UNIT V

AUDIT PLANNING

1. Which of the following is not considered among the benefits of auditing planning?
a. Audit planning helps coordinate the work to be done by auditors of components
and other parties such as experts specialists, etc.
b. Audit planning helps ensure that the audit is properly organized, managed and
performed in an effective and efficient manner.
c. Audit planning aids in ensuring the examination of financial statements can be
performed without problems and difficulties.
d. Audit planning helps ensure that appropriate attention is devoted to important
areas of the audit.

2. Which of the following procedures is not undertaken by the auditor at the beginning of
the current audit engagement?
a. Determines whether ethical requirements including independence are complied
with.
b. Establishes an understanding of the terms of engagement.
c. Determines whether relationship with client can be continued or not.
d. Determines the types of opinion that should be expressed on the financial
statements.

3. Which of the following is not considered by the auditor when establishing the scope of
the audit engagement?
a. The financial reporting framework on which the financial information to be
audited has been prepared.
b. Industry-specific reporting requirements.
c. Expected audit coverage including the number and locations of components to be
included.
d. Expected nature and timing of communications among engagement team
members including the nature and timing of the team meetings and timing of the
review of work performed.

4. Which of the following should be considered by the auditor when ascertaining the
reporting objects of the engagement, the timing of the audit and the nature objectives of
the engagement, the timing of the audit and the nature of communications required?
a. Availability of client personnel and data.
b. Affect of information technology on the audit procedures.
c. Audit areas where there is a higher risk of material misstatement.
d. The entity’s timetable of reporting such as at interim and final stages.

5. The auditor should plan the nature, timing and extent of direction and supervision of
engagement team members and review of their work. Which of the following factors
need not be considered by the auditor in preparing this plan?
a. Size and complexity of the entity.
 b. The reporting currency to be used, including any need for currency translation for
the financial information audited.
c. The capabilities and competence of personnel performing the audit work.
d. The risks of material misstatement.

6. For initial audits, additional matters the auditor may consider in the overall audit strategy
and audit plan include the following except
a. Confirmation of material accounts receivable balance at the end of the year.
b. Planned audit procedure to obtain sufficient appropriate audit evidence regarding
opening balances.
c. Assignment of firm personnel with appropriate levels of capabilities and
competence to respond to anticipated significant risks.
d. Major issues including the application of accounting principles or any auditing
and reporting standards discussed with management.

7. In determining the number of people who will be assigned to an engagement, an auditor

normally considers the following except
a. Audit’s size and complexity.
b. The availability of the work of internal auditors and the extent of the auditor’s
potential reliance on such work.
c. Availability and experience of personnel.
d. The necessity for special expertise.

8. In considering the work to be performed by other auditors, the following should be taken
into account except
a. The involvement of experts.
b. The number of locations.
c. The involvement of other auditors in the audit of components such as subsidiaries,
branches, and divisions.
d. The expected use of audit evidence obtained in prior audits.

9. PSA requires auditors to evaluate whether substantial doubt exists about an entity’s
ability to continue as a going concern. Which of the following items will not signify that
a material uncertainly exists?
a. Substantial operating losses or significant deterioration in the value of assets used
to generate cash flows.
b. Change from cash-on-delivery to credit transactions with suppliers.
c. Withdrawal of financial support by creditors for essential new product
development.
d. Adverse key financial ratios.

10. A time budget is an estimate of the total hours an audit is expected to take. The following
are among the factors to be considered in developing this budget, except
a. Location of the client facilities.
b. Client’s size as indicated by its gross assets, sales, number of employees.
c. The competence and experience of available staff.
 d. Whether the audit is performed during the interim or at year-end.

11. As the audit progress and additional information about the client is obtained, the
acceptable level of audit risk
a. may be modified.
b. may not be reduced because it would become statistically invalid, but it may be
increased.
c. may not be increased because it would become statistically invalid, but it may be
reduced.
d. may not be modified.

12. Which of the following is not a consideration when the auditor is attempting to assess the
inherent risk?
a. Nature of client’s business.
b. Existence of related parties.
c. Frequency and intensity of top management’s review of the accounting
transactions and records.
d. Susceptibility to defalcation.

13. Which of the following is an example of the concept of inherent risk?

a. Humans make more errors than computers, therefore a manual accounting system
is riskier than a computerized system.
b. Accounting systems with vouchers have many more controls built in, so the risk
that will be errors on the financial statements is reduced.
c. Loans receivable for a financial company are less likely to be collectible than
those of a bank.
d. Audits with larger sample sizes are less risky than those with smaller sample
sizes.

