Principles of Auditing and Assurance Services

Statements Answe Justification

r
1. Statement I. To be competent, audit evidence should be either persuasive or relevant, C The more difficult it is to obtain accounting
but need not both evidence, the more reliable the accounting
Statement II. The difficulty and expense of obtaining audit evidence concerning an data is.
account balance is a valid basis for omitting the test.
Statement III. The client’s accounting data can be sufficient audit evidence to support
the financial statements.

a. First and second statements are not correct; the third statement is correct.
b. All above statements are not correct.
c. First and third statements are not correct; the second statement is correct.
d. First statement is correct; the second and third statements are not correct.

2. Statement I. An auditor would most likely be concerned with internal control policies D In the audit of financial statements, the
and procedures that provide reasonable assurance about the entity’s auditor is only concerned with those
ability to process and summarize financial data. policies and procedures within the
Statement II. An auditor would most likely be concerned with internal control accounting and internal control systems
policies and procedures that provide reasonable assurance about that are relevant to the financial
the efficiency of management’s decision-making process. statements.
a. Both statements are correct.
b. The first statement is not correct; the second statement is correct.
c. Both statements are not correct.
d. The first statement is correct; the second statement is not correct.

3. Select the correct statement: D This is because comparison of actual

a. An auditor’s analytical procedures most likely would be facilitated if the entity corrects budget will already have been performed.
material weaknesses in internal control before the beginning of the audit.
b. An auditor’s analytical procedures most likely would be facilitated if the entity develops its
data from sources solely within the entity.
c. An auditor’s analytical procedures most likely would be facilitated if the entity segregates
obsolete inventory before physical inventory count.
d. An auditor’s analytical procedures most likely would be facilitated if the entity uses a
standard cost system that produces variance reports.

4. Statement I. An auditor assesses control risk because it indicates where inherent D An auditor assesses control risk because it
Page 1 of 25
 affects the level of detection risk that the
risk may be the greatest. auditor may accept. The auditor uses the
Statement II. An auditor assesses control risk because it determines whether assessed level of control risk, together with
sampling risk is sufficiently low. assessed level of inherent risk, to
Statement III. An auditor assesses control risk because it includes the aspects of non- determine the assessed risk of material
sampling risk that are controllable misstatement, which in turn affects the
level of detection risk for financial
a. All above statements are correct.
b. First statement is correct; the second and third statements are not correct. statement assertions.
c. The second statement is correct; the first and third statements are not correct.
d. All statements above are not correct.

5. Statement I. The objective of a review of interim financial information is to provide B It is the objective of the review of interim
the accountant with a basis for reporting whether material modification financial information as defined by AS
should be made to conform with generally accepted accounting principles. 4105: Reviews of Interim Financial
Statement II. The objective of a review of interim financial information is to provide the Reporting.
accountant with a basis for reporting whether the financial statements
are presented fairly in accordance with generally accepted accounting
principles.
Statement III. The objective of a review of interim financial information is to provide the
accountant with a basis for reporting whether the financial statements
are presented fairly in accordance with standards of interim reporting.

a. All above statements are correct.

b. First statement is correct; the second and third statements are not correct.
c. The second statement is correct; the first and third statements are not correct.
d. All above statements are not correct.

6. Statement I. The objective of tolerable rate in sampling for the tests of controls of an D The objective is to estimate the range of
internal control is to determine the probability of the auditor’s conclusion procedural deviations in the population.
based upon reliance factors.
Statement II. The objective of tolerable rate in sampling for the tests of controls of an
internal control is to determine that financial statements taken as a
whole are not materially in error.
Statement III. The objective of tolerable rate in sampling for the tests of controls of an
internal control is to estimate the reliability of substantive tests.

a. First statement is correct; the second and third statements are not correct.
b. First and second statements are not correct; third statement is correct.
c. First and third statements are not correct; second statement is correct.
d. All above statements are not correct.

Page 2 of 25
7. Statement I. A written engagement letter formalizing the level of service to be rendered B I. While auditor is required to have written
is a required documentation in an audit in accordance with generally understanding with the client, it does not
accepted auditing standards. have to be signed.
Statement II.A flowchart depicting the segregation of duties and authorization of
transactions is a required documentation in an audit in accordance with II. There are various other methods of
generally accepted auditing standards. documentation which are applicable for
the segregation of duties and authorization
of transactions in addition to flowcharts.
a. True; False
b. Both statements are false.
c. False; True
d. Both statements are true.

8. Statement I. In the context of an audit of financial statements, substantive tests are C I. Substantive tests obtain audit evidence
audit procedures that are designed to discover significant subsequent to detect MATERIAL MISSTATEMENT in
events. the financial statements.
Statement II. In the context of an audit of financial statements, substantive tests are
procedures that will increase proportionately with the auditor’s reliance II. The relationship of substantive tests to
on internal control. its chosen samples are inverse.
a. First statement is not correct; the second statement is correct.
b. Both statements are correct.
c. Both statements are not correct.
d. First statement is correct; the second statement is not correct.

9. Statement I. The various evidences obtained directly by the auditor through observation E I. It is RELIABLE if the “QUESTION”
such as test counts of inventory and those obtained directly from should have been about reliability.
independent.
Statement II. Evidence secured from within the entity like pre-numbered purchase II. Audit evidence obtained from external
order forms is considered as least persuasive type of audit evidence sources are more reliable that those
compared to externally created documents such as bank statements generated within the entity.
received from the client.
a. First statement is not correct; the second statement is correct.
b. Both statements are not correct.
c. First statement is correct; the second statement is not correct
d. Both statements are correct.

10. Statement I. Analytical procedures used in planning an audit should focus on B It should focus on:
identifying possible scope limitations and gathering evidence in a. Enhancing the auditor’s understanding
assessing control risk environmental factors. of the client’s business in the transactions
Statement II. Analytical procedures used in planning an audit should focus on and events that have occurred since the
last audit date; and
Page 3 of 25
 aggregating data at a low level and substantiating management’s assertions b. Identifying areas that may represent
that are embodied in the financial statements. specific risks relevant to the audit.
Statement III. Analytical procedures used in planning an audit should focus on
discovering material weaknesses in the internal control structure and
reporting them to the entity’s management for corrective action.
a. First and second statements are not correct; third statement is correct.
b. All above statements are not correct.
c. First statement is correct; the second and third statements are not correct.
d. First and third statements are not correct; second statement is correct.

11. In designing the audit program which of the following objectives should be given more weight: C Establishment of overall audit strategy for
the engagement and developing an audit
a. The auditor can make constructive suggestions to management. plan in order to reduce risk at an
b. That the audit evidence gathered supports the auditor’s conclusions. acceptably low level is the definition of
c. That inherent risk is assessed at a sufficiently low level. audit plan.
d. That most of the required procedures can be performed as interim work.

