TEST BANK

PSA 100

1. What is the overriding objective of the International Auditing

Standards that are issued by the International Auditing Practices
Committee of the International Federation of Accountants?
a. To improve the uniformity of auditing practices and related
services throughout the world.
b. To override a count’s regulations governing the audit of
financial statements.
c. To replace the generally accepted auditing standards.
d. To provide uniformity of specific audit procedures that are
acceptable worldwide.

Answer: A

2. Which of the following is considered least likely an objective of PSA

100, Philippine Standards on Assurance Engagement?
a. The standard serves as a framework for the development by the
AASC of specific standards for particular type of assurance
engagement.
b. To define specific rules on issuing report that contains either a
high or moderate level of assurance.
c. To establish standards for and provide guidance to professional
accountants in public practice for the performance of
engagements intended to provide a high level of assurance.
d. To describe the objectives and elements of assurance
engagements intended to provide either a high or moderate
levels of assurance.

Answer: B
PSA 100, Introduction

3. Which of the following statements about the standards on assurance

engagement is (are) valid?
I. The Philippine Standards on Assurance Engagements always
apply to an assurance engagement being performed by a
professional accountant.
II. Where a professional accountant in public practice performs
an engagement intended to provide a high level of assurance for
which no specific standards exist, the appropriately applicable

1
 standards included in the Standards on Assurance
Engagements are to be followed.
III. Whenever there is a conflict between the Standards on
Assurance Engagement and an existing Philippine Standards
on Auditing, the professional accountant should follow the
requirements of the Standard on Assurance Engagement.

a. I
b. II
c. I, II
d. II and III

Answer: B
PSA 100, Introduction

4. Which of the following is least likely an objective of an assurance

engagement?
a. The engagement is intended to prevent the issuance of
materially misleading information.
b. The engagement is intended to enhance the credibility of
information about a subject matter.
c. An assurance engagement is intended for a professional
accountant to express a conclusion that provides the intended
users with a level of assurance about the subject matter.
d. The engagement is intended to provide a level of assurance to
be issued by a professional accountant about the information of
being in conformity, in all material respects, with suitable
criteria.

Answer: A
PSA 100, Sec 4

5. The broad range of assurance engagements includes all, but which

of the following?
1. Engagements intended to provide high or moderate levels of
assurance.
2. Preparation of tax returns, though no conclusion is expressed.
3. Attest and direct reporting engagements.
4. Engagement to report externally, but not internally.
5. Engagements in the private and public sector.
6. Agreed-upon procedure engagement.

a. 2, 4, 5
b. 2, 4, 6

2
 c. 2, 5, 6
d. 4, 6

Answer: B
PSA 100, Sec 5 and 6

6. Which of the following is not an element of an assurance

engagement?
a. A subject matter.
b. Suitable criteria.
c. A conclusion.
d. A two-party relationship.

Answer: D
PSA 100, Sec 8

7. Which of the following is not among the fundamental principles that

the professional accountant has to observe?
a. Loyalty.
b. Objectivity.
c. Confidentiality.
d. Application of technical standards.

Answer: A
PSA 100, Sec 12

8. To which principle does the following relate?

“The intended user needs to have confidence that the profession

accountant has no interest that creates an unacceptable risk of bias
with respect to the subject matter”.
a. Confidentiality.
b. Integrity.
c. Professional competence and due care.
d. Objectivity.

Answer: D
PSA 100, Sec 13

9. Which is not true of the intended user?

a. The intended user is the person or class of persons for whom the
professional accountant prepares the report for a specific use or
purpose.

3
 b. The intended user(s) is (are) always limited to the addressee of
the professional accountant’s report.
c. The responsible party may also be one of the intended users.
d. The intended user(s) may not be the addressee of the
professional accountant’s report.

Answer: B
PSA 100, Sec 17

10. Which of the following is least likely a subject matter of an

assurance engagement?
a. Data.
b. Systems and processes.
c. Compliance with regulations.
d. Degree of loyalty of employees to their employer.

Answer: D
PSA 100, Sec 20

11. The criteria are the standards or benchmarks used to evaluate the
subject matter of an assurance engagement. Among the following
criteria, which one is the least objective?
a. Generally accepted accounting principles governing the
preparation of financial statements.
b. Specific agreements in a contract.
c. Control policies and procedures.
d. Effectiveness and efficiency in carrying out operating
procedures.

Answer: D
PSA 100, Sec 23

12. These refer to independent professional services that improve the

quality of information for decision makers:
a. Management advisory services.
b. Assurance services.
c. Attestation services.
d. Auditing.

Answer: B

13. It is a type of assurance service in which the CPA firm issues a

report about the reliability of an assertion that is the responsibility
of another party.

4
 a. Management advisory services.
b. Limited assurance services.
c. Attestation services.
d. Auditing.

Answer: C

14. A risk that reflects the possibility that the information upon which
the business risk decision was made was inaccurate refers to
a. Business risk.
b. Audit risk.
c. Information risk.
d. Risk-free rate interest rate.

Answer: C

15. Theoretically, it is possible to provide an infinite range of assurance

from a very low level of assurance to an absolute level of assurance.
In practice, the professional accountants cannot provide absolute
assurance because of the following, except:
a. The professional accountants employ testing process.
b. The internal control has inherent limitations.
c. The use of judgment in gathering evidence and drawing
conclusions based on that evidence.
d. The lack of expertise of the professional accountants in doing a
systematic engagement process.

Answer: D
PSA 100, Sec 28

16. To which of the following forms of risk does auditing has the most
significant effect?
a. Information risk.
b. Risk-free interest rate.
c. Business risk.
d. Inflation risk.

Answer: A

17. Any information used by the auditor to determine whether the

information being audited is stated in accordance with the
established criteria refers to:
a. Assertion.
b. Accounting information.

5
 c. Evidence.
d. Financial statements.

Answer: C

18. A review of any part of an organization’s operating procedures and

methods for the purpose of evaluating efficiency and effectiveness:
a. Operational audit.
b. Financial statement audit.
c. Compliance audit.
d. Internal audit.

Answer: A

19. How should generally accepted auditing standards and the

Philippine Standards on Auditing be looked on by CPA
practitioners?
a. They are maximum standards that must be complied with.
b. They are minimum standards of performance.
c. They are clearly defined guidelines for determining the extent of
evidence to be accumulated.
d. They are minimum specific audit procedures that the auditors
are expected to perform.

Answer: B

20. Though there may be available evidence that is conclusive and

reliable, the professional accountant may not be able to provide
absolute assurance because:
A B C D
Subject matter is determinate NO YES YES YES
Criteria are definitive YES NO YES YES
Process applied is comprehensive YES YES NO YES

Answer: D
PSA 100, Sec 29

21. Which of the following best describes “high level of assurance”?

a. It refers to the professional accountant having obtained
sufficient external and internal appropriate evidence to be
satisfied that the subject matter is plausible in the
circumstances.
b. It refers to the professional accountant having obtained
evidence based on procedures agreed upon between the

6
 practitioner and the intended users to be satisfied that findings
be reported to the intended users.
c. It refers to the professional accountant having obtained
sufficient appropriate evidence to conclude that the subject
matter conforms in all material respects with identified suitable
criteria.
d. It refers to the professional accountant having obtained
sufficient evidence to conclude that he has no knowledge of any
required modifications to be made in the financial statements in
order for them to conform of prescribed criteria.

Answer: C
PSA 100, Sec 29 and 30

22. Which of the following best refers to “moderate level of assurance”?

a. It refers to the professional accountant having obtained
sufficient evidence to conclude that he has no knowledge of any
required modifications to be made in the financial statements in
order for them to conform to prescribed criteria.
b. It refers to the professional accountant having obtained
sufficient appropriate evidence to conclude that the subject
matter conforms in all material respects with identified suitable
criteria.
c. It refers to the professional accountant having obtained evidence
based on procedures agreed upon between the practitioner and
the intended users to be satisfied that findings be reported to
the intended users.
d. It refers to the professional accountant having obtained
sufficient appropriate evidence to be satisfied that the subject
matter is plausible in the circumstances.

Answer: A

23. The practitioner neither assumes that the responsible party is

dishonest nor assumes unquestioned honesty. This characteristic
of a professional accountant refers to
a. Due care.
b. Objectivity.
c. Responsiveness.
d. Skepticism.

Answer: D
PSA 100, Sec 42

7
24. The following are factors that a professional accountant should base
his acceptance of an assurance engagement, except:
a. The auditor believes that a conclusion based on suitable criteria
can be expressed.
b. The subject matter is identifiable.
c. The conclusion can be meaningful to the intended user of the
report of the practitioner.
d. The likelihood that the conclusion to be expressed always
supports the assertion of the responsible party.

Answer: D
PSA 100, Sec 36

25. Some or all of the following are planning considerations:

I. Criteria to be used.
II. Nature and extent of involvement of the experts.
III. Possible sources of evidence.
IV. Type of conclusion to be issued.
V. Preliminary judgment about materiality and engagement
risk.
VI. Content of the management letter.

Which of the foregoing are matters that need to be considered in

planning an assurance engagement?
a. all of them.
b. I, II, III, V.
c. II, III, IV, VI.
d. I, III, V, VI.

Answer: B
PSA 100, Sec 41

26. The suitability of the criteria to which the professional accountant

will base his evaluation of the subject matter partly depends on:
A B C D
Relevance YES YES YES NO
Reliability YES YES YES YES
Understandability YES NO YES NO
Neutrality NO NO YES YES

Answer: C
PSA 100, Sec 45

8
27. Engagement risk is influenced by the risks associated with, except:
a. The sufficiency and appropriateness of the evidence likely to be
available.
b. The nature and extent of the process used to collect and
evaluate evidence.
c. The identified user of the assurance engagement report.
d. The nature and form of the subject matter.

Answer: C
PSA 100, Sec 51

28. In order for an effective audit to be completed, some, if not all, of the
following are required:
A. A grasp of internal control concepts.
B. A knowledge in the area of evidence gathering.
C. Thorough understanding of the entity being audited and the
industry of which it is a part.
D. A comprehensive knowledge of generally accepted accounting
principles.
E. A freedom from any form of financial interest.

a. All of these
b. A, B, and D
c. A, B, C, and D
d. B, C, D, and E

Answer: C

29. Which of the three general standards is the most critical when an
auditor undertakes to examine the financial statements of a client in
a previously unfamiliar industry?
a. First standard.
b. Second standard.
c. Third standard.
d. All of them are equally critical.

Answer: A

30. This standard requires that the auditor be prudent, applying

judgment in a conscientious manner, carefully weighing the relevant
factors before reaching a decision.
a. Competence and proficiency.
b. Due professional care.
c. Adequate planning.

9
 d. Evidence gathering.

Answer: B

31. Ultimately, which of the group(s) of generally accepted auditing

standards relate(s) to attest function of the auditor?
a. General standards.
b. Fieldwork standards.
c. Reporting standards.
d. a and c.

Answer: C

32. It occurs when the auditor issues an erroneous audit opinion as the
result of an underlying failure to comply with the requirements of
generally accepted auditing standards.
a. Business failure.
b. Audit failure.
c. Audit risk.
d. Nonsampling risk.

Answer:

33. What is the likely consequence of assigning unqualified assistants to

perform audit tasks who then fail to find material misstatements
that qualified auditors would discover?
a. Audit risk.
b. Detection risk.
c. Audit failure.
d. Sampling risk.

Answer:

34. It refers to the measure of the level of certainty that the auditor has
obtained at the completion of the audit:
a. Assurance.
b. Assertion.
c. Evidence.
d. Audit report.

Answer: A

35. The concept of reasonable assurance as expressed by the auditor on

his report means:

10
 a. The auditor just considers material misstatements when he
prepares his audit report.
b. It indicates that the auditor is not an insurer or guarantor of the
correctness of the financial statements.
c. The cost of doing the audit should not exceed the professional
fee charged.
d. The auditor has to observe reasonable care when he performs
the audit and prepares his audit report.

Answer:

36. Which of the following is the least reason why a CPA can just issue a
reasonable and not an absolute assurance?
a. The auditor’s responsibility is confined to his opinion issued on
the financial statements.
b. Most evidence results from testing a sample from population and
the test results require significant auditor judgment.
c. Accounting presentations contain complex estimates which
inherently involve uncertainty.
d. Fraudulently prepares financial statements are extremely
difficult for the auditor to detect.

Answer: A

37. An attitude that includes a questioning mind and a critical

assessment of audit evidence.
a. Investigative.
b. Skepticism.
c. Negative attitude.
d. Mistrust.

Answer: B

38. How do auditing standards consider the auditor’s responsibilities for

detecting fraud and errors?
a. Auditing standards make no distinction between the auditor’s
responsibilities for searching for errors and fraud?
b. The difficulty of detecting fraud changes the auditor’s
responsibility from reasonable to limited assurance.
c. The auditor should plan to discover material errors and all forms
of fraud.
d. Auditing standards provide an implicit responsibility for the
auditor to discover material misstatements due to fraud.

11
Answer: A

39. The following elements are related to auditing:

1. Understanding of the entity and the industry of which it is a
part.
2. Understanding of the economic substance of all significant
transactions.
3. Independence in appearance.
4. Understanding of the client’s accounting internal control.

Which of the foregoing would least likely be a factor of reducing

exposure to audit risk?
a. 1.
b. 2.
c. 3.
d. 4.

Answer: C

40. It refers to the measure of the quantity of evidence obtained:

a. Appropriateness.
b. Sufficiency.
c. Neutrality.
d. Relevance.

Answer: B
PSA 100, Sec 53

41. How is the responsibility of the practitioner affected by an

involvement of an expert in an assurance engagement?
a. The practitioner should always refer to the work of the expert in
his report.
b. The practitioner should divide the responsibility between him
and the expert.
c. The auditor should have an understanding of the aspects of the
subject matter for which the expert has used, sufficient to
enable the practitioner to accept responsibility for the
conclusion on subject matter being expressed.
d. The practitioner should first obtain a level of knowledge of the
business, sufficient to at least equal the expertise of the expert,
so that he can review the results of the work of the expert.
Answer: C
PSA 100, Sect 65 and 66

12
42. Before the practitioner rely on the work of the expert, he should
obtain sufficient appropriate evidence that the work of the expert is
adequate by considering the following, except:
a. The reasonableness and significance of the expert’s findings in
relation to the objective of the engagement and the conclusion
on the subject matter.
b. The professional competence, experience and objectivity of the
expert.
c. The findings of the expert support the assertion issued by the
party responsible to the subject matter.
d. The reasonableness of the assumptions, methods and source
data used by the expert.

