Tayabas Western Academy

Founded 1928
Recognized by the Government
De Gala St. Candelaria, Quezon 4323

Prelim Examination
PrE5: Auditing in CIS Environment
Chapter 1 to 6 with Taxation
22 copies

Student’s Name: __________________________ Date:__________

Course / Year:__________________________ Score _______

I. Multiple choice question. Encircle the letter of the correct answer.

1. What is the assessed level of control risk if the auditor finds that the internal control is
not functioning properly?
a. High
b. Less than high
c. Moderately high
d. Reasonable high
2. Auditor’s work commence when?
a. Financial reports are prepared whether budgeted or forecasted which is
intended to be use for decision making.
b. Financial statements of the past period are done and ready for issuance.
c. After accepting the engagement but before gaining enough knowledge about the
auditee’s operation.
d. All of the above
3. Which of the following is correct
a. Assessment of control risk and inherent risk is optional, auditor can go directly in the
substantive testing
b. Audit working paper is just an optional, and auditor may elect not to provide this
documentation if the cost of it will exceed the benefits.
c. Understanding of the client’s business and operation is necessary, that is why is the
auditor do not have sufficient knowledge at the time the engagement is offered, the
standard suggest declining the offer immediately without reservation.
d. Level of control risk will lead to the extend of detection risk to be perform.
e. All of the following are incorrect.
4. “What was held true in the past will continue to hold true in the future in the absence of
known condition to the contrary” suggests
a. Auditor should always design the audit with heightened level of professional
skepticism
b. Auditor should always design the audit with the objective of discovering material
fraud, error and noncompliance
c. Present or past experience of the auditor during audit will give him the idea or
knowledge to properly prepare the future audit to achieve better results.
5. Which audit is almost similar
a. Financial statements audit and operational audit
b. Operational audit and compliance audit
c. Compliance audit and financial statements audit
d. The three audit are almost similar in nature, scope and objectives.
6. Auditor is interest in misstatements that are
a. Immaterial
b. Material and pervasive
c. Immaterial and pervasive
 d. Materially misstatement whether resulted from error, fraud or noncompliance
7. In this audit report, auditor expresses no opinion.
a. Unmodified opinion
b. Modified opinion
c. Adverse opinion
d. Disclaimer of opinion
8. Who is the responsible for the financial statement AFTER the audit.
a. Management and the auditor
b. Management only
c. Auditor only
d. The recipient of the report
9. All of the following are assertions under transaction, except:
a. Cutoff
b. Completeness
c. Valuation
d. Accuracy
10. How many parties are involved in an audit?
a. 2 parties only
b. 1 party only
c. 3 parties only
d. It depends, it can be one, two or more parties
11. The audit report usually benefits the…
a. Shareholders
b. Those charge with governance
c. Audit firm that can be use for their accreditation
d. The public
12. Groups with different opinions before issuing the audit report should
a. Get the majority vote for the decision and declare the winning vote decision
b. Should base their final decision based on the recommendation of the lead partner of
engagement partner
c. Withdraw from the engagement due to differences of opinion
d. Resolves the conflict by examining factors that contributes to the conflict and try
to come up with a united opinion.
13. “Plant expansion” is general falls under the need for audit
a. Conflict of interest
b. Remoteness
c. Expertise
d. Financial consequences
14. What is the proper order of the life cycle of an assertions
a. Presentation, account balance and transactions
b. Transactions, account balance and presentation
c. Account balance, transactions and presentation
d. None of the above
15. Auditor is governed by the following, except
a. Code of professional ethics
b. Professional skepticism
c. Philippine standard on auditing
d. All of the above
16. What are the factors affecting the auditor before accepting an engagement?
a. Audit fees and the company’s integrity
b. Ability to serve the client and the client’s integrity
c. Client’s integrity and the kind of opinion to be issued
d. All of the above
17. What is the assessed level of control risk if the auditor finds that the internal control is
functioning properly?
a. High
b. Less than high
 c. Moderately high
d. Reasonable high
18. Which of the following is true
a. Inherent and control risk can be control and reduce to an acceptable level by the
auditor
b. Management representation is required before the commencement of the audit
c. Audit risk model is affected by factors such as inherent risk, control risk and
substantive test
d. Detection risk is the risk that the auditor will failed to detect material
misstatements
19. What is the established criteria for the conduction of the audit
a. Financial accounting and reporting
b. Generally accepted accounting principles
c. Generally accepted auditing standards
d. All of the above
20. If the auditor finds that the internal control is not functioning as intended, the auditor then
a. Will audit the internal control intensely
b. Will not audit the internal control or audit it at less extensive and devote time in
the substantive testing
c. Will audit the internal control intensely to reduce the control risk assessment
d. Will do all of the following
21. Audit that findings are based on the standards set by the top management
a. Operational audit
b. Compliance audit
c. Financial statements audit
d. All of the above
22. What is the level of assurance provided by the auditor.
a. Absolutely high
b. Reasonably high
c. Moderately high
d. Low high
23. Which of the following is part of the presentation and disclosure assertions
a. Occurrence and cutoff
b. Classification and accuracy
c. Classification and understandability
d. Existence
24. CPAs continually deliver exemplary, high quality services.
a. Objectivity
b. Competence
c. Commitment to excellence
d. Anticipating and serving evolving needs
25. Which of the following is an example of an error?
a. Defalcation