12. Statement I. Non-sampling risk includes only those aspects of audit risks that are not D I. Aspects which are not due to sampling
due to sampling. risks are effects of human errors rather
Statement II. Inherent risk is the susceptibility of an assertion to a material than from samples.
misstatement, assuming that there are no related internal control
structure, policies and procedures. II. Inherent risk is the susceptibility of an
Statement III. Sampling risk arises from the possibility that, when a test of controls account balance or class of transactions to
or a substantive test is restricted to a sample, the auditor’s conclusion a material misstatement assuming that
may be different from the conclusions he would reach if the test were there was no internal control.
applied in the same way to all items in the account balance or class of
transactions.
III. It is the definition of sampling risk.
a. First and second statements are not correct; third statement is correct.
b. All above statements are not correct.
c. First statement is correct; the second and third statements are not correct.
d. All above statements are correct.

13. Identify the correct combination of procedures which an auditor would most likely perform to D Inspecting includes examining of
obtain evidence about fixed asset additions documents, which is for reliability of audit
a. Recomputing calculations and obtaining written management representations. evidence and physical examination of
b. Observing operating activities and comparing balances to prior period balances. assets, which is for confirmation of
c. Confirming ownership and corroborating transactions through inquiries of client existence.
personnel.
d. Inspecting documents and physically examining assets.

Page 4 of 25
14. Statement I. When evaluating entity’s accounting estimates, one of the auditor’s B It should be based on the reasonableness
objective is to determine whether the estimates are not subject to bias. of the circumstance. Estimates are
Statement II. When evaluating entity’s accounting estimates, one of the auditor’s potentially biased and based on subjective
objective is to determine whether the estimates are consistent with and objective assumptions. Industry
industry guidelines. guidelines may provide assistance in the
Statement III. When evaluating entity’s accounting estimates, one of the auditor’s calculation of the estimates.
objectives is to determine whether the estimates are based on objective
assumptions.

a. First statement is correct; the second and third statements are not correct.
b. All above statements are not correct.
c. All above statements are correct.
d. Third statement is correct; first and second statements are not correct.

15. In statistical sampling methods used in substantive testing, when would an auditor most A Sampling of population that is highly
likely stratify a population into meaningful groups? variable requires a very large sample size.
a. If the population has highly variable recorded amounts. Therefore, to reduce it, it is better to divide
b. If probability proportional size sampling is used. the population.
c. If the auditor’s estimated tolerable misstatement is extremely small.
d. If the standard deviation of recorded amounts is relatively small.

16. Statement I. An auditor should design the written audit program so that all material
transactions will be selected for substantive testing.
Statement II. An auditor should design the written audit program so that substantive
test prior to the balance sheet date will be minimized.
Statement III. An auditor should design the written audit program so that each account
balance will be tested under either test of controls or tests of
transactions.
B An auditor should prepare s written audit
plan because the overall goal of the audit
is to gather sufficient appropriate evidence
to reduce the risk of material misstatement
to an acceptably low level.

a. First statement is correct; the second and third statements are not correct.
b. All above statements are not correct.
c. All above statements are correct.
d. Third statement is correct; first and second statements are not correct.

17. Choose the elements of the audit planning process most likely to be agreed upon with the B The auditor will ordinarily observe the
client before implementation of the audit strategy. counting of inventory and this will require
a degree of coordination between the
Page 5 of 25
 performance audit procedures and client
a. The determination of the evidence to be gathered to provide a sufficient basis for auditor’s count procedure.
opinion.
b. The determination of the timing of inventory observation procedures to be performed.
c. The determination of the pending legal matters to be included in the inquiry of the client’s
attorney.
d. The determination of the procedures to be undertaken to discover litigation, claims and
assessments.

18. Statement I. The working papers serve to satisfy the auditor’s responsibilities concerning C Working papers serve mainly to provide
the code of professional ethics. principal support for the auditor’s report.
Statement II. The working papers serve to monitor the effectiveness of the CPA firm’s
quality control procedures.
Statement III. The working papers serve to document the level of independence
Maintained by the auditor.

a. First and third statements are not correct; second statement is correct.
b. Second and third statements are not correct; first statement is correct.
c. All above statements are not correct.
d. First and second statements are not correct; third statement is correct.

19. Identify the reason why employers bond employees who handle cash receipts: C Companies will prosecute those accused of
a. Because fidelity bonds reduce the possibility of employing dishonest individuals and force dishonest acts and may deter employee’s
employees in position of trust to take periodic vacations and rotate their assigned duties. dishonest acts.
b. Because fidelity bonds reduce the possibility of employing dishonest individuals and
facilitate an independent monitoring of the receiving and depositing of cash receipts.
c. Because fidelity bonds reduce the possibility of employing dishonest individuals and deter
dishonesty by making employee aware that insurance companies may investigate and
prosecute dishonest acts.
d. Because fidelity bonds reduce the possibility of employing dishonest individuals and
protect employees who make unintentional errors from possible monetary damages
resulting from their errors.

20. What should be the direction of the audit testing when determining the completeness of the A If there is a source document, then the
recording of transactions? transaction happened.
a. From original source documents
b. From general journal entries
c. From the general ledger balances

Page 6 of 25
 d. From the adjusted trial balances

21. Identify the correct statement: D Operating effectiveness is evaluated late

a. As part of understanding the internal control structure, an auditor is not required to and only for those controls on which the
consider factors that affect the risk of material misstatement. auditor plans to rely on.
b. As part of understanding the internal control structure an auditor is not required to
ascertain whether internal control structure policies and procedures have been placed in
operation.
c. As part of understanding the internal control structure, an auditor is not required to
identify the types of potential misstatements that can occur.
d. As part of understanding the internal control structure, an auditor is not required to
obtain knowledge about the operating effectiveness of the internal control structure.

22. Choose the correct statement. A Corroborating information is sometimes

a. An auditor’s best source of corroborative information of a client’s plans to discontinue a limited. Obtaining a letter from
line of business is a written client representation letter. management will help confirm the intent.
b. An auditor’s best source of corroborative information of a client’s plans to terminate an
employee pension plan is a written client representation letter.
c. An auditor’s best source of corroborative information of a client’s plans to settle an
outstanding lawsuit for an amount less than the accrued loss contingency is a written
client representation letter.
d. An auditor’s best source of corroborative information of a client’s plans to make a public
offering of its common stock is a written client representation letter.