Answer: C
PSA 100, Sec 67

43. Which of the following statements about the report that conveys a
high level of assurance on the subject matter is correct?
a. The practitioner’s report should contain a subjective expression
of his opinion about a subject matter based on the identified
suitable criteria and the evidence obtained.
b. The practitioner must not issue an oral conclusion about a
subject matter based on the identified suitable criteria and the
evidence obtained.
c. The report can take various forms, such in writing, electronic
form, oral or by symbolic representation.
d. The report should be in a standard format for reporting on all
assurance engagement.

Answer: C
Sec 68 and 69

44. The practitioner’s report on an assurance engagement should

always include the following, except:
a. A description of the engagement and identification of the subject
matter.
b. Identification of the standards under which the engagement was
conducted.
c. Reference to the work of an expert.
d. Identification of the criteria.
Answer: C
PSA 100, Sec 71

13
45. Which of the following is the least potential problem associated with
managerial reporting?
a. Management bias in providing financial information.
b. Lack of expertise in financial reporting.
c. Remoteness of the users from the entity.
d. Complexity of transactions affecting the financial statements.

Answer: B

PSA 120

46. Mostly, the Philippine Auditing Standards apply to audit of historical

financial statements. Some of the standards apply to other nature
of engagement, like:
Agreed-upon
Review Compilation Procedures
a. YES YES YES
b. NO YES YES
c. YES NO NO
d. NO NO YES

Answer: A

47. Which of the following is an inappropriate specific procedure

required in completing a review engagement?
a. Inquiring with management about the extent of related-party
transactions.
b. Inquiry made with client’s legal counsel regarding litigations.
c. Comparison of company’s gross profit rate to industry data.
d. Inquiring with the management regarding its plans of
restructuring the company’s long-term loans.

Answer: B

48. Which of the following engagements is intended to report that the

auditor has no knowledge of whether material modifications should
be made to such financial statements to make them conform of
generally accepted accounting principles?
a. Audit
b. Compilation
c. Review
d. Agreed-upon procedures

14
Answer:

49. According to Philippine Standards on Auditing, the procedures

employed in doing agreed-upon procedures are:
a. Designed to enable the accountant to express a limited
assurance.
b. b. Designed to enable the accountant to express a negative
assurance.
c. Designed to enable the accountant to provide users factual
findings.
d. Less extensive than compilation but more extensive than review
procedures.

Answer:

PSA 200

50. In which of the following would the judgment of the auditor be least
critical?
a. Verification of the authenticity of the transfer certificate of title.
b. Determination of the material level.
c. Assessment of the management plans of action in order to
improve cash flows.
d. Assessing the reasonableness of the estimates made by the
management.

Answer: A

51. The primary goal of the CPA in performing the attest function is to
a. Investigate the incidence of fraud.
b. Examine all the individual transactions for him to issue an
opinion about the fairness of presentation of an entity’s financial
statements.
c. Determine whether the client’s assertions that are embodied in
the financial statements are fairly presented.
d. Prevent an issuance of improperly prepared financial
statements.

Answer:

52. The auditor’s opinion regarding the fairness of presentation of the

financial statements is primarily based on whether they conform
with
a. Financial assertions.

15
 b. Audit objectives.
c. Company’s accounting policies.
d. Generally accepted accounting principles.

Answer: D

53. It occurs when the auditor issues an erroneous audit opinion as the
result of an underlying failure to comply with the requirements of
generally accepted auditing standards.
a. Business failure.
b. Audit failure.
c. Audit risk.
d. Nonsampling risk.

Answer: B

54. What is the likely consequence of assigning unqualified assistants to

perform audit tasks who then fail to find material misstatements
that qualified auditors would discover?
a. Audit risk.
b. Detection risk.
c. Audit failure.
d. Sampling risk.

Answer: C
]
55. It refers to the measure of the level of certainty that the auditor has
obtained at the completion of the audit:
a. Assurance.
b. Assertion.
c. Evidence.
d. Audit report.

Answer: A

56. The concept of reasonable assurance as expressed by the auditor on

his report means:
a. The auditor just considers material misstatements when he
prepares his audit report.
b. It indicates that the auditor is not an insurer or guarantor of
the correctness of the financial statements.
c. The cost of doing the audit should not exceed the professional
fee charged.

16
 d. The auditor has to observe reasonable care when he performs
the audit and prepares his audit report.

Answer:

57. Which of the following is the least reason why a CPA can just issue a
reasonable and not an absolute assurance?
a. The auditor’s responsibility is confined to his opinion issued on
the financial statements.
b. Most evidence results from testing a sample from population
and the test results require significant auditor judgment.
c. Accounting presentations contain complex estimates which
inherently involve uncertainty.
d. Fraudulently prepares financial statements are extremely
difficult for the auditor to detect.

Answer: A

58. It refers to the correspondence of an evidence to a particular audit

objective:
a. Competence or reliability.
b. Relevance.
c. Persuasiveness.
d. Corroboration.

Answer: B

59. It refers to the degree to which evidence can be considered believable

or worthy of trust:
a. Competence or reliability.
b. Relevance.
c. Persuasiveness.
d. Corroboration.

Answer: B

60. In the absence of pronouncements issued by the ASPC and the

PICPA, published statements and guidelines by other authoritative
bodies, like AICPA, IAPC and AFA are the basis of determining
generally accepted auditing standards. What effect do these
pronouncements provide in determining the generally accepted
auditing standards?
a. Authoritative
b. Persuasive

17
 c. Alternative
d. Parallel

Answer: B

61. Specifically, the Board of Accountancy is officially represented in the

ASPC by
a. Secretary of the BOA
b. Chair, BOA
c. Chair, PRC
d. BOA member who handles Auditing Theory subject

Answer: B

62. A draft of statement, studies or standards should be discussed by

the Council en banc. How many members are required to approve
the draft to consider it for exposure?
a. Majority
b. Eight
c. Ten
d. Twelve

Answer: A

63. How many members of ASPC are needed to approve the exposed
draft of Philippine Standards in Auditing as Philippine Standards on
Auditing?
a. Majority of the regular members
b. At least eight
c. At least ten
d. At least twelve

Answer: C

64. Which of the following is a correct statement?

a. ASPC should normally expose a proposed interpretation of
statements.
b. ASPC should normally expose its opinion on specific queries
from a practicing CPA.
c. To make the statements on Philippine Standards on Auditing
operative, the final statement shall be submitted to the Board of
Accountancy for approval.
d. When it is deemed necessary to expose for a comment on
proposed interpretations of statements, the exposure period is

18
 understandably shorter than those of the regular drafts of
standards.

Answer: C

65. Which of the following is not presented by the signatories to the

Joint Memorandum of Support to the creation and operation of the
Auditing Standards and Practices Council?
a. Board of Accountancy.
b. Philippine Institute of Certified Public Accountants (PICPA).
c. Association of Certified Public Accountants in Public Practice
(ACPAPP).
d. Philippine Institute of Certified Public Accountants Foundation,
Inc.

Answer: A

66. Which of the following statements does not describe a condition that
creates a demand for auditing?
a. Conflict between an information prepare and a user can result
in biased information.
b. Information can have substantial economic consequences for a
decision maker.
c. Expertise is often required for information preparation and
verification.
d. Users can directly assess the quality of information.

Answer: D

67. The framework for auditing and related services as addressed by

PSA excludes
a. Review
b. Compilation
c. Tax services
d. Agreed upon procedure

Answer C
PSA 120 par

68. What level of assurance does a review report provide to users of

financial statements?
a. High
b. Absolute
c. Moderate

19
 d. No assurance on the statements.

Answer C
PSA par 17

69. It refers to the level of auditor’s satisfaction as to the reliability of an

assertion being made by one party for use by another party.
a. Confidence level
b. Assurance level
c. Reasonableness level
d. Tolerable level

Answer B
PSA 120 par 5

70. Which of the following engagements provides third parties the

highest level of assurance about the client’s financial statements?
a. Review
b. Audit
c. Agreed-upon procedures
d. Compilation

Answer B
PSA 120 par 4

71. Which of the following is an objective of a financial audit?

a. Expressing a positive opinion that the financial information is
presented in conformity with generally accepted accounting
principles.
b. Expressing a limited assurance to users who have agreed as to
procedures that will be performed by the CPA.
c. Reporting whether material modifications should be made to
such financial statements to make them conform with generally
accepted accounting principles.
d. Reporting that the financial statements, in all materials
respects, fairly present the financial position and operating
results of the client.

Answer D
PSA 120 par 14, 15

72. Which of the following best describes the objective of an audit of

financial statements?

20
 a. To express an opinion whether the financial statements are
prepared in accordance with prescribed criteria.
b. To express an assurance as to the future viability of the entity
whose financial statements are being audited.
c. To express an assurance about the management’s efficiency or
effectiveness in conducting the operations of entity.
d. To express an opinion whether the financial statements are
prepared, in all material respect, in accordance with an
identified financial reporting framework.

Answer D
PSA 200 par 2, 3

73. The objective and scope of the audit and the extent of the auditor’s
responsibilities to the client are best documented in
a. Independent auditor’s report
b. Audit engagement letter
c. Client’s Representation letter
d. Audit program

Answer B
PSA 210 par 5

74. The following are valid reasons why an auditor sends to his client an
engagement letter:
a b c d
Avoid misunderstanding with respect
to engagement Yes Yes No Yes
Confirms the auditor’s of the
appointment Yes Yes Yes No
Objective and scope of the audit Yes Yes Yes Yes
Assures CPA’s compliance to GAAS Yes No No Yes

Answer B
PSA 210 par 3

75. Which of the following least likely requires the auditor to send a new
engagement letter?
a. An indication that the client misunderstands the objective and
scope of the audit
b. Any revised or special terms of the engagement
c. A recent change in the audit firm’s management
d. Legal requirements and other government agencies’
pronouncements

21
Answer C
PSA 210 par

76. They comprise the methods used to ensure that the firm meets its
professional responsibilities to clients and others.
a. Generally accepted auditing standards.
b. Attestation standards.
c. Quality control standards.
d. Philippines Standards on Auditing.

Answer: C

77. Which of the following is least likely a factor that affects the extent of
quality control procedures?
a. The type of clients that the firm serves.
b. The size of the firm.
c. The number of practice offices.
d. The nature of the practice.

Answer: A

78. What quality control objective requires that each professional must
be evaluated on every engagement?
a. Supervision.
b. Advancement.
c. Monitoring.
d. Direction.

Answer: B

79. The quality control requiring the partner tests the quality control
procedures at least annually. Which quality control objective
requires the foregoing procedure?
a. Acceptance and continuance of clients.
b. Supervision.
c. Consultation.
d. Monitoring.

Answer: D

80. What differentiates fraud from an error?

a. Materiality
b. Intent

22
 c. Effect on financial statements
d. Frequency of occurrence

Answer: B

81. Which of the following acts are considered fraud?

I. Alteration of records or documents.
II. Misinterpretation of facts.
III. Misappropriation of assets.
IV. Recording of transactions without substance.
V. Clerical mistakes.

a. III only
b. I and III only
c. I, III, and IV only
d. All of them

Answer: C

82. A CPA, found guilty of act or omission of certifying financial

statements of a business enterprise containing an essential
misstatement of facts or omission in respect of the transactions,
taxable income, deductions and exemption of his client, shall be
punished by a fine of:
a. Not less than P10,000 but not more than P30,000.
b. Not less than P25,000 but not more than P50,000.
c. Not less than P50,000 but not more than P100,000.
d. Not less than P100,000 but not more than P250,000.

Answer: C

83. The risk of financial fraud may significantly increase if there is

a. A system of profit-sharing incentive plan.
b. A substantial growth in sales.
c. A change from manual processing to computerized system.
d. Frequent changes in suppliers.

Answer: A

84. The auditor-in-charge of engagement assesses risk of fraud higher

than the average. The prudent auditor is expected to
a. Assign more experienced auditors to the engagement.
b. Assign a more members to the engagement.
c. Make a more extensive test of controls.

23
 d. Raise the materiality level.

Answer: A

85. A type of fraud in which an employee takes assets from an

organization for personal gain:
a. Fraudulent financial reporting.
b. Defalcation.
c. Window dressing.
d. Secret reserve.

Answer: B

86. Which of the following is least likely a factor that increases potential
for fraud?
a. Operating, financing, and investing decisions are dominated by a
single person.
b. Operating results are highly sensitive to outside economic
conditions.
c. Audit client has been in the business and the leader of the
industry for more than a decade.
d. Organization is decentralized without adequate monitoring.

87. In assessing potential for fraud, the following are either likely or
unlikely to increase risk of misstatements of financial statements.
Which of the following combinations best describes the likelihood of
potential for fraud?
a b c d
1 Many contentions or difficult accounting
issues are present L L L U
2 Significant and unusual related-party
transactions are present L U U U
3 Direction of change in entity’s industry
is declining with many businesses L L U L

Answer: A

88. In assessing potential for fraud, the following are either likely or
unlikely to increase risk of misstatements of financial statements.
Which of the following combinations best describes the likelihood of
potential for fraud?

A B C D
1 Undue emphasis is placed on meeting

24
 projections. L U L U
2 Operating, financing and investing
activities are made by different
respective committees of the BOD. L U U U
3 Reputation of the management is
poor L L L U

Answer: C

89. Which of the following is an incorrect statement?

a. The amount of audit work should vary inversely with the
likelihood of material misstatements existing in the accounting
records.
b. The better the organization’s control structure, the less likely it
is that material misstatements will be present.
c. Complex or unusual transactions are more likely to be recorded
in error than recurring or routine transactions are.
d. If misstatements are likely to occur in the recording process, the
auditor should develop procedures to detect misstatements.

