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CPA PRACTICE SET 2017

SEPTEMBER 28, 2017 · PUBLIC

PHILIPPINE ACCOUNTANCY ACT OF 2004 (RA9298)

1. The Professional Regulatory Board of Accountancy shall be

composed of a chairman and (LIST A) members to be
appointed by the President of the Phils. from a list of (LIST B)
recommendees for each position and ranked by the
Commission, from a list of five (5) nominees for each position
submitted by <LIST C>.

LIST A LIST B LIST C

a. 6 5 BOA,

b. 7 5 PRC

c. 7 3 PICPA

d. 6 3 APO

Answer: d

2. The PICPA shall submit its nominations with supporting

documentation

a. Within 60 days prior to the expiry of the term of an

incumbent member or chairman

b. Within 90 days prior to the expiry of the term of an

incumbent member or chairman

c. Not later than 60 days prior to the expiry of the term of an

incumbent member or chairman

d. Not later than 90 days prior to the expiry of the term of an

incumbent member or chairman

Answer: c

3. Which of the following statements about the composition of

the Board of Accountancy is incorrect?

a. The four sectors in the practice of accountancy shall as much

as possible be equitably represented in the Board.

b. The Board shall be composed of a chairman and six

members.

c. The members of the Board shall be appointed by the

President of the Philippines from a list of three recommendees
for each position and ranked by the Commission, from a list of
five nominees for each position submitted by Accredited
Professional Organization (APO).

d. d. The Board shall elect a vice- chairman from among its

members to serve for a term of three years.

Answer: d

4. The following statements relate to the term of office of the

chairman and the members of the Board of Accountancy
(BOA).

I. No person who has served two (2) successive complete terms

shall be eligible for reappointment until the lapse of one (1)
year

II. Appointment to fill up an unexpired term is not to be

considered a complete term

III. A person may serve in the Board of Accountancy for eight

consecutive years.

IV. A person may serve in the Board for more than 12 years.

a. All statements are true c. Only IV is false

b. All statements are false d. Only I and II are true

Answer: d

5. Which of the following is not among the qualifications of a

member of the Board of Accountancy?

a. He/ She must have at least 10 years of experience in the

practice of accountancy

b. He/ She must be a natural-born CPA and a resident; of the

Philippines

c. He/ She must not be a director or officer of the accredited

national professional organization at the time of appointment.

d. He/ She must not have any direct or indirect pecuniary

interest in any school offering BS Accountancy degree

Answer: b

6. Which of the following is not a valid ground for suspension

or removal of a member of the Board. of Accountancy?

a. Being investigated of a crime involving moral turpitude.

b. Neglect of duty or incompetence

c. Manipulating the CPA licensure examination results.

d. Violating RA9298.

Answer: a

7. The standard setting body created by the PRC to promulgate

accounting standards that will be generally accepted in the
Philippines is known as

a. Financial Reporting Standards Council (FRSC)

b. Auditing Standards and Practices Council (ASPC)

c. Accounting Standards Council (ASC)

d. Auditing and Assurance Standards Council (AASC)

Answer: a

8. The Financial Reporting Standards Council shall be

composed of a chairman and

a. 14 members b. 17 members c. 8 members d. 15 members

Answer: a

9. The sector that is most represented in the Auditing and

Assurance Standards Council is the

a. Commerce and Industry c. Public Practice

b. Academe d. Government

Answer: c

10. Which of the following is not represented in the FRSC?

a. ACPAPP

b. FINER

c. Commission on Audit

d. Securities and Exchange Commission

Answer: a

11. The term of office of each member of AASC and FRSC is

a. 2 years, renewable c. 3 years, non renewable

b. 4 years, non renewable d. 3 years, renewable

Answer: d

12. Which of the following statements about Accounting

Standard Setting Council is correct?

a. The accounting standard setting body is known as

Accounting Standards Council (ASC).

b. The accounting standard setting body is composed of a

chairman and fifteen members.

c. The chairman and members of the standard setting council

shall be appointed by the Commission upon the
recommendation of the Board in coordination with the
accredited national professional organization.

d. The public accounting practice is the sector that is most

represented in the accounting standard setting council.

Answer: c

13. Which of the following best describes the function of

Auditing and Assurance Standards Council?

a. To monitor full compliance by auditors to PSAs

b. To promulgate auditing standards, practices and procedures

that shall be generally accepted by the accounting profession in
the Philippines

c. To assist the Board of Accountancy in conducting

administrative proceedings on erring CPAs in public practice

d. To undertake continuing research on both auditing and

financial accounting in order to make them responsive to the
needs of the public

Answer: b

14. The following are represented both to the Financial

Reporting Standards Council (FRSC) and Auditing and
Assurance Standards Council (AASC), except

a. Commission on Audit

b. Bureau of Internal Revenue

c. Securities and Exchange Commission

d. Board of Accountancy

Answer: b

15. The following statements relate to the RA9298. Which

statement is true?

a. Within two years, subject to certain conditions, the Board of

Accountancy may order the reinstatement of a CPA whose
certificate of registration has been revoked.

b. The Professional Regulation Commission has the authority

to remove any member of the Board of Accountancy for
negligence, incompetence, or any other just cause.

c. Insanity is not a ground for proceeding against a CPA.

d. No person shall be appointed as a member of the Board of

Accountancy unless he has been in the practice of accountancy
for at least 10 years, among others.

