COLEGIO DE DAGUPAN

Arellano Street, Dagupan City

School of Business and Accountancy

FINAL EXAMINATION
AUDITING AND ASSURANCE PRINCIPLE

1. Which statement is correct regarding assurance engagements?

a. The objective of an assurance engagement is for a professional accountant to evaluate or
measure a subject matter that is the responsibility of another party against identified suitable
criteria, and to express a conclusion that provides the intended user with a level of assurance
about that subject matter.
b. All engagements performed by professional accountants are assurance engagements.
c. Whether a particular engagement is an assurance engagement will depend upon whether it
exhibits all the following elements - a three party relationship, a subject matter, suitable criteria
and a conclusion.
d. All engagements undertaken by an auditor that is similar to an agreed-upon procedures
engagement does not result in the expression of a conclusion that provides a level of assurance.

2. According to PSA 120, which of the following is an appropriate combination of procedures

required in completing a review engagement?
a. Inquiry and observation
b. Inquiry and analytical procedures
c. Analytical procedures and inspection
d. Observation and analytical procedures

3. Emong and Bobads, CPAs, organized a partnership for the practice of public accounting. Which
of the following is the best name for the firm?
a. Emong and Bobads, CPAs.
b. Emong and Bobads, Inc.
c. Emong and Bobads, Auditors and Tax Consultants.
d. Emong and Bobads, Members, PICPA.

4. Individual CPAs, Firms or Partnerships of CPAs, including partners and staff members thereof
shall register with the BOA and the PRC. If the application for registration of AB and Co., CPAs
was approved on August 30, 2005, the registration will expire on
a. Sept. 30, 2007
b. Dec. 31, 2007
c. Dec. 31, 2008
d. Aug. 30, 2007
5. Examples of risk factors relating to misstatements resulting from fraud least likely include
a. There is mandatory vacation for employees performing key control functions.
b. A significant portion of management’s compensation is represented by bonuses the value of
which is contingent upon the entity achieving unduly aggressive targets for operating results,
financial position or cash flow.
c. A high degree of competition or market saturation, accompanied by declining margins.
d. Inability to generate cash flows from operations while reporting earnings and earnings growth.

6. Specific responses to the auditor’s assessment of the risk of material misstatement resulting from
fraud will vary depending upon the types or combinations of fraud risk factors or conditions
identified, and the account balances, classes of transactions and assertions they may affect.
Specific examples of such responses least likely include:
a. Visit locations or perform certain tests on a surprise or unannounced basis.
b. Request that inventories be counted at interim date.
c. Alter the audit approach in the current year.
d. Seeking additional audit evidence from sources outside of the entity being audited.

7. Prior to acceptance of the engagement, the successor auditor is required to

a. Obtain the prospective client’s signature on the engagement letter.
b. Prepare a memorandum setting forth the staffing requirements and documenting the
preliminary audit plan.
c. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.
d. Discuss the management representation letter with the prospective client’s audit committee.

8. If a CPA was asked in March 2006 to audit a company’s financial statements for the year ended
December 31, 2005, the CPA:
a. Should not accept the engagement since he was not able to observe the inventory taking as of
December 31, 2005.
b. May accept the engagement provided he will be able to perform an adequate examination and
to express a possible qualified opinion, if necessary.
c. Should not accept the engagement because generally accepted auditing standards require that a
CPA be engaged before the client’s year end.
d. May accept the engagement provided the company assures him that he will be able to give an
unqualified opinion

9. An auditor completed fieldwork on February 10, 2006 for a December 31, 2005 yearend client. A
significant subsequent event occurred on February 22, 2006. In this case, which of the following
report dates would not be appropriate?
a. February 10, 2006.
b. February 10, except Note 1, February 22, 2006.
c. February 22, 2006.
d. December 31, 2005.
10. A CPA engaged to examine financial statements observes that the accounting for a certain
material item is not in conformity with generally accepted accounting principles, and that this fact
is prominently disclosed in a footnote to the financial statements. The CPA does not agree with
this departure from GAAP and should
a. Not allow the accounting treatment for this item to affect the type of opinion because the
deviation from generally accepted accounting principles was disclosed.
b. Express an unqualified opinion and add an explanatory paragraph emphasizing the matter by
reference to the footnote.
c. Qualify the opinion because of the deviation from generally accepted accounting principles.
d. Disclaim an opinion.

