Auditing Theory Reviewer

1. Which of the following would not be a consideration of a CPA firm in
deciding whether to accept a new client?
" "a."The client's probability of achieving an unqualified opinion. "
" "b."The client's financial ability. "
" "c."The client's relations with its previous CPA firm. "
" "d."The client's standing in the business community. "

2. After accepting an audit engagement, a successor auditor should make
specific inquiries of the predecessor auditor regarding:
" "a."The predecessor's evaluation of matters of continuing accounting "
" " "significance. "
" "b."Disagreements which the predecessor had with the client concerning "
" " "auditing procedures and accounting principles. "
" "c."The client's ability to pay the fee for this engagement. "
" "d."The predecessor's assessments of inherent risk and judgments about "
" " "materiality. "

3. The objective and scope of the audit and the extent of the auditor's
responsibilities to the client are best documented in a(n):
" "a."Client's representation letter "c."Audit engagement letter. "
" "b."Independent auditor's report "d."Management letter "

4. Which of the following is not a valid reason why an auditor sends to his
client an engagement letter?
" "a."Avoid misunderstanding with respect to the engagement "
" "b."Confirms the auditor's appointment "
" "c."Discloses the objective and scope of the audit "
" "d."Assures CPA's compliance to PSAs "

5. The secondary purpose of the engagement letter is to:
" "a."Remind management that the primary responsibility for the financial"
" " "statements rests with management. "
" "b."Satisfy the requirements of the CPA's liability insurance policy. "
" "c."Provide a written record of the agreement with the client as to the"
" " "services to be provided. "
" "d."Provide a starting point for the auditor's preparation of the "
" " "preliminary audit program. "

6. S1 The engagement letter will include identification of significant
dates throughout the engagement.
S2 The engagement letter will inform the client about the audit
procedures to be performed.
" "a. "True, true "B. "False, false"c. "True, false "D. "False, true "

7. Which of the following procedures is performed primarily during audit
planning?
" "a. "Risk assessment procedures "
" "b. "Tests of controls "
" "c. "Substantive tests "
" "d. "All of the above are performed primarily during audit planning "

8. Which of the following is not a risk assessment procedure?
" "a. "Inquiries of management and others within the entity "
" "b. "Analytical procedures "
" "c. "External confirmation with customers "
" "d. "Observation and inspection "

9. S1 Materiality judgments are made in light of surrounding circumstances
and necessarily involve both quantitative and qualitative judgments.
S2 An auditor's consideration of materiality is influenced by the
auditor's perception of the needs of a reasonable person who will
rely on the financial statements.

10. S1 Analytical procedures are required to be used in planning a
financial statement audit.
S2 Analytical procedures are required to be used all throughout the
audit.

11. S1 In a financial statement audit, audit risk represents the
probability that internal controls fail and the failure is not
detected by the auditor's procedures.
S2 Audit risk may be eliminated by 100% testing of the items in the
population.

12. In a financial statement audit, detection risk represents:
" "a."The susceptibility of an account balance to error that could be "
" " "material. "
" "b."The risk that error could occur and not be prevented or detected by"
" " "the internal control structure of the client. "
" "c."The risk that the auditor fails to modify materially misstated "
" " "financial statements. "
" "d."The risk that error could occur and not be detected by the "
" " "auditor's procedures. "

13. The following statements describe components of internal control.
Which one describes risk assessment process?
" "a."This includes the governance and management functions and the "
" " "attitudes, awareness, and actions of those charged with governance "
" " "and management concerning the entity's internal control and its "
" " "importance in the entity. "
" "b."The process for identifying business risks relevant to financial "
" " "reporting objectives and deciding about actions to address those "
" " "risks, and the results thereof. "
" "c."The classes of transactions in the entity's operations that are "
" " "significant to the financial statements. "
" "d."The policies and procedures that help ensure that management "
" " "directives are carried out. "

14. S1 The auditor assesses detection risk because it affects the
level of control risk that the auditor may accept.
S2 The auditor assesses control risk because it affects the level of
detection risk that the auditor may accept.

15. Which of the following would not be a method used to conduct tests of
controls?
" "a."Inquiry and observation. "c."Reperformance. "
" "b."Inspection. "d."Analytical procedures "

16. As the auditor plans to rely more on the client's internal control
structure,
" "a."Substantive tests should "c."Substantive tests should "
" " "increase. " "decrease. "
" "b."Tests of controls should "d."Tests of controls should "
" " "increase. " "decrease. "

17. S1 Audit evidence comprises all the information available to the
auditor during an audit engagement.
S2 Accounting records, on their own, constitute sufficient appropriate
evidential matter.

18. Which of the following is an example of the auditor's direct knowledge?
I. Inspection
II. Observation
III. Computation
" "a. "I only "B. "I and III "c. "II and III "D. "I, II and "
" " " " " " " " "III "

19. S1 An auditor should recognize that the application of auditing
procedures may produce evidential matter indicating the possibility of
errors and irregularities and therefore should not depend on internal
accounting control features that are designed to prevent or detect errors
or irregularities.
S2 Inquiries of the client's internal audit staff, held in private,
constitute one of the most reliable sources of evidence in testing
the rights and obligations assertion related to land and buildings.

20. Which of the following is an example of fraud?
" "a."Client personnel make mistakes in gathering or processing "
" " "accounting data from which financial statements are prepared. "
" "b."Client personnel alter accounting records from which financial "
" " "statements are prepared. "
" "c."Client personnel overlook or misinterpret facts, causing accounting"
" " "estimates to be incorrect. "
" "d."Client personnel make mistakes in the application of accounting "
" " "principles. "

21. Which of the following situations are applicable to fraud as well as
error?
" "a."Mistakes in gathering or processing accounting data "
" "b."Suppression of the recording of accounting transactions "
" "c."Misinterpretation of facts, causing the classification of leases to"
" " "be incorrect "
" "d."Misapplication of accounting policies "

22. Which of the following best describes a portion of the auditor's
responsibility regarding illegal acts by clients?
" "a."The auditors have a responsibility to discover all material illegal"
" " "acts. "
" "b."If audit procedures reveal illegal acts, the auditors should take "
" " "appropriate actions. "
" "c."If the auditors suspect that illegal acts have been performed, they"
" " "should conduct a legal audit of the company "
" "d."The auditor's responsibility for the detection of all illegal acts "
" " "is the same as their responsibility regarding material errors and "
" " "irregularities. "

