Polytechnic University of the Philippines

College of Accountancy
Mabini Campus Sta. Mesa Manila

ACCO 4093 – AUDITING THEORY

Third Evaluation Examination
September 20, 2019

Instructions: Select your best answer for each of the following questions by shading the box corresponding to
your choice on the scannable answer sheet provided. Good luck and God bless! 

1. S1: Audit committees should be made up of the most qualified directors regardless of whether they are part
of management of the company or not.
S2: Analytical procedures are seldom used for planning an audit engagement because they are substantive
procedures.
A. True; True B. False; True C. True; False D. False; False

2. S1: Preliminary arrangements with clients should be set forth in the management letter.
S2: An audit plan includes a detailed listing of the audit procedures to be performed in the verification of
items in the financial statements.
A. True; True B. False; True C. True; False D. False; False

3. S1: The auditors’ communication of internal control significant deficiencies should be addressed only to
senior management of the company.
S2: CPA firms may use written narratives to describe internal control in their audit working papers.
A. True; True B. False; True C. True; False D. False; False

4. S1: In assessing the objectivity of a client’s internal auditors, the CPA would most likely to consider the
internal auditor’s organizational status within the company.
S2: If the auditors’ assessment of the design of internal control reveals that it cannot be relied upon, the
auditors are not required to prepare any documentation of internal control for their working papers.
A. True; True B. False; True C. True; False D. False; False

5. S1: The use of lead schedules is designed to increase and/or decrease the detail of the working trial
balance.
S2: Proposed adjusting journal entries are ordinarily recorded by the client, while proposed reclassifying
journal entries are being recorded by an external auditor.
A. True; True B. False; False C. True; False D. False; True

6. Inherent risk and control risk differ from detection risk, in that inherent and control risks
A. Arise from the misapplication of auditing procedures.
B. Can be changed at the auditor’s discretion.
C. Exist independently of the financial statement audit.
D. May be assessed in either quantitative or non-quantitative terms.

7. Reliable information is
A. Supportive of the engagement observations and consistent with the engagement objectives.
B. Helpful in assisting the organization in meeting prescribed goals.
C. Factual, adequate and convincing so that a prudent person would reach the same conclusion as the
auditor.
D. Competent and the best attainable through the use of appropriate engagement techniques.

8. Analytical procedures
A. Are considered direct information about the assertion being evaluated.
B. Involve such tests as confirmation of receivables.
C. May provide the best available information for the completeness assertion.
D. Are never sufficient by themselves to support management assertions.

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9. Each individual working paper should, at a minimum, contain
A. An expression of the internal auditor’s overall opinion.
B. A tick mark legend.
C. A complete flowchart of the system of internal controls for the area being reviewed.
D. A descriptive heading.

10. The auditor should remain alert for evidence of events or conditions which may cast significant doubt
on the entity’s ability to continue as a going concern:
A. During planning and consideration of internal controls.
B. During interim audit work.
C. During year-end audit work.
D. All of the above.

11. Which of the following most likely create “advocacy threat”

A. Dealing in, or being a promoter of, share or other securities in an assurance client.
B. Long association of a senior member of the assurance team with the assurance client.
C. Having a close business relationship with an assurance client.
D. Pressure to reduce inappropriately the extent of work performed in order to reduce fees.

12. Safeguards created by the profession, legislation or regulation, include the following
I. A corporate governance structure, such as an audit committee, that provides appropriate oversight and
communications regarding a firm’s services.
II. Continuing education requirements.
III. Legislation governing the independence requirements of the firm.
IV. Policies and procedures that emphasize the assurance client’s commitment to fair financial reporting.
V. The assurance client has competent employees to make managerial decision.
A. I, II, III and IV only. C. I, II and III only.
B. I, IV and V only. D. I and III only.

13. The "hallmark" of auditing is

A. Professional judgment. C. Materiality and audit risk.
B. Generally accepted auditing standards. D. Available audit technology.

