Roque Quick Auditing Theory Chapter 12 PDF

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CHAPTER 12
Practice
Examinations
PRACTICE EXAMINATION 1
1. Prior to, or in conjunction with, the information-gathering
procedures for an audit, audit team members should discuss
the potential for material misstatement due to fraud. Which
of the following best characterizes the mindset that the audit
team should maintain during this discussion?
A. Presumptive
B. Judgmental
C. Criticizing
D. Questioning
2. If the statement of financial position of a company is dated

Dece.11ber 31, 2015, the audit report is dated February 18,
2016, and both are released on February 25, 2016, tnis indi-
cates that the auditor has searched for subsequent events
that occurred up to:
816 CPA EXAMINATION REVIEWER: AUDITING THEORY
A. December 31, 2015

B. January 1, 2016
C. February 18, 2016
D. February 25, 2016
Items 3-6 are based on the following information:
Auditors perform audit procedures to obtain audit evidence that

will allow them to draw reasonable conclusions as to whether the
client's financial statements are prepared and presented in con-
formity with Philippine Financial Reporting Standards. Match each
audit procedure with its type.
Type of Audit Procedure
A. Analytical review procedures

B. Tests of controls
C. Risk assessment procedures (other ·than analytical oro-
·cedures)
D. Tests of details of account balances, transactions, or dis-
closures
3. Prepare a flowchart of internal control over purchases.
4. Calculate the ratio of bad debt expense to credit sales.
I
5. Determine whether disbursements are properly approved.
6. Confirm accounts receivable.
Items 7-10 are based on the following information:
Y?u are a senior auditor with JST and Co. CPAs. Tanya, a,, new
hire, has come to you with questions concerning "assertions and
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.. udit procedures.". Match. each assertion with the statement that

aost closely approxrmates rts meaning.
rn .
Statement
A. There is such an asset.
B. The company legally owns the assets.
C. All assets have been recorded.
D. Assets are recorded at proper amounts.
7. completeness
s. Existence and occurrence
9. Rights and obligations
10. Valuation
nems 11-12 are based on the following information:
Tue following statements relate to the confirmation process when

applied to accounts receivable.
1. The confirmation requests should be mailed to respond-
ents by the auditor.
2. A combination of positive and negative request forms
must be used if receivables are significant.
3. Second requests are ordinarily sent for positive form
confirmation requests when the first request is not re-
turned.
4. Confirmations address existence more than they address
completeness.
5. Auditors may ignore individually immaterial accounts
when confirming accounts receivable.
.. '-
mt ·.
6. The best way to evaluate the results of the confirmation

process is to total the misstatements identified and to
compare that total to the account's tolerable error
amounts.
11. W~ich of the above statements are correct?

A. 1, 3, and 4
B. 1, 2, and 5
C. 2, 3, and 6
D. 3, 4, and 5
12. Which of the above statements are incorrect?

A. 3, 4, and 6
B. 1, 4, and 5
C. 2, S, and 6
D. 1, 2, and 6
13. When using the cycle approach to segmenting the audit, the
reason for treating capital acquisition and repayment sepa-
rately from the acquisition of gouds and services is that:
A. The transactions are related to financing a company ra-
ther than to its operations.
B. Most capital acquisition and repayment cycle accoun~
involve few transactions, but each is often highly materi-
al and therefore should be audited extensively.
C. Both A and B are correct.
D. Neither A nor B is correct.
14. An auditor has identified the controller's review of th.e b~~~

reconciliation as a control to test. In connection withd the
test, the auditor interviews the controller to unde~n the
specific data reviewed on the reconciliation. In addition, re-
auditor verifies that the bank reconciliation is properlrie~ as
pared by the accountant and reviewed by the contro
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evidenced by th~ir respective sign-offs. Which of the follow-

ing types of audit procedures do these actions illustrate?
A. observation and inspection of records.
8. confirmation and reperformance.
c. Inquiry and inspection of records.
0 . Analytical procedures and reperformance.
Which of the following is a definition of control risk?

1~
A. The risk t hat a material misstatement will not be pre-
vented or detected on a timely basis by the client's inter-
nal controls.
B. The risk that the auditor will not detect a material mis-
statement.
c. The risk that the auditor's assessment of internal con-
trols will be at less than the maximum level.
D. The susceptibility of material misstijtement assuming
there are no related internal control policies or proce-
dures.
16. Which of the following statements is correct regarding in-

ternal control?
A. A well-designed internal control environment ensures the
achievement of an entity's control objectives.
B. An inherent limitation to internal control is the fact that
controls can be circumvented by management override.
C. A well-designed and operated internal control environ-
ment should detect collusion perpetrated by two people.
D. Internal control is a necessary business function and
should be designed and operated to detect all errors and
fraud.
17. When management has an adeqi.:ate level of integrity for the

auditor to accept the engagement but cannot be regarded as
completely honest in all dealings, auditors normally
A. Reduce acceptable audit risk and increase inherent risk.
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CPA EXAMINATION REVIEWER: AUDITING THEORY
B. Reduce inherent risk and control risk.

C. Increase inherent risk and control risk.
D. Increase a·cceptable audit risk and reduce inherent risk.
18. Which one of the following statements about the cycle ap-
proach to auditing is not correct?
A. There are differences among cycles in the frequency and
size of expected errors.
B. There are differences among cycles in the effectiveness
of internal controls.
C. There are differences among cycles on the auditor's will-
ingness to accept risk that material errors exist after the
auditing is complete.
D. It is common for auditors to want an equally low likeli-
hood of errors for each cycle after the auditor is finished.
19. When planning an audit, the auditor's assessed level of con-

trol risk is
A. Determined by using actuarial tables.
B. Calculated by using the audit risk model. . on·
C. An economic issue, trading off the costs of testing c
trols against the cost of testing balanc~s. . AICPA's
D. Calculated by using the formulas provided in the
auditing standards.
20. Which of the following is least likely to uncover fraud?

A. External auditors
B. Internal auditors
C. Internal controls
D. Management .
5
I controls i
21. Which of the following statements about genera d-
not correct? . alternative har
A. Disaster recovery plans should identify
ware to process company data.
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a. successf~ITul ITddevelopment efforts require the involve-

ment o an non-IT personnel.
c. The chief information officer should report to senior
management and the board.
0 . Programmers should have access to computer operations
to aid users in resolving problems.
22 The reliance placed on substantive tests in relation to the

' reliance placed on internal control varies in a relationship
that is ordinarily
A. Parallel
a. Inverse
c. Direct
o. Equal
23. It is important that sales be billed and recorded in the jour-

nal as soon as possible after
A. The order is received.
s. The order is received and credit is approved.
c. Credit is approved and it is verified that there is enough
inventory to fill the order.
D. The shipment takes place.
24. The tolerable rate of exceptions for tests of controls is gen-

erally
A. Lower than the expected rate of errors in the related ac-
counting records.
B. Higher than the expected rate of errors in the related ac-
counting records.
C. Identical to the expected rate of errors in the related ac-
counting records.
D. Unrelated to the expected rate of errors in the related
accounting records.
'
25. When performing tests of controls and tests of transactions

forsales, the auditor generally defines the population as
A. All accounts receivable transactions for the year.
B. All sales invoices for the year.
C. All cash receipts transactions for the year.
D. All sales invoices less sales return credit memos.
26. Because of the importance of tests of controls and substan-

tive tests of transactions for acquisitions and cash disburse-
ments, it is common in this audit area to use
A. Block sampling.
B. Variables sampling.
C. Attributes sampling.
D. Probability proportional to size sampling.
27. The auditor normally does not need to test the accuracy or
classification of fixed assets recorded in prior periods be-
cause
A. They are rarely material to the audit.
B. They rarely contain misstatements.
c. They are verified in previous audits.
D. They don't affect the balance sheet.
28. A portion of a client's inventory is in public warehouses. ~:

idence of the existence of this merchandise :an most~s?
ciently be acquired through which of the following meth
A. Observation
B. Confirmation
C. Calculation·
D. Inspection
. ff that reportS
29. Hazel Corp. maintains a large internal aud_1t sta 0 repared
directly to the chief financial officer. Audit rep rt:5 ~nction
k>y the internal auditors indicate that the system is
cHAP
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823
ing as it should and. that the accounting records are reliable.

An independent auditor will probably
A. Eliminate tests of controls.
B. Increase the depth of the study and evaluation of admin-
istrative controls.
c. Avoid duplicating the work performed by the internal au-
dit staff.
o. Place limited reliance on the work performed by the in-
ternal audit staff.
3o. Auditors may identify conditions during fieldwork that

change or support a judgment about the initial assessment
of fraud risks. Which of the following is not a condition
which should alert an auditor that the initial assessment
should be changed?
A. The auditor's lack of independence
B. Discrepancies in the accounting records
c.
Unusual relationships between the auditor and manage-
ment
D. Missing or conflicting evidence
31. Companies with non-complex IT environments often rely on

microcomputers to perform accounting system functions.
Which of the following is not an audit consideration in such
an environment?
A. Limited reliance on automated controls.
B. Unauthorized access to master files.
C. Vulnerability to viruses and other risks.
D. Excess reliance on automated controls.
32. Which of the following is not a valid basis for omitting an

audit test?
A. The difficulty and expense involved in testing a particular
item.
B. The relative risk involved.
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C. The degree of reliance on the relevant internal controls.

D. The relationship between the cost of obtaining evidence
and its usefulness~
33. A proof of cash is not useful in discovering differences in the

actual and reported cash balances due to
A. Deposits in transit. ·
B. Collections on the company's behalf by the bank which
are deposited directly to the company's account.
C. Cash receipts that were not recorded in the relevant
journals.
D. Service charges.
34. There are many kinds of statistical estimates that an auditor

may find useful, but basically every accounting estimate is
either of a quantity or of an error rate. The statistical terms
that roughly correspond to "quantities" and "error rate," re-
spectively, are
A. Attributes and variables
B. Variables and attributes
C. Constants and attributes
D. Constants and variables
35. The purpose of the audit procedure to "examine underlying

documentation for subsequent cash disbursements" is to
A. Uncover liabilities on the balance sheet which should not
have been recorded until a subsequent period.
B. Find the documentation relating to a cash disbur~rnen~-
C. Uncover payments made in a subsequent accounting P
riod for liabilities that existed at the balance sheet date. t
D. Uncover cash disbursements recorded in a subseque~
accounting period which should be recorded in this pen
od.
';,
E~ 12 Practice Examinations 825

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Assum~ that the clie~t's val.uation of an inventory item is PlO
36· per untt for 1,00~ ~~Its, using first-in, first-out (FIFO). If the
rnost recent acql:J1S1t1on of inventory was for 600 units at P10
per uni.t and the imm~diately preceding acquisition was for
700 units at pg per unit, the inventory item is in error and it
is
A. Understated P400
B. Understated P300
c. overstated P400
D. overstated P700
In the audit of notes payable, it is common to include tests

37. of principal and interest payments as a part of the audit of
the acquisitions and payment cycle because the payments
are in the cash disbursements journal that is being sampled.
It is also normal to test these transactions as part of the
capital acquisitions and repayment cycle because
A. It is not unusual for the auditor to duplicate a process,
thereby gathering a larger quantity of evidence.
B. Replicating the evidence will provide the auditor with a
higher level of assurance.
c. The tests done in the acquisitions and payments cycle
will look only at the cash credit side so the tests done in
the capital acquisitions and repayment cycle will look at
the debit side of the transaction.
D. Due to the infrequency of these transactions, in many
cases no transactions involving notes payable are includ-
ed in the sample tests of acquisitions and payments.
38. Which of the following misstatements is most likely to be

uncovered during an audit of a client's bank reconciliation?
A. Duplicate payment of a vendor's invoice.
B. Billing a customer at a lower price than indicated by
company policy.
C. Failure to record a collection of a note receivable by the

bank on the client's behalf.
D. Payment to an employee for more than the hours actual-
ly worked.
39. After an auditor has issued an audit report on a nonpublic

entity, there is no obligation to make any further audit tests
or inquiries with respect to the audited financial statements
covered by that report unless
A. Material adverse events occur after the date of the audi-
tor's report.
B. Final determination or resolution was made of a contin-
gency which had been disclosed in the financial state-
ments.
C. Final determination or resolution was made on matters
which had resulted in a qualification in th~ auditor's re-
port.
D. New information comes to the auditor's attention con-
cerning an event that occurred prior to the date of the
auditor's report that may have affected the auditor's re-
port.
40. The auditor's best course of action with respect to "other

information" included in an annual report containing the au-
ditor's report is to
A. Read and consider the manner of presentation of the
"other information."
B. Indicate in the auditor's report that the "other infor·
mation" is unaudited.
C. Consider whether the "other information" is accurate bY
performing a limited review.
D. Obtain written representations from management as to
the accuracy of the "other information."
cHJ\PTE
prospective financial statements are for general use or for

41 · limited use. General use refers to use by any third party,
whereas limited use refers to use by third parties with which
the responsible party is negotiating directly. Which of the
following statements is not correct?
A. Forecasts can be provided for general use.
B. Forecasts can be provided for limited use.
c. Projections can be provided for general use.
o. Projections can be provided for limited use.
42. Which of the following is not one of the major differences
between financial and operational auditing?
A. The financial audit is oriented to the past, but an opera-
tional audit concerns performance for the future.
B. The financial audit report is distributed to many readers,
but the operational audit report goes to a few managers.
c. Financial audits deal with the information on the financial
statements, but operational audits are concerned with
the information in the ledgers.
o. Financial audits are limited to matters that directly affect
the financial statements, but operational audits cover
any aspect of efficiency and effectiveness.
43. Which of the following is not a purpose of a program audit

as performed by government auditors?
A. Determination of the extent to which the desired results
established by the legislature are being achieved.
B. Determination of the causes of inefficiencies in spon-
sored programs.
C. Determination of the effectiveness of organizations, pro-
grams and activities.
D. Determination as to whether the entity has complied
with laws and regulations applicable to the program.
·. '.. '
44. A CPA may wish to emphasize specific matters regarding the

financial statements even though an unmodified opinion will
be issued. Normally, such explanatory information is
A. Included in the introductory paragraph.
B. Included in the opinion paragraph.
C. Included in a separate emphasis of matter paragraph in
the report.
D. Included in the auditor's responsibility paragraph.
45. Two overriding consideratibns affect the many ways an audi-

tor can accumulate evidence:
1. Sufficient appropriate evidence must be accumulated
to meet the auditor's professional responsibility.
2. Cost of accumulating evidence should be minimized.
In evaluating these considerations,
A. The first is more important than the second.
B. The second is more important than the first.
C. They are equally important.
D. It is impossible to prioritize them.
46. An auditor should recognize that the application of au~~~il~i

11
procedures may produce evidence indicating the possi
of errors or fraud and therefore should . de of
A. Plari and perform the engagement with an attitu
professional skepticism . . revent
B. Not rely on internal controls that are designed to P
or detect errors or fraud. ·ans.
C. Design audit tests to detect unrecorded transactl. ns and
D. Extend the wrn·k to audit most recorded transactlO
records of an entity.
47 . Which· of the following statements is incorrect?

cHAPT
A. Analytical procedures are used to isolate accounts or

transactions that should be investigated more extensive-
ly.
B. For certain immaterial accounts, analytical procedures
may be the only evidence needed.
c. In some instances, other types of evidence may be re-
duced when analytical procedures indicate that an ac-
count balance appears reasonable.
D. Analytical procedures use supporting documentation to
determine which account balances need additional de-
tailed procepures.
48. Tolerable misstatement as set by the auditor

A. Decreases acceptable audit risk.
B. Increases inherent risk and control risk.
c. Affects planned detection risk.
D. Does not affect any of the four risks.
49. Application controls vary across the IT system. To gain an

understanding of internal control for a private company, the
auditor must evaluate the application controls for every
A. Audit area.
B. Material audit area.
C. Audit area in which the client uses the computer.
D. Audit area where the auditor p!ans to reduce assessed
control risk.
50. Which of the following types of procedures will be perfor·med

in an audit of internal control over financial reporting?
Procedures to obtain an
understanding of internal control Ratio analysis
A. Yes Yes
B. No No
c. Yes No
D. No Yes
51. When designing substantive tests of transactions for sales,

the auditor is concerned with the possibility of several types
of misstatements. Which of the following is not one of the
types of these misstatements?
A. Sales being included in the journal for which no shipment
was made.
B. Sales to related parties, such as officers and subsidiaries.
C. Sales recorded more than once.
D. Shipments being made to nonexistent customers and
recorded as sales.
52. Place the following steps in their proper order:

1. Analyze exceptions
2. Select the -sample
3. Define attributes and exception conditions
4. State the objectives of the audit test
5. Specify the tolerable exception rate
A. 1,3,2,4,5
B. 4,3,1,2,5
c. 4,3,5,2,1
D. 1,2,3,4,5
53. When positive confirmations are used, auditing standard~

require follow-up procedures for confirmations not retur~eg
by the customer. In such a situation, which of the followin
would not be classified as an alternative procedure?
A. Send a second confirmation request. . . re-
B. Examine subsequent cash receipts to determine if the
ceivable has been paid. han·
C. Examine shipping documents to verify that the mere
dise was shipped. rcat
D. Examine customer's purchase order and th7 duP ~ ui·
sales invoice to determine that the merchandise wa
dered.
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The most important controls over cash disbursements in-

54· elude all but which of the following?
A. Signing of checks by an authorized employee.
B. Random examination of the supporting documents by
the authorized check signer before signing checks.
c. Separation of responsibilities for signing the checks and
performing the accounts payable function.
D. Prenumbering of checks and investigations of missing
checks.
S5. For effective internal control, the accounts payable depart-

ment should compare the information on each vendor's in-
voice with the
A. Receiving report and the voucher.
B. Vendor's packing slip and the voucher.
c. Receiving report and the purchase order.
D. Vendor's packing slip and the purchase order.
56. Which of the following statements is true?