11. The auditor’s report would have to note an inconsistency of a client’s accounting principles in
which of the following situations?
a. During the client’s first year of operations, it began using weighted average, but changed to
FIFO after six months, and finished their first year with their financial statements using FIFO.
b. Client’s previous year’s financial statements valued inventory using weighted average, while
the current statements used FIFO.
c. During the previous year the client, a privately-held company which did not publish its
financial statements and was not audited, valued inventory using weighted average. This year it
changed to FIFO. The amount of the inventory was immaterial in both years using either method.
d. All of the foregoing situations would require the auditor’s report to note the inconsistency

12. Which of the following events occurring after the issuance of an auditor’s report most likely
would cause the auditor to make further inquiries about the previously issued financial
statements?
a. An uninsured natural disaster occurs that may affect the entity’s ability to continue as a going
concern.
b. A contingency is resolved that had been disclosed in the audited financial statements.
c. New information is discovered concerning undisclosed lease transactions of the audited period.
d. A subsidiary is sold that accounts for 25% of the entity’s consolidated net income.

13. The primary objective of analytical procedures used in the final review stage of an audit is to
a. Obtain evidence from details tested to corroborate particular assertions.
b. Identify areas that represent specific risks relevant to the audit.
c. Assist the auditor in assessing the validity of the conclusions reached.
d. Satisfy doubts when questions arise about a client's ability to continue in existence.

14. An auditor is concerned with completing various phases of the examination after the balancesheet
date. This "subsequent period" extends to the date of the
a. Auditor's report.
b. Final review of the audit working papers.
c. Public issuance of the financial statements
d. Delivery of the auditor's report to the client.

15. Which of the following procedures would most likely be performed in connection with a review
of subsequent events?
a. Test of shipping cut-offs.
 b. Review of cut-of bank statements.
c. Vouching of subsequent payments of accounts payable
d. Reading of minutes of meetings of stockholders and board of directors up to the date of the
audit report.

16. Which of the following material events occurring subsequent to the balance sheet date would
require an adjustment to the financial statements before they are issued?
a. Sale of long-term debt or capital stock.
b. Loss of a plant as a result of a flood.
c. Major purchase of a business which is expected to double sales volume.
d. Settlement of litigation, in excess of the recorded liability.

17. The auditor's primary means of obtaining corroboration of management's information concerning
litigation is a
a. Letter of audit inquiry to the client's lawyer.
b. Letter of corroboration from the auditor's lawyer upon review of the legal documentation.
c. Confirmation of claims and assessments from the other parties to the litigation.
d. Confirmation of claims and assessments from an officer of the court presiding over the
litigation.

18. Which of the following conditions or events most likely would cause an auditor to have
substantial doubt about an entity’s ability to continue as a going concern?
a. Cash flows from operating activities are negative.
b. Research and development projects are postponed.
c. Significant related party transactions are pervasive.
d. Stock dividends replace annual cash dividends.

19. Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a
going concern for a reasonable period of time. In evaluating Zero’s plans for dealing with the
adverse effects of future conditions and events, Cooper most likely would consider, as a
mitigating factor, Zero’s plans to
a. Discuss with lenders the terms of all debt and loan agreements.
b. Strengthen internal controls over cash disbursements.
c. Purchase production facilities currently being leased from a related party.
d. Postpone expenditures for research and development projects.
20. When an auditor concludes there is a substantial doubt a continuing audit client’s ability to
continue as a going concern for a reasonable period of time, the auditor’s responsibility is to
a. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on
the financial statements.
b. Consider the adequacy of disclosure about the client’s possible inability to continue as a going
concern.
c. Report to the client’s audit committee that management’s accounting estimates may need to be
adjusted.
d. Reissue the prior year’s auditor’s report and add an explanatory paragraph that specifically
refers to “substantial doubt” and “going concern”