b. Suppression or omission of the effects of transactions from the records or documents
c. Recording of transactions without substance
d. Misapplication of accounting policies
26. 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. Standard audit report
b. Qualified or adverse opinion
c. Qualified or disclaimer of opinion
d. Unqualified opinion with explanatory paragraph
27. If the control risk increases, inherent risk will be
a. Increase
b. Decrease
 c. No relation
d. Direct relation
28. The primary orientation of operational auditing is towards
a. Future improvements to accomplish the goals of management
b. The accuracy of the data reflected in management’s financial reports
c. The verification that a company’s financial report is fairly presented
d. Past protection provided by existing internal control
29. The internal auditing department’s responsibility for detecting fraud is to
a. Establish an effective internal control system
b. Maintain internal control
c. Examine and evaluate the system of internal control
d. Exercise operating authority over fraud prevention activities.
30. An objective of a performance audit is to determine whether an entity’s
a. Operational information is in accordance with government auditing standards
b. Specific operating units are functioning economically and efficiently
c. Financial statements present fairly the results of operations.
d. Internal control is adequately operating as designed.
31. The auditor is required to maintain professional skepticism throughout the audit. Which of
the following statements concerning professional skepticism is false?
a. A belief that management and those charged with governance are honest and have
integrity relieves the auditor of the need to maintain professional skepticism.
b. Maintaining professional skepticism throughout the audit reduces the risk of using
inappropriate assumptions in determining the nature, timing and extent of the audit
procedures and evaluating the results thereof.
c. Professional skepticism is necessary to the critical assessment of audit evidence.
d. Professional skepticism is an attitude that includes questioning contradictory audit
evidence obtained.
32. Which of the following professionals has primary responsibility for the performance of an
audit?
a. The managing partner of the firm.
b. The senior assigned to the engagement.
c. The manager assigned to the engagement.
d. The partner in charge of the engagement.
33. What is the proper organizational role of internal auditing?
a. To serve as an independent, objective assurance and consulting activity that adds
value to operations.
b. To assist the external auditor in order to reduce external audit fees.
c. To perform studies to assist in the attainment of more efficient operations.
d. To serve as the investigative arm of the audit committee of the board of directors.
34. If the audit assurance is 87%, inherent risk is 78%, and control risk is 84%, what is the
level of substantive test to be done by the auditor?
a. 78.22%
b. 80.16%
c. 81.22%
d. 83.24%
35. CPAs are considered professional persons because they
a. Hold a license from a government agency
b. Pass the CPA examination and have qualifying practical experience
c. Serve the interests of the public in general and clients in particular
d. Are members of the PICPA
36. The primary purpose of establishing quality control policies and procedures for deciding
whether to accept a new client is to:
a. Anticipate before performing any fieldwork whether an unqualified opinion can be
expressed.
b. Enable the CPA firm to attest to the reliability of the client.
c. Satisfy the CPA firm's duty to the public concerning the acceptance of new clients.
d. Minimize the likelihood of association with whose management lacks integrity.
37. Which of the following quality control objectives would be least important to the auditor?
a. Engagement performance
b. Human resource
c. Determination of audit fee
d. Independence
38. Which of the following does not pertain to the standards of fieldwork?
a. Adequate planning and supervision
b. Obtaining sufficient competent evidential matter
c. Proper study and evaluation of internal control as a basis for reliance thereon
d. Technical training and proficiency
39. I. Inherent risk can be control by the auditor
II. Control risk cannot be controlled by the auditor
a. Statement I and II are both correct
b. Statement I is correct, while II is incorrect
c. Statement I is incorrect, while II is correct
d. Statement I and II are both incorrect
40. As defined in PSQC 1, __________ is a process comprising an ongoing consideration and
evaluation of the firm's System of quality control, including periodic inspection of a
selection completed engagements, designed to provide the firm with reasonable assurance
that its system of quality control is operating effectively.
a. Monitoring
b. Inspection
c. Engagement quality control review
d. Supervision
41. If the assessed level of control risk is less than high, evidence will tend to
a. Increase
b. Decrease
c. Depends on the situation
d. Cannot be assessed
42. If the auditor traces transactions from source documents to the accounting records, he then
test the assertion pertaining to:
a. Accuracy
b. Completeness
c. Existence
d. Cut-off
43. The Philippine Framework for Assurance Engagements
a. Contains basic principles, essential procedures and related guidance for the
performance of assurance engagements.
b. Defines and describes the elements and objectives of an assurance engagement,
and identifies engagements to which PSAs, PSREs and PSAEs apply.
c. Provides a frame of reference for CPAs in public practice when performing audits,
reviews and compilation of historical financial information.
d. Establishes standards and provides procedural requirements for the performance of
assurance engagements.
44. 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 statements are true
b. Only statements I and III are true
c. All of the above statements are false
d. Only statements II and IV are true
45. When the auditor believes a misstatement is or may be the result of fraud but that the effect
of the misstatement is not material to the financial statements, which of the following steps
is required?
a. Consider the implications for other aspects of the audit
b. Resign from the audit
c. Commence a fraud examination
d. Contact regulatory authorities