14. Which of the following discoveries by the auditor would not raise the red flag of
increased inherent risk?
a. Management bonuses are based on a percentage of net income.
b. A bond indenture requires a current ratio of at least three to one.
c. Client makes extensive use of notes receivable and notes payable rather than
buying and selling on open account.
d. Client is a parent company with a subsidiary.

15. Inherent risk is reduced where the likelihood of defalcations is low. This would be true
for an account such as
a. inventory.
b. marketable securities.
c. cash.
d. accounts receivable.

16. Both control risk and inherent risk are set by the auditor. On a typical engagement the
auditor would not set both of these for
 a. the overall audit.
b. each cycle.
c. each account.
d. each objective.

17. Because control risk and inherent risk vary from cycle to cycle, account to account, or
objective to objective.
a. acceptable audit risk must remain a constant.
b. detection risk and required audit evidence will also vary.
c. detection risk will vary but audit evidence will remain constant.
d. detection risk will remain constant but audit evidence will vary.

18. After obtaining an understanding of an entity’s internal control structure and assessing
control risk, an auditor may next
a. perform tests of controls to verify management’s assertions that are embodied in
the financial statements.
b. consider whether evidential matter is available to support a further reduction in
the assessed level of control risk.
c. apply analytical procedures as substantive tests to validate the assessed level of
control risk.
d. evaluate whether the internal control structure policies and procedures detected
material misstatements in the financial statements.

19. An auditor may compensate for a weakness in the internal control by increasing the
a. level of detection risk.
b. extent of tests of controls (compliance tests)
c. preliminary judgment about audit risk.
d. extent of analytical procedures.

20. When conducting an audit, errors that arouse suspicion of fraud should be given greater
attention than other errors. This is an example of applying the criterion of
a. reliability of evidence.
b. materiality.
c. risk.
d. dual-purpose testing.

21. When an independent auditor’s examination of financial statements disclose special

circumstances that make the auditor suspect that material errors and irregularities may
exist, the auditor’s initial course of action should be to
a. recommend that the client pursue the suspected fraud to a conclusion that is
agreeable to the auditor.
b. extend normal audit procedures in an attempt to detect the full extent of the
suspected fraud.
c. reach an understanding with the proper client representative as to whether the
auditor or the client is to make the investigation necessary to determine if a fraud
has in fact occurred.
 d. decide whether the fraud, if in fact it should exist, might be of such a magnitude
as to affect the auditor’s report on the financial statements.

22. The auditor risk against which the auditor requires reasonable protection is a combination
of two separate risks. The first of these is that material errors will occur in the accounting
process by which the financial statements are developed, and the second is that
a. a company’s system of internal control is not adequate to detect errors and
irregularities.
b. those errors that occur will not be detected in the auditor’s examination.
c. management may possess an attitude that lacks integrity.
d. evidential matter is not competent enough for the auditor to form an opinion
based on reasonable assurance.

23. A CPA may reduce the audit work on a first-time audit by reviewing the working papers
of the predecessor auditor. The predecessor should permit the successor to review
working papers relating to matters of continuing accounting significance such us those
that relate to
a. extent of reliance on the work specialists.
b. fee arrangements and summaries of payments.
c. analysis of contingencies.
d. staff hours required to complete the engagement.

24. Which of the following procedures is not performed as a part of planning an audit
engagement?
a. Reviewing the working papers of the prior year.
b. Performing analytical procedure.
c. Tests of controls.
d. Designing an audit program.

25. The risk of a material misstatement occurring in an account, assuming an absence of

internal, is referred to as:
a. Account risk
b. Control risk
c. Detection risk
d. Inherent risk

26. Which of the following is not generally considered a financial statement audit risk factor?
a. Management operating and financing decisions are dominated by top
management.
b. A new client with no prior audit history.
c. Rate of change in the entity’s industry is rapid
d. Profitability of the entity relative to its industry is inconsistent.

27. The risk that the auditor’s procedures will lead them to conclude that a material
misstatement does not exist in an account balance when in fact such a misstatement does
exist is referred to as:
 a. Account risk.
b. Control risk.
c. Detection risk.
d. Inherent risk.