A. Audit procedures on the sample item will vary as a result
of using either statistical or nonstatistical sampling.
B. The audit proc;edures will be the same for either statisti-
cal or nonstatistical sampling but they must be .per-
formed differently for each.
C. Statistical sampling requires quantitative audit proce-
dures whereas nonstatistical sampling requires judgmen-
tal audit procedures.
D.. Audit procedures on the sample item will not vary as a
result of using either statistical or nonstatistical sampling.
57. What is an auditor's evaluation of a statistical sample for at-

tributes when a test of 100 documents results in four excep-
tions if the tolerable exception rate is 5%, the expected
population exception rate is 3%, and the allowance for sam-
pling risk is 2%_
?
832 CPA EXAMINATION REVIEWER: AU.CITING THEORY
A. Accept the sample results as support for planned reliance

on the control because the tolerable rate less the allow-
ance for sampling risk equals the expected population
exception rate. ·
B. Modify planned reliance on the control because the sam-
ple exception rate plus the allowance for sampling risk
exceeds the tolerable rate.
C. Modify planned reliance on the control because the tol-
erable rate plus the allowance for sampling risk exceeds
the expected population exception rate.
D. Accept the sample results as support for planned reliance
on the· control because the sample exception rate plus
the allowance for sampling risk exceeds the tolerable
rate.
58. Which of the following is likely to be determined first when

performing tests of details for accounts receivable?
A. Recorded accounts receivable exist.
B. Accounts receivable in the aged trial balance agree with
rel·ated master file amounts, and the total is correctly
added and agrees with the general ledger.
C. Accounts receivable are owned.
D. Existing accounts receivable are included.
59. An auditor learns that collections of accounts receivable du~

ing the first ten days of January were debited to cash an
credited to accounts receivable as of December 31. The ef-
fect generally will be to .
A. Overstate the current ratio with no effect on working
capital at December 31. . t
B. Overstate both working capital and the current ratio a
December 31. t
C. Overstate working capital with no eff€ct on the curren
ratio at December 31.
cHAPi
o. Leave both working capital and the current ratio un-

changed at December 31.
60 Which of the following should an auditor do when control

· risk is assessed at the maximum level?
A. Perform fewer substantive tests of details.
B. Perform more tests of controls.
c. Document the assessment.
o. Document the internal control system more extensively.
61. Which of the following is least likely to be considered when

assessing inherent risk?
A. Nonroutine transactions.
B. Estimation transactions.
c. Susceptibility to theft.
D. Expected effectiveness of controls.
62. Which of the following is used to obtain ·evidence that the

client's equipment accounts are not understated?
A. Analyzing repairs and maintenance expense accounts.
B. Vouching purchases of plant and equipment.
C. Recomputing depreciation expense.
D. Analyzing the miscellaneous revenue account.
63. The erroneous inclusion of transactions that should properly

be recorded as assets into accounts such as repairs expense,
lease expense, or supplies is a common client error. The au-
ditor should evaluate the likelihood of these types of mis-
classifications in conjunction with
A. Obtaining an understanding of internal control.
B. The· test of controls.
C. The tests of transactions.
D. The tests of details of balances.
834 CPA. EXAMINATION REVIEWER: AUDITING THEORY
64. If the client fails to record disposals of property, plant, and

equipment, both the original cost of the asset account and
the net book value will be incorrect.
A. Both will be overstated indefinitely.
B. The original cost will be overstated indefinitely, and the
net book value will be overstated until the asset is fully
depreciated.
C. The original cost will be overstated indefinitely, and the
net book value will be understated indefinitely.
D. The original cost will be overstated indefinitely, and the
net book value will be understated until the asset is fully
depreciated.
65. Which of the following is an effective internal accounting

control used to prove that production department employees
are properly validating payroll time cards at a time-recording
station?
A. Internal auditors should make observations of distribu-
tion of paychecks on a surprise basis.
B. Time cards should be carefully inspected by those per-
sons who distribute pay envelopes to the employees.
C. One person should be responsible for maintaining rec-
ords of employee time for which salary payment is not to
be made.
D. Daily reports showing time charged to jobs should be
approved by the supervisor and compared to the total
hours worked on the employee time cards.
66. The auditor's objective during an observation of a client's

physical inventory count is to
A. Disc~ver whether a client has counted a particular inven-
tory item or group of items.
B. Obtain direct knowledge that the inventory exists and
has been properly counted.
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12 Practice Examinations
835
C. Provide an appraisal of the quality of the merchandise on

hand on the d~y of the p~ysical count.
D. Allow the aud~tor to supervise the conduct of the count
so as to obtain assurance that inventory quantities are
reasonably accurate.
67. During its fiscal year, a company issued, at a discount, a

substan~ial am?_unt of firs~-mortgage bonds. When perform-
ing audit work in connection with the bond issue the inde-
pendent auditor should '
A. Confirm the existence of the·bondholders.
B. Review the minutes for authorization.
c. Trace the net cash received from the issuance to the
bond .Payable account.
o. Inspect the records maintained by the bond trustee.
68. A proof of cash is not an effective procedure for identifying
which of the following types of misstatements?
A. All recorded disbursements were paid by the bank.
B. All recorded cash receipts were deposited.
C. All amounts that were paid by the bank were recorded.
D. Some checks were written for incorrect amounts.
69. Which of the following is not a reason why the auditor re-
quests that th~ client provide a letter of representation?
A. Professional auditing standards require the auditor to ob-
tain a letter of representation .
B. It impresses upon management its responsibility for the
accuracy of the information in the financial statements.
C. It provides written documentation of the oral responses
. already received to inquiries of management.
D. It provides written documentation, which is a higher
quality of evidence than management's oral responses to
inquiries.
70. The auditor's responsibility with respect to events occurring

between the balance sheet date and the end of the audit
examination is best expressed by which of the following
statements? ·
A. The auditor is fully responsible for events occurring in
the subsequent period and should extend all· detailed
procedures through the last day of fieldwork.
B. The auditor is responsible for determining that a proper
cutoff has been made and performing a general review
of events occurring in the subsequent period.
C. The auditor's responsibility is to determine that a proper
cutoff has been made and that transactions recorded on
or before the balance sheet date actually occurred. ·
D. The auditor has no responsibility for events occurring in
the subsequent period unless these events affect trans-
actions recorded on or before the balance sheet date.
71. According to the Code of Professional Ethics for CPAs, which

of the following fee arrangements is prohibited?
A. A fee for a review of financial statements that is based
on time spent on the engagement. . d
B. A fee for a review of financial statements that is base
on time spent and a premium for the risk involved. d
C. A fee for a review engagement that is based on a fixe
fee of PlS,000. . on
D. A fee for a review engagement that varies dependi~g
the amount of financing that the company may obtain .
· re·
72. Which of the following is not ordinarily performed in
sponse to the risk of management override? nsac·
A. Evaluating the rationale for significant unusual tra
tions.
B. Observe counts of inventor)i at all locations.
C. Review accounting estimates for bias. . ents·
D. Test appropriateness of journal entries and adJUstfll
cHApTE
In considering internal control, the auditor is basically con-

73. cerned that it provides reasonable assurance that
A. ·operational efficiency has been achieved in accordance
with management plans.
B. Material misstatements due to errors and fraud have
been prevented or detected. ·
c. controls have not been circumvented by collusion.
o. Management cannot override the system.
74. Which of the following fraudulent activities most likely ·could

be perpetrated due to the lack of effective internal controls
in the revenue cycle?
A. Fictitious transactions may be recorded that cause an
understatement of revenues and an overstatement of re-
ceivables.
B. Claims received from customers for goods returned may
be intentionally recorded in other customers' accounts.
c. Authorization of credit memos by personnel who receive
cash may permit the misappropriation of cash.
D. The failure to prepare shipping documents may cause an
overstatement of inventory balances.
75. Which of the following is a general principle relating to the

reliability of audit evidence?
A. Audit evidence obtained from indirect sources rather
than directly is more reliable than evidence obtained di-
rectly by the auditor.
B. Audit evidence . provided by copies is more reliable than
that provided by facsimiles.
C. Audit evidence obtained from knowledgeable independ-
ent sources outside the client company is more reliable
than audit evidence obtained from nonindependent
sources.
'It it ' •: 5
D. Audit evidence provided by original documents is more

reliable than audit evidence generated through a system
of effective controls.
76. An entity's income statements were misstated due to the

recording of journal entries that involved debits and credits
to an unusual combination of expense and revenue ac-
counts. The auditor most likely could have detected this
fraudulent financial reporting by
A. Tracing a sample of journal entries to the general ledger.
B. Evaluating the effectiveness of internal control.
C. Investigating the reconciliations between controlling ac-
counts and subsidiary records.
D. Performing analytical procedures designed to disclose
differences from expectations.
77. Which of the following is the best example of a substantive

test?
A. Examining a sample of cash disbursements to test
whether expenses have been properly approved.
B. Confirmation of balances of accounts receivable.
C. Comparison of signatures on checks to a list of author-
ized signers.
D. Flowcharting of the client's cash receipts system.
78. Which of the following is not an element of examinin_g a

forecast?
. fi ancial
A. Evaluating the preparation of the prospective in
statements.
B. Understanding internal controls.
C. Evaluating the support underlying the assumptions.
D. Issuing an examination report.
cHAPT
Assurance_ provided by a r~view is substantially less than an

79
· audit. Wh1_ch of the following statements is true regarding
these services?
A. A review requires more substantive evidence than an
audit.
B. An audit requires less evidence related to internal control
than a review.
c. A review requires less evidence than an audit.
D. None of the above statements is true.
80. The statement that "Nothing came to our attention which

would indicate that these statements are not fairly present-
ed" expresses which of the following?
A. Disclaimer of an opinion. '
B. Negative assurance.
c. Negative confirmation.
D. Shared opinion.
81. When comparing misstatements with a measurement base,

the auditor must consider the pervasiveness of the mis-
statement. Of the following examples, the most pervasive
misstatement is a(n):
A. Understatement of inventory.
B. Understatement of retained ear11ings caused by a miscal-
culation of dividends payable.
C. Misclassification of notes payable as a long-term liability
when it should be current.
D. Misclassification of salary expense as a selling expense
when it should be allocated equally to both selling and
administrative expense.
82. Which of the following representa~ions· does an auditor make

explicitly and which implicitly when issuing an unmodified
opinion?
Conformity with PFRS Adequacy of disclosure

A. Explicitly Explicitly
e. Explicitly Implicitly
c. Implicitly Explicitly
D. Implicitly Implicitly
83. When there is uncertainty about a company's ability to con-

tinue as a going concern, the auditor's concern is the possi-
bility that the client may not be able to continue its opera-
tions or meet its obligations for a "reasonable period of
time." For this purpose, a reasonable period of time is con-
sidered not to exceed
A. Six months from the date of the financial statements.
B. One year from the date of the financial statements.
·C. Six months from the date of the audit report.
D. One year from the date of the audit report.
84. Which of the following statements is true when the CPA has
been engaged to perform an audit of financial statements?
A. The CPA firm is engaged and paid by the client; there·
fore, the firm has primary responsibility to be an advo·
cate for the client.
B. The CPA firm is engaged and paid by the client, but the
primary beneficiaries of the audit are those who rely on
the financial statements.
C. Should a situation arise where there is no convincing auf
tho_ritative ~tandard available, and there is a ~hOiC~t~
act1ons which could impact a client's financ1a! st_ in
15
ments, the CPA is free to endorse the choice which
the investors' interests. ·
D. The CPA fi rm has primary responsibility to the FRSC.
85. Accordinq- to the

. Code of Ethics , all CPAs
· e at ".. 11
A. Should be independent in fact and in appearanc
times.
ct-l.ApTE R
6. In public practice should be independent in fact and in

appearance at all times.
c. In public practice should be independent in fact and in
appearance when providing auditing and other assurance
services.
o. In public practice should be independent in fact and in
appearance when providing auditing, tax, and MAS ser-
vices.
86. Which of the following statements is incorrect?

A. There are many ways an auditor can accumulate evi-
dence to meet overall audit objectives.
B. Sufficient appropriate evidence must be accumulated to
meet the auditor's professional responsibility.
c. It is appropriate to minimize the cost of accumulating ev-
idence.
D. Gathering evidence and minimizing costs are equally im-
portant considerations that affect the approach the audi-
tor selects.
87. Management assertions are

A. Implied or expressed representations about accounts,
transactions, and disclosures in the financial statements. ·
B. Stated in the notes to the financial statements.
C. Explicitly expressed representations about the financial
statements.
D. Provided to the auditor in the assertions letter, but are
not disclosed on the financial statements.
88. Which of the following statements about the existence and

completeness assertions is not true?
A. The existence and completeness .assertions .emphasize
different audit concems.
B. Existence deals with overstatements and completeness
deals with understatements.
r:
842
'c.Existence deals with understatements and completeness

deals with overstatements.
D. The completeness assertion deals with unrecorded
transactions.
89. Whtch of the following statements is true?

A. Audit objectives follow and are closely related to man-
agement assertions.
8. Management's assertions follow and are closely related
to the audit objectives.
C. The auditor's primary responsibility is to find and disclose
fraudulent management assertions.
D. Assertions about presentation and disclosure deal with
whether the accounts have been included in the financial
statements at appropriate amounts.
90. After the auditor has completed all audit procedures, it is

necessary to combine the information obtained to reach an
overall conclusion as to whether the financial statements are
fairly presented. This is a highly subjective process that re-
lies heavily on
A. PFRS .
8. The Code of Professional Ethics
C. AASC
D. The auditor's professional judgment
. d the use of
91. Under which of the following circumstances woul. le most
the blank form of confirmations of accounts rece1vab
likely be preferable to positive confirmations? . without
A. The recipients are likely to sign the confirmations
devoting proper attention to them. . t to verifY·
8. Subsequent cash recei~ts ~re unusually d1fficul ptions are
C. Analytical procedures indicate that few exce
expected.
cW'P 843
D. i:ie _combined assessed level of inherent risk and control

nsk is low. . .
92. Which of the foll_owing is not a step in an auditor's assess-

ment of control nsk?
A. Evaluate the effectiveness of internal control with tests
of controls. ·
B. Obtain an understanding of the entity's information sys-
tem and control environment.
c. Perform tests of details of transactions to detect material
misstatements in the financial statements.
o. Consider whether controls can have a pervasive effect on
financial statement assertions.
93, An auditor is considering whether the omission of a substan-

tive procedure considered necessary at the time of an audit
may impair the auditor's present ability to support the previ-
ously expressed opinion. The auditor need not apply the
omitted procedure if the · ·
A. Financial statements and auditor's report were not dis-
tributed beyond management and the board of directors.
B. Auditor's previously expressed opinion was qualified be-
cause of a material misstatement in the financial state-
ments.
C. Results of other procedures that were applied tend to
compensate for the procedure omitted.
D. Omission is due to unreasonable delays by client person-
nel in provi_ding data on a timely basis.
94. The following statements relate to the ~erfqrma.nce of ?n

assurance engagement other than an audit or review of his-
torical financial information cover~d by PSAs' and PSREs.
Which is incorrect?
A. Those persons who are to perform the engagement

should collectively possess the necessary professional
competence:
B. The practitioner is not allowed to use the work of per-
sons from other professional disciplines.
C. The practitioner should consider materiality and assur-
ance engagement risk when planning and performing an
assurance engagement.
0. The assurance report should be in writing and should
contain a clear expression· of the practitioner's conclusion
about the subject matter: information.
95. Which of the following fundamental ethical principles prohib-

its association of professional accountants with reports, re-
turns, communications or other information that is believed
to contain a materially false or misleading statement?
A. Integrity
B. Objectivity
C. Professional competence and due care
D. Confidentiality
96. Early in an audit, the auditor discovered several fraud ris~

factors. Which of.the following is the least likely response 0
the. auditor? he
A. Substantive test procedures are moved away from t
5
end of the client's accounting period so that diff~rence
can be more easily resolved. . dit
B. The auditor should attempt to incorporate in the au
more elements of unpredictability. .t evi·
C. The auditor should attempt to gather more audi
dence _through physical inspection. . more
D. Analytical procedure should still be applied but at a
disaggregated level.
ER 12 Practice Examinations
cHAPT 845
each of the following types of mis tat

fOr 100) select th s ements (Ques-
tions 97- .' e control that should have pre-
\fented the misstatement.
97, A manufacturing company received a substantial sales return

in the last month of the year, but the credit memorandum
for the return .was not prepared until after the auditors had
completed their field work. The returned merchandise was
included in the physical inventory.
A. Aged trial balance of accounts receivable is prepared.
B. Credit memoranda are prenumbered and all numbers are
accounted for.
c. A reconciliation of the tri~I balance of customers' ac-
counts with the general ledger control is prepared peri-
odically. · .
D. Receiving reports are prepared for all materials received
and such reports are accounted for on a regular basis.
98. The sales manager credited a salesman, Juniver, with sales

that were actually "house account" sales. Later, Juniver di-
vided his excess sales commissions with the sales manager.
A. The summary sales entries are checked periodically by
persons independent of sales functions.
8. Sales orders are reviewed and approved by persons in-
dependent of the sales department.
C. The internal auditor compares the sales commission
statements with the cash disbursements records.
D. Sales orders are prenumbered, and all numbers are ac-
counted for.
99. A sales invoice for P52,000 was computed correctly but, by

mistake, was key entered as P25,000 to the sales journal
and to the accounts receivable master file. The customer
remitted only P25,000, the amount on his monthly state-
ment.
------
._,........._ _____............ _......,_,.,-~:~_,,,--·
'
,_ Q , , ~ ~ ·
~I
A. Prelistings and predetermined totals are used to control

postings.
B. Sales invoice serial numbers, prices, discounts, exten-
. sions, and footings are independently chetked.
C. The customers' monthly statements are verified and
mailed by a responsible person other than the
bookkeeper who prepared them.
D. Unauthorized remittance deductions made by customers
or other matters in dispute are investigated promptly by
a person independent of the accounts receivable func-
tion.
100. Copies of sales invoices show different unit prices for appar-
ently identical items. .
A. All sales invoices are checked as to all details after their
preparat.ion.
B. Differences reported by customers are satisfactorily in·
vestigated.
C. Statistical sales data are compiled and reconciled with
recorded sales. ·
D. All sales invoices are compared with the customers' pur-
chase orders. ·
...c:R 12 Practice Examinations 847
ct'fAP• ..
l(EY ANSWERS-1
1. D 26. c 51. B 76. D

2. c 27. c 52. c 77. B
3. c 28. B 53. A 78. B
4. A 29. D 54. B 79. c
5. B 30. A SS. c 80. B
6. D 31. D 56. D 81. A
7. c 32. A 57. B 82. B
8. A 33. c 58. B 83. B
9. B 34. B 59. D 84. B
10. D 35. c 60. c 85. c
11. A 36. c 61. D 86. D
12. c 37. D 62. A 87. A
13. c 38. c 63. A 88. c
14. c 39. D 64. B 89. A
15. A 40. A 65. D 90. D
16. B 41. c 66. B 91. A
17. A 42. c 67. B 92. c
18. c 43. B 68. D 93. c
19. c 44. c 69. 0- 94. B
20. A 45. A 70. B 95. A

21. D 46. A 71. D 96. A
22. B 47. D 72. B 97. D
23. D 48. D 73. B 98. B
24. B 49. D 74. c 99. A
25. B so. c 75. c · 100. A
1. Which of the following activities performed by a department

supervisor most likely would help in the prevention or detec-
tion of a payroll fraud?
A. Distributing paychecks directly to department employees.
B. Setting the pay rate for departmental employees.
C. Hiring employees and authorizing them to be added to
payroll.
D. Approving a summary of hours each employee worked
during the pay period.
2. In establishing the existence and ownership of long-term

investments in the form of publicly-traded stock, an auditor
most likely would inspect the securities or
/'.. Correspond with the investee company to verify the
numbP.r" of shares owned.
B. Confirm the number of shares owned that are held by an
independent custodian.
C. Apply analytical procedures to the dividend income and
investments accounts. ·
D. Inspect the cash receipts journal for amounts that could
represent the sale of securities.
3. Which of the following statements ordinarily is not inclu~~

