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Substantive Tests

1
Which of the following statements is most correct regarding the primary purpose of audit procedures?
a
To detect all errors or fraudulent activities as well as illegal activities
b
To comply with the SEC
c
To gather corroborative audit evidence about management assertions regarding the clients financial
statements
d
To determine the amount of errors in the balance sheet accounts in order to adjust the accounts to
actual
2
A procedure designed to test for monetary misstatements directly affecting the validity of the financial
statements balances is a:
a
Test of controls
b
Substantive test
c
Test of attributes
d
Monetary-unit sampling test
3
Below are the five types of tests which auditors use to determine whether the financial statements are fairly
stated. Which three are substantive test?
1
Risk assessment procedures
2
Tests of controls
3
Tests of transaction
4
Analytical procedures
5
Tests of details of balances
a
1,2 and 3
b
3,4 and 5
c
2,3 and 5
d
2,3 and 4
4
Which of the following is true?
a
Tests of details balances focus of the ending balances of accounts in the client’s trial balance.
b
Test s of details of balances focus on the transactions during the period.
c
Tests of details of balances focus on the auditor’s understanding of internal controls.
d
Tests of details of balances focus on comparisons of recorded amounts to expectations developed by
the auditor.
5
In the context of an audit of financial statements, substantive test are audit procedures that
a
May be eliminated under certain conditions.
b
Are designed to discover significant subsequent events.
c
May be either tests of transaction, direct test of financial balances, or analytical tests.
d
Will increase proportionately with the auditor’s assessment of control risk.
6
The primary emphasis in most test of details of balances is on the:
a
Balance sheet accounts
b
Revenue accounts
c
Cash flow statement accounts
d
Expense accounts
7
Evidence is usually more persuasive for balance sheet accounts when it is obtained:
a
As close to the balance sheet date as possible.
b
Only from transactions occurring on the balance sheet date.
cFrom various times throughout the client’s year.
d
From the time period when transactions in that account were most numerous during the fiscal period.
8
“The use of comparisons and relationships to assess whether accounts balances or other data appear
reasonable compared to the auditor’s expectations” is a definition of:
a
Analytical procedures
b
Tests of transactions
c
Test of balances
d
Auditing
9
Often, auditor procedures significant differences being discovered by the auditor .The auditor should
investigate further if:
Significant differences are not
Significant differences are
expected but do exist
expected but do not exist
a
Yes
Yes
b
No
No
c
Yes
No
d
No
Yes
10 Analytical procedures are required to be performed during which phase(s) of the audit?
Planning
Test of Control
Completion
a
Yes
No
Yes
b
Yes
Yes
No
c
No
No
Yes
d
No
Yes
No
11 Auditors may decide to replace tests of details with analytical procedures when possible because the:

c In some instances. Of the following procedures. b Analytical procedures use in planning an audit should not use non-financial information. an unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities? a Unrecorded purchases b Unrecorded sales c Merchandise purchases being charges to operating expense d Fictitious sales Which result of analytical procedure suggests the existence of obsolete merchandise? a Decrease in the inventory turnover rate b Decrease in the ratio of gross profit to sales c Decrease in the ratio of inventory to accounts payable d Decrease in the ratio of inventory to accounts receivable If accounts receivable turned over 8 times in 2014 as compared to only 6 times in 2015. Auditors try to identify predictable relationships when using analytical procedures. the beginning and ending inventory amounts that were use to determine costs of sales d Compare the actual revenues and expenses with the corresponding figures of the previous year and investigative significant difference Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests? a Relationship involving balance sheets accounts. should be applied to the income statement? a Select sales and expense items and trace amounts to related supporting documents b Ascertain that the new income amount in the income statement cash flows agrees with the net income amount in the income statement c Obtain from the clients representatives. d Tests of details are more difficult to interpret. c Analytical procedures usually effective and efficient for tests controls. b Analytical procedures must be used throughout the audit. c Relationships involving income statement accounts. d Data subject to audit testing in the prior year. For example. b Transactions subject to management discretion. c Analytical procedures are more persuasive. Interest expense Auditors sometimes use of comparison ratios as audit evidence. cost of sales. which does not produce analytical evidence? a Compare revenue. other types of evidence may be reduce when analytical procedures indicate that an account balance appears reasonably. b For certain immaterial accounts. Which of the following is correct with respect to the use of analytical procedures? a Analytical procedures may be used in evaluating balances in the testing phase as long as the auditor also uses them in assessing the going concern assumption. Which of the following statements concerning analytical procedures is correct? a Analytical review may be omitted entirely for some financial statements audits. Relationship involving transactions from which of the following accounts most likely would yield the highest level of evidence? a Accounts payable c.12 13 14 15 16 17 18 19 20 21 22 a Analytical procedures are more reliable. Which of the following statements is not correct? a Analytical procedures are use to isolate accounts or transactions that should be investigated more extensively. c Analytical procedures used in the testing phase of the audit are primarily used to direct an auditor’s understanding of the business improved. d Analytical procedures alone may provide the appropriate level of assurance for some assertions. and gross profit with the prior year and investigate significant variations b Examine monthly performance reports and investigate significant revenue and expense variances c Confirm customer’s accounts receivable and clear material exceptions d Compare sales trends and profit margins with industry averages and investigate significant differences Which of the following comparisons is most useful to an auditor in evaluating the results of an entity’s operations? a Prior year accounts payable to current year accounts payable b Prior year payroll expense to budgeted to current year payroll expense c Current year revenue to budgeted current year revenue d Current year warranty expense to current year contingent liabilities Which of the following analytical procedures. d Analytical procedures use supporting documentation to determine which account balances need additional detailed procedures. b Analytical procedures are considerably less expensive. analytical procedures may be the only evidence needed. Accounts receivable b Advertising expense d. d Analytical procedures are performed by studying plausible relationships between financial and nonfinancial data. it is possible that there were a Unrecorded credit sales in 2015 .