Answer: A

90. In the regular audit of Lira Company, Aril, CPA, discovered a

material fraud being perpetrated by the cashier. What do you
expect most of Aril to do?
a. Report the incident to the SEC.
b. Communicate the existence and details of the fraud to the audit
committee of the board of directors and to management at least
one level above that where the fraud has occurred.
c. Advise the stockholders of the client company regarding the
fraud.
d. Make an extensive investigation in order to account for the
extent of the fraud.

Answer: B

91. An attitude that includes a questioning mind and a critical

assessment of audit evidence.
a. Investigative.
b. Skepticism.
c. Negative attitude.
d. Mistrust.

Answer: B

25
92. How do auditing standards consider the auditor’s responsibilities for
detecting fraud and errors?
a. Auditing standards make no distinction between the auditor’s
responsibilities for searching for errors and fraud?
b. The difficulty of detecting fraud changes the auditor’s
responsibility from reasonable to limited assurance.
c. The auditor should plan to discover material errors and all
forms of fraud.
d. Auditing standards provide an implicit responsibility for the
auditor to discover material misstatements due to fraud.

Answer: A

93. What should the auditor do first when in an audit of a client entity,
an illegal act has been identified?
a. Consider the effects of the illegal act on the financial
statements.
b. Communicate the matter with the audit committee of the board
of directors.
c. Submit a confidential report to the SEC.
d. Consult the client’s legal counsel about the matter.

Answer: A

PSA 320
Materiality

94. Which of the following is a qualitative misstatement?

a. Inadequate allowance for uncollectible accounts.
b. Padded sales.
c. Unrecorded short-term obligations.
d. Failure to disclose loan restrictions in payment of dividends.

Answer: D
Sec. 5

95. In which of the following situations would materiality be least likely

considered critical?
a. A decision of whether the auditor has to obtain a representation
letter from the management.
b. In determining the nature, timing and extent of audit
procedures.

26
 c. A decision of whether to modify the audit opinion.
d. Evaluating the effect of misstatements.

Answer: A
Sec 8
.
96. The auditor’s considerations of materiality level relate to:
A B C D
Individual account balances YES YES YES NO
Classes of transactions YES YES NO NO
Disclosures YES NO NO YES

Answer: A
Sec 7

97. The auditor’s assessment of materiality level in relation to specific

account balances and classes of transactions will enable the auditor
to:
a. Omit certain necessary audit tests.
b. Assess whether the audit opinion will be modified.
c. Select audit procedures that are appropriate based on
acceptable detection risk.
d. Primarily determine whether tests of controls would be
performed.

Answer: C
Sec 9

98. Which of the following statements about materiality is incorrect?

a. The assessment of what is material is a matter of professional
judgment.
b. When planning the audit, the auditor should consider what
would make the financial statements materially misstated.
c. The assessed level of materiality should not normally be revised
by the auditor.
d. Materiality is addressed in the auditor’s report.

Answer: C
Sec 4, 9, 11

99. The aggregate uncorrected misstatements include:

a. Specific misstatements during the current audit year identified
by the auditor.

27
 b. Net effect of uncorrected misstatements identified during the
audit of previous year.
c. The auditor’s best estimate of other misstatements which cannot
be specifically identified.
d. The sum of A, B, and C.

Answer: D
Sec 12

100. Upon completion of the audit, the auditor needs to consider

uncorrected misstatements because:
a. The aggregate of uncorrected misstatements, when considered,
makes the financial statements materially misstated.
b. There is a need to revise the financial statements after their
issuance.
c. They are basis of whether the auditor needs to redocument
internal control.
d. The aggregate of uncorrected misstatements is the basis of the
auditor to reassess materiality level.

Answer: A
Sec 14

101. What should a prudent auditor do when the aggregate of

uncorrected misstatements approach the materiality level?

A B C D
Perform additional procedures. YES NO NO YES
Request management to adjust
financial statements for identified YES YES NO YES
misstatements
Request management to adjust
financial statements for projected YES NO YES NO
misstatements.

Answer: D
Sec 16

102. If based on the aggregate of uncorrected misstatements the auditor

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

28
 a. Issue a standard opinion.
b. Consider resigning from the engagement.
c. Appropriately modify the audit report.
d. Obtain additional representation letter covering uncorrected
misstatements.

Answer: C
Sec 14, 15

103. What is the relationship between materiality and the level of audit
risk?
a. Direct
b. Parallel
c. Inverse
d. Positive

Answer: C
Sec 10

104. In which of the following would the judgment of the auditor be least
critical?
a. Verification of the authenticity of the transfer certificate of title.
b. Determination of the material level.
c. Assessment of the management plans of action in order to
improve cash flows.
d. Assessing the reasonableness of the estimates made by the
management.

Answer: A
PSA 200

PSA 500

105. According to PSA 500 (Audit Evidence), which of the following is not
true of audit evidence?
a. Audit evidence may be obtained entirely from substantive
procedures.
b. The appropriateness of the audit evidence is the measure of
both the quality and quantity of audit evidence.
c. Audit evidence is obtained form an appropriate mix of tests of
control and substantive procedures.

29
 d. Substantive procedures mean tests performed to obtain audit
evidence to detect material misstatements in the financial
statements.

Answer: B
Sec 3, 6, 7

106. Which of the following is an incorrect statement?

a. The auditor should obtain sufficient appropriate audit evidence
to be able to draw above reasonable conclusions on which to
base the audit opinion.
b. Tests of control refer to tests performed to obtain audit evidence
about the suitability of design and effective operation of the
accounting and internal control systems.
c. Substantive procedures consist of two types – tests of details
and analytical procedures.
d. The auditor ordinarily relies on audit evidence that is persuasive
rather than conclusive.

Answer: A
Sec 2, 5, 6, 7

107. Which of the following least likely affect the sufficiency of the
appropriate audit evidence?
a. Nature of the accounting and internal control systems.
b. Materiality of the item being examined.
c. Source and reliability of information available.
d. The type of sampling approach – statistical or judgmental.

Answer: D
PSA 500 Sec 9

108. It refers to the measure of the quantity of audit evidence considered

necessary to achieve the predetermined acceptable level of detection
risk:
a. Relevance.
b. Validity.
c. Sufficiency.
d. Appropriateness.

Answer: C
PSA 500 Sec 7

30
109. The determination of the appropriate sample size based on the
tolerable deviation rate in a test of control procedure relates to
a. Sufficiency.
b. Relevance.
c. Validity.
d. Appropriateness.

Answer: A
PSA 500, Sec 7

110. Generally, the auditor prefers external evidence to internal evidence.

This is a measure of
a. Relevance.
b. Appropriateness.
c. Analysis.
d. Evidence gathering.

Answer: B
PSA 500, Sec 7

111. “ A transaction or event is recorded at the proper amount and

revenue or expense is allocated at the proper period” is a financial
assertion of:
a. Occurrence.
b. Completeness.
c. Valuation.
d. Measurement.

Answer: D
PSA 500, Sec 13F

112. Which of the following is an invalid statement about an audit

evidence?
a. Ordinarily, audit evidence regarding one assertion will
compensate for failure to obtain audit evidence regarding
another assertion.
b. Ordinarily, audit evidence is obtained regarding each financial
assertion.
c. The nature, timing and extent of substantive tests will vary
depending on the assertions.
d. Audit tests can provide audit evidence about more than one
assertion.
Answer: A
PSA 500, Sec 15

31
113. Which of the following statements does not relate to the
persuasiveness of audit evidence?
a. Audit evidence obtained directly by the auditor is more reliable
than that one provided by the client management.
b. Oral representation by the client management is an invalid
evidence.
c. The effectiveness of accounting and internal control adds to the
reliability of internal audit evidence.
d. While internal audit evidence is considered to be acceptable, the
auditor usually prefers audit evidence form external sources.

Answer: B
PSA 500, Sec 15

114. The following statements are discussions about financial assertions

and audit evidence. Which of them is(are) correct?
I. When in substantial doubt as to a material financial
statement assertion, the auditor likely attempt to obtain
sufficient appropriate audit evidence to remove such doubt.
II. Difficulty and cost involved is a valid basis for omitting a
necessary procedure.
III. In obtaining audit evidence, the auditor needs to consider
the relationship between the cost of obtaining it and its
usefulness.
IV. When there are inconsistent evidences provided by two
different sources, the auditor may need to modify his audit
opinion.

a. II, III, IV
b. I, III
c. II, IV
d. I, III, IV

Answer: B
PSA 500, Sec 16, 17, 18

115. The three major categories of documentary audit evidence are:

1. Documentary audit evidence created by third parties and held
by the client entity.
2. Documentary audit evidence created and held by third parties.
3. Documentary audit evidence created and held by the client
entity.

32
 What is the order of their degree of reliability?

a. 1, 3, 2.
b. 3, 1, 2.
c. 2, 1, 3.
d. 2, 3, 1.

Answer: C
PSA 500, Sec 20

116. Inspection of property and equipment primarily relates to which

financial assertion?
a. Ownership.
b. Valuation.
c. Completeness.
d. Existence.

Answer: D
PSA 500, Sec 20

117. The manner of obtaining audit evidence that consists of examining

records, documents or tangible assets:
a. Inspection.
b. Inquiry.
c. Analytical procedures.
d. Observation.

Answer: A
PSA 500, Sec 20

118. They involve analysis of significant ratios and trends including the
resultant investigation of fluctuations and relationships that are
inconsistent with other relevant information or expectation:
a. Inquiry.
b. Analytical procedures.
c. Account analysis.
d. Inspection.

Answer: B
PSA 500, Sec 25

119. Which of the following procedures may provide the auditor with
information not previously possessed by him?
a. Inspection.

33
 b. Inquiry.
c. Analytical procedures.
d. Computation.

Answer: B
PSA 500, Sec 22

120. When the auditor performs tests of control regarding the policy of
counting materials received from the suppliers, the auditor most
likely will:
a. Inspect the receiving reports.
b. Verify that cash vouchers are accompanied by receiving reports.
c. Inquire the receiving clerk of whether count of incoming
deliveries is being made.
d. Observe several times as the receiving section is receiving the
incoming deliveries.

Answer: D
PSA 500, Sec 21

121. It consists of looking at a process or procedures being performed by

other persons:
a. Inquiry.
b. Observation.
c. Tracing.
d. Inspection.

Answer: B
PSA 500, Sec 21

122. Which of the following least likely affect the persuasiveness of audit
evidence that the audit obtains?
a. The source of the audit evidence.
b. The consistency of evidence obtained form different sources.
c. The number of audit evidence from a group of sources.
d. The effectiveness of accounting and internal control of the client
entity.

Answer: C
PSA 500, Sec 15, 16

123. Which of the following is the least relevant to the auditor’s decision
on obtaining audit evidence?
a. Which audit procedures to use?

34
 b. What sample size to select for a given procedure?
c. When to perform the procedures?
d. Which evidence is convincing?

Answer: D

124. The detailed instruction for the collection of a type of audit evidence
that is to be obtained at some time during the audit:
a. Audit program.
b. Audit procedure.
c. Audit technique.
d. Working papers.

Answer: B

125. It refers to the list of audit procedures for an audit area or an entire
audit.
a. Audit checklist.
b. Audit objective.
c. Audit program.
d. Planning memoranda.

Answer: C

126. It is a measure of the quality of audit evidence and its relevance to a

particular assertion and its reliability.
a. Sufficiency.
b. Appropriateness.
c. Objectivity.
d. Fairness.

Answer: B
PSA 500, Sec 7

127. Does each of the following affect the persuasiveness of audit

evidence?
A B C D
Competence YES YES NO NO
Sufficiency YES NO YES NO

Answer: B

128. The following statements relate to audit evidence, except:

35
 a. The competence of audit is likely improved by selecting a larger
sample size or different population items.
b. The evidence obtained from a source outside the client entity is
more persuasive than that one obtained from within.
c. When a client’s accounting and internal controls are effective,
the evidence obtained is more reliable.
d. The evidence obtained directly by the auditor through physical
examination, computation, observation, or confirmation is more
competent than an information obtained indirectly.

Answer: A
PSA 500, Sec 15

129. An objective evidence is more reliable than an evidence that requires

considerable judgment to determine whether it is correct. The
following are example objective evidence, except:
a. Confirmation replies.
b. Physical count of cash and securities.
c. Replies from client’s legal counsel.
d. Adding a list of accounts payable.

Answer: C
PSA 500

130. It refers to the correspondence of an evidence to a particular audit

objective:
a. Competence or reliability.
b. Relevance.
c. Persuasiveness.
d. Corroboration.

Answer: B
PSA 500

131. What is meant by timeliness of audit evidence?

a. Evidence is more reliable for balance sheet accounts when it is
obtained as close to the balance sheet date as possible.
b. Evidence is more reliable for income statement accounts if the
sample comes from part of the period as close to balance sheet
date as possible.
c. Tests of transactions should be performed close to balance
sheet date.
d. Tests of account balances must be performed before the balance
sheet date.

36
Answer: A

132. Confirmation is required for:

A B C D
Accounts Receivable YES YES NO YES
Cash YES YES NO NO
Inventory YES NO YES NO
Accounts Payable YES NO YES NO

Answer: D

133. This procedure involves rechecking a sample of the computations

and transfers of information made by the client during the period
under audit.
a. Analytical procedure.
b. Vouching.
c. Reperformance.
d. Inspection.

Answer: C

134. Which of the following is an invalid statement about the relationship

of accounting and internal control to the persuasiveness of audit
evidence?
a. The effectiveness of the client’s accounting and internal control
has a significant impact on the competence of most types of
evidence.
b. Both physical examination and reperformance are likely to be
highly reliable if the accounting internal controls are effective.
c. The effectiveness of accounting and internal control system is
inversely related to the sufficiency of audit evidence required.
d. The effectiveness of accounting policies and procedures on
revenue and cash receipts significantly affects the extent of
substantive procedures on cash disbursements and
expenditures.

Answer: D
PSA 500, Sec 12, 14, 15

135. The collections of audit procedures to be applied to meet specified

audit objectives:
a. Assertion.
b. Audit note.

37
 c. Audit program.
d. Audit memoranda.

136. Are substantive tests of transactions performed during:

A B C D
Interim phase? YES YES NO NO
Final (year end) phase? YES NO YES NO

Answer: A

137. Which of the following types of evidence is most expensive to obtain?

a. Confirmation.
b. Inquiries of the client.
c. Reperformance.
d. Observation.