1
among the written client representations made by the c
executive officer and the chi~f financial officer? . bl to
A. "Sufficient evidential matter has been made a~ailda epin·
0
the auditor to permit the issuance of an unrnod1fie
ion." . . · at our
B. "There are no unasserted claims or assessments ~h and
lawyer has advised us are proba.bl~ of assertion
must be disclosed."
cJ-1.AP"f
c. "We !:lave no _plans or intentions that may materially af-

fect the carrying value or classification of assets and lia-
bilities."
D. "No events have occurred subsequent to the balance
sheet date that would require adjustment to, or disclo-
sure in, the financial statements."
. 4. Accepting an engagement to examine an entity's financial

projection most likely would be appropriate if the projection
were to be distributed to
A. All employees who work for the entity.
B. Potential shareholders who request a prospectus or a
registration statement. ·
c. A bank with which the entity is negotiating for a loan.
D. All shareholders of record as of the report date.
s. Which of the following represents an inherent limitation of

internal controls?
A. Bank reconciliations are not performed on a timely basis.
B. The CEO can request a check with no purchase order.
C. Customer credit checks are not performed.
D. Shipping documents are not matched to sales invoices.
6. An auditor would use variables sampling to

A. Determine the total estimated value of ending merchan-
dise inventory.
B. Determine the number of inventory items improperly
costed.
C. Determine how often credit sales of a certain magnitude
were not approved.
D. Estimate how often sales invoices were not verified for
mathe:matical accuracy.
. 7. Auditors usually trace the details of the test counts made

during the physical inventory observation to the final pricec.
I
l
I
II
inventory, a procedure that is done to provide evidence that

· items observed by the auditor at the physical inventory
count date are
A. Owned by the client.
B. Not obsolete.
C. Physically present at the time the final priced inventory is
prepared.
D. Included in the final priced inventory.
8. A purpose of a management representation letter i~ to re-

duce
A. Audit risk to an aggregate level of misstatement that
could be considered material.
B. An auditor's responsibility to detect material misstate-
ments only to the extent that the letter is relied on.
c. The possibility of a misunderstanding concerning man-
agement's responsibility for the financial statements.
D. The scope Jf an auditor's procedures concerning refated
party transactions and subsequent events.
9. A retailing entity uses the Internet to execute and record its

purchase tran$aCtions. The entity's auditor recognizes that
the documentation of details of transactions will be retained
for only a short period of time. To compensate for this limi-
tation, the auditor most likely would: .
A. Compare a sample of paid vendors' invoices to the re-
ceiving records at year-end. .
B. Plan for a large measure of tolerable misstatement in
substantive tests.
C. Pe.rform tests several times during the year, rather than
only at year-end.
D. Increase the sample of transactions to be selected for
cutoff tests.
cfi.APT
Equipment acq~isitions that are misclassified as maintenance

10
· expense most likely would be detected by an internal control
procedure th.at provide.s for
A. Segregation of duties of employees in the accounts pay-
able department.
B. Independent verification of invoices for disbursements
recorded as equipment acquisitions.
c. Investigation of variances within a formal budgeting sys-
tem.
o. Authorization by the board of directors of significant
equipment acquisitions.
ll. controls should be designed to provide reasonable assur-

ance that
A. Organizational objectives and goals will be achieved eco-
nomically and efficiently.
B. Management's plans have not been circumvented by
worker collusion.
c. The internal audit activity's g~idance and oversight of
management's performance is accomplished economical-
ly and efficiently.
D. Management's planning, organizing, and directing pro-
cesses are properly evaluated.
12. Which of the following procedures would an auditor most

likely perform in obtaining evidence about subsequent
events?
A. Examine changes in the quoted market prices of invest-
ments purchased since the year end.
B. Compare the latest available interim financial information
with the financial statements being reported upon.
C. Apply analytical procedures to the details of the balance
sheet accounts that were tested a't interim dates.
D. Inquire about payroll checks that were recorded before
the year end but cashed after the year end.
13. A "proof of cash" used by an auditor

A. Proves that the client's year-end balance of cash is fairly
stated.
,B. Confirms that the client has properly separated the cus-
tody function from the recording function with respect to
cash.
C. Validates that the. client's bank did not make an error
during the period being examined.
D. Determines if there were any unauthorized disburse-
ments or unrecorded deposits for the given period.
14. To achieve audit efficiency and effectiveness with a personal

computer, the two crucial requirements are selecting
A. The appropriate audit tasks for personal computer appli-
cations and the appropriate software to perform the se-
lected audit tasks.
B. The appropriate software to perform .the selected audit
tasks and data that can be accessed by the auditor's
personal computer.
C. Company data that can be accessed by the auditor's per-
sonal computer and the appropriate audit tasks for per-
sonal computer applications.
D. The appropriate sample of company data to test with the
auditor's personal computer and the appropriate soft-
ware to perform the selected audit tasks.
15. Which of the following conditions most likely would pose the
greatest risk in accepting a new audit engagement? .
A. Staff will need to be rescheduled to cover this new client.
B. There will be a client-imposed scope limitation.
C. The firm will have to hire .an expert in one audit area.
Q. The client's financial reporting system has been in place
for 10 years.
,-ER 12 Practice Examinations 853
ctJAP .
A client decides ~ot to make an auditor's proposed adjust-

16· ments that collectively are not material, and wants the audi-
tor to issue the re~ort based on the unadjusted numbers.
Which of the following statements is correct regarding the
financial statement presentation?
A. The financial statements are free from material mis-
statement, and no disclosure is required in the notes to
the financial statements.
B. The financial statements do not conform with the re-
quirements of the PFRS.
c. The financial statements contain unadjusted misstate-
ments that should result in a qualified opinion.
o. The financial statemer:its are free from material mis-
statement, but disclosure of the proposed adjustments is
required in the notes to the financial statements.
l7. In the audit of which of the following types of profit-oriented

enterprises would the auditor be most likely to place special
emphasis on tests of controls for proper classifications of
payroll transactions?
A. A manufacturing organization.
B. A retailing organization.
C. A wholesaling organization.
D. A service organization.
18. Prior to commencing field work, an auditor usually discusses

the general audit strategy with the client's managemen~.
Which of the following details do management and the audi-
tor usually agree upon at this time? · . .
A. The specific matters to be included in the communication
with the audit committee.
B. The minimum amount of misstatements that may be
considered to be reportable conditions.
C. The schedules and analyses that the client's staff should
prepare.
854 CPA EXAM/NATION REVIEWER: AUDITING THEORY
D. The effects that inadequate controls may have over the

safeguarding of assets.
19. An~lytical procedures

A. Are intended to detect material misstatements in finan-
cial statement accounts.
B. Are evaluations of financial information made by a study
of plausible relationships among both financial and non-
financial data.
C. Are concerned with how internal control policies or pro-
cedures are applied.
D. Are procedures that lend hindsight to amounts and in-
formation disclosed in financial statements as of the bal-
ance sheet date.
20. Which of the following procedures would an accountant

most likely perform during an engagement to review the fi-
nancial statements of an entity?
A. Review the predecessor accountant's working papers.
B. Inquire of management about related party transactions.
C. Corroborate litigation information with the entity's attor-
ney.
D. Communicate internal control deficiencies to senior man-
agement
21. Which of the following auditing procedures most likely·would

assist an auditor in identifying related party transactions? .
A. Retesting ineffective internal . control procedures previ-
ously reported to the audit committee.
B. Sending second requests for unanswered positive con-
firmations of accounts receivable.
C. Reviewing accounting records for nonrecurring u-ansac·
tions re~ognized ne~r t~e end of the reporting peri~d. ce
D. Inspecting communications with law firms for ev1den
of unreported contingent liabilities.
cf'iAP
TER 12 Practice Examinations 855
22 The marketing .department's proposal was finally accepted,

· and the marketing employees attended a class in using the
mainframe re~ort writer. Soon, marketing analysts found
that it was e.as1er to download the data and manipulate it on
their own microcomputers than to perform all the data ma-
nipulation with the mainframe report writer directly. One
analyst became highly skilled at downloading and wrote
downloading command sequences for the other employees.
When the analyst left the company for a better job, the de-
partment had problems making modifications to these com-
mand sequences. The department's problems are most like-
ly due to inadequate
A. Documentation.
B. Program and data backup.
c. Program testing.
o. Anti-virus software.
23. To avoid misunderstandings between a practitioner and cli-
ent, engagement arrangements are written in
A. A legal letter.
B. An engagement letter.
c. A client representation letter.
D. A letter on significant deficiencies in internal control.
24. Before expressing an opinion concerning the results of oper-

ations, the auditor would best proceed ~ith the audit of the
income statement by ·
A. Applying a rigid measurement standard designed to test
for understatement of net income.
B. Analyzing the beginning and ending balance sheet inven-
tory amounts.
C. Making net income comparisons to published i.ndustry
trends and ratios.
D. Auditing income statement accounts concurrently with
the related balance sheet accounts.
25. An auditor generally obtains from a client a formal written

statement concerning the accuracy of inventory. This par-
ticular letter of representation is used by the auditor to
A. Reduce the scope of the auditor's physical inventory
work but not the other inventory audit work that is nor-
mally performed.
B. Confirm in writing the valuation basis used by the client
to value the inventory at the low~r of cost or net realiza-
ble value.
C. Lessen the auditor's responsibility for the fair presenta-
tion of balance sheet inventories.
D. Remind management that the primary responsibility for
the overall fairness of the financial statements rests with
management and not with the auditor.
26. If a company employs a capital stock registrar and/or trans-

fer agent, the registrar or transfer agent should be request-
ed to confirm directly to the auditor the number of shares of
each class of stock
A. Surrendered and canceled during the year.
B. Authorized at the end of the reporting period. .
C. Issued and outstanding at the end of the reporting peri-
od.
D. Authorized, issued, and outstanding during the year.
27. Which of the following procedures most likely would give the
greatest assurance that securities held as investments are
safeguard~d? . d
A. There 1s no access to securities between the year en
and the date of the auditor's security count. . b
B. Proceeds from the sale of investments are received Y
an employee who does not have access to securities. f
0
C. Investment acquisitions are authorized by a member
the Board of Directors before execution.
cHAP 857
o. Access to :ecurities requires the signatures and presence

of two designated officials. ·
zs. Which of the following payroll control activities would most

effectively ensure that payment is made only for work per-
formed?
A. Require all employees to record arrival and departure by
using the time clock.
B. Have a payroll clerk recalculate all time cards.
c. Require all employees to sign their time cards.
o. Require employees to have their direct supervisors ap-
prove their time cards.
29. Using laptop computers in conducting financial statement

audits may affect the methods used to review the work of
staff assistants because
A. Supervisory personnel may not have an understanding of
the capabilities and limitations of computers.
B. Working paper documentation may not contain readily
observable details of calculations.
c. The overall audit objectives may differ.
D. Documenting the supervisory review may require assis-
tance of management services personnel.
30. Which of the following factors would least likely affect the
extent of the auditor's consideration of the client's internal
controls?
A. The amount of time budgeted to complete the enga~~-
ment.
B. The size and complexity of the client.
C. The nature of specific relevant controls.
D. The auditor's prior experience with client operations.
31. Assume an auditor's interim consideration of intetnal control

in the expenditure/disbursement cycle reveals that control
nr··.·.,.r •
risk can be assessed below the maximum and detection risk

above· the minimum for certain assertions. Which of the fol-
lowing is true about substantive tests applied to accounts
payable?
A. The auditor is more apt to·confirm payables balances.
B. The auditor is less apt to perform substantive tests at
the balance sheet date only.
C. The auditor is more apt to increase the extent of sub-
stantive tests.
D. The auditor is more apt to ignore the risk of incorrect ac~
ceptance when sampling accounts payable.
32. Analytical procedures performed during an audit indicate

that accounts .receivable doubled since the end of the prior
year. However, the ·allowance for doubtful accounts as a
percentage of accounts receivable remained about the same.
Which of the following client explanations would satisfy the
auditor?
A. A greater percentage of accounts receivable are listed in
the "more than 120 days overdue" category than in the
prior year.
B. Internal control activities over the recording of cash ~e
ceipts have been improved since the end of the pnor
year.
C. The client opened a second retail outlet during the cuhr-
rent year and its credit sales approximately equaled t e
older outlet. nt
D. The client tightened its credit policy during the curre _
year and sold considerably less merchandise to custorn
ers with poor credit ratings.
. t copies
33. Tracing copies of computer-prepared sales .invo~ce: 0 docu-
of the corresponding computer-prepared sh1pp1ng
ments provides evidence that
A. Shipments to customers were properly billed.
-----
ER
cHAPT
B. Entries in the accounts receivable subsidiary ledger were

for sales actually shipped.
c. Sales billed to customers were actually shipped.
o. No duplicate shipments to customers were made.
34. An auditor compares annual revenues and expenses with
similar amounts from the prior year and investigates all
changes exceeding 10%. This procedure most likely could
indicate that
A. Fourth quarter payroll taxes were properly accrued and
recorded, but were not paid · until early in the subse-
quent year.
B. Unrealized gains from increases in the value of available-
for-sale securities were recorded in the income account
for trading securities.
c. The annual provision for uncollectible accounts expense
was inadequate because of worsening economic condi-
tions.
D. Notice of an increase in property tax rates was received
by management, but was not recorded until early in the
subsequent year.
35. Which of the following audit procedures would allow an au-

ditor to test whether receiving department procedures are
applied properly?
A. Test a sample of receiving documents.
B. Observe receiving procedures on a surprise basis.
C. Review procedures manuals.
D. InterJiew receiving department personnel.
36. An adequate system of internal controls is most likely to de-

tect a fraud perpetrated by a
A. Group of employees.in colfusion.
B. Single employee.
C. Group of managers in collusion.
D. Single manager.
37. An auditor is testing sales transactions. One step is to trace

a sample of debit entries from the accounts receivable sub-
sidiary ledger back to the supporting sales invoices. What
would the auditor intend to establish by this step?
A. All sales have been recorded. .
B. Debit entries in the accounts receivable subsidiary ledger
are properly supported by sales invoices.
C. All sales invoices have been properly posted to customer
accounts.
D. Sales invoices represent bona fide sales.
38. IT, Inc. has changed from a conventional to a computerized

payroll clock card system. Factory employees now record
time in and out with magnetic cards, and the computer sys-
tem automatically updates all payroll records. Because of
this change,
A. The auditor must conduct the audit using computer-
assisted auditing techniques.
B. The internal control has improved.
C. Part of the audit trail has been lost.
D. The potential for payroll-related fraud has been dimin-
ished.
39. All of the following are examples of substantive tests to veri-

fy the valuation of net accounts receivable except the
A. Recomputation of the allowance for bad debts.
B. Inspection of accounts for current versus noncurrent sta-
tus in t~e statement of financial position.
C. Inspect1?n of the accounts receivable aging schedule.
D. ~ompanson of the allowance for bad debts with past pe-
nods.
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\.
pTER 12 Practice Examinations 861

cHA
40. Wh_ich of the f~llowing explanations best describes why an

auditor r:na~ decide to reduce tests of details for a particular
audit obJect1ve? ,
~ A. The audit is being performed soon after the balance
~ sheet date.
~ B. Audit staff are experienced in performing the planned
procedures.
c. Analytical procedures have revealed no unusual or unex-
~ · pected results.
D. There were many transactions posted to the account
Ofi' during the period.
41. An auditor concludes that there is a material inconsistency in

the other information in an annual report to shareholders
eo containing audited financial statements. The auditor believes
rO that the financial statements do not require revision, but the
l- client is unwilling to revise or eliminate the material incon-
j sistency in the other information. Under these circumstanc-
es, what action would the auditor most likely take?
A. Consider the situation closed because the other infor-
mation is not in the audited financial statements.
B. Issue an "except for" qualified opinion after discussing
the matter with the client's audit committee. ·
C. Disclaim an opinion on the financial statements after ex-
plaining the material inconsistency in a separate "other
matter" paragraph.
D. Revise the auditor's report to include a sep~rate "other
matter" paragraph describing the material inconsistency.
42. Internal control should provide reasonable (but not neces-

sarily absolute) assurance that the entity's objectives con-
cerning reliability of financial reporting, effectiveness and ef-
ficiency of operations, and compliance with laws and regula-
tions will be achieved. This means that
A. Internal control is management's, not the auditor's re-

sponsibility.
B. An assurance engagement about management's internal
control assertions may not necessarily detect all signifi-
cant internal control deficiencies.
C. The cost of installing and implementing control activities
should not exceed the benefits.
D. There is always a risk that significant deficiencies in in-
ternal control may result in material financial statement
misstatements.
43. After testing a client's internal control activities, an auditor

discovers a number of significant deficiencies in the opera-
tion of a client's internal controls. Under these circumstances
the a1,.1ditor most likely would
A. Issue a disclaimer of opinion about the internal controls
as part of the auditor's report.
B. Increase the assessment of control risk and increase the
extent of substantive tests.
c. Issue a qualified opinion of this finding as part of the au-
ditor's report.
D. Withdraw from the audit because the internal controls
are ineffective.
44. Which of the following describes how the objective of a re-

view of financial statements differs from the objective of a
compilation engagement?
A. The primary objective of a review engagement is to test
the completeness of the financial statements prepared,
but a compilation tests for reasonableness.
B. The primary objective of a review engagement is to pro-
vide positive assurance that the financial statements are
fairly presented, but a compilation provides no such as-
surance.
cHAP
c. In a review engagement, accountants provide limited as-

surance, but a compilation expresses no assurance.
D. In a review engagement, accountants provide reasona-
ble or positive assurance that the financial statements
are fairly presented, but a compilation provides limited
assurance.
45. An auditor believes that there is substantial doubt about an

entity's ability to continue as a going concern for a reasona-
ble period of time. In evaluating the entity's plans for deal-
ing with the adverse effects of future conditions and events,
the auditor most likely would consider, as a mitigating fac-
tor, the entity's plans to :
A. Repurchase the entity's stock at a price below its book
value.
B. Issue stock options to key executives.
c. Lease rather than purchase operating facilities.
D. Accelerate t he due date of an existing mortgage.
46. An auditor should design the written audit program so that

A. All material transactions will be selected for substantive
testing.
B. Substantive tests prior to the balance sheet date will be
minimized.
C. The audit procedures selected will achieve specific audit
objectives.
D. Each account balance will be tested under either tests of
controls or tests of transactions.
47. A departure from Philippine Financial Reporting ,Standards

(PFRS) is disclosed in a note to the financial statements.
The auditor should
A. Issue an unmodified opinion, but emphasize the matter
in an emphasis of matter paragraph.
B. Issue an unmodified opinion, with no Emphasis of Matter

paragraph, since the departure from PFRS is disclosed.
C. Issue a qualified opinion.
D. Disclaim an opinion.
48. Which of the following questions would most likely be in-

cluded in an internal control questionnaire concerning the
completeness assertion for purchases?
A. Is an authorized purchase order required before the re-
ceiving department can accept a shipment or the vouch-
ers payable department can record a voucher?
B. Are purchase requisitions prenumbered and inde-
pendently matched with vendor invoices?
C. Is the unpaid voucher file periodically reconciled with in-
ventory records by an employee who does not have ac-
cess to purchase requisitions?
D. Are purchase orders, receiving reports, and vouchers
prenumbered and periodically accounted for?
49. In evaluating an entity's accounting estimates, one of an au-

ditor's objectives is to determine whether the estimates are
A. Not subject to bias.
B. Consistent with industry guidelines.
C. Based on objective assumptions.
D. Reasonable in the circumstances.
50. As a result of tests of controls, an auditor assessed control

risk too low and decreased substantive testing. This as-
sessment occurred because the true deviation rate in the
population was
A. Less than the risk of assessing control risk too low,.
based on the auditor's sample.
B. Less than the dev!ation rate in the auditor's sample.
C. More than the nsk of assessing control risk too low,
based on the auditor's sample.
cHAPTER 12 Practice Examinations
865
o. More than the deviation rate in the auditor's sample.
Which of the following statements best describes the audi-