23. Which of the following is not generally included in the working papers
file?
" "a. "Documentation of the auditor's understanding of the accounting and"
" " "internal control systems. "
" "b. "Copy of the internal auditor's audit program. "
" "c. "Analyses of significant ratios and trends. "
" "d. "An indication as to who performed the audit procedures and when "
" " "they were performed. "

24. The standard (unmodified) audit report includes the following:
I. Emphasis of a matter paragraph
II. Unqualified opinion
" "a. "I only "B. "II only "c. "I and II "D. "Neither I "
" " " " " " " " "nor II "

25. When restrictions that materially limit the scope of the audit are
imposed by the client, the auditor generally should issue which of the
following opinions?
" "a.""Except for" "c."Unqualified "
" "b."Adverse "d."Disclaimer "

26. An audit report should be dated no earlier than:
" "a. "Date the report is delivered to the entity audited. "
" "b. "Date the auditee has obtained sufficient, appropriate audit "
" " "evidence. "
" "c. "Date of the completion of the audit. "
" "d. "Date a letter of audit inquiry is received from the entity's "
" " "attorney of record. "

27. Which of the following statements indicates an adverse opinion?
" "a.""The financial statements do not present fairly in all material "
" " "respects the financial position, results of operations, and cash "
" " "flows in conformity with GAAP." "
" "b.""The auditor does not express an opinion on the financial "
" " "statements." "
" "c.""The financial statements present fairly in all material respects "
" " "the financial position, results of operations, and cash flows in "
" " "conformity with GAAP." "
" "d.""Except for the effects of a matter, the financial statements "
" " "present fairly in all material respects the financial position, "
" " "results of operations, and cash flows in conformity with GAAP." "

28. In which of the following paragraphs can you find the phrase
"Philippine Financial Reporting Standards"?
I. Opening paragraph
II. Management responsibility paragraph
III. Auditor's responsibility paragraph
IV. Opinion paragraph
" "a. "I only "B. "II and III "c. "II and IV "D. "II, III and "
" " " " " " " " "IV "

29. This means the application of audit procedures to less than 100% of
items within an account balance or class of transactions, where all
sampling units have a chance of being selected for testing.
" "a. "Audit sampling "c."Haphazard testing "
" "b. "Selecting specific items "d."Statistical sampling "

30. A sample in which every possible combination of items in the population
has an equal chance of constituting the sample is a
" "a. "Random sample. "c."Judgment sample. "
" "b. "Statistical sample. "d."Representative sample. "

31. S1 The documentary evidence which physically represents the
sampling units in a given population, is known as sampling form.
S2 Error that arises from an isolated event that has not recurred other
than on specifically identifiable occasions and is therefore not
representative of errors in the population is known as projected error.

32. S1 An advantage of statistical sampling over non-statistical
sampling methods in tests of controls is that the statistical sampling
methods provide an objective basis for qualitatively evaluating sampling
risk.
S2 Statistical sampling methods do not allow the auditor to eliminate the
need to use judgment in determining the appropriate sample size.

33. One of the causes of sampling error is
" "a."The use of inappropriate or ineffective audit procedures. "
" "b."Fatigue and lack of attention to detail "
" "c."Failure to draw a representative sample. "
" "d."The use of attributes sampling instead of variables sampling. "

34. Which of the following comments best illustrates the concept of non-
sampling risk?
" "a."A randomly chosen sample may not be representative of the "
" " "population as a whole on the characteristic of interest. "
" "b."An auditor may select audit procedures that are not appropriate to "
" " "achieve the specific objective. "
" "c."An auditor uses attributes sampling instead of variables sampling. "
" "d."The documents related to the chosen sample may not be available for"
" " "inspection. "

35. At times a sample may indicate that the auditor's assessed level of
control risk for a given control is reasonable when, in fact, the true
compliance rate does not justify the "less than high" level. This
situation illustrates the risk of
" "a. "Assessing control risk too low. "c. "Incorrect rejection. "
" "b. "Assessing control risk too high."d. "Incorrect acceptance. "

36. The consequence of assessing control risk too high relates to the
" "a."Efficiency of the audit. "c."Preliminary estimates of "
" " " " "materiality levels. "
" "b."Effectiveness of the audit. "d."Allowable risk of tolerable "
" " " " "error. "

37. The likelihood of assessing control risk too low is the risk that the
sample selected to test controls:
" "a. "Does not support the auditor's planned assessed level of control "
" " "risk when the true operating effectiveness of the control "
" " "structure justifies such an assessment. "
" "b. "Contains misstatements that could be material to the financial "
" " "statements when aggregated with misstatements in other account "
" " "balances or transactions classes. "
" "c. "Contains proportionately fewer deviations from prescribed "
" " "internal control structure policies or procedures than exist in "
" " "the balance or class as a whole. "
" "d. "Supports the auditor's planned assessed level of control risk "
" " "when the true operating effectiveness of the control structure "
" " "does not justify such an assessment. "

38. While performing a substantive test of details during an audit, the
auditor determined that the sample results supported the conclusion that
the recorded account balance was materially misstated. It was, in fact,
not materially misstated. This situation illustrates the risk of
" "a."Incorrect rejection. "c."Assessing control risk too low."
" "b."Incorrect acceptance. "d."Assessing control risk too "
" " " " "high. "

39. A sampling method that is useful when testing controls is:
" "a. "Non-statistical sampling. "c."Discovery sampling. "
" "b. "Attribute estimation sampling. "d."Stratified random sampling. "

40. If the auditor is concerned that a population may contain exceptions,
the determination of a sample size sufficient to include at least one
such exception is a characteristic
" "a. "Random sampling "c."PPS Sampling "
" "b. "Discovery sampling "d."Variable sampling "

41. S1 Statistical sampling may be applied to test controls when a
client's control procedures leave an audit trail as evidence of
compliance.
S2 For purposes of audit sampling in tests of controls, errors refer to
misstatements.