b Variance analysis of actual versus budgeted amounts for production. When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year currently under audit. In order to promote audit efficiency the auditor considers cost in selecting audit test s to perform. By this procedure the auditor is most likely to learn that a An increase in property tax rates has not been recognized in the client’s accrual. c Prepare a going concern opinion for the client. Which of the following statements is not correct with respect to analytical procedures? a Auditing standard require the use of analytical procedures. or when control deviations are discovered. c Confirmation accounts payable recorded amounts.23 24 25 26 27 28 29 30 31 32 33 b Unrecorded cash receipt in 2014 c More thorough credit investigations made by the company late in 2014 d Fictitious in 2015 Which of the following would not be classified as an analytical procedure? a Benchmarking the company’s profitability ratio against other industry. c Analytical procedures may be performed as test of control. d It will be necessary to increase the test of transactions. substantive test will be eliminated. You are primarily concerned with company not recording all purchases transactions. c When controls are not considered effective. c It will not be necessary to perform test of balances. Which of the following audit test would be the most costly? a Analytical Procedures b Risk Assessment Procedures c Tests of Control d Tests of Details of Balances If no material differences are found using analytical procedures and the auditor concludes that misstatements are not likely to have occurred: a Other substantive test may be included. b Assist management in developing greater costs efficiencies in their product line. such as sales transactions b Bank balances and accounts receivable c Fixed asset additions d Payroll expenses You are auditing the company’s purchasing process for goods and services. The practice of auditing firms to spread work throughout the year by carrying out as many auditing procedures as practicable before the balance sheet date. Which of the following is considered further audit procedures that maybe design after assessing of the risk of material misstatement? Substantive test of details Risk assessment procedures a Yes Yes . d Reconciling fixed asset dispositions with the fixed asset ledger. d The client’s change its capitalization policy for small tools during the year. d Tests of details of balances are normally done last. b It is common use analytical procedures at any time during the audit. b This year’s provision uncollectable account is inadequate because of worsening economic conditions. Confirmation would almost always be used. Which audit procedure below would be the most effective audit procedure in this case? a Vouching from the accounts payable account to the vendor invoices. for: a Individual transactions between organizations. c December payroll taxes were not paid. d Advise the client to have extensive disclosure to alleviate investor concerns. This is called a Test of recorded transactions b Confirmation of receivable and payables c Observation and test-check of inventories d Interim work Which of the following statements is not true? a Tests of transactions are often performed several months prior to the balance sheet date. b Analytical procedures may be performed as substantive test. The auditor should: a Investigate the possibility the client may have made an error in their cost of goods sold computation. d Reconciling the accounts payable subsidiary ledger to the accounts payable account. assuming all the accounts below are material. c Reforming the client’s depreciation expense using the client’s accounting policies for capital expenditures made during the year. An auditor compares this year’s revenues and expenses with those of the prior year and investigates all changes exceeding 10%. in order to minimize the load during the peak period. b It will be necessary to increase the tests of balances. d Analytical procedures use comparisons and relationship to assess whether accounts balances appear reasonable. b Tracing vendor invoices to recorded amounts in the accounts payable accounts.