21. In an assertion-based engagement

A. The practitioner either directly evaluates or measures the subject matter or obtains a
representation from the responsible party that has performed the evaluation.
B. The evaluation by the responsible party of the subject matter is not available to the intended
users.
C. The subject matter is in the form of an assertion by the responsible party that is made available
to the intended users.
D. The subject matter information is provided to the intended users in the assurance report.

22. Which of the following is not a financial statement assertion relating to account balances?
A. Completeness.
B. Existence.
C. Rights and obligations.
D. Valuation and competence.

23. Which does not describe the level of assurance provided in a financial statement audit?
A. High
B. Reasonable
C. Above average
D. Positive

24. Before accepting an engagement to audit a new client, a CPA is required to obtain
A. An understanding of the prospective client’s industry and business.
B. The prospective client’s signature to the engagement letter.
C. A preliminary understanding of the prospective client’s control environment.
D. The prospective client’s consent to make inquiries of the predecessor auditor, if any.

25. The audit plan generally is modified when

A. Results of tests of control differ from expectations.
B. An engagement letter has been signed by the auditor and the client.
C. A significant deficiency has been communicated to the audit committee of the board of
directors.
D. The search for unrecorded liabilities has been performed and obtained results as had been
expected during the planning of the audit.
26. The accounts receivable turnover ratio increased during 2021. This is consistent with:
A. Items shipped on consignment during December were recorded as credit sales; no cash
receipts have yet been received on these consignments.
B. The company increased credit sales by 10% by allowing more lenient credit terms—30 days
are now allowed whereas previously only 20 days were allowed.
C. A major credit sale on which title passed as of December 31, 2021 was recorded in January of
2022.
D. Sales for each month are approximately 25% higher than those of the preceding year.

27. The most important consideration in performing further audit procedure is its
A. Nature
B. Cost
C. Timing
D. Extent

28. When the auditor performs risk assessment on the controls, the auditor is required to understand
which aspects of the controls?
I. Design and implementation
II. Consistent and effective functioning
A. I only
B. II only
C. Both I and II
D. Neither I nor II

29. Which of the following statements is (are) correct?

I. The auditor cannot test controls that leave no audit trail.
II. The absence of misstatements detected by substantive procedures provides evidence that
controls related to the assertion being tested are effective.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

30. Which of the following controls would be MOST effective in assuring that recorded purchases
are free of material errors?
A. The receiving department compares the quantity ordered on purchase orders with the quantity
received on receiving reports.
B. An employee who is independent of the receiving department compares vendors’ invoices
with purchase orders.
C. Receiving reports require the signature of the individual who authorized the purchase.
D. Purchase orders, receiving reports, and vendors’ invoices are independently matched in
preparing vouchers.
31. Which of the following statements is correct relating to the auditor’s consideration of fraud?
A. The auditor’s interest in fraud consideration relates to fraudulent acts that cause a material
misstatement of financial statements.
B. A primary factor that distinguishes fraud from error is that fraud is always intentional, while
errors are generally, but not always, intentional.
C. Fraud always involves a pressure or incentive to commit fraud, and a misappropriation of
assets.
D. While an auditor should be aware of the possibility of fraud, management, and not the auditor,
is responsible for detecting fraud.

32. Choose the incorrect statement concerning substantive procedures.

A. They are procedures to detect material misstatement in the financial statements.
B. They may be test of details (of classes of transactions or balances) or analytical procedures.
C. They are performed irrespective of the assessed risks of material misstatement.
D. They constitute the final phase of the audit process.

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

A. Reduce substantive testing by relying on the assessments of inherent risk and control risk.
B. Postpone the planned timing of substantive tests from interim dates to the year-end.
C. Eliminate the assessed level of inherent risk from consideration as a planning factor.
D. Lower the assessed level of control risk from the maximum level to below the maximum.