42. A decrease in the expected population deviation rate will cause the
sample size to:
" "a. "Increase "c. "Remain unchanged "
" "b. "Decrease "d. "Cannot be determined. "

43. This is the deviation rate that an auditor will permit in the
population and would still be willing to reduce the assessed level of
control risk:
" "a. "Population deviation rate. "c."Sample deviation rate. "
" "b. "Tolerable misstatement. "d."Tolerable deviation rate. "

44. Which of the following sampling methods is used to estimate a numerical
measurement of a population, such as a peso value?
" "a. "Attribute sampling. "c."Variables sampling. "
" "b. "Stop-or-go sampling. "d."Random-number sampling. "

45. When selecting samples, a decrease in the tolerable misstatement will
cause the sample size to:
" "a. "Increase "c. "Remain unchanged "
" "b. "Decrease "d. "Cannot be determined. "

46. This is the misstatement that the auditor finds in the sample, adjusted
to estimate the misstatement in the population.
" "a. "Tolerable misstatement. "c. "Projected misstatement. "
" "b. "Sample misstatement. "d. "Anticipated misstatement. "

47. When performing a test of a control with respect to control over cash
receipts, an auditor may use a systematic sampling technique with a start
at any randomly selected item. The biggest disadvantage of this type of
sampling is that the items in the population
" "a."Must be systematically replaced in the population after sampling. "
" "b."May systematically occur more than once in the sample. "
" "c."Must be recorded in a systematic pattern before the sample can be "
" " "drawn. "
" "d."May occur in a systematic pattern, thus destroying the sample "
" " "randomness. "

48. S1 A method of sampling in which all items in the population are
divided into two or more sub-population is known as systematic
sampling.
S2 One of the disadvantages of haphazard sampling is the risk of
conscious bias in the selection of samples.

49. According to PSA 560, "subsequent events" refer to:
" "a. "Events occurring between the period end and the date of the "
" " "auditor's report "
" "b. "Facts discovered after the date of the auditor's report. "
" "c. "Events occurring between the week immediately before the end of the"
" " "period and the date of the auditor's report. "
" "d. "Events occurring between the period end and the date of the "
" " "auditor's report and facts discovered after the date of the "
" " "auditor's report. "

50. Which of the following procedures should an auditor most likely perform
regarding subsequent events?
" "a."Comparing the financial statements being reported on with those of "
" " "the prior period. "
" "b."Investigating changes in accounting department personnel occurring "
" " "after the date of the financial statements. "
" "c."Confirming a sample of material accounts receivable established "
" " "after the date of the financial statements. "
" "d."Inquiring as to whether any unusual adjustments were made after the"
" " "date of the financial statements "

51. After the date of the audit report but before the financial statements
are issued, the auditor becomes aware of a material subsequent event
which requires adjustment in the financial statements. If management
does not amend the financial statements, the audit opinion to be issued
would be:
" "a. "Unqualified opinion with "c."Adverse opinion "
" " "explanation " " "
" "b. "Qualified opinion or adverse "d."Qualified opinion "
" " "opinion " " "

52. When obtaining evidence regarding litigation against a client, the CPA
would be least interested in determining:
" "a."The period in which the underlying causes of litigation occurred. "
" "b."An estimate of when the matter will be resolved. "
" "c."An estimate of the potential loss. "
" "d."The probability of an unfavorable outcome. "

53. The secondary source of information to be reported about litigation,
claims, and assessments is the
" "a. "Client's lawyer "c."Client's management "
" "b. "Court records "d."Independent auditor "

54. Which of the following statements extracted from a client's lawyer's
letter concerning litigation, claims and assessments most likely would
cause the auditor to request clarification?
" "a.""I believe that the company will be able to defend this action "
" " "successfully." "
" "b.""The possible liability to the company is nominal in amount." "
" "c.""This case against the company is without merit!" "
" "d.""The action can be settled for less than the damages claimed." "

55. If a lawyer refuses to furnish corroborating information regarding
litigation, claims, and assessments, the auditor should:
" "a."Honor the confidentiality of the client-lawyer relationship. "
" "B."Seek to obtain the corroborating information from management. "
" "c."Consider the refusal to be tantamount to a scope limitation. "
" "d."Disclose this fact in the notes to the financial statements. "

56. Audit inquiries with the client's legal counsel should cover cases up
to:
" "a. "The balance sheet date "c."The date when the letter was "
" " " " "written "
" "b. "The date of the audit report "d."Cannot be determined "

57. The primary objective of analytical procedures used in the final review
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 determining the reasonableness of the "
" " "financial statements. "
" "d."Satisfy doubts when questions arise about a client's ability to "
" " "continue in existence. "

58. The responsibility for the identification and disclosure of related
parties and related party transactions rests with the:
" "a. "External auditor. "c."Internal audit department "
" " " " "head "
" "b. "Entity management "d."Controller "

59. Which of the following events most likely indicates the existence of
related parties?
" "a."Discussing terms of merger with a company that is a major "
" " "competitor. "
" "b."Making a loan with scheduled terms for repayment "
" "c."Borrowing a large sum of money at a very low interest rate. "
" "d."Selling real estate at a price that differs significantly from its "
" " "carrying value. "

60. An auditor searching for related party transactions should obtain an
understanding of each subsidiary's relationship to the total entity
because:
" "a."This may permit the audit of intercompany account balances to be "
" " "performed as of concurrent dates. "
" "b."The business structure may be deliberately designed to obscure "
" " "related party transactions. "
" "c."This may reveal whether particular transactions would have taken "
" " "place if the parties had not been related. "
" "d."Intercompany transactions may have been consummated on terms "
" " "equivalent to arms' length transactions. "

61. When auditing related-party transactions, an auditor places primary
emphasis on
" "a."Eliminating the effects of related party transactions. "
" "b."Substance over form of the transactions, and disclosure of the "
" " "related-party transactions. "
" "c."Testing the existence of the related parties. "
" "d."Determining the accuracy and classification of the related-party "
" " "transactions. "

62. The responsibility to evaluate the cliednt's assessment of an entity's
ability to continue as a going concern rests with:
" "a. "The auditor "c."The BOA "
" "b. "The entity's management "d."The financial statement users"

63. 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 positive. "
" "b."Share dividends replace annual cash dividends. "
" "c."Significant related party transactions are pervasive. "
" "d."Interest payable in arrears for several months. "

64. Travis, CPA, believes there is substantial doubt about the ability of
Alice Co. to continue as a going concern for a reasonable period of time.
In evaluating Alice Co.'s plans for dealing with the adverse effects of
future conditions and events, Travis most likely would consider, as a
mitigating factor, Alice Co.'s plans to:
" "a."Postpone or cancel research and development projects related to "
" " "future products "
" "b."Accumulate treasury stock at prices favorable to Alice Co.'s "
" " "historic price range "
" "c."Purchase equipment and production facilities currently being leased"
" "d."Negotiate increases in required dividends being paid on preference "
" " "shares "

65. The auditor should obtain evidence of management's acknowledgment of
responsibility for
" "I. "The fair presentation of the financial statements in accordance "
" " "with PSAs "
" "II."Approval of the financial statements "

" "a. "I only "B. "II only "c. "Both I and "D. "Neither I "
" " " " " " "II " "nor II "

66. Which of the following documentation is required for an audit in
accordance with Philippine Standards on Auditing (PSAs)?
" "a. "An internal control questionnaire."c."A client engagement letter. " " "
" "b. "A planning memorandum or "d."A management representation "
" " "checklist. " "letter. "

67. S1 Management representation letters are substitutes for
substantive test procedures.
S2 All members of the client's management are to sign the management
representation letter.