Answer: d

16. The following are the qualifications of applicants for CPA

Examinations; except

I. Must be a natural born Filipino citizen

II. Must be a BS Accountancy degree holder

III. Must be of good moral character

IV. Must be at least 21 years old

a. I only b. II and TV c. IV only d. I and IV

Answer: d

17. Which of the following statements is correct?

a. Any candidate who fails in two (2) complete CPA board

examinations will no longer be allowed to take another set of
examination.

b. Any candidate who fails in two (2) complete CPA board

examinations shall be disqualified from taking another set of
examinations unless he/she submits evidence to the
satisfaction of the Board that he/she enrolled in and completed
at least 21 units of subjects given in the licensure examination.

c. The examination in which the candidate was conditioned and

the removal examination on the subject in which he/she failed
shall be counted as one complete examinations.

d. The refresher course should be completed within two (2)

years from the preceding examination.

Answer: c

18. The Board of Accountancy shall submit to the PRC the

ratings obtained by each candidate within days after the
examination, unless extended for just cause.

a. 10 b. 5 c. 2 d. 3

Answer: a

19. Which of the following shall be issued to a candidate who

passes the CPA licensure examination?

a. Certificate of accreditation to practice public accountancy

and PRC ID:

b. Personal identification card and a certificate of accreditation

to practice public accountancy

c. Certificate of registration and professional identification card

d. Certificate of full compliance and PRC ID.

Answer: c

20. The Board of Accountancy may issue certificate of

registration and professional identification card to any
successful examinee:

a. Of unsound mind

b. Convicted by a court of political offense.

c. Guilty of immoral or dishonorable conduct.

d. Who has falsely represented himself/ herself in his /her

application for , examination.

Answer: b

21. The following statements relate to roster of CPAs. Identify

the incorrect statement.

a. A roster showing the names and place of business of all

registered CPAs shall be prepared and updated by the Board.

b. Copies of the roster shall be made available to any party as

may be deemed necessary.

c. The Board, upon approval of the Commission, may delegate

the preparation of this roster to the APO.

d. The publication of the roster in the official gazette or in any

major newspaper of public circulation shall be deemed
compliance with the requirement of RA 9298.

Answer: d

22. Any person who shall violate any of the provisions of the
Accountancy Act or any of its implementing rules and
regulations promulgated by the Board of Accountancy subject
to the approval of the PRC, shall upon conviction , be punished
by

a. Lethal injection

b. A fame of not more than P50,000

c. An imprisonment for a period not exceeding two years

d. Both b and c.

Answer: c

23. PRC- CPE Council differs from AASC and FRSC in that

a. PRC-CPE Council members are appointed by the

Commission.

b. PRC-CPE Council is composed of a chairman and 14

members

c. The chairperson of PRC-CPE Council is elected by the

members of the Board from among themselves.

d. PRC-CPE Council members are co-terminus with the

President of the Philippines.

Answer: c

24. Which of the following statements is correct about the PRC-

CPE Council?

a. The Council shall be composed of six members and a

chairperson.

b. The Council shall be composed of two members and a

chairperson.

c. The members of the Council shall be appointed by the

Commission upon recommendation of the Board in
coordination with APO.

d. The chairperson and members of the Council shall have a

term of three years renewable for another term.

Answer: b

25. Which statement is correct regarding CPF, requirements for

renewal of professional license?

a. The total CPE credit units required for CPAs shall be sixty
(60) units for three (3) years, provided that a minimum of
twenty (20) credit units shall be earned in each year.

b. A registered professional shall be permanently exempted

from CPE requirements upon reaching the age of 60 years old.

c. A registered professional who is working abroad shall be

temporarily exempted from compliance with CPE requirement
during his/her stay abroad, provided that he/she is has been
out of the country for at least one year immediately prior to the
date of renewal.

d. Those who failed to renew professional licenses for a period

of five (5) continuous years from initial registration, or from
last renewal shall be declared delinquent.

Answer: d

26. Unless otherwise exempted, registered CPAs in the practice

of accountancy who have not completed the CPE requirements
shall

a. Be dropped from the roster of CPAs.

b. Not be allowed to renew their professional licenses.

c. Present evidence to the satisfaction of the Board that they

have the necessary knowledge, skills and experience to
discharge their professional responsibility.

d. Submit a letter addressed to the Board indicating the reasons

for not complying with the CPE requirements.

Answer: b

27. How many credit units per hour will be earned by a

participant in a CPE seminar?

a. 1 CU per hour c. 3 CU per hour

b. 5 CU per hour d. 2 CU per hour

Answer: a

28. Who is not permitted by RA 9298 to practice public

accountancy?

a. A general partnership.

b. A limited liability partnership.

c. A sole proprietorship.

d. A corporation, whose stockholders are all CPAs.

