Item 1

 Holding other planning considerations equal, a decrease in the amount of misstatement

in a class of transactions that an auditor could tolerate most likely would cause the
auditor to
Response: Decrease the extent of auditing procedures to be applied to the class of
transactions.
Correct answer: Perform the planned auditing procedures closer to the balance sheet
date.
Score: 0 out of 1 No

Item 2
 Verifying the accuracy of the accounts receivable trial balance relates to the:
Response: Valuation or measurement assertion.
Correct answer: Valuation or measurement assertion.
Score: 1 out of 1 Yes

Item 3
 As the acceptable level of detection risk decreases, an auditor may
Response: Postpone the planned timing of substantive tests from interim dates to the
year-end.
Correct answer: Postpone the planned timing of substantive tests from interim dates to
the year-end.
Score: 1 out of 1 Yes

Item 4
 Which of the following statements reflects an auditor’s responsibility for detecting
misstatements due to errors and fraud?
Response: An auditor should design the audit to provide reasonable assurance of
detecting misstatements due to errors and fraud that are material to the financial
statements
Correct answer: An auditor should design the audit to provide reasonable assurance of
detecting misstatements due to errors and fraud that are material to the financial
statements
Score: 1 out of 1 Yes

Item 5
 An auditor tests an entity’s policy of obtaining credit approval before shipping goods to
customers in support of management’s financial statement assertion of
Response: Valuation or allocation.
Correct answer: Valuation or allocation.
Score: 1 out of 1 Yes

Item 6
 Which of the following statements is correct concerning the use of negative
confirmation requests?
Response: Negative confirmation requests are effective when detection risk is low.
Correct answer: Unreturned negative confirmation requests rarely provide significant
explicit evidence.
Score: 0 out of 1 No

Item 7
 When a customer fails to include a remittance advice with a payment, it is common
practice for the person opening the mail to prepare one. Consequently, mail should be
opened by which of the following four company employees?
Response: Receptionist.
Correct answer: Receptionist.
Score: 1 out of 1 Yes

Item 8
 In the processing of accounts receivable confirmations the auditor would not normally
be expected to:
Response: Personally post the requests.
Correct answer: Personally prepare the confirmations.
Score: 0 out of 1 No

Item 9
 Which of the following is most likely to be unique to the audit work of CPAs as
compared to work performed by practitioners of other professions?
Response: Independence.
Correct answer: Independence.
Score: 1 out of 1 Yes

Item 10
Which of the following are considered further audit procedures that may be designed
after assessing the risks of material misstatement?
       Substantive tests of details      Risk assessment procedures
              
       
                
       
Response: Yes                                                Yes
Correct answer: Yes                                                Yes
Score: 1 out of 1 Yes

Item 11
 Which of the following audit procedures would an auditor most likely perform to test
controls relating to management’s assertion concerning the completeness of sales
transactions?
Response: Inspect the entity’s reports of prenumbered shipping documents that have
not been recorded in the sales journal.
Correct answer: Inspect the entity’s reports of prenumbered shipping documents that
have not been recorded in the sales journal.
Score: 1 out of 1 Yes

Item 12
 Which of the following factors most likely would influence an auditor’s determination of
the auditability of an entity’s financial statements?
Response: The operating effectiveness of control procedures.
Correct answer: The adequacy of the accounting records.
Score: 0 out of 1 No

Item 13
 Proper authorization of writeoffs of uncollectible accounts should be approved in which
of the following departments?
Response: Treasurer.
Correct answer: Treasurer.
Score: 1 out of 1 Yes

Item 14
 Which of the following would an auditor most likely use in determining the auditor’s
preliminary judgment about materiality?
Response: The anticipated sample size of the planned substantive tests.
Correct answer: The entity’s annualized interim financial statements.
Score: 0 out of 1 No

Item 15
 During the initial planning phase of an audit, a CPA most likely would
Response: Discuss the timing of the audit procedures with the client’s management.
Correct answer: Discuss the timing of the audit procedures with the client’s
management.
Score: 1 out of 1 Yes