34. Which of the following does not result to reduction of non-sampling risk?
A. Adequate planning
B. Proper direction, supervision and review of the audit team
C. Testing a larger sample size than initially planned
D. Adherence to firm’s quality control standards

35. Ignoring any particular legal or regulatory requirement, audit documentation should be retained
A. A minimum of five years.
B. As long as lead schedules have relevance to forth coming audits.
C. Until three years after the client selects another auditor.
D. Working papers must be maintained indefinitely.

36. Which of the following is not one of the purposes of audit documentation?
A. Accountability of team members for work performed
B. Reference for future audits
C. Assistance to audit team in planning and performing the audit
D. Provide opinion on the financial statements
37. Which of the following statements is correct about the working papers?
A. In determining the extent of documentation, it may be useful to consider what would be
necessary to provide another auditor who has no previous experience with the audit an
understanding of the detailed aspects of the audit.
B. Every matter the auditor considers in an audit must be documented in the working papers.
C. Working papers should not include documentation prepared by the client.
D. The auditor should prepare the working papers which are sufficiently complete and detailed to
provide an overall understanding of the audit.

38. Which of the following procedures would an auditor most likely perform during an audit
engagement’s overall review stage in formulating an opinion on an entity’s financial statements?
A. Obtain assurance from the entity’s attorney that all material litigation has been disclosed in the
financial statements.
B. Verify the clerical accuracy of the entity’s proof of cash and its bank cutoff statement.
C. Determine whether inadequate provisions for the safeguarding of assets have been corrected.
D. Consider whether the results of audit procedures affect the assessment of the risk of material
misstatement due to fraud.

39. Subsequent events became known to the auditor after the report date but before the financial
statements were issued. The audit report was not yet provided or released to the entity. Which is
not correct?
A. Retain the original date of the audit report if the event is an adjusting event.
B. Issue a qualified or adverse opinion on the unamended financial statements should
management refuse to reflect the adjusting event.
C. Determine whether management prepared amended financial statements to reflect the adjusting
event.
D. Notify those charged with governance not to issue the financial statements to third parties
before the necessary amendments have been made

40. The auditor’s responsibility when there is substantial doubt on the continuance of an entity as a
going concern is to

A. Based on materiality, appropriately modify the opinion

B. Include an Emphasis of Matter paragraph to disclose the doubt
C. Assess whether the uncertainty was disclosed, and whether the disclosure is adequate
D. Report to the audit committee that accounting estimates need to be revised

41. An unmodified opinion

A. Means that the auditor has complied with all relevant technical standards in the conduct of the
audit
B. Provides assurance as to the future viability of the entity or the efficiency and effectiveness
with which management has conducted the affairs of the entity
C. Indicates that the financial statements prepared are accurate
D. Implies that material disagreements between the client entity and the auditor for the period
under audit were resolved to the satisfaction of the auditor
42. Six months after issuing an unmodified opinion on audited financial statements, an auditor
discovered that the engagement personnel failed to confirm several of the client’s material
accounts receivable balances. The auditor should first
A. Assess the importance of the omitted procedures to the auditor’s ability to support the
previously expressed opinion
B. Inquire whether there are persons currently relying, or likely to rely, on the unmodified
opinion
C. Perform alternative procedures to provide a satisfactory basis for the unmodified opinion
D. Request the permission of the client to undertake the confirmation of accounts receivable

43. The responsibilities explicitly stated in the Management’s Responsibility paragraph are:
I. Preparation of financial statements in accordance with applicable financial reporting framework
II. Such internal control determined necessary to enable the preparation of financial statements,
whether due to fraud or error
III. Adequacy of accounting books and records, or accounting system
A. I and II only
B. I and III only
C. II and III only
D. I, II and III
44. Which of the following is incorrect regarding term of office of chairman and members of the
Board?
A. No member shall serve for more than 12 years.
B. No person who has served two successive terms shall be eligible for reappointment until the
lapse of one year.
C. Appointment to fill up an unexpired term is not to be considered as a complete term.
D. A vice-chairman shall be elected by the Board among themselves to serve a vice chairman for
three years, renewable.