objective. d It consists of written statements made by managers of the enterprise audit. c The type of audit evidence available to the auditor. Evidence 35 The information obtained by the auditor in arriving at the conclusions on which the audit opinion is based is called: a Audit working papers b Audit assertions c Audit evidence d Audit standards 36 The major reason an independent auditor gathers evidence is to a Form an opinion in the financial statements b Detect fraud c Evaluate management d Evaluate internal control 37 Which of the following is the best example of a corroborating evidence? a General journal b Worksheet coat allocations c Vendor’s invoice d Cash receipts journal 38 Which of the following statements relating to the competence of evidential matter is always true? a Evidence from outside an enterprise always reliable. 39 Which of the following is correct about the appropriateness of the evidence? a Audit evidence from external sources is more relevant than evidence generated internally. c Detect material misstatements in the account balances of the financial statements. b Audit evidence is more persuasive when items of evidence from different sources or of different nature are not consistent. b The auditor’s evaluation of internal control. 42 Evidence is generally considered sufficient when a It is appropriate. 43 Appropriateness of evidence is measure of the: a Quantity of evidence b Quality of evidence c Sufficiency of evidence d Meaning of evidence 44 Theoretically. which of the following would not have an effect on the amount of audit evidence gathered by the auditor? a The type of opinion to be issued. c Audit evidence is more persuasive when items of evidence is different sources or of different nature are consistent. d Sufficiency refers to the amount of evidence needed. . d Evidence must be both reliable and relevant to considered appropriate. d Evaluate whether controls operated effectively. b There is enough of it to afford a reasonable basis for an opinion on financial statements. b Sufficiency is measure of the quality of audit evidence and its relevance to a particular assertion and its reliability. c Audit evidence generated internally is more reliable when the related accounting and internal control system are effective. c Oral representations made by management are not reliable evidence. b Accounting data develop under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions.b Yes No c No Yes d No No 34 The objective of test of details of transactions performed as substantive tests is to a Monitor the design and use of entity documents such as prenumbered shipping form b Determine whether controls have been placed in operation. d It has been obtained by random selection. c It has the qualities of being relevant. and free from known bias. objective. and free from unknown bias. 40 Which of the following statements about audit evidence is correct? a Appropriateness is the measure of the quantity of audit evidence. b Philippine Standard Auditing. b There is enough of it to afford a reasonable basis for an opinion on financial statements. d There should be a one-to-one relationship between audit objective and audit procedure. 45 The sufficiency of appropriateness of evidential matter ultimately is base on the a Availability of corroborating data. c It has the qualities of being relevant. 41 Evidence is generally considered appropriate when: a It has been obtained by random selection. d Whether or not the client reports to the Securities and Exchange Commission.

Which of the following is not a characteristic of the appropriateness of evidence? a Effectiveness of client internal control . Which statement below does not relate to the appropriateness of audit evidence? a The more effective the internal control system. c Minutes of the board of directors authorizing the purchase of stock as an investment. but need not be both. which of the following would the auditor consider to the most reliable? a Documentary evidence that supports the accounts receivable balance. c Evidence obtained from independent sources outside the entity is generally more reliable than evidence secured solely within the entity. is more persuasive than information obtained indirectly from outside sources. Which of the following procedures would provide the most reliable audit evidence? a Inquiries of the client’s internal audit staff held in private b Inspection of prenumbered client purchase orders field in the voucher payable department c Analytical procedures performed by the auditor on the entity’s trial balance d Inspection of bank statements obtained directly from the client’s financial institution Which of the following forms of evidence would be least persuasive in forming the auditor’s opinion about trading securities and other investments held by the company? a Responses to auditor’s questions by the president and the controller regarding investment account. but which was prepared by someone outside the client’s organization. d Appropriateness of evidential matter refers to the amount of corroborative evidence to be obtained. d The independent auditor’s direct personal knowledge. c Direct telephone communication between auditor and debtor. Determine which of the following is most correct regarding the reliability of audit evidence a Information that is indirectly obtained from external sources is the most reliable audit evidence b Reliability of the audit evidence is dependent upon the evidence being convincing c Reliability of evidence refers to the amount of evidence obtained d An effective internal control system provides more reliable audit evidence An example of external document that provides reliable information for the auditor is: a Employees time reports b Bank statements c Purchase order for company purchase d Carbon copies of checks An example of document auditor receive from the client. d Judgment of the auditor. is generally regarded as more reliable than the answers obtained from inquiries of the