28. Which of the following statements is correct regarding the auditor’s determination of
materiality?
a. The planning level of materiality will normally be the larger of the amount
considered for the balance sheet vs. the income statement.
b. The auditor’s planning level of materiality misstatements” for the various
accounts.
c. Auditors may use various rules of thumb to arrive at an evaluation level of
materiality, but not for determining the planning level of materiality.
d. The amount used for the planning will equal that used for evaluation.

29. The auditors must consider materiality in planning an audit engagement. Materiality for
planning purpose is:
a. The auditor’s preliminary estimate of the largest amount of error that would be
material to any one of the client’s financial statements.
b. The auditor’s preliminary estimate of the smallest amount of error that would be
material to any one of the client’s financial statements.
c. The auditor’s preliminary estimate of the amount of error that would be material
to the client’s balance sheet.
d. An amount that cannot be quantitatively stated since it depends on the nature of
the item.

30. The systems approach to an audit is less likely to be appropriate for:

a. Clients with weak internal control.
b. Rights that are large in size.
c. Legality.
d. Presentation and disclosure.

31. Which of the following is not an assertion that is made in the financial statements by
management concerning each major account and class of transaction?
a. Completeness.
b. Rights and obligations.
c. Legality.
d. Presentation and disclosure.

32. Which of the following income statements is least likely to be verified in conjunction
with the audit of a balance sheet account?
a. Depreciation expense.
b. Interest revenue.
c. Travel and entertainment.
d. Uncollectible accounts expense.
33. Tests for unrecorded assets typically involve tracing from:
a. Source documents to recorded journal entries.
b. Source documents to observations.
c. Recorded journal entries to documents.
d. Recorded journal entries to observations.

34. Tracing from source documents forward to ledgers is most likely to address which
assertion related to posted entries:
a. Completeness.
b. Existence.
c. Rights.
d. Valuation.

35. Determining that receivables are presented at net-realizable value is most directly related
to which management assertion?
a. Existence or occurrence.
b. Rights.
c. Valuation or allocation.
d. Presentation and disclosure.

36. Which of the following is not a general objective for the audit of asset accounts?
a. Establishing existence of assets.
b. Establishing proper valuation of assets.
c. Establishing proper safeguarding of assets.
d. Establishing the completeness of assets.

37. Which of the following is not used by auditors to establish the completeness of recorded
assets?
a. Assessing control risk.
b. Tracing from source documents to entries in the accounting records.
c. Performing analytical procedures.
d. Vouching transactions.

38. To test for unsupported entries in the journals, the direction of audit testing should be to
the:
a. Ledger entries.
b. Journal entries.
c. Original source documents.
d. Financial statements.

39. The auditors will not ordinarily initiate discussion with the audit committee concerning
the:
a. Extent to which the work of internal auditors will influence the scope of the
examination.
b. Extent to which change in the company’s organization will influence the scope of
the examination.
 c. Details of potential problems which the auditors believe might cause a qualified
opinion.
d. Details of the procedures which the auditors intend to apply.

40. When planning an examination, an auditor should:

a. Consider whether the extent of substantive tests may be reduced based on the
results of the internal control questionnaire.
b. Make preliminary judgments about materiality levels for audit purposes.
c. Conclude whether change in compliance with prescribed control procedures
justifies reliance on them.
d. Prepare a preliminary draft of the management representation letter.

41. With respect to the auditor’s planning of the year-end examination, which of the
following statements is always true?
a. An engagement should not be observed at the fiscal year-end.
b. An inventory count must be observed at the balance sheet date.
c. The client’s audit committee should not be told of any specific audit procedures
which will be performed.
d. It is an acceptable practice to carry our parts of the examination at interim dates.

42. Santos requested permission to communicate with the predecessor auditor and review
certain portions of the predecessor auditor’s working papers. The prospective client’s
refusal to permit this will bear directly on Santos’ decision concerning the:
a. Adequacy of the preplanned audit program.
b. Ability to establish consistency in application of accounting principles between
years.
c. Apparent scope limitation.
d. Integrity of management.

43. The auditor faces a risk that the examination will not detect material misstatements in the
financial statements. In regard to minimizing this risk, the auditor preliminary relies on:
a. Substantive tests.
b. Tests of controls.
c. Internal control.
d. Statistical analysis.

44. An abnormal fluctuation in gross that might suggest the needed audit procedures for sales
and inventories would most likely be identified in the planning phase of the audit by the
use of:
a. Tests of transactions and balances.
b. An assessment of internal control.
c. Specialized audit programs.
d. Analytical procedures.

