Philippine School of Business Administration

CPA Review Quezon City

Auditing TheoryPre-Week

R. C. DalioanPage 1

1. Which of the following is an example of a related-party transactions?a. An action is taken by the directors of company A to provide

additional compensation for vice presidents in charge of the principal business function of company A

b. A long term agreement is made by company A to provide merchandise or services to company B, a longtime, friendly competitor

c. A short-term loan is granted to company A by a bank that has a depositor who is a member of the board of directors of Company A

d. A nonmonetary exchange occurs whereby company A exchanges property for similar property owned by company B, an unconsolidated subsidiary of company A:

2. For a reporting entity that has participated in material related-party transactions, disclosure in the financial statements should include which of the following?a. The nature of the relationship involved and a description of

transactionsb. Details of the history of all related-party relationshipsc. A statement to the effect that a transaction was consummated

on term no different than those that would have been obtained if the transaction had been with an unrelated party:

d. A reference to deficiencies in the entity’s internal control3. Which of the following would not necessarily be a related-party

transaction?a. Sales to another corporation with a similar name b. Purchases from another corporation that is controlled by the

corporation’s chief stockholderc. A loan from the corporation to a major stockholderd. Sale of land to the corporation by the spouse of a director

4. Which of the following auditing procedures most likely would assist an auditor in identifying related-party transactions?a. Retesting ineffective internal control procedures previously

reported to the audit committeeb. Sending second requests for unanswered positive

confirmations of accounts receivablec. Reviewing accounting records for nonrecurring transactions

recognized near the balance sheet dated. Inspecting communications with law firms for evidence of

unreported contingent liabilities5. When scheduling the work to be performed on an audit, the

auditor should consider confirming accounts receivable balances at an interim date if which of the following situations exist?a. Subsequent collections are to be reviewedb. Internal controls over receivables are good

1

c. Negative confirmations are to be usedd. A simultaneous audit of cash and accounts receivable will

occur6. In which of the following instances would an auditor be least likely

to require the assistance of a specialist? a. Assessing the valuation of inventories of artworksb. Determining the quantities of materials stored in piles on the

groundc. Determining the value of unlisted securitiesd. Ascertaining the assessed valuation of fixed assets

7. Which of the following situations would most likely require special audit planning by the auditor?a. Some items of factory and office equipment do not bear

identification numbersb. Depreciation methods used on the client’s tax return differ

from those used on the booksc. Assets costing less than P500 are expensed even though the

expected life exceeds one yeard. Inventory comprises precious stones

8. Which of the following errors would cause a misstatement under the existence or occurrence assertion for sales transactions?a. A sales invoice is incorrectly extended for P500 instead of

P5,000b. The credit manager mistakenly approved a credit sale to a

customer who is bankruptc. A sale of company land was erroneously recorded as a sale of

merchandised. A shipment of goods in July was billed to the customer in July,

paid, and billed again in August 9. Carolina Sales Corporation maintains large full-time internal audit

staff that reports directly to the company president. Audit reports the internal auditors prepared indicate that internal control is suitably designed and operating effectively. The independent auditor will probablya. Eliminate tests of controlsb. Avoid duplicating work the internal audit staff performed c. Use the work the internal audit staff performed in assessing

control riskd. Perform more substantive tests

10. Which of the following is one of the better auditing techniques an auditor can use to detect kiting?a. Review a composition of deposit slips stamped by the bankb. Review subsequent bank statements and canceled checks

received directly from the bankc. Prepare a schedule of bank transfers from the client’s books d. Prepare a year-end bank reconciliations

11. An auditor is testing sales transactions. One step is to trace a sample of debit entries from the account receivable subsidiary ledger back to the supporting sales invoices. What would the auditor intend to establish by this step?a. The sales invoices represent bona fide salesb. All sales have been recordedc. All sales invoices have been properly posted to customer

accountsd. Debit entries in the accounts receivable subsidiary ledger are

properly supported by sales invoices

2

12. The auditor obtains corroborating evidential matter for accounts 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 disputeb. Control risk for accounts receivable is highc. Client records include a large number of relatively small

balancesd. The auditor believes recipients of the requests are unlikely to

give them consideration 13. When determining the adequacy of the allowance for

uncollectible accounts, the least reliance should be placed upon which of the following?a. The credit manager’s opinion b. An aging schedule of past-due accountsc. Collection experience of the client’s collection agencyd. Ratios calculated showing the past relationship of the