23. Statement I. In evaluating the reasonableness of an accounting estimate, an auditor A The auditor would normally concentrate on
most likely would concentrate on key factors and assumptions that are such, as well as those that are significant
consistent with prior periods. to accounting estimate, sensitive to
Statement II. In evaluating the reasonableness of an accounting estimate, an auditor variations, and subjective and susceptible
most likely would concentrate on key factors and assumptions that are to misstatement and bias.
objective and not susceptible to bias.
Statement III. In evaluating the reasonableness of an accounting estimate, an auditor
most likely would concentrate on key factors and assumptions that are
deviations from historical patterns.

a. Third statement is correct; first and second statements are not correct.
b. All above statements are correct.
c. First statement is correct; second and third statements are not correct.
d. Second statement is correct; first and third statements are not correct.

Page 7 of 25
24. Identify the required documentation in an audit in accordance with generally accepted A The procedure in auditing is one of the
auditing standards. requirements in making an audit plan.
a. A written audit program describing the necessary procedures to be performed.
b. A written engagement letter formalizing the level of service to be rendered.
c. A memorandum setting forth the scope of the audit.
d. A flowchart depicting the segregation of duties and authorization of transactions.

25. Which of the following statements is correct regarding the auditor’s primary objective in C The primary objective is to provide
performing procedures to obtain an understanding of the internal control structure? knowledge necessary to determine the
a. The primary objective is to provide the auditor with evidential matter to use in assessing nature, timing, and extent for further audit
inherent risk. procedures.
b. The primary objective is to provide the auditor with a basis for modifying tests of controls.
c. The primary objective is to provide the auditor with knowledge necessary for audit
planning.
d. The primary objective is to provide the auditor with an evaluation of the consistency of
application of management’s policies.

26. Select the correct statement about the reliability of evidential matter. D If internal control is strong, reliability for
a. To be reliable, evidential matter should be convincing rather that persuasive. the information from internal sources are
b. Reliability of evidential matter refers to the amount of corroborative evidence obtained. high
c. Information obtained indirectly from outside sources is the most reliable evidential matter.
d. An effective internal control structure provides more assurance about reliability of
evidential matter.

27. Which of the following is considered the principal advantage of statistical methods of B Population based upon sample items is the
attribute sampling over non-statistical methods? source of statistical sampling.
a. The statistical methods of attribute sampling provide a scientific basis for planning the
tolerable rate.
b. The statistical methods of attribute sampling provide a scientific basis for planning a
sample size.
c. The statistical methods of attribute sampling provide a scientific basis for planning the
risk of assessing control risk too low.
d. The statistical methods of attribute sampling provide a scientific basis for planning the
expected population deviation rate.

28. Statement I. Performing tests of transactions to corroborate management’s financial
statement assertions is included when analytical procedures are used in
the overall review stage of an audit.
Statement II. Restating control procedures that appeared to be ineffective during the
assessment of control risk is included when analytical procedures are
used in the overall review stage of an audit.
Statement III. Considering unusual or unexpected account balances that were not
D The objective of analytical procedure used
in the overall review stage of the audit is to
assist the auditor in assessing conclusions
reached and in the evaluation of the
overall financial statement presentation.

Page 8 of 25
 previously identified is included when analytical procedures are used in
the overall review stage of the audit.

a. All statements above are correct.

b. Second statement is correct; first and third statements are not correct.
c. First statement is correct; second and third statements are not correct.
d. Third statement is correct; first and second statements are not correct.

29. Choose the statement which reflects an auditor’s responsibility for detecting errors and D Detection of fraud and error primarily rests
irregularities: with those charged with governance of the
a. An auditor is responsible for detecting employee errors and simple fraud, but not to entity and management.
discovering irregularities involving employee collusion or management override.
b. An auditor should plan the audit to detect errors and irregularities that are caused by
departures from generally accepted accounting procedures.
c. An auditor should design the audit to provide reasonable assurance of detecting errors
and irregularities that are material to the financial statements.
d. An auditor is not responsible for detecting errors and irregularities unless the application
of generally accepted auditing standards would result in such detection.

30. Statement I. An auditor assesses control risk because it affects the level of detection A The auditor uses the assessed level of
risk the auditor may accept. control risk (together with the assessed
Statement II. An auditor assesses control risk because it indicates where inherent risk level of inherent risk) to determine the
may be the greatest. assessed risk of material misstatement,
Statement III. An auditor assesses control risk because it determines whether sampling which in turn affects the acceptable level
risk is sufficiently low. of detection risk for financial statement
assertions.
a. First statement is correct; the second and third statements are not correct.
b. The second statement is correct; the first and third statements are not correct.
c. All above statements are correct.
d. The third statement is correct; the first and second statements are not correct.

31. What would be the most likely use of analytical procedures when testing long-term C The auditor uses analytical procedures to
investments? develop an expectation of investment
a. To ascertain the reasonableness of the valuation of marketable equity securities. income. This figure is then compared to
b. To ascertain the reasonableness of the existence of unrealized gains or losses in the recorded investment income and
investment portfolio. significant differences are investigated
c. To ascertain the reasonableness of the completeness of recorded investment income. further.
d. To ascertain the reasonableness of the classification between current and long-term
investments.

32. Statement I The procedure you would most likely perform in auditing the statement of cash A The procedure most likely to be performed
flows is to compare the amounts included in the statements of cash flows to similar amounts in auditing statement of cash flows is to
Page 9 of 25
 in the prior year’s statements of cash flows. reconcile the amounts included in the
statement of cash flows to the other
Statement II The procedure you would most likely perform in auditing the statement of cash financial statement balances and amounts.
flows is to reconcile the cut-off bank statements to verify the accuracy of the year-end bank
balances.

Statement III The procedure you would most likely perform in auditing the statement of
cash flows is to vouch all bank transfer for the last week of the year and the first week of the
subsequent year.

a. All above statements are not correct.

b. First statement is correct; the second and third statements are not correct.
c. First statement is not correct; the second and third statements are correct.
d. All above statements are correct.

33. Statement I Analyses of capital stock and other owners’ equity accounts are working papers D Permanent files include information
that would most likely be included in an auditor’s permanent file. affecting more than one year, i.e. equity
accounts. Most documentation will be
Statement II Documentation indicating that the audit work was adequately planned and retained in the current file.
supervised are working papers that would most likely be included in an auditor’s permanent
file.

a. True; True
b. False; False
c. False; True
d. True; False

34. Statement I An auditor would most likely have substantial doubt about an entity’s ability to A I. While postponement of research and
continue as a going concern if research and development projects are postponed. development projects may sometimes be
due to extreme financial difficulty, often it
Statement II An auditor would most likely have substantial doubt about an entity’s ability is not.
to continue as a going concern if significant related party transactions are pervasive.
II and III. They do not indicate substantial
Statement III An auditor would most likely have substantial doubt about an entity’s ability doubt about an entity’s ability to continue
to continue as a going concern if stock dividends replace annual cash dividends. as a going concern.
a. All above statements are not correct.
b. First statement is correct; the second and third statements are not correct.
c. Second statement is correct; the first and third statements are not correct.
d. Third statement is correct; the first and third statements are not correct.