68. Written client representation letters are normally signed by the:
" "a."president and the chairperson of the board. "
" "b."treasurer and the internal auditor. "
" "c."chief executive officer and the chief financial officer. "
" "d."corporate counsel and the audit committee chairperson. "

69. Management representation letters should be dated as of the date of
the:
" "a."Statement of financial position. "c."Completion of the audit "
" "b."Latest interim financial "d."Latest related party "
" " "statements. " "transaction. "

70. Management's refusal to furnish a written representation letter on a
matter, which the auditor considers essential, may lead the auditor to
choose between the issuance of:
" "a."Unqualified or qualified opinion "c."Adverse opinion or disclaimer"
" " " " "of opinion "
" "b."Qualified opinion or Adverse "d."Qualified opinion or "
" " "opinion " "disclaimer of opinion "

71. Which of the following statements is incorrect?
a. PSA 100 states that when an expert is used in the collection and
evaluation of evidence, the practitioner and the expert should
on a combined basis, possess sufficient knowledge of the subject
matter and have adequate proficiency in the subject matter for
the practitioner to determine that sufficient, appropriate
evidence has been obtained. (x)
b. Compilation engagements ordinarily entails reducing detailed
data to a manageable and understandable form without a
requirement to test the assertions underlying that information.
c. According to PSA 200, Objective and General Principles Governing
an Audit of Financial Statements, the professional
responsibilities of an auditor include independence, integrity,
objectivity, confidentiality, professional behavior, technical
standards, and professional competence and due care.
d. PSA 210, Terms of Audit Engagements, applies to audits, reviews,
and other related services.

72. Assurance services are independent professional services that
a. Include a written communication that expresses a conclusions
b. Improve the quality of information, or its context for decision
makers. (x)
c. Include audit services, attest services, and consulting
services.
d. Involve the examination of the credibility of a written
assertion that is the responsibility of another party.

73. Which of the following services would be most likely to be structured
as an attest engagement?
a. Advocating a client's position in tax matter.
b. A consulting engagement to develop a new data-base system for
the revenue cycle.
c. An engagement to issue a report addressing an entity's
compliance with requirements of specified laws. (x)
d. The compilation of client's forecast information.

a. Attendance consists of being present during all or part of a
process being performed by others.
b. Audit evidence will comprise source documents and accounting
records underlying financial statements and corroborating
information from other sources.
c. The characteristics for determining whether criteria are
suitable are relevance, reliability, neutrality and consistency.
(x)
d. Governance describes the role of persons entrusted with the
supervision, control and direction of an entity.

75. The Constitution of the Philippines requires this Office to "keep the
general accounts of the Government and for such period as may be
provided by law, preserve the vouchers pertaining thereto"
a. National Accounting Office
b. Ministry of Finance
c. Auditing units to each bureau or office.
d. Commission on Audit. (x)

76. Which of the following is not required by PSA 200, which states that
professional competence and due care is one of the ethical
responsibilities of an auditor in an audit engagement?
a. observance of the relevant Philippine Standards on Auditing
b. critical review of the audit work performed at every level of
supervision
c. degree of skill commonly possessed by others in the profession
d. responsibility for losses because of errors of judgment (x)

77. The term testing alludes to the concept of
a. A guarantee
b. A certificate
c. Accuracy
d. Sampling (x)

78. An auditor is unable to obtain absolute assurance that misstatements
due to fraud will be detected for all of the following except
a. Employee collusion.
b. Falsified documentation.
c. Need to apply professional judgment in evaluating fraud risk
factors.
d. Professional skepticism. (x)

79. Philippine Standards on Auditing (PSAs)
a. must be followed on every audit, but the auditor may choose an
alternative course of action if it is justifiable (x)
b. must be followed only on those audits which must be submitted to
the SEC
c. are ideal standards that are rarely, if ever, attained
d. must be followed by CPAs who are members of the PICPA, but they
are optional for CPAs who are not members of the PICPA

80. All of the following organizations are represented in both the
Financial Reporting Standards Council (FRSC) and the Auditing and
Assurance Standards Council (AASC), except:
a. Professional Regulatory Board of Accountancy
b. Bangko Sentral ng Pilipinas
c. Bureau of Internal Revenue (x)
d. Commission on Audit

81. PSAs include standards on reporting. Which of the following is not
one of the focus of PSA 700, the Auditor's Report on Financial
Statements?
a. adequacy of informative disclosures
b. circumstances when GAAP are not consistently followed
c. whether statements were prepared in accordance with GAAP
d. sufficient appropriate evidence is to be obtained to support the
audit conclusions (x)

82. Because external auditors are paid fees by their clients, external
auditors
a. are absolutely independent and may conduct audits
b. may be sufficiently independent to conduct audits (x)
c. are never considered to be independent
d. must receive approval of the SEC before conducting audits

83. Which of the following situations best illustrates the application of
professional skepticism?
a. G, CPA, is engaged in discussions with J, the client's
controller. G obtains several oral representations from J,
which the former readily accepts without further work or support
from other audit procedures.
b. G, CPA has decided to continue with the audit of FLS Company.
Throughout the course of the audit, G does not believe any of
the representations made by J, controller.
c. G, CPA, is discussing several audit issues with J, a member of
top management. Throughout the meeting with J, G neither
assumes that J is dishonest, nor assumes unquestioned honesty in
J's oral representations. (x)
d. G, CPA is engaged in discussions with J, the client's
controller, regarding several audit issues. Throughout the
meeting with J, J neither assumes that G is dishonest, nor
assumes unquestioned honesty in G's oral representations.

84. Objectivity refers to a practitioner's ability:
a. To remain impartial. (x)
b. To identify assertions that are appropriate.
c. To be unyielding in all disputes.
d. To choose independently between accounting principles and
auditing standards.

85. Before accepting an engagement to audit a new client, a CPA is
required to obtain
a. An understanding of 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. (x)

86. In financial statement audit, audit risk represents the probability
that
a. internal control fails and the failure is not detected by the
auditor's procedures
b. the auditor unknowingly fails to modify an opinion on
materiality misstated financial statements (x)
c. inherent and control risk cause errors that could be material to
the financial statements
d. the auditor is not retained to conduct financial statement audit
in the succeeding year

87. If the auditor concludes that there is reasonable justification to
change the engagement and if the audit work performed complies with
the PSAs applicable to the changed engagement, the report issued would
be that appropriate for:
a. The original engagement, without reference to the original
engagement.
b. The revised terms of engagement, without reference to the
original engagement. (x)
c. The revised terms of engagement, with reference to the original
engagement.
d. The original engagement, with reference to the revised
engagement.

