R4-LEVEL 2
The most important factor in planning for a major change in a
1.Which of these is not a common dimension in a feasibility study?
a. Operational
b. Schedule
c. All of these are common dimensions
d. Technical
2.The risk of fraudulent financial reporting increases in the presence of
a. Frequent changes in supplier
b. Substantial increase in sales
c. Improved control systems
d. Incentive systems based on operating income
3.For the fiscal year ending December 31, previous year and the
current year, Justin Co. has net sales of P1,000,000 and
P2,000,000; average gross receivables of P100,000 and P300,000;
and allowance for uncollectible accounts receivable of P30,000
and P50,000, respectively. If the accounts receivable turnover and
the ratio of allowance for uncollectible accounts receivable to
gross accounts receivable are calculated, which of the following
best represents the conclusions to be drawn
a. Accounts receivable turnovers are 14.3 and 8.0 and the
ratios of uncollectible accounts receivable to gross accounts
receivable is 0.42 and 0.20, respectively. Examine allowance
for possible overstatement of the allowance
b. Accounts receivable turnovers are 10.0 and 6.6 and the
ratios of uncollectible accounts receivable to gross accounts
receivable are 0.30 and 0.16, respectively. Examine
allowance for possible understatement of the allowance.
c. Accounts receivable turnovers are 14.3 and 8.0 and the
ratios of uncollectible accounts receivable to gross accounts
receivable are 0.42 and 0.20, respectively. Examine
allowance for possible understatement of the allowance.
d. Accounts receivable turnovers are 10.0 and 6.6 and the
ratios of uncollectible accounts receivable to gross accounts
receivable are 0.30 and 0.16, respectively. Examine
allowance for possible overstatement of the allowance
4.Which of the following statements is a standard applicable to
financial statement audits in accordance with Government
Auditing Standards?
a. An auditor should assess whether the entity has reportable
measures of economy and efficiency that are valid and
reliable.
b. An auditor should briefly describe in the auditor's report
the method of statistical sampling used in performing tests
of controls and substantive tests.
c. An auditor should report on the scope of the auditor's
testing of internal controls.
d. An auditor should determine the extent to which the
entity's programs achieve the desired level of results.
5.Which of the following is not an example of analytical evidence?
a. Examined invoices for plant asset additions to determine
whether the client had erroneously recorded ordinary
repairs as plant assets
b. Compared gross profit percentages by major product
classes with the prior year
c. Examined monthly performance reports and investigated
significant variations from budgeted amounts
d. Compared inventory turnover by major class with the prior
year on a monthly and quarterly basis
6.Ricky, Inc. began operating on January 1, 2014. At the end of the first
year of operations, Ricky reported P7,500,000 income before
income taxes on its income statement but only P700,000 taxable
income on its tax return. Analysis of the P6,800,000 difference
revealed that P6,200,000 was a permanent difference and
P600,000 was a temporary difference related to a current asset.
At the end of 2015, the accumulated temporary tax liability
difference related to future years us P1,100,000. The enacted tax
rate is 30% for 2014 and 2015. The journal entry to adjust the
deferred tax liability at the end of 2015 should include a
a. Credit to Deferred tax liability of P330,000
b. Credit to Deferred tax liability of P150,000
c. Debit to Deferred tax asset of P150,000
d. Debit to Deferred tax liability of P150,000
7.
computer-based system is:
a. The participation of top management in the planning
process.
b. The ability of the systems programmers to write
appropriate software.
c. The organization of the IT department.
d. The selection of the most advanced computer equipment.
8.During the course of an audit engagement, an auditor prepares and
accumulates audit working papers. The primary purpose of the
audit working papers is to
a. support the auditor's opinion
b. support the underlying concepts included in the
preparation of the basic financial statements
c. aid the auditor in adequately planning his work
d. provide a point of reference for future audit engagements
9.Which of the following is the most appropriate method of reporting
disagreement between the auditor and the auditee concerning
audit findings and recommendations?
a. State neither position. If the disagreement is ultimately
resolved, there will be no reason to report the previous
disagreement. If the disagreement is never resolved, the
disagreement should not be reported, because there is no
mechanism to resolve it.
b. State the auditees position because management is
ultimately responsible for the activities reported.
c. State both positions and identify the reasons for the
disagreement.
d. State the auditor’s position because the report is designed
to provide the auditors independent view.
10. When issuing an unmodified auditor’s report, the auditor
a. May refer to the work of an expert
b. Should not refer to the expert’s work
c. Should refer to the work of an expert to indicate a division
of responsibility
d. Should include in the auditor’s report the identity of the
expert and the extent of the expert’s involvement
11. An assumption underlying analytical procedures is that
a. Statistical tests of financial information may lead to the
discovery of material errors in the financial statements
b. The study of financial ratios is an acceptable alternative to
the investigation of unusual fluctuations
c. Relationships among data may reasonably be expected to
exist and continue in the absence of known conditions to
the contrary
d. These procedures cannot replace tests of balances and
transactions
12. Which of the following is generally included or shown in the
auditor's working papers?
a. Analyses that are designed to be a part of, or a substitute
for, the client's accounting records.
b. The procedures used by the auditor to verify the personal
financial status of members of the client's management
team.
c. The manner in which exceptions and unusual matters
disclosed by the auditor's procedures were resolved or
treated.
d. Excerpts from authoritative pronouncements that support
the underlying generally accepted accounting principles
used in preparing the financial statements.
13. 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 audited
amount of P4,000. If this were the only misstatement discovered
