Which of the following best demonstrates the concept of professional skepticism?

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.

1. 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.

1. 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

1. 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

1. 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.

1. 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

2. 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

3. 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

4. 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. A. True, true B. False, false C. True, false D. False, true

10 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. A. True, true B. False, false C. True, false D. False, true

11 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. A. True, true B. False, false C. True, false D. False, true

1. 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.

1. 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.

2. 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

3. 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

1. 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.

2. 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.”

1. 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

2. 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

3. 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 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. A. True, true B. False, false C. True, false D. False, true

32 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. A. True, true B. False, false C. True, false D. False, true

33 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.

1. 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 consequence of assessing control risk too high relates to

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 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 sampling method that is useful when testing controls is:

A. Non-statistical sampling. C. Discovery sampling. B. Attribute estimation sampling. D. Stratified random sampling.

1. 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 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. A. True, true B. False, false C. True, false D. False, true

1. 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.

2. 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.

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.”

1. 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.

1. 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

2. 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.

1. 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

1. 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.

1. 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.

1. 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.

2. 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

3. 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.

1. 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

1. 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 II D. Neither I nor II

1. 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 checklist. D. A management representation letter.

67 Management representation letters are substitutes for substantive test procedures. S2 All members of the client’s management are to sign the management representation letter. A. True, true B. False, false C. True, false D. False, true

1. 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.

1. 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 statements. D. Latest related party transaction.

d. Professional skepticism. (x)

79 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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.

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.

1. 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)

2. 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.

3. 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.

4. 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) and/or annual revenue of at least Ten Million Pesos (10,000,000). 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.

5. 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.

6. 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 RA 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.

7. 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.

8. 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)

9. 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.

10. 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.

11. 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)

12. 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.

13. 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. 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)

1. Which of the following statements is incorrect? 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.

2. 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

3. 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.

4. 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.

5. 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)

6. 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)

7. 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.

8. 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

1. Which of the following statements is incorrect? 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)

2. 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.

3. 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.

4. 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.

5. 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.

6. 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)

7. 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

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.

1. Which of the following cases illustrate a violation of the provisions of RA 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)

2. 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.

3. 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.”

4. 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)

1. 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)

2. 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)

3. 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)

What is an example of professional skepticism?

What is professional skepticism?

Which of the following most accurately defines professional skepticism?

What does professional skepticism mean quizlet?