88. Which of the following services provides the highest level of
assurance to third parties about a company's financial statements?
a. Audit (x)
b. Review
c. Compilation
d. Write-up work

89. When CPA firms do an audit of historical financial statements, part of
the audit usually consists of identifying operational problems and
making recommendations they may benefit the audit client. The
recommendations can be made orally but they are typically made by use
of a
a. Letter of representation
b. Engagement letter.
c. Management letter. (x)
d. Client letter.

90. Which of the following best describes what is meant by the term "fraud
risk factor"?
a. Factors whose presence indicates that the risk of fraud is high.
b. Factors whose presences often have been observed in
circumstances where frauds have occurred. (x)
c. Factors whose presence requires modification of planned audit
procedures.
d. Reportable conditions identified during an audit.

91. The most difficult type of misstatement to detect is fraud based on
a. The over-recording of transactions.
b. The non-recording of transactions. (x)
c. Recorded transactions in subsidiaries.
d. Related party receivables.

92. Which of the following conditions identified during fieldwork of an
audit is most likely to affect the auditor's assessment of the risk of
misstatement due to fraud?
a. Checks for significant amounts outstanding at year end.
b. Computer generated documents.
c. Missing documents. (x)
d. Year-end adjusting journal entries.

93. Which of the following most accurately summarizes what is meant by the
term "material misstatement?"
a. Fraud and direct-effect illegal acts.
b. Fraud involving senior management and material fraud.
c. Material error, material fraud, and certain illegal acts. (x)
d. Material error and material illegal acts.

94. Which of the following is most likely to be a response to the
auditor's assessment that the risk of material misstatement due to
fraud for the existence of inventory is high?
a. Observe test counts of inventory of certain locations on an
unannounced basis. (x)
b. Perform analytical procedures rather than taking test counts.
c. Request that the inventories be counted prior to year-end.
d. Request that inventory counts at the various locations be
counted on different dates so as to allow the same auditor to be
present at every count.

95. Which of the following is not a component of audit planning?
a. Observing the client's annual physical inventory-taking and making test
counts of selected items. (x)
b. Making arrangements with the client concerning the timing of
audit fieldwork and use of the client's staff in completing
certain phases of the examination.
c. Obtaining an understanding of the entity and its environment,
including its internal control.
d. Developing audit programs.

96. In planning an examination, the auditor would consider all of the
following matters, except
a. Anticipated reliance on internal controls
b. Preliminary judgment about materiality levels for audit purposes
c. Financial statements items likely to require adjustment
d. The kind of audit opinion likely to be given (x)

97. In developing the overall audit plan for a new client, a factor not to
be considered is
a. The terms of the engagement and any statutory responsibilities
b. The client's business, including the structure of the
organization and accounting system used
c. The amount of estimated audit fee (x)
d. The audit risks and procedures to be performed to achieve audit
objectives

98. A CPA may reduce audit work on a first time audit by reviewing the
working papers of the predecessor auditor. The predecessor should
permit the successor to review working papers relating to matters of
continuing significance, such as those that relate to
a. Extent of reliance on the work of specialists
b. Fee arrangements and summaries of payments
c. Analysis of contingencies (x)
d. Staff hours required to complete the engagement

99. Following PSAs, which of the following is not one of the assertions
made in financial statements by management concerning each major
account and class of transactions?
a. Relevance. (x)
b. Existence.
c. Valuation.
d. Presentation and disclosure.

100. Assertions are representations of management that are embodied in
financial statement components. They can be either explicit or
implicit. Which of these assertions is not about valuation or
allocation?
a. Property is recorded at historical cost.
b. Trade accounts receivable in the balance sheet are stated at net
realizable value.
c. Notes payable in the balance sheet include all such obligations
of the entity. (x)
d. Property cost is systematically allocated to appropriate
accounting period.

101. Which statement is correct?
a. A review involves the application of audit skills and techniques
and the gathering of evidence. (x)
b. A review comprises inquiry, confirmation, and analytical
procedures which are designed to review the reliability of an
assertion that is the responsibility of one party for use by
another party.
c. In a compilation engagement, the accountant is engaged to use
auditing expertise as opposed to accounting expertise.
d. Since no assurance is expressed in a compilation engagement,
users of compiled information derive no benefit, even when the
service has been performed with due professional skill and care.
102. Adequate planning helps ensure that appropriate attention is devoted:
a b(x) c d

To important areas of the audit Yes Yes Yes
Yes
So that potential problems are
promptly identified Yes Yes No No
So that the work is completed
expeditiously No Yes No Yes

103. Which of the following procedures would an auditor most likely perform
in planning a financial statement audit?
a. Reviewing investment transactions of the audit period to
determine whether related parties were created.
b. Performing analytical procedures to identify areas that may
represent specific risks. (x)
c. Reading the minutes of stockholder and director meeting to
discover whether any unusual transactions have occurred.
d. Obtaining a written representation letter from the client to
emphasize management's responsibilities.

104. A preliminary or entrance conference with the auditee is a useful step
in avoiding misunderstandings. Which of the following items is
usually not covered in a preliminary conference?
a. Special problems known to be relevant to the audit.
b. Extent to which the independent auditor will need assistance and
cooperation from the organization's personnel.
c. Condition of accounting records and other data sources which may
affect the cope of the audit and difficulty of completion.
d. Audit program to be followed. (x)

105. Audit programs generally include procedures necessary to test actual
transactions and resulting balances. These procedures are primarily
designed to
a. Detect irregularities that result in misstated financial
statements.
b. Test the adequacy of internal control.
c. Gather corroborative evidence (x)
d. Obtain information for informative disclosures.

106. A procedure designed to test for peso errors or irregularities
directly affecting the correctness of financial statement balances is
a
a. Substantive test. (x)
b. Compliance test.
c. Test of controls.
d. Definition of peso-unit sampling.