valuation allowance to net credit sales14. Which of the following procedures ordinarily would be expected to

best reveal unrecorded sales at the balance sheet date?a. Compare shipping documents with sales records b. Apply gross margin rates to inventory disposed of during the

periodc. Trace payments received subsequent to the balance sheet

dated. Send accounts receivable confirmation requests

15. Customers having substantial year-end past-due balances fail to reply after second request confirmation forms have been mailed directly to them. Which of the following is the most appropriate audit procedure?a. Examine shipping documentsb. Review collections for the year being examined c. Extend tests of controls for assertions related to receivablesd. Increase the balance in the accounts receivable allowance

(contra) account16. To verify that all sales transactions have been recorded, a test of

transactions should be completed on a representative sample drawn from which of the following?a. Entries in the sales journalb. The billing clerk’s file of sales ordersc. A file of duplicate copies of sales invoices for which all

prenumbered forms in the series have been accounted ford. The shipping clerk’s file of duplicate copies of bills of lading

17. During the process of confirming receivables as of December 31, 2003, a positive confirmation was returned indicating the ‘balance owed as of December 31 was paid on January 9, 2004. The auditor most likely woulda. Determine whether any changes in the account occurred

between January 1 and January 31, 2004b. Determine whether the customer took a customary trade

discountc. Reconfirm the zero balance as of January 10, 2004d. Verify that the amount was received

18. Which of the following is the best argument against the use of negative accounts receivable confirmations?a. The cost per response is excessively high

3

b. The auditor has no way of knowing if the intended recipients received them

c. Recipients are likely to feel that in reality the confirmation is a subtle request for payment

d. The inference drawn from receiving no reply may not be correct

e. are unlikely to confirm the information19. Which of the following is not a primary objective of the auditor in

the audit of accounts receivable?a. To determine the approximate realizable valueb. To establish existence of the receivablesc. To determine the approximate time of collectibility of the

receivablesd. To determine that receivables are from trade customers, not

officers or employees20. For the confirmation of accounts receivable, the auditor most

likely woulda. Request confirmation of a sample of the inactive accounts b. Seek positive confirmation for at least 50% of the total peso

amount of receivablesc. Require confirmation of all receivables from federal

government agenciesd. Send confirmation requests within one month of the fiscal

year-end21. Which of the following sets of duties would be considered an

improper segregation of duties in the expenditure cycle?a. Receiving, counting, and inspecting goods and also preparing

the receiving reportb. Preparing, approving, and issuing purchase orders and also

following up on unfilled ordersc. Approving vouchers for payment and also preparing and

signing checksd. Comparing vendor invoices with purchase orders, requisitions,

and receiving reports and also approving vouchers for payment

22. Fagan Products, Inc., requires that an approved receiving report be prepared before an entry is made in the voucher register to record a purchase and related account payable. To test the effectiveness of this control, the auditor compares the date on the receiving report with the date of the entry in the voucher register. The auditor would be most likely to question the effectiveness of this control when the test of controls reveals thata. Voucher register entries are dated on or after the

corresponding receiving report datesb. Receiving reports are dated on or before the corresponding

voucher register entry datesc. Receiving reports are dated after the corresponding voucher

register entry datesd. Voucher register entries are dated after the corresponding

receiving report dates23. Which of the following internal controls would least likely prevent

or detect a misstatement of the existence or occurrence assertion for cash payments caused by the duplicate payment of a voucher?a. Cancelling documentation supporting the voucher immediately

after the voucher is paid

4

b. Reconciling monthly vendor statements with the accounts payable subsidiary ledger

c. Individuals responsible for signing checks also preparing and approving vouchers

d. Attaching a check copy to the voucher immediately after the voucher is paid

24. For comparing the confirmation of accounts payable with suppliers and confirmation of accounts receivable with debtors, which of the following is statements is true?a. Confirmation of accounts payable with suppliers is a more

widely accepted auditing procedure than is confirmation of accounts receivable with debtors

b. Statistical sampling techniques are more widely accepted for the confirmation of accounts payable than for the confirmation of accounts receivable

c. As compared with the confirmation of accounts payable, the confirmation of accounts receivable will tend to emphasize accounts with zero balances at the balance sheet date

d. It is less likely that the confirmation request sent to the supplier will show the amount owed the supplier than that the request sent to the debtor will show the amount due from the debtor

