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Question 1
An auditor is auditing the financial statements of Gawad Kalinga, a not-for-profit
organization that receives financial assistance from government agencies. To
detect misstatements in Gawad Kalingas financial statements resulting from
violations of laws and regulations, the auditor should focus on violations that
could result in criminal prosecution against the organization
have a direct and material effect on the amounts in the organizations financial
statements
demonstrate the existence of material weaknesses
involve reportable conditions to be communicated to the organizations
trustees and the funding agencies
Auditing Theory - Audit Sampling (Average)

Question 2
Ernie Dela Cruz, CPA, has been approached by a prospective new audit client,
Double Dragon Enterprises, Inc. Double Dragon had previously been audited by
another CPA. Before accepting the engagement, Dela Cruz discussed several
matters with Double Dragons controller and (with Double Dragons permission)
the other CPA. As a result of these discussions, the following information was
obtained.
Incorporated in 1992, Double Dragons primary business is buying, developing,
selling, and leasing commercial real estate. Apartment complexes, shopping

malls, and industrial parks make up the major portion of the companys business.
Starting out in Albuquerque, New Mexico and the surrounding area, Double
Dragon gradually expanded its operations to include most of southwestern United
States, including the Phoenix--Scottsdale--Mesa area of Arizona.
After two years of losses, the company reported its first earnings in 1994. From
1995 to 2000, revenues and earnings increased dramatically. Earnings for 2001
and 2002, however declined from earlier levels. For the current year, 2003,
unaudited net income has rebounded to the 2000 level.
Dela Cruz has learned from discussions with Double Dragons controller that, as
of 12/31/03, the end of the current year, the company was in the process of
completing a major mall project. The company currently owns several apartment
complexes and leases its completed shopping malls to numerous retail
establishments. After having been developed, industrial properties are sold either
to municipalities or to companies locating in the complexes.
In discussing past audits with the CPA formerly engaged by Double Dragon, Dela
Cruz learned that several disagreements had arisen over the years, many of
which had not been resolved to the satisfaction of the former auditors. The
disagreements related to accounting matters as well as to the substance of
certain transactions with lessees.
Audit reports frequently contain an explanatory paragraph following the scope
paragraph or the opinion paragraph.
What condition under which one might expect to find an explanatory paragraph
following the opinion paragraph of the audit report.
Some material receivables are not confirmed by the Companys debtors
Default by the Company in paying its bank loans
The corporate counsel failed to submit their Certification despite the
persistent follow up of the auditors.

Departure from a designated principle and the

auditor agrees with the departure
Auditing Theory - Audit Planning (Difficult)

Question 3
Ernie Dela Cruz, CPA, has been approached by a prospective new audit client,
Double Dragon Enterprises, Inc. Double Dragon had previously been audited by
another CPA. Before accepting the engagement, Dela Cruz discussed several
matters with Double Dragons controller and (with Double Dragons permission)
the other CPA. As a result of these discussions, the following information was
obtained.
Incorporated in 1992, Double Dragons primary business is buying, developing,
selling, and leasing commercial real estate. Apartment complexes, shopping
malls, and industrial parks make up the major portion of the companys business.
Starting out in Albuquerque, New Mexico and the surrounding area, Double
Dragon gradually expanded its operations to include most of southwestern United
States, including the Phoenix--Scottsdale--Mesa area of Arizona.
After two years of losses, the company reported its first earnings in 1994. From
1995 to 2000, revenues and earnings increased dramatically. Earnings for 2001
and 2002, however declined from earlier levels. For the current year, 2003,
unaudited net income has rebounded to the 2000 level.
Dela Cruz has learned from discussions with Double Dragons controller that, as
of 12/31/03, the end of the current year, the company was in the process of
completing a major mall project. The company currently owns several apartment
complexes and leases its completed shopping malls to numerous retail
establishments. After having been developed, industrial properties are sold either
to municipalities or to companies locating in the complexes.
In discussing past audits with the CPA formerly engaged by Double Dragon, Dela