45. Which of the following is incorrect?

A. All successful examinees in the Philippine CPA examinations shall take an oath of profession.
B. The Certificate of Registration issued to successful examinees shall be renewed every after
three (3) years, upon payment of registration fees.
C. The Professional Identification Card bears the registration number of the new CPA, date of
issuance, expiry date and is duly signed by the chairman of the PRC.
D. A roster showing the names and place of business of all registered CPAs shall be prepared and
updated by the Board.

46. Which of the following is not an element of quality control?

A. Acceptance and continuance of client relationships and specific engagements.
B. Human resources.
C. Internal control.
D. Monitoring.

47. The word auditing comes from the Latin audire, which means:
 A. To see
B. To hear
C. To detect
D. To test

48. 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
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

49. The phrase “in our opinion” in the auditor’s report is intended to inform users that auditors:
A. guarantee fair presentation of the financial statements.
B. act as insurers of the accuracy of the statements.
C. certify the material presented in the statements by management.
D. base their conclusions about the statements on professional judgment.

50. If a company’s external auditor expresses an unqualified opinion as a result of the audit of
the company’s financial statements, readers of the audit report can assume that
A. The external auditor found no fraud
B. The company is financially sound and the financial statements are accurate
C. Internal control is effective
D. All material disagreements between the company and the auditor about the application of
accounting principles were resolved in the satisfaction of the external auditor.

51. An audit engagement letter least likely include:

A. A reference to the inherent limitations of an audit that there is an unavoidable risk that
some material misstatements may remain undiscovered
B. Description of any letters or reports that the auditor expects to submit to the client
C. Identification of specific audit procedures that the auditor needs to undertake
D. Basis on which fees are computed and any billing arrangements

52. Inherent risk is _______ related to detection risk and _______ related to the amount of audit
evidence.
A. directly, inversely
B. directly, directly
C. inversely, inversely
D. inversely, directly
53. Which of the following is an example of the concept of inherent risk?
A. Humans make more errors than computers; therefore, a manual accounting system is
riskier than a computerized system.
B. Accounting systems with vouchers have many more controls built in, so the risk that there
will be errors on the financial statements is reduced.
C. Loans receivable for a finance company are less likely to be collectible than those of a
bank.
D. Audits with larger sample sizes are less risky than those with smaller sample sizes.

54. When discussing control risk (CR) and the audit risk model, which of the following is false?
A. CR is a measure of the auditor’s assessment of the likelihood that misstatements will not
be prevented or detected by internal control.
B. If the auditor concludes that internal control is completely ineffective to prevent or detect
errors, he/she would assign a low value to CR.
C. The relationship between control risk and detection risk is inverse.
D. The relationship between control risk and evidence needed to support account balances
is direct.

55. The sequence of steps in gathering evidence as the basis of the auditor's opinion is:
A. Substantive tests, documentation of control structure, and tests of controls.
B. Documentation of control structure, substantive tests, and tests of controls.
C. Documentation of control structure, tests of controls, and substantive tests.
D. Tests of controls, documentation of control structure, and substantive tests.

56. After testing a client's internal control activities, an auditor discovers a number of significant
deficiencies in the operation of a client's internal controls. Under these circumstances the
auditor most likely would
A. Issue a disclaimer of opinion about the internal controls as part of the auditor's report.
B. Increase the assessment of control risk and increase the extent of substantive tests.
C. Issue a qualified opinion of this finding as part of the auditor's report.
D. Withdraw from the audit because the internal controls are ineffective.

57. The auditor who becomes aware of reportable conditions is required to communicate this to
the
A. Audit committee and client's legal counsel.
B. Board of directors and internal auditors.
C. Senior management and board of directors.
D. Internal auditors and senior management.