Answer: d

29. According to RA 9298, if a partner in a two-member

partnership dies, the surviving partner may continue to
practice as an individual under the existing firm title which
includes the deceased partner's name.

a. For a period of time not to exceed five years.

b. For a period of time not to exceed two years.

c. Indefinitely.

d. Until the partnership pay-out to the deceased partner's

estate is terminated.
Answer: d

30: A CPA shall not practice under a full name that includes or
indicates the following, except

a. Fictitious name

b. Specialization

c. Misleading as to the type of organization

d. Name(s) of past partner(s) in the firm name of the successor

partnership.

Answer: d

31. Below are names of four CPA firms and pertinent facts
relating to them. Unless otherwise indicated, the individuals
named are CPAs and partners and there are no other partners.
Which firm name and related facts indicate a violation of the
Philippine Accountancy Act of 2004?

a. Binhi, Binti and Bigti, CPAs (Bigti died about 5 years ago;
Binhi and Binti are continuing the firm.)

b. Tiu and Ramos, CPAs ( The name of R. Hermosilla, CPA, a

third partner is omitted from the firm name.)

c. Bitay and Bigo, CPAs (Bitay died about three years ago; Bigo
is continuing the firm as a sole practitioner.)

d. R. Hermosilla and Co., CPAs (R. Hermosa'a has ten other

partners who are all CPAs)

Answer: c

32. CPAs, firms and partnerships of CPAs engaged in the

practice of public accountancy including partners and staff
members thereof, shall register with the Commission and the
Board, such registration to be renewed every three years on or
before

a. April 15 c. December 31

b. September 30 d. May 31

Answer: b

33. Which of the following is not one of the functions of the

Board of Accountancy?

a. To supervise the registration, licensure and practice of

accountancy in the Philippines

b. To issue, suspend, revoke, or reinstate the certificate of

registration for

the practice of the accountancy profession

c. To prescribe and/or adopt a code of ethics for the practice of

accountancy

d. To adopt an official seal of the Commission.

Answer: d

34. The letters "CPA" shall be engraved in what part of the

CPA's seal?

a. Upper portion of the space between the bigger and smaller

circle.

b. Lower portion of the space between the bigger and smaller

circle.

c. Left and right portion of the space between the bigger and
smaller circle and in the middle of the smaller circle.

d. Middle of the smaller circle.

Answer: d

35.Which of the following is not one of the functions of the

Board of Accountancy as specified in the RA 9298?

a. To look from time to time into the conditions affecting the

practice of the accountancy profession.

b. To appoint members of the AASC r c

c. To investigate violations of RA 9298 and its IRRs.

d. To determine and prescribe minimum requirements leading

to the admission of candidates to the CPA examination.

Answer: b

36. A CPA certificate is evidence of

a. Independence as a professional.

b. Basic competence at the time of certification.

c. Membership in the accredited association.

d. Completion of continuing professional education program.

Answer: b

37. A certificate of accreditation shall be issued to certified

public accountants in public practice only upon showing, in
accordance with rules and regulations promulgated by the
Board and approved by the Commission, that such registrant
has acquired how many years of meaningful experience in any
of the areas of public practice?

a. One b. Two c. Three d. Four

Answer: c

38 and 39 are based on the following information:

38. and Co. CPAs, was approved on April 30, 2016; the
registration shall expire on
a. September 30, 2018. c. April 30, 2019.

b. September 30, 2019. d. December 31, 2018

Answer: d

39. Which of the following is one of the reasons for not issuing
a certificate of registration to a successful examinee? The
individual:

a. Is of unsold mind.

b. Had been guilty of immoral and dishonorable conduct.

c. Had been convicted by a court of a criminal offense involving

moral turpitude.

d. All of the given choices.

Answer: a

40. A CPA whose certificate of registration has been revoked:

a. Can no longer be reinstated.

b. Is automatically reinstated as a CPA by the PRC after two

years if he has acted in an exemplary manner.

c. May be reinstated by the Professional Regulation

Commission after two years if he has acted in an exemplary
manner.

d. May be reinstated as a CPA by the Board of Accountancy

after two years if he has acted in an exemplary manner.

Answer: d

41. A Professional Identification Card bearing the registration

number, date of issuance, expiry date, duly signed by the
chairperson of the Commission, shall be issued to every
registrant renewable every
a. Two years b. Three years c. Four years d. Five years

Answer: b

AUDIT RELATED SERVICES

1. The degree of certainty that the practitioner has attained and

wishes to convey is called:

a. Assurance c. Audit risk

b. Precision d. Materiality

Answer: a

2. Which of the following is not included among the Auditing

and Assurance Standards Council (AASC) pronouncements?

a. Philippine Standards on Auditing

b. Philippine Standards on Review Engagements

c. Philippine Standards on Compilation Engagements

d. Philippine Standards on Related Services

Answer: c

3. According to AASC pronouncements, audit related services

include:

a. Review c. Examination

b. Consultancy d. Compilation

Answer: d

4. Which of the following services is covered by AASC

pronouncements?

a. Taxation c. Management Advisory

b. Consultancy d. Agreed-upon procedures

Answer: d

5. Which of the following services provides the highest level of

assurance?

a. Audit c. Review

b. Agreed-upon procedures d. Compilation

Answer: a

6. When performing a review of financial statements, a CPA is

required to

a. Apply analytical procedures and make inquiries from third

by sending confirmation letters.

b. Assess the effectiveness of the client's accounting and

internal control systems.

c. Obtain corroborative evidence to support management's

responses to inquiries.

d. Obtain understanding of the client's business and industry.