45. As the acceptable level of detection risk decreases, the assurance directly provided from
a. substantive tests should increase.
 b. substantive test should decrease.
c. tests of controls should increase.
d. test of control should decrease.

46. As the acceptable level of detection risk decreases, an auditor may change the
a. timing of substantive tests by performing them at an interim date rather than at
year end.
b. nature of substantive tests from a less effective to a more effective procedure.
c. timing of tests of controls by performing them at several dates rather than at one
time.
d. assessed level of inherent risk to a higher amount.

47. Which of the following audit risk components may be assessed in non-quantitative terms?

Inherent risk Control Risk Detection risk

a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes

48. Inherent risk and control risk differ from detection risk in that inherent risk and control
risk are
a. Elements of audit risk while detection risk is not.
b. Changed at the auditor’s discretion while detection risk is not.
c. Considered at the individual account-balances risk is not.
d. Functions of the client and its environment while detection risk is not.

49. Which of the following elements underlines the application of generally accepted
auditing standards, particularly the standards of field work and reporting?
a. Internal control.
b. Corroborating evidence.
c. Quality control.
d. Materiality and relative risk.

50. Which of the following procedures would an auditor least likely perform in planning a
financial statement audit?
a. Coordinating the assistance of entity personnel in data preparation.
b. Discussing matters that may affect the audit with firm personnel responsible for
non-audit services to the entity.
c. Selecting a sample of vendors’ invoices for comparison to receiving reports.
d. Reading the current year’s interim financial statements.
51. One of the first things that the auditor will do after accepting a new client is
a. tour client’s facilities.
b. contact client’s attorney to discover legal obligations.
c. study client’s internal control structure.
d. communicate with predecessor auditor.

52. Which of the following is not a document or record that should be examined early in the
engagement?
a. Corporate charter and bylaws.
b. Management letter.
c. Minutes of board of directors’ and stockholders’ meetings.
d. Contracts.

53. Which of the following would not be found in the corporate charter?
a. The date of incorporation.
b. The kinds and amount of capital stock authorized.
c. The rules and procedures adopted by the stockholders.
d. The types of business activity that the corporation is allowed to conduct.

54. During the planning phase when the auditor is examining the contracts of the client, the
primary attention should focus on
a. large peso value items.
b. any aspect of the agreement affecting financial disclosure.
c. tracing the information to verify correct journal entries.
d. the discovery of related party transactions.

55. Which of the following is the most likely first step an auditor would perform at the
beginning of an initial audit engagement?
a. Prepare a rough draft of the financial statements and of the auditor’s report.
b. Study and evaluate the system of internal administrative control.
c. Tour the client’s facilities and review the general records.
d. Consult with and review the work of the predecessor auditor prior to discussing
the engagement with the client management.

56. A CPA is conducting the first examination of a non-public company’s financial

statements. The CPA hopes to reduce the audit work by consulting with the predecessor
auditor and reviewing the predecessor’s working papers. This procedure is
a. acceptable if the client and the predecessor auditor agree to it.
b. acceptable if the CPA refers in the audit report to reliance upon the predecessor
auditor’s wok.
c. required if the CPA is to render an unqualified opinion.
 d. unacceptable because the CPA should bring an independent viewpoint to a new
engagement.

57. The auditors will not ordinarily initiate discussion with the audit committee concerning
the
a. extent to which the work of internal auditors will influence the scope of the
examinations.
b. extent to which change in the company’s organization will influence the scope of
the examination.
c. details of potential problems which the auditors believe might cause a qualified
opinion.
d. details of the procedures which the auditors intend to apply.

58. Which of the following is an effective audit planning and control procedure that helps
prevent misunderstandings and inefficient use of audit personnel?
a. Make copies, for inclusion in the working papers, of those client supporting
documents examined by the auditor.
b. Arrange to provide the client with copies of the audit programs to be used during
the audit.
c. Arrange a preliminary conference with the client to discuss audit objective, fees,
timing, and other information.
d. Arrange to have the auditor prepare and post any necessary adjusting or
reclassification entries prior to final closing.

59. The auditor should carefully consider the competence of the auditor’s employee because
their competence deals directly and importantly upon the
a. Cost/benefit relationship of the system of internal control.
b. Achievement objectives of the system of internal control.
c. Comparison of recorded accountability with assets.
d. Riming of the tests to be performed.