107. The following statements relate to the scope of practice of
accountancy. Which one is correct?
a. Practice in Education/Academe shall constitute in a person in an
educational institution which involve teaching of accounting,
auditing, management advisory services, accounting aspects of
finance, business law, taxation, and other technically-related
subjects. (x)
b. Members of the Integrated Bar of the Philippines are the only
ones allowed to teach business law and taxation.
c. In connection with the practice of accountancy in commerce and
industry, any position in any business or company in the private
sector which requires supervising the recording of financial
transactions, preparation of financial statements, coordinating
with the external auditors for the audit of such financial
statements and other related functions shall be occupied only by
a duly registered CPA, provided that such business or company
must have authorized capital of at least Five Million Pesos
(5,000,000.00) and/or annual revenue of at least Ten Million
Pesos (10,000,000.00).
d. Practice in government shall constitute in a person who holds,
or is appointed to, a position in an accounting professional
group in government or in a government-owned and/or controlled
corporation, excluding those performing proprietary functions,
where decision-making requires knowledge in the science of
accounting.

108. The following, except one, are the duties normally performed by the
engagement partner:
a. To manage the firm.
b. To establish contact with clients.
c. To discuss with the client problems that may arise during the
audit. (x)
d. To decide on questions of policy.

109. Which of the following is not a power of the Professional Regulatory
Board of Accountancy?
a. To prescribe and adopt the rules and regulations necessary for
carrying out the provisions of RA9298
b. To hold exclusive power to administer oaths in connection with
the administration of RA9298 (x)
c. To issue, suspend, revoke, or reinstate the Certificate of
Registration for the practice of the accountancy profession
d. To monitor the conditions affecting the practice of accountancy
and adopt such measures, including promulgation of accounting
and auditing standards, rules and regulations and best
practices, as may be deemed proper for the enhancement and
maintenance of high professional, ethical, accounting and
auditing standards.

110. Which of the following factors or conditions is an auditor least
likely to plan an audit to discover?
a. Financial pressures affecting employees. (x)
b. High turnover of senior management.
c. Inadequate monitoring of significant controls.
d. Inability to generate positive cash flows from operations.

111. Which of the following is the best criterion for evaluating a staff
auditor's work performance?
a. Quantity of deficiency findings.
b. Ability to get along with clients.
c. Working papers appearance.
d. Fulfillment of objectives set forth in the audit. (x)

112. International Standards on Auditing (ISAs) on which the PSAs are based
are generally applicable to the public sector, including government
business enterprises. However, the applicability of the equivalent
PSAs on Philippine public sector entities has not been addressed by
the Auditing Standards and Practices Council (Note: The ASPC has been
replaced by the Auditing and Assurance Standards Council). It is the
understanding of the ASPC that this matter will be addressed by:
a. The Association of CPAs in Public Practice itself in due course.
b. The Commission on Audit itself in due course. (x)
c. The Professional Regulation Commission of the Philippines itself
in due course.
d. The Professional Regulatory Board of Accountancy itself in due
course.

113. Materiality should be considered by the auditor when:
a. Determining the nature, timing and extent of audit procedures
and evaluating the effect of misstatements. (x)
b. Evaluating the effect of misstatements.
c. Determining the nature, timing and extent of audit procedures.
d. Evaluating the effect of misstatements but not when determining
the nature, timing and extent of audit procedures.

114. Which one of the following statements is correct concerning the
concept of materiality?
a. Materiality is determined by reference to guidelines established
by the Philippine Institute of CPAs.
b. Materiality depends only on the peso amount of an item relative
to other fees in the financial statements.
c. Materiality depends on the nature of an item rather than the
peso amount.
d. Materiality is a matter of professional judgment. (x)

115. Pirma and Lang, CPAs, is doing the 2006 audit of SAN MIGUEL BEEF. The
partner assigned to the engagement, Mr. Pirma, works at the Manila
office of the firm. Which of the following audit firm personnel
should obtain a sufficient understanding of San Miguel Beef and its
environment, including its internal control?
a. Assistants assigned to the Manila Office of Pirma and Lang,
CPAs.
b. The whole team assigned to the San Miguel Beef audit engagement.
(x)
c. All firm professionals, regardless of their involvement in the
engagement.
d. Only Mr. Pirma, since is he is the one to sign the audit report
for San Miguel Beef's 2006 financial statements.

116. The following statements relate to Councils mentioned in the
Implementing Rules and Regulations of the Philippine Accountancy Act
of 2004. Which of these statements is incorrect?
a. The Chairpersons of the FRSC and the AASC shall both be
appointed by the Professional Regulation Commission.
b. Any member of any existing accounting and auditing standard-
setting council shall not be disqualified from being appointed
to the FRSC and the AASC as the case may be for the terms
provided herein.
c. The Education Technical Council was created to assist the
Professional Regulation Commission in carrying out its powers
and functions and to further assist in the attainment of the
objective of continuously upgrading the accountancy education in
the Philippines. (x)
d. The PRC CPE Council shall be composed of a chairperson and two
(2) members.

117. Auditing standards require the auditor to obtain an understanding of
the client's internal controls
a. for every audit (x)
b. for first-time audits
c. sufficient to find any frauds which may exist
d. whenever it would be appropriate

118. Which of the following best describes the interrelated components of
internal control?
a. Organizational structure, management philosophy, and planning.
b. Control environment, risk assessment, control activities,
information and communication systems, and monitoring. (x)
c. Risk assessment, backup facilities, responsibility accounting
and natural laws.
d. Legal environment of the firm, management philosophy and
organizational structure.

119. An auditor should obtain sufficient knowledge of an entity's
information system relevant to financial reporting to understand the
a. Safeguards used to limit access to computer facilities
b. Process used to prepare significant accounting estimates (x)
c. Procedures used to assure proper authorization of transactions
d. Policies used to detect the concealment of fraud

120. Internal control cannot be designed to provide reasonable assurance
regarding the achievement of objectives concerning
a. Reliability of financial reporting
b. Elimination of all fraud (x)
c. Compliance with applicable laws and regulations
d. Effectiveness and efficiency of operations

121. The following statements relate to reinstatement, reissuance and
replacement of revoked or lost certificates. Which one of these
statement(s) is(are) correct?
(1) The Board may, after the expiration of two (2) years from the
date of revocation of a certificate of registration and upon
application and for reasons deemed proper and sufficient,
reinstate the validity of a revoked certificate of registration and
in so doing, may, in its discretion, exempt the applicant from
taking another examination.
(2) A new certificate of registration to replace lost,
destroyed, or mutilated certificate/license may be issued,
subject to the rules promulgated by the Board and the Commission,
upon payment of the required fees.
(3) The Board shall issue a resolution, subject to the
approval of the Commission in granting a petition for
reinstatement to the practice of accountancy.

a. (1) and (2)
b. (1) and (3)
c. (2) and (3)
d. (1), (2), and (3) (x)

122. Experience has shown that certain conditions in an organization are
symptoms of possible management fraud. Which of the following
conditions would not be considered indicators of possible fraud?
a. Managers regularly assuming subordinates' duties.
b. Managers dealing in matters outside their profit center's scope.
c. Managers not complying with corporate directives and procedures.
d. Managers subject to formal performance reviews on a regular
basis. (x)

a. Internal auditing relates to audit which serves the needs of
management.
b. Government auditing often extends beyond examinations leading to
the expression of opinion on the fairness of financial
presentation and includes audits of efficiency, effectiveness
and compliance.
c. A compliance audit is designed to evaluate the efficiency and
effectiveness of an organization or some part thereof. (x)
d. CPA firms, internal auditors and governmental auditors can
perform operational audits.