35. Statement I Inherent risk is the risk that the auditor will not detect a material misstatement A I. It is a detection risk.
that exists in an assertion.
Page 10 of 25
 Statement II Non-sampling risk includes only those aspects of audit risks that are not due
to sampling.

Statement III Inherent risk is the susceptibility of an assertion to a material misstatement,

assuming that there are no related internal control structure, policies or procedures.

a. First statement is not correct; second and third statements are correct.
b. All above statements are not correct.
c. All above statements are correct.
d. First statement is correct; second and third statements are not correct.

36. If the financial statements taken as a whole are not resented fairly in accordance with D An adverse opinion states that the
Philippine Financial Reporting Standards, the auditor must express a (an) financial statements do not present fairly
a. Unmodified opinion in accordance with generally accepted
b. Qualified opinion accounting principles.
c. Except for opinion
d. Adverse opinion

37. An auditor reconciles the total of the accounts receivable subsidiary ledger to the general C By reconciling the accounts receivable
ledger control account as of October 31, 20X1. By this procedure the auditor would be most ledger to the general ledger control
likely to learn which of the following account, transfer errors will be identified.
a. An October invoice was improperly computed.
b. An October check from a customer was posted in error to the account of another
customer.
c. An opening balance in a subsidiary ledger account was improperly carried forward from
the previous accounting period.
d. An account balance is past due and should be written off.

38. Negative confirmation of accounts receivable is less effective than positive confirmation of C A non-response is not a confirmation.
accounts receivable because
a. A majority of recipients are usually unwilling to respond objectively.
b. Some recipients may report incorrect balances that require extensive follow-up.
c. The auditor cannot infer that all nonrespondents have verified the account information.
d. Negative confirmations do not produce evidence that is statistically quantifiable.

39. The accounts payable department receives a purchase order form to accomplish all of the C It is the responsibility of the receiving
following, except department.
a. Comparing invoice price to purchase order price.
b. Ensuring that the purchase had been properly authorized.
c. Ensuring that the goods had been received by the party requesting the goods.
d. Comparing quantity ordered to quantity purchased

Page 11 of 25
40. Which of the following is not an appropriate activity for the treasurer’s department? D Separation of duties: The accounts payable
a. Prepare checks. department will prepare vouchers after
b. Forward checks to vendors. receiving the supplier’s invoice.
c. Cancel vouchers.
d. Prepare vouchers.

41. In a computerized payroll system environment, an auditor would least likely to use test data B Approval of overtime by supervisors most
to test controls related to likely entails initialing of time cards.
a. Missing employee numbers. Inspection by the auditor is the
b. Proper approval of overtime by supervisors. appropriate test of control.
c. Time tickets with invalid job numbers.
d. Agreement of hours per clock cards with hours on time tickets.

42. Comfort letters are ordinarily signed by the A A common condition of an underwriting
a. Independent auditor. agreement in connection with the offering
b. Client. for sale of securities registered with SEC
c. Client’s lawyer under Securities Act of 1933 is that the
d. Internal auditor. auditors will furnish a comfort letter to
underwriters.
43. The following are common activities of the expenditure/disbursement cycle, except B PPE acquisitions belong to the investing
a. Purchasing. part.
b. PPE acquisitions.
c. Receiving.
d. Recording.

44. Which of the following statements accurately describes the impact that automation has on C Computer-based systems usually have fail
the controls normally present in a manual system? safe concepts wherein computer control
a. Transaction trails are more extensive in a computer based system than in a manual systems are installed in the coding
system because there is always a one-for-one correspondence between data entry and structure of the system thus making
output. processes in a computer-based
b. Responsibility for custody of information assets is more concentrated in user departments environment more efficient and with less
in a computer-based-system than it is in a manual system. error.
c. Controls must be more explicit in a computer-based system because many processing
points that present opportunities for human judgment in a manual system are eliminated.
d. The quality of documentation becomes less critical in computer-based system than it is in
a manual system because data records are stored in machine-readable files.

45. Which of the following statements is generally correct about the appropriateness of evidential A Effective internal control can serve as an
matter? assurance about the reliability of an
a. The more effective the internal control system, the more assurance it provides about the accounting data and financial statements.
reliability of the accounting data and financial statements.

Page 12 of 25
 b. Appropriateness of evidential matter refers to the amount of corroborative evidence
obtained
c. Information obtained indirectly from independent outside sources is more persuasive than
the auditor’s direct personal knowledge obtained through observation and inspection
d. Appropriateness of evidential matter refers to the audit evidence obtained from outside the
entity.

46. Image processing can be used to convert paper documents into electronic images. Which of A Electronic images stored in electronic are
the following concepts distinguishes the retention of computerized audit documents from the more safe would be subject to the
traditional hard copy form? computer control system to check if it is
a. Analyses, conclusions, and recommendations are filed on electronic media and are relevant to the audit and while doing so, it
therefore subject to computer system controls and security procedures. can be locked with password with a
b. Evidential support for all findings is copied and provided to local management during the combination of letters, numbers, and
closing conference and to each person receiving the final report. symbols.
c. Computerized data files can be used in computer audit procedures
d. Audit programs can be standardized to eliminate the need for a preliminary survey at each
location

47. Which of the following statements about internal control system is correct? D A primary criterion of any system of
a. A properly maintained internal control system reasonably ensures that collusions among internal control is the cost-benefit
employees cannot occur. relationship. The cost of an entity's
b. The establishment and maintenance of the internal control system is an important internal control should not exceed the
responsibility of the internal auditor benefits to be derived.
c. An exceptionally strong internal control system is enough for the auditor to eliminate
substantive tests on a significant account balance.
d. The cost-benefit relationship is a primary criterion that should be considered in designing
an internal control system.