14. The measure of the quantity of audit evidence and its relevance to a particular assertion and its reliability.
A. Sufficiency B. Adequacy C. Appropriateness D. Scope

15. This refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the
audit.
A. Scope of an audit B. Audit program C. Audit procedures D. Audit plan

16. Which of the following statements concerning materiality is not correct?

A. When establishing the overall audit strategy, the auditor shall determine materiality for the financial
statements as a whole.
B. The materiality level for the financial statements as a whole determined in the planning stage of the
audit should not be affected by changes in the circumstances of the engagement.
C. If, in the specific circumstances of the entity, there is one or more particular classes of transactions,
account balances or disclosures for which misstatements of lesser amounts than materiality for the
financial statements as a whole could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements, the auditor shall also determine the materiality
level or levels to those particular classes of transactions, account balances or disclosures.
D. Determining materiality involves the exercise of professional judgment.

17. A measure of how willing the auditor is to accept that the financial statements may be materially misstated
after the audit is completed and an unmodified opinion has been issued is the
A. Acceptable inherent risk. C. Acceptable audit risk.
B. Acceptable control risk. D. Acceptable detection risk.

18. The relationship between materiality and audit risk is:

A. Direct B. Inverse C. Indeterminable D. None of these

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19. When setting a preliminary judgment about materiality,
A. There is no relationship between it and the peso amount of evidence needed.
B. The same amount of evidence is required for either low or high peso amounts.
C. More evidence is required for a low peso amount than for a high peso amount.
D. Less evidence is required for a low peso amount than for a high peso amount.

20. Which of the following controls would an entity most likely use in safeguarding against the loss of
investment securities?
A. The internal auditor verifies the investment securities in the entity’s safe each year on the balance sheet
date.
B. The independent auditor traces all purchases and sales of investment securities through the subsidiary
ledgers to the general ledger.
C. An independent trust company that has no direct contract with the employees who have recordkeeping
responsibilities has possession of securities.
D. A designed member of the board of directors controls the securities in a bank safe deposit box.

21. A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and
submission of coupons for periodic interest collections probably should be delegated to the
A. Chief accountant B. Internal auditor C. Cashier D. Treasurer

22. The element of the audit planning process most likely to be agreed upon with the client before In
developing the overall audit plan and audit program, the auditor should assess inherent risk at the
Audit plan Audit program
A. Financial statement level Account balance level
B. Account balance level Financial statement level
C. Account balance level Account balance level
D. Financial statement level Financial statement level

23. Audit sampling involves the

A. Selection of all items over a certain amount.
B. Application of audit procedures to less than 100% of items within a class of transactions or an account
balance such that all items have a chance of selection.
C. Application of audit procedures to all items that comprise a class of transactions or an account balance.
D. Application of audit procedures to all items over a certain amount and those that are unusual or have a
history of error.

24. Population, as defined in PSA 530, means the entire set of data from which a sample is selected and about
which the auditor wishes to draw conclusions. It is important for the auditor to ensure that the population
is
I. Appropriate to the objective of the audit procedure.
II. Complete.
A. I only C. Both I and II
B. II only D. Neither I nor II

25. An advantage of statistical over nonstatistical sampling methods in tests of controls is that the statistical
methods
A. Afford greater assurance than a nonstatistical sample of equal size.
B. Provide an objective basis for quantitatively evaluating sampling risks.
C. Can more easily convert the sample into a dual-purpose test useful for substantive testing.
D. Eliminate the need to use judgment in determining appropriate sample sizes.

26. Which of the following best illustrates the concept of sampling risk?
A. The documents related to the chosen sample may not be available for inspection.
B. An auditor may select audit procedures that are not appropriate to achieve the specific objective.
C. An auditor may fail to recognize errors in the documents examined for the chosen sample.
D. A randomly chosen sample may not be representative of the population as a whole on the characteristic
of interest.