Item 16
 To enhance controls in the credit sales area, the warehouse should be instructed not to
release goods until:
Response: An approved sales order is received.
Correct answer: An approved sales order is received.
Score: 1 out of 1 Yes

Item 17
 Which of the following procedures would an auditor most likely perform for yearend
accounts receivable confirmations when the auditor did not receive replies to second
requests?
Response: Review the cash receipts journal for the month prior to the yearend.
Correct answer: Inspect the shipping records documenting the merchandise sold to the
debtors.
Score: 0 out of 1 No

Item 18
 In most credit sales audits, on what is the auditor's concern over sales adjustment
transactions based?
Response: The potential use of these transactions to conceal a theft of cash.
Correct answer: The potential use of these transactions to conceal a theft of cash.
Score: 1 out of 1 Yes

Item 19
 Which of the following pairs of accounts would an auditor most likely analyze on the
same working paper?
Response: Notes receivable and interest income.
Correct answer: Notes receivable and interest income.
Score: 1 out of 1 Yes

Item 20
 After obtaining an understanding of internal control and assessing the risk of material
misstatement, an auditor decided to perform tests of controls. The auditor most likely
decided that
Response: There were many internal control weaknesses that could allow
misstatements to enter the accounting system.
Correct answer: It would be efficient to perform tests of controls that would result in a
reduction in planned substantive tests.
Score: 0 out of 1 No

Item 21
 In relation to materiality, which of the following statements is most accurate?
Response: Cash balances at the end of a particular reporting period will always be
material.
Correct answer: Accounts receivable produced by credit sales transactions are material
to the balance sheet for all businesses except those with cash sales.
Score: 0 out of 1 No

Item 22
 Which of the following procedures concerning accounts receivable would an auditor
most likely perform to obtain evidence in support of an assessed level of control risk
below the maximum?
Response: Sending confirmation requests to an entity’s principal customers to verify the
existence of accounts receivable.
Correct answer: Observing an entity’s employee prepare the schedule of past due
accounts receivable.
Score: 0 out of 1 No

Item 23
 Which of the following procedures most likely would not be a control designed to
reduce the risk of misstatements in the billing process?
Response: Reconciling the control totals for sales invoices with the accounts receivable
subsidiary ledger.
Correct answer: Reconciling the control totals for sales invoices with the accounts
receivable subsidiary ledger.
Score: 1 out of 1 Yes
Item 24
 In the context of an audit of financial statements, substantive tests are audit procedures
that
Response: May be either tests of transactions, direct tests of financial balances, or
analytical tests.
Correct answer: May be either tests of transactions, direct tests of financial balances, or
analytical tests.
Score: 1 out of 1 Yes

Item 25
 An auditor most likely would limit substantive audit tests of sales transactions when
control risk is assessed as low for the occurrence assertion concerning sales
transactions and the auditor has already gathered evidence supporting
Response: Cash receipts and accounts receivable.
Correct answer: Cash receipts and accounts receivable.
Score: 1 out of 1 Yes

Item 26
 An auditor suspects that certain client employees are ordering merchandise for
themselves over the Internet without recording the purchase or receipt of the
merchandise. When vendors’ invoices arrive, one of the employees approves the
invoices for payment. After the invoices are paid, the employee destroys the invoices
and the related vouchers.
In gathering evidence regarding the fraud, the auditor most likely would select items for
testing from the file of all
Response: Receiving reports.
Correct answer: Cash disbursements.
Score: 0 out of 1 No

Item 27
 Upon receipt of customers’ checks in the mailroom, a responsible employee should
prepare a remittance listing that is forwarded to the cashier. A copy of the listing should
be sent to the
Response: Accounts receivable bookkeeper to update the subsidiary accounts
receivable records.
Correct answer: Accounts receivable bookkeeper to update the subsidiary accounts
receivable records.
Score: 1 out of 1 Yes
Item 28
 The objective of tests of details of transactions performed as substantive tests is to
Response: Detect material misstatements in the financial statements.
Correct answer: Detect material misstatements in the financial statements.
Score: 1 out of 1 Yes