46. If the auditor concludes that the internal control is being assessed, he then
a. Document the understanding of the control and assessed level of control risk at
less than high.
b. Document the understanding of the control and assessed level of control risk at high
and justify the reason for relying on the internal control.
c. Document the understanding of the control and assessed level of control risk at less
than high, justification of the control assessment is not necessary.
d. Find ways how to reduce the control risk to an acceptable level and discuss to the
management how to improve the internal control better.
47. Which of the following procedures would assist the auditor in identifying noncompliance
with laws and regulations?
a. Inquiring of client’s lawyer
b. Inspecting correspondence with relevant regulatory agencies
c. Inquire of management concerning entity’s policies and procedures regarding
compliance with laws and regulations
d. Discuss with the client management the policies or procedures adopted for
identifying, evaluating and accounting for litigation, claims and assessments.
48. Before an effectiveness audit can be performed, there must be
a. Specific criteria developed to define effectiveness
b. A compliance audit performed by a government auditor
c. A review performed by either an independent or internal auditor
d. A financial statement audit by an independent auditor
49. Review uses what type of audit procedures
a. Inquiry and computation
b. Analytical procedures and confirmation
c. Analytical procedures and inquiry
d. Inquiry, computation and analytical procedures
50. Criteria that are embodied in laws or regulations, or issued by authorized or recognized
bodies of experts that follow a transparent due process are called
a. Suitable Criteria c. Assurance
b. Subject Matter d. Conclusion
51. The engagement partner should take responsibility for the direction, supervision, and
performance of the audit engagement in compliance with professional standards and
regulatory and legal requirements, and for the auditor’s report that is issued to be
appropriate in the circumstances. Supervisor includes the following except
a. Tracking the progress of the audit engagement
 b. Addressing significant issues arising during the audit engagement, considering their
significance, and modifying-the planned approach appropriately.
c. Informing the team members of the engagement team of their responsibilities.
d. Identifying matters for consultation or consideration by more experienced
engagement team members during the audit engagement.
52. If the materially level set by auditor decreases, evidences to be gathered tend to
a. Increase
b. Decrease
c. Depends on the situation
d. Cannot be assessed
53. The audit work performed by each assistant should be reviewed to determine whether it
was adequately performed and to evaluate whether the
a. Auditors system of quality control has been maintained at a high level.
b. Results are consistent with the conclusions to be presented in the auditor's
report
c. Audit procedures performed are approved in the professional standards.
d. Audit has been performed by persons having adequate technical training and
proficiency as auditors.
54. A basic objective of a CPA firm is to provide professional services that conform with
professional standards. Reasonable assurance of achieving this basic objective is provided
through
a. Compliance with Philippine Standards on Auditing
b. A system of quality control
c. A system of quality assurance review
d. Continuing professional education
55. A body created by the Board to conduct an oversight of the quality of audit of financial
statements by reviewing the firms quality control is known as:
a. Quality review committee (QRC)
b. Educational training committee (ETC)
c. Financial reporting standards council (FRSC)
d. Auditing and assurance service council (AASC)
56. This involves upholding ethical standards in accordance with the Code of Ethics for
Professional Accountant which places emphasis on ethical behavior as well as
internalization of principles of integrity.
a. Organizational and environmental awareness
b. Change, uncertainty and complexity
c. Professionalism and ethical behavior
d. An investor and wider stakeholder focus
57. CPAs demonstrate superior technical proficiency by performing with a high level of
expertise and knowledge.
a. Objectivity
b. Competence
c. Commitment to excellence
d. Anticipating and serving evolving needs
58. Maintaining and providing access to adequate reference libraries and other authoritative
sources is a procedure that is most likely performed to comply with the policy of
a. Monitoring
b. Skills and competence
c. Consultation
d. Assignment
59. The pyramid of fraud includes:
a. Intimidation, pressure and rationale
 b. Opportunities, incentives and pressure
c. Rationale, opportunity and intimidation
d. Pressure, rationale and opportunity
60. I. Audit firm should ask management written representation letter before the audit
commences.
II. The practice of public and private accounting is cover by provision under Philippine
Accountancy Act of 2004 (R.A. 9398).
a. Statement I and II are both correct
b. Statement I is correct, while II is incorrect
c. Statement I is incorrect, while II is correct
d. Statement I and II are both incorrect
61. If the CPA examinee has generated a board exam grades of:
Management services (MS) 90%
Auditing 86%
Taxation 75%
Regulatory framework for Business Transactions (RFBT) 66%
Financial accounting and reporting (FAR) 67%
Advanced financial accounting and reporting (AFAR) 66%
Total 75%
Remarks will be:
a. Passed, because the general average is 75%
b. Failed, because three subjects are lower than 75%, regardless of the general
average
c. Conditional taking up two subjects only, RFBT and AFAR
d. Passed, because that is no grades lower than 65% at any subject.
62. When considering the internal control, auditor is least likely to
a. Understand the flow of internal control and what assertions are being affected by
these controls
b. Understand the reason why internal control is being applied
c. Require to know if the internal control is working as intended
d. Require to know if the management has the tendency to override the controls
63. If the control risk increases, substantive testing will be
e. Increase
f. Decrease
g. No relation
h. Direct relation