25. Why do the audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable?a. Accrued liabilities usually pertain to services of a continuing

nature, whereas accounts payable are the result of completed transactions

b. Accrued liability balances are less material than accounts payable balances

c. Evidence supporting accrued liabilities is nonexistent, whereas evidence supporting accounts payable is readily available

d. Accrued liabilities at year-end will become accounts payable during the following year

26. Under which of the following circumstances would be advisable for the auditor to confirm accounts payable with creditors?a. Internal controls for accounts payable are adequate and

sufficient evidence is on hand to minimize the risk of a material misstatement

b. Confirmation response is expected to be favorable, and accounts payable balances are of immaterial amounts

c. Creditor statements are not available, and internal control over accounts payable is unsatisfactory

d. The majority of accounts payable balances are with associated companies

27. Which of the following audit procedures is least likely to detect an unrecorded liability?a. Analysis and recomputation of interest expenseb. Analysis and recomputation of depreciation expense c. Mailing standard bank confirmation formsd. Reading the minutes of board of directors meetings

28. Which of the following internal controls would be least effective in preventing the accumulation of obsolete or slow-moving inventory?a. Using perpetual inventory recordsb. Using secured storage areas for inventoryc. Using sales forecasts

5

d. Using authorized production orders

29. Lutel Manufacturing Corporation mass-produces 12 different products. The controller interested in strengthening internal control for the existence assertion for finished inventory would be most likely to implement which of the following?a. A separation of duties among production personnelb. The use of sales forecastsc. A job-order cost accounting systemd. A perpetual inventory system

30. Holly, Inc., uses time clocks and time cards to help ensure that employee work time is accurately recorded. Which internal control would be most effective for determining whether production employees are properly recording their time on the payroll time cards at a time clock station?a. The production supervisor should approve daily time charged

to job orders and compare that time with hours recorded on the time cards

b. Payroll checks should be distributed by the internal auditing department

c. Hours recorded on the time cards should be compared to payroll computations by an independent employee

d. The duties of hiring, payroll computation, and paying employees should be segregated

31. Purchase cutoff procedures should be designed to test whether merchandise is included in the client company’s inventory if the companya. Has paid for the merchandiseb. Has physical possession of the merchandisec. Holds legal title to the merchandised. Holds the shipping documents for the merchandise issued in

the company’s name32. An auditor has accounted for a sequence of inventory tags and is

now going to trace information on a representative number of tags to the physical inventory sheets. The purpose of this procedure is to obtain assurance thata. The final inventory is valued at costb. All inventory represented by an inventory tag is listed on the

inventory sheetsc. All inventory represented by an inventory tag is bona fided. Inventory sheets do not include untagged inventory items

33. The physical count of a retailer’s inventory was higher than shown by the perpetual records. Which of the following could explain the difference?a. Inventory items had been counted, but the tags placed on the

items had not been taken off the items and added to the inventory accumulation sheets

b. Credit memos for several items customers returned had not been recorded

c. No journal entry had been made on the retailer’s books for several items returned to its suppliers

d. An item purchased F.O.B. shipping point had not arrived at the date of the inventory count and had not been reflected in the perpetual records

34. Purchase cutoff procedures should be designed to test whether or not all inventory

6

a. Purchased and received before year-end was recordedb. On the year-end balance sheet was carried at lower of cost or

marketc. On the year-end balance sheet was paid for the companyd. The company owns is in the company’s possession

35. The audit of year-end physical inventories should include steps to verify that the client’s purchase and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as aa. Sale in the subsequent periodb. Purchase in the current periodc. Sale in the current period d. Purchase return in the subsequent period

36. An auditor usually will trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule. This audit procedure is meant to provide evidence that items physically present and the auditor observed at the time of the physical inventory count area. Owned by the clientb. Not obsoletec. Physically present at the time of the final-inventory-schedule

preparationd. Included in the final inventory schedule

37. After accounting for a sequence of inventory tags, An Auditor traces a sample of the tags to the physical-inventory listing to obtain evidence that all itemsa. Included in the listing have been countedb. Represented by inventory tags are included in the listingsc. Included in the listing are represented by inventory tagsd. Represented by inventory tags are bona fide