Item 29
 Which of the following controls most likely would assure that all billed sales are
correctly posted to the accounts receivable ledger?
Response: Daily sales summaries are compared to daily postings to the accounts
receivable ledger.
Correct answer: Daily sales summaries are compared to daily postings to the accounts
receivable ledger.
Score: 1 out of 1 Yes

Item 30
 Inherent risk and control risk differ from detection risk in that they
Response: Exist independently of the financial statement audit.
Correct answer: Exist independently of the financial statement audit.
Score: 1 out of 1 Yes

Item 31
 Tracing shipping documents to prenumbered sales invoices provides evidence that
Response: All prenumbered sales invoices were accounted for.
Correct answer: Shipments to customers were properly invoiced.
Score: 0 out of 1 No

Item 32
 The risk that an auditor will conclude, based on substantive tests, that a material
misstatement does not exist in an account balance when, in fact, such misstatement
does exist is referred to as
Response: Detection risk.
Correct answer: Detection risk.
Score: 1 out of 1 Yes

Item 33
 The audit program usually cannot be finalized until the
Response: Reportable conditions have been communicated to the audit committee of
the board of directors.
Correct answer: Consideration of the entity’s internal control has been completed.
Score: 0 out of 1 No

Item 34
 During the consideration of a small business client’s internal control, the auditor
discovered that the accounts receivable clerk approves credit memos and has access to
cash. Which of the following controls would be most effective in offsetting this
weakness?
Response: The owner reviews errors in billings to customers and postings to the
subsidiary ledger.
Correct answer: The owner reviews credit memos after they are recorded.
Score: 0 out of 1 No

Item 35
 In testing the existence assertion for an asset, an auditor ordinarily works from the
Response: Accounting records to the supporting evidence.
Correct answer: Accounting records to the supporting evidence.
Score: 1 out of 1 Yes

Item 36
 When an auditor increases the assessed level of control risk because certain control
activities were determined to be ineffective, the auditor would most likely increase the
Response: Extent of tests of controls.
Correct answer: Extent of tests of details.
Score: 0 out of 1 No

Item 37
 An auditor should perform alternative procedures to substantiate the existence of
accounts receivable when
Response: No reply to a positive confirmation request is received.
Correct answer: No reply to a positive confirmation request is received.
Score: 1 out of 1 Yes

Item 38
 An auditor obtains knowledge about a new client’s business and its industry to
Response: Understand the events and transactions that may have an effect on the
client’s financial statements.
Correct answer: Understand the events and transactions that may have an effect on the
client’s financial statements.
Score: 1 out of 1 Yes

Item 39
 An auditor uses the knowledge provided by the understanding of internal control and
the assessed level of the risk of material misstatement primarily to
Response: Determine the nature, timing, and extent of substantive tests for financial
statement assertions.
Correct answer: Determine the nature, timing, and extent of substantive tests for
financial statement assertions.
Score: 1 out of 1 Yes

Item 40
 When issuing an unqualified opinion, the auditor who evaluates the audit findings
should be satisfied that the
Response: Amount of known misstatement is acknowledged and recorded by the client.
Correct answer: Estimate of the total likely misstatement is less than a material amount.
Score: 0 out of 1 No

Item 41
 Which of the following is not a financial statement assertion relating to account
balances?
Response: Valuation and competence.
Correct answer: Valuation and competence.
Score: 1 out of 1 Yes

Item 42
 Which of the following most likely would not be considered an inherent limitation of the
potential effectiveness of an entity’s internal control?
Response: Management override.
Correct answer: Incompatible duties.
Score: 0 out of 1 No

Item 43
 To obtain audit evidence about control risk, an auditor selects tests from a variety of
techniques including
Response: Inquiry.
Correct answer: Inquiry.
Score: 1 out of 1 Yes

Item 44
 Professional skepticism requires that an auditor assume that management is
Response: Neither honest nor dishonest.
Correct answer: Neither honest nor dishonest.
Score: 1 out of 1 Yes

