
b. Provide reasonable assurance that the objectives of the organization are achieved
c. Encourage compliance with organization objectives
d. Ensure the accuracy, reliability and timeliness of information
3. Which of the following internal control objectives would be the most relevant to the audit?
a. Operational objective c. compliance objective
b. Financial reporting objective d. administrative control objective
4. An act of two or more employees to steal assets or misstate records is frequently referred to as:
a. Collusion c. a material weakness
b. A control deficiency d. any of the above
5. In an audit of financial statements, an auditor’s primary consideration regardin an internal control
activity is whether the control:
a. Refects management’s philosphy and operating style
b. Affects management’s financial statement assertions
c. Provides adequate safeguards over access to assets
d. Enhances management’s decision-making process
6. Inherent limitations in an internal control must be considered in evaluating its effectiveness in
preventing and detecting errors and fraud. Inherent limitations do not include:
a. Misunderstanding of instructions, mistakes of judgment, personal carelessness, distraction or
fatigue
b. Incompatible functions performed by the same person
c. Collusion among employees
d. Management override of certain policies or procedures
7. The following statements relate to internal controls, which is false?
a. No one person should be responsible for the custodial responsibility and the recording responsibility
for an asset
b. Transactions must be properly authorized before such transactions are processed
c. Because of the cost benefit relationship, a client may apply control procedures on a test basis
d. Control procedures reasonably ensure that collusion among employees cannot occur.*
8. The internal control cannot be designed to provide reasonable assurance that:
a. Transactions are executed in accordance with management’s authorization
b. Fraud will be eliminated
c. Access to assets is permitted only in accordance with management authorization
d. The recorded accountability for assets is compared with the existing assets at reasonable intervals
9. Internal controls can never be reagarded as completely effective. Even if company personnel could
design an ideal system, its effectiveness depends on the:
a. Adequacy of the computer system c. ability of the internal audit staff to maintain it
b. Proper implementation by management d. competency and dependability of people using it.*
10. Which of the following is correct about internal control?
a. Accounting and internal control systems provide management with conclusive evidence that
objectives are reached
b. One of the inherent limitations of accounting and internal control systems is the possibility that the
procedures may become inadequate due to changes in conditions, and compliance with procedures
may deteriorate
c. Most internal control tend to be directed at non-routine transactions
d. Management does not consider costs of the accounting and internal control systems.
11. Which of the following best describes the interrelated components of internal control?
a. Organizational structure, management philosophy and planning
b. Control environment, risk assessment, control activities, information and communications systems,
and monitoring
c. Risk assessment, back-up facilities, responsibility accounting and natural laws
d. Internal audit and management’s philosophy and operating style
12. The overall attitude and awareness of an entity’s board of directors concerning the importance of the
internal control usually is reflected in its:
a. Computer based controls c. control environment
b. System of segregation of duties d. safeguards over access to assets
13. When obtaining an understanding of an entity’s control environment, an auditor should concentrate on
the substance of management’s policies and procedures rather than their form because:
a. The auditor may believe that the policies and procedures are inappropriate for that particular entity
b. The board of directors may not be aware of management’s attitude toward the control environment
c. Management may establish appropriate policies and procedures but not act on them
d. The policies and procedures may be so ineffective that the auditor may assess control risk at a high
level.
14. Basic to a proper control environment are the quality and integrity of personnel who must perform the
prescribed procedures. Which is not a factor in providing for competent personnel?
a. Segregation of duties* c. training programs
b. Hiring practices d. performance evaluation
15. In evaluating the design of the entity’s internal control environment, the auditor considers the certain
subcomponents of control environment and how they have been incorporated into the entity’s
processes. Subcomponents of control environment would not include:
a. Integrity and ethical values
b. Commitment to competence
c. Organizational structure
d. Information and communications systems*
16. It is important for the auditor to consider the competence of the audit client’s employees, because their
competence bears directly and importantly upon the:
a. Cost-benefit relationship of internal control
b. Achievement of the objectives of internal control
c. Comparison of recorded accountability with assets
d. Timing of the tests to be performed
17. Which of the following components of an entity’s internal control structure includes the development of
employee promotion and training policies?