38. Which of the following is not one of the independent auditor’s objectives when auditing inventories?a. Verifying the client owns the inventory countedb. Verifying the client has used proper inventory pricingc. Ascertaining the physical quantities of inventory on handd. Verifying that all inventory the client owns is on hand at the

time of the count 39. Where no independent stock transfer agents are employed and

the corporation issues its own stocks and maintains stock records, cancelled stock certificates should a. Be defaced to prevent reissuance and attached to their

corresponding stubsb. Not be defaced but be segregated from other stock certificates

and retained in a cancelled certificates filec. Be destroyed to prevent fraudulent reissuanced. Be defaced and sent to the secretary

40. Which of the following is an internal control weakness related to factory equipment?a. A policy exists requiring all purchases of factory equipment to

be made by the department in need of the equipmentb. Checks issued in payment of equipment purchases are not

signed by the controllerc. Factory equipment replacements generally are made when

estimated useful lives, as indicated in depreciation schedules, have expired

7

d. Proceeds from sales of fully depreciated equipment are credited to other income

41. The financial management of a company should take steps to see the company investment securities are protected. Which of the following is not a step designed to protect investment securities?a. Custody of securities should be assigned to persons who have

the accounting responsibility for securitiesb. Securities should be properly controlled physically to prevent

unauthorized usec. Access to securities should be vested in more than one

persond. Securities should be registered in the name of the owner

42. Which of the following is the most important internal control over acquisitions of property, plant, and equipment?a. Establishing a written company policy distinguishing between

capital and revenue expendituresb. Using a budget to forecast and control acquisitions and

retirementsc. Analyzing monthly variances between authorized expenditures

and actual costsd. Requiring acquisitions to be made by user departments

43. Which of the following audit procedures would least likely lead the auditor to find unrecorded fixed asset disposals?a. Examination of insurance policiesb. Review of repairs and maintenance expensec. Review of property tax filesd. Scanning of invoices for fixed asset additions

44. The controller of Excello Manufacturing, Inc., wants to use ratio analysis to identify the possible existence of idle equipment or the possibility that equipment has been disposed of without having been written off. Which of the following ratios would best accomplish this objective?a. Depreciation expense to book value of manufacturing

equipmentb. Accumulated depreciation to book value of manufacturing

equipmentc. Repairs and maintenance cost to direct-labor costsd. Gross manufacturing equipment cost to units produced

45. Which of the following is the best evidence of real estate ownership at the balance sheet date?a. Title insurance policyb. Original deed held in the client’s safec. Paid real estate tax bill d. Closing statement

46. In the audit of property, plant, and equipment, the auditor tries to determine all of the following except the a. Design of internal controlsb. Extent of property abandoned during the yearc. Adequacy of replacement funds d. Reasonableness of depreciation expense

47. During the year under audit, a company has completed a private placement of a substantial amount of bonds. Which of the following is the most important step in the auditor’s program for the examination of bonds payable?a. Confirming the amount issued with the bond trustee

8

b. Tracing the cash received from the issue to the accounting records

c. Examining the bond records the transfer agent maintainsd. Recomputing the annual interest cost and the effective yield

48. An auditor compares 19X9 revenues and expenses with those of the prior year and investigates all changes exceeding 10%. By this procedure the auditor would be most likely to learn thata. An increase in property tax rates has not been recognized in

the client’s accrualb. The 19X9 provision for uncollectible accounts is inadequate

because of worsening economic conditionsc. Fourth-quarter payroll taxes were not paid d. The client changed its capitalization policy for small tools in

19X949. An auditor determines that a client has capitalized properly a

leased asset (and corresponding lease liability) as representing, in substance, an installment purchase. As part of the auditor’s procedures, the auditor shoulda. Substantiate the cost of the property to the lessor and

determine whether this is the cost the client recordedb. Evaluate the propriety of the interest rate used to discount the

future lease paymentsc. Determine whether the leased property is being amortized

over the life of the leased. Evaluate whether the total amount of lease payments

represents the fair market value of the property50. Which of the following best describes the independent auditor’s

approach to obtaining satisfaction concerning depreciation expense in the income statement?a. Verify the mathematical accuracy of the amounts charged to

income as a result of depreciation expenseb. Determine the method for computing depreciation expense,

and ascertain whether it is in accordance with generally accepted accounting principles

c. Reconcile the amount of depreciation expense to amounts credited to accumulated depreciation accounts

d. Establish the basis for depreciable assets, and verify the depreciation expense