by the auditor, the projected misstatement of this sample would
be:
a. 2,000
b. 1,000
c. 5,000
d. 10,000
14. Sales commissions as a percentage of sales declined significantly
during the year under audit. Of the following possible causes, the
most likely is
a. The sales force was reduced at the end of the year
b. Sales increased during the year
c. Fictitious sales were recorded at year-end to inflate
earnings. Commissions were not recorded on these sales
d. Sales commission rates were increased at the beginning of
the year
15. An auditor requests a client to send letters of audit inquiry to
attorneys who have been consulted concerning litigation, claims,
and assessments. The primary reason for this request is to obtain:
a. The opinion of an expert whether any loss contingencies
are possible, probable, or remote.
b. A description of litigation, claims, and assessments that
have a reasonable possibility of unfavorable outcomes.
c. Corroboration of the information furnished by management
concerning litigation, claims, and assessments.
d. The attorney’s assurance that litigation, claims, and
assessments that are probable of assertion are properly
accounted for.
16. In applying analytical procedures, the auditor discovered that
gross profit as a percent of sales declined sharply during the
current year. A possible cause might be
a. Depreciation of office equipment was overstated
b. The client has significant amounts of obsolete inventory
carried at full cost
c. Recorded sales included goods that were shipped the
following year
d. A significant quantity of finished goods located in a distant
warehouse was inadvertently omitted from the ending
inventory
17. During the working paper review, an audit supervisor finds that
the auditor's reported findings are not adequately cross-
referenced to supporting documentation. 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.
b. Provide a workpaper indexing system that shows the
relationship between findings, conclusions, and the related
facts.
c. Eliminate any cross-references to other working papers
since the system is unclear.
d. 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.
18. Which of the following most likely would not be considered an
inherent limitation of internal control?
a. Mistakes in judgment
b. Collusion among employees
c. Incompatible functions
d. Management override
19. It would be appropriate for the payroll accounting department to
be responsible for which of the following functions?
a. Temporary retention of unclaimed employee paychecks
b. Approval of employee time records
c. Preparation of periodic governmental reports as to
employees' earnings and withholding taxes
d. Maintenance of records of employment, discharges, and
pay increases
20. Which of the following items would most likely require an
adjustment to the financial statements for the year ended
December 31, year 1?
a. Settlement of litigation in year 2 over an event that
occurred in year 2.
b. Uninsured loss of inventories purchased in year 1 as a
result of a flood in year 2.
c. Loss on an uncollectible trade receivable recorded in year
1 from a customer that declared bankruptcy in year 2.
d. Proceeds from a capital stock issuance in year 2 which was
being approved by the board of directors in year 1.
21. In a well-designed internal control system, employees in the
same department most likely would approve purchase orders and
also
a. Negotiate terms with vendors
b. Authorize requisitions of goods
c. Inspect and count goods upon receipt
d. Reconcile the open invoice file
22. To be more responsive to its customers, a bank wants a system
that will permit account representatives to consolidate
information about all the accounts belonging to individual
customers. Bank management is willing to experiment with
different approaches because the requirements are evolving
rapidly. The best development approach for this system is
a. System development life cycle model
b. Prototyping
c. Structured analysis and design technique
d. Pilot operation
23. When providing limited assurance that the financial statements
of a non-issuer require no material modifications to be in
accordance with GAAP, the accountant should:
a. Communicate with the audit committee regarding material
weaknesses in internal control.
b. Understand the accounting principles of the industry in
which the entity operates.
c. Perform tests of controls to evaluate the effectiveness of
the controls.
d. Assess the risk of material misstatement in the financial
statements due to fraud.
24. Of the following procedures, which is the most important that an
auditor should use when performing an analytical review of the
income statement?
a. Select sales and expense items and trace amounts to
related supporting documents
b. Ascertain that the net income amount in the statement of
changes in financial position (statement of cash flows)
agrees with the net income amount in the income
statement
c. Obtain from the proper client representatives, inventory
certificates for the beginning and ending inventory
amounts that were used to determine cost of sales
d. Compare actual revenues and expenses with the
corresponding figures of the previous year and investigate
significant differences
25. Which of the following procedures would an auditor most likely
perform to assist in the evaluation of loss contingencies?
a. Checking arithmetic accuracy of the accounting records.
b. Reading the financial statements, including footnotes.
c. Obtaining a letter of audit inquiry from the clients lawyer.
d. Performing appropriate analytical procedures.
26. To provide assurance that each voucher is submitted and paid
only once, an auditor most likely would examine a sample of paid
vouchers and determine whether each voucher is:
a. Returned to the vouchers payable department.
b. Stamped paid by the check signer.
c. Pre-numbered and accounted for.
d. Supported by a vendors invoice and purchase order.
27. Of the following control environment characteristics, identify the
one that contributes most to effective internal control
a. The company routinely transacts business with related
parties
b. The company has an effective internal audit staff that
monitors controls on a continuous basis
c. The company does not have a centralized human
resources function
d. The audit committee consists of the president, two vice-
presidents, and the corporate controller
28. In statistical sampling methods used in substantive testing, an
auditor most likely would stratify a population into meaningful
groups if:
a. The standard deviation of recorded amounts is relatively
small.
 b. The auditor's estimated tolerable misstatement is