a. Control activities c. information and communications
b. Control environment d. quality control system
18. A proper segregation of duties require:
a. An individual authorizing a transaction records it
b. An individual authorizing a transaction maintains a custody of the asset that resulted from the
transaction
c. An individual maintaining custody of an asset be entitled to access the accounting records for the
asset
d. An individual recording a transaction do not compare the accounting record of the asset with the
asset itself
19. The single most effective control procedure established to avoid allowing any person to be in a position
to perpetrate and then conceal errors or fraud is:
a. The separation of the functional responsibilities, custodianship, recordkeeping, operation and
authorization
b. Require each employee to take a vacation each year
c. Establish an internal audit department
d. Require the bonding of personnel in positions that necessitate handling of cash and other
universally desirable values
20. Which of the following statements best describes the entity’s risk assessment process?
a. Entity’s process of identifying business risks relevant to financial reporting objectives and deciding
about actions to address those risks.
b. Entity’s assessment of audit risks affecting the financial statements
c. Entity’s process of evaluating the risks of misstatements due to fraud
d. Entity’s assessment of risks that internal control may fail to detect misstatements affecting the
financial statements
21. The polices and procedures that help ensure that management directives are carried out
a. Control environment c. monitoring of controls
b. Control activities d. information system
22. Which of the following is not one of the specific control activities that are relevant to financial statement
audit?
a. Performance reviews c. segregation of duties
b. Physical controls d. monitoring
23. A small entity may use less formal means to ensure that internal control objectives are achieved. For
example, extensive accounting procedures, sophisticated accounting records, or formal controls are
least likely to be needed if:
a. Management is closely involved in operations
b. The entity is involved in complex transactions
 c. The entity is subject to legal or regulatory requirements also found in larger entities
d. Financial reporting objectives have been established
24. Auditing standards require the auditor to obtain understanding of the client’s internal control structure:
a. For every audit c. sufficient to find any frauds which may exist
b. For first time audits d. whenever it would be appropriate
25. Which of the following techniques is not useful for obtaining an understanding of internal controls?
a. Make inquiries of the client’s personnel
b. Examine documents and records
c. Read industry trade magazines
d. Observe client activities and operations
26. Evaluating the design of the entity’s internal control would involve:
a. Considering whether the control, individually or in combination with other controls, is capable of
effectively preventing, or detecting and correcting material misstatements
b. Determining whether control exists and the entity is using it
c. Determining whether the control is operating effectively
d. Determining the consistency of application of internal control procedures
27. Obaining knowledge about whether the control is implemented can best be obtained by:
a. Inquiry of client’s personnel
b. Reading procedures manual
c. Tracing transactions through the information system relevant to financial reporting
d. Performing tests of control
28. An auditor should consider two key issues when obtaining an understanding of a client’s internal
controls. These issues are:
a. The effectiveness and efficiency of the controls
b. The frequency and effectiveness of the controls
c. The design and implementation of the controls
d. The implementation and efficiency of the controls
29. When the auditor attempts to understand the operation of the accounting system by tracing a few
transactions through the accounting system, the auditor is:
a. Tracing c. vouching
b. Performing a walk-through d. performing tests of control
30. Which of the following would an auditor least likely perform when obtaining understanding of the entity’s
accounting and internal control systems?
a. Inquiries of appropriate personnel c. observation of the entity’s activities and operations
b. Inspection of documents and records d. performing analytical review procedures
31. After obtaining sufficient understanding of the entity’s accounting and internal control systems, the
auditor should make a preliminary assessment of:
a. Audit risk c. inherent risk
b. Control risk d. detection risk
32. Which of the following statements regarding auditor’s documentation of the client’s internal control
structure is correct?
a. Documentation must include flow charts
b. Documentation must include procedural write-ups
c. No documentation is necessary although, it is desirable*
d. No one particular form of documentation is necessary, and the extent of documentation may vary.