51. The auditor may conclude that depreciation charges are insufficient by notinga. Large amounts of fully depreciated assetsb. Continuous trade-ins of relatively new assetsc. Excessive recurring losses on retired assetsd. Insured values greatly in excess of book values

52. Which of the following internal controls would be most effective for maintaining proper custody of financing cycle assets?a. Access to securities in the safe deposit box is limited to only

one officerb. Personnel who post investment transactions to the general

ledger are not permitted to update the investment subsidiary ledger

c. The purchase and sale of investments are executed only after the specific authorization of the board of directors

d. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe-deposit box by independent personnel

9

53. What is the major reason an independent auditor gathers evidence?a. To form an opinion on the financial statementsb. To detect fraudc. To evaluate managementd. To assess control risk

54. When is evidential matter generally considered sufficient?a. When it is competentb. When enough of it is present to afford a reasonable basis for

an opinion on the financial statementsc. When it has the qualities of being relevant, objective, and free

from unknown biasd. When the auditor uses professional judgment in its selection

55. Evidential matter supporting the financial statements consists of the underlying accounting data and all corroborating information available to the auditor. Which of the following is an example of corroborating information?a. Minutes of meetings b. General ledgersc. Accounting manualsd. Worksheets supporting consolidated financial statements

56. When is evidential matter generally considered competent?a. When it has the qualities of being relevant, objective, and free

from known biasb. When enough of it is present to afford a reasonable basis for

an opinion on the financial statementsc. When it has been obtained by random selectiond. When it consists of written statements made by managers of

the enterprise under audit 57. Which of the following circumstances is most likely to cause an

auditor to consider whether a material misstatement exists?a. Transactions selected for testing are not supported by proper

documentationb. The turnover of senior accounting personnel is exceptionally

lowc. Management places little emphasis on meeting earnings

projectionsd. Operating and financing decisions are dominated by several

persons58. Which of the following types of documentary evidence should the

auditor consider the most reliable?a. A sales invoice the client issued and supported by a delivery

receipt from an outside truckerb. Confirmation of an account payable balance mailed by and

returned directly to the auditorc. A check the company issued bearing the payee’s

endorsement, which is included with the bank statements mailed directly to the auditor

d. A working paper the client’s controller prepared and the client’s treasurer reviewed

59. The strongest criticism of the reliability of audit evidence the auditor physically observes is thata. The client may conceal items from the auditorb. The auditor may not be qualified to evaluate the items

observedc. Such evidence is too costly in relation to its reliability

10

d. The observation must occur at a specific time, which is often difficult to arrange

60. Audit working papers are used to record the results of the auditor’s evidence-gathering procedures. What should the auditor remember when preparing working papers?a. Working papers should be kept on the client’s premises so

that the client can have access to them for reference purposesb. Working papers should be the primary support for the financial

statements being auditedc. Working papers should be considered a substitute for the

client’s accounting recordsd. Working papers should be designed to meet the

circumstances and the auditor’s needs on each audit61. Although the quantity, type, and content of working papers will

vary with the circumstances, the working papers generally would include which of the following?a. Copies of client records the auditor examined during the

course of the auditb. Evaluation of the efficiency and competence of the audit staff

assistants by the partner responsible for the auditc. Auditor’s comments concerning the efficiency and

competence of client management personneld. The auditing procedures followed and the testing performed to

obtain evidential matter 62. Audit evidence can come in different forms with different degrees

of persuasiveness. Which of the following is the least persuasive type of evidence?a. Documents third parties mailed to the auditorb. Correspondence between the auditor and vendorsc. Sales invoices the auditor inspectedd. Computations the auditor made

63. Which of the following factors will least affect the independent auditor’s judgment as to the quantity, type, and content of working papers desirable for a particular audit?a. Nature of the auditor’s reportb. Nature of the financial statements, schedules, or other

information the auditor is reporting onc. Need for supervision and reviewd. Number of personnel assigned to the audit

64. Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?a. Vendor’s invoiceb. Bank statement obtained from the clientc. Calculations the auditor maded. Prenumbered client invoices