Sl. tor's responsibility to detect conditions relating to financial
stress of employees or adverse relationships between a
company and its employees?
A. The auditor is required to plan the audit to detect these
conditions on all audits.
B. These conditions relate to fraudulent financial reporting,
and an auditor is required to plan the audit to detect
these conditions when the client is exposed to a risk of
misappropriation of assets.
c. The auditor is required to plan the audit to detect these
conditions whenever they may result in misstatements.
o. The auditor is not required to plan the audit to discover
these conditions, but should consider them if he or she
becomes aware of them during the audit.
52. Which of the following is an inherer:it limitation ·in internal

control?
A. Incompatible duties.
B. Lack of segregation·of duties.
c. Faulty human judgment.
D. Lack of an audit committee.
53. An auditor's engagement letter most likely would include a

statement that . . . . .
A. Lists potential significant defic1enc1es discovered dunng
the prior year's audit. .
B. Explains the analytical procedures that the auditor ex-
pects to apply. I ·
C. Describes the auditor's responsibility to eva uate going
D. ~f~~~r~~~s~~ditor's responsibility to detect errors and

fraud.
54. When considering internal control, an auditor should be

aware of the concept of reasonable assurance, which recog-
nizes that
A. Internal control may be ineffective due to mistakes in
judgment and personal carelessness.
B. Adequate safeguards over access to assets and records
should permit an entity to maintain proper accountabil-
ity.
C. Establishing and maintaining internal control is an im-
portant responsibility of management.
D. The cost of an entity's internal control should not exceed
the benefits expected to be derived.
55. ln planning an audit, the auditor's knowledge about the 'de-

sign of relevant controls should be used to
A. Identify the types of potential misstatements that could
occur.
B. Assess the operational efficiency of internal control.
C. Determine whether controls have been circumvented by
collusion.
D. Document the assessed level of control risk.
56. An audit supervisor reviewed the work performed by the

staff to determine if the audit was adequately performed .
The supervisor accomplished this by primari'ly reviewing
which of the following?
A. Checklists
B. Working papers
C. Analytical procedures
D. Financial statements
57. Under which . of the following circumstances would the ex-

pression of a. disc~aimer of.opinion be inappropriate?
A. The auditor 1s unable to obtain the audited financial
statements of a consolidated investee.
ct"l~pTER
B. Management . does not provide reasonable justification

for a change 1n accounting principles.
c. The company failed to make a count of its physical in-
ventory during the year and the auditor was unable to
apply alternative procedures to verify inventory quanti-
ties.
D. Management refuses to allow the auditor to have access
to the company's canceled checks and bank statements.
58. In which of the following circumstances is substantive test-

ing of accounts receivable before the balance sheet date
most appropriate?
A. The client has a new sales incentive program in place.
6. Internal controls during the remaining period are effec-
tive.
c. There is a high turnover of senior management.
o. It is a first engagement of a new client.
59. When companies use information technology (IT) extensive-
ly, evidence may be available only in electronic form. What
is an auditor's best course of action in such situations?
A. Assess the control risk as high.
6. Use audit software to perform analytical procedures.
C. Use generalized audit software to extract evidence from
client databases.
D. Perform limited tests of controls over electronic data.
60. Which of the following matters is an auditor required to

communicate to those charged with governance?
A. Adjustments that were suggested ·by the auditor and
recorded by management that have a significant effect
on the entity's financial reporting process.
B. The auditor's consideration of risk factors in assessing
the risk of material misstatement arising from the misap-
propriation of assets.
C. The results of the auditor's analytical procedures per-

formed in the review stage of the engagement that indi-
cate significant variances from expected amounts.
D. Changes in the auditor's preliminary judgment about ma-
teriality that were caused by projecting the results of sta-
tistical sampling for tests of transactions.
61. Before applying principal substantive tests to an entity's ac-

counts receivable at an interim date, an auditor should
A. Consider the likelihood of assessing the risk of incorrect
rejection too low.
B. Project sampling risk at the maximum for tests covering
the remaining period.
C. Ascertain that accounts receivable are immaterial to the
financial statements.
D. Assess the difficulty in controlling the incremental audit
risk.
62. Which of the following procedures would a CPA most likely

perform in the planning stage of a financial statement audit?
A. Obtain representations from management regarding the
availability of all financial records.
B. Communicate with those charged with governance con-
cerning the prior year's audit adjustments.
C. Make inquiries of the client's attorney regarding pending
and threatened litigation and assessments.
D. Compare recorded financial information with anticipated
results from budgets and forecasts.
63. Which of the following strategies most likely could improve

the response rate of the confirmations of accounts receiva-
ble?
A. Restrict the selection of accounts to be confirmed to
those customers with large balances.
cti.APT
B. Include a list of items or invoices that constitute the cus-

tomers' account balances.
c. Explain to customers that discrepancies will be investi-
gated by an independent third party.
o. Ask customers to respond to the confirmation requests
directly to the auditor by fax.
64. Which of the following business functions is associated with

the revenue/receipt cycle?
A. Obligations are paid to vendors and employees.
B. Resources are distributed to outsiders in exchange for
promises of future payments.
c. Resources are used, held, or tran:;formed.
o. Capital funds are received from investors and creditors.
65. Which of the following would prevent a paid disbursement
from being paid a second time?
A. Individuals responsible for signing checks should prepare
vouchers.
B. Disbursements should be approved by at least two re-
sponsible officials.
C. The disbursement date should be within a few days of
the date the voucher is presented for payment.
D. The official signing the check should cancel the support-
ing documents.
66. When a client engages in transactions involving derivatives,

the auditor should
A. Develop an understanding of the economic substance of
each derivative.
B. Confirm with the client's broker whether the derivatives
are for trading purposes.
C. Notify the audit committee about the risks involved in
derivative transactions.
D. Add an emphasis-of-matter paragraph to the auditor's

report describing the risks associated with each deriva-
tive.
67. Unlike consulting services, assurance services

A. Make recommendations to management.
8. Report on how to use information.
C. Report on the quality of information.
D. Are two-party contracts.
68. Assuming cash receipts from credit sales have been misap-
propriated. Which of the following is likely to conceal the
misappropriation and unlikely to be detected?
A. Understating the sales journal.
8. Overstating the accounts receivable control account.
C. Overstating the accounts receivable subsidiary ledger.
D. Overstating the cash receipts journal.
69. Which of the following factors would most likely influence an

auditor's consideration of the reliability of data when per-
forming analytical procedures?
A. Whether the data were developed in a computerized or a
manual accounting system .
B. Whether the data were prepared on the cash basis or in
conformity with PFRS.
C. Whether the data were developed under a system with
adequate controls.
D. Whether the data were processed in an online system or
a batch entry system.
70. When an auditor tests the internal controls of a computer-

ize€! accounting system, which of the following is true of the
test data approach?
I
\
'
TER
ct-iAP
A. Test data are coded to a dummy subsidiary so they can

be extracted from the system under actual operating
conditions.
B. Test data programs need not be tailor-made by the au-
ditor for each client's computer applications.
c. Test data programs usually consist of all possible valid
and invalid conditions regarding compliance with internal
controls.
o. Test data are processed with the client's computer and
the results are compared with the auditor's predeter-
mined results.
71. The best argument against the use of negative accounts re-
ceivable confirmations is
A. The cost-per-response is excessively high.
B. There is no way of knowing if the intended recipients re-
ceived them.
c. Recipients are likely to feel that in reality the confirma-
tion is a subtle request for payment.
D. The inference drawn from receiving no reply may not be
correct.
72. The CPA reviews an entity's payroll procedures. An example

of an internal control weakness is to assign to a department
supervisor the responsibility for
A. Distributing payroll checks to subordinate employees.
B. Reviewing and approving time reports for subordinates.
C. Interviewing applicants for subordinate positions prior to
hiring by the personnel department.
D. Initiating requests for salary adjustments for subordinate
employees.
73. A client is a defendant in a patent infringement lawsuit

against a major competitor. Which of the following items
872 . CPA EXAMINATION REVIEWER: AUDITING THEORY
would least likely be included in the attorney's response to

the auditor's letter of inquiry?
A. A description of potential litigation in other matters or re-
lated to· an unfavorable verdict in the patent infringe-
ment lawsuit. .
B. A discussion of case progress and the strategy currently
in place by client management to resolve the lawsuit.
C. An evaluation of the probability of loss and a statement
of the amount or range of loss if an unfavorable outcome
is reasonably possible.
D. An evaluation of the ability of the client to continue as a
going concern if the verdict is unfavorable and maximum
damages are awarded.
74. On March 1, Guanzon, CPA, expressed an unmodified opin-

ion on the financial statements of Apex Co. On July 1,
Guanzon's internal inspection program discovered that en-
gagement personnel failed to observe Apex's physical inven-
tory. Guanzon believes that this omission impairs Guanzon's
ability to support the unmodified opinion. If Apex's creditors
are currently relying on Guanzon's opinion, Guanzon should
first:
A. Request Apex's management to communicate to its cred-
itors that Guanzon's opinion should not be relied on.
B. Reissue Guanzon's auditor's n~port with an "other mat-
ter" paragraph describing the departure from PSAs. d
C. Undertake to apply the alternative procedures that woul
provide a satisfactory basis for Guanzon's opinion.
1
D. Advise Apex's board of directors to disclose this deve-
opment in its next interim report.
I
75. Which of the following procedures is ordinarily ~erform~~a~~

an accountant during an engagement to como1le the
cial statements of an entity?
ct-!APr
ER f2 Practice Examinations 873
A. Make inquiries of the employees and senior management

regarding transactions with related parties.
B. Determine whether there is substantial doubt about the
entity's ability to continue as a going concern.
c. scan the entity's records for the period just after the
balance sheet date to identify subsequent events requir-
ing disclosure.
D. Consider whether the financial statements are free from
obvious material mistakes in the application of account-
ing principles.
]6. In assessing the competence of internal auditors, an inde-

pendent CPA most likely would obtain information about the
A. Influence of managemt:!nt on the scope of the internal
auditors' duties.
B. Policies limiting internal auditors from communicating
with the audit committee.
c. Quality of the internal auditors' working paper documen-
tation.
D. Entity's ability to continue as a going concern for a rea-
sonable period of time.
77. The primary purpose of an independent financial statement

audit is to
A. Provide a basis for assessing management's perfor-
mance.
B. Comply with government regulatory requirements.
C. Assure management that the financial statements are
unbiased and free from material misstatement.
D. Provide users with an unbiased opinion about the fair-
ness of information reported in financial statements.
78. An internal control objective in the revenue cycle is to insure

that recorded sales are valid and documented. Which evi-
dence is least likely to satisfy that objective?
874 CPA EXAMINATION REVIEWER: AUDITING THEO.RY
A. Bills of lading exist for all invoices.

B. Customer purchase orders support invoices.
C. Shipping documents exist for all invoices.
D. Credit sales have been approved by the credit depart-
ment.
79. A client's purchasing system ends with the assumption of a

liability and the eventual payment of the liability. Which of
the following best describes the auditor's primary concern
with respect to liabilities resulting from the purchasing sys-
tem?
A. Accounts payable are not materially understated.
B. Authority to incur liabilities is restricted to one designat-
ed person.
C. Acquisition of materials is not made from one ·vendor or
one grcup of vendors.
D. Commitments for all purchases are made only after es-
tablished competitive bidding procedures are followed.
80. At the conclusion of an audit, an auditor is reviewing the ev-

idence gathered in support of the financial statements. With
regard to the valuation of inventory, the auditor concludes
that the evidence obtained is not sufficient to support man-
agement's representations. Which of the following actions is
the auditor most likely to take?
A. Consult with the audit committee anci issue a disclaimer
of opinion. ·
B. Consult with the audit committee and issue a qualified
opinion. .
C. Obtain additional evidence regarding the valuation of in-
ventory. .
D. Obtain a statement from management supporting their
inventory valuation.
cHAP
for which of the following audit tests would a CPA most like-
81. ly use attri b ute sampling?
A. Identifying entries posted to incorrect accounts.
8. Estimating the amount in an expense account.
c. Evaluating the reasonableness of depreciation expense.
o. Selecting receivables for confirmation of account balanc-
es.
sz. Which of the following circumstances would permit an inde-

pendent auditor to accept an engagement after the close of
the fiscal year?
A. Issuance of a disclaimer of opinion as a result of inability
to conduct certain tests required by PSAs due to the tim-
ing of acceptance of the engagement.
8. Assessment of control risk below the maximum level.
c. Receipt of an assertion from the preceding auditor that
the entity will be able to continue as a going concern.
D. Remedy of limitations resulting from accepting the en-
gagement after the close of the end of the year, such as
those relating to the existence of physical inventory.
83. During an audit of a publicly held company, the auditor

should obtain written confirmation regarding debenture
transactions from the
A. Debenture holders.
B. Client's attorney.
C. Internal auditors.
D. Trustee.
84. Why is it less common for auditors to perform extensive

tests of controls over investments in debt and equity securi-
ties?
A. It is customary to assess control risk at the maximum
level for these accounts.
B. Physical custody of securities is often vested in outside

trustees.
C. The volume of transactions is not often large enough to
justify the cost of tests of controls.
D. These transactions are not supported by extensive doc-
umentation.
85. A client maintains a large data center where access is limited

to authorized employees. How may an auditor best deter-
mine the effectiveness of this control activity?
A. Inspect the policy manual establishing this control activi-
ty.
B. Ask the chief technology officer about known problems.
C. Observe whether the data center is monitored.
D. Obtain a list of current data center employees.
86. An entity's financial statements were misstated over a period

of years due to large amounts of revenue having peen rec- .
orded in journal entries that involved debits and credits to
an illogical combination of accounts. The auditor could most
likely have been alerted to this irregularity by
A. Scanning the general journal for unusual entries.
B. Performing cutoff tests at year end.
c. Tracing a sample of journal entries to the general ledger.
D. Examining documents supporting sales returns and al-
lowances recorded after year end.
87. Which of , the following procedures would an auditor most

likely perform prror to the balance sheet .date?
A. Review subsequent events.
B. Perform search for unrecorded liabilities.
C. Send inquiry letter to client's legal counsel. .
D. Review detail and test significant travel and entertain-
ment expenses.
TEf' 12 Practice Examinations 877
cHAP
88 A practitioner's report on agreed-upon procedures that is in

· the form ~f procedures and findings should contain:
A. Negative assurance that the procedures did not neces-
sari.ly disclose all reportable conditions. ·
B. An acknowledgment of the practitioner's responsibility
for the sufficiency of the procedures.
c. A statement of restrictions on the use of the report.
o. A disclaimer of opinion on the entity's financial state-
ments.
89 . The online data entry control callod preformatting is

A. A program initiated prior to regular input to discover er-
rors in data before entry so that the errors can be cor-
rected.
B. A check to determine if all data items for a transaction
have been entered by the terminal operator.
c. A series of requests for required input data that requires
an acceptable response to each request before a subse-
quent request is made. · ·
D. The display of a document with blanks for data items to
be entered by the terminal operator.
90. If an auditor is certain a fraud has a material effect on finan-

cial statements and the client agrees to adjust the state-
ments accordingly, the auditor should
A. Withdraw from the engagement.
B. Issue a qualified opinion.
C. Disclaim an opinion on the financial statements taken as
a whole.
D. Issue an unmodified opinion.
91. The expenditure/disbursement cycle begins wit~ requisition_s

from user departments and ends with the receipt of materi-
als and the recognition of a liability. .An auditor's primary
objective in reviewing the cycle is to
A. Obtain an understanding of the client's pre~.cribed poli-

cies and procedures sufficient to plan the audit.
B. . Investigate the handling and recording of unusual acqui-
sitions.
C. Consider the need to increase substantive tests of pur-
chases and accounts payable.
D. Assure that materials ordered, received, and paid for are
actually on hand.
92. Which of the following statements best describes an audi-

tor's responsibility to dete.ct fraud?
A. The auditor is responsible for failing to detect fraud
when the failure clearly results from not performing audit
procedures described in the engagement letter.
B. The auditor must extend auditing procedures to search.
actively for fraud.
C. The auditor must assess the risk that material fraud may
exist.
D. The auditor is responsible for failing to detect fraud only
when an unmodified opinion is issued.
93. The tolerable rate of occurrence in statistical sampling plan

is
A. A statistical measure, at a specified reliability level, of the
maximum rate of occurrence of an attribute.
B. The percentage of items in a sample that possess a par-
ticular attribute.
C. The percentage of items in a population that possess a
particular attribute.
D. The maximum rate of exception that the auditor would
be willing to accept in the population without altering the
planned reliance on the attribute.
94. VGR Corporation has numerous customers. A customer file

is kept on disk. Each customer file contains name, address,
\
\
\

cHAPrE
~. : credit limit, and a~count balance. The auditor wishes to test

this file to determine whether credit limits are being exceed-
~~ ed. The best procedure for the auditor to follow would be to
A. Develop test data that would cause some account bal-
~~. ances to exceed the credit limit and determine if the sys-
tem properly detects such situation. .
f~ a. Develop program to compare credit limits with account
balances and print out the details of any account with a
balance exceeding its credit limit.
~ . c. Request a printout of all account balances so they can be
manually checked agpinst the credit limits.
~ o. Request ·a printout of a sample account balances so they
~ can be individually checked against the credit limits.
~ 95. Assuming the tolerable deviation rate is 5 percent, the ex-

pected population deviation rate is 3 percent, and the allow-
~~, ance for sampling risk is 2 percent. What should an auditor
conclude if tests of 100 randomly chosen documents reveal
Cf/; 4 deviations?
A. Accept the sample results as support for assessing con-
trol risk below the maximum level because the tolerable
~ deviation rate less the allowance for sampling risk equals
the expected popuJation deviation rate.
·~~ B. Assess control risk at the maximum level because the
sample deviation rate plus the allowance for sampling
J· risk exceeds the tolerable deviation rate.
C. Assess control risk at the maximum level because the
i: tolerable deviation rate plus the allowance for sampling
risk exceeds the expected population deviation rate.
; D. Accept the sample result as support for assessing control
~ risk below the maximum because the sample deviation
r~te plus the allowance for sampling risk exceeds the
tolerable rate.
880 CPA EXAfV!INATION REVIEWER: AUDITING THEORY
96. Which of the following statements most likely would be in-

cluded in an engagement letter from an auditor to a client?
A. The CPA firm will provide absolute assurance about
whether the financial statements are free of material
misstatement.·
B. The CPA firm is responsible for ensuring that the client
complies with applicable laws.
C. The CPA firm will involve information technology experts
in the performance of the audit.
D. The CPA firm will adjust the financial statements to cor-
rect misstatements before issuing a report.
97. Which of the following prospective financial statements

is(are) appropriate for general use?
Financial forecast Financial projection
A. Yes Yes
B. Yes No
C. No Yes
D. No No
98. An auditor's tests of controls for completeness for the reve-

nue cycle usually include determining whether
A. Each receivable is collected subsequent to the year end.
B. An invoice is prepared for each shipping document.
c. Each invoice is supported by a customer purchase order.
D. Each credit memo is properly approved.
99. In verifying a November 30 sales cutoff date, an auditor

would be most concerned with comparing records of
A. November cash receipts with December bank deposits.
·· • .... - - - - a.... ,..,,.. c-hinmPnts.
'
ct-IAP
. In a financi~I statement audit, inherent risk is evaluated to