27. Which of the following statistical selection techniques is least desirable for use by an auditor?
A. Systematic selection C. Block selection
B. Stratified selection D. Sequential selection

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28. The use of a computer changes the processing, storage, and communication of financial information. A
CIS environment may affect the following, except
A. The specific procedures to obtain knowledge of the entity’s accounting and internal control systems.
B. The overall objective and scope of an audit.
C. The auditor’s design and performance of tests of control and substantive procedures to satisfy the audit
objectives.
D. The accounting and internal control systems of the entity.

29. The following are benefits of using IT-based controls, except

A. Ability to process large volume of transactions.
B. Ability to replace manual controls with computer-based controls.
C. Over-reliance on computer-generated reports.
D. Reduction in misstatements due to consistent processing of transactions.

30. Which of the following statements concerning the Internet is incorrect?

A. The Internet is a private network that only allows access to authorized persons or entities.
B. The Internet is a shared public network that enables communication with other entities and individuals
around the world.
C. The Internet is a worldwide network that allows entities to engage in e-commerce/e-business activities.
D. The Internet is interoperable, which means that any computer connected to the Internet can
communicate with any other computer connected to the Internet.

31. In planning the portions of the audit which may be affected by the client’s CIS environment, the auditor
should obtain an understanding of the significance and complexity of the CIS activities and the availability
of data for use in the audit. The following relate to the complexity of CIS activities except when
A. Complicated computations of financial information are performed by the computer and/or material
transactions or entries are generated automatically without independent validation.
B. Material financial statement assertions are affected by the computer processing.
C. The volume of transactions is such that users would find it difficult to identify and correct errors in
processing.
D. Transactions are exchanged electronically with other organizations (for example, in electronic data
interchange systems [EDI]).

32. The auditor shall consider the entity’s CIS environment in designing audit procedures to reduce risk to an
acceptably low level. Which of the following statements is incorrect?
A. The auditor’s specific audit objectives do not change whether financial information is processed
manually or by computer.
B. The methods of applying audit procedures to gather audit evidence are not influenced by the methods
of computer processing.
C. The auditor may use either manual audit procedures, computer-assisted audit techniques (CAATs), or a
combination of both to obtain sufficient appropriate audit evidence.
D. In some CIS environments, it may be difficult or impossible for the auditor to obtain certain data for
inspection, inquiry, or confirmation without the aid of a computer.

33. A database management system __________.

A. Stores data on different files for different purposes, but always knows where they are and how to
retrieve them.
B. Physically stores each element of data only once.
C. Allows quick retrieval of data but it needs to update files continually.
D. Allows quick retrieval of data but at accost of inefficient use of file space.

34. In comparing the control environment in complex versus non-complex Computerized Information System
(CIS), the control environment in complex CIS system is:
A. More critical because there is greater potential for errors and irregularities.
B. More critical because of the high degree of technical competence needed by the programmers and
operators.
C. Less critical because the complexity ensures that controls will be built into the system.
D. Less critical because non-experts do not have the opportunity to interact with the system and mess it
up.

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35. Continues to be an integral part of the audit function because it supports the auditor's judgment on the
quality of the information processed by computer systems.
A. IT Consultancy C. IT Auditing
B. IT Accounting D. IT System Software and Development

36. Software that evaluate application controls, and select and analyze computerized data for substantive audit
tests?
A. Audit Productivity Tools (APT)
B. Computer-Assisted Tools (CAT)
C. Computer-assisted Audit Tools (CAATs)
D. Computer-assisted Audit Tools and Techniques (CAATTs)

37. Software and/or methodology applied to test or document selected IT processes and their integration within
the IT environment?
A. Audit Productivity Tools (APT)
B. Computer-Assisted Tools (CAT)
C. Computer-assisted Audit Tools (CAATs)
D. Computer-assisted Audit Tools and Techniques (CAATTs)

38. In auditing in CIS environment, this would assess the adequacy of the control environment for developing
effective system.
A. Risk assessment C. Software development controls review
B. Software development life cycle D. Audit plan