Answer: d

7. Which of the following procedures is not included in a review

engagement of .

a non-public entity? a. inquiries of management

b. inquiries regarding subsequent events

c. procedures designed to identify unusual fluctuations

d. studying and evaluating the client's internal control

Answer: d

8. The objective of an agreed upon-procedures engagement is

for the auditor to:
a. Carry out procedures of an audit nature to which the auditor
and the entity and any appropriate third parties have agreed
and to report on factual findings.

b. Carry out procedures of a review nature to which the auditor

and the entity and any appropriate third parties have agreed
and to report on factual findings.

c. Carry out procedures of a review nature and to express

limited assurance based on those agreed procedures.

d. Carry out procedures of an audit nature and is express

limited assurance.

Answer: a

9. A report on factual findings is the end product of the auditor

when performing

a. Examination c. Review

b. Audit d. Agreed-upon procedures

Answer: d

10. Engagement to apply agreed-upon procedures on certain

accounts within a financial statement may be-accepted
provided

a. The CPA has expressed opinion on the financial statements

taken as a whole.

b. The CPA takes full responsibility for the adequacy of the

procedures to be performed.

c. The CPA provides only a limited assurance about the

reliability of the financial statements.

d. The distribution of the report is limited only to specified

parties involved.
Answer: d

11. A CPA may accept an engagement to apply agreed-upon

procedures on specified element of financial statements
provided

a. An audit of the financial statements taken as a whole is also

performed.

b. The CPA will issue an opinion on the specified element.

c. An examination of the-specified element is also conducted.

d. The client takes full responsibility for the procedures to be

performed.

Answer: d

12. Which of the following ethical principles does not apply to

an agreed-upon procedure engagement?

a. Independence

b. Confidentiality

c. Professional behavior.

d. Professional competence and due care.

Answer: a

13. What level of assurance does an accountant give on a

compilation report?

a. None c. Low

b. Moderate d. High

Answer: a

14. Which of the following procedures would an accountant

most likely perform in a compilation engagement?
a. assemble financial information

b. apply analytical procedures

c. assess risk components

d. test the accounting records

Answer: a

15. The procedures employed in doing compilation are:

a. Designed to enable the accountant to express a limited

assurance

b. Designed to enable the accountant to express a negative

assurance

c. Not designed to enable the accountant to express any form of

assurance

d. Less extensive than review procedures but more extensive

than agreed-upon procedures

Answer: c

16. Which of the following is incorrect about a compilation

engagement?

a. The CPA uses his auditing expertise to collect, classify and

summarize financial information.

b. The engagement ordinarily entails reducing detailed data to

a manageable and understandable form.

c. The CPA should exercise due care

d. The procedures performed do not enable the accountant to

express any form of assurance

Answer: a

17. What level of assurance does the CPA provide under the
following engagements?

Agreed-upon

Audit Review procedure Compilation

a. High Moderate None None

b. High Limited Low None

c. Moderate Moderate None None

d. Reasonable Negative None Low

18. The use of negative assurance in audit reports on financial

statements is

a. A violation of the professional standards.

b. Encouraged by PICPA

c. A help in clarifying the degree of responsibility being

assumed by the auditor.

d. Properly located in the opinion paragraph of the unqualified

report.

Answer: a

19. When an independent CPA is associated with the financial

statements of a publicly held company but has not audited or
reviewed the financial statements, the appropriate form of
report that must be issued must include

a. negative assurance c. disclaimer of opinion

b. compilation opinion d. explanatory paragraph

Answer: c

20. The statement that nothing came to our attention which

would indicate that these statements are not fairly presented
expresses which of the following?

a. disclaimer of opinion c. negative confirmation

b. negative assurance d. adverse report

Answer: b

21. A CPA who is not independent may issue a

a. Review report

b. Special report

c. Report expressing a qualified opinion

d. Compilation report

Answer: d

22. A CPA should perform analytical procedures when engaged

to

I Audit II Review III Compile

a. Yes, Yes, Yes c. No, Yes, No

b. Yes, Yes, No d. Yes, No, No

Answer: b

23. Auditors of public companies are often requested to report

on interim financial statements. A review of interim financial
information consists primarily of

a. Vouching and tracing c. Inquires and analytical procedures

b. Reconciling and reforming d. Confirmation and observation

Answer: c

24. What level of assurance does an auditor provide in an

engagement to perform agreed-upon procedures?
a. High but not absolute assurance

b. Limited assurance

c. Moderate assurance

d. No assurance

Answer: d

25. When an independent CPA assists in preparing the

financial statements of a publicly held entity, but has. not
audited or reviewed them, the CPA should issue a disclaimer of
opinion. The CPA has no responsibility to apply any procedures
beyond

a. Ascertaining whether the financial statements are in

conformity with generally accepted accounting principles

b. Determining whether management has elected to omit

substantially all required disclosures

c. Documenting that internal control is not being relied on.

d. Reading the financial statements for obvious mistakes in

application of PFRS

Answer: b

26. Which of the following procedures is ordinarily performed

by CPA in a review engagement of a non-public entity?

a. Analytical procedures designed to test the accounting records

by obtaining corroborating evidential matter.

b. Inquiries concerning entity's procedures for recording and

summarizing transactions

c. Analytical review designed to evaluate the effectiveness of

internal control

d. Inquiries from client's lawyers about pending litigation,

claims and assessments.