Cruz learned that several disagreements had arisen over the years, many of
which had not been resolved to the satisfaction of the former auditors. The
disagreements related to accounting matters as well as to the substance of
certain transactions with lessees.
In deciding whether to accept this engagement, which of the following will be
considered the least?
Competence of Dela Cruz to satisfactorily perform the audit
Seriousness of disagreements with the prior auditor and their potential impact
on the financial statements
Whether the disagreements demonstrate lack of management integrity
Duration of the audit procedures.
Auditing Theory - Audit Planning (Difficult)

Question 4
Ernie Dela Cruz, CPA, has been approached by a prospective new audit client,
Double Dragon Enterprises, Inc. Double Dragon had previously been audited by
another CPA. Before accepting the engagement, Dela Cruz discussed several
matters with Double Dragons controller and (with Double Dragons permission)
the other CPA. As a result of these discussions, the following information was
obtained.
Incorporated in 1992, Double Dragons primary business is buying, developing,
selling, and leasing commercial real estate. Apartment complexes, shopping
malls, and industrial parks make up the major portion of the companys business.
Starting out in Albuquerque, New Mexico and the surrounding area, Double
Dragon gradually expanded its operations to include most of southwestern United
States, including the Phoenix--Scottsdale--Mesa area of Arizona.
After two years of losses, the company reported its first earnings in 1994. From

1995 to 2000, revenues and earnings increased dramatically. Earnings for 2001
and 2002, however declined from earlier levels. For the current year, 2003,
unaudited net income has rebounded to the 2000 level.
Dela Cruz has learned from discussions with Double Dragons controller that, as
of 12/31/03, the end of the current year, the company was in the process of
completing a major mall project. The company currently owns several apartment
complexes and leases its completed shopping malls to numerous retail
establishments. After having been developed, industrial properties are sold either
to municipalities or to companies locating in the complexes.
In discussing past audits with the CPA formerly engaged by Double Dragon, Dela
Cruz learned that several disagreements had arisen over the years, many of
which had not been resolved to the satisfaction of the former auditors. The
disagreements related to accounting matters as well as to the substance of
certain transactions with lessees.
If you are Ernie Dela Cruz, what is the item that I will be most concerned about?
revenues are increasing dramatically despite the first losses in its first 2 years.
unfinished and ongoing construction projects of Double Dragon
increase in unaudited earnings suggests possible overstatement of revenues
or understatement of expenses
aggressive growth strategy of Double Dragon
Auditing Theory - Audit Planning (Difficult)

Question 5
Which of the following statement best describes systematic auditing?
Systematic auditing means that the auditor studies and tests the system of
internal control before testing the substance of transactions and balances.

Strong internal control increases the level of confidence and decreases the
extent of transaction and balance testing.
Systematic auditing means that the auditor studies and tests the system of
internal control before testing the substance of transactions and balances. Strong
internal control increases the level of confidence and decreases the extent of
transaction and balance testing.
Systematic auditing means that the auditor studies and tests the system of
internal control before testing the substance of transactions and balances. Strong
internal control increases the level of confidence and increases the extent of
transaction and balance testing.
Auditing Theory - Audit Planning (Easy)

Question 6
As a new staff, Michi Ang was assigned to monitor the disclosures of her new
client, a publicly listed company. Before going to her lunch, she would access the
website by the Philippine Stock Exchange and look for disclosures related to her
company. On one occasion, she suddenly noticed that all disclosures filed are
digitally signed y the Compliance Information Officer. She wanted to raise this
observation to her boss. If her boss ask her to define what a digital signature is,
what could be her best answer
the computed digest of the senders digital certificate
allows digital messages to be sent over analog telephone lines
the encrypted mathematical value of the message senders name
derived from the digest of a document that has been encrypted with the
senders private key

Auditing Theory - Audit Planning (Difficult)

Question 7
Michael & Jones, CPAs, has just accepted an engagement to audit Ginger and
Cinnamon, a small manufacturer of spice products. Jennifer Castro has been
selected as the in-charge auditor for the engagement, and Mark Cruz will be her
assistant. In planning the audit field work, Jenkins makes the following
assignments of audit tasks:
Jennifer Castro
Internal audit
Test internal control over cash receipts
Audit accounts receivable balances
Final audit
Test internal control over sales
Obtain signed copy of engagement

Mark Cruz
Audit property, plant, and equipment
balances
Test internal control over cash
disbursements
Audit cash balances
Audit inventory balances