Item 45
 Which of the following procedures would an auditor most likely perform to test controls
relating to management’s assertion about the completeness of cash receipts for cash
sales at a retail outlet?
Response: Observe the consistency of the employees’ use of cash registers and tapes.
Correct answer: Observe the consistency of the employees’ use of cash registers and
tapes.
Score: 1 out of 1 Yes

Item 46
 An auditor should design the written audit program so that
Response: The audit procedures selected will achieve specific audit objectives.
Correct answer: The audit procedures selected will achieve specific audit objectives.
Score: 1 out of 1 Yes

Item 47
 Sound internal control dictates that immediately upon receiving checks from customers
by mail, a responsible employee should
Response: Prepare a duplicate listing of checks received.
Correct answer: Prepare a duplicate listing of checks received.
Score: 1 out of 1 Yes

Item 48
 Before assessing control risk at a level lower than the maximum, the auditor obtains
reasonable assurance that controls are in use and operating effectively. This assurance
is most likely obtained in part by
Response: Inspection of documents.
Correct answer: Inspection of documents.
Score: 1 out of 1 Yes

Item 49
 As the acceptable level of detection risk decreases, the assurance directly provided
from
Response: Substantive tests should increase.
Correct answer: Substantive tests should increase.
Score: 1 out of 1 Yes

Item 50
 A basic premise underlying the application of analytical procedures is that
Response: Plausible relationships among data may reasonably be expected to exist
and continue in the absence of known conditions to the contrary.
Correct answer: Plausible relationships among data may reasonably be expected to
exist and continue in the absence of known conditions to the contrary.
Score: 1 out of 1 Yes

Item 51
 In considering materiality for planning purposes, an auditor believes that misstatements
aggregating P10,000 would have a material effect on an 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
Response: P10,000
Correct answer: P10,000
Score: 1 out of 1 Yes

Item 52
 The most difficult type of misstatement to detect is fraud based on
Response: The nonrecording of transactions.
Correct answer: The nonrecording of transactions.
Score: 1 out of 1 Yes

Item 53
 In determining whether transactions have been recorded, the direction of the audit
testing should be from the
Response: Original source documents.
Correct answer: Original source documents.
Score: 1 out of 1 Yes

Item 54
 Which of the following is not a basic procedure used in an audit?
Response: Tests of direct evidence.
Correct answer: Tests of direct evidence.
Score: 1 out of 1 Yes

Item 55
 Which of the following is least likely to be considered a risk assessment procedure?
Response: Confirmation of ending accounts receivable.
Correct answer: Confirmation of ending accounts receivable.
Score: 1 out of 1 Yes

Item 56
 Audit programs should be designed so that
Response: The audit evidence gathered supports the auditor’s conclusions.
Correct answer: The audit evidence gathered supports the auditor’s conclusions.
Score: 1 out of 1 Yes

Item 57
 When an auditor does not receive replies to positive requests for yearend accounts
receivable confirmations, the auditor most likely would
Response: Inspect the allowance account to verify whether the accounts were
subsequently written off.
Correct answer: Ask the client to contact the customers to request that the
confirmations be returned.
Score: 0 out of 1 No

Item 58
 In obtaining an understanding of an entity’s internal control relevant to audit planning,
an auditor is required to obtain knowledge about the
Response: Effectiveness of controls that have been implemented.
Correct answer: Design of the controls pertaining to internal control components.
Score: 0 out of 1 No

Item 59
 Which of the following procedures most likely would provide an auditor with evidence
about whether an entity’s internal control activities are suitably designed to prevent or
detect material misstatements?
Response: Observing the entity’s personnel applying the activities.
Correct answer: Observing the entity’s personnel applying the activities.
Score: 1 out of 1 Yes

Item 60
 An attitude that includes a questioning mind and a critical assessment of audit evidence
is referred to as
Response: Professional skepticism.
Correct answer: Professional skepticism.
Score: 1 out of 1 Yes

