AT - Diagnostic Exam

1. Auditing is based on the assumption that financial data and statements are:
a. In conformity with GAAP c. Presented fairly
b. Verifiable d. Consistently applied
2. The auditors who find that the client has committed an illegal act would be most likely to withdraw
from the engagement when the:
a. Management fails to take appropriate corrective action
b. Illegal act has material financial statement implications
c. Illegal act has received widespread publicity
d. Auditors cannot reasonably estimate the effect of the illegal act on the financial statements
3. A review of any part of an organization’s procedures and methods for the purpose of evaluating
efficiency and effectiveness is classified as a(n)
a. Audit of financial statements c. Operational audit
b. Compliance audit d. Production audit
4. Which of the following is a violation of the code of professional ethics for certified public
accountants?
a. A CPA permits his/her name to be used in a client’s advertising as having verified financial
data and/or statistical facts with respect to the client’s product
b. Based on information obtained in an audit, a CPA reports an illegal act of his client to
government authorities.
c. Three years after a partner has retired, the remaining partners continue to practice under a
firm name that includes the name of the retired partner. The retired partner has served all
connections with the CPA firm.
d. A CPA running for public office uses the professional designation “CPA” after his name on
posters employed in connection with his election campaign.
5. Which of the following is not one of the concepts in the framework of auditing theory?
a. Ethical conduct c. Evidence
b. Conflict of interest d. Fair presentation
6. Internal auditors’ role in preventing and detecting fraud would not include the
a. Audit of abnormal expenditures
b. Audit of sensitive expenses such as foreign sale expenses
c. Review of the company’s policies regarding questionable payments
d. Direct responsibility of reporting fraud to the SEC
7. Upon discovery of irregularities in the client’s tax return that the client refuses to correct, a CPA
withdraws from the engagement. How should the withdrawing CPA respond if asked by the
successor CPA why the relationship was terminated?
a. “It was a misunderstanding.”
b. “I suggest you get the client’s permission for us to discuss all matters freely.”
c. “I suggest you ask the client.”
d. “I found irregularities in the tax return which the client would not correct.”
8. Richard, CPA performs accounting services for Tower Corporation. Tower wishes to offer its shares
to the public and asks Richard to audit the financial statements prepared for registration purposes.
Richard refers Tower to Cruz, CPA, who is more competent in the area of registration statements.
Cruz performs the audit of Tower’s financial statements and subsequently thanks Richard for the
 referral by giving Richard a portion of the audit fee collected. Richard accepts the fee. Who, if
anyone, has violated professional ethics?
a. Only Richard c. Only Cruz
b. Both Richard and Cruz d. Neither Richard nor Cruz
9. Internal auditing is a dynamic profession. Which of the following best describes the scope of internal
auditing as it has developed to date?
a. Internal auditing involves appraising the economy and efficiency with which resources are
employed.
b. Internal auditing involves evaluating compliance with policies, plans, procedures, laws and
regulations
c. Internal auditing has evolved to verifying the existence of assets and reviewing the means of
safeguarding
d. Internal auditing has evolved to more of an operational orientation from a strictly financial
orientation.
10. The members who compose the Commission on Audit should
a. Be a commissioner member and an associate commissioner
b. Hold officer for nine years without reappointment
c. Be a CPA or member of the Bar with at least ten years experience
d. Be a member of the bidding committee of the agency
11. A CPA shall not practice under a firm 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 successor partnership
12. In determining estimates of fees, an auditor may take into account each of the following, except the
a. Value of the service to the client
b. Degree of responsibility assumed by undertaking the engagement
c. Skills required to perform the service
d. Attainment of specific findings
13. When CPA firms do an audit of historical financial statements, part of the audit usually consist of
identifying operational problems and making recommendations that may benefit the audit client. The