If you are Jennifer Castro, what is the major strength of this audit planning?
Audit procedures related cash, accounts receivable and inventory balances
will be performed.
The auditors tested internal control over cash receipts and disbursements
before auditing cash balances.
The audit tasks are delegated and clear.
The signed copy of the engagement will be obtained by Jennifer Castro
Auditing Theory - Audit Planning (Difficult)

Question 8
Michael & Jones, CPAs, has just accepted an engagement to audit Ginger and
Cinnamon, a small manufacturer of spice products. Jennifer Castro has been

selected as the in-charge auditor for the engagement, and Mark Cruz will be her
assistant. In planning the audit field work, Jenkins makes the following
assignments of audit tasks:
Jennifer Castro
Internal audit
Test internal control over cash receipts
Audit accounts receivable balances
Final audit
Test internal control over sales
Obtain signed copy of engagement

Mark Cruz
Audit property, plant, and equipment
balances
Test internal control over cash
disbursements
Audit cash balances
Audit inventory balances

If you are Jennifer Castro, what is a correct audit procedure that you can do?
I will forego with the internal control over sales transactions to save time
because the audit of cash and accounts receivables balances will mitigate any
audit risk.
Instruct that internal control over sales be performed on the interim audit
instead on the final audit.
I will divide the testing of internal control over cash receipts and
disbursements to 2 auditors to ensure that 2 eyes will be looking into the process.
To follow the money flow is crucial
.
I will ensure that we obtain the signed copy of the engagement letter before
the audit closing meeting.
Auditing Theory - Audit Planning (Difficult)

Question 9
Michael & Jones, CPAs, has just accepted an engagement to audit Ginger and
Cinnamon, a small manufacturer of spice products. Jennifer Castro has been
selected as the in-charge auditor for the engagement, and Mark Cruz will be her

assistant. In planning the audit field work, Jenkins makes the following
assignments of audit tasks:
Jennifer Castro
Internal audit
Test internal control over cash receipts
Audit accounts receivable balances
Final audit
Test internal control over sales
Obtain signed copy of engagement

Mark Cruz
Audit property, plant, and equipment
balances
Test internal control over cash
disbursements
Audit cash balances
Audit inventory balances

What is the order of steps in completing the audit?

audit planning, interim audit, final audit, audit report
audit planning, interim audit, audit report
audit planning, audit report, final audit
audit planning, final audit, audit report
Auditing Theory - Audit Planning (Difficult)

Question 10
Which of the following statements best describes the auditors responsibility to
detect conditions relating to financial stress of employees or adverse
relationships between a company and its employees?
These conditions relate to fraudulent financial reporting, and an auditor is
required to plan the audit to detect these conditions when the client is exposed to
a risk of misappropriation of assets.
The auditor is required to plan the audit to detect these conditions on all
audits.

The auditor is required to plan the audit to detect these conditions whenever
they may result in misstatements.
The auditor is not required to plan the audit to discover these conditions, but
should consider them if he or she becomes aware of them during the audit.
Auditing Theory - Audit Planning (Average)

Question 11
Ken Perez, a CPA wanted to know what advantage will it have if require the
paymaster to deliver all unclaimed paychecks to the internal audit department?
to prevent the paymaster from cashing unclaimed checks
to avoid paying absent employees for payday
to prevent an absent employees check from being lost
to detect a phantom employee for whom a check was produced
Auditing Theory - Audit Planning (Easy)

Question 12
Which steps in the Financial Accounting Process are in the correct sequence?
record the transaction, post to the ledger, record adjusting entries, prepare the
unadjusted trial balance, prepare financial statements
record the transaction, post to the ledger, prepare the adjusted trial balance,
prepare financial statements, record closing entries
record the transaction, post to the ledger, prepare the adjusted trial balance,
enter adjusting entries, prepare financial statements

record the transaction, prepare the unadjusted trial balance, record adjusting
journal entries, record closing entries, prepare financial statements
Auditing Theory - Audit Planning (Easy)

Question 13
In an audit closing meeting, the newly appointed Country Manager of ABN
AMRO asked you how their system can be protected against subversive threats.
Which of the following will you not mention?
field interrogation
one-time passwords
firewalls
data encryption
Auditing Theory - Audit Planning (Easy)