60. In considering materiality tor planning purposes, an auditor believes that misstatements
aggregating P10,000 would have a material effect on the entity’s income statement, but
that misstatements would have to aggregate P20,000 to materially affect the balance
sheet. Ordinarily, it would be appropriate to design auditing procedures that would be
expected to detect misstatements that aggregate.
a. P10,000.
b. P15,000.
c. P20,000.
d. P30,000.
61. Analytical procedures used in planning an audit should focus on
a. Evaluating the adequacy of evidence gathered concerning unusual balances.
b. Testing individual account balances that depend on accounting estimates.
c. Enhancing the auditor’s understanding of the client’s business.
d. Identifying material weaknesses in the internal control structure.

62. Analytical procedures

a. Are required to be performed in the planning phase of the audit.
b. Are often done during the examination’s testing phase.
c. Are required to be done during the completion phase of the audit.
d. May be performed at any of the three times during the engagement.

63. A benefit obtained from comparing client’s data with industry averages is that it provides
a. An indication of the likelihood of financial failure.
b. As indication where errors exist in the statements.
c. A benchmark to be used in evaluating client’s budgets.
d. A comparison of “what is” with “what should be”.

64. If most companies in the industry use FIFO inventory valuation and straight-line
depreciation, and the audit client uses weighted-average and double-declining balance
comparisons of client and industry data.
a. Will be a meaningful highlight of the result of these differences in accounting
methods.
b. Will enable the auditor to spot errors but not irregularities.
c. Will enable the auditor to spot irregularities but not errors.
d. May not be meaningful.

65. Two analytical procedures available to the auditor are

1. Compare current year’s balances with the preceding year.
2. Compare detail of a total balance with the preceding year. Shortcomings of
these two procedures are that
a. the first fails to consider growth or decline in business activity and the second
ignores relationships of data to other data.
b. the first ignores relationships of data to other data and the second fails to consider
growth or decline in business activity.
c. both fail to consider growth or decline in business activity and ignore
relationships of data.
d. it is difficult, time consuming, and therefore costly to perform these procedures.
66. A common comparison occurs when the auditor calculates the expected balance and
compares it with the actual balance. The auditor’s expected account balance may be
determined by
 a. Using industry standards.
b. Using Dun and Bradstreet reports.
c. Relating it to some other balance sheet or income statement account or accounts.
d. Inquiry of client.

67. The first step in applying analytical procedures is to

a. Set the objectives.
b. Apply the decision rules.
c. Conduct the tests.
d. Determine what would be relevant data to use.

68. The design of the specific analytical procedures depends upon

a. The objectives the auditor sets.
b. The data available.
c. The decision rules which apply.
d. The conclusion to be reached.

69. When analytical procedures are being design, the auditor should evaluate whether
relationships among data are both possible and predictable. Which one of the following
statements is not true?
a. As a general rule, relationships in a stable environment are more predictable than
those in an unstable or dynamic environment.
b. If the relationships among data are plausible but not adequately predictable, the
procedure will not provide useful results.
c. Relationships are plausible when there is a clear cause and effect relationship
among them.
d. Once plausibility has been verified, then predictability can be presumed.

70. Which one of the following statements regarding use of appropriate data is not true?
a. For comparisons to be useful, the data used must be relevant to the objectives
involved.
b. It is questionable value to compare current-year unaudited data with data that is
unreliable.
c. To determine trends that meaningful analysis, comparisons should be made of at
least four periods for each ratio and percentage used.
d. Analytical procedures performed on disaggregated data are not as effective as
those applied to the financial statement data.

71. Many auditors believe that the most important aspect of analytical procedures are
a. Making the calculations based on design of the test.
b. Classifying the result according to the decision rule.
 c. Performing follow-up procedures.
d. All three of the above.

72. The most common statistical technique used with analytical procedures is
a. Disaggregated data.
b. Regression analysis.
c. A decision rule table.
d. Comparison of current-year with prior-year data, looking for large peso or large
percentage changes.

73. Where an unusual fluctuation is indicated by analytical procedures and management is

unable to provide a satisfactory explanation, the auditor must assume that there is a high
probability that an error or irregularity exists. In this case, the auditor must
a. Issue either a qualified or an adverse opinion.
b. Issue a disclaimer.
c. Issue either a qualified opinion or a disclaimer.
d. Design other appropriate audit procedures to determine if such errors do exist.