48. A client’s materials purchasing cycle begins with requisitions from user departments and A The auditor’s primary objective in
ends with the receipt of materials and the recognition of a liability. An auditor’s primary reviewing the material purchasing cycle is
objective in reviewing this cycle is to too evaluate the reliability of the
a. Evaluate the reliability of information generated as a result of the purchasing process. information gathered as a result of the
b. Investigate the physical handling and recording of unusual acquisitions of materials purchasing process.
c. Consider the need to be on hand for the annual physical count if this system is not
functioning effectively
d. Ascertain that materials said to be ordered, received, and paid for are on hand

49. Which of the following is not a step in an auditor’s decision to assess control risk at below C These are substantive procedures which
the maximum? would generally be performed after the
a. Evaluate the effectiveness of internal control with tests of controls assessment of control risk is made.
b. Obtain an understanding of the entity’s information system and control environment
c. Perform tests of details of transactions to detect material misstatements in the financial
statements
Page 13 of 25
 d. Consider whether controls can have a pervasive effect on financial statement assertions

50. Which of the following statements is correct concerning statistical sampling in tests of D There is an inverse relationship between
controls? the sample size and the tolerable rate.
a. The population size has little or no effect on determining sample size except for very small
populations
b. The expected population deviation rate has little or no effect on determining sample size
except for every small populations
c. As the population size doubles, the sample size also should double
d. For a given tolerable rate, a larger sample size should be selected as the expected
population deviation rate decreases

51. Which of the following is a substantive test than an auditor most likely would perform to C Vouching of various payable accounts to
verify the existence and valuation of recorded accounts payable? purchase orders and receiving reports will
a. Investigating the open purchase order file to ascertain that pre-numbered purchases order provide evidence that the debt was
file are used and accounted for incurred and the related goods received,
b. Receiving the client’s mail, unopened, for a reasonable period of time after the year-end to thereby providing evidence on the
search for unrecorded vendor’s invoices existence of the debt and its amount or
c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders valuation.
and receiving report
d. Confirming accounts payable balances with known suppliers who have zero balances

52. Before accepting an audit engagement, a successor auditor should make specific inquiries of B The successor should request information
the predecessor’s such as:
a. Opinion of any subsequent events occurring since the predecessor’s audit report was 1. Facts that might bear on the integrity of
issued management;
b. Understanding as to the reasons for the change of auditors 2. Disagreements with management as to
c. Awareness of the consistency in the application of PFRS between periods accounting principles, audit procedures, or
d. Evaluation of all matters of continuing accounting significance other significant matters; and
3. The predecessor’s understanding of the
reasons for the change of auditors.
53. Which of the following statements is true regarding analytical procedures in a review D Although analytical procedures used in
engagement? planning the audit often use only financial
a. Analytical procedures are not required to be used as a substantive test data, sometimes relevant nonfinancial
b. Analytical procedures do not involve comparisons of recorded amounts to expected information is considered as well. For
amounts example, number of employees, square
c. Analytical procedures are required to be used in the final review stage footage of selling space, volume of goods
d. Analytical procedures involve the use of both financial and nonfinancial data produced, and similar information may
contribute to accomplishing the purpose of
the procedures.
54. After issuing an auditor’s report, an auditor has no obligation to make continuing inquiries C After issuing his or her report, an auditor
concerning audited financial statements unless has no obligation to make continuing
Page 14 of 25
 a. Information about a material transaction that occurred just after the auditor’s report was inquiries concerning audited financial
issued is deemed to be reliable statements unless information that existed
b. A final resolution is made of a contingent liability that that had been disclosed in the at the report date and may affect the
financial statements report comes to the auditor's attention.
c. Information that existed at the report date and may affect the report comes to the
auditor’s attention
d. An event occurs just after the auditor’s report was issued that affects the entity’s ability to
continue as a going concern

55. Assuming the tolerable deviation rate is 5%, the expected population deviation rate is 3%, B 4/100= 4% + 2%= 6%
and the allowance for sampling risk is 2%. What should an auditor conclude if test of 100 When deviation rate plus allowance for
randomly chosen documents reveal 4 deviation? sampling risk exceeds the tolerable rate,
a. Accept the sample results as support for assessing control risk below the maximum level the assessed level of control risk may
because the tolerable deviation rate less the allowance for sampling risk equals the increase. As seen in the computation
expected population deviation rate above it exceeded the tolerable rate of 5%.
b. Assess control risk at the maximum level because the sample deviation rate plus the
allowance for sampling risk exceeds the tolerable deviation rate
c. Assess control risk at the maximum level because the tolerable deviation rate plus the
allowance for sampling risk exceeds the expected population deviation rate
d. Accept the sample result as support for assessing control risk below the maximum
because the sample deviation rate plus the allowance for sampling risks exceeds the
tolerable rate

56. Which of the following procedures is ordinarily performed by an accountant during an D A compilation requires the accountant to
engagement to compile the financial statements of an entity? read the financial statements and whether
a. Make inquiries of the employees and senior management regarding transactions with there are obvious mistakes in the
related parties application of accounting principle.
b. Determine whether there is substantial doubt about the entity’s ability to continue as a
going concern
c. Scan the entity’s records for the period just after the balance sheet date to identify
subsequent events requiring disclosure
d. Consider whether the financial statements are free from obvious materials mistakes in the
application of accounting principles

57. When an auditors test the internal controls of a computerized accounting system, which of D Comparison between the actual processing
the following is true of the test date approach? results and the predetermined results is
a. Test data are coded to a dummy subsidiary so they can be extracted from the system the final step in audit test data approach.
under actual operating conditions
b. Test data programs need not be tailor-made by the auditor for each client’s computer
applications
c. Test data programs usually consist of all possible valid and invalid conditions regarding
compliance with internal controls
d. Test data are processed with the client’s computer and the results are compared with the
Page 15 of 25
 auditor’s predetermined results

58. Which of the following matters is an auditor required to communicate to those charged with A The auditor should ensure that those
governance? charged with governance are informed
a. Adjustments that were suggested by the auditor and recorded by management that have a about the process used by the
significant effect on the entity’s financial reporting process management in formulating particularly
b. The auditor’s consideration of risk factors in assessing the risk material misstatement sensitive accounting estimates and about
arising from the misappropriation of assets the basis for the auditor’s conclusions
c. The results of the auditor’s analytical procedures performed in the review state of the regarding the reasonableness of the
engagement that indicate significant variances from expected amounts estimates.
d. Changes in the auditor’s preliminary judgment about materiality that were caused by
projecting the results of statistical sampling for tests of transactions

59. Which of the following procedures would a CPA most likely perform in the planning stage of a D The other choices refer to procedures that
financial statement audit? an accountant would most likely perform
a. Obtain representations from management regarding the availability of all financial records in the fieldwork phase of a financial
b. Communicate with those charged with governance concerning the prior year’s audit statement audit.
adjustment
c. Make inquiries of the client’s attorney regarding pending and threatened litigation and
assessments
d. Compare recorded financial information with anticipated results from budgets and
forecast

60. Which of the following questions would most likely be included in an internal control D Pre-numbering and accounting for
questionnaire concerning the completeness assertion for purchases? purchase orders, receiving reports, and
a. Is an authorized purchase order required before the receiving department can accept a vouchers will allow a company to
shipment of the vouchers payable department can record a voucher? determine that purchases are completely
b. Are purchase requisitions pre-numbered and independently matched with vendor invoice? recorded.
c. Is the unpaid voucher file periodically reconciled with inventory records by an employee
who does not have access o purchase requisitions
d. Are purchase orders, receiving reports, and vouchers pre-numbered and periodically
accounted for?