Answer: b

27. In which of the following reports should an accountant not

express negative or limited assurance?

a. A standard review report on financial statements of a

nonpublic entity.

b. A standard compilation report on financial statements of a

nonpublic entity

c. A standard comfort letter on financial information included

in a registration statement of a public entity

d. A standard review report on interim financial statements of a

public entity

Answer: b

OVERVIEW OF AUDITING

1. An audit of financial statements is conducted to determine if

the

a. organization is operating efficiently and effectively

b. auditee is following specific procedures or rules set down by

some higher authority

c. overall financial statements are stated in accordance with

specified criteria

d. auditee has complied with government laws and regulations

Answer: c

2. The subject matter of any audit consists of

a. Financial statements
b. Economic data

c. Assertions about economic actions and events

d. Operating data

Answer: c

3. The criteria for evaluating quantitative information vary. For

example, in the audit of historical financial statements by CPA
firms, the criteria is usually

a. The Philippine Standards on Auditing

b. Financial reporting standards

c. Regulations of the Bureau of Internal Revenue

d. Regulations of the. Securities and Exchange Commission

Answer: b

4. Most of the independent auditor's work in formulating an

opinion on financial statements consists of

a. Studying and evaluating internal control

b. Obtaining and examining evidential matter

c. Examining cash transactions

d. Comparing recorded accountability with assets

Answer: b

5. An audit that involves obtaining and evaluating evidence

about the efficiency and effectiveness of an entity's operating
activities in relation to specified objectives is a(n):

a. internal audit

b. external audit

c. operational audit
d. compliance audit

e. financial statement audit

Answer: c

6. An audit that involves obtaining and evaluating evidence in

order to determine whether certain financial or operating
activities of an entity conform to specified conditions, rules, or
regulations is a(n):

a. internal audit

b. external audit

c. operational

d. compliance audit

e. financial statement audit

Answer: d

7. In financial statement audits, the ludit—proce; should

conform with

a. Philippine Standards on Auditing c. The audit program

b. Financial reporting standards d. The auditor's judgment.

Answer: a

8. Which of the following has the primary responsibility for the

fairness of the representations made in the financial
statements?

a. client's management c. Audit committee

b. Independent auditor d. Financial statements

9. The auditor communicates the results of his or her work

through the medium of the
a. Engagement letter. c. Audit report.

b. Management letter. d. Financial statements

Answer: c

10. Which. of the following types of audit uses as its criteria

laws and regulations?

a. Operational audit c. Compliance audit

b. Financial statement audit d. Performance audit

Answer: c

11. Which of the following best describes why an independent

auditor is asked to express an opinion on the fair presentation
of financial statements?

a. It a difficult to prepare financial statements that fairly

present a company's financial position and changes in cash
flows without the expertise of an independent auditor.

b. It is management's responsibility to seek available

independent aid in the appraisal of the financial information
shown in its financial statements.

c. The opinion of an independent party is needed because a

company may not be objective with respect to its own financial
statements.

d. It is a customary courtesy that all stockholders of a company

receive an independent report on management's stewardship in
managing the affairs of the business.

Answer: c

12. Which of the following types of auditing is performed most

commonly by CPA's on a contractual basis?

a. Internal auditing c. Income tax auditing

b. Government auditing d. External auditing

Answer: d

13. The primary purpose of an independent financial statement

audit is to

a. provide a basis for assessing management's performance

b. comply with state regulatory requirements

c. assure management that the financial statements are

unbiased and free from material error

d. provide users with an unbiased opinion about the fairness of

information reported in the financial statements

Answer: d

14. Independent auditing can best be described as a

a. subset of accounting

b. professional activity data attests to the fair presentation of

financial statements

c. professional activity that measures and communicates

financial accounting data

d. regulatory activity that prevents the issuance of improper

financial information

Answer: b

15. The reason an independent auditor gathers evidence is to

a. form an opinion on the financial statements

b. detect fraud

c. evaluate management

d. evaluate internal controls

Answer: a

16. The primary goal of the CPA in performing the attest

function is to

a. Detect fraud.

b. Examine individual transactions so that the auditor may

certify as to their validity.

c. Determine whether the client's assertions are fairly stated.

d. Assure the consistent application of correct accounting

procedures.

Answer: c

17. Any service in which the CPA firm issues a written

communication that expresses a conclusion with respect to the
reliability of a written assertion that is the responsibility of
another party is a(n)

a. accounting and bookkeeping service

b. attestation service

c. management advisory service

d. tax service

Answer: b

18. Which of the following criteria is unique to the auditor's

attest function?

a. General competence

b. Familiarity with the industry in which the client operates.

c. Due professional care

d. Independence
Answer: d

19. In general, internal auditors' independence will be greatest

when they report directly to 'the:

a. vice-president for finance

b. corporate controller

c. audit committee of the board of directors

d. corporate stockholders

Answer: c

20. The independent audit is important to readers of financial

statement because it

a. Determine the future stewardship of the management of the

company whose financial statements are audited.

b. Measures and communicates financial and business data

involved in financial statements.

c. the objective examination of and reporting on management

prepared statements.

d. Reports on the accuracy of 'all information in the , financial

statements.