recommendations can be made orally but they are typically made by use of a
a. Letter of representation c. Management letter
b. Engagement letter d. Client letter
14. Which of the following is not one of the grounds for proceeding against a CPA?
a. Gross negligence or incompetence in the practice of his profession
b. Engaging in public practice while being employed in a private enterprise
c. Insanity
d. Immoral or dishonorable conduct
15. Internal auditing is considered to be part of an organization’s
a. Accounting system c. Control environment
b. Internal control procedures d. External controls
16. In an audit in accordance with generally accepted auditing standards, the auditors must test
compliance with those laws and regulations that
a. Have a direct and material effect on the financial statements
 b. Have a direct and material effect on major government programs
c. Have a material effect or indirect effect on the financial statements
d. Have a material effect on major or non-major programs
17. The Accountancy Law provides that all working papers made during an audit shall be the property of
the auditor. These working papers shall include the following, except
a. Schedules of memoranda made by the CPA and his staff
b. Working papers prepared and submitted by the client
c. Excerpts of copies of documents furnished to the auditor
d. Reports submitted by the CPA to the client
18. The expertise that distinguishes auditors from accountants is in the
a. Ability to interpret generally accepted accounting principles
b. Requirement to possess education beyond the Bachelor’s degree
c. Accumulation and interpretation of evidence
d. Ability to interpret PFRSs and PASs
19. The normal sequence of events in a typical public accounting audit of financial statements includes
these activities, in the order of performance shown below:
a. Investigate a new client, gather evidence about account balances, obtain an understanding of
internal control
b. Assign staff, assess control risk, evaluate evidence about account balances
c. Obtain evidence about account balances, obtain an engagement letter, report on the financial
statements
d. Investigate a new client, assess control risk, obtain an engagement letter
20. To operate effectively, an internal auditor must be independent of
a. The line functions of the organization
b. The entity
c. The employer-employee relationship which exists for other employees in the organization
d. All of the above
21. Which of the following would not be a consideration of a CPA firm in deciding whether to accept a
new client?
a. Client’s probability of achieving an unqualified opinion
b. Client’s financial ability
c. Client’s relation with its previous CPA firm
d. Client’s standing in the business community
22. Where client is changing auditors, PSA requires communication between predecessor and successor
auditors. The burden of initiating the communication rests with the
a. Predecessor b. Client c. Successor d. SEC
23. The three types of attestation services are
a. Audits, reviews and compilations
b. Audits, compilations and other attestation services
c. Reviews, compilations and other attestation services
d. Audits, reviews and other attestation services
24. Investigation of new clients and re-evaluation of existing ones is an essential part of deciding
a. Inherent risk c. Statistical risk
b. Acceptable audit risk d. Financial risk
25. Auditors focus on
a. Areas where the risk of material errors and irregularities is least
b. Areas where the risk of material errors and irregularities is greatest
c. All areas equally
d. A random selection of all areas
26. The auditing profession recognizes the need for uniformity in reporting as a means of
a. Defending against capricious lawsuits
b. Upgrading the communication skills of auditors
c. Standardizing the policies of various CPA firms
d. Avoiding confusion
27. The risk that an auditor’s procedures will lead to the conclusion that a material error does not exist in
an account balance when, in fact, such error does exist is referred to as
a. Audit risk b. Inherent risk c. Control risk d. Detection risk
28. As the acceptable level of detection risk decreases, the assurance directly provided from
a. Substantive tests should increase c. Tests of controls should increase
b. Substantive tests should decrease d. Tests of controls should decrease
29. The auditor with responsibility for reporting on the financial statements of an entity when those
financial statements include financial information one or more components audited by another
auditor.
a. Continuing auditor c. Principal auditor
b. External auditor d. Other auditor
30. The maximum error in a population that the auditor is willing to accept.
a. Anomalous error c. Sampling error
b. Expected error d. Tolerable error
31. An engagement, wherein the accountant is engaged to use accounting expertise as opposed to
auditing expertise to collect, classify, and summarize financial information.
a. Compilation engagement c. Review engagement
b. Agreed-upon procedures engagement d. Audit engagement
32. Consist of the record of the auditor’s planning; nature, timing and extent of the auditing procedures
performed; and the results of such procedures and the conclusions drawn from the evidence obtained.
a. Engagement memorandum c. Working papers
b. Documentation d. Database
33. A letter that documents and confirms the auditor’s acceptance of the appointment, the objective and
scope of the audit, the extent of the auditor’s responsibilities to the client and the form of any reports.
a. Comfort letter c. Engagement letter
b. Confirmation letter d. Management letter
34. A report separate from the financial statements, in which an entity provides third parties with
qualitative information on the entity’s commitments towards the environmental aspects of the
business, its policies and targets in that field, its achievement in managing the relationship between its
business processes and environmental risk, and quantitative information on its environmental
performance.