100
help an auditor assess which of the following?
A. The internal audit department's objectivity in reporting a
material misstatement of a financial statement assertion
it detects to the audit committee.
B. The risk that the internal control system will not detect a
material misstatement of a financial statement assertion.
c. The risk that the audit procedures implemented will not
detect a material misstatement of a financial statement
assertion.
o. The susceptibility of a financial statement assertion to a
material misstatement assuming there are no related
controls.
KEY ANSWERS-2
1. D 26. c 51. D 76. c

2. B 27. D 52. c 77. D
3. A 28. D 53. D 78. D
4. c 29. B 54. D 79. A
5. B 30. A 55. A 80. c
6. A 31. B 56. B 81. A
7. D 32. c 57. B 82. D
8. c 33. c 58. B 83. D
9. c 34. B 59. c 84. c
10. c 35. B 60. A 85. c
11. A 36. B 61. D 86. A
12. B 37. B 62. D 87. D
13. D 38. c 63. B 88. c
14. A 39. B E4. B 89. B
15. B 40. c 65. D 90. D
16. A 41. D 66. A 91. A
17. A 42. c 67. c 92. c
·1s. c 43. B 68. A 93. D
19. B 44. c 69. c 94. B
20. B 45. c 70. D 95. B
21. c 46. c 71. D 96. c
22. A 47. c 72. A 97. B
23. B 48. D 73. D 98. B
24. D 49. D 74. c 99. D
25. D 50. D 75. D 100. D
...
'

c1-tAP
pR.ACTICE EXAMINATION 3
,AsSurance service engagements

1
· A. Do not require independence.
s. Require application of all MSC "engagement standards."
c. Are performed in accordance with applicable PSAs,
PSREs, or PSAEs.
o. Do not require accumulation of sufficient appropriate ev-
idence.
2. Marciano decides to use stratified sampling. The reason for

using stratified sampling rather than unrestricted sampling is
to
A. Reduce as much as possible the degree of variability in
the overall population.
B. Give every element in the population an equal chance of
being included in the sample.
·c. Allow the person selecting the sample to use his/her own
judgment in deciding which elements should be included
in the sample.
D. Reduce the required sample size from a nonhomogene-
ous population.
3. In a 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
materially misstated financial statements.
C. Inherent and control risk cause errors that could be ma-
terial in the financial statements.
D. The auditor is not retained to conduct a financial state-
ment audit in the succeeding year.
4. Restrictions imposed by a client prohibit the observation of

physical inventories, which account for 35% of all assets.
Alternative audit procedures cannot be applied, although the
auditor was able to examine satisfactory evidence for. all
other items in the financial statements. The auditor should
issue a(an)
A. "Except for" qualified opinion.
B. Disclaimer of opinion.
C. Unmodified opinion with a separate Emphasis of Matter
paragraph.
D. Unmodified opinion with an explanation in the Auditor's
Responsibility paragraph.
5. Which of the following represents an additional cost of

transmitting business transactions by means of electronic
data interchange (EDI) rather than in a traditional paper en-
vironment?
A. Redundant data checks are needed to verify that individ-
ual EDI transactions are not recorded twice.
B. Internal audit work is needed because the potential for
random data entry errors is increased.
C. Translation software is needed to convert transactions
from the entity's internal format to a standard EDI for-
mat.
D. More supervisory personnel are needed because the
amount of data entry is greater in an EDI system.
6. Which of the following is most likely to require special plan-

ning consideration related to asset valuation?
A. Inventory is comprised of diamond rings.
B. The client has recently purchased an expensive coPY
machine.
C. Assets costing less than P2,500 are e;pensed even when
the expected life exceeds one year.
ct-!AP
o. Accelerated depreciation methods are used for amortiz-

ing the costs of factory equipment.
7. Which of the following is most likely to be a response to the

auditor's assessment that the risk of material misstatement
due to fraud for the existence of inventory is high?
A. Observe test counts of inventory at certain locations on
an unannounced basis.
B. Perform analytical procedures rather than taking test
counts.
c. Request that inventories be counted prior to year-end.
o. Request that inventory counts at the various locations be
counted on different dates so as to allow the same audi-
tor to be present at every count.
8. An auditor may achieve audit objectives related to particular

assert!ons by
A. Performing analytical procedures.
B. Adhering to a system of quality control.
c. Preparing auditor working papers.
D. Increasing the level of detection risk.
9. In auditing long-term bonds payable, an auditor most likely

would
A. Perform analytical procedures on the bond premium and
discount accounts.
B. Examine documentation of assets purchased with bond
proceeds for liens.
C. Compare interest expense with the bond payable amount
for reasonableness.
D. Confirm the existence of individual bond holders at year-
end.
886
CPA EXAMINATIC?N REVIEWER: AUDITING THEORY
10.
·c~nfirmation is most likely to be a relevant form of evidence
with re~ard to assertions about accounts receivable when
the auditor has concerns about the receivables'
A. Valuation
B. Classification
C. Existence
D. Completeness
11. Which of the following best describes what is meant by the

term "fraud risk factor?"
A. Factors whose presence indicates that the risk of fraud is
high.
B. Factors whose presence often has been observed in cir-
cumstances where frauds have occurred.
C. Factors whose presence requires modification of planned
audit procedures.
D. Significant deficiencies in an entity's internal control.
12. When an auditor believes that ·an understanding with the

client has not been established, he or she should ordinarily
A. Perform the audit with increased professional skepticism.
B. Decline to accept or perform the audit.
C. Assess control risk at the maximum level and perform a
primarily substantive audit. .
D. Modify the scope of the audit to reflect an increased nsk
of material misstatement due to fraud.
13. Which of the following is not a reason an audito: s~~uld 0 ~

tain an understanding of the elements of an entity s intern
control system in planning an audit? n
A. Identify the types of potential misstatements that ca
occur.
B. Design substantive test procedures. . con-
e. Consider the operating effectiveness of the mterna1
trol system.
cHf1P'f£
o. consider factors that affect the risk of material mis-

statements.
Which of the following statements is correct concerning an-

14· alytical pr?cedures?
A. Analytical procedures usually involve comparisons of ra-
tios developed from recorded amounts to assertions de-
veloped by management.
B. Analytical procedures used in planning an audit generally
use data aggregated at a high level.
c. Analytical procedures can replace tests of controls in
gathering evidence to support the assessed level of. con-
trol risk.
D. Analytical procedures are more efficient, but not more
effective, than t_
ests of details and transactions.
1s. Which of the following is not a primary purpose of audit

documentation?
A. Coordinate the audit
B. Assist in the preparation of the audit report.
C. Support the entity's financial statements.
D. Provide evidence of the audit work performed.
16. Which of the .following computer documentation would an

auditor most likely utilize in obtaining an understanding of
an entity's internal control system?
A. Systems flowcharts
B. · Record counts
C. Program listings
D. Record layouts
17. Which of the following statements best describes how a de-

tailed audit program of a- CPA who is engaged to audit the
financial statements of a large entity compares with the au-
dit client's comprehensive internal audit program?
888
A. The comprehensive internal audit program is substantial-

ly identical to the audit program used by the CPA be-
cause both cover substantially identical areas.
B. The comprehensive internal audit program is less de-
tailed and covers fewer areas than would normally be
covered by the CPA.
C. The comprehensive internal audit program is more de-
tailed and covers areas that would normally not be cov-
ered by the CPA.
D. The comprehensive internal audit program is more de-
tailed although it covers fewer areas than would normal-
ly be covered by the CPA.
18. If a lawyer refuses to furnish corroborating information re-

garding litigation, claims, and assessments, the auditor
should
A. Honor the confidentiality of the client-lawyer relationship.
B. Consider the refusal to be tantamount to a scope re-
striction.
c. Seek to obtain the corroborating information from man-
agement.
D. Disclose the fact in note to the financial statements.
19. The primary objective of security software is to

A. Control access to information system resources. .
B. Restrict access to prevent installation of unauthorized
utility software. ·
c. Detect the presence of viruses.
o. Monitor the separation of duties within applications.
20. In pursuing its quality control objectives with respect to ac-
ceptance of a client, a CPA firm is not likely to
A. Make inquiries on the proposed client's legal c~unsel.
B. Review financial statements of the proposed client.
c. Make inquiries of previous auditors.
"'R 12 Practice Examinations 889
cf'l.APT"'
o. Review the personnel practices of the proposed client.
An auditor is testing the reasonableness of dividend income

21
· from investments in publicly-held companies. The auditor
most likely would compute the amount that should have
been received and recorded by the client by .
A. Reading the details of the board of directors' meetings.
B. Confirming the details with the investee companies' reg-
istrars.
c. Electronically accessing the details of dividend records on
the Internet.
o. Examining the details of the client's most recent cutoff
bank statement.
22. In auditing an entity's computerized payroll transactions, an

auditor would be least likely to use test data to test controls
.concerning
A. Overpayment of employees for hours not worked.
B. Control and distribution of unclaimed checks.
c. Withholding of taxes and Social Security contributions.
D. Missing employee identification numbers.
23. Which of the following factors is most relevant when an au-

ditor considers the client's organizational structure in the
context of control risk?
A. Management's attitude toward information processing
and accounting departments.
B. The organization's recruiting and hiring practices.
C. Physical proximity of the accounting function to upper
management.
D. The suitability of the client's lines of reporting.
24. An auditor who uses the work of an expert may refer to the
expert in the auditor's report if the
A. Auditor believes that the expert's findings are reasonable

in the circumstances.
B. Expert's findings support the related assertions in the fi-
nancial st.atements.
C. Auditor modifies the report because of the difference be-
tween the client's and the expert's valuations of an as-
set.
D. Expert's findings provide the auditor with greater assur-
ance of reliability about management's representations.
25. In attribute sampling, a 25% change in which of the follow-

ing factors will have the smallest effect on the size of the
sample?
A. Tolerable rate of deviation.
B. Number of items in the population.
C. Degree of assurance desired.
D. Planned assessed level of control risk.
26. Which of the following is an analytical procedure that an au-

ditor most likely would perform during the final review stage
of an audit?
A. Comparing each individual expense account balance with
the relevant budgeted amounts and investigating any
significant variations.
B. Testing the effectiveness of internal control procedures
that appear to be suitably designed to prevent or detect
material misstatements.
C. Reading the financial statements and considering wheth-
er there are any unusual or unexpected balances that
were not previously identified.
D. Calculating each individual expense account balance as a
percentage of total entity expenses and comparing the
results with industry averages.
cHAPTER 12 Practi~ Examinations 891
27. A CPA firm is completing the fieldwork for an audit of Swe-

den Co. for the current year ended December 31. The man-
ager in charge of the ·audit is performing the final steps in
the evidence accumulation phase of the audit and notes that
there have been several changes in Sweden during the year
under audit. Which of the following items would indicate
there could be substantial doubt about Sweden's ability to
continue as a going concern for a reasonable period of time?
A. Cash infusion by a venture capital firm.
s. Recurring working capital shortages.
c. A lack of significant contracts with new customers.
D. Term debt refinanced with a new bank.
28. The blank form of accounts receivable confirmations may be

less efficient than the positive form because
A. Shipping documents need to be inspected.
B. Recipients may sign the forms without proper investiga-
tion.
c. More nonresponses to the requests are likely to occur.
D. Subsequent cash receipts need to be verified.
29. An accountant agrees to the client's request to change an

engagement from a review to a compilation of financial
statements. The compilation report should include
A. No reference to the original engagement.
B. Reference to a departure from PSAs.
C. Scope limitations that may have resulted in the change
of engagement.
D. Information about review procedures already performed.
30. The responsibility for the proper preparation of a company's

financial statements rests with its
A. Management
B. Audit committee
C. Internal auditors
D. External auditors
31. Which of the following most likely would cause an auditor to

consider whether a client's financial statements contain ma-
terial misstatements?
A. Management did not disclose to the auditor that it con-
sulted with other accountants about significant account-
ing matters.
B. The chief financial officer will not sign the management
representation letter until the last day of the auditor's
field work.
C. Audit trails of computer-generated transactions e;xist only
for a short time.
D. The results of an analytical procedure disclose unex-
pected differences.
32. Which of the following actions should the auditor take in re-
sponse to discovering a deviation from the prescribed con-
trol procedure?
A. Make inquiries to understand the potential consequence
of the deviation.
B. Assume that the deviation is an isolated occurrence
without audit significance.
C. Report the matter to the next ·higher level of authority
within the entity.
D. Increase sample size of tests of controls.
33. Which of the following events least likely would indicate the
existence of related party transactions?
A. Making a loan with no scheduled date for the funds to be
repaid.
B. Maintaining compensating balance arrangements for the
benefit of principal shareholders.
C. Borrowing funds at an interest rate significantly below
prevailing market: rates.
I'
cHAP
o. Writing off obsolete inventory to net realizable value just

before year end.
34. After issuing an auditor's report, an auditor has no obligation

to make continuing inquiries concerning audited financial
statements unless
A. Information about a material transaction that occurred
just after the auditor's report was issued is deemed to be
reliable.
B. A final resolution is made of a contingent liability that
had been disclosed in the financial statements.
c. Information that existed at the report date and may af-
fect the report comes to the auditor's attention.
D. An event occurs just after the auditor's report was issued
that affects the entity's ability to continue as a going
concern.
35. Which of the following factors is most likely to affect the ex-
tent of the documentation of the auditor's understanding of
a client's system of internal controls? _
A. The industry and the business and regulatory environ-
ments in which the client operates.
B. The degree to which information technology is used in
the accounting function.
C. The relationship between management, the board of di-
rectors, and external stakeholders.
D. The degree to which the auditor intends to use internal
audit personnel to perform substantive tests.
36. A successor auditor's inquir:ies of the predecessor auditor

should include questions regarding
A. The predecessor's evaluation of audit risk and judgment
about materiality.
B. Subsequent events that occurred since the predecessor's
audit report was issued.
- Eh;{ ·-i( Hf ' ·u -r · · · 'tcrt' ·, ' •
C. The predecessor's understanding as to the reasons for

the change in auditors.
D. The predecessor's knowledge of accounting matters of
continuing significance.
37. Which of the following procedures is- considered a test of

controls?
A. An auditor reviews the entity's check register for unre-
corded liabilities.
B. An auditor evaluates whether· a general journal entry
was recorded at the proper amount.
C. An auditor interviews and observes appropriate ·person-
nel to determine segregation of duties.
D. An auditor reviews the audit workpapers to ensure prop-
er sign-off.
38. An auditor's analytical procedures indicate a lower than ex-

pected return on an equity method investment. This situa-
tion most likely could have been caused by
A. An error in recording amortization of the excess of the .
investor's cost over the investment's underlying book
value.
B. The investee's decision to reduce cash dividends de-
clared per share of its ordinary shares.
C. An error in recording. the unrealized gain from an ·in-
crease in the fair value of available-for sale securities in
the income account for trading securities.
D. A substantial fluctuation in the price of the investee's or-
dinary shares on a national stock exchange.
39. Under which of the following conditions may an auditor's

observation procedure for inventory be performed during or
after the end of the period under audit?
A. When _the client maintains periodic inventory records.
TER
cHAP
B. When the auditor finds minimal variations in client rec-

ords and test counts in prior periods.
c. When total inventory has not varied more than 5% in
.the last five years.
D. When well-kept perpetual inventory records are checked
by the client periodically by comparisons with physical
counts.
4o. Auditors try to identify predictable relatio.nships when apply-

ing analytical procedures. Relationship involving transactions
from which of the followlng 9ccounts most likely would yield
the highest level of evidence?
A. Interest expense
B. Allowance for _doubtful accounts
c. Accounts receivable
D. Accounts payable
41. Which of the following would be a consideration in planning

a sample for a test of subsequent cash receipts?
A. Preliminary judgments about materiality levels.
B. The amount of bad debt write-offs in the prior year.
C. The size of the intercompany receivable balance.
D. The auditor's allowable risk of assessing control risk is
too.low.
42. What type of evidence would provide the highest level of

assurance in an assurance engagement?
A. Evidence secured solely from within the entity.
B. Evidence obtained from independent sources. .
C. Evidence obtained indirectly. .
D. Evidence obtained from multiple internal inquiries.
43. Which of the following outcomes is a likely benefit of infor-

mation technology used for internal control?
A. Processing of unusual or nonrecurring transactions.
B. Enhanced timeliness of information.

