Auditing Theory

1. A control which relates to all parts of the EDP system is called a(n)
a. Systems control c. Applications control
b. eneral control d. !ni"ersal control
#. $hich of the following is not an output control%
a. Proper authori&ation of transaction
b. 'ontrol totals
c. 'hec( digits
d. Ade)uate documents
*. Should the auditor feel+ after obtaining an understanding of the EDP internal control
structure+ that control ris( cannot be reduced+ he or she will
a. ,ssue a disclaimer
b. ,ssue an ad"erse opinion
c. ,ncrease the sample si&e for tests of controls
d. E-pand the substanti"e testing portion of the audit
.. The real/time feature normally would be least useful when applied to accounting for a
firm0s
a. 1an(/account balances
b. Property and depreciation
c. 'ustomer accounts recei"able
d. 2erchandise in"entory
3. A sample in which the characteristics in the sample are the same as those of the
population is a
a. 4andom sample c. Attributes sample
b. 5ariables sample d. 4epresentati"e sample
6. Establishing a route through the random number table
a. ,s an arbitrary decision
b. 7eeds to be done in ad"ance of choosing the numbers
c. ,s essential and the route must be followed consistently
d. 4e)uires that all three of the abo"e is true
8. $hen an auditor goes through a population and selects items for the sample without
regard to their si&e+ source+ or other distinguishing characteristics+ it is called
a. 1loc( selection
b. 9apha&ard selection
c. Systematic selection
d. Statistical selection
:. $hich of the following may be used to reduce the ris( of non sampling errors%
a. ,ncreasing the si&e of audit samples
b. Stratifying audit samples
c. Ade)uately planning audit samples
d. !sing statistical sampling techni)ues
;. A number of factors influences the sample si&e for a substanti"e test of details of an
account balance. All other factors being e)ual+ which of the following would lead to
larger sample si&e%
a. reater reliance on internal control
b.
c. Smaller reliance o analytical procedures
d. Smaller measures of tolerable misstatement
1<. =raudulent financial reporting is often called
a. 2anagement fraud c. Defalcation
b. Theft of assets d. Employee fraud
11. The most important general ledger account included in and affecting se"eral cycles is
the
a. eneral cash account c. ,ncome ta- e-pense ad liability accounts
b. ,n"entory accounts d. 4etained earnings account
1#. ,n testing for cut/off + the ob>ecti"e is to determine
a. $hether all of the current period0s transactions are recorded
b. That no transactions from the prior period are included in the current period0s
balances
c. That no transactions of the curret period ha"e been delayed and recorded in the
future period.
d. $hether transactions are recorded in the proper period.
1*. The primary difference between an audit of the balance sheet and an audit of the income
statement lies in the fact that the audit of the income statement deals with the "erification
of
a. Transactions c. 'osts
b. Authori&ation d. 'utoffs
1.. Documentation is a form of e"idence
a. !sed in e"ery financial statement audit
b. !sed in most financial statement audit
c. !sed o the rate occasions when it is both readily a"ailable ad less costly than other
procedures
d. !sed when nothing is a"ailable that is more competent
13. The current file of the auditor0s wor(ing papers generally should include
a. a flowchart of internal controls
b. organi&ation charts
c. a copy of the financial statements
d. copies of bond and note indentures
16. An audit wor(ing paper that reflects the ma>or components of an amount reported in the
financial statements is referred to as(an)
a. ?ead schedule c. Audit control schedule
b. Supporting schedule d. $or(ing trial balance
18. The ma>or reason an independent auditor gathers audit e"idence is to
a. =orm an opinion on the financial statements
b. Detect fraud
c. E"aluate management
d. E"aluate internal control
1:. An auditor most li(ely would analy&e in"entory turno"er rates to obtain e"idence
concerning managements assertions about
a. E-istence or occurrence
b. 4ights and obligations
c. Presentation and disclosure
d. 5aluation and allocation
1;. To which type of the following matters would materiality limits not apply when obtaining
client representations%
a. ?osses from sales commitments.