58. The most important test of details of balances to determine the existence of recorded accounts
receivable is:
A. tracing details of sales invoices to shipping documents.
B. tracing the credits in accounts receivable to bank deposits.
C. tracing sales returns entries to credit memos issued and receiving room reports.
D. the confirmation of customers’ balances.
59. If an auditor establishes a relatively high level for materiality, then the auditor will:
A. accumulate more evidence than if a lower level had been set.
B. accumulate less evidence than if a lower level had been set.
C. accumulate approximately the same evidence as would be the case were materiality
lower.
D. accumulate an undetermined amount of evidence.

60. Which of the following is not a related party of an entity?

A. An associate of the entity.
B. Chief executive officer of the entity.
C. A shareholder owning 20% of the ordinary shares.
D. A financial institution providing banking facilities to the entity.

61. Each of the following might, by itself, form a valid basis for an auditor to decide to omit a test
except for the
A. Difficulty and expense involved in testing particular item.
B. Assessment of control risk at a low level.
C. Inherent risk involved.
D. Relationship between the cost of obtaining evidence and its usefulness.

62. As the acceptable level of detection risk decreases, an auditor may change the
A. Timing of substantive tests by performing them at an interim date rather than at year-
end
B. Nature of substantive tests from a less effective to a more effective procedure
C. Timing of tests of controls by performing them at several dates rather than at one time
D. Assessed level of inherent risk to a higher amount

63. The negative form of accounts receivable confirmation is not useful when
A. Internal control is considered to be effective.
B. A large number of small balances are involved.
C. The auditor has reason to believe that persons receiving the requests are likely to consider
them.
D. Individual account balances are relatively large.

64. In evaluating the reasonableness of an accounting estimate, an auditor most likely would
concentrate on key factors and assumptions that are
A. Consistent with prior periods.
B. Similar to industry guidelines.
C. Objective and not susceptible to bias.
D. Deviations from historical patterns.
65. Audit working papers should not
A. Include any client-prepared papers or documents other than those prepared by the CPA
or his assistant.
B. Be kept by the CPA after review and completion of the audit except for items required for
the income tax return or the permanent file.
C. Be submitted to the client to support the financial statements and to provide evidence of
the audit work performed.
D. By themselves be expected to provide sufficient support for the auditor’s opinion.

66. Which of the following procedures would an auditor most likely perform in planning a
financial statement audit?
a. Inquiring of the client’s legal counsel concerning pending litigation.
b. Comparing the financial statements to anticipated results.
c. Examining computer generated exception reports to verify the effectiveness of
internal control.
d. Searching for unauthorized transactions that may aid in detecting unrecorded
liabilities.

67. Analytical procedures used during risk assessment in an audit should focus on
a. Reducing the scope of tests of controls and substantive tests.
b. Providing assurance that potential material misstatements will be identified.
c. Enhancing the auditor’s understanding of the client’s business.
d. Assessing the adequacy of the available evidence.

68. A primary purpose of performing analytical procedures as risk assessment procedures is

to identify the existence of
a. Unusual transactions and events.
b. Illegal acts that went undetected because of internal control weaknesses.
c. Related-party transactions.
d. Recorded transactions that were not properly authorized
 69. Which of the following actions may be appropriate if the auditor is unable to agree to a
change of the engagement and is not permitted to continue the original engagement
I. Issue a qualified opinion due to a significant scope limitation.
II. Auditor should withdraw from the engagement.
III. Consider whether there is any obligation to report to the board of
directors or shareholders the circumstances necessitating
withdrawal

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

70. The development of a general strategy and a detailed approach for the expected nature,
timing, and extent of audit refers to :
a. Supervision
b. Audit procedures
c. Directing
d. Planning

Prepared by:
____________________________
KIM JOSEPH B. VISPERAS, CPA
Instructor

Noted by:
____________________________
DANIEL T. GONZALES, CPA, MDM
Dean, SBA