65. For what minimum period should audit working papers be retained by the independent CPA?a. For the period the entity remains a client of the independent

CPAb. For the period an auditor-client relationship exits, but not more

than seven yearsc. For the statutory period when legal action may be brought

against the independent CPAd. For as long as the CPA is in public practice

11

66. During an audit, pertinent data are compiled and included in the audit working papers. The working papers primarily are considereda. A client-owned record of conclusions reached by the auditors

who performed the auditb. Evidence supporting financial statementsc. Support for the auditor’s representation as to compliance with

generally auditing standardsd. A record to be used as a basis for the following year’s audit

67. Which of the following statements is true regarding an auditor’s working papers?a. They should not be permitted to serve as a reference source

for the clientb. They should not contain critical comments concerning

managementc. They should show that the accounting records agree or

reconcile with the financial statementsd. They should be considered the primary support for the

financial statements being audited.68. In general, which of the following statements is correct with

respect to ownership, possession, or access to working papers a CPA firm prepared in connection with an audit?a. The working papers may be obtained by third parties when

they appear to be relevant to issues raised in litigationb. The working papers are subject to the privileged

communication rule which, in a majority of jurisdictions, prevents third-party access to the working papers

c. The working papers are the property of the client after the client pays the fee

d. The working papers must be retained by the CPA firm for a period of ten years

69. Which of the following is an advantage of a systematic sampling over random-number sampling?a. It provides a stronger basis for statistical conclusionsb. It enables the auditor to use the more efficient sampling-with-

replacement tablesc. A correlation among the location of items in the population, the

feature of sampling interest, and the sampling interval may exist

d. It does not require the auditor to establish correspondence between random numbers and items in the population

70. Tests of controls are intended to provide reasonable assurance that the internal control procedures are being applied as prescribed. Which sampling method is most useful when testing controls?a. Haphazard samplingb. Attribute samplingc. Sampling with replacementd. Stratified random sampling

71. Which of the following best describes what the auditor means by the rate of deviation in an attribute sampling plan?a. The number of deviations that reasonably can be expected to

be found in a populationb. The frequency a certain characteristics occurs within a

population:c. The degree of confidence that the sample is representative of

the population

12

d. The dollar range the true population total can be expected to fall within

72. If an auditor, planning to use statistical sampling, is concerned with the number of client sales invoices that contain mathematical misstatements, which method would the auditor most likely use?a. Random sampling with replacementb. Sampling for attributes:c. Sampling for variablesd. Stratified random sampling

73. Rachel Jones, CPA, believes the expected deviation rate of client billing errors is 3% and has established a tolerable deviation rate of 5%. In the review of client invoices, which method should Jones use?a. Discovery samplingb. Attribute sampling:c. Stratified samplingd. Variable sampling

74. An auditor selects a preliminary sample of 100 items out of a population of 1,000 items. The sample statistics generate an arithmetic mean of P120, a standard deviation of P12, and a standard error of the mean of P1.20. If the sample was adequate for the auditor’s tolerable misstatement was plus or minus P2,000, what would be the minimum acceptable peso value of the population?a. P122,000 c. P118,000:b. P120,000 d. P117,600

75. In which of the following cases would the auditor be most likely to conclude that all of the items in an account under consideration should be examined rather than tested on a sample basis?

The Measure of Misstatements Are Tolerable Misstatement Is Expected To be

a. Large Low b. Large High

a. Small High:b. Small Low

76. Parts A and B are based on the following information: The following diagram depicts the auditor’s estimated deviation rate compared with the tolerable rate, and it also depicts the true population deviation rate compared with the tolerable rate.

True State of Population Auditor’s Estimate Deviation Rate Deviation Rate

Based on Exceeds Tolerable Is Less Than Sample Results Rate Tolerable Rate

Deviation rate Exceeds Tolerable Rate I II

Deviation Rate Is Less Than Tolerable Rate III IV

A. In which of the situations would the auditor have properly assessed the level of control risk?

a. I:b. IIc. IIId. IV

13

B. As a result of testing controls, the auditor assesses control risk too high and thereby increases substantive testing. Which situation illustrates this result?a. Ib. II:c. IIId. IV

77. If all other factors specified in an attribute sampling plan remain constant, changing the tolerable rate from 6% to 10% and changing the specified reliability from 97% to 93% (changing the risk of assessing control risk too low from 3% to 7%) would cause the required sample size toa. Increase c. Decrease:b. Remain the same d. Change by 4%