74. One feature which is common to all microcomputer-based audit software is

a. The ability to input client’s general ledger into the auditor’s computer system.
b. The ability to generate decision-rule tables.
c. The ability to download data from client’s mainframe into the auditor’s
microcomputer system.
d. The ability to record adjusting journal entries into client’s system directly from
the auditor’s system.

75. Which of the following ratios is not an indicator of client’s short-term debt-paying
ability?
a. Current ratio.
b. Debt to equity ratio.
c. Quick ratio.
d. Cash ratio.

76. If a company does not have sufficient cash and cash-like items to meet its obligations.
a. It is bankrupt.
b. It is insolvent.
c. The key to its debt-paying ability will be the length of times it takes the company
to convert less liquid current assets into cash.
d. The key to its debt-paying ability is the line of credit which it has available from
banks.
77. To help plan the nature, timing, and extent of substantive auditing procedures,
preliminary analytical procedures should focus on
a. Enhancing the auditor’s understanding of the client’s business and event that have
occurred since the last audit date.
b. Developing plausible relationships that corroborate anticipated results with a
measurable amount of precision,
c. Applying ratio analysis to externally generated data such as published industry
statistics or price indices.
d. Comparing recorded financial information to the results of other tests of
transactions and balances.

78. In connection with the examination of financial statements by an independent auditor, the
client suggests the members of the internal audit staff be utilized to minimized audit
costs. Which of the following tasks could most appropriately be delegated to the internal
audit staff?
a. Selection of accounts receivable for confirmation, based upon the internal
auditor’s judgment as to how many accounts and which accounts will provide
sufficient coverage.
b. Preparation of schedules for negative accounts receivable responses.
c. Evaluation of the internal control of accounts receivable and sales.
d. Determination of the adequacy of the allowance for doubtful accounts.

79. Reportable conditions are matters that come to an auditor’s attention, which should be
communicated to an entity’s audit committee because they represent
a. Material irregularities or illegal acts perpetrated by high-level management.
b. Significant deficiencies in the design or operation of the internal control structure.
c. Flagrant violations of the entity’s documented conflict-of-interest policies.
d. Intentional attempts by client personnel to limit the scope of the auditor’s field
work.

80. An auditor searching for related party transactions should obtain an understanding of
each subsidiary’s relationship to the total entity because
a. This may permit the audit of intercompany account balances to be performed as
of concurrent dates.
b. Intercompany transactions may have been consumed on terms equivalent to
arm’s-length transactions.
c. This may reveal whether particular transactions would have taken place if the
parties had not been related.
d. The business structure may be deliberately designed to obscure related party
transactions.
81. A basic premise underlying analytical procedures is that
a. These procedures cannot replace tests of balances and transactions.
b. Statistical tests of financial information may lead to the discovery of material
errors in the financial statements.
c. The study of financial ratios is an acceptable alternative to the investigation of
unusual fluctuations.
d. Relationships among data may reasonably be expected to exist and continue in the
absence of known conditions to the contrary.

82. An abnormal fluctuation in gross profit that might suggest the need for extended audit
procedures for sales and inventories would most likely be identified in the planning phase
of the audit by the use of
a. Tests of transactions and balances.
b. A preliminary review of internal control.
c. Specialized audit programs.
d. Analytical procedures.

83. An example of an analytical procedure is the comparison of

a. Financial information with similar information regarding the industry which the
entity operates.
b. Recorded amounts of major disbursements with appropriate invoices.
c. Results of a statistical sample with the expected characteristics of the actual
population.
d. EDP generated data with similar data generated by a manual accounting system.

84. Before applying principal substantive tests to the details of asset and liability account at
an interim date, the auditor should
a. Assess the difficulty in controlling incremental audit risk.
b. Investigate significant fluctuations that have occurred in the asset and liability
accounts since the previous balance-sheet date.
c. Select only those accounts which can effectively be sampled during year-end
audit work.
d. Consider the tests of controls that must be applied at the balance-sheet date to
extend the audit conclusions reached at the interim date.

85. For which of the following account balances are substantive tests of details least likely to
be performed unless analytical procedures indicate the need to extend detail testing?
a. Payroll expense.
b. Marketable securities.
c. Research and development costs.
d. Legal expense.
86. An auditor should examine minutes of board of director’s meetings
a. Through the date of his report.
b. Through the date of the financial statements.
c. On a test basis.
d. Only at the beginning of the audit.