61. Internal control should provide reasonable (but not necessarily absolute) assurance that the A The responsibility of the auditor relating to
entity’s objectives concerning reliability of financial reporting, effectiveness and efficiency or internal control is to express an opinion on
operations, and compliance with laws and regulations will be achieved. This means that the effectiveness of the company's internal
a. Internal control is management’s not the auditor’s responsibility control over financial reporting. The
b. An assurance engagement about management’s internal control assertions may not management is responsible for the
necessarily detect all significant internal control deficiencies effectiveness of its internal control.
c. The cost of installing and implementing control activities should not exceed the benefits
d. There is always a risk that significant deficiencies in internal control may result in
material financial statement misstatements

Page 16 of 25
62. An auditor compares annual revenues and expenses with similar amounts from the prior B It should be included in Other
year and investigates all changes exceeding 10%. This procedure most likely could indicate Comprehensive Income and Income
that statement.
a. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until
early in the subsequent year
b. Unrealized gains from increases in the value of available-for-sale were recorded in the
income account for trading securities
c. The annual provision for uncollectible accounts expense was inadequate because or
worsening economic conditions
d. Notice of an increase in property tax rates was received by management, but was not
recorded until early in the subsequent year

63. Prior to commencing field work, an auditor usually discusses the general audit strategy with C The engagement letter should contain:
the client’s management. Which of the following details do management and the auditor (2)Responsibilities of auditors and
usually agree upon this time? management.
a. The specific matters to be included in the communication with the audit committee
b. The minimum amount of misstatements that may be considered to be reportable
conditions
c. The schedules and analyses that the client’s staff should prepare
d. The effects that inadequate controls may have over the safeguarding of assets

64. A retailing entity uses the internet to execute and record its purchase transactions. The C Performing tests throughout the year will
entity’s auditor recognizes that the documentation of details of transactions will be retained allow the auditor to examine transaction
for only a short period of time. To compensate for this limitation, the auditor most likely documentation before the transactions are
would: destroyed.
a. Compare a sample of paid vendor’s invoices to the receiving records at year-end
b. Plan for a large measure of tolerable misstatement in substantive tests
c. Perform tests several times during the year, rather than only at year-end
d. Increase the sample of transactions to be selected for cut-off tests

65. An auditor is considering whether the omission of a substantive procedure considered C When the auditor concludes that an
necessary at the time of an audit may impair the auditor’s present ability to support the auditing procedure considered necessary
previously expressed opinion. The auditor need not apply the omitted procedure if the at the time of the audit was omitted, the
a. Financial statements and auditor’s report were not distributed beyond management and auditor should assess the importance pf
the board of directors the procedure to the present ability to
b. Auditor’s previously expressed opinion was qualified because of material misstatement in support the previously issued opinion. The
the financial statements results of other procedures that were
c. Results of other procedures that were applied tend to compensate for the procedure applied may tend to compensate for the
omitted
one omitted or makes its omission less
d. Omission is due to unreasonable delays by client personnel in providing data on a timely
important.
basis

66. Which of the following is not a step in an auditor’s assessment of control risk? C Pertains more directly to detection risk
Page 17 of 25
 a. Evaluate the effectiveness of internal control with tests of controls rather than control risk.
b. Obtain an understanding of the entity’s information system and control environment
c. Perform tests of details of transactions to detect material misstatements in the financial
statements
d. Consider whether controls can have a pervasive effect on financial statements assertions

67. Which of the following statement is incorrect? D It is more important to accumulate

a. There are many ways an auditor can accumulate evidence to meet overall audit objectives sufficient appropriate evidence to meet the
b. Sufficient appropriate evidence must be accumulated to meet the auditor’s professional auditor’s professional responsibility rather
responsibility than minimizing the costs of accumulating
c. It is appropriate to minimize the cost of accumulating evidence evidence.
d. Gathering evidence and minimizing costs are equally important considerations that affect
the approach the auditor selects

68. Which of the following is an effective internal accounting control used to prove that D The total time recorded on the time cards
production department employees are properly validating payroll time cards at a time- should be reconciled to the total hours
recording station? worked by the employee and any
a. Internal auditors should make observations of distribution of paychecks on a surprise differences should be accounted for,
basis queried, and corrected by the supervisor.
b. Time cards should be carefully inspected by those persons who distribute pay envelopes to
the employees
c. One person should be responsible for maintaining records of employee time for which
salary payment is not to be made
d. Daily reports showing time charged to jobs should be approved by the supervisor and
compared to the total hours worked on the employee time cards

69. Place the following steps in their proper order: C These are the steps in planning the sample
1. Analyze exceptions for non-statistical sampling.
2. Select the sample
3. Define attributes and exception conditions
4. State the objectives of the audit test
5. Specify the tolerable exception rate
a. 1,3,2,4,5
b. 4,3,1,2,5
c. 4,3,5,2,1
d. 1,2,3,4,5

70. Two overriding considerations affect the many ways an auditor can accumulate evidence: A It is more important to accumulate
1. Sufficient appropriate evidence must be accumulated to meet the auditor’s sufficient appropriate evidence to meet the
professional responsibility auditor’s professional responsibility rather
2. Cost of accumulating evidence should be minimized than minimizing the costs of accumulating
In evaluating these considerations, evidence.
a. The first is more important than the second
Page 18 of 25
 b. The second is more important than the first
c. They are equally important
d. It is impossible to prioritize them

71. A proof of cash is not useful in discovering differences in the actual and reported cash C An audit procedure to test whether all
balances due to recorded cash receipts have been
a. Deposits in transit deposited in the bank account is by
b. Collections on the company’s behalf by the bank which are deposited directly to the reconciling the total cash receipts recorded
company’s account in the cash receipts journal for a given
c. Cash receipts that were not recorded in the relevant journals period with the actual deposits made to
d. Service charges the bank. If cash receipts were not
recorded in relevant ledgers then the audit
procedure would fail.
72. Which of the following statements is correct regarding internal control? B Many major financial reporting scandals
a. A well-designed internal control environment ensures the achievement of an entity’s are examples of management override, i.e.
control objectives Enron.
b. An inherent limitation to internal control is the fact that controls can be circumvented by
management override
c. A well-designed and operated internal control environment should detect collusion
perpetrated by two people
d. Internal control is necessary business function and should be designed and operated to
detect all errors and fraud