b. !nasserted claims and assessments
c. ,rregularities in"ol"ing management
d. 7oncompliance with contractual agreements
#<. $hich of the following procedures is more li(ely to be performed i a re"iew engagement
of a non/public entity that i n a compilation engagement%
a. aining an understading of the entity0s business transactions
b. 2a(ing a preliminary assessment of control ris(
c. @btaining a representation letter from the chief e-ecuti"e officer
d. Assisting the entity i ad>usting the accounting records
#1. ,n auditing accounts payable+ an auditor0s procedures most li(ely would focus primarily o
management0s assertion of
a. E-istence or occurrence
b. Presentation and disclosure
c. 'ompleteness
d. 5aluation or allocation
##. 1efore goods are shipped on account+ a properly authori&ed person must
a. Prepare the sales in"oice
b. Appro"e the >ournal entry
c. Appro"e credit
d. 5erify that the unit price is accurate
#*. $hich of the following is not a auditor0s concern about a (ey authori&ation point in the
salesAcollection cycle
a. The recei"ing room must ha"e authori&ation before releasing items to in"entory
control
b. 'redit must be authori&ed before sale
c. oods must be shipped after the authori&ation
d. Prices must be authori&ed
#.. $hene"er footing ad comparisons are restricted to >ournals+ master file records+ and
ledgers+ the process is
a. 5aluation c. 'utoff
b. Summari&ation d. 'ompleteness
#3. The most significant effect of the results of the tests of controls substanti"e tests of
transactions in tha sales and collection cycle is on
a. Allowance for uncollectible accounts
b. 1ad debts e-pense account
c. 'onfirmation of accounts recei"able
d. ,ncome ta- payable
#6. There is a difference between internal control ob>ecti"es and audit ob>ecti"es. $hich of
the following is not an audit ob>ecti"e%
a. 5alidity c. 5aluation
b. 'ompleteness d. Authori&ation
#8. =or effecti"e internal control+ employees maintaining the accounts recei"able subsidiary
ledger should not also appro"e
a. Employee o"ertime wages
b. 'redit granted to customers
c. $rite/offs of customer accounts
d. 'ash disbursement
#:. The general cash account is considered significant in almost all audits
a. $here the ending balance0 is material
b. $here either the beginning balance is material
c. E"en when the ending balance is immaterial
d. E-cept those of not/for/profit organi&ations
#;. Sales order form and in"oice blan(s should be controlled in the
a. Sales order section of the sales department
b. 1illing cler( in the accounting department
c. 'redit manager in the credit department
d. Sales manager in the sales department
*<. $hich of the following is a substanti"e test of transactions
a. 4e"iew personnel policies
b. Account for a se)uence of payroll chec(s
c. 4econcile the disbursements i the payroll >ournal with the disbursements on the
payroll ban( statement
d. E-amine printouts of transactions re>ected by the computer as ha"ing in"alid
employee numbers
*1. The information typically needed to prepare a production order would not include a
a. Sales forecast c. ,n"entory plan
b. Production plan d. 1ill of materials
*#. The substanti"e test which re)uires the auditor to Btrace from a file of recei"ing reports to
the ac)uisitions >ournalC satisfies the ob>ecti"e of
a. 5alidity c. 'ompleteness
b. Authori&ation d. 5aluation
**. An auditor usually e-amines recei"ing reports to support entries in the
a. 5oucher register and sales return >ournal
b. Sales >ournal and sales return >ournal
c. 5oucher register and sales >ournal
d. 'hec( register and sales >ournal
*.. The in"entory and warehousing cycle can be thought of as comprising two separate but
closely related systems+ one in"ol"ing the actual physical flow of goods+ and the other
the
a. internal control o"er those goods
b. related costs
c. storing of the goods
d. pre"ention of wastes+ obsolenscence+ and theft
*3. ,n planning an audit engagement+ which of the following is a factor that affects the
independent auditor0s >udgement as to the )uantity+ type+ and content of wor(ing