87. One reason why the independent auditor makes an analytical review of the client’s
operations is to identify probable
a. Weaknesses of a material nature in the system of internal control.
b. Non-compliance with prescribed control procedures.
c. Improper separation of accounting and other financial duties.
d. Unusual transactions.

88. Which of the following ratios would be the least useful in reviewing the overall
profitability of a manufacturing company?
a. Net income to net worth.
b. Net income to total assets.
c. Net income to sales.
d. Net income to working capital.

89. Which of the following best describes the most important stage of an auditor’s statistical
analysis of significant ratios and trends?
a. Computation of significant ratios and trends.
b. Interpretation of significant variations and unusual relationships.
c. Reconciliation of statistical data to client’s accounting records.
d. Comparison of statistical data to prior-year statistics and to similar data published
by governmental and private sources.

90. The auditor generally gives most emphasis to ratio and trend analysis in the examination
of the statement of
a. Retained earnings.
b. Income.
c. Financial position.
d. Cash flows.

91. A not-for-profit organization published a monthly magazine that had 30,000 subscribers
on January 2,2004. The number of subscribers increased steadily throughout the year and
at December 31,2004, there were 32,400 subscribers. The annual magazine subscription
cost was P10 on January 1, 2004, and was increased to P12 for new members on April 1,
 2004. An auditor would expect that the receipts from subscriptions for the year ended
December 31,2004, would be approximately
a. P358,800.
b. P343,200.
c. P328,800.
d. P327,600.

92. Audit programs are modified to suit the circumstances on particular engagements. A
complete audit program for an engagement generally should be developed
a. Prior to beginning the actual audit work.
b. After the auditor has completed an evaluation of the existing internal accounting
control.
c. After reviewing the client’s accounting records and procedures.
d. When the audit engagement letter is prepared.

93. Which of the following is an aspect of scheduling and controlling the audit engagement?
a. Include in the audit program a column for estimated and actual time.
b. Perform audit work only after the client’s books of account have been close for
the period under examination.
c. Write a conclusion on individual working papers indicating how the results
thereon will affect the auditor’s report.
d. Include in the engagement letter an estimate of the minimum and maximum audit
fee.

94. Which of the following analytical review procedures, should be applied to the statement?
a. Select sales and expense items and trace amounts to related supporting document?
b. Ascertain that the new income amount in the statement of changes in financial
position agrees with the net income amount in the income statement.
c. Obtain from the proper client representatives, the beginning and ending inventory
amounts that were used to determine costs of sales.
d. Compare the actual revenues and expenses with the corresponding figures of the
previous year and investigate significant differences.

95. Audit programs generally include procedures necessary to test actual transactions and
resulting balances. These procedures are primary designed to
a. Detect irregularities that result in misstated financial statements.
b. Test the adequacy of internal control.
c. Gather corroborative evidence.
d. Obtain information of informative disclosures.
96. An auditor uses analytical review during the course of an audit. The most important
phase of this review is the
a. Computation of key ratios such as inventory turnover and gross profit
percentages.
b. Investigation of significant variations and unusual relationships.
c. Comparison of client-computed statistics with industry data on a quarterly and
full-year basis.
d. Examinations of the client data that generated the statistics that are analyzed.

97. Which of the following is not a typical analytical review procedure?

a. Study of relationships of the financial information with relevant non-financial
information.
b. Comparison of the financial information.
c. Comparison of recorded amounts of major disbursements with appropriate
invoices.
d. Comparison of the financial information with budgeted amounts.

98. Auditors sometimes use comparison of rations as audit evidence. For example, an
unexplained decrease in the ratio of gross profit to sales may suggest which of the
following possibilities?
a. Unrecorded purchases.
b. Unrecorded sales.
c. Merchandise purchases being charge to selling and general expense.
d. Fictitious sales.

99. The risk of a material misstatement occurring in an account, assuming an absence of

internal control is referred to as
a. Account risk.
b. Control risk.
c. Detection risk.
d. Inherent risk.

100. Which of the following is not generally considered a financial statement audit risk
factors?
a. Management and operation and financing decisions are dominated by top
management.
b. A new client with no prior audit history.
c. Rate of change in the entity’s industry is rapid.
d. Profitability of the relative to its industry is inconsistent.
101. The predecessor auditor is required to respond to the request of the successor
auditor for information, but the response ca of the successor auditor for information, but
the response can be limited to stating that no information will be provided when
a. predecessor auditor has poor relations with successor auditor.
b. client is dissatisfied with predecessor’s work.
c. there are legal problems between client and predecessor.
d. predecessor believes that client lacks integrity.