C. Potential loss of data.
D. Recording of unauthorized transactions.
44. Which of the following procedures would be most appropri-

ate for testing the completeness assertion as it applies to in-
ventory?
A. Scanning perpetual inventory, production, and purchas-
ing records. ·
B. Examining paid vendor invoices.
C. Tracing inventory items from the tag listing back to the
physical inventory quantities.
D. Performing cutoff procedures for shipping and receiving.
45. An auditor is concerned about a policy of management over-

ride as a limitation of internal control. Which of the following
tests would best assess the validity of the auditor's concern?
A. Matc.hing purchase orders to accounts payable.
B. Verifying that approved spending limits are not exceed-
ed.
C. Tracing sales orders to the revenue account.
D. Reviewing minutes of board meetings.
46. When an auditor plans to rely on controls that have changed

since they were last tested, which of the following courses of
action would be most appropriate?
A. Test the operating effectiveness of such controls in the
current audit.
B. Document that reliance and proceed with the original
audit strategy.
C. Inquire of management as to the effectiveness of the
controls.
D. Report the reliance in the report on internal controls.
cHAPTER 12 Practice Examinations 897
47. In which of the following circumstances would an auditor

expect to find that an entity implemented automated con-
trols to reduce risks of misstatement?
A. When errors are difficult to predict.
B. When misstatements are difficult to define.
c. When large, unusual, or nonrecurring transactions re-
quire judgment.
D. When transactions are high-volume and recurring.
48. Which of the following management roles would typically be

acknowledged in a managemel)t representation letter?
A. Management has the responsibility for the design of con-
trols to detect fraud. ·
B. Management communicates its views on ethical behavior
to its employees.
C. Management's knowledge of fraud is communicated to
the audit committee.
· D. Management's compensation is contingent upon operat-
ing results.
49. An auditor is determining if internal control relative to the

revenue cycle of a wholesaling entity is operating effectively
in minimizing the failure to prepare sales invoices. The audi-
tor most likely would select a sample of transactions from
the population represented by the
A. Cash receipts file
B. Shipping document file
C. Customer order file
D. Sales invoice file
50. An auditor observes the mailing of monthly statements to a

client's customers and reviews evidence of follow-up .on er-
rors reported by the customers. This test of controls most
likely is performed to support management's financial state-
ment assertions of
Presentation Existence or
and disclosure occurrence
A. Yes - Yes
B. Yes No
c. No Yes
D. No No
51. When a company's stock record books are maintained by an

outside registrar· or transfer agent, the auditor should obtain
confirmation from the registrar or transfer agent concerning
the
A. Amount of dividends paid to related parties.
B. Expected proceeds from stock subscriptions receivable.
C. Number of shares issued and outstanding.
D. Proper authorization of stock rights and warrants.
52. When an auditor has substantial doubt about an entity's abil-

ity to continue as a going concern because of the probable
discontinuance of operations, the auditor most likely would
express a qualified opinion if
A. The effects of the adverse financial conditions likely will
cause a bankruptcy filing.
B. Information about the entity's ability to continue as a go-
ing concern is not disclosed.
C. Manag~ment has no plans to reduce or delay future ex-
penditures.
D. Negative trends and recurring operating losses appear to
be irreversible.
53. An auditor plans to apply substantive tests to the details of

asset and liability accounts as of an interim date rather than
as of the balance sheet date. The auditor should be aware
that this practice:
A. Eliminates the use of certain statistical sampling methods
that would otherwise be available.
ct!APTE
B. Presumes that the auditor will reperform the tests as of

the balance sheet date.
c. Should be especially considered when there are rapidly
changing economic conditions.
o. Potentially increases the risk that errors that exist at the
balance sheet date will not be detected.
54, Which of the following statements is correct about the

sampie size in statistical sampling when testing internal con-
trols?
A. The auditor should consider the tolerable rate of devia-
tion from the controls being tested in determining sam-
ple size.
B. As the likely rate of deviation decreases, the auditor
should increase the planned sample size.
c. The allowable risk of assessing control risk too low has
no effect on the planned sample size.
D. Of all the factors to be considered, the population size
has the greatest effect on the sample size.
ss. Which of the following factors would most likely be consid-

ered an inherent limitation to an entity's internal contr.ol?
A. The complexity of the information processing system.
B. Human judgment in the decision making process.
C. The ineffectiveness of the bi:>ard of directors.
D. The lack of management incentives to improve the con-
trol environment.
56. A successor auditor is required to attempt communication

with the predecessor auditor prior to
A. Performing test of controls.
B. Testing beginning balances for the current year.
C. Making a proposal for the audit engagement.
D. Accepting the engagement.
57. As a result of sampling procedures applied as tests of con-

trols, an auditor incorrectly assesses control risk higher than
appropriate. The most likely explanation for this situation is
that ·
A. The deviation rate in the auditor's sample is less than the
tolerable rate, but the deviation rate in the population
exceeds the tolerable rate. ·
B. The deviation rate in the auditor's sample exceeds the
tolerable rate, but the deviation ·rate in the population is
less than the tolerable rate.
C. The deviation rates of both the auditor's sample and the
population exceed the tolerable rate. ,
D. The deviation rates of both the auditor's sample and the
population are less than the tolerable rate.
58. An auditor compared the current-year gross profit with the

prior-year gross profit to determine if cost of sales is reason-
able. What type of audit procedure was performed?
A. Test of transactions
B. Analytical procedures
C. Test of controls
D. Test of details
59. If the business environment is experiencing a recession, the

auditor most likely would focus increased attention on which
of the following accounts?
A. Purchase returns and allowances.
B. Allowance for doubtful accounts.
C. Ordinary share capital. .
D. Noncontrolling interest of a subsidiary purchased during
the year.
60. Which of the following factors most likely would cause a CPA
to decline to accept a new audit engagement?
cHAP
A. The CPA does not understand the entity's operations

and industry.
B. Management acknowledges that the entity has had re-
curring operating losses.
c. The CPA is unable to review the predecessor auditor's
working papers.
D. Management is unwilling to permit inquiry of its legal
counsel.
Gl. An auditor's principal objective in analyzing repairs and

maintenance expense accounts is to
A. Determine that all obsolete plant and equipment assets
were written off before the year-end.
B. Verify that all recorded plant and equipment assets actu-
ally exist. .
c. Discover expenditures that were expensed but should
have been capitalized.
D. Identify plant and equipment assets that cannot be re-
paired and should be written off.
62. Which of the following statements is true regarding analyti-

cal procedures in a review engagement?
A. Analytical procedures are not required to be used as a
substantive test.
B. Analytical procedures do riot involve comparisons of rec-
orded amounts to expected amounts.
C. Analytical procedures are required to be used in the final
review stage.
D. Analytical procedures involve the use of both financial
and nonfinancial data.
63. As a result of tests of controls, an auditor assesses control.

risk too high. This incorrect assessment most likely occurred
because
A. Control risk based on the auditor's sample is less than

the true operating effectiveness of the client's control ac-
tivity.
B. The auditor believes that the control activity relates to
the client's assertions when, in fact, it does not.
C. The auditor believes that the control activity will reduce
the extent of substantive testing when, in fact, it will
not.
D. Control risk based on the auditor's sample is greater than
the true operating effectiveness of the client's control ac-
tivity.
64. The auditor's inventory observation test counts are traced to

the client's inventory listing to test for which of the following
financial statement assertions?
A. Completeness
B. Rights and obligations
C. Allocation and valuation
D. Understandability and classification
65. What type of information system uses communications ca-

pabilities to make needed data and computing capability
available to end users at separate locations?
A. Distdbuted processing system
B. Time-sharing system
c. Online processing system
D. Personal computing system
66. When assessing application controls, which one of the fol-

lowing input controls or edit checks is most likely to be used
to detect a data input error in the customer account number
-field?
A. Limit check
B. Validity check
C. Control total
cHAP
o. Hash total
A manufacturer is considering using bar-code identification

67· for recording information on parts used by the manufa~ure~.
A reason to use bar codes rather than other means of rdenti-
fjcation is to ensure that
A. The movement of all parts is recorded.
s. The movement of parts is easily and quickly recorded.
c. Vendors use the same part numbers.
o. Vendors use the same identification methods.
6s. Before accepting an audit engagement, a successor auditor
should make specific inquiries of the predecessor auditor re-
garding 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 audi-
tors.
c. Awareness of the consistency in the application of PFRS
between periods.
D. Evaluation of all matters of continuing accounting signifi-
cance.
69. The ultimate purpose of assessing control risk is to contrib-

ute to the auditor's evaluation of the risk that
A. Specific internal control activities are not operating as
designed.
B. The collective effect of the control environment may not
achieve the control objectives.
C. Tests of controls may fail to identify activities relevant to
assertions.
D. Material misstatements may exist in the financial state-
ments.
904' CPA EXAMINATION REVIEWER: AUDITING THEORY
70. After making inquiries about credit granting policies, an au-

ditor selects a sample of sales transactions and examines ev-
idence of credit approval. This test of controls most likely
supports management's financial statement assertion(s) of:
Rights and Allocation and
Obligations valuation
A. Yes Yes
B. Yes No
C. No Yes
D. No No

likely perform in auditing the statement of cash flows?
A. Reconcile the amounts included in the statement of cash
flows to the other financial statements' amounts.
B. Vouch a sample of cash receipts and disbursements for
the last few days of the current year.
C. Reconcile the cutoff bank statement to the proof of cash
.to verify the accuracy of the year-end cash balar:ice.
D. Confirm the amounts included in the statement of cash
flows with the entity's financial institution.
72. Which of the following would be a consideration in planning

an auditor's sample for a test of controls?
A. Preliminary judgments about materiality levels.
B. The auditor's allowable risk of assessing control risk too
high.
C. The level of detection risk for the account.
D. The auditor's allowable risk of assessing control risk too
low.
73. During the consideration 'of internal control in a financial

statement audit, an auditor is not obligated to
A. Search for significant deficiencies fn the operation of the
internal control.
cf1APTER 12 Practice Examinations
905
a. Understand the internal control and th . i:

tern.
t·
e in, orma ran sys-
. C. Deter~ine whether the control activities relevant to audit
planning have been placed in operation.
D. Perform procedures to understand the design of internal
control.
74, Which of the following is a substantive test that an auditor

most likely would perform to verify the existence and valua-
tion of recorded accounts payable?
A. Investigating the open purchase· order file to ascertain
that prenumbered purchase orders are used and ac-
counted for.
B. Receiving the client's mail, unopened, for a reasonable
period of time after the year-end to search for unrecord-
ed vendors' invoices.
C. Vouching selected entries in the accounts payable sub-
sidiary ledger to purchase orders and receiving reports.
D. Confirming accounts payable balances with known sup-
pliers who have zero balances.
75. An auditor obtains knowledge about a new client's business

and its industry to .
A. Make constructive suggestions concerning improvements
to the client's internal control.
B. Develop an attitude of professional skepticism concern-
ing management's financial statement assertions ..
C. Evaluate whether the aggregation of known misstate-
ments causes the financial statements taken as a whole
to be materially misstated.
D. Understand the events and transactions that may have
an effect on the client's financial statements.
906 ·CPA EXAMINATION REVIEWER: AUDITING THEORY
76. Which of the following fraudulent activities most likely could

be perpetrated due to the lack of effective internal controls
in the revenue cycle?
A. Fictitious transactions may be recorded that cause an-
understatement of revenues and overstatement of re-
ceivables.
B. Claims received from customers for goods returned may
be intentionally recorded in other customers' accounts.
C. Authorization of credit memos by personnel who receive
cash may permit the misappropriation of cash.
D. The failure to prepare shipping documents may cause an
overstatement of inventory balances.
77. When audited financial statements are presented in a client's

document containing other information, the auditor should
A. Perform inquiry and analytical procedures to ascertain
whether the other information is reasonable .
B. Add an emphasis-of-matter paragraph to the auditor's
report without changing the opinion on the financial
statements.
C. Perform the appropriate substantive auditing procedures
to corroborate the other information.
D. Read the other information to determine that it is con-
sistent with the audited financial statements.
78. Before accepting an engagement to audit a new client, a

CPA is required to obtain
A. An understanding of the prospective client's industry and
business. .
B. The prospective client's signature to the engagement let-
ter.
C. A preliminary understanding of th~ prospective client's
control environment.
D. The prospective client's consent to make inquiries of the
predecessor auditor, if any.
!ER 12 Practice Examinations 907
cf'lAP
Because of the risk of material misstatement, an audit of

79
· financial statements in accordance with PSAs should be
planned and performed with an attitude of
A. .Objective judgment.
B. Independent integrity.
c. Professional skepticism.
D. Impartial conservatism.
80. To reduce the risks associated with accepting e-mail re-

sponses to requests for confirmation of accounts receivable,
an auditor most likely would
A. Request the senders to mail the original· forms to the au-
ditor.
s. Examine subsequent cash receipts for the accounts in
question.
c. Consider the e-mail responses to the confirmations to be
exceptions.
D. Mail second requests to the e-mail r~spondents.
81. The most reliable procedure for an auditor to use to test the
existence of a client's inventory at an outside location would
be to
A. Observe physical counts of the inventory items.
B. Trace the total on the inventory listing to the general
ledger inventory account.
C. Obtain a confirmation from the client indicating inventory
ownership.
D. Analytically compare the current-year inventory balance
to the prior-year balance.
82. Which of the following procedures is usually the· first step in

reviewing the financial statements of an entity?
A. Make preliminary judgments about risk and materiality to
determine the scope and nature of the procedures to be
performed.
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B. '?btai~ a general understanding of the entity's organiza-

tion,_ its operating characteristics, and its products or
services.
C. Assess the risk of material misstatement arising from
fraudulent financial reporting and the misappropriation of
assets.
D. Perform a preliminary assessment .of the operating effi-
ciency of the entity's internal control activities.
83. Which of the following circumstances would an auditor most

likely consider a risk factor relating to misstatements arising
from fraudulent financial reporting?
A. Several members of management have recently pur-
chased additional shares of the entity's stock.
B. Several members of the board of directors have recently
sold shares of the entity's stock.
C. The entity distributes financial forecasts to financial ana-
lysts that predict conservative operating results.
D. Management is interested in maintaining the entity's
earnings trend by using aggressive accounting practices.
84. Operational auditing is primarily oriented toward

A. Future improvements to accomplish the goals of man-
agement. . .
B. The accuracy of data reflect~d in management's financial
records.
c. The verification that a company's financial statements
are fairly presented. .
o. Past protection provided by existing internal cofitrol.
auditor to belie_v~
85. The adverse effects of events causing an
. , bTty to cont1n
b
there is substantial doubt a out an entity s a 11 i-
ue as a going concern would most likely be mitigated by ev
dence relating to the
cHAP
A. Ability to expand operations into new product lines in the

future.
B. Feasibility of plans to purchase leased equipment at less
than market value.
c. Marketability of assets that management plans to sell.
o. Committed arrangements to convert preference shares
to long-term debt.
86. Which of the foll.owing statements is correct concerning sta-

tistical sampling in tests of controls?
A. The population size has little or no effect on determining
sample size except for very small populations.
B. The expected population deviation rate has little or no
effect on determining sample size except for very small
populations.
C. As the population size doubles, the sample size also
should double.
D. For a given tolerable rate, a larger sample size should be
selected as the expected population deviation rate de-
creases.
87. Which of the following inquiry or analytical procedure ordi-

narily is performed in an engagement to review an entity's
financial statements?
A. Analytical procedures designed to test the accounting
records by obtaining corroborating evidential matter.
B. Inquiries concerning the entity's procedures for recording
and summarizing transactions.
C. Analytical procedures designed to test management's as-
sertions regarding continued existence.
D. Inquiries of the entity's attorney concerning contingent
liabilities.
88. Which of the following is an example of a c~eck digit?
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\~. $! . tT~•'<~jl~~~:-.:~~7
in ;;;:;,., '~=-::· :• ;· •.•h'l ii
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A. An agreement of the total number of employees to the

total number of checks printed by the computer.
B. An algebraically determined number produced by the
other digits of the employee number.
C. A logic test that ensures all employee numbers are nine
digits.
D. A limit check that an employee's hours do not exceed 48
hours per work week.
89. The in-charge auditor most likely would have a supervisory

responsibility to explain to the staff assistants
A. That immaterial fraud is not to be reported to the client's
audit committee.
B. How the results of various auditing procedures per-
formed by the assistants should be evaluated.
c. What benefits may be attained by the assistants' adher-
ence to established time budgets.
D. Why certain documents are being transferred from the
current file to the permanent file.
90. When an auditor has chosen a random sample and is using

nonstatistical attributes sampling, that auditor
A. Need not consider the risk of assessing control risk too
low.
B. Has committed a nonsampling error.
c. Will have to use discovery sampling to evaluate the re-
sults.
o. Should compare the deviation rate of the sample to the
tolerable deviation rate.
91. Which of the following controls most likely would be used to

maintain accurate inventory records? . . ed
A. Perpetual inventory records are penod1cal.ly compar
with the current cost of individual inventory items.
TER
cHAP
B. A just-in-time !nventory ordering system keeps inventory

levels to a desired minimum.
c. Requisitions, receiving reports, and purchase orders are
ind~p~n~ently matched before payment is approved.
o. Penod1c inventory counts are used to adjust the perpet-
ual inventory records.
92. Which of the following is not a step in an auditor's decision

to assess control risk at below the maximum?
A. Evaluate the effectiveness of internal control with tests
of controls.
B. Obtain an understanding of the entity's information sys-
c. Perform tests of details of transactions to detect material
D. Consider whether controls can have a pervasive effect on
financial statement assertions.
93. Tracing shipping documents to pren1,1mbered sales invoices

provides evidence that
A. No duplicate shipments or billings occurred.
B. Shipments to customers were properly invoiced.
C. All goods ordered by customers were shipped.
D. All prenumbered sales invoices were accounted for.
94. . An auditor is auditing a mutual fund company that uses a

transfer agent to handle accounting for shareholders. Which
of the following actions by the auditor would be most effi-
cient for obtaining information about the transfer agent's in-
ternal controls?
A. Review reports on internal control placed in operation
and its operating effectiveness produced by the agent's
own auditor.
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912
B. Review prior-year workpapers to determine whether the

nu':1be~ of transactions processed by the agent has ma-
terially increased.
C. Perform an audit on the internal control function of the
agent.
D. Perform tests of controls on a sample of the audited
firm's transactions through the agent.
95. In assessing control risk for purchases, an auditor vouches a

sample of entries in the voucher register to the supporting
documents. Which assertion would this test of controls most
likely support?
A. Completeness.
B. Existence or occurrence.
c. Valuation or allocation.
D. Rights and obligations.
96. A client's materials purchasing cycle begins with requisitions

from user departments and ends with the receipt of materi-
als and the recognition of a liability. An auditor's primary
objective in reviewing this cycle is to
A. Evaluate the reliability of information generated as a re-
sult of the purchasing process.
B. Investigate the physical handling and recording of unu-
sual acquisitions of materials.
c. consider the need to be on hand for the annual physical
count if this system is not functioning effectively.
o. Ascertain that materials said to be ordered, received, and
paid for are on hand.
97. W hich of the following presumptions is correct about the re-

liability of evidential matter?
A. Information obtained indirectly from outside sources is
the most reliable evidential matter.
ct-fAPTER 12 Practice Examinations 913
B. To be reliable, evidential matter should be convincing ra-

ther than persuasive.
C. Reliability of evidential matter refers to the amount of
corroborative evidence obtained. ·
D. Effective internal control provides more assurance about
the reliability of evidential matter.
98. Which of the following comparisons would an auditor most

likely make in evaluating an entity's costs and expenses?
A. The current .year's accounts receivable with the prior
year's accounts receivable. ·
8. The current year's payroll expense with the prior year's
payroll expense.
C. The budgeted current year's sales with the prior year's
sales.
D. The budgeted current year's warranty expense with the
current year's contingent liabilities.
99. In planning an audit, the auditor considers audit risk. Audit

risk is the
A. Susceptibility of an assertion to material misstatement
assuming there are no related controls.
B. Risk that a material misstatement in an assertion will not
be prevented or detected on a timely basis by the client's
internal control.
C. Risk that the auditor's procedures for verifying account
balances will not detect a material misstatement that in
fact exists.
D. Risk that the auditor may unknowingly fail to appropri-
ately modify the opinion on financial statements that are
materially misstated.
100. To provide assurance that each voucher is sub~itted and

paid only once, an auditor most likely would examine a sam-
r .~~- --------- -·--· ~ · --~--·-··- .~

mmnn 'rirt nit . :;,.-
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- 2
pie of paid vouchers and determine whether each voucher

is:
A. Stamped "paid" by the check signer.
B. Returned to the vouchers payable department.
C. Supported by a vendor's invoice and purchase order.
D. Prenumbered and accounted for.
cW'pTER
ANSWERS-3
KEY
1. c
26. c 51. c 76. c
2. D
27. B 52. B 77. D
28. c 53. D 78. D
3. B
4. B 29. A 54. A 79. c
s. c 30. A 55. B 80. A
6. A 31. D 56. D 81. A
7. A 32. A 57. B 82. B
8. A 33. D 58. B 83. D
9. c 34. c 59. B 84. A
10. c 35. B 60. D 85. c
11. B 36. c 61. c 86. A
12. B 37. c 62. D 87. B
13. c 38. A 63. D 88. B
14. B 39. D 64. A 89. B
15. c 40. A 65. A 90. D
16. A 41. A 66. B 91. D
17. c 42. B 67. B 92. c
18. B 43. B 68. B 93. B
19. A 44. ·o 69. D 94. A
20. D 45. B 70. c 95. B
21. c 46. A 71. A 96. A
22. B 47. D 72. D 97. D
23. D 48. A 73. A 98. B
24. c 49. B 74. c 99. D
25. B 50. c 75. D 100. A
• -· ... "8 - '
1. If the obj~ctive of an auditor's test of details is to detect a
possible understatement of sales, the auditor most likely
would trace transactions from the
A. Sales invoices to the shipping documents.
B. Cash receipts journal to the sales journal.
C. Shipping documents to the sales invoices.
D. Sales journal to the cash receipts journal.
2. A CPA has not been able to confirm a large account receiva-

ble, but he has satisfied himself as to the proper statement
of the receivable by means of alternative auditing proce-
dures. The auditor's report on the financial statements
should include
A. A description of the limitation on the scope of his audit
and the alternative auditing procedures used, but an
opinion qualification is not required.
s. An opinion qualification, but reference to the use of al-
ternative auditing procedures is not required.
c. Both a scope qualification and an opinion qualification.
o. Neither comment on the use of alternative auditing pro-
cedures nor an opinion qualification.
3. An auditor is planning an audit engagement for a new client

in a business that is unfamiliar to the auditor. Which of the
following would be the most useful source of information for
the auditor during the preliminary planning stage, when the
auditor is trying to obtain a general understanding of audit
problems that might be encountered?
A. Client manuals of accounts and charts of accounts.
B. Industry Audit Guides.
c. Prior year documentation of the predecessor auditor.
D. Latest annual and interim financial statements issued bY
the client.
cHA
pTER 12 Practice Ex-aminations . 917
4. During the initial planning phase of an audit, a CPA most

likely would
A. Identify specific internal control activities that are likely
to prevent fraud.
B. Evaluate the reasonableness of the client's accounting
estimates.
c. Discuss the timing of the audit procedures with the cli-
ent's management.
D. Inquire of the client's attorney as to whether any unre-
corded claims are probable of assertion.
s. The actual operation of an internal control system may be

most objectively evaluated by
A. Completing an internal control questionnaire and
flowchart of the accounting system in the year under au-
dit.
B. Review of the previous year's audit documentation to
update the report of internal control evaluation.
C. Selection of items processed by the system and determi-
nation of the presence or absence of errors and compli-
ance deviations.
D. Substantive tests of account balances based on the audi-
tor's assessment of internal control strength.