extremely small.
c. Probability proportional to size (PPS) sampling is used.
d. The population has highly variable recorded amounts.
29. As part of audit planning, CPAs should design audit programs for
each individual audit and should include audit steps and
procedures to
a. Ensure that only material items are audited
b. Provide assurances that the objectives of the audit are met
c. Detect and eliminate fraud
d. Increase the amount of management information available
30. Which of the following statements best distinguishes a forecast
from a projection?
a. A forecast reflects conditions expected to exist, whereas a
projection presents financial position, results of operations,
and cash flows given one or more hypothetical
assumptions.
b. A forecast contains one or more hypothetical assumptions,
whereas a projection reflects conditions expected to exist.
c. A projection is appropriate for general distribution to third
parties, whereas a forecast is more tentative and should be
restricted to those parties with whom the client is
negotiating directly.
d. The CPA may review a financial forecast but may only
compile a projection.
31. What threats to independence are created when a contingent fee
is charged by a firm in respect of an assurance engagement?
a. Self-interest and self-review threats
b. Self-interest and advocacy threats
c. Self-review and intimidation threats
d. Familiarity and intimidation threats
32. An auditor’s purpose in reviewing credit ratings of customers with
delinquent accounts receivable most likely to obtain evidence
concerning management’s assertion about
a. Rights and Obligations
b. Completeness
c. Existence
d. Valuation and Allocation
33. In examining whether or not an auditee is conforming with the
company’s affirmative action policy, the internal auditor has
found that:
1 Five percent of the employees are from minority groups.
2 No one from a minority group has been hired this year.
The most appropriate conclusion the internal auditor should draw is
a. The auditee is violating the company’s policy.
b. Insufficient evidence exists of compliance with the
affirmative action policy.
c. The auditee is complying with the affirmative action policy.
d. The company’s policy is unauditable and hence
unenforceable.
34. The understanding between the client and the auditor as to the
degree of responsibilities to be assumed by each are normally set
forth in a(an)
a. Representation letter
b. Comfort letter
c. Engagement letter
d. Management letter
35. The basic concept of internal control which recognizes that the
cost of internal control should not exceed the benefits expected
to be derived is known as
a. Limited liability
b. Management by exception
c. Reasonable assurance
d. Management responsibility
36. Detection risk differs from both control risk and inherent risk in
that detection risk.
a. Should be assessed in non-quantitative terms.
b. Exists independently of the financial statement audit.
c. Arises from risk factors relating to fraud.
d. Can be changed at the auditor’s discretion.
37. Significant unexpected fluctuations identified by analytical
procedures will usually necessitate a(an)
a. Review of internal control
b. Explanation in the representation letter
c. Consistency qualification
d. Auditor investigation
38. Which of the following is not a general objective in the design of
an information system?
a. A system should be flexible to accommodate changes of a
reasonable magnitude when required.
b. A system should provide information that is timely and
relevant for decision making by management and operating
personnel.
c. The output of a system should be highly accurate.
d. A system should have sufficient capacity to accommodate
levels of normal activity; any additional capacity proves too
costly in the long run.
39. It would be appropriate for the payroll accounting department to
be responsible for which of the following functions?
a. Approval of employee time records
b. Temporary retention of unclaimed employee paychecks
c. Maintenance of records of employment, discharges, and
pay increases
d. Preparation of periodic governmental reports as to
employees' earnings and withholding taxes
40. Which of the following is not a typical analytical procedure?
a. a study of relationships of financial information with
relevant nonfinancial information
b. comparison of financial information with similar
information regarding the industry in which the entity
operates
c. Comparison of recorded amounts of major disbursements
with budgeted amounts
d. Comparison of recorded amounts of major disbursements
with appropriate invoices
41. Which of the following is not one of the elements of assurance
engagement?
a. Sufficient appropriate evidence
b. A suitable opinion
c. A three-party relationship
d. A written assurance report
42. PAS 500 describes five generalizations concerning the reliability of
evidence. The situations given below indicate the relative degrees
of assurance provided by two types of evidence obtained in
different situations. Which describes an exception to one of the
generalizations?
a. The schedule of insurance coverage obtained from the
company’s insurance agent provides greater assurance than
one prepared by the internal audit staff
b. The auditor’s computation of interest payable on
outstanding bonds provides greater assurance than reliance
on the client’s calculation
c. The auditor has obtained greater assurance about the
balance of sales at Plant A where he/she has made limited
tests of transactions because of effective internal control
than at Plant B where he/she has made extensive tests of
transaction because of ineffective internal control
d. The report of an expert regarding the valuation of a
collection of paintings held as an investment provides
greater assurance than the auditor’s physical observation of
the paintings
43. In auditing a not-for-profit entity that receives governmental
financial assistance, the auditor has a responsibility to:
a. Render an opinion concerning the entity's continued
eligibility for the governmental financial assistance.
b. Assess whether management has identified laws and
regulations that have a direct and material effect on the
entity's financial statements.
 c. Issue a separate report that describes the expected benefits d. Substantive tests designed to evaluate the reasonableness
and related costs of the auditor's suggested changes to the of financial information
entity's internal control.
d. Notify the governmental agency providing the financial
assistance that the audit is not designed to provide any
assurance of detecting errors and fraud.