client. such as communications from banks. d External evidence. b To be appropriate. b Credits to accounts receivable from the cash receipt book after the close of business at the yearend. Which of the following statement is not a correct use of the terminology in relation to audit evidence? a Evidence obtained from an independent source outside the client organization is more reliable than that obtained from within. b Documentary evidence is more reliable when it is received by the auditor indirectly rather than directly. c Documents that originate outside the company is considered more reliable than those that originate within the client’s organization. d The auditor’s count of marketable securities. d Confirmation replies received directly from customers. the more assurance it provides the auditor about the reliability financial reporting by the client. evidential matter must be either reliable or relevant. b Correspondence with a stockbroker regarding the quantity of client’s investments held by the broker. obtained through inquiry. obtained through observation and inspection. c Accounting data alone may be considered sufficient appropriate evidential matter to issue an unqualified opinion of financial statements. In determining validity of accounts receivable. is a: a Confirmation b Sales invoice c Vendor invoice d Bank reconciliation Which of the following is the most reliable type of evidence? a A written representation signed by the entity’s CFO b The physical counts of securities and cash c Inquires of the credit manager about the collectability of noncurrent accounts receivable d Observation of cobwebs on some inventory bins Which of the following statements is generally correct about appropriateness of evidential matter? a The auditor’s direct personal knowledge. For audit evidence to be compelling to the auditor it must be sufficient and appropriate. to be economically useful and profitable to the auditing firm needs to be formed within a reasonable time and based on evidence obtained that assures profits for the auditing firm. is generally more persuasive than information obtained indirectly. b An auditor opinion.46 47 48 49 50 51 52 53 54 55 56 c Pertinence of the evidence. observation and inspection.

b Provide a principal support for the income tax return. b Conclusive. relevance and reliability. Given the choices below which provides the auditor with the most reliable audit evidence? a general ledger account balances b confirmation of accounts payable balance received from a vendor c internal memo explaining the issuance of a credit memo d copy of month-end adjusting entries 59 Given the audit procedures below. d Completely convincing. 66 Which one of the following is not one of the primary purposes of audit documentation prepared by the audit team? a A basis for planning the audit. the auditor’s goal is to obtain a sufficient amount of timely. b A record of the evidence accumulated and the results of the tests. 61 To be considered reliable evidence confirmations must be controlled by: a A client employee responsible for account receivable b A financial statement auditor c A client’s internal audit department d A client’s controller or CFO 62 Given the economic and time constraints in which auditors can collect evidence about management assertions about the financial statements. c At the lowest possible total cost. c The client denies its veracity. which one provides the most reliable evidence about the validity of accounts receivable balance? a Confirmations b Recalculation c Reperformance d Observations 60 Audit evidence obtained directly by the auditor will not be reliable if: a The auditor lacks the competence to evaluate the evidence. and extent of the audit procedures performed. and the conclusions reached from the audit evidence obtained. because they bill the client foer costs incurred. timing. d It is impossible for the auditor to obtained additional corroboratory evidence. reliable evidence that is relevant to the information being verified. d Correspondence from the client’s attorney about litigation. the auditor normally gathers the evidence that is: a Irrefutable. c Test counts of inventory performed by the auditor. d At the cost suggested in the engagement letter. 67 Which of the following statement is incorrect about the working papers prepared by the auditor? a The auditor should record in the working papers information on planning the audit the audit work. 58 Audit evidence has two primary qualities for the auditor. c Provide documentation that the audit was conducted in accordance with auditing standards.b Education of auditor c Independence of information provider d Timeliness 57 Which of the following types of audit evidence is the least persuasive? a Prenumbered purchase order forms. or obtained and retained by the auditor in connection with the performance of the audit. b It is provided by the client’s attorney. the goal of audit efficiency is to gather and evaluate of the information: a No matter the cost is involved in obtaining such evidence. c A basis for review by the supervisors and partners. the nature. b The extent of working paper documentation is a matter of professional judgment. b Bank statements obtained from the client. c Working papers should be in the form on data stored on paper. Working papers 64 It refers to the material (working papers) prepared by and for. the results thereof. d A basis for determining work deficiencies by peer review teams. d Working papers should be designed and organized to meet the circumstances and the auditor’s need for each individual audit. c Persuasive. d Provide additional support of recoded amounts to the client. . 63 When making decisions about evidence for a given audit. a Documentation b Audit report c Accounting data d Corroborative evidence 65 Which of the following best describes one of the primary objectives of audit documentation? a Defend against claims of deficient audit. In addition. b Even if cost is irrelevant to the auditor.