likely perform in searching for unrecorded liabilities?
A. Trace a sample of accounts payable entries recorded just
before year-end to the unmatched receiving report file.
B. Compare a sample of purchase orders issued just after
year-end with the year-end accounts payable trial bal-
ance.
C. Vouch a sample of cash disbursements recorded just af-
ter year-end to receiving reports and vendor invoices.
D. Scan the cash disbursements entries recorded just be-
fore year-end for indications of unusual transactions.
7. Confirming accounts receivable is an audit procedure that

generally is performed exclusively by the independent audi-
tor or
A. By the internal al1ditor exclusively.
B. By COA auditors exclusively.
C. By both independent and interl!al auditors.
D. By neither independent nor internal auditors.
8. The communication between an external auditor and a client

is confidential. Ordinarily,
A. The client is not required to answer an external auditor's
questions in certain circumstances.
B. An external auditor is not permitted to testify in a court
of law without the permission of the client.
c. An external auditor is not required to divulge client in-
formation even if demanded by a subpoena.
D. An external auditor should not disclose information ob-
tained in the course of the engagement without the cli-
ent's permission.
9. If a client is using a voucher ·system, the auditor who is ex-

amining accounts payable records should obtain a schedule
of all unpaid vouchers at the balance sheet date and
A. Retrace voucher register items to the source indicated in
the reference column of the register.
B. Vouch items in the voucher register and examine related
canceled checks.
C. Confirm items on the schedule of unpaid vouchers and
obtain satisfaction for all confirmation exceptions.
D. Compare the items on the schedule with open vouchers
and uncanceled entries in the voucher register, and ac-
count for unmatched items.
·10. Which of· the following types of documentary evidence

should the auditor consider to be the most reliable?
CHAPTER 12 Practice Examinations 919
A. A sales invoice issued by the client and supported by a

delivery receipt from an outside trucker.
B. Confirmation of an account payable balance mailed by
and returned directly to the auditor.
c. A check issued by the company and bearing the payee's
endorsement which is included with the bank statement
mailed directly to the auditor.
D. A working paper prepared by the client's controller and
reviewed by the client's treasurer.
11. For good internal control, the billing department should be

under the direction of the
A. Controller
B. Credit manager
C. Sales manager
D. Treasurer
12. The ultimate risk against which the auditor requires reason-
able protection is a combination of two separate risks. The
first of these is that material errors will occur in .the account-
ing process by which the financial statements are developed,
and the second is that
A. A company's system of internal control is not adequate
to detect errors and irregularities.
B. Those errors that occur will not be detected in the audi-
tor's examination.
C. Management may possess an attitude that lacks integri-
ty.
D. Evidential matter is not competent enough for the audi-
tor to form an opinion based on reasonable assurance.
13. Which of the following statements relating to tests of con-

trols is most accurate?
A. Auditing procedures cannot concurrently provide both

evidence of compliance with control procedures and evi-
dence required for substantive tests.
B. Tests of controls include physical observations of the
proper segregation of duties which ordinarily may be lim-
ited to the normal audit period.
C. Tests of controls should be based upon proper applica-
tion of an appropriate statistical sampling plan;
D. Tests of controls ordinarily should be performed as of
the balance sheet date or during the period subsequent
to that date.
14. To avoid potential errors and irregularities, a well-designed

system of internal control in the accounts payable area
should include a separation of which of the following func-
tions?
A. Cash disbursements and invoice verification.
B. Invoice verification and merchandise ordering.
C. Physical handling of merchandise received and prepara-
tion of receiving reports.
D. Check signing and cancellation of payment documenta-
tion.
15. When financial statements of the prior year are presented

together with those of the current year, the current auditor
should express an audit opinion on the financial statements
of the prior year if
A. The current auditor has audited the statements of the
prior year.
B. The client requests the current auditor to review the fi-
nancial statements of the prior year and report thereon.
C. The prior auditor previously disclaimed an opinion on the
prior year financial statements.
D. The statements of the prior year were unaudited.
'l!r cHAPTER 12 Practice Examinations 921
16. If the auditor believes that required disclosures of a signifi-

cant nature are omitted from the financial statements under
audit, the auditor should decide between issuing
A. A qualified opinion or an adverse opinion.
B. A disclaimer of opinion or a qualified opinion.
c. An adverse opinion or a disclaimer of opinion.
D. An unmodified opinion or a qualified opinion.
17. The CPA analyzes the accrued interest payable account for
the year, recomputes the amount~ of payments and begin-
ning and ending balances and reconciles to the interest ex-
pense account.
A. Interest income of P8,000 on a note receivable was cred-
ited against miscellaneous expense.
B. A provision of a loan agreement was violated. Dividends
on ordinary shares are prohibited if income available for
interest and dividends is not three times interest re-
quirements.
C. Interest paid on an open account was charged to the
raw material purchases account.
D. A note payable had not been recorded. Interest of
Pl,500 on the note was properly paid and charged to the
interest expense account.
18. In determining the type of opinion to express, an auditor

assesses the nature of the reporting qualifications and the
materiality of their effects. Materiality will be the primary
factor considered in the choice between
A. An "except for" opinion and an adverse opinion.
B. An "except for" opinion and a "subject to" opinion.
C. An adverse opinion and a disclaimer of opinion.
D. A "subject to" opinion and a piecemeal opinion.
19. The components of audit risk include inherent risk, control

risk, and detection risk. Detection risk is the
_,;u~'1fet "· trrw -, · en · ..:.· ,,,··tffWa
A. Risk that a material misstatement that could occur in an

assertion will not be prevented by the entity's internal
control or detected on a timely basis.
B. Risk that the sample supports the conclusion that the
recorded account balance is materially misstated when it
is not.
C. Susceptibility of an assertion to a material misstatement,
assuming that there are no related controls.
D. Risk that the auditor will not find a material misstate-
ment that exists in an assertion.
20. For the accounting system of Acne Company, the amounts

of cash disbursements entered into a terminal are transmit-.
ted to the computer that immediately transmits the amounts
back to the terminal for display on the terminal screen. This
display enables the operator to
A. Establish the validity of the account number.
B. Verify the amount was entered accurately.
C. Verify the authorization of the disbursement.
D. Prevent the overpayment of the account.
21. . The audit step most likely to reveal the existence of .contin-
gent liabilities is
A. A review of vouchers paid during the month following
the year-end.
B. Account payable confirmations.
c. An inquiry directed to legal counsel.
D. .Mortgage note confirmation.
22. The auditor's primary method to corroborate information on

litigation, claims, and assessments is
A. Reviewing the response from the client's lawyer to a let-
ter of audit inquiry.
B. Examining legal invoices sent by the client's attorney.
C. Verifying attorney-client privilege through interviews.
CHAPTER 12 Practice Examinations 923
D. Reviewing the written representation letter obtained

from management.
23. In performing an audit, which one of the following proce-

dures would be considered a substantive test?
A. Comparing last year's interest expense with this year's
interest expense.
B. Comparing signatures on checks with the signatures of
authorized check signers.
C. Reviewing initials on receiving documents.
D. Reviewing procedures, followed in receiving, depositing,
and disbursing of cash.
24. In performing audit test, the auditor may use either nonsta-
tistical or statistical sampling. The critical difference be-
tween the two types of sampling is that
A. The sampling plan for nonstatistical sampling eliminates
procedures required for statistical sampling.
B. Statistical sampling enables quantification and control of
sampling risk.
C. Nonsampling risk is lower in statistical sampling.
D. Statistical sampling eliminates both sampling and
nonsampling risk.
25. The auditor obtains corroborating evidential matter for ac-

counts receivable by using positive or negative confirmation
requests. Under which of the following circumstances might
the negative form of the accounts receivable confirmation be
useful?
A. A substantial number of accounts are in dispute.
B. Internal control over accounts receivable is ineffective.
C. Client records include a large number of relatively small
balances.
D. The auditor believes that recipients of the requests are
unlikely to give them consideration.
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. . ·-·
·- ·~ · - • · • •· -
924 GPA EXAMINATION REVIEWER: AUDITING THEORY
26. Which of the following statements best describes a positive

request for confirmation of an accounts receivable balance?
A. The customer will be asked to indicate to the auditor the
current balance in the account.
B. The cu~tomer will be asked to respond to the confirma-
tion request only if the balance indicated in the request
is incorrect.
C. The customer will be asked to inform the auditor wheth-
er the balance indicated in the request is correct and to
respond regardless of whether such stated balance is
correct.
o. The customer will be asked to indicate to the auditor the
balance in his/her account only if it is positive (i.e.,
greater than zero).
27. Other than a full financial statement audit, which is the

highest level of assurance that a CPA provides?
A. A review.
B. A confirmation.
C. A compilation.
o. Unaudited financial statements.
28. lf the financial statements taken as a whole are not present-
ed fairly in accordance with Philippine Financial Reporting
Standards, the auditor must express a(an)
A. Unmodified opinion
B. Qualified opinion
c. Except for opinion
o. Adverse opinion
29. Which of the following fee arrangements would violate the
Code of Professional Ethics?
A. A fee based on the approval of a bank loan. .
B. A fee based on the outcome of a bankruptcy proceeding.
c. A per hour fee t..,at includes out-of-pocket expenses.
cHAP
o. A fee based on the complexity of the engagement.
30. A sample consisting of every nth item in the population is a

A. Systematic sample
s. Random sample
c. Stratified sample
o. Haphazard sample
3i. In determining the sample size for a test of controls using
attribute sampling, an auditor would be least concerned with
the
A. Expected rate of occurrence.
B. Results of substantive audit procedures.
c. Upper precision limit.
D. Acceptable risk of assessing control risk too low.
32. In obtaining an understanding of a manufocturing entity's

internal control system concerning inventory balances, an
auditor most likely would
A. Review the entity's descriptions of inventory policies and
procedures.
B. Perform test counts of inventory during the entity's phys-
ical count.
C. Analyze inventory turnover statistics to identify slow-
moving and obsolete items.
D. Analyze monthly production reports to identify variances
and unusual transactions.
33. Inherent and control risk differ from detection risk in that
inherent risk and control risk are
A. Elements of audit risk while detection risk is not.
B. Changed at the auditor's discretion while detection risk is
r:iot.
C. Considered at the individual account balance level while
detection risk is not.
D. Functions of the client and its environment while detec·

tion risk is not.
34. Under PSA 540 (Auditing Accounting Estimates, Including

Fair Value Estimates, and Related Disclosures), an auditor is
responsible for
A. Making accounting estimates.
B. Evaluating the reasonableness of manaqement's esti-
mates.
C. Auditing transactions in the subsequent period that lend
insight into estimates recorded at the end of the report-
ing period.
D. Including accounting estimates within the letter of audit
inquiry sent to all attorneys of record.
35. Which of the following indicates a qualified opinion?

A. The financial statements do not present fairly. in all ma-
terial respects, the financial position, results of opera-
tions, and cash flows in accordance with PFRS.
B. The auditor does not express an opinion on the financial
statements.
C. The financial statements present fairly, in all m~terial re-
spects, the financial position, results of operations, and
cash flows in accordance with PFRS.
D. Except for the effects of the matter, the financial state-
ments present fairly, in all material respects, the financial
position, results of operations, and cash flows in accord-
ance with PFRS.
36. The most reliable form of evidence, other than subsequent

cash receipts, concerning the validity of a note receivable
balance is a(n)
A. Bill of lading
B. Confirmation
C. Customer purchase order
TER
cHAP
o. Sales invoice
37. With respect to errors and fraud, which of the following

should be part of an auditor's planning of the audit engage-
ment?
A. Planning to search for errors or fraud that would have a
material effect on the financial statements.
B. Planning to discover errors or fraud that are either mate-
rial or immaterial.
c. Planning to discover errors or fraud that are material.
D. Planning to consider factors affecting the risk of material
misstatement both at the financial statement and the ac-
count balance level.
38. Which of the following statements about the appropriateness

of evidence is always true?
A. Evidence gathered by an auditor from third parties is re-
liable.
B. Accounting data developed when control risk is low is
more relevant than data developed. when control risk is
high.
C. Oral representations made by management are not valid
evidence.
D. To be appropriate, evidence must be both valid and rele-
vant.
39. Omitting quantities from copies of purchase orders sent to

the receiving department is a control procedure intended
mainly to
A. Ensure that goods received are physically counted by re-
ceiving department personnel.
B. Identify and return damaged goods as soon as they are
received.
C. Provide a cross-check for verifying the accuracy of per-
petual inventory records.
D. Prevent theft of goods by receiving department person-

nel.
40. Which c;>f the following procedures is not appropriate to a

review of interim financial information?
A. Confirm cash balances with all banks and depositories.
B. Make inquiries concerning the accounting system and
any significant changes in the internal control system.
C. Perform analytical procedures to identify and provide a
basis for inquiry about relationships and individual items
that appear unusual.
D. Read the minutes of meetings of stockholders, the board
of directors, and committees of the board.
41. Of the following, which is the least persuasive type of audit

evidence?
A. Documents mailed by outsiders to the auditor.
B. Correspondence between auditors and vendors.
C. Copies of sales invoices inspected by the auditor.
D. Computations made by the auditor.
42. Tests of controls

A. Are intended to detect material misstatements in finan·
B. Are concerned with how internal control policies or pro-
C. Are evaluations of financial information made by a study
financial data.
ance sheet date.
43. Substantive tests of details

A. Are intended to detect material misstatements in finan-

B. Are concerned with how internal control policies or pro-
c. Are evaluations of financial information made by a study
financial data.
ance sheet date.
44. A purpose of reviewing first quarter financial results during

audit planning is to
A. Identify unexpected fluctuations occurring in account
balances since the prior year's financial statements.
B. Become familiar with accounts likely to appear in the fi-
nancial statements.
C. Plan evidence to be gathered in auditing accounts that
are new to the first quarter financial statements.
D. Assess first quarter financial position, results of opera-
tions, and cash flows.
45. Early appointment of the auditor enables preliminary work to

be performed by the auditor, which benefits the client in that
it permits the audit to be performed in
A. A more efficient manner.
B. A more thorough manner.
C. Accordance with Philippine Standards on Quality Control
(PSQC).
D. Accordance with Philippine Standards on Auditing (PSAs).
46. The purpose of tests of controls is to provide reasonable as-

surance that
A. The extent of substantive testing is minimized.
.,.........
930
B. Evidence will be bt · d .
. o ame to determine an assessed level
of control nsk.
C. Errors and fraud are prevented and detected in a timely
manner.
D. The auditor has an understanding of the control envi-
ronment.
47. The auditor's failure to recognize a misstatement in an

amount or a control deviation is described as a
A. Statistical error.
B. Sampling error.
C. Standard error of the mean.
D. Nonsampling error.
48. Which of the following analytical procedures should be ap-

plied to the income statement?
A. Select sales and expense items and trace amounts to re-
lated supporting documents.
B. Ascertain that the net income amount in the statement
of cash flows agrees with the net income amount in the
income statement.
c. Obtain from the proper client representatives the begin-
ning and ending inventory amounts that were used to
determine costs of sales.
D. Compare the actual revenues and expenses with the cor-
responding figures of the previous year and investigate
significant differences.
49. An operational aµdit is designed to ,

A. Assess the efficiency and effectiveness of management 5
operating procedures. .
s. Assess the presentation of management's financial
statements in accordance with PFRS. . _
c. Determine whether management has complied with ap
plicable laws and regulations.
ctiA P
o. Determine whether the audit committee of the board of

directors is effectively discharging its responsibility to
oversee management's operations.
50. The purpose of a compliance audit for a governmental entity

is to determine whether
A. Financial sta~ements comply with PFRS and whether the
entity is operating efficiently.
B. Financial statements comply with PFRS and the entity
has complied with applicable laws and regulations.
c. The entity has complied with applicable laws and regula-
tions.
o. Financial statements comply with PFRS.
51. As part of a periodic planning exen::ise, an entity discovers
that a Middle East political dispute may interfere with supply
sources. This internal control component is called
A. Control environment.
B. Risk assessment.
C. Control activities.
D. Information and communication.
52. An auditor considers internal ·control to

A. Determine whether assets are safeguarded from theft
and other forms of misappropriation.
B. Suggest improvements in internal control.
C. Plan audit procedures.
D. Express an opinion on an entity's financial statements.
53. The following are examples of computer-assisted audit tech-

niques, except ·
A. Integrated test data.
B. Audit modules.
C. Disk operating systems.
D. Audit hooks.
. ... , ~4 ..
54. During the review of a small owner-managed entity's inter-

nal controls, the auditor discovers that the accounts receiva-
ble clerk approves credit memos and has access to cash.
Which of the following controls would offset this deficienoj?
A. The owner reviews errors in billings to customers and
postings to subsidiary records.
B. The controller receives the monthly bank statement di-
rectly and reconciles the checking account.
C. The owner reviews credit memos after they are record-
ed.
D. The controller reconciles the detailed receivables records
to the general ledger.
55. Tests of controls provide reasonable assurance that controls

are applied as prescribed. A sampling method that is most
appropriate when testing controls is
A. Nonstatistical sampling.
B. Attribute estimation sampling.
C. Discovery sampling.
D. Stratified random sampling.
56. Which of the following statements about internal control sys-

tem is correct?
A. A properly maintained internal control system reasonably
ensures that collusion among employees cannot occur.
8. The establishment and maintenance of the internal con-
trol system is an important responsibility of the internal
auditor.
C. An exceptionally strong internal control system is enou~h
for the auditor to eliminate substantive tests on a signifi-
cant account balance.
D. The cost-benefit relationship is a primary criterion that
should be considered in designing an internal control
system.
. cHAPTER 12 Practice Examinations 933
57. A financial statement audit can best be described as a