Answer: c

21. The primary reason for an audit by ;n independent, external

audit firm is

a. To satisfy governmental regulatory to requirements.

b. To guarantee that there are no misstatements in the financial

statements.

c. To provide increased assurance to users as to the fairness of

the financial statements.
d. To ensure that any fraud will be discovered.

Answer: c

22. Which one of the following is not among the conditions that
give rise to a demand by external users for independent audits
of financial statements?

a. remoteness of users

b. complexity of subject matter

c. the securities acts, administered by the SEC

d. potential conflict of interest between users and preparers of

the statements

e. consequence for making decisions

Answer: c

23. Which of the following best describes the reason why an

independent auditor reports on financial statements?

a. A management fraud may exist and it is more likely to be

detected by independent auditors.

b. Different interests may exist between the company preparing

the statements and the persons using the statements.

c. A misstatement of account balances may 'exist and is

generally corrected as the result of the independent auditor's
work.

d. A poorly designed Mternal control system may be in

existence.

Answer: b

24. Which of the following statements does not describe a

condition that creates a demand for auditing?
a. Conflict between an information preparer and a user can
result in biased information.

b. Information can have substantial economic consequences for

a decision-maker.

c. Expertise is often required for information preparation and

verification

d. Users can directly assess the quality of information.

Answer: d

25. Which of the following statements does not properly

describe a limitation of an audit?

a. Many audit conclusions are made on the basis of examining a

sample of evidence.

b. Some evidence supporting peso representation in the

financial statements must be obtained by oral or written
representation of management.

c. Fatigue and carelessness can cause auditors to overlook

pertinent evidence.

d. Many financial statement assertions cannot be audited.

Answer: d

26. Which of the following statements does not properly

describe an element of theoretical framework of auditing?

a. The data to be audited can be verified

b. Short-term conflicts may exist between managers who

prepare the data and auditors who examine the data.

c. Auditors act on behalf of the management

d. An audit benefits the public

Answer: c

27. General purpose financial statements may be prepared in

accordance with the following framework except.

a. Generally accepted accounting principles in the Philippines.

b. Other authoritative and comprehensive bases of Accounting

c. Generally accepted auditing standards in the Philippines.

d. International accounting standard

Answer: c

28. The form of assurance issued when auditing financial

statements

a. High

b. Negative

c. positive

d. Reasonable

Answer: c

29. The auditor's satisfaction as to the reliability of as assertion

being made by one party is called:

a. Assurance

b. Audit risk

c. Precision

d. Materiality level

Answer: a

30. Which of the following is not one of the reasons why

absolute assurance can not be attained when auditing financial
statements?
a. The auditor does not examine all evidence available.

b. Most of the evidence gathered by the auditor is persuasive

and not conclusive

c. Auditors may commit mistakes in the application of his

judgment.

d. Many financial statement assertions can not be audited.

Answer: d

31. Which of the following is not one of the limitations of an

audit?

a. the use of testing

b. error in the application of judgment

c. inherent limitation of internal control

d. scope limitations imposed by the entity

Answer: d

32. Which of the following is incorrect about responsibility (or

financial statements?

a. Management is responsible for fair presentation of the

financial statements.

b. Auditor is responsible for expressing an opinion on the

financial statements

c. Audit of financial statements does not educe management's

responsibility

d. Fair presentation of financial statements is an implicit part

of the auditor's responsibility.

Answer: c
PRE-ENGAGEMENT

1. Which of the following is the correct order of steps in the

audit process?

A. Obtain understanding of the client's internal control

B. Perform tests of control

C. Obtain understanding of the client's business and its

environment

D. Draft an audit report

E. Prepare a management letter

F. Prepare engagement letter G. Perform substantive tests

a. F, C, A, B, G, E, D

b. F,A,C,B,G,E,D

c. F, A, C, B, G, E, D

d. F, C, A, B, G, D, E

Answer: d

2. In making a decision to accept or continue with a client, the

auditor should consider:

abcd

Its competence YES YES YES YES

Its own independence YES NO YES NO

Its ability to service the client properly YES YES YES NO

The integrity of the client's management YES YES NO YES

Answer: a

3. Which of the following is not one of the reasons why auditor

should perform preliminary engagement activities?

a. To ensure that the auditor maintains the necessary

independence and ability to perform the engagement.

b. To help ensure that there are no issues with management

integrity that may affect the auditor's willingness to continue
the engagement.

c. To ensure that 'there is no misunderstanding with the client

as to the terms of the engagement.

d. To ensure that sufficient appropriate evidence will be

obtained to support the auditor's Opinion on the financial
statements.

Answer: d

4. An auditor who accepts an audit engagement and does not

possess the industry expertise of the business entity should

a. Engage financial experts familiar with nature of the business

entity

b. Obtain knowledge of matters that relate to the nature of the

entity's business

c. Refer a substantial portion of the audit to another CPA who

will act as the principal auditor

d. Inform the client that an unqualified opinion can not be

expressed.