The following statements relate to the confirmation process when applied to accounts D 3. If positive requests are not received,
receivable. auditors should apply certain specific
1. The confirmation requests should be mailed to responsible by the auditor alternative procedures subject to
2. A combination of positive and negative request forms must be used if receivables are limitations.
significant
3. Second requests are ordinarily sent for positive form confirmation requests when the first 4. Confirmation will be able to provide if
request is not returned the transaction has actually occurred or
4. Confirmations address existence more than they address completeness not.
5. Auditors may ignore individually immaterial accounts when confirming accounts
receivable
5. If accounts receivable are immaterial to
6. The best way to evaluate the results of the confirmation process is to total the
misstatements identified and to compare that total to the account’s tolerable error
financial statements, the auditor may not
amounts need to request for its confirmation.

73. Which of the above statements are correct?

a. 1,3,4
b. 1,2,5
c. 2,3,6
d. 3,4,5

Page 19 of 25
74. Which of the above statements are incorrect? D 1. Mailed to RESPONDENTS
a. 3,4,6
b. 1,4,5 2. For most engagements, auditors must
c. 2,5,6 use positive, not negative, requests.
d. 1,2,6
6. The best way to evaluate the results is
to consider:
a. The reliability of the confirmations and
alternative procedures;
b. The nature of any exceptions, including
implications;
c. The audit evidence provided by other
procedures; and
d. Whether additional audit evidence is
needed.
75. Which of the following is not a step in an auditor’s decision to assess control risk at below C The other choices are steps in assessing
the maximum level? control risk at below maximum level.
a. Evaluate the effectiveness of the internal control procedures with tests of controls.
b. Obtain an understanding of the entity’s accounting system and control environment.
c. Perform tests of details of transactions to detect material misstatements in the financial
statements.
d. Consider whether control procedures can have a pervasive effect on financial statement
assertions.

76. Even though an organization is committed to using its mainframe for its manufacturing plant D Downsizing is often a result of poor
operations, it has been looking for ways to downsize other applications. The purpose of economic conditions that is why
downsizing is companies have to cut jobs in order to
a. Improve reliability. lower costs in order to increase profit and
b. Improve security. maintain efficiency.
c. Reduce complexity.
d. Decrease costs.

77. Which of the following should be emphasized before designing any system elements in a top- A Top-down approach emphasizes planning
down approach to new systems development? and a complete understanding of the
a. Types of processing systems being used by competitors. system. It is inherent that no coding can
b. Computer equipment to be used by the system. begin until a sufficient level of detail has
c. Information needs of managers for planning and control. been reached in the design of at least some
d. Controls in place over the current system. part of the system.

78. Responsibility for the control of end-user computing exists at the organizational, D End-user computing involves user-created
departmental, and individual user level. A direct responsibility of the individual users is or user-acquired systems that are
Page 20 of 25
 a. Acquisition of hardware and software. maintained and operated outside of
b. Taking equipment inventories. traditional information systems control. In
c. Strategic planning of end-user computing. this environment, an individual user is
d. Physical security computer hardware. ordinarily responsible for the physical
security of the equipment being used.
79. The possibility of erasing a large amount of information stored on magnetic tape most likely A It is a control that ensures that an
would be reduced by the use of operator does not erase important
a. File protection rings. information on a magnetic tape.
b. Self-checking digits.
c. Completeness tests.
d. Conversion verification.

80. Which of the following audit procedures is best for identifying unrecorded trade accounts A This is done in order to determine whether
payable? the related payables apply to the prior
a. Reviewing cash disbursements recorded subsequent to the balance sheet date to period.
determine whether the related payables apply to the prior period.
b. Investigating payables recorded just prior to and just subsequent to the balance sheet
date to determine whether they are supported by receiving reports.
c. Examining unusual relationships between monthly accounts payable balances and
recorded cash payments.
d. Reconciling vendors’ statements to the file of receiving reports to identify items received
just prior to the balance sheet date.

81. A representation letter issued by a client C Representation letters are necessary

a. Is essential for the preparation of an audit program. information that the auditor requires in
b. Is a substitute for the performance of audit procedures. connection with the audit of the entity’s
c. Does not reduce the auditor’s responsibility. financial statements.
d. Reduces the auditor’s responsibility only to the extent that it is relied on.

82. The letter of audit inquiry to the client’s legal counsel should be mailed only by the B Since the auditor will be the one to review
a. Client after the auditor has reviewed it for appropriate content. the financial statements, the auditor will
b. Auditor after preparation by the client and review by the auditor. be the one to send the letter of audit
c. Auditor’s attorney after preparation by the client and review by the auditor. inquiry in order ask if there are any events
d. Client after review by the auditor’s attorney. that may affect the client’s financial
status, including pending litigations.
83. When an auditor selects a sample of items from the vouchers payable register for the last C Some obligations that were recorded and/
month of the period under audit and traces them to underlying documents, the auditor is or paid may not be valid.
gathering evidence primarily to support the assertion that
a. Recorded obligations were paid.
b. Incurred obligations were recorded in the correct period.
c. Recorded obligations were valid.
d. Cash disbursements were recorded as incurred obligations.
Page 21 of 25
84. Which of the following would not be appropriate to a report on an engagement to apply B The auditor will not express an opinion or
agreed-upon procedures to specified financial statement elements? provide any assurance regarding the
a. Indicate the intended distribution of the report. specified element, account or item of a
b. Provide an opinion on the specified elements, accounts, or items. financial statement.
c. Enumerate the procedures performed.
d. State that the report relates only to the elements, accounts, or items specified.

85. Which of the following functions is not appropriate for the accounts payable department? C Purchase requisitions and purchase orders
a. Preparing purchase orders. are for the purchasing department.
b. Preparing vouchers and daily purchases summary. Receiving reports are prepared by the
c. Comparing purchase requisitions, purchase orders, receiving reports, and vendors’ receiving department.
invoices. Vendors’ invoices are for the accounting
d. Filing voucher package according to due date. department.

86. Which of the following procedures relating to tests of accounts payable could the auditor C It is a client’s accounting function used by
delegate entirely to the client’s employees? the auditor when corroborating accounts
a. Testing footings in the accounts payable ledger. payable control account.
b. Reconciling unpaid invoices to vendor’s statements.
c. Preparing a schedule of accounts payable.
d. Mailing confirmations for selected account balances.