papers%
a. The estimated occurrence rate of attributes
b. The preliminary e"aluation based upon initial substanti"e testing
c. The content of the client0s representation letter
d. The anticipated nature of the auditor0s report
*6. A listing of all the things which the auditor will use to gather sufficient+ competent
e"idence is the
a. audit procedure
b. audit plan
c. audit program
d. audit ris( model
*8. The primary emphasis in most tests of details of balances is on the
a. balance sheet accounts
b. income statement accounts
c. cash flow statement accounts
d. three statements abo"e
*:. Tracing recorded sales transactions in the sales >ournal to the shipping documents (bills
of lading) pro"ides e"idence about the
a. 'ompleteness of recording of sales transactions
b. @ccurrence of sales transactions
c. billing of all sales transactions
d. presentation of payables
*;. $hich of the following is the best audit procedure for the detection of lapping%
a. 'omparison of postings of cash receipts to accounts with the details of cash deposits
b. 'onfirmation of the cash balance
c. 4econciliation of the cash account balances
d. Preparing a proof of cash
.<. To gather e"idence regarding the balance per ban( in the ban( reconciliation+ an auditor
could e-amine all of the following e-cept
a. 'ut/off ban( statement
b. year/end ban( statement
c. ban( confirmation
d. general ledger
.1. The confirmation of accounts recei"able is most closely associated with
a. business ris(
b. detection ris(
c. inherent ris(
d. relati"e ris(
.#. The client0s physical count of in"entories is lower than the in"entory )uantities in the
perpetual records. This could be the result of a failure to record
a. purchases
b. purchases discounts
c. sales
d. sales discounts
.*. The most li(ely techni)ue for the current year audit of goodwill which was not ac)uired
three years ago by a continuing audit client.
a. 'onfirmation
b. @bser"ation
c. 4ecomputation
d. ,n)uiry
... The auditor will most li(ely perform e-tensi"e tests for possible understatement of
a. re"enues
b. assets
c. liabilities
d. capital
.3. ,f the auditor is determined to lac( independence+ a disclaimer of opinion must be issued
a. in all cases
b. only if it is highly material
c. only if it is material
d. if the client re)uests it
.6. The use of negati"e assurances in audit reports of historical financial statements is
a. a "iolation of the standards of reporting
b. encouraged by the Philippine ,nstitute of 'PAs
c. a help in clarifying the degree of responsibility by being assumed by the auditor
d. properly located in the opinion paragraph of the un)ualified report
.8. !n)ualified financial statements for the prior year presented in comparati"e form with
audited financial statements for the current year should be clearly mar(ed to indicate
their status and
I. The report on the prior period should be reissued to accompany the
current period report
II. The report on the current period should include as a separate
paragraph description of the responsibility assumed for the prior
period0s financial statements
a. , only
b. ,, only
c. 1oth , and ,,
d. Either , or ,,
.:. 'ompilation ser"ices are intended to enable a 'PA firm to compete with
a. 2anagement ad"isory ser"ice firms
b. Ta- preparation businesses
c. 'omputer ser"ice business
d. 1oo((eeping firms
.;. A modification of the 'PA0s report on a re"iew of the interim financial statements of a
publicly/held company would be necessitated by which of the following%
a. An uncertainty
b. ?ac( of consistency
c. 4eference to another accountant
d. ,nade)uate disclosure
3<. 'omfort letters ordinarily are signed by the client0s
a. independent auditor
b. underwriter of securities
c. audit committee
d. senior management
ANSWER KEY
1) B
2) B
3) D
4) B
5) D
6) D
7) B
8) C
9) D
10) A
11) A
12) D
13) A
14) A
15) C
16) D
17) A
18) D
19) C
20) C
21) C
22) C
23) A
24) B
25) D
26) D
27) D
28) D
29) A
30) C
31) D
32) C
33) A
34) B
35) D
36) D
37) A
38) B
39) A
40) D
41) B
42) D
43) C
44) C
45) A
46) A
47) D
48) D
49) A
50) A