78. In estimation sampling for variables, which of the following must be known to estimate the appropriate sample size required to meet the auditor’s needs in a given situation?a. The total amount of the population:b. The desired standard deviationc. The desired confidence leveld. The estimated rate of misstatement in the population

79. If statistical sampling methods are used by a client to take physical inventory, the CPA must a. Insist that the client take a complete physical inventory at least

once each year and observe the inventory count if it is reasonable and practicable to do so

b. Observe such test counts as he or she deems necessary to obtain satisfaction that the sampling plan has statistical validity, that it was properly applied, and that the resulting precision and reliability are reasonable in the circumstances:

c. Either observe a complete inventory count sometime during the year to obtain satisfaction that the statistical procedures are valid or qualify or disclaim an opinion on the financial statements taken as a whole

d. Either observe a statistical inventory count each year or qualify or disclaim an opinion on the financial statements taken as a whole

80. The estimated deviation rate obtained from attribute sampling is most useful for satisfying the auditing standard that statesa. The work is to be adequately planned, and assistants, if any,

are to be properly supervisedb. Sufficient competent evidential matter is to be obtained

through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion

c. The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor

d. A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed:

81. Anthony Hill has decided to use PPS sampling, sometimes called peso-unit sampling, in the audit of a client’s accounts receivable balances. Hill plans to use the following PPS sampling table:

Reliability Factors for Errors of Overstatement Number of Overstatement Risk of Incorrect Acceptance Errors 1% 5% 10% 15% 20%

0 4.61 3.00 2.31 1.90 1.61

14

1 6.64 4.75 3.89 3.38 3.002 8.41 6.30 5.33 4.72 4.283 10.05 7.76 6.69 6.02 5.524 11.61 9.16 8.00 7.27 6.73

Additional Information Tolerable misstatement (net of effect of expected misstatement) P24,000Risk of incorrect acceptance 20%Number of errors allowed 1Recorded amount of accounts receivable P240,000Number of accounts 360

What sample size should Hill use?a. 120 c. 60b. 108: d. 30

82. In a probability-proportional-to-size sample with a sampling interval of P10,000, an auditor discovered that a selected account receivable with a recorded amount of P5,000 had an audit amount of P2,000. What was the projected error of this sample?a. P3,000 c. P6,000:b. P4,000 d. P8,000

83. Auditors sometimes use comparisons of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?a. Unrecorded purchasesb. Unrecorded sales:c. Merchandise purchases being charged to selling and general

expensed. Fictitious sales

84. The auditor notices significant fluctuations in key elements of the company’s financial statements. If management cannot provide an acceptable explanation, what should the auditor do?a. Consider the matter a scope limitationb. Perform additional audit procedures to investigate the matter

further:c. Intensify the audit, expecting to detect management fraudd. Withdraw from the engagement

85. Of the following, which is the most efficient audit procedure for verification of interest earned on bond investments?a. Tracing interest declarations to an independent record bookb. Recomputing interest earned:c. Confirming interest rate with the issuer of the bondsd. Vouching the receipt and deposit of interest checks

86. An auditor testing long-term investments ordinarily would use analytical procedures as the primary audit procedures to ascertain the reasonableness of thea. Valuation of the marketable equity securitiesb. Classification of gains and losses on the disposal of securitiesc. Completeness of recorded investment income:d. Existence and ownership of investments

###########################################################1. Which of the following would lessen the effectiveness of internal

control in an electronic data-processing system?a. The computer librarian maintains custody of computer

program instructions and detailed program listings:b. Computer operators have access to operator instructions and

detailed program listings

15

c. The control group maintains sole custody of all computer output

d. Computer programmers write and debug programs that perform routines the systems analyst designs

2. To update a computerized accounts receivable file, which of the following would be used as a batch control to verify the accuracy of the posting of cash receipts remittances?a. The sum of the cash deposits plus the discounts less the sales

returnsb. The sum of the cash depositsc. The sum of the cash deposits less the discounts taken by the

customersd. The sum of the cash deposits plus the discounts taken by the

customers:3. When an online, real-time electronic data-processing system is in

use, which of the following could strengthen internal control?a. Providing for the separation of duties between data entry and

error-listing operatorsb. Using ‘read-only’ protection on all hard drives before new data

can be entered on the filec. Making a validity check of an identification number before a

user can obtain access to the computer files:d. Preparing batch totals to insure that file updates are made for

the entire input4. When erroneous data are detected by computer program controls,

such data may be excluded from processing and printed on an error report. Who should most probably review and follow up on the error report?a. The supervisor of computer operationsb. The systems analystc. The EDP control group:d. The computer programmer