can be relied upon to make managerial decisions about the firm d Audit evidence as displayed in the work papers in the primarily perform to protect the auditing firm in the case of a lawsuit by investors 76 Audit files that are updated with new information of continuing importance is called a Current files c. as prepared by management . d When reporting on comparative financial statements. . 69 Which one of the following is not one of the primary purposes of working papers? a To assist in planning and performance of the audit. a Working papers are personal property of the auditor and the client has no rights to the working paper prepared by the auditor. c Working papers should not be made available to the client. c An auditor’s working papers may not serve as a reference source for the client. b To assist in the supervision and review of work. b The form of working papers should be designed to meet the circumstances of a particular engagement. d The auditor should prepare working papers which are sufficiently complete and detailed to provide an overall understanding of the audit. d Document the level of independence maintained by the auditor. custody and confidentiality of working papers. Correspondence file 77 Which of the following statements about working papers is correct? a Working papers are not permitted to be use as a reference source by the client. c Working papers may regarded as a substitute for the client’s accounting records. 78 PSA 230 provides general guidelines about the ownership. Permanent files b Working paper file d. it may be useful to consider what would be necessary to provide another auditor has no previous experience with the audit an understanding of the detailed aspects of the audit. and continent of working papers? a The timing and the number of personnel to be assigned to the engagement b The nature of engagement c The need for supervision of the engagement d Forms of the report 74 An auditor’s working papers will generally not include documentation showing how the a Client’s schedule were prepared b Engagement has been planned c Client’s system of internal control had been reviewed and evaluated d Unusual matters were resolved 75 Due care in the matter of audit documentation requires that the audit documentation of the evidence gathered by the auditors meets which of the following criteria? a Working papers be indexed to the general ledger accounts and include both a permanent file and a general file b The content be sufficient to provide support for the auditor’s opinion. d Working papers should show that the internal accounting control system has been studied and evaluated to the degree necessary. and content of working papers? a The nature and conditions of the client’s accounting and internal control systems b The continent of the client’s representation letters c The timing of substantive test completed prior to the balance sheet date d The usefulness of the working papers as reference source for the client 73 Which of the following is not a factor that affects the independent auditor’s judgment as to the quantity. type. d To substitute the clients accounting records. b The working papers should retained by the auditor for a sufficient period of time but not to exceed five years. the independent auditor may discard working papers after two years.68 Which of the following statement is correct about the working papers? a Working papers should not include documentation prepared by the client. 71 Which of the following statements concerning working papers is incorrect? a An auditor may support an opinion by other means in addition to working papers. c Monitor the effectiveness of the CPA Firm’s quality control procedures. b The auditors should document the understanding of the client’s internal control obtained to plan the audit. type. c In determining the extent of the working paper documentation. c To record the audit evidence resulting from the audit work performed to support the auditor’s opinion. b Every matter the auditor considers in an audit must be documented in the working papers. Accordingly. 72 Which of the following factors most likely affects the auditor’s judgment about the quantity. including the auditor’s representation as to compliance with auditing standards c Audit evidence is principally gathered to determine if the client’s financial statements. b Satisfy the auditor’s responsibilities concerning the Code of Professional Ethics. 70 An auditor’s working paper serve mainly to a Provide the principal support for the auditor’s report.

c Auditors should use professional skepticism in determining which audit documentation should be deleted. d Audit documentation should never be deleted from the audit file. 87 Which statements is correct concerning the deletion of audit documentation? a Superseded audit documentation should always be deleted from the audit file. including unadjusted ending balance and beginning balances for accounts c A schedule of adjusting entries made by the client for all balance sheets accounts d Detailed transaction information that may explain the changes in balance sheet accounts for the current year under audit 90 Audit documentation should posses certain characteristics. 79 Working papers would not include a Information concerning the legal and organizational structure of the entity. the auditor should not delete or discard audit documentation. b The auditor should document the bias for assessing control risk at the maximum level. an auditor’s permanent files most likely include a Schedules that support the current year’s adjustment entries b Prior years accounts receivable confirmations that were classified as exceptions c Documentation indicating that the audit work was adequately planned and supervised d Analysis of capital stock and other owners equity accounts 82 The permanent file of the auditor’s working papers generally would not include a Bond indenture agreements b Working trial balance c Lease agreements d Flowchart of the internal control structure 83 The current file of the auditor’s working papers generally should include a A flowchart of the internal accounting controls b A copy of the financial statements c Organization charts d Copies of bond and note indentures 84 The current file of an auditor’s working papers most likely would include a copy of the a Bank reconciliation b Articles of incorporation c Pension plan contact d Flowchart of the internal control procedures 85 For what minimum period should audit working papers be retained by the independent CPA? a For the period during which the entity remains the client of the independent CPA b For the period during which an auditor-client relationship exists but not more than six years c For the statutory period within which legal action may be brought against the independent CPA d For as long as the CPA is in public practice 86 Which of the following statements about working papers is correct? a Working papers may be permitted to be use as a reference source by a client. 