33. An auditor assesses control risk because it:
a. Is relevant to the auditor’s understanding of the control environment
b. Provides assurance that the auditor’s materiality levels are appropriate
c. Indicates to the auditor where inherent risk may be the greatest
d. Affects the level of detection risk that the auditor may accept
34. When the auditor increases the assessed level of control risk because certain control activities were
determined to be ineffective, the auditor would most likely increase the:
 a. Extent of tests of controls c. extent of test of details
b. Level of detection risk d. level of inherent risk
35. An auditor uses the knowledge provided by the understanding of internal control and the assessed level
of risk of material misstatement primarily to:
a. Determine whether procedures and records concerning the safeguarding of assets are reliable
b. Ascertain whether the opportunities to allow any person to both perpetrate and conceal fraud are
minimized
c. Modify the initial assessments of inherent risk and preliminary judgments about materiality levels
d. Determine the nature, timing and extent of substantive tests for financial statements assertions*
36. Which of the following statements concerning control risk is correct?
a. Assessing control risk and obtaining an understanding of an entity’s internal control structure may
be performed concurrently
b. When control risk is at high level, an auditor is required to document the basis for that assessment
c. Control risk may be assessed sufficiently low to eliminate substantive testing for significant
transaction classes
d. When assessing control risk an auditor should not consider evidence obtained in prior audits about
the operation of control procedures
37. Which of the following is a step in an auditor’s decision to assess control risk at less than high level?
a. Apply analytical procedures to both financial data and nonfinancial information to detect conditions
that may indicate weak controls
b. Perform test of details of transactions and account balances to identify potential errors and fraud
c. Identify specific internal control policies and procedures that are likely to detect or prevent material
misstatements
d. Document the additional audit effort to perform tests of controls exceeds the potential reduction in
substantive testing
38. If, after obtaining an initial understanding of a client’s internal control, the auditor wishes to further
reduce the assessed level of control risk relating to plant asset transactions, the auditor should next:
a. Make extensive substantive tests of plant asset balances
b. Establish the physical existence of current year additions
c. Complete the plant asset section of the internal accounting control questionnaire
d. Further test those internal control procedures relating to processing and recording plant asset
transactions
39. Control testing or test of control is performed in order to determine whether or not:
a. The assessed level of control risk can be reduced
b. Necessary controls are absent
c. Incompatible functions exists
d. Material peso errors exist
40. An auditor uses the knowledge provided by the understanding of internal control and the final assessed
level of control risk primarily to determine the nature, timing and extent of the:
a. Attribute tests c. compliance tests
b. Test of controls d. substantive tests
41. Test of controls do not include
a. Reperformance of internal control procedures
b. Inquiries about, and observation of, internal controls which leave no audit trails
c. Inspection of documentary support for transactions evidencing authorization
d. Analytical procedures involving comparison of operating expenses with budgeted amounts
42. For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor
would most likely test the procedure by:
a. Reperformance and corroboration
b. Observation and inquiry*
c. Inspection and vouching
d. Confirmation and recomputation
43. After obtaining an understanding of the internal control structure and assessing control risk, an auditor
decided to perform test of controls. The auditor most likely decided that:
a. It would be efficient to perform tests of controls that would result in a reduction in planned
substantive tests
b. Additional evidence to support further reduction in control risk is not available
c. An increase in the assessed level of control risk is justified for certain financial statement assertions
d. There were many internal control weaknesses that could allow errors to enter the accounting
system
44. After considering a client’s internal control, an auditor has concluded that the system is well designed
and is functioning as anticipated. Under these circumstances, the auditor would most likely:
a. Cease to perform further substantive tests
b. Not increase the extent of planned substantive tests*
c. Increase the extent of anticipated analytical procedures