Answer: A

138. Which of the following is least likely a procedure to be used in

satisfying the audit objective that inventory quantities on the client’s
perpetual records agree with items physically on hand?
a. Count a sample of inventory and compare quantity and
description to client’s counts.
b. Observe whether the receiving personnel personally counts the
incoming deliveries.
c. Observe the client’s personnel as he is counting the inventory in
order to determine whether they are properly following
instructions.
d. Compare quantity on client’s perpetual records to quantity on
client’s counts.

Answer: B

139. Which of the following audit evidences is least relevant to

determining whether inventories on the client’s perpetual records
agree with inventories on hand?
a. Inquiries.
b. Observation.
c. Documentation.
d. Physical examination.

Answer: A

38
140. It supports a specific amount and is normally expected to tie the
amount recorded in the client’s records to another source of
information.
a. Analysis.
b. Test of reasonableness.
c. Reconciliation.
d. Vouching.

Answer: C

141. An audit schedule which is designed to show the activity in a

general ledger account during the entire period under audit, tying
together the beginning and ending balances:
a. Analysis.
b. Tests of reasonableness.
c. Reconciliation.
d. Vouching.

Answer: A

142. A schedule presentation that contains the detailed accounts from

the general ledger making up the line item total:
a. Analysis.
b. Supporting schedule.
c. Lead schedule.
d. Working trial balance.

Answer: C

143. Which of the following is not a primary purpose of preparing working

papers?
a. To coordinate the audit.
b. To provide records of the audit work performed.
c. To assist in the preparation of the audit report.
d. To support the financial statements.

Answer: D

144. Which of the following is unlikely a reason why an auditor a good

understanding of the client’s industry and external environment?
a. There are industries that require different form of short-form
audit report.
b. There are inherent risks that are typically common to all clients
in certain industry.

39
 c. There are risks associated with specific industry.
d. Many industries have unique accounting requirements that the
auditor must understand to evaluate whether the client’s
financial statements conform to generally accepted accounting
principles.

Answer: A

145. What is the auditor’s primary concern when assessing client’s

business risk?
a. The client may not achieve its objectives.
b. The risk of material misstatements in the financial statements
due to business risk.
c. The entity may have potential problems that may hamper its
going concern ability.
d. The entity may have carried out its operations inefficiently.

Answer: B

146. A measure of how willing the auditor to accept that the financial
statements may be materially misstated and an unqualified opinion
can be issued:
a. Acceptable audit risk.
b. Reasonable assurance.
c. Materiality.
d. Acceptable deviation rate.

Answer: A

147. Which of the following is incorrect about materiality?

a. Materiality is an absolute concept.
b. It is necessary to have bases for establishing whether
misstatements are material.
c. Certain types of misstatements are likely to be more important
to users than others, even if the peso amounts are the same.
d. Materiality is a matter of professional judgment.

Answer: A

148. A measure of the risk that the audit evidence for a segment will fail
to detect material misstatements, if any, exceeding a tolerable
amount:
a. Audit risk.
b. Inherent risk.

40
 c. Control risk.
d. Detection risk.
Answer: D

149. Which of the following is a factor that least requires the external
users’ reliance on client’s financial statements?
a. The number of years of entity’s operations.
b. The entity’s size.
c. The nature and amount of liabilities.
d. Distribution of ownership.

Answer: A

150. Are the following factors good indicators of client’s business failure?
A B C D
Liquidity position YES NO YES YES
Nature of client’s operations NO YES NO YES
Competence of management YES NO YES YES
Methods of financing NO YES YES YES

Answer: D

151. What is the planned detection risk when:

Acceptable audit risk is high;
Inherent risk is low; and,
Control risk is low?

a. High.
b. Medium.
c. Low.
d. Indeterminate.

Answer: A

152. In which of the following order, from least to most, do audit tests
cost?
a. Analytical procedures, understanding and tests of controls, tests
of details of balances, tests of transactions.
b. Understanding and tests of controls, analytical procedures, tests
of details of balances, tests of transactions.
c. Analytical procedures, understanding and tests of controls, tests
of transactions, tests of details of balances.
d. Understanding and tests of controls, tests of transactions,
analytical procedures, tests of details of balances.

41
Answer: C

153. Which of the following statements about tests of controls is most

accurate?
a. Auditing procedures cannot concurrently provide both evidence
of the effectiveness of internal control procedures and evidence
required for substantive tests.
b. Tests of controls include observations of the proper segregation
of duties.
c. Tests of controls provide direct evidence about monetary
misstatements in transactions.
d. Tests of controls ordinarily should be performed as of the
balance sheet date or during the period subsequent to that
date.

Answer: B

154. Which of the following would be least likely to be included in an

auditor’s tests of controls?
a. Documentation.
b. Observation.
c. Inquiry.
d. Confirmation.

Answer: D

155. The two phases of the auditor’s involvement with internal control are
sometimes called “understanding and assessment” and “tests of
controls.” In the tests of controls phase, the auditor attempts to
obtain
a. A reasonable degree of assurance that the client’s internal
controls are operating effectively on a consistent basis
throughout the year.
b. Sufficient, competent evidential matter to afford a reasonable
basis for the auditor’s opinion.
c. Assurances that informative disclosures in the financial
statements are reasonably adequate.
d. Knowledge and understanding of the client’s prescribed
procedures and methods.

Answer: A

42
156. Which of the following is ordinarily considered a test of control audit
procedure?
a. Sending confirmation letters to banks.
b. Counting and listing cash on hand.
c. Examining signatures on checks.
d. Preparing reconciliations of bank accounts as of the balance
sheet date.

Answer: C

157. The following are few of the audit procedures taken from an audit
program:
A. Confirm accounts payable directly with vendors.
B. Examine vendors’ invoices and other documentation.
C. Examine the internal auditor’s initials on monthly bank
reconciliations as an indication of whether they have been
reviewed.
D. Compare the balance in payroll tax expense with previous
years. The comparison takes the increase in payroll tax rates
into account.

The foregoing audit procedures are classified as Tests of Controls

(TOC), Substantive Tests of Transactions (STT), Analytical
Procedures (AP), Tests of Details of Balances (TDB):

a. TDB, STT, TOC, AP.

b. STT, STT, TOC, AP.
c. STT, TDB, AP, TOC.
d. STT, STT, TOC, TOC.

Answer: A

158. An audit program usually includes: “Inquire about the accounts

payable supervisor’s monthly review of a computer-generated
exception report of receiving reports and purchase orders that have
not been matched with a vendor invoice.”
The procedure is classified as:
a. Tests of details of balances.
b. Tests of controls.
c. Substantive tests of transactions.
d. Analytical procedures.

Answer: B

43
159. Indicate whether each procedure is a test of control (TOC),
substantive test of transaction (STT), analytical procedure (AP), or a
test of details of balances (TDB)
1. Discuss the duties of the cash disbursements clerk with him
and observe whether he has responsibility for handling cash or
preparing the bank reconciliations.
2. Account for a sequence of checks in the cash disbursements
journal to determine whether any have been omitted.
3. Confirm accounts receivable balances directly with customers.
4. Examine vendors’ invoices to verify the ending balance in
accounts payable.

a. TOC, STT, TDB, TDB

b. TOC, STT, TDB, TOC
c. STT, STT, TDB, TDB
d. TDB, TDB, TDB, STT

Answer: A

160. Following are several decisions that the auditor must make in an
audit. Letters indicate alternative conclusions that could be made.
Decisions Alternative Conclusions
1. Determine whether it is cost A. It is cost effective.
effective to perform tests of B. It is not cost effective.
controls.
2. Perform substantive tests of C. Perform reduced tests
details of balances. D. Perform expanded
tests.
3. Complete initial assessment of E. Controls are effective.
control risk. F. Controls are
ineffective.
4. Perform tests of controls. G. Controls are effective.
H. Controls are
ineffective.

Which of the following is not a logical conclusions?

a. A, D, E, H
b. B, C, E, H
c. A, C, E, G
d. D, F

Answer: B

44
161. For the initial audit engagement, the auditor should obtain sufficient
appropriate audit evidence that:
a. Accounting procedure are consistently observed
b. The opening balances do not contain material misstatements.
c. The prior period’s real account balances have been correctly
brought forward to the current period.
d. Appropriate accounting policies are consistently observed or
changes in accounting policies have been properly accounted
for and adequately disclosed.

Answer: A

162. Opening balances are based upon the closing balances of the prior
period and reflect the effect of
I. Current transactions (e.q., stock dividends) that will be given
retroactive effect recognition.
II. Transactions of prior periods.
III. Accounting policies applied in the prior periods.

a. All of these
b. I and II only
c. I only
d. II and III only

Answer: D
163. Which of the following is least considered in determining the
sufficiency and appropriateness of the audit evidence that the
auditor will obtain regarding opening balances?
a. The length of years in operations of the entity.
b. The materiality of the opening balances relative to the current
period’s financial statements.
c. The accounting policies adopted by the entity.
d. The risk of misstatements of accounts.

Answer: A

164. If, after performing procedures, the auditor is unable to obtain

sufficient, appropriate evidence concerning opening balances, the
auditor may express modified opinion on financial statements
during and as of year end of the current period:
Income Statement Balance Sheet
Qualified Disclaimer Qualified Disclaimer
a. Yes Yes Yes Yes
b. Yes Yes No No

45
 c. Yes No Yes No
d. No No Yes Yes

Answer: A

165. If the current period’s accounting policies have not been consistently
applied in relation to opening balances and if the change has not
been properly accounted for or disclosed, the auditor should issue
either a(an)
a. Qualified or disclaimer of opinion.
b. Qualified or adverse opinion.
c. Adverse or disclaimer of opinion.
d. Standard unqualified opinion or unqualified opinion with
explanatory paragraph.

Answer: B

166. In relation to opening balances, which of the following may cause

the auditor to disclaim his opinion?
a. The opening balances contain misstatements that could
materially affect the current period’s financial statements and
such misstatements have not been corrected.
b. The current period’s accounting policies have not been
consistently applied in relation to opening balances and the
effect of such change is not properly accounted for or disclosed.
c. The inability of the auditor to obtain sufficient appropriate audit
evidence concerning opening balances.
d. The assessed substantial doubt about the entity’s ability to
continue as a going concern as indicated by consistent negative
cash flows.

Answer: C

167. When the comparatives in which the prior audit report is unmodified
are used as corresponding figures, the auditor should issue an audit
report in which:
a. The comparatives are specifically identified in the opening
paragraph but not referred to in the opinion paragraph of the
auditor’s report.
b. The comparatives are specifically identified in the opening
paragraph and are referred to in the opening paragraph.
c. The comparatives are not specifically identified in the audit
report.

46
 d. The comparatives are described in the emphasis-of-matter
paragraph of the auditor’s report.

Answer: C

168. When the auditor’s report on the prior period, as previously issued,
included a modified opinion and the matter which gave rise to the
modification is unresolved, and results in a modification of the
auditor’s report regarding the current period figures:
a. The auditor’s report should be unmodified regarding the
corresponding figures.
b. The auditor’s report should also be modified regarding the
corresponding figures.
c. The auditor’s report does not refer to the previous modification.
d. The auditor should omit the comparatives as corresponding
figures.

Answer: B

169. In relation to comparatives as corresponding figures, which of the

following is incorrect?
a. When the prior period financial statements are not audited, the
incoming auditor should state in the auditor’s report that the
corresponding figures are unaudited.
b. The incoming auditor must refer to the predecessor auditor’s
report on the corresponding figures in the incoming auditor’s
report for the current period.
c. When the financial statements of the prior period were audited
by another auditor, the incoming auditor’s report should state
that the prior period was audited by another auditor.
d. In situations were the incoming auditor identified that the
corresponding figures are materially misstated, the auditor
should request management to revise the corresponding figures
or if management refuses to do so, appropriately modify the
report.

Answer: B

170. When the financial statements of the prior period were audited by
another CPA, the incoming auditor’s report indicates:
A B C D
1. The dates and periods
covered by prior years’ YES YES NO NO
financial statements

47
 2. That the financial
statements of the prior YES YES YES NO
periods were audited by
another CPA
3. The type of opinion
issued by another CPA YES NO YES YES
and if modified, the
reason thereof

Answer: C

PSA 710

171. Which of the following is a true statement?

a. The extent of audit procedures performed on the corresponding
figures is significantly less than for the audit of the current
figures.
b. When the financial statements of the prior period have been
audited by another auditor, the current auditor must insist that
there would be division of responsibility with respect to audit.
c. When the financial statements of the prior period have been
audited by another auditor, the successor auditor must insist of
the financial statements of the prior periods.
d. When the comparatives are presented as corresponding figures,
the auditor must specifically refer to the predecessor in the
introductory paragraph of the auditor’s report.

Answer: B
Sec 6, 7, 10 PSA 710

172. When the auditor’s report on the prior period, as previously issued,
included a modified opinion, the auditor’s report should refer to the
corresponding figures:
a. though the matter which gave rise to the modification of the
audit report had been subsequently resolved.
b. If the matter that gave rise to the modification of the previous
auditor’s report is unresolved and results in a modification of
the auditor’s report regarding the current figures.
c. Only when the matter that gave rise to the modification is
unresolved and results to a modification of the auditor’s report
regarding the current figures.
d. In all cases where the matter which give rise to the modification
of the previous audit report is satisfactorily resolved and

48
 properly dealt with in the financial statements, the current
report would not refer to the previous modification.

Answer: B
Sec 12 and 13

173. In which of the following circumstances would a modification of the

auditor’s report on the current period not necessary?
a. If the prior period financial statements have been revised and
reissued with a new auditor’s report.
b. If the prior period financial statements have not been revised
and reissued but the matter that gave rise to the modification,
though material to the current period, is resolved.
c. If the matter that gave rise to the modification of the previous
audit report is related to unresolved beginning balances of
property accounts.
d. The audit report of the prior period was issued by a continuing
auditor.

Answer: A
Section 13, 15, 16

174. When the financial statements of the prior period were not audited,
the incoming auditor should:
a. not allow the inclusion of the corresponding figures in the
financial statements of the current period.
b. obtain sufficient appropriate audit evidence that the
corresponding figures meet the requirements of the relevant
financial reporting framework.’
c. Disclaim his opinion and treat the unaudited corresponding
figures as basis of scope limitation.
d. Insist that an audit of prior year’s financial statements must be
made.