5. In client’s EDP system, the auditor will encounter general controls and application controls. Which of the following is an application control?a. Password c. Systems flowchartb. Hash total: d. Control over program changes

6. Control activities within EDP activity may leave no visible evidence indicating they were performed. In such instances, the auditor should test these controls bya. Making corroborative inquiriesb. Observing the separation of personnel duties:c. Reviewing transactions submitted for processing and

comparing them to related outputd. Reviewing the run manual

7. Which of the following is likely to be least important to an auditor who is obtaining an understanding of internal control surrounding the automated data-processing function?a. Disposition of source documentsb. Operator competencec. Bit storage capacity:d. Segregation of duties

8. After obtaining an understanding of a client’s internal control, an auditor may decide not to perform tests of controls related to the controls within the EDP portion of the client’s internal control. Which of the following would not be a valid reason for choosing to omit tests of controls?

16

a. The controls appear adequate:b. The controls duplicate controls existing elsewhere in the

systemc. Major weaknesses appear to exist that would be preclude an

assessment of control risk at below the maximumd. The time and dollar costs of testing exceed the time and dollar

savings in substantive testing if the tests of controls show the controls to be operative

9. Which of the following constitutes a weakness in an EDP system’s internal control?a. One generation of backup files is stored outside the premisesb. Machine operators distribute error messages to the control

groupc. Machine operators do not have access to the complete

systems manuald. Machine operators are supervised by the programmer:

10. The internal control activity of segregation of duties exists when computer department personnel do which of the following?a. Participate in making decisions about acquiring computer

softwareb. Design documentation for computer applicationsc. Initiate changes in master files: d. Provide physical security for program files

11. Which of the following is true of generalized audit software programs?a. They can be used only for auditing online computer systemsb. They can be used on any computer without modificationc. Each has its own characteristics that the auditor must carefully

consider before using it in a given audit situation:d. They cannot be used on microcomputers

12. Smith T. Enterprises has changed from a manual to a computerized payroll clock card system. Factory employees now record time in and out with magnetic cards, and the computer system automatically updates all payroll records. Because of this change, a. The auditor must use a computer-assisted audit techniqueb. Internal control has improvedc. Part of the audit trail has been lost:d. The potential for payroll-related fraud has been diminished

13. When a computerized accounting system is tested, which of the following is not true of the test data approach?a. Test data are processed by the client’s computer program

under the auditor’s controlb. The test data must consist of all possible valid and invalid

conditions:c. The test data need consist only of the valid and invalid

conditions the auditor is interested ind. Only one transaction of each type need be tested

14. A primary advantage of using GASPs in the audit of an entity with an advanced computer system is that they enable the auditor toa. Substantiate the accuracy of data through self-checking digits

and hash totalsb. Use the speed and accuracy of the computer:c. Verify the performance of machine operations that leave

visible evidence of occurrence d. Gather and store large quantities of supportive evidential

matter in machine-readable form

17

15. Which of the following is true of tests of controls for a computer system?a. They only can be performed using actual transactions

because testing of simulated transactions is of no consequence

b. They can be performed using actual transactions or simulated transactions:

c. They are impractical because many procedures within the computer activity leave no visible evidence of having been performed

d. They are inadvisable because they may distort the evidence in master files

16. Which of the following computer-assisted auditing techniques allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process?a. Parallel simulationb. Generalized audit software programmingc. Integrated test facility:d. Test data approach

17. Which of the following statements best describes why the CPA profession has deemed essential to promulgate a code of ethics and to establish a mechanism for enforcing observance of the code?a. A distinguishing mark of a profession is its acceptance of

responsibility to the public:b. A prerequisite for success is the establishment of an ethical

code that stresses primarily the professional’s responsibility to clients and colleagues

c. Most state laws require the profession to establish a code of ethics

d. An essential means of self-protection for the profession is its establishment of flexible ethical standards

18