88 Ignoring any particular legal or regulatory requirement audit documentation should be retained a A minimum of five years b As long as leads schedules have relevance to forthcoming audits c Until 3 years after the client selects another auditor d Working papers must be maintained indefinitely 89 What client information is needed by auditors in creating lead schedules? a Interim statements prepared by the client b General ledger information. d The independent auditor may discard working papers after two years. c Working papers provide principal support for the financial statements. 80 The permanent (continuing) file of an auditor’s working papers most likely would include copies of the a Bank statements c. Debt agreement b Lead schedules d. b After the audit has been completed. Attorney’s letters 81 Although the quantity and the content of the audit working papers vary with each particular engagement. Which of the following is true regarding those characteristics? I Audit documentation should be indexed and crossed-referenced II Audit documentation should be organized to benefit the client’s staff a Both statements are true b Both statements are false c Statement I is true but Statement II is false d Statement I is false but Statement II is true 91 The main advantage of properly indexed working papers is to a Reduce the size of the file b Better organize the working papers c Allow division of the labor within the audit team . c Copies of the financial statements and the auditor’s report. d Documentation showing how the client’s schedules are prepared. b Letters of the representation received from the entity.d Working papers may be considered a substitute for the client’s accounting records.

the auditor would need to pay particular attention to assumptions which are a Reasonable in the light of actual results in prior periods. d Provide a work paper indexing system that shows the relationship between findings. c The evidence available to support an accounting estimate will often be more difficult to obtained and less conclusive than evidence available to support other items in the financial statements. b Explain the use of tick marks. c Provide explanation of the audit steps performed. c Consistent with management’s plans which appear appropriate. 94 Audit documentation must contain sufficient information to allow what type of auditor to understand the nature. and related facts. 101 Which of the following would an auditor generally perform to obtain assurance that accounting estimates are properly accounted for and disclosed? a Inquiry management b Make an independent estimate for comparison with client’s estimate c Review subsequent events d Obtain knowledge about the applicable financial reporting standards related to the accounting estimate 102 Which of the following procedures would an auditor least likely perform when evaluating the reasonableness of management’s estimates? a Make an independent estimates for comparison with management estimates b Read the minutes of the board of directors ‘ meeting c Review and test the process used by management d Review subsequent events which confirm the estimates made . conclusions. Audit risk 96 In evaluating the reasonableness of an accounting estimate. c Eliminate any cross-references to other working papers since the system is unclear.d Facilitate the efficient use of audit staff 92 During the working paper review. 93 The principal purpose for cross-indexing audit working papers is to a Give the working papers a professional appearance. 100 Which of the following statements is incorrect about accounting estimates? a Management is responsible for making accounting estimates included in the financial statements. I only 99 In evaluating the assumptions on which the estimate is based. b Familiarize him/herself with the sequence of working papers so that he(she) will be able to answer questions about the conclusions stated in the report. d Provide a trail for the auditor and the reviewer. an audit supervisor finds that the auditor’s reporters finding are not adequately cross-referenced to supporting documentation. one of an auditor’s objectives is to determine whether the estimate are a Not subject to bias b Consistent with industry guidelines c Based on objective assumption d Reasonable in the circumstance 98 The auditor should adopt one or a combination of the following approaches in the audit of an accounting estimates are I Review and test the process use by management to develop the estimate II Use an independent estimate for comparison with that prepared by management III Review subsequence events which confirm the estimate made a Any of the above c. and results of procedures performed? a An experience audit team member b An experience auditor having no previous connection with the engagement c Any certified public accountant d An editor qualified as a peer review specialist Accounting estimates 95 It is an approximation of the amount of an item in the absence of a precise means of measurement a Accounting estimate c. The supervisor will most likely instruct the auditor to a Prepare a working paper to indicate that the full scope of the audit was carried out. an auditor most likely would concentrate on key factors and assumption that are a Consistent with prior periods b Similar to industry guidelines c Based on objective assumption d Reasonable in the circumstance 97 In evaluating an entity’s accounting estimates. timing. Either I or II bNone of the above d. b The risk of material misstatements is greater when accounting estimates are involved. b Consistent with those used for other accounting estimates. the auditor should pay particular attention to assumptions that are objective and consistent with industry patterns. d Subjective or susceptible to material misstatements. Materiality b Audit sampling d. extent. d When evaluating accounting estimates.