Part II. Taxation

64. Which of the following is an example of a direct tax?
a. Sales tax
b. Property tax
c. Excise duty
d. Customs duty
65. What is the primary purpose of taxation?
a. To control inflation
b. To fund government expenditures
c. To regulate imports and exports
d. To encourage private investment
66. Which tax system imposes a higher tax rate as income increases?
a. Regressive tax
b. Proportional tax
c. Progressive tax
d. Indirect tax
67. A tax levied on goods and services rather than on income or profits is called a(n):
a. Direct tax
b. Indirect tax
 c. Capital gains tax
d. Estate tax
68. Which of the following taxes is typically deducted directly from an employee’s
paycheck?
a. Corporate tax
b. Excise tax
c. Payroll tax
d. Sales tax

69. What is the main difference between tax evasion and tax avoidance?
a. Tax evasion is illegal, while tax avoidance is legal
b. Tax evasion applies only to businesses, while tax avoidance applies to individuals
c. Tax evasion is voluntary, while tax avoidance is mandatory
d. There is no difference
70. Which of the following is an example of a regressive tax?
a. Federal income tax
b. Luxury tax
c. Sales tax
d. Estate tax
71. A tax imposed on the transfer of wealth from a deceased person to their heirs is called:
a. Income tax
b. Estate tax
c. Value-added tax
d. Corporate tax
72. What is the tax that businesses pay on their profits called?
a. Sales tax
b. Corporate income tax
c. Payroll tax
d. Excise tax
73. A tax imposed on specific goods like alcohol, tobacco, and gasoline is known as:
a. Excise tax
b. Property tax
c. Inheritance tax
d. Customs duty

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