39. In auditing in CIS environment, without this the auditor's job is more difficult and recommendations are
not as readily accepted as it is.
A. Risk assessment C. Software development controls review
B. Software development life cycle D. Audit plan

40. Provides system of checks and balances to prevent unauthorized access and changes to programs and data.
A. Resource Management C. Roles and Responsibilities
B. Separation of Duties D. User Management Responsibilities

41. Which of the following sampling methods could be designed to estimate the peso value of an audit
population?
A. Statistical sampling C. Non-statistical sampling
B. Sampling for attributes D. Sampling for variables

42. Which of the following statements is correct about statistical sampling?

A. A classical variables sample needs to include negative balances in the sample.
B. An assumption of probability-proportional-to-size sampling is that the underlying accounting
population be distributed normally.
C. An auditor needs to estimate the population standard deviation to use classical variables sampling.
D. The selection zero balances usually does not require special sample design considerations when using
probability-proportional-to-size sampling.

43. An accounts receivable aging schedule was prepared in 300 pages with each page containing the aging data
for 50 accounts. The pages were numbered from 1 to 300 and the accounts listed on each were numbered
from 1 to 50. An auditor selected accounts receivable for confirmation using a table of numbers as
illustrated:
Select Column from Table of Numbers Separate 5 digits: First 3 digits, Last two digits
04859 048 – 59 x
32729 327 – 29 *
49674 496 – 74 *
59680 596 – 80 *

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 23445 234 – 45 *
34609 346 – 09 *
87485 874 – 85 *
04297 042 – 97 y
13452 134 – 52 z
34565 345 – 65*
x- Mailed confirmation to account 59 listed in page 48
y- Mailed confirmation to account 97 listed in page 42
z – Mailed confirmation to account 52 listed in page 134
*- Rejected

This is an example of which of the following sampling methods?

A. Block sampling. C. Systematic sampling.
B. Haphazard sampling. D. Random-number sampling.

44. In which sampling method is the probability of selecting an item proportional to the size of the value of the
item (i.e. a P 1,000 item is 10 times more likely to be selected than a P 100 item)?
A. Difference estimation. C. Mean-per-unit estimation.
B. PPS sampling. D. Non-statistical sampling for variables.

45. Assume that you are auditing a retail department store and want to estimate the peso amount of errors on
sales invoices using probability-proportional-to-size sampling. Which of the following is true?
A. Tolerable error ignored.
B. The risk of incorrect acceptance and incorrect rejection are greater than for a classical variables
sampling plan.
C. The estimate will be unreliable if the error rate is small.
D. An invoice with a large balance has a greater chance of being selected than one with a smaller balance.

46. After the auditor has prepared a flowchart of internal control for sales and cash receipts transactions and
evaluated the design of the system, the auditor would perform tests of controls on all control procedures
A. Considered to be deficiencies that might allow errors to enter the accounting system.
B. Considered to be strengths that auditor plans to rely on in assessing control risk.
C. Documented in the flowchart.
D. That would aid in preventing irregularities.

47. The audit inquiry letter to the client’s legal counsel should be mailed only by the
A. Auditor after preparation by the client and review by the auditor.
B. Auditor’s attorney after preparation by the client and review by the auditor.
C. Client after review by the auditor’s attorney.
D. Client after the auditor has reviewed it for appropriate content.

48. A written representation letter from a client’s management that, among other matters, acknowledges
responsibility for the fair presentation of financial statements, should normally be signed by the
A. Chief executive officer and the chief financial officer.
B. Chief financial officer and the chairman of the board of directors.
C. Chairman of the audit committee of the board of directors.
D. Chief executive officer, the chairman of the board of directors, and the client’s attorney.

49. If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments, the
auditor should
A. Consider the refusal to be tantamount to a scope limitation.
B. Disclose the fact in a footnote to the financial statements.
C. Honor the confidentiality of the client-lawyer relationship.
D. Seek to obtain the corroborating information from management.