a. Annual report c. Audit report
b. Environmental performance report d. Management report
35. A person or firm possessing special skill, knowledge, and experience in a particular field other than
accounting and auditing.
a. Expert c. Specialist
b. Independent appraiser d. Computer specialist
36. If the auditor is convinced that the client has an excellent internal control structure, the amount of
audit evidence to be gathered
a. Can be significantly less than where internal control is not adequate
b. Will not be affected since the auditor must arrive at an independently determined opinion
c. Must be increased to support the auditor’s belief
d. Is not determinable
37. Within the context of quality control, the primary purpose of continuing professional education and
training activities, is to enable a CPA firm to provide personnel within the firm with
a. Technical training that assures proficiency as an auditor
b. Professional education that is required in order to perform with due professional care
c. Knowledge required to fulfill assigned responsibilities and to progress within firm
d. Knowledge required in order to perform a peer review
38. A report other than an unqualified report must be issued whenever any of the three conditions
requiring a departure from an unqualified report
a. Exists
b. Exists and is material
c. Exists, is material and is within management’s control
d. Exists, is material, and is within either management’s or auditor’s control
39. The distinction between an adverse opinion and a disclaimer is
a. Lack of GAAP versus lack of GAAS
b. Knowledge versus lack of knowledge
c. The CPA’s report versus the CIA’s report
d. FRSC statements versus the PICPA standards
40. A qualified opinion is appropriate when the auditor is satisfied that the overall financial statements
are
a. Fairly stated
b. Materially misstated
c. Fairly stated, but there is a material exception
d. Fairly stated, even though there is an immaterial exception
41. If the auditor is determined to lack independence, a disclaimer of opinion must be issued
a. In all cases c. Only if it is material
b. Only if it is highly material d. If the client requests it
42. A statement in a report such as “Nothing came to our attention that would lead us to question the
fairness of the presentations” is referred to as
a. The unqualified opinion c. Negative assurance
b. A disclaimer of opinion d. Positive assurance
43. Grant Company’s financial statements adequately disclose uncertainties that concern future events,
the outcome of which are not reasonably estimable. The auditor’s report should include a(an)
a. Unqualified opinion c. “Except for” qualified opinion
b. “Subject to” qualified opinion d. Adverse opinion
44. Which of the following representations does an auditor make explicitly and which implicitly when
issuing an unqualified opinion?
Conformity with GAAP Adequacy of disclosures
a. Explicitly Explicitly
b. Implicitly Implicitly
c. Implicitly Explicitly
d. Explicitly Implicitly
45. The auditor’s report should be dated as of the date on which the
a. Report is delivered to the client c. Fiscal period under audit ends
b. Fieldwork is completed d. Review of the working papers is complete
46. When the audited financial statements of the prior year are presented together with those of the
current year, the continuing auditor’s report should cover
a. Both years
b. Only the current year
c. Only the current year, but the prior year’s report should be presented
d. Only the current year, but the prior year’s report should be referred to
47. How are management’s responsibility and the auditor’s responsibility presented in the standard
auditor’s report?
Management’s responsibility Auditor’s responsibility
a. Explicit Explicit
b. Implicit Implicit
c. Implicit Explicit
d. Explicit Implicit
48. When the users of financial statements have confidence in the independence of the CPA, it is referred
to as independence
a. In fact b. In appearance c. In conduct d. In total
49. If legal proceedings cannot require a person to provide information, even if there is a subpoena, the
information is called
a. Secret b. Private c. Privileged d. Sequestered
50. A CPA firm should reject a management advisory services engagement if
a. It would require the CPA firm to make management decisions for an audit client
b. Recommendations are to be subject to review by the client
c. The firm audits the financial statements of a subsidiary of the prospective client
d. The proposed engagement is not accounting-related
51. The standard of due care to which the auditor is expected to uphold is referred to as the
a. Prudent person concept c. Due care concept
b. Common law doctrine d. Reckless regard doctrine
52. The responsibility for adopting sound accounting policies, maintaining an adequate internal control
structure, and making fair representations in the financial statements rests
a. With management c. Equally with management and the auditor
b. With the independent auditor d. With the internal audit department
53. The factor which distinguishes an error from an irregularity is
a. Materiality
b. Intent
 c. Whether it is a peso amount or a process
d. Whether it is caused by the auditor or the client
54. If there is fraud involving the collusion of several employees that includes the falsification of
documents, the chance that such a fraud would be uncovered in a normal audit is
a. Zero b. Unlikely c. 50% d. Very high
55. When planning the audit, if the auditor has no reason to believe that illegal acts exist, the auditor
should
a. Make inquiries of management regarding their policies and regarding their knowledge of
violations, and then rely on normal audit procedures to detect errors, irregularities and
illegalities
b. Still include some audit procedures designed specifically to uncover illegalities
c. Ignore the topic
d. Include audit procedures which have a strong probability of detecting illegal acts
56. Only three management assertions are associated with transaction-related audit objectives. Which
one of the following is not?