Answer: B
Section 9

175. What circumstance(s) would the auditor’s report make specific

reference to the corresponding figures?
i. When the auditor’s report on the prior period, as previously
issued, included a modified opinion and the matter which gave
rise to the modification is unresolved.
ii. If the prior period financial statements have not been revised
and reissued, and the corresponding figures have not been

49
 properly restated and/or appropriate disclosures have not been
made.
iii. When the financial statements of prior period were unaudited
and the incoming auditor identifies that the corresponding
figures are materially misstated but the management refuses to
revise them.
iv. In all cases where the corresponding figures are material to the
current financial statements.

a. All of them
b. I, II, V
c. I, II, III
d. II, III, IV

Answer: C

176. What are the concerns of an auditor when assessing whether

comparative financial statements meet the requirements of the
relevant financial reporting framework?
i. That prior period figures presented agree with the amounts and
other disclosures presented in the prior period or if necessary,
appropriate adjustments and/or disclosures have been made
ii. That accounting policies of the prior period are consistent with
those of the current period.

a. Yes, Yes
b. Yes, No
c. No, Yes
d. No, No
Answer: A
Sec. 19, 20

177. When the comparatives are presented as comparative financial

statements:
a. The auditor should issue a report in which the comparatives are
referred to when the comparatives are materially misstated.
b. The auditor is not required to identify the comparative in his
report because his opinion applies only to the current year’s
financial statements.
c. The auditor should issue a report in which the comparatives are
specifically identified because the auditor’s opinion is expressed
individually on the financial statements of each period
presented.

50
 d. The auditor is only required to specifically identified the
comparatives when his opinion on the prior year’s financial
statements is other than unqualified.
Answer: C
Sec 24

178. Which of the following is an incorrect statement about

comparatives?
a. The auditor may express a qualified, adverse of disclaimer of
opinion with respect to one or more financial statements for one
or more periods, while issuing a different report on other
financial statements.
b. When reporting on the prior period financial statements in
connection with the current year’s audit, if the opinion on such
prior period financial statements is different from the opinion
previously expressed, the auditor should disclose the
substantive reasons for the different opinion in the opening
paragraph.
c. The auditor may consider expressing an opening on prior period
financial statement which is different from the opinion that he
had previously expressed on such financial statements.
d. When the prior period financial statements are not audited, the
incoming auditor should carry on appropriate procedures of
verifying the opening balances.

Answer: B
Sec 24, 25, 30

179. The following explanatory paragraph accompanies the auditor’s

report for financial statements as of and for period ending December
31, 2005:

“Because we were appointed auditors of the Company during 2004,

we were not able to observe the counting of the physical inventories
at the beginning of 2004 or satisfy ourselves concerning those
inventory quantities by alternative procedures. Since opening
inventories…. Our audit report on the financial statements for the
year ended December 31, 2004 was modified accordingly.”

The foregoing paragraph is included in connection with a report in

which the auditor.
a. Expresses an unmodified opinion regarding the current financial
statements but a modified report regarding comparatives

51
 b. Expresses unmodified opinion regarding the current period
figures but a modified report regarding the corresponding
figures.
c. Expresses modified report on both the current financial
statements and comparatives.
d. Expresses modified report regarding the current period and
corresponding figures.

Answer: B
Sec 12a, 12b and appendix 2

180. For what purpose does the following explanatory paragraph in an

audit report that accompanies the financial statements of Grey
Company as of and for the year ended December 31, 2005 serve?

“As discussed in Note No. 9 to the financial statements no

depreciation has been provided in the financial statements which
practice, in our opinion, is not in accordance with generally
accepted accounting principles in the Philippines. This is a result of
a decision taken by management at the start of 2004 and caused us
to qualify our audit opinion on the financial statements relating to
the year. Based on the straight-line depreciation,… The loss for the
year should be increased by P1.2 Million in 2005 and P800,000 in
2004….”
a. An explanatory paragraph for a modification of the auditor’s
report regarding the current period and the corresponding
figures.
b. An explanatory paragraph for a modification of the
corresponding figures but not for modification of current period
figures
c. An explanatory paragraph for a modification of the auditor’s
report regarding both the current financial statements and prior
year’s financial statements.
d. An explanatory paragraph regarding a modification of the
auditor’s report regarding prior year’s financial statements only.

Answer: A
Sec 12a, Appendix 2a

181. The following modification is made on the opening paragraph of the

audit report that accompanies the financial statement Gold, Inc.

We have audited the accompany balance sheet as of December 31,

2005, and the related … for the year the ended. These financial

52
 statements … “The financial statements of the company as of and
for the year ended December 31, 2004, where audited by and the
auditor whose report dated April 5, 2005, expressed an unqualified
opinion this statements.” The modification is made in connection
to:

a. Prior period financial statements were audited by other auditor

and the incoming auditor decided to share responsibilities with
the predecessor auditor.
b. Prior period financial statements were audited by another
auditor and such financial statements of prior year are used as
comparatives.
c. Reference to the predecessor auditor’s report on the
corresponding figures in the incoming auditor’s report for the
current period.
d. A modified report regarding the current period figures but
unmodified report regarding the corresponding figures.

Answer: C
Sec 17, Appendix 2, Example D

182. Which of the following actions by an incoming auditor statements of

prior year audited by another CPA is inappropriate?
a. The incoming auditor report only on the current period and the
predecessor auditor to reissue the audit report on the prior
period.
b. The incoming auditor modifies the opening paragraph by
stating that the prior period’s statements were audited by
another auditor, the type of report and the appropriate reasons
for a modification if the report was modified, and the date of the
report.
c. The incoming should assess whether the comparative financial
statements meet the requirements of the relevant financial
accounting framework.
d. Review the working papers prepared by the predecessor auditor
and appropriately assesses whether he can assume
responsibility with respect to the comparatives that are
presented as comparative financial statements.

Answer: D
Sec. 22, 26

53
183. When the prior year’s financial statements, that are used as
comparatives, were audited by other auditor, the incoming auditor
should modify:
a. The opening paragraph of the audit report
b. The scope paragraph of the audit report
c. The opinion paragraph of the audit report
d. All the three paragraphs of the audit report
Answer: A
Sec 26b

184. When an incoming auditor becomes aware of certain material

misstatement in the prior periods comparative financial statements
on which the predecessor auditor previously issued unmodified
report, the incoming auditor should
a. Modify the opening paragraph by referring to the predecessor
auditor, the type of opinion issued and the date of the report
b. Restate the financial statements of the prior period
c. Discuss the matter with the management and, after having
obtained management’s authorization, contract the predecessor
auditor and propose that the prior period financial statements
be restated.
d. Obtain management’s authorization for the revision of the prior
year’s financial statements and include an emphasis of matter
paragraph to describe such a revision made.

Answer: C
Sec 28 and 29

185. Which of the following action by the incoming auditor on unaudited

comparative financial statements is inappropriate to do?
a. In situation where the incoming auditor identifies that the prior
years unaudited financial statements are materially misstated,
the auditor should revise them.
b. The incoming auditor should state in the auditor’s report that
the comparative financial statements are unaudited.
c. The incoming auditor should carry out appropriate procedures
regarding opening balances of the current period.
d. Modify the audit report if such materially misstated prior year’s
financial statements are not revised by the management.

Answer:
Sec 30 and 31

54
186. Which of the following least likely requires an additional explanatory
paragraph in a standard unqualified report?
a. Substantial doubt about going-concern ability of the entity.
b. Reports involving other auditors.
c. Emphasis of a matter.
d. Auditor agrees with change in generally accepted accounting
principles.

Answer: B

187. Which of the following requires a modified wording report?

a. Substantial doubt about going-concern problems of the entity.
b. Reports involving other auditors.
c. Emphasis of a matter.
d. All of the above.

Answer: B

188. Which of the following changes would affect comparability but not
consistency?
a. Variations in format and presentation of financial information.
b. Change from FIFO to LIFO inventory costing.
c. Changes in reporting entity, such as the inclusion of a company
in consolidated financial statements.
d. Correction of errors involving accounting principles.

Answer: A

189. Which of the following may an auditor least likely consider a

symptom of an entity’s significant going-concern problems?
a. Significant recurring working capital deficiencies.
b. Legal proceedings that might jeopardize the entity’s ability to
operate.
c. A new government regulation imposes a change in accounting
principle.
d. A recurring default in meeting the entity’s financial obligation.

Answer: C

190. Which of the following is not a reason for inclusion of an explanatory

paragraph to emphasize a matter in the auditor’s report?
a. The client’s refusal to include the statement of changes in cash.
b. The existence of significant related-party transactions.
c. Important events occurring subsequent to balance sheet date.

55
 d. Material uncertainties that are fully disclosed in the financial
statements.

Answer: A

191. When a significant portion of the financial statements have been

audited by other auditors and the principal auditor is not willing to
assume the whole responsibility, the auditor report should include

a. Modified wording in the introductory paragraph.

b. A modified wording in the introductory and opinion paragraphs
but not on opinion paragraph.
c. Modified wordings on the three paragraphs.
d. Separate paragraph to indicate a divided responsibilities.

Answer: C

192. Which of the following types of report is mostly uncommon?

a. Adverse report.
b. Qualified report.
c. Standard unqualified report with modified wordings.
d. Unqualified report.

Answer: A

193. Pervasiveness of an exception most likely refers to:

a. Whether a misstatement is material or highly material.
b. The extent to which the misstatement affects the different parts
of the financial statements.
c. An understatement error.
d. An overstatement error.

Answer: B

194. Notwithstanding materiality, which of the following is likely the least

pervasive error?
a. A current liability is misclassified as long-term liability.
b. Error on sales cut off.
c. A failure to accrue interest on bonds payable.
d. A capital expenditure is inappropriately recorded as revenue
expenditure.

Answer: A

56
195. Which of the following scope limitation that is beyond the auditor
and the client’s control may mostly occur on a late engagement?
a. Review of bank reconciliation prepared by client personnel.
b. Request for cutoff bank statement.
c. Tests of sales transactions.
d. Observation of year-end inventory.

Answer: D

196. In which of the following type of audit report would omission of

scope paragraph is required?
a. an except for opinion due to possible significant effect of a
client-imposed limitation.
b. A disclaimer of opinion due to possible significant effect of
client-imposed scope limitation.
c. An audit report limited to income statement only.
d. A and B

Answer: B

197. In the audit of financial statements of Laarni Corporation as of and

for the year ended December 31, 2005, Tomas, CPA, was not able to
observe physical inventory count. He was not able to satisfy himself
of the propriety of the inventory balance through the use of
alternative procedures. He considered that the inventory amount
was significant in the determination of financial position and the
amount of income. In addition, there is a substantial doubt about
the entity’s ability to continue as a going concern. The company’s
financial statements adequately disclosed its going concern
problems.

How should the auditor issue his audit report?

a. Express a qualified opinion with explanatory paragraph that is
presented before the opinion paragraph.
b. Modify the audit report for each condition.
c. Express a disclaimer of opinion due to multiple exception.
d. Express and adverse opinion.

Answer: B

198. If the principal auditor’s report refers to the audit of another auditor,
he is required to disclose the:
a. Name of another auditor.
b. Portion of the financial statements audited by the other auditor.

57
 c. Opinion expressed by the other auditor and the reason if the
opinion is other than unqualified.
d. Reason for being unwilling to assume the responsibility for the
other auditor’s work.

Answer: B

199. Under which of the following circumstances would an unqualified

opinion be entirely inappropriate?
a. The principal auditor decides to make reference to the qualified
report of another auditor who audited a subsidiary.
b. There are significant uncertainties affecting the financial
statements.
c. There has been material effect between periods of the change in
the methods of application of GAAP.
d. There has been a material effect of a departure from generally
accepted accounting principle.

Answer: D

200. Celia, CPA, is auditing Lyka Corporation for the first time. Lyka has
been in the business for several years but has never had an audit
before. After the audit is completed, Celia concludes that the
current year balance sheet is stated correctly in accordance with
GAAP. The client did not authorize Celia to do test work for any of
the previous years. Reporting on the current year’s financial
statements, Celia most likely would express:
a. Qualified opinion on the financial statements of Lyka
Corporation.
b. Unqualified opinion on the balance sheet and qualified opinion
on the income statement.
c. Unqualified opinion on the income statement and qualified
opinion on the balance sheet.
d. Unqualified opinion on Lyka Corporation’s financial statements.

Answer: B

201. Subsequent to the date of the financial statements as part of his

post-balance-sheet date audit procedures, Thomas, CPA, learned
that a recent fire caused heavy damage to one of a client’s two
plants; the loss will not be reimbursed by insurance. The
newspapers described the event in detail. The client did not disclose
the event in the notes to financial statements. Thomas most likely
would express

58
 a. An unqualified opinion because disclosure in the financial
statements is no longer necessary since the event was reported
in detail in the newspapers.
b. Either a qualified or disclaimer of opinion.
c. Either a qualified or adverse opinion.
d. A disclaimer of opinion.
Answer: C

202. Generally, for the auditor to issue an unqualified audit opinion, does
each of the following condition need to exist?
I. No significant scope restrictions.
II. The financial statements, including the notes to financial
statements, contain no material departure from GAAP.
III. All the segments of the financial statements are audited by
the auditor.
IV. Significant uncertainty about the financial statements does
not exist.

a. I, II
b. I, II, III
c. I, II, IV
d. All of these

Answer: A

203. Millard, CPA, is engaged in the audit of the financial statements of

Alpha Company, a manufacturing entity with branch offices in many
widely separated cities. Millard was not able to count the
substantial undeposited cash receipts on the last day of the fiscal
year at all branch offices. As an alternative procedures, Millard
verified all the reported undeposited cash collections in the cut-off
bank statements and was satisfied as to cut-off of cash receipts.

How should Millard prepare his audit report?

a. Issue an unqualified opinion with an emphasis of matter
paragraph that refers to the use of alternative audit procedure.
b. Issue a qualified opinion due to scope limitation.
c. Issue an unqualified opinion on income statement and a
qualified opinion on the balance sheet.
d. Issue a standard unqualified opinion.