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50. An auditor should obtain written representation from management concerning litigation, claims and
assessments. These representations may be limited to matters that are considered either individually or
collectively material, provided an understanding on the limits of materiality for this purpose has been
reached by
A. The auditor independently of management.
B. The auditor and the client’s lawyer.
C. Management, the client’s lawyer, and the auditor.
D. Management and the auditor.

51. Which of the following auditing procedures is ordinarily performed last?

A. Confirming accounts payable.
B. Obtaining a management representation letter.
C. Reading minutes of meeting of the director’s meetings.
D. Testing of the purchasing function.

52. When auditing contingent liabilities, which of the following procedures would be least effective?
A. Examining customer confirmation replies.
B. Examining invoices for professional services.
C. Reviewing the bank confirmation letter.
D. Reading minutes of meeting of the director’s meetings.

53. Under auditing standards, an auditor’s responsibility to detect and report violations of laws and regulations
is to
A. Assess the risk that violations of laws and regulations may cause materially misstated financial
statements and to design the audit accordingly.
B. Report all violations of laws and regulations to SEC.
C. Detect all violations of laws and regulations, including those that are neither direct nor material.
D. Coordinate the search for violations of laws and regulations with all agencies from which the entity has
received financial assistance.

54. In assessing whether management has overlooked relevant laws and regulations, the auditor would perform
all of the following except
A. Review relevant portions of grant and loan agreements.
B. Obtain written representations from management.
C. Discuss laws and regulations with the entity’s chief financial officer and legal counsel.
D. Confirm grant arrangements with granting agencies.

55. Program audits performed for governmental entities include

A. Determining whether the financial statements are presented fairly.
B. Determining whether the entity is acquiring resources economically and efficiently.
C. Determining whether the entity has adhered with specific financial compliance requirements.
D. Determining the extent to which the desired results or benefits established by the legislature are being
achieved.

56. To provide for the greatest degree of independence in performing internal auditing functions, an internal
control most likely should report to the
A. Financial vice-president. C. Corporate controller.
B. Corporate stockholders. D. Board of directors.

57. An independent auditor might consider the procedures performed by the internal auditors because
A. Their degree of independence may be inferred by the nature of their work.
B. Their work impacts upon the cost-benefit tradeoff in evaluating inherent limitations.
C. They are employees of the client, but their work might be relied on.

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 D. They are employees whose work must be reviewed during substantive testing.

58. Manga Otiz Inc., maintains a large full-time internal audit staff, which reports directly to the chief
accountant. Audit reports prepared by the internal auditors indicate that the system is functioning as it
should and that control risk is low. The independent auditor will probably
A. Place limited reliance on the work performed by the internal audit staff.
B. Increase test of controls.
C. Eliminate compliance testing.
D. Avoid duplicating the work performed by the internal audit staff.

59. When an independent auditor decides that the work performed by internal auditors may have a bearing on
the nature, timing, and extent of contemplated audit procedures, the independent auditor should plan to
evaluate the objectivity of the internal auditors. Relative to objectivity, the independent auditor should
A. Review the quality control program in effect for the internal audit staff.
B. Examine the quality of the internal audit reports.
C. Consider the qualifications of the internal audit staff.
D. Consider the organization level to which internal auditors report the results of their work.

60. In connection with the audit of financial statements by an independent auditor, the client suggests that
members of the internal audit staff be utilized to minimize audit cost. Which of the following tasks could
most appropriate be delegated to the internal audit staff?
A. Determination of the adequacy of the allowance for doubtful accounts.
B. Evaluation of internal control for accounts receivable and sales.
C. Preparation of schedules for negative accounts receivable responses.
D. Selection of accounts receivable for confirmation, based on the internal auditor’s judgment as to how
many accounts and which accounts will provide sufficient coverage.