Item 61
Which of the following audit risk components may be assessed in nonquantitative
terms?
        Control risk      Detection risk      Inherent risk
 
 
 
 
Response: Yes                            Yes                     Yes
Correct answer: Yes                            Yes                     Yes
Score: 1 out of 1 Yes

Item 62
 A primary objective of procedures performed to obtain an understanding of internal
control is to provide an auditor with
Response: A basis for modifying tests of controls.
Correct answer: Knowledge necessary to assess the risks of material misstatements.
Score: 0 out of 1 No
Item 63
 Which of the following is least likely to be evidence the auditor examines to determine
whether controls are operating effectively?
Response: Signatures on authorization forms.
Correct answer: Confirmations of accounts receivable.
Score: 0 out of 1 No

Item 64
 Which of the following statements is not correct about materiality?
Response: An auditor considers materiality for planning purposes in terms of the largest
aggregate level of misstatements that could be material to any one of the financial
statements.
Correct answer: An auditor considers materiality for planning purposes in terms of the
largest aggregate level of misstatements that could be material to any one of the
financial statements.
Score: 1 out of 1 Yes

Item 65
 In which of the following circumstances would the use of the negative form of accounts
receivable confirmation most likely be justified?
Response: A small number of accounts may be in dispute and the accounts receivable
balance arises from sales to many customers with small balances.
Correct answer: A small number of accounts may be in dispute and the accounts
receivable balance arises from sales to many customers with small balances.
Score: 1 out of 1 Yes

Item 66
 An auditor assesses control risk because it
Response: Affects the level of detection risk that the auditor may accept.
Correct answer: Affects the level of detection risk that the auditor may accept.
Score: 1 out of 1 Yes

Item 67
 Which of the following is the best example of a substantive test?
Response: Confirmation of balances of accounts receivable.
Correct answer: Confirmation of balances of accounts receivable.
Score: 1 out of 1 Yes
Item 68
 Which of the following procedures would an auditor most likely perform in planning a
financial statement audit?
Response: Searching for unauthorized transactions that may aid in detecting
unrecorded liabilities.
Correct answer: Comparing the financial statements to anticipated results.
Score: 0 out of 1 No

Item 69
 Regardless of the assessed level of control risk, an auditor would perform some
Response: Tests of controls to determine the effectiveness of internal control policies.
Correct answer: Identifying specific controls relevant to specific assertions.
Score: 0 out of 1 No

Item 70
Walkthroughs ordinarily provide evidence that helps the auditor to
                               
Evaluate design effectiveness of controls         Confirm whether controls have been
placed in Operation
 
   
 
 
 
Response:            Yes                                                  Yes
Correct answer:            Yes                                                  Yes
Score: 1 out of 1 Yes

Item 71
 Which of the following controls most likely would help ensure that all credit sales
transactions of an entity are recorded?
Response: The billing department supervisor matches prenumbered shipping
documents with entries in the sales journal.
Correct answer: The billing department supervisor matches prenumbered shipping
documents with entries in the sales journal.
Score: 1 out of 1 Yes

Item 72
 Which of the following is not a step in an auditor’s assessment of control risk?
Response: Consider whether controls can have a pervasive effect on financial
statement assertions.
Correct answer: Perform tests of details of transactions to detect material
misstatements in the financial statements.
Score: 0 out of 1 No

Item 73
 A procedure that involves tracing a transaction from its origination through the
company’s information systems until it is reflected in the company’s financial report is
referred to as a(n)
Response: Walkthrough.
Correct answer: Walkthrough.
Score: 1 out of 1 Yes

Item 74
 What type of analytical procedure would an auditor most likely use in developing
relationships among balance sheet accounts when reviewing the financial statements of
a nonpublic entity?
Response: Ratio analysis.
Correct answer: Ratio analysis.
Score: 1 out of 1 Yes

Item 75
 Use of an authorised price list in preparing the sales invoices meets primarily the:
Response: Accuracy, valuation or allocation assertion.
Correct answer: Accuracy, valuation or allocation assertion.
Score: 1 out of 1 Yes