d. Perform all tests of controls to the extent outlined in the pre-planned audit prgram
45. After considering internal control, an auditor might decide to:
a. Increase the extent of tests of controls and substantive tests in areas where internal control is
strong
b. Increase the extent of substantive tests in areas where internal control is weak
c. Reduce the extent of tests of controls in areas where internal control is strong
d. Reduce the extent of both subtantive tests and tests of controls in areas where internal control is
strong
46. The auditor would most likely assess control risk at a high level when:
a. It would be efficient to perform test of control
b. The entity’s accounting and internal control systems are not reliable
c. The auditor wishes to rely on the entity’s accounting and internal control systems
d. The auditor wants to restrict substantive tests
47. The primary emphasis by auditors is on controls over:
a. Classes of transactions
b. Account balances
c. Both A and B, because they are equally important
d. Both A and B, because they vary from client to client
48. When control risk is assessed at a high level, the auditor should document his:
Understanding of Conclusion that Basis for concluding
internal control control risk is at that control risk is at a
components high level high level
a. Yes Yes Yes
b. Yes Yes No
c. Yes No No
d. No No No

49. When control risk is assessed at less than high level, the auditor should document his:
Understanding of Basis for concluding
internal control that control risk is at a
components high level
a. a. Yes Yes
b. b. Yes No
c. c. No Yes
d. No No

50. The auditor will perform tests of controls when controls are initially assessed as:
Low level Moderate level High level
a. Yes Yes Yes
b. Yes Yes No
 c. No Yes No
d. No No Yes

51. Which of the following may not be required on a particular audit of a company?
a. Test of control c. substantive tests
b. Analytical procedures d. risk assessment procedures
52. Control risk should be assessed in terms of:
a. Specific controls c. control environment factors
b. Types of potential fraud d. financial statement assertions
53. Which of the following audit tests would be regarded as a test of controls?
a. Comparison of the inventory pricing to vendor’s invoices
b. Tests of the signatures on canceled checks to board of director’s authorization
c. Tests of the additions to property, plant and equipment by physical inspections
d. Review of the specific items making up the balance in a given general ledger account
54. Which of the following is correct when the auditor assesses control risk at a high level?
a. The auditor should document the basis for his assessment*
b. The auditor should perform tests of control
c. The auditor should document his conclusion that control risk is at a high level
d. The auditor need not document his understanding of internal control
55. Tests of controls are designed to obtain evidence to support the auditor’s assessment of control risk
a. At a high level c. at zero level
b. At less than high level d. at maximum level
56. Management letter is used
a. To allow management to corroborate oral representations to the auditor
b. To confirm the terms of the audit engagement
c. To document the auditor’s consideration of internal controls
d. To make recommendations to the client based on observations made during the audit
57. During the consideration of internal control in a financial statement audit, the auditor is not obligated:
a. Search for significant deficiencies in the operation of the internal control
b. Understand the internal control and the information systems
c. Determine whether the control activities relevant to audit planning have been implemented
d. Perform procedures to understand the design of interna control
58. In general, a material weakness in internal control may be defined as a condition in which material
errors or irregularities may occur and not be detected within a timely basis by
a. An independent auditor during tests of controls
b. Management when reviewing interim financial statements and reconciling account balances
c. Employees in the normal course of performing their assigned functions
d. Outside consultants who issue a special-purpose report on internal control structure.
59. Which of the following types of evidence would an auditor most likely examine to determine whether
controls are operating as designed?
a. Confirmation of receivables verifying account balance
b. Letters of representations corroborating inventory pricing
c. Attorneys’ responses to the auditor’s inquiries
d. Client records documenting the use of computer programs
60. An auditor is likely to use four types of procedures to support operating effectiveness of internal
controls. Which of the following would generally NOT be used?
a. Make inquiries of appropriate client personnel
b. Examine documents, records and reports
c. Reperform client procedures
d. Inspect the design of documents