a. Existence or occurrence c. Valuation or allocation
b. Completeness d. Presentation and disclosure
57. The detail tie-in objective is not concerned that the details in the account balance
a. Agree with related subsidiary ledger amounts
b. Are properly disclosed, in accordance with GAAP
c. Foot to the total in the account balance
d. Agree with the total in the general ledger
58. Which of the following factors most likely affects the auditor’s judgment about the quantity, type and
content of working papers?
a. The assessed control risk
b. The content of the client’s representation letter
c. The timing of substantive tests completed prior to the balance sheet date
d. The usefulness of working papers as a reference source for the client
59. When unable to obtain sufficient competent evidential matter to determine whether certain client acts
are illegal, the auditor would most likely issue
a. An unqualified opinion with a separate explanatory paragraph
b. Either a qualified opinion or an adverse opinion
c. Either a disclaimer of opinion or a qualified opinion
d. Either an adverse opinion or a disclaimer of opinion
60. Which one of the following is not one of the characteristics of competent evidence?
a. Independence of provider c. Size of the sample
b. Effectiveness of internal control structure d. Degree of objectivity
61. When the auditor is gathering evidence, he/she will conclude that if the source of information is
independent, the evidence will
a. Be reliable
b. Not be reliable
c. Be reliable if the provider has no reason to be biased
d. Not be reliable unless the provider is qualified to do so
62. An example of vouching would be:
 a. Trace from receiving reports to the acquisitions journal
b. Trace from the acquisitions journal to supporting vendors invoices
c. Trace from duplicate bank deposit slips to the cash receipts journal
d. Trace from canceled checks to the cash disbursement journal
63. One feature common to all microcomputer-based audit software is
a. The ability to input client’s general ledger into the auditor’s computer system
b. The ability to input auditor’s software into client’s computer system
c. The inclusion of an industry database to facilitate analytical review procedures
d. DOS-based command systems
64. An auditor may compensate for a weakness in the internal control by increasing the
a. Level of detection risk
b. Extent of tests and controls (compliance tests)
c. Preliminary judgment about audit risk
d. Extent of substantive tests
65. Which one of the following is not typically included in the sales and collection cycle?
a. Sales returns and allowances
b. Bad debts expense
c. Allowance for uncollectible accounts
d. Cash credits from the cash disbursements journal
66. The document used as the basis for recording sales transactions and updating the accounts receivable
master file is the
a. Sales order b. Bill of lading c. Sales journal d. Sales invoice
67. Which of the following would be the best protection for a company that wishes to prevent the
“lapping” of trade accounts receivable?
a. Segregate duties so that the bookkeeper in charge of the general ledger has no access to
incoming mail.
b. Segregate duties so that the employees has access to both checks from customers and
currency from daily cash receipts
c. Have customers send payments directly to the company’s depository bank
d. Request that customer’s payment checks be made payable to the company and addressed to
the treasurer
68. Random numbers that don’t match population item numbers and therefore are not usable are referred
to as
a. Rejects b. Discards c. Wasteful d. Mismatches
69. Establishing the tolerable exception rate (TER) requires
a. Statistically frequency probability tables c. A computer program
b. Random number tables d. Auditor judgment
70. You are reviewing sales to discover cutoff problems. If the client’s policy is to record sales when
title to the merchandise passes to the buyer, then the books and records would contain errors if the
December 31 entries were for sales recorded
a. Before the merchandise was shipped
b. At the time the merchandise was shipped
c. Several days subsequent to shipment
d. At a time other than the point at which title passed