CASE I. You have been presented with the following draft financial information about BDM Corporation, very
successful company that develops and licenses specialist computer software and hardware. Its non-current assets
mainly consist of property, computer hardware and investments, and there have been additions to these during the
year. The company is experiencing increasing competition from rival companies, most of which specialize in
hardware or software, but not both. There is pressure to advertise and to cut prices.

You are the audit manager. You are planning the audit and are conducting a preliminary analytical review
and associated risk analysis for this client for the year ended 31 May 2019. You have been provided with a
summarized draft statement of comprehensive income which has been produced very quickly and certain
accounting ratios and percentages. You have been informed that the company accounts for research and
development costs in accordance with IAS 38 Intangible Assets.

Statement of comprehensive income (In thousand pesos)

Year ended 31 May
2019 2018
Revenue 15,206 13,524
Cost of sales 3,009 3,007
–––––– ––––––
Gross profit 12,197 10,517
Distribution costs 3,006 1,996
Administrative expenses 994 1,768
Selling expenses 3,002 274
–––––– ––––––
Operating profit 5,195 6,479
Net interest receivable 995 395
Income tax expense 3,104 1,452
–––––– ––––––
Profit 3,086 5,422
–––––– ––––––
Retained profits 1,617 3,983
–––––– ––––––

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 Dividends paid 1,469 1,439

Accounting ratios and percentages:

Earnings per share 0·43 1·04
Gross margin 0·80 0·78
Expenses as a percentage of revenue:
Distribution costs 0·20 0·15
Administrative expenses 0·07 0·13
Selling expenses 0·20 0·02
Operating profit 0·34 0·48

Answer the following:

61. Using the information above, which of the following statement is true about the performance of the
company for the two years.
A. The company has increased its revenues by 12% and its gross profit by 16% which in a competitive
market is very good. However, decreased operating expenses have resulted in a reduction in operating
profits of 20%.
B. The decrease in the distribution costs as a percentage of revenue may reflect inefficiencies in the
method of distribution in an industry that separates these functions.
C. The gross margin is very low; this is not abnormal in this sector, especially for software (although the
margin is high for hardware), but it may also be the result of errors, because the information has been
produced very quickly. This is also true of the other figures.
D. Total operating expenses as a percentage of revenue have increased substantially with the result that
operating profit as a percentage of revenue has reduced by around a third and gross margin is higher
than the previous year.

62. Using your answer to number 1, (a). Identify the areas that are subject to increased audit risk and (b).
Describe briefly the further audit work you would perform in response to those risks (Audit procedures).

Higher risk areas Audit procedures

A. Cost of sales and operating Obtain a detailed schedule of revenue and cost of sales showing the
expenses opening and closing inventory figures for both software and
hardware and perform a detailed review of changes on (say) a
monthly, quarterly and half-yearly basis.

B. Gross margin and operating Perform detailed analytical procedures on operating expenses and
expenses cost of sales/gross margins on a quarterly and monthly basis and
increase detailed testing of transactions in these areas in order to
ensure that misclassifications have not occurred.

C. Interest receivable Perform further analytical procedures on the interest costs and
income and ensure that these are in line with current interest rates
and the values and types of investments and borrowing held by the
company.

D. Taxation Obtain copies of the tax calculations for detailed review, and to
corroborate explanations provided by management.

CASE II. Your firm is the external auditor of Westwood Engineering, a listed company, which has annual sales of
P100 million. The head office site includes the manufacturing unit, the accounting functions and main
administration. There are a number of sales offices in different parts of the country. Westwood Engineering does
not have an internal audit department.