87. Which of the following is not a subsequent events procedure? C It is the responsibility of the management
a. Reviewing available interim financial information. to inform the auditor of information that
b. Reading available minutes of meetings of shareholders and directors. affects the audit.
c. Making inquiries with respect to the financial statements covered by the auditor’s All other choices refer to the
previously issued report if new information has become available during the current audit responsibilities of the auditor.
that might affect that report.
d. Discussing with officers the current status of items in the financial statements that were
accounted for on the basis of tentative, preliminary, or inconclusive data.

88. A company holds bearer bonds as a short-term investment. Responsibility for custody of D The treasurer has custodial functional
these bonds and submission of coupons for period interest collections probably should be responsibility thus the responsibility for
delegated to the the custody of the bonds.
a. Controller.
b. Internal auditor.
c. Cashier.
d. Treasurer.

89. Which of the following components is appropriate in a practitioner’s report on the results of D Agreed-upon procedures report result in a
applying agreed-upon procedures? list of procedures performed and findings.
a. A statement that the report is unrestricted in its use.

Page 22 of 25
 b. A title that includes the phrase “independent audit.”
c. A statement that management is responsible for expressing an opinion.
d. A list of the procedures performed, as agreed to by the specified parties identified in the
report.

90. An auditor plans to examine a sample of 20 checks for countersignatures as prescribed by B If the auditor is unable to apply the
the entity’s internal control procedure. One of the checks in the sample cannot be found. The designed audit procedures, or suitable
auditor should alternative procedures, to a selected item,
a. Evaluate the results as if the sample size had been 19. the auditor should treat that item as a
b. Treat the missing check as a deviation from the prescribed control procedure. deviation from the prescribed control (in
c. Treat the missing check in the same manner as the majority of the other 19 checks, i.e. the case of tests of controls) or a
countersigned or not. misstatement (in the case of tests of
d. Choose another check to replace the missing check in the sample. details).
91. The proper use of prenumbered termination notice forms by the payroll department should D Payroll department must see to it that
provide assurance that all terminated employees do not continue to
a. Uncashed payroll checks were issued to employees who have not been terminated. receive payroll checks.
b. Personnel files are kept up to date.
c. Employees who have not been terminated receive their payroll checks.
d. Terminated employees are removed from the payroll.

92. Auditor confirmation of accounts payable balances at the end of the reporting period may be C There are better evidences like
unnecessary because examination of cash payments subsequent
a. There is a duplication of cutoff tests. to the balance sheet date.
b. Accounts payable balances at the end of the reporting period may not be paid before the
audit is completed.
c. There is likely to be other reliable external audit evidence available to support the
balances.
d. Correspondence with the client’s attorney will reveal all legal actions by vendors for
nonpayment.

93. Which of the following procedures would help an auditor test for overstatement of accounts A Reviewing cash disbursements after
payable at the end of the entity’s reporting period? balance sheet date is an effective
a. Trace entries in the cash disbursements records to items in the accounts payable trial procedure in detecting any misstatements
balance. in the accounts payable.
b. Agree items in the file of unmatched receiving reports to the accounts payable trial
balance.
c. Trace items in the accounts payable trial balance to documentation contained in cancelled
voucher packages.
d. Coordinate cutoff tests performed for receiving and for shipping.

94. An auditor has concluded that a client’s internal controls are well designed and functioning B Strong internal control and effective

Page 23 of 25
 as expected. Under these circumstances, the auditor would most likely application can serve as potential audit
a. Cease to perform further substantive test procedures. evidence.
b. Not increase the extent of planned substantive test procedures.
c. Increase the extent of planned substantive analytical procedures.
d. Increase the extent of planned substantive tests of details.

95. Which of the following is a necessary control procedure for cash disbursements? B Pre-numbering establishes an audit trail
a. Checks should be signed by the controller and at least one other employee of the over check disbursements.
company.
b. Checks should be sequentially numbered, and the numerical sequence should be
accounted for by the person preparing the bank reconciliation.
c. Checks and supporting documents should be marked “paid” immediately after the check
is returned with the bank statement.
d. Checks should be sent directly to the payee by the employee who prepares documents that
authorize check preparation.

96. Which of the following is not an internal control weakness related to factory equipment? A,C,E The department which will inspect the
a. Checks issued in payment of acquisitions of equipment are not signed by the controller. needs of the entity and the department
b. All acquisitions of factory equipment are required to be made by the department in need of which purchases those needs are two
the equipment. separate functions. If it will be made the
c. Factory equipment replacements are generally made when estimated useful lives, as department in need, then internal control
indicated in depreciation schedules, have expired. might be weak.
d. Proceeds from sales of fully depreciated equipment are credited to other income.

97. When assessing an internal auditor’s objectivity, an independent auditor should C Objectivity is reflected by the
a. Evaluate the adequacy of the internal auditor’s audit programs. organizational level to which the internal
b. Inquire about the internal auditor’s educational background and professional certification. auditor reports as well as by policies
c. Consider the organizational level to which the internal auditor reports. prohibiting audits of areas where the
d. Review the internal auditor’s audit documentation. internal auditor lacks independence. In
assessing the objectivity of internal
auditors, the independent CPA who is
auditing the entity's financial statements
considers information obtained from
previous experience, from discussions with
management, from external quality reviews
(if performed), and from professional
internal auditing standards (such as those
developed by The Institute of Internal
Auditors).
98. Assessing control risk too low relates to A The risk of assessing control risk too low is
a. The effectiveness of the audit. the risk that the assessed level of control
b. The efficiency of the audit. risk based on sample is less than the true
Page 24 of 25
 c. The effectiveness and efficiency of the audit. operating EFFECTIVESNESS of the
d. The preliminary estimate of materiality. control.

99. Which of the following comparisons would be most useful to an auditor in evaluating the C When performing analytical procedure to
results of an entity’s operations? test revenue, the auditor develops certain
a. Prior year accounts payable to current year accounts payable. expectations based on the issuer’s budget.
b. Prior year payroll expense to budgeted current year payroll expense.
c. Current year revenue to budgeted current year revenue.
d. Current year warranty expense to current year contingent liabilities.

100. A financial statement audit can best be described as a B Financial statement audit is a form of
a. Subset of accounting. attest service. The result of this is a report
b. Professional activity that attests to the fair presentation of financial statements. by the auditor attesting to the fairness of
c. Professional activity that measures and communicates financial accounting data. presentation of the financial statements
d. Regulatory activity that prevents the issuance of improper financial information. and related disclosures.

Page 25 of 25