124. A comprehensive and constructive examination of the organizational
structure of a company, institution, or branch of government or any
component thereof, its plans and objectives, its means of operation
and its use of human and physical facilities to reveal defects or
irregularities and to indicate possible improvements is called
a. Financial audit
b. Management audit (x)
c. Government audit
d. Internal audit

125. In an audit situation, communication between the successor and
predecessor auditors should be
a. Documented in an engagement letter.
b. Acknowledged in a representation letter.
c. Initiated by the successor auditor. (x)
d. Written and included in the audit report.

126. An auditor who has been invited to submit a proposal for an audit
engagement is a
a. Predecessor auditor.
b. Successor auditor. (x)
c. Principal auditor.
d. Interim auditor.

127. JM, CPA, requested permission to communicate with the predecessor
auditors of a prospective client. The prospective client's refusal to
permit this will bear directly on JM's decision concerning the
a. Adequacy of the preplanned audit program
b. Ability to establish consistency in application of accounting
principles between years.
c. Apparent scope limitation.
d. Integrity of management. (x)

128. The auditors will not ordinarily initiate discussion with the audit
committee concerning the
a. Extent to which the work of internal auditors will influence the
scope of the examination.
b. Extent to which change in the company's organization will
influence the scope of the examination.
c. Details of potential problems which the auditors believe might
cause a qualified opinion.
d. Details of the procedures which the auditors intend to apply.
(x)

129. The policy on delegation states that there is to be sufficient
direction, supervision and review of work at all levels to provide
reasonable assurance that the work performed meets appropriate
standards of quality. These procedures include the following, except:
a. Provide for the approval of the scheduling and staffing of the
audit by the auditor. (x)
b. Provide procedures for planning audits.
c. Provide procedures for maintaining the firm's standards of
quality for the work performed.
d. Provide on-the-job training during the performance of audits.

130. According to the IRR, how many representatives of the Quality Review
Committee will come from the accredited national professional
organization of CPAs?
a. Five members (x)
b. Four members
c. Six members
d. Seven members

a. Per PSA 220, the auditor means the person with the final
responsibility for the audit.
b. The auditor should implement those quality control procedures
which are, in the context of the policies and procedures of the
firm, appropriate for the individual audit.
c. The work performed by each assistant needs to be reviewed by
personnel of at least equal competence.
d. The procedures on skills and competence include those for
hiring, for professional responsibilities and for advancement.
(x)

132. The following fraud risk factors relate to industry conditions,
except:
a. New accounting, statutory or regulatory requirements that could
impair the financial stability or profitability of the entity.
b. A high degree of competition or market saturation, accompanied
by declining margins.
c. Unusually rapid growth or profitability, especially compared
with that of other companies in the same industry. (x)
d. A declining industry with increasing business failures and
significant declines in customer demand.

133. If there is a risk of material misstatement resulting from fraud that
may involve or result in improper revenue recognition, which of the
following is the most appropriate course of action for the auditor to
take?
a. Review the entity's inventory records to help identify
locations, areas or items for specific attention during or after
the physical inventory count.
b. Confirm with customers certain relevant contract terms and the
absence of side agreements. (x)
c. Perform tests of non-standard journal entries affecting long-
term liabilities to confirm that they are adequately supported
and reflect the underlying events and transactions.
d. Request the assistance of an expert, taking care to ensure that
the expert's assumptions, methods or findings have also been
reviewed by the auditor.

134. When evaluating the possible effect of noncompliance on the financial
statements, the auditor considers the following, except:
a. The potential financial consequences, such as fines, penalties,
damages, threat of expropriation of assets, enforced
discontinuation of operations, and litigation.
b. Whether the auditor should be held responsible for preventing
such non-compliance. (x)
c. Whether the potential financial consequences require disclosure.
d. Whether the potential financial consequences are so serious as
to call into question the fair presentation given by the
financial statements.

135. According to the Implementing Rules and Regulations, which portion of
RA9298 embodies the legislative intent in enacting the Philippine
Accountancy Act of 2004?
a. Short title.
b. Objectives.
c. Declaration of policy (x)
d. Scope of practice.

136. Practice of public accountancy shall constitute in a person, be it
his/her individual capacity, or as a partner or as a staff member in
an accounting or auditing firm, holding out himself or herself as one
skilled in the knowledge, science and practice of accounting, and as a
qualified person to render professional services as a CPA, or offering
or rendering, or both, to more than one client on a fee basis or
otherwise, services such as the following, except:
a. The audit or verification of financial transactions and
accounting records.
b. The preparation, signing or certification for clients of reports
of audit, balance sheet, and other financial, accounting and
related schedules, exhibits, statements or reports which are to
be used by stockholders or for publication or for credit
purposes, or to be filed with a court or government agency, or
to be used for any other purpose.
c. The design, installation, review, and revision of accounting
systems and controls.
d. When he/she represents clients before government agencies on tax
and other matters outside the province of accounting. (x)

137. The following statements pertain to the rules and regulations on the
accreditation of individual CPAs, firms and partnerships of CPAs
engaged in the public practice of accountancy. Which one is correct?
a. Within sixty days from the effective date of the revised rules
and regulations, individual CPAs, firms, and partnerships of
CPAs who/which are not yet registered shall register with the
Board and the Commission in the manner provided for in the
Implementing Rules and Regulations of the Philippine Accountancy
Act of 2004.
b. The registration shall be valid for a period of two years.
c. Renewal of registration shall be made every three years on or
before November 30 on the year of expiry upon compliance with
the requirements set forth in the Implementing Rules and
Regulations.
d. The registration of applicants approved during any month of the
year shall expire on the third year following its approval. (x)