Answer: b

5. Preliminary knowledge about the client's business and

industry must be obtained prior to the acceptance of the
engagement primarily to

a. Determine the degree of knowledge and expertise required

by the engagement.

b. Determine the integrity of management.

c. Determine whether the firm is independent of the client.

d. Gather evidence about the fairness of the financial

statements.

Answer: a

6. Which of the following factors most likely would cause an

auditor not to accept a new audit engagement?

a. An inadequate understanding of the entity's interval control

structure

b. The close proximity to the end of the entity's fiscal year

c. Concluding that the entity's management probably lacks

integrity

d. An inability to perform preliminary analytical procedures

before assessing control risk

Answer: c

7. Which of the following factors most likely would influence an

auditor's determination of the auditability of the entity's
financial statements?

a. The complexity of the accounting system

b. The existence of related party transactions

c. The adequacy of the accounting records

d. The operating effectiveness of control procedures

Answer: c

8. Which of the following is not normally performed in the

preplanning or pre-engagement phase?

a. Deciding whether to accept or reject an audit engagement

b. Inquiring from predecessor auditor

c. Preparing an engagement letter

d. Obtaining management representation letter

Answer: d

9. The primary purpose of establishing quality control policies

and procedures for deciding whether to accept a new client is to

a. Enable the CPA firm to attest to the reliability of the client.

b. Satisfy the CPA firm's duty to the public concerning the

acceptance of new clients.

c. Minimize the likelihood of association with clients whose

management lacks integrity.

d. Anticipate before performing any field work whether an

unqualified opinion can be expressed.

Answer: c

10. A CPA firm's quality control procedures pertaining to the

acceptance of a prospective audit client would most likely
include

a. Inquiry of management as to whether disagreements

between the predecessor auditor and the prospective client
were resolved satisfactorily.

b. Consideration of whether sufficient competent evidential

matter may be obtained to afford a reasonable basis for an
opinion.

c. Inquiry of third parties, such as the prospective client's

bankers and attorneys about information regarding the
prospective client and its management.

d. Consideration of whether the internal control structure is

sufficiently effective to permit a reduction in the required
substantive tests.

Answer: c

11. What is the most likely course of action that will be taken by
an auditor in assessing management integrity?

a. Tour the plant

b. Review the minutes of the board of directors

c. Research the background and histories of officers

d. Review bank reconciliation

Answer: c

12. An auditor who has been invited to submit a proposal for an

audit engagement is a/an

a. predecessor auditor c. principal auditor

b. successor auditor d. interim auditor

Answer: b

13. What will an auditor who has been proposed for an audit
engagement usually do prior to accepting a new client?

a. Draft the financial statements of the client.

b. With the permission from the prospective client, contact the

predecessor auditor to determine if there are any
disagreements between the client and the audit firms.

c. Obtain the potential client's permission to talk to the former

auditor and review work papers.
d. Prepare an audit engagement letter.

Answer: b

14. Where client is changing auditors, PSA requires

communication between predecessor and successor auditors.
The burden of initiating the communication rest with the

a. Predecessor auditor

b. client

c. incoming auditor

d. SEC

Answer: c

15. Prior to the acceptance of an audit engagement with a client

who has terminated the services of the predecessor auditor, the
CPA should

a. a. Contact the predecessor auditor without advising the

prospective client and request a complete report of the
circumstance leading to the termination with the
understanding that all information disclosed will be kept
confidential.

b. b. Accept the engagement without contacting the predecessor

auditor since the CPA can include audit procedures to verify the
reason given by the client for the termination.

c. c. Not communicate with the predecessor auditor because

this would in effect be asking the auditor to violate the
confidential relationship between the auditor and client.

d. d. Advise the client of the intention to contact the

predecessor auditor and request permission for the contact.

Answer: d
16. When a CPA is approached to perform an audit for the first
time, the CPA should make inquires of the predecessor auditor.
This is a necessary procedure because the predecessor may be
able to provide the successor with information that will assist
the successor in determining.

a. a. Whether he predecessor's work should be utilized

b. b. Whether the company follows the policy of rotating its

auditors

c. c. Whether in the predecessor's opinion internal control of

the company has been satisfactory.

d. d. Whether the engagement should be accepted

Answer: d

17. When one auditor succeeds another, the successor auditor

should request the

a. Client to instruct its attorney to send a letter of audit inquiry

concerning the status of the prior year's litigation, claims, and
assessments.

b. Predecessor auditor to submit a list of internal accounting

control weaknesses that have not been corrected.

c. Client to authorize the predecessor auditor to allow a review

of the predecessor auditor's working papers.

d. Predecessor auditor to update the prior year's report to the

date of the change of auditors.