A. Subset of accounting.
B. Professional activity that attests to the fair presentation
of financial statements.
C. Professional activity that measures and communicates fi-
nancial accounting data.
D. Regulatory activity that prevents the issuance of improp-
. er financial information.
58. Which of. the following comparisons would be most useful to

an auditor in evaluating th·e results of an entity's operations?
A. Prior year accounts payable to current year accounts
payable.
B. Prior year payroll expense to budgeted current year pay-
roll expense.
C. Current year revenue to budgeted current year revenue.
D. Current year warranty expense to current year contin-
gent liabilities.
59. Assessing control risk too low relates to

A. The effectiveness of the audit.
B. The efficiency of the audit.
C. The effectiveness and efficiency of the audit.
D. The preliminary estimate of materiality.
60. When assessing an internal auditor's objectivity, an Inde-

pendent auditor should
A. Evaluate the adequacy of the internal auditor's audit
programs.
B. Inquire about the internal auditor's educational back-
ground and professional certification.
C. Consider the organizational level to which the internal
auditor reports.
D. Review the internal auditor's audit documentation.
61. Which of the following is not an internal control weakness

related to factory equipment?
A. Checks issued in payment of acquisitions of equipment
are not signed by the controller.
B. All acquisitions of factory equipment are required to be
made by the department in need of the equipment.
C. Factory equipment replacements are generally made
when estimated useful lives, as indicated in depreciation
schedules, have expired.
D. Proceeds from sales of fully depreciated equipment are
credited to other income.
62. Which of the following is a necessary control procedure for

cash disbursements?
A. Checks sl1ould be signed by the controller and at least
one other employee of the company.
B. Checks should be sequentially numbered, and the nu-
merical sequence should be accounted for by the person
preparing the bank reconciliation.
c. Checks and supporting documents should be marked
"paid" immediately after the check is returne<il with the
bank statement.
o. Checks should be sent directly to the payee by the em-
ployee who prepares documents that authorize check
preparation.
63. An auditor has concluded that a client's internal controls are

well des!gned and functioning as expected. Under these cir-
cumstances, the auditor would most likely
A. Cease to perform further substantive test procedures.
B. Not increase the extent of planned substantive test pro-
cedures.
C. Increase the extent of planned substantive analytical
procedures.
D. Increase the extent of planned substantive tests of de-

tails.
64. Which of the followin'g procedures would help an auditor test

for overstatement of accounts payable at the er:1d of the en-
tity's reporting period?
A. Trace entries in the cash disbursements records to items
in the accounts payable trial balance.
B. Agree items in the file of unmatched receiving reports to
the accounts payable trial balance.
C. Trace items in the accounts payable trial balance to doc-
umentation contained in canceled voucher packages.
D. Coordinate cutoff tests performed for receiving and for
shipping.
65. Auditor confirmation of accounts payable balances at the

end of the reporting period may be unnecessary because
A. There is a duplication of cutoff tests.
B. Accounts payable balances at the end of the reporting
pertod may not be paid before the audit is completed.
C. There is likely to be other reliable external audit evidence
available to support the balances.
D. Correspondence with the client's attorney will reveal all
legal actions by vendors for nonpayment.
66. The proper use of prenumbered termination notice forms by

the payroll department should provide assurance that all
A. Uncashed payroll checks were issued to employees who
have not been terminated.
B. Personnel files are kept up to date.
C. Employees who have not been terminated receive their
payroll checks.
D. Terminated employees are removed from the payroll.
67. An auditor plans to examine a sample of 20 checks for coun-

tersignatures as prescribed by the entity's internal control
procedure. One of the checks in the sample cannot be
found. The auditor should
A. Evaluate the results as if the sample size had been 19.
B. Treat the missing check as a deviation from the pre-
scribed control procedure.
C. Treat the missing check in the same manner as the ma-
jority of the other 19 checks, i.e., countersigned or not.
D. Choose another check to replace the missing check in
the sample.
68. Which of the following components is appropriate in a practi-

tioner's report on the results of applying agreed-upon proce-
dures?
A. A statement that ,.the report is unrestricted in its use.
B. A title that includes the phrase "independent audit."
c. A statement that management is responsible for express-
ing an opinion.
o. A list of the procedures performed, as agreed to by the
specified parties identified in the report.
69. A company holds bearer bonds as a short-term investment.

Responsibility for custody of these bonds and submission of
coupons for period interest collections probably should be
delegated to the
A. Controller.
B. Internal auditor.
C. Cashier.
D. Treasurer.
70. Which of the following is not a subsequent events proce-

dure?
A. Reviewing available interim financial information.
TER
cHAP
e. Reading available minutes of meetings of shareholders

and directors.
c. Making inquiries with respect to the financial statements
covered by· the auditor's previously issued report if new
information has become available during the current au-
dit that might affect that report.
D. Discussing with officers the current status of items in the
financial statements that were accounted for on the ba-
sis of tentative, preliminary, or inconclusive data.
71. Which of the following procedures relating to tests of ac-

counts payable could the auditor delegate entirely to the cli-
ent's employees?
A. Testing footings in the accounts payable ledger.
B. Reconciling unpaid invoices to vendor's statements.
c. Preparing a schedule of accounts payable.
D. Mailing confirmations for selected account balances.
72. Which of the following functions is not appropriate for the

accounts payable department?
A. Preparing purchase orders.
B. Preparing vouchers and daily purchases summary.
C. Comparing purchase requisitions, purchase orders, re-
ceiving reports, and vendors' invoices.
D. Filing voucher package according to due date.
73. Which of the following would not be appropriate to a report

on an engagement to apply agreed-upon procedures to
specified financial statement elements?
A. Indicate the intended distribution of the report.
B. Provide an opinion on the specified elements, accounts,
or items.
C. Enumerate the procedures performed.
D. State that the report relates only to the elements, ac-
counts, or items specified.
74. Image processing can be used to convert paper documents

into electronic images. Which of the following concepts dis-
tinguishes the retention of computerized audit documents
from the traditional hard copy form?
A. Analyses, conclusions, and recommendations are filed on
electronic media and are therefore subject to computer
system controls and security procedures.
B. Evidential support for all findings is copied and provided
to local management during the closing conference and
to each person receiving the final report.
C. Computerized data files can be used in computer audit
procedures.
D. Audit programs can be standardized to eliminate the
need for a 'preliminary survey at each location.
75. When an auditor selects a sample of items from the vouch-

ers payable register for the last month of the period under
audit and traces them to underlying documents, the auditor
is gathering evidence primarily to support the assertion that
A. Recorded obligations were paid.
B. Incurred obligations were recorded in the correct period.
c. Recorded obligations were valid.
D. Cash disbursements were recorded as incurred obliga-
tions.
76. The primary responsibility for overseeiny the establishment

and administration of internal control rests with
A. The independent auditor.
B. Senior management.
C. The controller.
D. The treasurer.
77. The letter of audit inquiry to the client's legal counsel should
be mailed only by the
A. Client after the auditor has reviewed it for appropriate

content.
8. Auditor after preparation by the client and review by the
auditor.
c. Auditor's attorney after preparation by the client and re-
view by the auditor.
D. Client after review by the auditor's attorney.
78. A representation letter issued by a client

A. Is essential for the preparation of an audit program.
B. Is a substitute for the performance of audit procedures.
C. Does not reduce the auditor's responsibility.
D. Reduces the auditor's responsibility only to the extent
that it is relied on.
79. Which of the following audit procedures is best for identify-

ing unrecorded trade accounts payable?
A. Reviewing cash disbursements recorded subsequent to
the balance sheet date to determine whether the related
payables apply to the prior period.
B. Investigating payables recorded just prior to and just
subsequent to the balance sheet date to determine
whether they are supported by receiving reports.
C. Examining unusual relationships between monthly ac-
counts payable balances and recorded cash payments.
D. Reconciling vendors' statements to the file of receiving
reports to identify items received just prior to the bal-
ance sheet date.
80. The possibility of erasing a large amount of information

stored on magnetic tape most likely would be reduced by
the use of ·
A. File protection rings.
B. Self-checking digits.
C. Completeness tests.
D. Conversion verification.·
81. Responsibility for the control of end-user computing exists at

the organizational, departmental, and individual user level.
A direct responsibility of the individual users is
A. Acquisition of hardware and software.
B. Taking equipment inventories.
C. Strategic planning of end-user computing.
D. Physical security computer hardware.
82. Analytical procedures used in planning an audit should focus

on identifying
A. Material weaknesses in the control system.
B. The predictability of financial data from individual trans-
actions.
c. The various assertions that are embodied in the financial
statements.
o. Areas that may represent specific risks relevant to the
audit.
83. The following are common activities of the expendi-

ture/disbursement cycle, except
A. Purchasing.
B. PPE acquisitions.
C. Receiving.
D. Recording.
84. Which of the following should be emphasized before design-

ing any system elements in a top-down approach to new
systems development?
A. Types of processing systems being used by competitors.
B. Computer equipment to be used by the system.
c. Information needs of managers for planning and control.
o. Controls in place over the current system.
cHAP
85· Even thoug_h an organization is committed to using its main-

frame for its manufacturing plant operations, it has been
looking for ways to ownsize other applications. The pur-
pose of downsizing is
A. Improve reliability.
B. Improve security.
c. Reduce complexity.
D. Decrease costs.
86. Which of the following is not a step in an auditor's decision

to assess control risk at below the maximum level?
A. Evaluate the effectiveness of the internal control proce-
dures with tests of controls.
B. Obtain an understanding of the entity's accounting sys-
C. Perform tests of details of transactions to detect material
D. Consider whether control procedures can have a ,perva-
sive effect on financial statement assertions.
87. Which of the following statements is generally correct

about the appropriateness of evidential matter?
A. The more effective the internal control system, the more
assurance it provides about the reliability of the account-
ing data and financial statements.
B. Appropriateness of evidential matter refers to the
amount of corroborative evidence obtained.
C. Information obtained indirectly from independent outside
sources is more persuasive than the auditor's direct per-
sonal knowledge obtained through observation and in-
spection.
D. Appropriateness of evidential matter refers to the audit
evidence obtained from outside the entity.
lI
I
88. After identifying re1ated party transactions, an auditor most

likely would
A. Substantiate that the transactions were consummated on
terms equivalent to those prevailing in arms-length
transactions.
B. Discuss the implications of the transactions with third
parties, such as the entity's attorneys and bankers.
C. Determine whether the transactions were approved by
the board of directors .or other appropriate officials.
D. Ascertain whether the transactions would have occurred
if the parties had not been related.
89. Which of the following statements accurately describes tile

impact that automation has on the controls normally present,
in a manual system?
A. Transaction trails are more extensive in a computer-
based system than in a manual system because there is
always a one-for-one correspondence between data en-
try and output.
B. Responsibility for custody of information assets is more
concentrated in user departments in a computer-t-Jased
system than it is in a manual system.
c. Controls must be more explicit in a computer-based sys-
tem because many processing points that present oppor-
tunities for human judgment in a manual system are
eliminated.
o. The quality of documentation becomes less critical in a
computer-based system than it is in a manual system
because data records are stored in machine-readable
files.
90. Comfort letters are ordinarily signed by the

A. Independent auditor.
B. Client.
C. Client's lawyer.
c~PTER 12 Practice Examinations 943
o. Internal auditor.
91. The accounts payable department generally should ·

A. Cancel supporting documents after a cash payment is
mailed.
B. Approve the price and quantity of each purchase requisi-
tion.
C. Assure that the quantity ordered is omitted from the re-
ceiving department's copy of the purchase order.
D. Agree the vendor's invoice with the receiving report and
purchase order.
92. Which of the following is required documentation in an audit

in accordance with PSAs?
A. A flowchart of the accounting system describing the re-
cording and classification of transactions for financial re-
porting.
B. A narrative of the accounting system describing the re-
cording and classification of transactions for financial re-
porting.
C. An audit program setting forth in detail the procedures
necessary to accomplish the engagement's objectives.
D. An internal control questionnaire identifying policies anrl
procedures that assure specific objectives will be
achieved.
93. Which of the following represents a limitation on the use of

generalized audit software (GAS)?
A. It requires lengthy detailed instructions in order to ac-
complish specific tasks.
B. It has limited application without significant modificatton.
c. rt requires substantial programming _knowledge to be
used effectively.
o. It can only be used on hardware with compatible operat-
ing systems.
94. The following tasks can be performed by an auditor using

computer-assisted audit techniques (CAATs) software, ex-
cept
A. Identifying missing check numbers.
B. Extracting data files containing only a two-digit year date
field and changing it to hold four digits.
C. Matching identical product information in separate data
files.
D. Aging accounts receivable.
95. The two broad groupings of information systems control ac-

tivities are general controls and application controls. Gen-
eral controls include controls
A. Relating to the correction and resubmission of faulty da-
ta.
B. For developing, modifying, and maintaining computer
programs.
c. Designed to assure that only authorized users receive
output from processing.
D. Designed to ensure that all data submitted for processing
have been properly authorized.
96. In a computerized payroll system environment, an auditor

would be least likely to use test data to test controls related
to
A. Missing employee numbers.
B. Proper approval of overtime by supervisors.
C. Time tickets with invalid job numbers.
D. Agreement of hours per clock cards with hours on time
tickets.
97. An auditor reconciles the total of the accounts receivable

subsidiary ledger to the general ledger control account as of
October 31, 20Xl. By this procedure the auditor would be
most likely to learn which of the following? ·
A. An October invoice was improperly computed.

B. An October check from a customer was posted in error
to the account of another customer.
C. An opening balance in a subsidiary ledger account was
improperly carried forward from the previous accounting
period.
D. An account balance is past due and should be written
off.
98. Negative confirmation of accounts receivable is less effective

than positive confirmation of accounts receivable because
A. A majority of recipients are usually unwilling to respond
objectively.
B. Some recipients may report incorrect balances that re-
quire extensive follow-up.
C. The auditor cannot infer that all nonrespondents have
verified the account information.
D. Negative confirmations do not produce evidence that is
statistically quantifiable.
99. The accounts payable department receives a purchase order

form to accomplish all of the following, except
A. Comparing invoice price to purchase order price.
B. Ensuring that the purchase had been properly author-
ized.
C. Ensuring that the goods had been n~ceived by the party
requesting the goods.
D. Comparing quantity ordered to quantity purchased.
100. Which of the following is not an appropriate activity for the

treasurer's department?
A. Prepare checks.
B. Forward checks to vendors.
C. Cancel vouchers.
D. Prepare vouchers.
K EY A N 5 W E RS - 4·
1. c 26. c 51. B 76. B

2. D 27. A 52. c 77. B
3. B 28. D 53. c 78. c
4. c 29. A 54. c 79. A
5. c 30. A 55. B 80. A
6. c 31. B 56. D 81. D
7. c 32. A 57. B 82. D
8. D 33. D 58. c 83. B
9. D 34. B 59. A 84. c
10. B 35. D 60. c 85. D
11. A 36. B 61. A 86. c
12. B 37. D 62. B 87. A
13. B 38. D 63. B 88. c
14. A 39. A M. c 89. c
15. A 40. A 65. c 90. A
16. A 41. c 66. D 91. D
17. D 42. 8 - 67. B 92. c
18. A 43. A 68. D 93. D
19. D 44. A 69. D 94. B
20. B 45. A 70. c 95. B
21. c 46. B 71. c 96. B
22. A 47. D 72. A 97. c
23. A 48. D 73. B 98. c
24. B 49. A 74. A 99. c
25. c 50. B 75. c 100. D
REFERENCES
1. Philippine Staf!dards on Auditing

2. Philippine Auditing Pra·ctice Statements
3, Philippine Standards on Review Engagements
4. Philippine Standards on Assurance Engagements
s. Philippine Standards on Related Services
6. International Standards on Auditing
7. Auditing & Systems - Gleim and Hillison
8. AICPA Examination Questions
9. Auditing and Assurance Services
David N. Ricchiute
10. Philippine Accountancy Act of 2004 (RA 9298)
and its Implementing Rules and Regulations (IRRs)
11. Code of Professional Ethics for Professional Accountants
in the Philippines
12. CIA Examination Questions

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815

2. If the statement of financial position of a company is dated

A. December 31, 2015

Items 3-6 are based on the following information:

Auditors perform audit procedures to obtain audit evidence that

Type of Audit Procedure

A. Analytical review procedures

3. Prepare a flowchart of internal control over purchases.

4. Calculate the ratio of bad debt expense to credit sales.

6. Confirm accounts receivable.

Items 7-10 are based on the following information:

.. udit procedures.". Match. each assertion with the statement that

s. Existence and occurrence

9. Rights and obligations

nems 11-12 are based on the following information:

Tue following statements relate to the confirmation process when

818 CPA EXAMINATION REVIEWER: AUDITING THEORY

6. The best way to evaluate the results of the confirmation

11. W~ich of the above statements are correct?

12. Which of the above statements are incorrect?

14. An auditor has identified the controller's review of th.e b~~~

evidenced by th~ir respective sign-offs. Which of the follow-

Which of the following is a definition of control risk?

16. Which of the following statements is correct regarding in-

17. When management has an adeqi.:ate level of integrity for the

B. Reduce inherent risk and control risk.

19. When planning an audit, the auditor's assessed level of con-

20. Which of the following is least likely to uncover fraud?

a. successf~ITul ITddevelopment efforts require the involve-

22 The reliance placed on substantive tests in relation to the

23. It is important that sales be billed and recorded in the jour-

24. The tolerable rate of exceptions for tests of controls is gen-

25. When performing tests of controls and tests of transactions

26. Because of the importance of tests of controls and substan-

28. A portion of a client's inventory is in public warehouses. ~:

ing as it should and. that the accounting records are reliable.

3o. Auditors may identify conditions during fieldwork that

31. Companies with non-complex IT environments often rely on

32. Which of the following is not a valid basis for omitting an

C. The degree of reliance on the relevant internal controls.

33. A proof of cash is not useful in discovering differences in the

34. There are many kinds of statistical estimates that an auditor

35. The purpose of the audit procedure to "examine underlying

E~ 12 Practice Examinations 825

In the audit of notes payable, it is common to include tests

38. Which of the following misstatements is most likely to be

C. Failure to record a collection of a note receivable by the

39. After an auditor has issued an audit report on a nonpublic

40. The auditor's best course of action with respect to "other

prospective financial statements are for general use or for

43. Which of the following is not a purpose of a program audit

828 CPA EXAMINATION REVIEWER: AUDITING THEORY

44. A CPA may wish to emphasize specific matters regarding the

45. Two overriding consideratibns affect the many ways an audi-

46. An auditor should recognize that the application of au~~~il~i

47 . Which· of the following statements is incorrect?

A. Analytical procedures are used to isolate accounts or

48. Tolerable misstatement as set by the auditor

49. Application controls vary across the IT system. To gain an

50. Which of the following types of procedures will be perfor·med

51. When designing substantive tests of transactions for sales,

52. Place the following steps in their proper order:

53. When positive confirmations are used, auditing standard~