At the interim audit you have been assigned to the audit of the wages system. This will involve obtaining
an understanding of the wages system; testing the controls and performing substantive procedures in order to
verify wages transactions. The wages records are maintained on a computer and all the wages information is
processed at the head office. Some of the employees in the manufacturing unit are paid in cash and all other
employees have their wages paid directly into their bank account. Manufacturing employees are paid their wages a

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week in arrears. All other employees are paid at the end of each week or month. There is a personnel department
which is independent of the wages department. The personnel department maintain records of the employees,
including their starting date, grade, current wage rate and leaving date (if appropriate). Previous years’ audits have
revealed frauds by wages department staff which have been facilitated by weaknesses in controls in the wages
system. These frauds have included:

i. paying employees after appointment but before they commenced work;

ii. paying employees after they have left; and
iii. paying fictitious employees.

A check of current controls in the wages system has revealed that the company has failed to instigate
controls to prevent these types of fraud recurring. So, the audit program requires extensive substantive procedures
to be carried out to ensure that recorded wages transactions have not been mis-stated by similar frauds taking place
in the current year. The existence of employees at the head office site can be verified by physical inspection. From
a cost effectiveness point of view, only a small sample of sales offices will be visited. The audit manager has asked
you to consider the audit procedures you would carry out to obtain sufficient appropriate evidence of the existence
of employees at sales offices not visited by the audit staff.

The audit manager has explained that “unclaimed wages” arise when manufacturing employees are not
present to collect their wages when they are paid out. The unclaimed wage envelopes are given to the cashier who
records their details in the unclaimed wages book and is responsible for their custody. Any employee who has not
received his wage package at the pay-out can obtain it from the cashier. You have ascertained that there is no
system of checking the operation of the unclaimed wages system by a person independent of the cashier and the
wages department.

Answer the following:

63. Employees not on the first payroll who are on the second payroll, these are “starters”; Employees on the
first payroll who are not on the second, these are “leavers”. For both starters and leavers, ascertain the date
each employee started or left from the personnel department. Which of the following explain at the best
about the verification, that employees are not paid before they commenced employment or after they have
left (a “starters and leavers” test) the company?
A. For starters, check to the relevant payrolls that they were paid before they started employment. For
leavers, check to the relevant payrolls that they were paid after they ceased employment. An alternative
way of performing this test is to start from the personnel records of staff who have started or left during
the period and checking to payroll.
B. For starters, check to the relevant payrolls that they were paid after they started employment. For
leavers, check to the relevant payrolls that they were unpaid before they ceased employment. An
alternative way of performing this test is to start from the personnel records of staff who have started or
left during the period and checking to payroll.
C. For starters, check to the relevant payrolls that they were not paid before they started employment. For
leavers, check to the relevant payrolls that they were not paid after they ceased employment. An
alternative way of performing this test is to start from the personnel records of staff who have started or
left during the period and checking to payroll.
D. For starters, check to the relevant payrolls that they were not paid after they started employment. For
leavers, check to the relevant payrolls that they were not paid before they ceased employment. An
alternative way of performing this test is to start from the personnel records of staff who have started or
left during the period and checking to payroll.

64. Which of the following is the best audit procedures you would carry out in connection with attending a
pay-out of wages in cash to manufacturing employees?
A. When the employee is given his wage, he should sign for it. The signature should be test checked to the
employee’s signature kept by the personnel department. Mark the list as each employee collects his
wage.
B. Observe to ensure that no employee receives more than one pay packet or one for another employee.
C. Before the wages are paid, take a copy of the payroll and check there is a pay packet for each
employee.
D. Attend a weekly pay packet preparation and ensure that it is secure. Select a small sample of pay
packets before they are sealed and confirm that all cash per payroll totals is accounted for.
E. All of the above.

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65. The following describe the substantive checks of transactions you would carry out on the unclaimed wages
system except?
A. Where employees have collected their wages, check that they have either signed for the wage or there
is a letter from the employee authorizing another person to collect the wage packet (e.g. when the
employee is ill). Check the employee’s signature to the personnel records.
B. The unclaimed wage packets should be kept in a secure place (e.g. a safe). Ideally, unclaimed wages
should not be dealt with by employees in the wages department, and there should be an independent
check (probably by the accounts or personnel department) to ensure that proper procedures are carried
out and there is no fraud.
C. Check the number of unclaimed wage envelopes is about the same each week. If they are significantly
less in other weeks, this indicates that some unclaimed wages are not recorded in the unclaimed wages
book.
D. None of the above.