Answer: D

59
204. Trulav Company has prepared financial statements but has decided
to omit the statement of cash flows. The management believes that
the users of the financial statements the statement of cash flows
confusing and prefer not to have it included.

The omission of the statement of cash flows would require the

auditor to
a. Include in an unqualified report an emphasis of matter
paragraph that explains the reasons for such an omission of the
statement.
b. Issue an adverse opinion due to inadequate disclosure.
c. Issue a qualified opinion due to inadequate disclosure.
d. Issue an unqualified opinion based on limited reported objective.

Answer; C

205. The senior auditor who is assigned in the audit of Lucky U

Corporation, based on the just completed audit, believes that the
entity’s financial statements are fairly presented. On the last day
the fieldwork, the senior auditor discovers that the supervisor who is
assigned to the audit of Lucky U Corporation has a material
investment in the entity.

How is the auditor’s audit report affected by the newly discovered

information, if any?
a. No effect because the discovery is made after the senior auditor
forms his opinion.
b. No effect because the type of opinion is determined by the
senior auditor and not by the supervisor.
c. Qualify the opinion because of lack of independence.
d. Disclaim the opinion due to lack of independence.

Answer: D

206. Due to recurring operating losses and working capital deficiencies,

an auditor has substantial doubt about the ability of the entity to
continue as a going concern for a reasonable period of time.
However, the financial statement disclosures concerning these
matters are adequate.

The auditor should issue his report that contains:

a. Disclaimer of opinion.
b. Adverse opinion.
c. Standard unqualified opinion.

60
 d. Unqualified opinion with an emphasis of matter paragraph.

Answer: D

207. A continuing auditor has just completed the audit of the entity. The
audit report for the past three years included an emphasis of matter
paragraph that referred to a substantial doubt about the ability of
the entity to continue as a going concern. At the middle of the
current audit year, the major stockholders infused substantial
capital that made the company stable.
The continuing auditor should report on the comparative financial
statements by:
a. Updating the audit report by issuing a standard three-
paragraph audit report.
b. Including an emphasis of matter paragraph that refers to prior
years’ going concern problem.
c. Issue an unqualified opinion with an emphasis of matter
paragraph that describes the steps the management did in
solving its going concern problem.
d. Qualify the audit report due to questionable strategy of
strengthening the entity’s financial stability.

Answer: A

208. Which of the following should the auditor consider in determining

the significance of service organization activities to the client and the
relevance to the audit?
a. The control policies and procedures of the client of requiring
that all payments for goods and services be supported by
receiving reports.
b. The client’s internal controls that are applied to the
transactions processed by the service organization.
c. The material financial statement assertions that are affected by
the use of the service organization.
d. Terms of contract and relationship between the client and the
service organization.

Answer: A

209. When the auditor considers that the service organization activities
are significantly relevant to the audit and he concludes that it would
be efficient to obtain audit evidence from tests of controls, such
evidence may be obtain by, except:
a. Visiting the service organization.

61
 b. Performing tests of the client’s control over activities of the
service organization.
c. Review the service contract between the client and the service
organization.
d. Obtaining a service organization auditor’s report that expresses
an opinion as to the operating effectiveness of the service
organization’s accounting and internal control systems for the
processing applications relevant to the audit.

Answer: C

210. Which of the following is the least concern of the client auditor in
reviewing the report of service organization auditor on suitability of
internal control design of the service organization?
a. The system’s controls have been placed in operation.
b. The accuracy of a description of the service organization’s
accounting and internal control systems which is ordinarily
prepared by the management of the service organization.
c. The type of documentation of the understanding of the service
organization’s control system.
d. The accounting and internal control systems are suitably
designed to achieve the stated objectives.

Answer: C

211. Which of the following is least likely entitled to the report of the
service organization auditor on the suitability of internal control
design and operating effectiveness of the service organization.
a. Service organization management .
b. Service organization stockholders
c. Service organization’s customer
d. Client auditors.

Answer: B

212. When a client auditor uses a report from the auditor of a service
organization, the client auditor:
a. Should refer the matter in a separate emphasis of matter
paragraph of his auditor’s report.
b. Should refer the matter by modifying the scope and opinion
paragraphs of the auditor’s report.
c. Should attach the copy of the service organization auditor’s
report to his audit report.

62
 d. Makes no reference in his auditor’s report on the service
organization.

Answer: D

213. When the client auditor has to conclude, based on the report of the
service organization auditor’s report, that the service organization
auditor’s tests of controls and their results are adequate, the client
should consider the:
I. Length of period covered by the service organization
auditor’s tests.
II. Time since the performance of the tests of controls.
III. The cost efficiency of the tests of controls performed.

a. I only
b. I and II only
c. II and III only
d. I, II and III

Answer: B

214. Which of the following statements is incorrect?

a. If the client auditor cannot obtain sufficient information to
understand accounting and internal control system, he would
consider the need to request the service organization to have its
auditor to perform such procedures as to supply the needed
information.
b. A client auditor wishing to visit a service organization may
advise the client to request the service organization to give the
client auditor access to the necessary information.
c. The client auditor should make perform the ordinary
procedures of understanding and documentation of the service
organization’s control system.
d. If the client auditor concludes that the activities of the service
organization are insignificant to the entity and are irrelevant to
the audit, the auditor needs not obtain sufficient of the service
organization .

Answer: C

215. The objective of an agreed upon-procedures engagement is for the

auditor to:

63
 a. Carry out procedures of an audit nature to which the auditor
and the entity and any appropriate third parties have agreed
and to report on factual findings.
b. Carry out procedures of a review nature to which the auditor
and the entity and any appropriate third parries have agreed
and to report on factual findings.
c. Carry out procedures of a review nature and to express limited
assurance based on those agreed procedures.
d. Carry out procedures of an audit nature and is express limited
assurance.

Answer: A

216. Which of the following ethical principles governing the auditor’s

professional responsibilities for agreed-upon procedures engagement
is not required of auditors?
a. Technical standards
b. Confidentiality
c. Integrity
d. Independence

Answer: D

217. Which of the following is incorrect about agreed-upon procedures

engagement?
a. An engagement to perform agreed-upon procedures may involve
the auditor in performing certain procedures concerning
individual items of financial data.
b. Users of the agreed-upon procedures report assess for
themselves the procedures and findings reported by the auditor
and draw their conclusion from the auditor’s work.
c. The auditor should be independent of the financial data or
financial statements where agreed procedures have to be
applied.
d. The report is restricted to those parties that have agreed to the
procedures to be preformed.

Answer: C

218. Matters to be agreed in an agreed-upon procedures engagement

include the following, except:
a. Stated purpose of the engagement
b. Limitations on distribution of the report of factual findings.

64
 c. Anticipated form of the report and the level of assurance to be
provided
d. Nature, timing and extent of the specific procedures to be
applied.

Answer: C

219. The following procedures may be performed by CPAs in an

engagement.

I. Consideration of internal control

II. Observation
III. Inquiry and analysis
IV. Inspection
V. Confirmation
VI. Obtaining management representation letter

Which of the foregoing may be performed in an agreed-upon

procedures engagement?

a. II and VI only
b. I, II and VI only
c. II, III, IV and V only
d. II, III, IV and Vi only

Answer: C

220. The report on an agreed-upon procedures engagement needs to

describe the purpose and the agreed-upon procedures of the
engagement in sufficient details. The report should appropriately
include the ”title”
a. Report of Agreed-Upon Procedures
b. Report of Factual Findings
c. Report of agreed Procedures and Finding
d. CPA’s Report of Agreed-Upon Procedures

Answer: B

221. Which of the following is/are included in the report of factual

findings?
a. Review Report
b. Compilation Report
c. Report of Factual Findings
d. Audit Report

65
Answer: C

222. Which of the following should the auditor perform in a review

engagement ?
a. Understand matters that are relevant to the financial
statements.
b. Understand the entity’s internal control system.
c. Observe the physical count of inventory.
d. Inquire of legal counsel of pending litigations.

Answer: A

223. In planning a review of financial statements, the auditor should

obtain or update the knowledge of the business. Which of the
following is not one of these knowledge of the business?
a. Entity’s organization
b. Nature of entity’s assets, liabilities, revenues and expenses
c. Accounting system
d. Internal control

Answer: D

224. Which of the following is not a basis of the auditor in determining

the specific nature, timing and extent of review procedures?
a. Assessed level of control risk
b. The extent to which a particular item is affected by
management judgment
c. The materiality of transactions and account balances
d. Any knowledge acquired by carrying out reviews of the financial
statements for prior periods.

Answer: A

225. Which of the following is least likely done by the auditor in

conducting a review of financial statements.
a. Study of the relationships of the elements of the financial
statements.
b. Comparison of the financial statements with statements for
prior period.
c. Comparison of the financial statements with anticipated results
and financial position.
d. Comparison of inventory listing with physical inventory count.

66
Answer: D

226. Which of the following is not included in the scope paragraph of a

review report?
a. A statement that a review is limited primarily to inquires and
analytical procedures.
b. A reference to Philippine Standard on Auditing applicable to
review engagement.
c. A statement the review included an evaluation of
reasonableness of accounting estimates made by management.
d. A statement that an audit has not been performed.

Answer: C

227. Where do you find the following paragraph?

…..Nothing has come to our attention that causes us to believe that

the accompanying financial statements are not presented fairly, in
all material respects in accordance with generally accepted
accounting [principles in the Philippines.
a. Opinion paragraph of auditor’s report
b. Opinion paragraph of review report
c. Negative assurance paragraph
d. Scope paragraph of a review report

Answer: C

228. In a review engagement, if there has been a material scope

limitation, the auditor should describe the limitation in the review
report and either
a. Express a qualification of the negative assurance or not issue
any assurance.
b. Express a qualification of the negative assurance provided or
give an adverse statement that the financial statement are not
presented fairly.
c. Express an adverse statement that the financial statements are
not presented fairly or the auditor not issue any assurance.
d. Not modify the negative assurance or not issue an assurance.

Answer: A

229. Melba, CPA, has significant indirect financial interest on Mott

Corporation. Mott Corporation engaged Melba to apply agreed-upon
procedures on accounts receivable and thereafter submit a Report of

67
 Factual Findings to Discount Finance According to Philippine
Standards on Auditing that applies to this engagement, Melba
a. Should decline the engagement because of her lack of
independence.
b. Should convince Mott Corporation to change the engagement to
compilation due to her lack of independence.
c. Can accept the engagement, issue the Report of Factual Finding
and state in the report her lack of independence.
d. Perform agreed-upon procedures and withhold the findings due
to her lack of independence.

Answer: C

230. The report of Factual Findings is ordinarily addressed to

a. Entity’s stockholder
b. Entity’s board of directors
c. The entity
d. The client who engaged the auditor

Answer: D

231. The Review Report include the following

A B C D
Reference to Philippine Standard on
Auditing Yes No Yes No
A statement that a review is limited to
inquires and analytical procedures Yes Yes Yes No
Specific description of procedures that
have been performed by the auditor No Yes Yes Yes

Answer: A

232. Which of the following is incorrect about the management’s

responsibility to make an assessment of an entity’s ability to
continue as a going concern?
a. In assessing whether the going concern assumption is
appropriate, the management takes into account all available
information for the foreseeable future, which should be at least
twelve months from the balance sheet date.
b. Though there is a history of profitable operations and a ready
access to financial resources, management must make its
assessment with detailed analysis.

68
 c. Management’s assessment of the going concern assumption
involves making a judgment, at a particular point of time, about
the future outcomes of events or conditions which are
inherently uncertain.
d. Management should make explicit assessment of its ability to
continue as a going-concern entity.

Answer: B

233. Which of the following least likely is an action that may mitigate an
entity’s difficulty to continue as a going concern?
a. Increased cash dividends.
b. Retirement of outstanding capital stock in order to improve
earnings per share.
c. Retirement of long-term debt in order to improve profitability.
d. Disposal of property in a sale-leaseback arrangement.

Answer: D

234. Which of the following least likely indicate a potential going-concern

problem of an entity?
a. Historical negative operating cash flows.
b. Failure to comply with loan covenants.
c. Refinancing of large short-term obligation with a medium-term
loan.
d. Pending regulatory proceedings against the entity.

Answer: C

235. Which of the following is correct about the auditor’s responsibility

with respect to the entity’s ability to continue as a going concern?
a. The auditor is responsible to make an assessment of the entity’s
ability to continue as a going concern.
b. The auditor’s responsibility is to consider the appropriateness
of the management’s use of the going concern assumption in
the preparation of the financial statements.
c. The auditor can predict future events or conditions that may
cause an entity to cease to continue as a going concern.
d. The auditor may allow the management to make an assessment
of its ability to continue as a going concern if the management
is believed to be objective in doing such an assessment.

Answer: B

69
236. In evaluating management’s assessment of the entity’s ability to
continue as a going concern, he should consider the following,
except:
a. The independence of the management.
b. The process that the management has followed to make its
assessment.
c. The assumptions on which the assessment is based and
management’s plan for future action.
d. Whether the assessment has taken into account all relevant
information of which the auditor is aware of as a result of the
audit procedures.
Answer: A

237. Which of the following is an appropriate procedure to test for an

indication of events or conditions that cast significant doubt on the
entity’s ability to continue as a going concern beyond the period
assessed by management?
a. Inspection
b. Inquiry
c. Observing
d. Analysis

Answer B

238. The management’s assessment of those events that may cast

significant doubt about the entity’s ability to continue as a going
concern should be at least
a. Two years from the balance sheet date.
b. Two years from the date of the audit report.
c. One year from the balance sheet date.
d. One year from the date of the audit report.

Answer: C

239. When events or conditions have been identified to cast significant

doubt on the entity’s ability to continue as a going concern, the
auditor should
a. Consider reassessing control risk at the maximum.
b. Consider the issuance of disclaimer of opinion due to scope
limitation.
c. Review management plans for future actions based on its going-
concern assessments.
d. Report the matter to the board of directors and stockholders.