but were not recorded. c Tests the calculation used by the management in developing the estimates. b Of the lack of independence between the parties. d It is required by PFRS. b Vouching accounting records for recurring transactions recorded just after the balance sheet date. d Substantiate that the transaction was consummated on terms equivalent to an arm’s-length transaction. d Obtain an understanding of how management developed its estimates. c Obtain an understanding of the business purpose of the transaction. c Their existence and significance be adequately disclosed. 106 The auditor determines that Jin Company occupies the 3 rd floor of an office tower for which it pays no rent. d Their effects are eliminated from the financial statements. an auditor should a Add a separate paragraph to the auditor’s standard report to explain the transactions. c Reviewing confirmations of loans receivable and payable for indications of guarantees. 108 Which of the following would not necessarily be a related-party transaction? a Sale to another corporation with a similar name b Purchase from another corporation that is controlled by the corporation’s chief stockholder c Loan from the corporation to a major stockholder d Sale of land to the corporation by the spouse of a director 109 Which of the following most likely to indicate the existence of related parties? a Writing down obsolete inventory just before year end b Failing to correct previously identified internal control deficiencies c Depending on a single product for the success of the entity d Borrowing money at an interest rate significantly below the market rate 110 Related party transactions may be indicated when another company: a Subsidizes certain operating expenses of the company b Purchases its securities at their fair value c Loans to company at market rates d Has had a distributor relationship with the company for 10 years 111 Which of the following auditing procedures is most likely to assist an auditor in identifying related party transaction? a Retesting ineffective control previously reported to the audit committee b Sending second request for unanswered positive confirmations of accounts receivable c Reviewing information provided by management identifying related parties and being alert for other material related party transactions d Inspecting communications with law firms for evidence of unreported contingent liabilities 112 Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions? a Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.103 Which of the following procedures would an auditor ordinarily perform first in evaluating management’s accounting estimates for reasonableness? a Develop independent expectations of management’s estimates. The most likely explanation is: a They got lucky the landlord hasn’t noticed the lack of payments b Landlord has weak internal controls over billings c Related party transaction in which a major shareholders owns the office tower d Jin company is engaging in fraudulent activities 107 Most auditors assess inherent risk high for related parties and related party transactions because: a Of the unique classification of the related party transaction required on the balance sheet. an auditor palaces primary emphasis on a Ascertaining the rights and obligations of the related parties b Confirming the existence of the related parties c Verifying the valuation of the related party transactions d Evaluating the disclosure of the related party transactions . 113 After determining that a related party transaction has in fact occurred. c A related party transaction may be motivated by other than ordinary business considerations. Related parties 104 Which of the following is not one of the primary reasons why auditor should be aware of related parties and transactions between such parties? a PFRS requires disclosure of the related party transactions if they are material. 114 When auditing related party transaction. b Their form be emphasized rather than their economic substance. b The existence of related parties or related party transactions may affect the financial statements and the reliability of audit evidence. b Consider of the appropriateness of the key factors or assumption used in preparing the estimates. d PFRS requires that related party transactions be recorded in their equivalent arm’s-length transaction. b Perform analytical procedures to verify whether similar transaction occurred. 105 The primary concern of the auditor regarding related party transactions is that a They are reported to proper regulatory authorities because there are illegal. c Of the unique classification of related party transactions required on the income statement. d Performing analytical procedures for indications of possible financial difficulties.