102. The systems approach to an audit is least likely to be appropriate for

a. clients with weak internal control.
b. clients that are large in size.
c. clients in specialized industries.
d. clients that publicly held.

103. Which of the following is an aspect of scheduling and controlling the audit
engagement?
a. Include in the audit program a column for estimated and actual time.
b. Perform audit work only after the client’s books of accounts have been closed for
the period under examination.
c. Write a conclusion in individual working papers indicating how the results of the
audit will affect the auditor’s report.
d. Include in the engagement letter in estimated of the minimum audit fee.

104. An audit program provides proof that

a. Sufficient competent evidential matter was obtained.
b. The work was adequately planned.
c. There was compliance with generally accepted standards of reporting.
d. There was a proper study and evaluation of internal control.

105. Audit programs are modified to suit the circumstances on particular engagements.
A complete audit program for an engagement generally should should be developed
a. Prior to beginning the actual audit work.
b. After the auditor has completed an evaluation of the existing internal accounting
control.
c. After reviewing the client’s accounting records and procedures.
d. When the audit engagement letter is prepared.

106. Client acceptance and retention policies and procedures do not include
a. Evaluating firm’s independent with potential client.
b. Obtaining and reviewing information about company.
c. Permission of the predecessor auditor.
 d. Considering whether engagement required special skills

107. The probability that an auditor will give an inappropriate opinion on financial
statements is
a. Audit risk.
b. Inherent risk.
c. Control risk.
d. Detection risk.

108. Auditors work appear not to exhibit due audit care if there was a
a. High audit risk.
b. Low detection risk.
c. High inherent risk.
d. Low control risk.

109. An auditor who believes that a material irregularity may exist should initially
a. Withdraw from the engagement
b. Discuss the matter with those higher level of management
c. Discuss the matter with those believed to be involved in the perpetration of the
material irregularity
d. Consult legal counsel.

110. If the independent auditor decide that the work performed y the internal auditor
may have a bearing on their own procedures, they should consider the internal auditor’s
a. Training and supervisory skills.
b. Efficiency and experience.
c. Competence and objectivity.
d. Independence and review skills.
111. The auditors are planning an auditor engagement for new client in a business that
is unfamiliar to the auditors. Which of the following would be the most useful source of
information for the audits during the preliminary planning stage when they are trying to
obtain a general understanding of audit problems that might be encountered?
a. Client manuals of accounts and charts of accounts.
b. PICPA Industry Audit Guides.
c. Prior-year working papers of the predecessor auditors.
d. Latest annual and interim financial statements issued by the client.

112. Which of the following situations would most likely require special audit
planning by the auditor?
a. Some items of factory and office equipment d not bear identification numbers.
 b. Depreciation methods used not the client’s tax return differed from those used o
the boos.
c. Assets costing less than P200 are expensed even though expected life exceeds one
year.
d. Inventory is comprised of precious stones

113. The element of the auditor planning process most likely to be agreed upon with
the client before implementation of the audit strategy is the determination of the
a. Timing of inventory observation procedures to be performed.
b. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
c. Procedures to be undertaken to discover litigation, claims, and assessments.
d. Pending legal matters to be included in the inquiry of the client’s attorney.

114. investigation of new clients and reevaluation of existing ones is an essential part
of deciding
a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.

115. An extensive understanding of the client’s business and industry and knowledge
about the company’s operations are essential for doing an adequate audit. For a new
client most of this information is obtained
a. From the predecessor auditor.
b. From the Securities and Exchange Commission.
c. From the permanent file.
d. At the client’s premises.

116. Research has indicated several factors which affect business risk and therefore
acceptable risk. Which of the following does not affect business risk?
a. The degree to which external users rely on the statements.
b. The likelihood that client will have financial difficulties after the audit report is
issued.
c. The integrity of management.
d. Weaknesses in client’s internal control structure.

117. The audit risk against which the auditor requires reasonable protection is a
combination of two separate risks. The first of these is that material errors will occur in
the accounting process by which the financial statements are developed, and the second is
that
a. A company’s system of internal control is not adequate to detect errors and
irregularities.
b. Those errors that occur will not be detected in the auditor’s examination.
c. Management may possess an attitude that lacks integrity.
d. Evidential matter is not an opinion based on reasonable assurance.

END