Question 14
Which of the following statements is not correct?
the voucher system permits the firm to consolidate payments of several
invoices on one voucher
many firms replace accounts payable with a voucher payable system
the sum of the paid vouchers represents the voucher payable liability of the
firm
the voucher system is used to improve control over cash disbursements
Auditing Theory - Audit Planning (Easy)

Question 15

An entity's comparative financial statements include the financial statements of

the prior year that were audited by a predecessor auditor whose report is not
presented. If the predecessor's report was qualified, the successor should:
Express an opinion only on the current year's financial statements and make
no reference to the prior year's statements.
Indicate the substantive reasons for the qualification in the predecessor
auditor's opinion.
Explain to the client that comparative financial statements may not be
presented under these circumstances.
Issue an updated comparative audit report indicating the division of
responsibility.
Auditing Theory - Uncategorized (Difficult)

Question 16
A person identified as an audit committee financial expert of an issuer generally
must have acquired the attributes of a financial expert through any of the
following experiences, except:
Assessing the performance of public accountants with respect to preparation,
auditing, or evaluation of financial statements.
Serving on at least one other issuer's audit committee or disclosure
committee of the board of directors.
Actively supervising a principal financial officer or principal accounting officer.
As a principal financial officer, principal accounting officer, controller, public
accountant, or auditor.
Auditing Theory - Uncategorized (Difficult)

Question 17
After the preliminary phase of the review of a clients computer controls, an
auditor may decide not to perform test of controls (compliance tests) related to
the controls within the computer portion of the clients internal control. Which of
the following would not be a valid reason for choosing to omit such tests?
The time and peso costs of testing exceed the time and peso savings in the
substantive testing if the tests of controls show the controls to be operative.
The controls appear adequate.
The controls duplicate operative controls existing elsewhere in the structure.
There appear to be a major weaknesses that would preclude reliance on the
stated procedure
Auditing Theory - Computerized Auditing (Average)

Question 18
Hector just resigned from Isla Lipana as a Senior Associate. He was hired as the
Accounting Manager of Ayala Land Inc. His CFO asked his advice how they can
ensure that their accounting system are protected from computer viruses. Which
of the following policies are relevant except
he policy that permits users to take files home to work on them
the policy that all software upgrades are checked for viruses before they are
implemented
the policy that current versions of antivirus software should be available to all
users
the policy on the purchase of software only from reputable vendors

Auditing Theory - Audit Planning (Average)

Question 19
Which of the following is most likely to be a response to the auditors assessment
that risk of material misstatement due to fraud for the existence of inventory is
high?
Request that inventory counts at the various locations be counted on different
dates so as to allow the same auditor to be present at every count.
Request that inventories be counted prior to year end.
Perform analytical procedures rather than taking test counts.
Observe test counts of inventory at certain locations on an unannounced
basis.
Auditing Theory - Audit Planning (Average)

Question 20
With a limited work force and a desire to maintain strong internal control, which
combination of duties performed by a single individual presents the least risk
exposure?
preparing the accounts payable journal voucher and recording it in the
general ledger
maintaining the cash disbursements journal and recording direct labor costs
applied to specific jobs
maintaining the inventory ledger and recording the inventory journal voucher
in the general ledger

recording the inventory journal voucher in the general ledger and maintaining
custody of inventory
Auditing Theory - Audit Planning (Easy)

Question 21
Transaction authorization occurs in a traditional manufacturing environment in all
of the following ways except
the sales department modifies work orders to match changes in demand
production planning and control initiates production with a work order
the materials requisition authorizes the storekeeper to release materials to the
work centers
movement of the work through the production process follows the move ticket
Auditing Theory - Audit Planning (Easy)

Question 22
Jane Guerero is a newly promoted Senior Associate in Deloitte. Her new staff
asked her advice which one of the following is not an audit objectives in the
Electronic Data Interchange (EDI) environment?
unauthorized trading partners cannot gain access to database records
backup procedures are in place and functioning properly
a complete audit trail of EDI transactions is maintained
all EDI transactions are authorized
Auditing Theory - Audit Planning (Average)