44. Which of the following is not a component of audit planning?

a. Developing audit programs
b. Observing the client's annual physical inventory taking and
making test counts of selected items
c. Obtaining an understanding of the business
d. Making arrangements with the client concerning the
timing of audit field work and use of the client's staff in
completing certain phases of the examination

45. 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 simulation
b. Integrated test facility
c. Data entry monitor
d. Input control matrix

46. Which of the following should not be included in an accountant's

standard report based upon the compilation of an entity's
financial statements?
a. that the accountant has not audited or reviewed the
financial statements.
b. A statement that a compilation is limited to presenting in
the form of financial statements information that is the
representation of management.
c. A statement that the compilation was performed in
accordance with standards established by PICPA
d. A statement that the accountant does not express an
opinion but expresses only limited assurance on the
financial statements.

47. Which of the following is an internal control weakness related to

factory equipment?
a. Proceeds from sales of fully depreciated equipment
are credited to other income
b. Checks issued in payment of purchases of equipment
are not signed by the controller
c. Factory equipment replacements are generally made
when estimated useful lives, as indicated in
depreciation schedules, have expired
d. A policy exists requiring all purchases of factory
equipment to be made by the department in need of
the equipment

48. Audit risk consists of all but the following components

a. Control risk
b. Inherent risk
c. Substantive risk
d. Detection risk

49. Competence of personnel is necessary to proper recording of

transactions and supports financial statements that are fairly
presented. In reviewing the organization for necessary
competence, which of the following job types would be of least
interest to the auditor?
a. Vice-president for marketing
b. Chief accountant
c. Corporate controller
d. Manager of electronic data processing

50. Analytical procedures are

a. Substantive tests designed to evaluate a system of internal
control
b. Tests of control procedures designed to detect errors in
reported financial information
c. Tests of control procedures designed to evaluate the
validity of management's representation letter