138. Individual CPAs, firms, and partnerships of CPAs organized after the
effective date of the revised rules and regulations set forth in Annex
A of the IRR shall register with the board and the commission and:
a. Shall not commence the practice of public accountancy until a
valid Certificate of Registration has been issued. (x)
b. Shall not commence the practice of public accountancy until a
valid Certificate of Commissioning has been issued.
c. Subject to favorable recommendation of the Board, shall be
issued the corresponding certificate of registration to practice
public accountancy, with such certificate being valid for two
years.
d. Subject to favorable recommendation of the Commission, shall be
issued the corresponding certificate of registration to practice
public accountancy, with such certificate being valid for three
years.

a. The auditor should plan the audit so that the engagement will be
performed in an effective manner.
b. Planning an audit involves establishing the overall audit
strategy for the engagement and developing the audit report, in
order to reduce audit risk to an acceptably low level. (x)
c. Planning involves the engagement partner and other key members
of the engagement team to benefit from their experience and
insight and to enhance the effectiveness and efficiency of the
planning process.
d. Planning is not a discrete phase of an audit, but rather a
continual and iterative process that often begins shortly after
(or in connection with) the completion of the previous audit and
continues until the completion of the engagement.

140. In performing MAS engagement, CPAs should not take any positions that
might
a. Constitute advice and assistance.
b. Provide technical assistance in implementation.
c. Result in new organizational structure.
d. Impair their objectivity. (x)

141. The overall attitude and awareness of an entity's board of directors
concerning the importance of the internal control structure usually is
reflected in its
a. computer-based controls
b. system of segregation of duties
c. control environment (x)
d. safeguards over access to assets

a. Competence as a CPA includes having the required technical
qualifications to perform an audit engagement.
b. Generally accepted auditing standards are best described as the
conventions, rules and procedures that are necessary to define
the accepted accounting practices at a particular time. (x)
c. Generally, evidential matter is considered sufficient when there
is enough of it to afford a reasonable basis for an opinion.
d. An annual report is a document, which an entity ordinarily
issues on an annual basis, which includes its financial
statements together with the audit report thereon.

143. The following statements relate to the Philippine Institute of
Certified Public Accountants (PICPA). Which one is incorrect?
a. A director can only represent a sector in a region if he/she has
been a member in good standing in such sector in the region for
at least two years at the time of his/her nomination.
b. There shall only be fourteen national directors, unless there is
a valid reason to have additional representation. (x)
c. The national directors shall be apportioned according to sectors
in the four geographic sectors based on the ratio of latest
available number of members in good standing from those areas.
d. It shall have a full-time career Executive Director who shall
implement the policies promulgated by the PICPA Board of
Directors and shall have direct supervision over the PICPA
Secretariat.

144. Which of the following cases illustrate a violation of the provisions
of RA9298 and its IRR regarding the rule on temporary and special
permits?
a. F, foreign CPA, is internationally recognized as one of the
foremost experts in computerized fraud audits. In the judgment
of the Board of Accountancy, obtaining the services of F is
essential for the advancement of accountancy in the Philippines.
F is granted a temporary/special permit to provide training to
Filipino auditors regarding the finer points of his
specialization, and his permit is restricted to this particular
engagement.
b. L, foreign CPA, is called for a specific purpose which, in the
judgment of the Board of Accountancy, is essential for the
development of the country. L is granted a temporary/ special
permit to practice for the particular work that he is being
engaged. There is no Filipino CPA qualified for such specific
purpose.
c. C, foreign CPA, is called for consultation, which, in the
judgment of the Board of Accountancy, is essential for the
development of the country. C is granted a temporary/ special
permit to practice for the particular consultation that she is
being engaged. There is no Filipino CPA qualified for such
consultation.
d. S, foreign CPA, is engaged as professor in special international
accounting modules which are essential to accountancy education
in the Philippines. She was given a temporary/special permit
which restricts her practice to teaching and performing
compilation work for local enterprises. (x)

145. The following except one, are examples of the type of information that
may come to the auditor's attention that may indicate that
noncompliance with laws or regulations has occurred:
a. Investigation by government departments or payment of fines or
penalties.
b. Payments for unspecified services or loans to consultants,
related parties, employees or government employees.
c. Purchasing at prices approximating market price. (x)
d. Existence of an accounting system which fails, whether by design
or by accident, to provide an adequate audit trail or sufficient
evidence.

146. Eugene, CPA is planning the audit of Ghostfighter Corporation's 2006
financial statements. In documenting the terms of engagement, which
of the following statements is most likely to appear in Eugene's
engagement letter?
a. "Fees for our services are based on our regular per diem rates,
plus travel and other out-of pocket expenses and a certain
percentage of the tax savings as a result of audit adjustments
to net income."
b. "Because of the test nature and other inherent limitations of an
audit, together with the inherent limitations of any accounting
and internal control system, there is an unavoidable risk that
even some material misstatements may remain undiscovered." (x)
c. "During the course of our audit, we may observe opportunities
for economy in, or improved controls over your operations."
d. "In addition to our report on the financial statements, we
expect to provide you with a separate letter concerning any
material weaknesses in accounting and internal control systems
which did not come to our notice."

147. The following statements pertain to audit planning and materiality.
Which one is incorrect?
a. The extent of planning will vary according to the size of the
entity, the auditor's experience with the entity and knowledge
of the business, and the complexity of the audit engagement.
b. Materiality provides a threshold or cut-off point rather than
being a primary qualitative characteristic which information
must have if it is to be useful.
c. Materiality is most useful in assessing the scope of an
auditor's program relating to various amounts.
d. An overall audit program is first prepared, followed by the
development of the overall audit plan and the establishment of
an overall audit strategy. (x)

148. The auditor's duty of confidentiality would ordinarily preclude the
reporting of fraud or error to a third party. However, in certain
circumstances, the duty of confidentiality is justifiably overridden
by the following, except:
a. Law.
b. Statute.
c. Courts of law.
d. Pressure from a competitor of the audit client. (x)

149. Which of the following statements is correct?
a. A profession is distinguished by certain characteristics, one of
which is the collection of fees for services rendered and the
fee is based on written agreements with the client.
b. Retainer fee basis is the method of billing clients whereby the
billing is done on the basis of actual time spent by the staff
multiplied by the hourly rates agreed upon.
c. The sole proprietorship, corporate, and partnership forms of
business organization are the only allowable legal forms of
public accounting practice in the Philippines.
d. The Securities and Exchange Commission shall not register any
corporation organized for the practice of public accountancy.
(x)

150. The audit procedures deemed necessary in the circumstances to achieve
the objective of the audit refer to:
a. Audit program
b. Audit objective
c. Substantive procedures
d. Scope of an audit (x)

Auditing Theory Reviewer

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