Question 23

Auditors of ERP systems

need not worry about segregation of duties.
find independent verification easy
need not worry about system access since the ERP determines it
may feel that the data warehouse is too clean and free from errors
Auditing Theory - Audit Planning (Easy)

Question 24
An auditor has identified the controller's review of the bank reconciliation as a
control to test. In connection with this test, the auditor interviews the controller to
understand the specific data reviewed on the reconciliation. In addition, the
auditor verifies that the bank reconciliation is properly prepared by the accountant
and reviewed by the controller as evidenced by their respective sign-offs. Which
of the following types of audit procedures do these actions illustrate?
Observation and inspection of records.
Inquiry and inspection of records
Confirmation and reperformance
Analytical procedures and reperformance.
Auditing Theory - Uncategorized (Average)

Question 25
Which of the following is not a requirement in managements report on the
effectiveness of internal controls over financial reporting?

A statement of managements responsibility for establishing and maintaining

adequate internal control user satisfaction.
A statement identifying the framework used by management to conduct their
assessment of internal controls.
A statement that the organizations internal auditors has issued an attestation
report on managements assessment of the companies internal controls.
An explicit written conclusion as to the effectiveness of internal control over
financial reporting.
Auditing Theory - Audit Planning (Easy)

Question 26
After an audit report is issued, an auditor discovers that an important audit
procedure was not performed. Which of the following procedures is acceptable in
this situation?
No further action is necessary if the audit report can still be supported.
Immediately notify known users of the omitted audit procedure.
Require that the client notify financial statements users of the omitted
procedures.
Let the current report stand and correct material errors on the next audit
report.
Auditing Theory - Uncategorized (Average)

Question 27
When performing a test of a control with respect to control over cash receipts, an
auditor may use a systematic sampling technique with a start at any randomly

selected item. The biggest disadvantage of this type of sampling is that the items
in the population
may occur in a systematic pattern, thus destroying the sample randomness.
must be recorded in a systematic pattern before the sample can be drawn.
may systematically occur more than once in the sample.
must be systematically replaced in the population after sampling.
Auditing Theory - Audit Sampling (Average)

Question 28
After fieldwork audit procedures are completed, a partner of the CPA firm who
has not been involved in the audit performs a second or wrap-up working paper
review. This second review usually focuses on
Fraud involving the clients management and its employees.
The materiality of the adjusting entries proposed by the audit staff.
The fair presentation of the financial statements in conformity with PFRS and
PAS.
The communication of internal control weaknesses to the clients audit
committee.
Auditing Theory - Uncategorized (Uncategorized)

Question 29
The materiality of the adjusting entries proposed by the audit staff.
2. The communication of internal control weaknesses to the clients audit
committee.
DIF: 2 TOP: Audit Planning

29. A recently passed accounting graduate processed the following business

transaction.
An unsecured loan for P3.2 million was granted to Diane Gregorio, the chief
executive officer of Tea House, Inc., at the beginning of 2014. On December 31,
2014, the company drew a check for P3.2 million on Bank A for deposit in Bank
B. The transaction was recorded by a debit to cash in Bank B and a credit to
loans receivable-officers. The check was not listed as outstanding on Bank A. It
did appear as a credit on the December 31 bank statement received from Bank
B. On January 2, 2015, the company made a journal entry debiting loans
receivable-officers and crediting cash in Bank A for P3.2 million. The loan
accounted for 35% of the entitys total assets.
Is there a fraud?
This set of journal entries is an example of fraudulent misrepresentation in the
form of kiting.
There might be fraud in this case but the data is incomplete.
There is no fraud but a misstatement because the accountant is a fresh
graduate.
There is no fraud and possible misstatement in this situation.
Auditing Theory - Audit Planning (Difficult)

Question 30
JM is the manager of the audit engagement of Coca Cola Bottlers. He noticed
that Coca Cola is using the latest electronic data interchange to manager their
vendors databases. In his test of controls, he would ensure that the customers of
Coca Cola will routinely
access the vendor's accounts receivable file with read/write authority

access the vendor's open purchase order file with read-only authority
access the vendor's price list file with read/write authority
access the vendor's inventory file with read-only authority
Auditing Theory - Audit Planning (Easy)