70
Answer: C

240. Subsequent events refer to

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

Answer: B

241. Which of the following statements that relate to subsequent events

is inappropriately described?
a. The auditor is expected to conduct a continuing review of all
matters to which previously applied procedures have provided
satisfactory conclusions.
b. The auditor should consider the effect of subsequent events on
the financial statements and on the auditor’s report.
c. The procedures to identify events that may require adjustment
of, or disclosure in, the financial statements would be performed
as near as practicable to the date of the auditor’s report.
d. The procedures that are designed to obtain sufficiently
appropriate audit evidence that all events up to the date of the
audit report that may require adjustment of, or disclosure in,
the financial statements are in addition to routine procedures
which may be applied to specific transactions.

Answer: A

242. Which of the following appropriately describes the auditor’s

procedures with respect to subsequent events?
a. The procedures to identity events that may require adjustments
of, or disclosure in, the financial statements would be performed
as early as practicable.
b. Those routine procedures that are applied to specific
transactions occurring after period end are designed to obtain
sufficient appropriate audit evidence that all events up to the
date of the audit report have been identified.

71
 c. When a component is audited by another CPA, the auditor
would consider the other auditor’s procedures regarding events
after period end and the need to inform the other auditor of the
planned date of the audit report.
d. The auditor is responsible to inquire regarding the financial
statements after the date of the auditor’s report.

Answer: D

243. Which of the following should the auditor do last when, after the
financial statements have been issued, the auditor becomes aware of
a fact that existed at the date of the auditor’s report?
a. Consider whether the financial statements need revisions.
b. Discuss the matter with management.
c. Take the action appropriate in the circumstance.
d. Inform those users who are currently relying on the financial
statements.

Answer: D

244. When a fact, that existed before the date of the report is discovered
and the management revises previously issued audited financial
statements, the following are appropriate except:
a. A new auditor’s report should include an emphasis of a matter
paragraph that refers to a note to the financial statements that
discusses the reason for the revision of the financial statements
and to the earlier report issued by the auditor.
b. The new auditor’s report should contain the original date.
c. The performance of the procedures that are designed to obtain
sufficient evidence as to subsequent events would ordinarily be
extended to the date the revised financial statements are
approved by the entity’s management.
d. The auditor is permitted to restrict the audit procedures
regarding the financial statements to the effects of the
subsequent event that necessitated the revision.

Answer: B

245. When a fact is discovered after the date of the report but before the
financial statements are issued and the client amends the financial
statements, would the following procedures or actions be necessary?
A B C D
I. Procedures to obtain evidence with
respect to subsequent events are Yes Yes No No

72
 extended.
II. An emphasis of a matter paragraph is
required Yes No No Yes

Answer: B

PAPS 1001

1. Which of the following is incorrect about personal computer?

a. Personal computers may constitute only of a part but not the
entire computer-based accounting system.
b. Computer information system environments in which personal
computers are used are different from other CIS environments.
c. Personal computers are economical yet powerful self-contained
general purpose computer consisting typically of a central
processing unit, memory, monitor and other paraphernalia.
d. Certain types of internal controls need to be emphasized due to
the characteristics of personal computer and the environments
in which they are used.

Answer: A
Sec 2, 3, 4

2. Which of the following is least likely an advantage of using personal

computers?
a. They are small enough to be transportable.
b. Their operating system software is equally comprehensive as
those found in larger computerized environments.
c. They are relatively inexpensive to acquire and maintain.
d. There is an ease of using personal computers.

Answer: B
Sec 10
3. Which of the following is not a type of installation of personal
computers?
a. A workstation connected to a server.
b. a stand-alone workstation operated by a single user or a
number of users at different times.
c. A workstation which is part of a local area network of personal
computers.
d. A stand-alone workstation operated by a single user or a
number of users simultaneously using the same or different
applications.

73
Answer: D
Sec 5

4. Which of the following characteristics is not typical of a workstation

of local area network of personal computers?
a. One of the personal computers will act as the file server.
b. Multiple users can have access to information, data and
programs in shared files.
c. A local area network allows the sharing of resources such as
storage facilities and printers.
d. Shared data and programs are accessible to multiple users at
different times.

Answer: D
Sec 7

5. A computer program that attaches itself to a legitimate program or

data file and users it as a transport mechanism to reproduce itself
without the knowledge of the user:
a. Trojan horse
b. Virus
c. Hacker
d. Backup

Answer: B
Sec 13

6. Which of the following is least considered a threat to security of data

or information stored in stand-alone personal computer files?
a. Unauthorized access to programs and data.
b. Theft of information by other unauthorized users.
c. Unauthorized alternation.
d. Incompatibility of the application programs to the personal
computer’ operating system.
Answer: D
Sec 14

7. Which of the following measures is least helpful to physically protect

personal computers?
a. The use of user passwords that are periodically changed.
b. Use of door locks during nonbusiness hours.
c. Fastening the personal computer to a table using security
cables.

74
 d. Use of an alarm system that is activated anytime the personal
computer is moved from its location.
Answer: A
Sec 19

8. The technique that lends an effective control for protecting

confidential information from unauthorized access by transforming
programs and information into an unintelligible form:
a. Defragmentation.
b. Cryptography.
c. Trojan horse
d. Recycle

Answer: B
Sec 27

9. The most common threat to any computer security is

a. Computer hacking.
b. Virus.
c. Salami technique.
d. Theft of data and information.

Answer: B
Sec 30

10. It refers to the plans made by the entity to obtain access to

comparable hardware, software and data in the event of their failure,
loss or destruction.
a. Simulation.
b. Backup.
c. Documentation.
d. Parallel run.

Answer: B
Sec 36

11. Which of the following is classified as general CIS controls that

relates to segregation of duties?
a. Reconciliation of record counts.
b. Authorization of modifying the operating system.
c. A system of transaction logs.
d. Follow up all errors detected during processing.

Answer: B

75
Sec 39 and 40

12. Which of the following is least considered a control procedure that

the auditor has to consider when he intends to rely on internal
accounting controls that relate to the use of third-party software?
a. The approval of the budget before acquiring the applications
software.
b. Ongoing assessment of the adequacy of the software to meet
user requirements.
c. Review of the applications software prior to purchasing,
including functions, capacity and controls.
d. Adequate testing of the software and the modification to it prior
to use.

Answer: A
Sec 45C

13. Which of the following is the least concern of the auditor when he
intends to rely on internal accounting controls that relate to stand-
alone personal computers?
a. Segregation of duties and balancing controls.
b. Access to the personal computers and files.
c. A system of authorization before a transaction is executed.
d. Use of third-party software.

Answer: C
Sec 45

14. How does the stand-alone personal computer environment of the

client entity affect the auditor’s audit procedures?
a. The auditor often assumes that control risk is reasonably low.
b. Because of the advantage provided by the use of stand-alone
personal computers, the audit procedures are restricted to low
level.
c. The auditor usually concentrates the audit efforts on
substantive tests at or near the end of the year.
d. To be cost effective, the auditor makes an extensive review of
general CIS and CIS application controls as basis of reducing
the audit efforts to be performed on detailed testing of balances
and transaction classes.

Answer: C
Sec 41 and 42

76
15. Computer-assisted audit may include the use of:
A B C D
Client software YES YES NO NO
Auditor’s own software programs YES NO YES NO

Answer: A
Sec 43

16. Which of the following may not be a purpose of using computer-

audit software?
a. Add transactions or balances in the data files for comparison
with control account balances.
b. Select accounts or transactions for detailed testing.
c. To evaluate the collectibility of accounts receivable.
d. To examine data bases for unusual items.

Answer: C
Sec 43

17. When the client has a large number of transactions that are
processed by stand-alone personal computer, the auditor:
a. May do tests of controls which he intends to rely on, if
appropriate, to reduce the assessed control risk, and do audit
work on the data at a preliminary date.
b. Understand the control environment and flow of transactions
but must omit preliminary audit tests.
c. May do tests of controls and if those controls can be relied on,
do interim testing and omit year end audit testing.
d. Usually omits the understanding of control environment
because the stand-alone personal computer environment is not
reliable.

Answer: A
Sec 42 and 44

18. How could an entity improve the application software integrity if the
accounting application is used at various locations?
a. The application programs should be developed and maintained
at one place rather than by each user.
b. Each user should be allowed to develop and maintain own
application programs.

77
 c. Each user should be given the responsibility of maintaining and
modifying the application programs, if necessary.
d. A copy of the application software should be tested first for
consistency before they are issued to each user.

Answer: A
Sec 35

19. What is the best physical control over non-removable storage media
in personal computers?
a. A use of locking devices.
b. A use of back-up files that are kept in separate locked cabinet.
c. A use of a file directory.
d. A policy that requires that only authorized personnel should
have access to the personal computers.

Answer: A
Sec 21

20. Which of the following is an access control?

a. A back up system.
b. A use of user ID and password.
c. Data integrity and consistency standards.
d. Appropriate segregation of functional duties.

Answer: B
Sec 26

21. What is one of the effective means of program and data security for
removable storage media in a personal computer environment?
a. A system of labeling the storage media in order to prevent
accidental erasure of files.
b. Maintain and keep a back-up copy of the files in a separate
well-protected storage.
c. A policy of identifying users who are given access to those
removable storage media.
d. Remove those storage media from the personal computer and
either a particular user or a librarian keep them under
controlled custody.

Answer: D
Sec 29

78
22. Which of the following least likely improves software and data
integrity control?
a. Adequate written documentation of application controls.
b. Format and range checks and cross checks of results.
c. Centralized development and maintenance of application
software though the users are dispersed throughout the entity.
d. A system of access control like the use of user ID and password.

Answer: D
Sec 33, 34, 35

23. Which of the following controls may be built into the application
software in order to limit access to programs and data to authorized
personnel?
I. The use of passwords.
II. A written policy of segregation of functions.
III. The use of hidden files and secret file names.
IV. The use of cryptography.

a. I, II, III, IV
b. I, II, III
c. I, IV
d. I, III, IV

23. Answer: D
Sec 24
24. Which of the following is not a characteristic of the stand-alone
workstation?
a. Can be operated by a single user.
b. Generally, data are entered manually through the keyboard.
c. Can be operated by a number of users simultaneously.
d. The use of different programs that are stored in the personal
computer.

Answer: C
Sec 6

25. Which of the following is least likely a characteristic of a local area

network?
a. Multiple users can have access to program and data at different
times.
b. Two or more computers are linked together through the use of
special software and communication lines.

79
 c. One of the personal computers acts as the file server that
manages the network.
d. It allows the sharing of resources such as storage and printers.

Answer: A
Sec 7
26. A personal computer that manages the local area network refers to:
a. Communication link
b. File server
c. Configuration
d. Mainframe

Answer: B
Sec 7

27. An arrangement where two or more personal computers are linked

together through the use of special software and communication
lines:
a. A stand-alone work station.
b. Extension.
c. Local area network.
d. Internet.

Answer: C
Sec 7
28. Which of the following is least likely a typical characteristic of
personal computers?
a. The use of system software and application programs that are
“user friendly”.
b. Operating system software is usually developed by the end
user.
c. They are small enough to be transportable.
d. They are less expensive.

Answer: B
Sec 10

PAPS 1002
29. A computer system that enables users to a access data and
programs directly through workstations:
a. On-line computer systems.
b. Data-base system.
c. Flat-file system.

80
 d. Computer line system.

Answer: A
Sec 2

30. Which of the following is least likely a function of an on-line

computer system?
a. Entering transactions.
b. Requesting reports.
c. Updating master files.
d. Determining the approval of a processed transaction.

Answer: D
Sec 3

31. The on-line computer system may use both general and special
purpose terminals. Which of the following is a special purpose
terminal?
a. Basic keyboard and monitor.
b. Intelligent terminal.
c. Point of sale devices.
d. Personal computer.

Answer: C
Sec 4b

32. It is a special purpose terminal being used to initiate, validate,

record, transmit and complete various banking transactions:
a. ATM
b. POS
c. CPU
d. WAN

Answer: A
Sec 4b
33. Which of the following is not a characteristic of a local workstation?
a. The use of telecommunication link.
b. Used by many users, for different purposes, in different
locations, all at the same time.
c. Connected directly to the computer through cables.
d. Application software and data are kept on-line.

Answer: A

81
Sec 5

34. Which of the following is not a basis of classifying an on-line

computer system?
a. How information is processed.
b. How information is entered into the system.
c. When the results are available to the user.
d. The type of information to be processed.

Answer: D
Sec7

35. An on-line system that processes and validates individual

transactions as they are entered, updates the related files and made
them available immediately to users:
a. On-line, real-time
b. On-line, batch-processing
c. On-line, memo update
d. On-line, inquiry

Answer: A
Sec 9

36. It involves a transfer of data from a master file to a remote

workstation for further processing by the user:
a. On-line, memo update.
b. On-line, downloading.
c. On-line, uploading.
d. On-lien, batch-processing.

Answer: B
Sec 12

37. It refers to the transfer of processed data from a remote workstation

to the master file:
a. On-line, memo update.
b. On-line, downloading.
c. On-line, uploading.
d. On-line, inquiry.

Answer: C
Sec 12

82
38. It Is a communication system that enables computer users to share
computer equipment, application software, data and voice and video
transmissions:
a. Workstation.
b. Network.
c. Server.
d. Module.

Answer: B
Sec 13

39. A system that combines on-line, real-time and on-line, batch-

processing systems:
a. real-time-batch-processing.
b. On-line, downloading/uploading processing.
c. On-line, memo update.
d. On-line, inquiry.

Answer: C
Sec 10

40. Which of the following characteristics is not true of on-line, memo

update?
a. It involves a shadow update.
b. A creation of a memo file containing information which has
been extracted from the recent version of the master file.
c. Transactions are immediately validated, followed by updating of
master file.
d. Updating of master file on batch basis.

Answer: C
Sec 10

41. A type of computer system whereby individual transactions are

entered on line and are added to a transaction file that contains
other transactions entered during the period. Later, this transaction
file, on a periodic basis, updates the master file.
a. On-line, batch system.
b. On-line, real-time system.
c. On-line, memo update system.
d. On-line, shadow update system.
Answer: A
Sec 9

83
42. It is a computer with an operating system that allows multiple users
on a network to access software applications and data files:
a. File server.
b. Verifier.
c. Compiler.
d. Processor.

Answer: A
Sec 13

43. Which one of the following is not true of a network?

a. The use of a file server or host computer.
b. Sharing of computer equipment and other computer
equipments.
c. The presence of multiple users.
d. The use of several computers, each having own operating
systems.