Answer: c

18. Which of the following will an auditor least likely discuss

with the former auditors of a potential client prior to
acceptance?
a. Integrity of management

b. Fees charged for services

c. Disagreement with management regarding accounting

principles

d. Reasons for changing audit firms

Answer: b

19. In an audit, communication between the predecessor and

successor auditor should be

a. authorized in an engagement letter

b. acknowledged in a representation letter

c. either written or oral

d. written and included in the working papers

Answer: c

20. A successor auditor plans to communicate with the

predecessor in connection with an audit of prospective client's
financial statements. Such communication is acceptable if

a. the client consents

b. the predecessor auditor consents

c. the client and predecessor auditor consent

d. the client and successor auditor consent

Answer: c

21. Upon discovering material misstatements in a client's

financial statements that the client would not revise, the
auditor withdrew from the engagement. If asked by the
successor auditor about the termination the engagement, the
predecessor auditor should

a. State that he found material misstatements that the client

would not revise

b. Suggest that the successor ask the client

c. Suggest that the successor obtain the client's permission to

discuss the reasons

d. Indicate that a misunderstanding occurred

Answer: c

22. Before accepting an audit engagement, a successor auditor

should make specific inquiries of the predecessor auditor
regarding the predecessor's

a. Opinion of any subsequent events occurring since the

predecessor's audit report was issued

b. Understanding as to the reasons for the change of auditors

c. Awareness of the consistency in the application of GAAP

between periods

d. Evaluation of all matters of continuing accounting

significance

Answer: b

23. A successor auditor most likely would make specific

inquiries of the predecessor auditor regarding

a. Specialized accounting principles of the client's industry

b. The competency of the client's internal audit staff.

c. The uncertainty inherent in applying sampling procedures.

d. Disagreements with management as to auditing procedures.

Answer: d

24. Which of the following should an auditor obtain from the

predecessor auditor prior to accepting an audit engagement?

a. Analysis of balance sheet accounts

b. Analysis of income statement accounts

c. All matters of continuing accounting significance

d. Facts that might bear on the on the integrity of management

Answer: d

25. What information should a successor auditor obtain during

the inquiry of the predecessor auditor prior to acceptance of the
audit?

I. Facts that bear on the integrity of management

II. Understanding or-the client as to the reasons for change of

auditors

III. Disagreement with management concerning auditing

procedures

IV. The amount of misstatement which the auditor considers to

be material to the financial statements.

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

Answer: b

26. According to PSA 210, the auditor and the client should
agree on the terms of engagement. The agreed terms would
need to be recorded in

a. memorandum to be placed in the permanent section of the

auditing working papers

b. engagement letter
c. client representation letter

d. comfort letter

Answer: b

27. Engagement letter that documents and confirms the

auditor's acceptance of the engagement would normally be sent
to the client.

a. before the audit report is issued

b. after the audit report is issued

c. at the end of fieldwork

d. before the commencement of the engagement

Answer: d

28. An engagement letter should ordinarily include information

on the objectives of the engagement and

CPA's responsibilities Client's responsibilities Limitation of

engagement

a. Yes Yes Yes

b. Yes No Yes

c. Yes No No

d. No No No

Answer: a

29. The primary reason an engagement letter is obtained by

audit firms prior to starting the work is that

a. it clarifies the responsibilities of management and those of

the auditor.

b. it defines the firm's policies and procedures regarding new

clients.

c. it assures that all misstatements will be detected by the

auditor.

d. it communicates the type of opinion that will be rendered on

the engagement"

Answer: a

30. Which of the following best describes the purpose of the

engagement letter?

a. The engagement letter relieves the auditor of some

responsibility for the exercise of due care.

b. By clearly defining the nature of the engagement, the

engagement letter helps avoid and resolve Misunderstandings
between CPA and client regarding the precise nature of the
work to be performed and the type of report to be issued.

c. The engagement letter informs the management of the

detailed steps to be applied in the audit process.

d. The engagement letter outlines the deficiencies in the client's

business noted by the auditor during the audit engagement.

Answer: b

31. Which of the following would be least likely to be included

in the auditor's engagement letter

a. Forms of the report

b. Extent of his responsibilities to his client

c. Objectives and scope of the audit

d. Type of opinion to be issued

Answer: d
32. An engagement letter would not normally include

a. billing arrangement

b. arrangement concerning client's assistance

c. details of the procedure that will be performed

d. expectation of receiving a representation letter from

management

Answer: c

33. Arrangements concerning which of the following are least

likely to be included in engagement letter?

a. auditor's responsibilities

b. Fees and billing

c. CPA investment in client securities

d. Other forms of reports to be issued in addition to the audit

report

Answer: c

34. The audit engagement letter should generally include a

reference to 'each of the following except

a. The expectation of receiving a written management

representation letter

b. A request for the client to confirm the terms of the

engagement

c. A description of the auditor's method of sample selection

d. The risk that material misstatements may remain

undiscovered.

Answer: c
35. After preliminary audit, arrangements have been made, an
engagement confirmation letter should be sent to the client.
The letter usually would not include

a. A reference to the auditor's responsibility for the detection of

errors or irregularities

b. An estimate of the time to be spent on the audit work by

audit staff and management

c. A statement that management advisory services would be

made available upon request

d. A statement that a management letter will be issued

outlining comments and suggestions as to any procedures
requiring the client's attention

Answer: c

36. The use of an engagement letter is the best method of

documenting

I. The required communication of significant deficiencies in

internal control structure

II. Significantly lower materiality levels than those used in the

prior audit

III. The description of any letters or reports that the auditor

expects to issue

IV. Notification of any changes in the original arrangements of

the audit

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

Answer: d

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