66. Assuming the tolerable deviation rate is 5 percent, the expected population rate is 3 percent, and the
allowance for sampling risk is 2 percent, what should an auditor conclude if tests of 100 randomly selected
documents reveal 4 deviations?
A. Accept the sample results as support for assessing control risk below the maximum because the
tolerable rate less the allowance for sampling risk equals the expected population deviation rate.
B. Accept the sample results as support for assessing control risk below the maximum because the sample
deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
C. Assess control risk at the maximum because the sample deviation rate plus the allowance for sampling
risk exceeds the tolerable rate.
D. Assess control risk at the maximum because the tolerable rate plus the allowance for sampling risk
exceeds the expected population deviation rate.

67. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high
relate to the
A. Audit quality controls. C. Efficiency of the audit.
B. Effectiveness of the audit. D. Selection of the sample.

68. An auditor plans to examine a sample of 20 purchase orders for proper approvals as prescribed by the
client’s internal control procedure. One of the purchase orders in the chosen sample of 20 cannot be found,
and the auditor is unable to use alternative procedures to test whether that purchase order was properly
approved. The auditor should
A. Choose another purchase order to replace the missing purchase order in the sample.
B. Consider this test of control invalid and proceed with substantive tests since internal control cannot be
relied upon.
C. Select a completely new set of 20 purchase orders.
D. Treat the missing purchase order as a deviation for the sample.

69. Detection risk in statistical sampling is

A. Related to audit risk as a whole.
B. The risk of deciding a book balance is fairly stated when it is materially misstated.
C. The risk of selecting a sample that is too big.
D. The risk that a material misstatement will occur in a financial statement assertion and the auditor will
not or not able to detect it.

70. Alpha risk in statistical sampling is

A. The risk that a material misstatement will occur in a financial statement assertion and the audit will not
detect it.
B. The risk of selecting a sample that is too small.
C. The risk of deciding a book balance is not fairly stated when it is immaterially misstated.
D. Related to sampling and non-sampling risk.

71. Financial statement risk or risk of material misstatement in auditing using the sampling techniques is
A. The risk that material errors will occur in the process by which the financial statements are developed
or prepared.
B. The risk that a material misstatement will occur in a financial statement assertion and the audit will not
detect it.
C. The risk of deciding a book balance is not fairly stated when it is immaterially misstated.
D. The risk of deciding a book balance is fairly stated when it is materially misstated.

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72. Define attribute sampling and deviation rate/error.
A. Deviation rate pertains to characteristics or quality of a population or sample while Attributes sampling
is the absence of such characteristics.
B. Attributes sampling pertains to quantity or the amount in the population or sample while deviation rate
is the absence of such amount.
C. Attributes sampling pertains to characteristics or quality of a population or sample while deviation rate
is the absence of such characteristics.
D. Attributes sampling is the same as deviation rate.

73. An example of an inventory accounting policy that should be disclosed is the

A. Method used for inventory costing.
B. Identification of major suppliers.
C. Effect of inventory profit caused by inflation.
D. Classification of inventory into raw materials, work in process and finished goods.

74. S1: A critical success factor to purchasing services or products from third parties is a sourcing strategy and
supplier management processes.
S2: The sourcing strategy should align only to the organization’s overall strategy.
B. True; True B. False; True C. True; False D. False; False

75. In comparing the control environment in complex versus non-complex Computerized Information System
(CIS), the control environment in complex CIS system is:
A. More critical because there is greater potential for errors and irregularities.
B. More critical because of the high degree of technical competence needed by the programmers and
operators.
C. Less critical because the complexity ensures that controls will be built into the system.
D. Less critical because non-experts do not have the opportunity to interact with the system and mess it
up.

***END OF THE EXAMINATION***

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