Answer: D
Sec 13

44. Which of the following is not one of the three basic types of network?
a. LAN
b. DAN
c. WAN
d. MAN

Answer: B
Sec 15

45. A network system to connect two or more geographically separated

local area networks:
a. Metropolitan area network.
b. Dispersed area network.
c. Wide area network.
d. Sattelite area network.

Answer: C
Sec 15B

46. A type of network whereby a service provider is used to connect a

different closely situated buildings as a campus:
a. Close area network.
b. Dispersed area network.

84
 c. Metropolitan area network.
d. Wide area network.

Answer: C
Sec 15C

47. Which one of the following is not a communication device used in a

larger network?
a. Gateway.
b. Radar.
c. Route.
d. Bridge.

Answer: B
Sec 16

48. When the two networks or protocols are not similar, communication
is made through the use of:
a. Bridge.
b. Route.
c. Gateway.
d. Repeater.

Answer: C
Section 16

49. Which of the following is the least significant characteristic of an on-

line computer system?
a. Adequately visible transaction trail.
b. Potential access to the system by the programmer.
c. On-line access to the system by users.
d. On-line data entry and validation.

Answer: A
Sec 17

50. Which of the following is mostly a potential threat to an on-line

computer system?
a. A user may have the potential ability to make unauthorized
changes to the data and program.
b. Validation checks of data entered is usually ignored.
c. Most of transactions may be omitted because of the absence of
adequate audit trail.

85
 d. Most of documents that will be processed may lack proper
authorization.

Answer: A
Section 18, 19, 20

51. Which of the following is least likely a potential risk that relates to
an on-line computer system?
a. A user may have the potential ability to make unauthorized
changes to the data in the master file.
b. Programmers may have an ability to make unauthorized
changes to programs.
c. Unauthorized users may have the potential ability to access
data files.
d. Data entered are usually processed by the computer without
any appropriate validation.

Answer: D
Sec 18, 19, 21

52. Which of the following is one of the significant effect of having an on-
line computer system for an entity?
a. A decrease or possibly an elimination of visible audit trail.
b. The irrelevance of data validation checks.
c. The absence of any hard copy of an abstract of transaction
summaries.
d. The elimination of any manual processing of transactions.

Answer: A
Sec 17, 20
53. Which of the following control policies would potentially prevent the
programmer to make unauthorized changes to programs?
a. An unscheduled rotation of duties of the different programmers.
b. Having a system programmer a person different form an
application programmer.
c. A thorough checking and testing of the application program
before they are finally installed.
d. A strict implementation of a policy that prevents the
programmer to have access to program used in the computer
operations.

Answer: D
Sec 21

86
54. Which of the following errors may be detected in an on-line
computer system when transactions or documents are entered into
the computer?

a. Credit to Inventory Stock No. 1021 for Inventory Stock No.

1012. Both stock numbers exist in the inventory master file.
b. An employee’s time card lacks the approval signature for the
employee’s overtime work.
c. A collection from customer A is credited to customer Y. Both
are regular customers of the entity.
d. Sale of Stock No. AA1012 is entered as Stock No. 1012.

Answer: D
Sec 18.
55. What is the potential risk of an on-line access by the programmers
to programs that are currently used in computer operations?

a. Debugging of program bug or error may be made in the copy of

the program that is currently used but not made on other
copies of the same application program.
b. Unauthorized modification to an existing program may be made
by the programmers.
c. The programmers may perform function that are inherently an
operating function.
d. Many transactions may be entered and processed without any
proper authorization.

Answer: B
Sec 21
56. Which of the following is not a general CIS control?
a. Access control procedures designed to restrict access to
programs and data.
b. Controls over passwords.
c. Controls over changes to master file.
d. System development and maintenance controls.

Answer: C
Sec 22 and 23

57. The access control procedures include the following:

A B C D
Use of user-IDs and passwords YES YES NO NO
Use of authorization table YES YES NO NO

87
 Use of physical controls YES NO YES YES
Use of biometrics YES NO NO YES

Answer: A
Sec 22
58. Which of the following is a general CIS control?
a. Programming controls that are designed to detect improper changes
to computer programs.
b. Pre-processing authorization to initiate a transaction.
c. Cut-off procedures to ensure that transactions are processed in the
proper accounting period.
d. Balancing control totals over data being submitted for processing.

Answer: A
Sec 22 and 23
59. Classify the following procedures as general (GC) or application (AC)
controls:

A B C D
Access controls AC GC GC AC
System development and
Maintenance controls GC GC GC AC
Use of transaction logs GC GC AC GC
Editing and validation tests AC AC GC AC
Controls over master files AC AC AC GC
Use of anti-virus software AC GC GC GC

Answer: B
Sec 22 and 23
60. Which of the following is not a programmed routing that checks
input data and processing results for completeness, accuracy and
reasonableness?
a. Edit check.
b. Existence check.
c. Reasonableness test.
d. Password verification.
Answer: D
Sec 23
61. The CIS application control that requires permission to initiate a
transaction refers to:
a. Master file controls.
b. Pre-processing authorization.

88
 c. Balancing.
d. Validation test.

Answer B
Sec 23
62. The CIS control procedures of ensuring that transactions are
processed in the proper accounting period:
a. Completeness check.
b. Existence check.
c. Cutoff procedures.
d. Balancing.

Answer: C
Sec 23
63. The process of establishing control totals over data being submitted
for processing and comparing the control totals during and after
computer processing to ensure that complete and accurate data are
transferred to each processing phase:
a. Balancing controls.
b. Master file controls.
c. Validation controls.
d. Rejected data controls.

Answer: A
Sec 23
64. A computer report which is designed to create an audit trail for each
on-line transaction:
a. Transaction file.
b. Master file.
c. Transaction edit report.
d. Transaction log.

Answer: D
Sec 22
65. Which of the following is not one of the factors that determine the
extent of the effect of an on-line computer system on the accounting
system and the associated risk?
a. The extent to which the on-line system is being used to process
accounting information.
b. The nature of files and programs used in the application.
c. The volume of transactions.

89
 d. The type and significance of financial transactions being
processed.

Answer: C
Sec 27
66. Which of the following circumstances would not effectively reduce
the risk of fraud or error in an on-line processing system?
a. The personnel who enter transactions through workstation is
fully knowledgeable of computer programming.
b. Invalid transactions are corrected and reentered immediately.
c. Transactions are processed immediately on-line.
d. On-line data entry is performed at or near the point where
transactions originate.

Answer: A
Sec 25
67. The risk of fraud or error in an on-line computer system is least
likely increased if:
a. Workstations are located throughout the entity.
b. Invalid transactions are corrected and reentered immediately.
c. On-line access to data and programs through
telecommunications.
d. On-line processing is interrupted.

Answer: B
Sec 25
68. What is the potential effect of on-line processing on the effectiveness
of internal controls?
a. There may not be source document for every input transaction.
b. The on-line computer system may not be designed to provide
report.
c. Validation of transactions is often omitted.
d. Results of processing may be highly summarized.

Answer: C
Sec 22
69. Which of the following is least likely a procedure being performed
after computer processing has taken place?
a. Reprocessing of transactions as either a test of control or
substantive procedure.
b. Test of controls over the on-line applications.
c. Substantive test of transactions and processing results.

90
 d. Test of controls over transactions logged by the on-line
computer system.

Answer: B
Sec 30 and 31
PAPS 1003

70. In considering an audit of an entity, which of the following is least

likely affected by CIS environment?
a. Objective of the audit.
b. Design of accounting system and the related internal controls.
c. Nature, timing and extent of audit procedures.
d. The selection by the auditor of internal controls that he intends
to rely.

Answer: A
Note to PAPS 1003

71. The database system consists of two essential components. They

are:
A B C D
Database YES YES NO NO
Database management YES NO YES NO
Hardware NO YES NO YES
Software NO NO YES YES

Answer: A
Sec 2
72. It is a collection of data that is shared and used by a number of
different users for different purposes:
a. Flat file.
b. Database.
c. File.
d. Record.
Answer: B
Sec 3
73. Which of the following the least function of DBMS software?
a. Facilitates the physical storage of the data.
b. Helps applications software manipulate computer processing.
c. Maintains the interrelationships among data.
d. Makes the data available to application programs.

91
Answer: B
Sec

74. Important characteristic(s) of database systems include:

A B C D
Data sharing YES NO YES NO
Inconsistency of data YES YES NO NO
Data independence NO YES YES YES

Answer: C
Sec 6
75. Which of the following is incorrect about database system?
a. Database system can only be used by computer mainframe.
b. Database is a collection of data that is shared and used by a
number of different users for different purposes.
c. Generally, individual users are not aware of all the data that are
stored in the database.
d. Database system reduces data redundancy.

Answer: A
Sec 3,5,8
76. A special software within the DBMS that facilitates the tracking of
the location of the data in the database:
a. Data pointer.
b. Data address.
c. Dictionary.
d. Schema.

Answer:
Sec 10
77. Which of the following is not a principal task of the database
administrator?
a. Defining the database structure.
b. Monitoring system performance.
c. Coordinating compute operations related to the database.
d. Designing the systems software.

Answer: D
Sec 13

78. The tasks of database administrator include:

A B C D

92
 Defining the database structure YES YES YES YES
Monitoring system performance NO YES YES NO
Encoding data YES NO NO NO
Maintaining data integrity,
Security and completeness YES NO YES YES

Answer: C
Sec 13
79. When more than one database is used in some applications, the
database administrator should ensure that:
a. Adequate linkages exist between databases.
b. Coordination of functions is maintained.
c. Data contained in different databases are consistent.
d. All of these.

Answer: D
Sec 14
80. How does database environment affect internal controls?
a. Both general and application controls have equal influence on
database system.
b. Application controls have greater influence than CIS general
controls on database system.
c. CIS general controls have greater influence than CIS application
controls on database system.
d. Both CIS general and application controls are unaffected by
having a database system.

Answer: C
Sec 15 and 16

81. Are the following CIS general controls particularly important to

database environment than to a flat file system?
A B C D
Standard approach for develop-
ment and maintenance of
application programs YES NO YES YES
Data ownership YES NO NO YES
Access to the database NO YES YES YES
Segregation of duties NO YES NO YES

Answer: A
Sec 16

93
82. It refers to a type of control that limits the number of users to whom
a user can assign privileges of access to data:
a. Particular propagation controls.
b. Vertical propagation controls.
c. Horizontal propagation controls.
d. Limited propagation controls.

Answer: C
Sec 19
83. In order to limit access to data, two types of granting privileges to
others are either horizontal or vertical propagation. Vertical
propagation refers to
a. Limiting the number of users to whom a user can assign privileges.
b. Limiting the depth of propagation or number of users in a sequence
that can be granted privileges.
c. Limiting the security level of access of a user to a particular data.
d. Limiting the number of files that a user can have an access.

Answer: B
Sec 19
84. Which of the following is a primary access control the database?
a. Use of password.
b. Encryption.
c. Use of hidden files.
d. Maintaining the file in a removable storage media.

Answer: A
Sec 20
85. Which of the following is the least effective policy on controlling
passwords?
a. a policy of periodically changing passwords.
b. Maintaining secrecy of passwords.
c. Reviewing and investigating attempted security violations.
d. Use of simple 6-letter passwords.

Answer: D
Sec 20
86. What is a discretionary access control whereby users are either
permitted or denied access to a data resource depending on its
content?
a. Name-dependent restriction.
b. Context-dependent restriction.

94
 c. Content-dependent restriction.
d. History-dependent restriction.

Answer: C
Sec 23
87. How is the history-dependent restriction control logically
formulated?
a. Users are either permitted or denied access to data resource
depending on the context in which they are seeking access.
b. Users are permitted or denied access to data resource depending
on the time series of accesses to and actions they have undertaken
on data resources.
c. Users either have access to a name data resource or they do not
have access to the resource.
d. Users are permitted or denied access to a data resource depending
on its contents.

Answer: B
Sec 23
88. Which of the following is not one of the discretionary access
controls?
a. Information-dependent restriction.
b. Content-dependent restriction.
c. History-dependent restriction.
d. Name-dependent restriction.

Answer: A
Sec 23
89. The controls that allow users to specify who can access data the own
and what action privileges they have with respect to that data:
a. Mandatory access controls.
b. User-identification access controls.
c. Discretionary access controls.
d. Subjective access controls.

Answer: C
Sec 23
90. This set of controls requires a database administrator to assign
security attributes to data that cannot be changed by the database
users:
a. Read-only access controls.
b. Mandatory access controls.

95
 c. Discretionary access controls.
d. View-limit access controls.

Answer: B
Sec 24
91. It presents only a subset of the database to a user:
a. View.
b. Back-up.
c. Transcript.
d. Abstract.

Answer: A
Sec 24
92. One way in which any type of the four discretionary controls or
restrictions is enforced is through the implementation of view.
Which one of the following is a way of Implementing the view?
a. Read-only access.
b. Inquiry to data.
c. Filtering data.
d. Shadow access.

Answer: C
Sec 24
93. Which of the following is the least consideration in terms of the
effect of a database system on the accounting system and the
associated risk?
a. The type and significance of financial transactions being processed.
b. The extent to which databases are being used by accounting
applications.
c. The nature of the databases, the DBMS, data administration tasks
and the applications.
d. The type of decisions being made based on the information in the
database.

Answer: D
Sec 26
94. Which of the following contributes most to the reliability of data in a
Database system?
a. A system of pre-authorization of transactions is required.
b. Access to data is more restricted.
c. Timely generation of data.

96
 d. Improved consistency of data because they are recorded and
updated only once.

Answer: D
Sec 27
95. One of the factors that contribute to greater reliability of data in a
database system is data integrity. Such integrity of data is improved
by, except:
a. Generalized edit.
b. Validation routines.
c. Security and control features.
d. Documentation of general and application controls and procedures.

Answer: D
Sec 27
96. Which of the following is a weakness associated of database system?
a. Access control is not complemented by security level or
authorization table.
b. Responsibility to database administration is assigned to a group of
persons rather than to only one officer.
c. Access to database is allowed through a terminal.
d. Data files are stored in non-removable file storage.

Answer: A
Sec 20, 21, 22

97