and reports of internal auditors can often be used as a substitute for the work of the independent auditor’s staff. Engineer 117 During an audit. A common example is a Evaluating the potential financial statement effect of an employee fraud b Determination of the amounts using actuarial computations c Evaluating the integrity of management d Determining the sufficiency and appropriateness of evidential matter obtained 118 Each of the following procedures requires the assistance of an expert except a Determining the physical condition or quantity of underground mineral b Determining the value of works of art c Interpreting major contracts d Determining the adequacy of disclosure in the notes to the financial statements 119 A n expert whose expertise is used by the entity in preparing financial statements is called a(n): a Financial expert b Management expert c Auditor’s expert d Specialist 120 An expert whose expertise is used by the firm in obtaining sufficient appropriate evidence is called a(n): a Financial expert b Management expert c Auditor’s expert d Specialist 121 When may the auditor refer to an expert’s work in the audit report? Only if the expert’s report only when the expert Results in a modification of the audit Assisted in the audit of material opinion account in the financial statements a Yes Yes b No No c Yes No d No Yes 122 Which of the following least likely requires the services of an expert? a Valuation of certain types of assets like land and buildings b Legal opinions concerning interpretations of engagements. Expert b Consultant d. b Procedures performed by the internal audit staff may eliminate the independent auditor’s need for an extensive study and evaluation of internal control. the auditor may need the assistance of an expert in obtaining sufficient appropriate evidence. Assistant 116 Which of the following is not an expert upon whose work an auditor may rely? a Actuary c. knowledge and experience in a particular field other than accounting and auditing is called a/an a Professional c. Appraiser b Internal auditor d. and extent of the independent auditor’s procedures. timing. working papers. statutes and regulations cDetermination of amounts using specialized techniques d Application of accounting methods in computing inventory balances 123 When the auditor has to determine the need to use the work of an expert. Ordinarily. c Work performed by internal auditors maybe a factor in determining the nature. he would least likely consider: a The cost of using the services of an expert b The quantity and quality of other audit evidence available c The materiality of the financial statement item being considered d The risk of misstatement based on the nature and complexity of the matter being considered Internal auditors 124 The independent auditor should acquire an understanding of the internal audit function as it relates to the independent auditor’s study and evaluation of internal control because the: a Audit programs. d Understanding of the internal audit function is an important substantive test to be performed by the independent auditor. internal auditing activities include one or more of the following except . 125 External auditor must obtain evidence regarding what attributes of an internal audit department if the external auditors intend to rely on internal auditor’s work? a Integrity b Objectivity c Competence d All of the above 126 The scopes and objective of internal auditing vary widely and depend on the size and structure of the entity and the requirements of its management.Expert 115 A person or firm possessing special skill.

timing. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that accounting records are reliable. 127 Which of the following statements about the internal auditor and the external auditor is not correct? a The role of internal auditing is determined by management and its objectives differ from those of the external auditor who is appointed to report independently on the financial statements. b The management should act on internal audit recommendations. d In some cases. measure. b Consider the organizational level to which the internal auditors report the results of their work. reduction in the extent and even eliminate in its entirety some procedures performed by external auditor. after having considered the activities of the internal auditing. . maintains a large internal audit staff that report directly to the chief financial officer. An independent auditor will probably: a Eliminate tests of controls. 134 Allen Corp. the important criteria includes organization status. b During the course of planning the audit. b Their work affects the cost benefit trade-off. b Review of the economy. regulations and other external requirements and with management policies and directives and other internal requirements. scope of function. b The external auditor has the sole responsibility for audit opinion expressed and that responsibility is not reduced by any use made of internal auditing. d The audit committee of the board of directors. 131 When obtaining an understanding and performing a preliminary assessment of the internal audit function. c Effective internal auditing will often allow a modification in the nature . c Establishment of adequate accounting and internal control system. 130 To operate effectively. classify and report such information and specific inquiry into individual items including detailed testing of transactions and recommending improvements thereto. b Increase the depth of the study and evaluation of administrative controls. 128 Which of the following statements in relation to the preliminary assessment of internal auditing is false? a The external auditor should obtain a sufficient understanding of internal audit activities to assist in planning the audit and developing an effective audit approach. d There should be adequate audit manuals. work programs and working papers. c Avoid duplicating the work performed by audit staff. d Place limited reliance on the work performed by the internal audit staff. c Consider proper planning. an internal auditor must be independent of a The line function of organization. b The entity. the external auditor may decide that internal auditing will have no effect on external audit procedures. d Review of compliance with laws. supervision and documentation of internal auditor’s work. timing. d Consider the nature and extent of the internal auditors’ assignment. and extent of audit procedures. the external auditor should perform a preliminary assessment of the internal audit function when it appears that internal auditing is relevant to the external audit of the financial statements in specific audit areas. Which of the following statements relates to the criteria of due professional care? a The internal auditor should be free to communicate fully with the external auditor. d All judgment relating to the audit of financial statements are those of the external auditor. c They are employees whose work may affect the nature.a Examination of financial and operating information including review of the means to identity. 133 To assess the objectivity of the internal auditors. c Internal auditors should exercise the same degree of independence as required of the external auditor. the auditor should consider the internal auditors’ Organizational Scope of Technical competence and due Status functions care a Yes Yes Yes b Yes No Yes c Yes No No d No Yes No 132 An independent auditor might consider the procedures performed by the internal auditors because a They are employees whose work must be reviewed during substantive testing. an independent auditor most likely a Consider the professional qualifications and experience of the internal auditors. c The employer-employee relationship which exists for other employees in the organization. c There should be appropriate policies for hiring and training the internal auditing staff. efficiency and effectiveness of operations including non-financial control system. d Their degree of independence may be inferred from the nature of their work. technical competence and due professional care. 129 When obtaining an understanding and performing preliminary assessment of the internal audit function.