Item 76
 On the basis of the audit evidence gathered and evaluated, an auditor decides to
increase the assessed level of control risk from that originally planned. To achieve an
overall audit risk level that is substantially the same as the planned audit risk level, the
auditor would
Response: Decrease detection risk.
Correct answer: Decrease detection risk.
Score: 1 out of 1 Yes

Item 77
 A key control environment factor in reducing the risk of fraudulent financial reporting
through the overstatement of sales and accounts receivable is:
i. Management's adoption and adherence to high standards of integrity and ethical
values.
ii. Reducing the emphasis on sales targets.
iii. Establishing an effective audit committee.
Response: (i) and (ii) only.
Correct answer: (i), (ii) and (iii).
Score: 0 out of 1 No

Item 78
 Accounting for the numerical sequence of dispatch notes used in tracing will primarily
meet the:
Response: Completeness assertion.
Correct answer: Completeness assertion.
Score: 1 out of 1 Yes

Item 79
 In designing written audit programs, an auditor should establish specific audit
objectives that relate primarily to the
Response: Financial statement assertions.
Correct answer: Financial statement assertions.
Score: 1 out of 1 Yes

Item 80
 Which of the following factors would most likely cause a CPA to decide not to accept a
new audit engagement?
Response: Management’s disregard of its responsibility to maintain an adequate
internal control environment.
Correct answer: Management’s disregard of its responsibility to maintain an adequate
internal control environment.
Score: 1 out of 1 Yes

Item 81
 Which of the following procedures would an auditor most likely include in the planning
phase of a financial statement audit?
Response: Identify specific internal control activities designed to prevent fraud.
Correct answer: Obtain an understanding of the entity’s risk assessment process.
Score: 0 out of 1 No

Item 82
 Control risk should be assessed in terms of
Response: Financial statement assertions.
Correct answer: Financial statement assertions.
Score: 1 out of 1 Yes

Item 83
 Which of the following controls most likely would reduce the risk of diversion of
customer receipts by an entity’s employees?
Response: A bank lockbox system.
Correct answer: A bank lockbox system.
Score: 1 out of 1 Yes

Item 84
 Which of the following is a cut-off test?
Response: Selecting a sample of bad debts written off after the year-end and agreeing
to sales invoices dated before the year-end.
Correct answer: Selecting a sample of delivery notes around the year-end and agreeing
to sales invoices to ensure they are included in the appropriate period.
Score: 0 out of 1 No

Item 85
 Which of the following controls most likely would be effective in offsetting the tendency
of sales personnel to maximize sales volume at the expense of high bad debt writeoffs?
Response: Employees involved in the credit granting function are separated from the
sales function.
Correct answer: Employees involved in the credit granting function are separated from
the sales function.
Score: 1 out of 1 Yes

Item 86
 In assessing control risk, an auditor ordinarily selects from a variety of techniques,
including
Response: Inquiry and analytical procedures.
Correct answer: Reperformance and observation.
Score: 0 out of 1 No

Item 87
Financial statement assertions are established for account balances,
Classes of transactions     Disclosures
 
Response: Yes    No
Correct answer: Yes     Yes
Score: 0 out of 1 No

Item 88
 After assessing control risk, an auditor desires to seek a further reduction in the
assessed level of control risk. At this time, the auditor would consider whether
Response: Additional audit evidence sufficient to support a further reduction is likely to
be available.
Correct answer: Additional audit evidence sufficient to support a further reduction is
likely to be available.
Score: 1 out of 1 Yes

Item 89
In obtaining an understanding of an entity’s internal control, an auditor is required to
obtain knowledge about the
             Operating effectiveness      Design of controls of controls
          
          
     
    
Response: Yes                                                Yes
Correct answer: No                                                Yes
Score: 0 out of 1 No
Item 90
 Confirmation is most likely to be a relevant form of evidence with regard to assertions
about accounts receivable when the auditor has concerns about the receivables’
Response: Existence.
Correct answer: Existence.
Score: 1 out of 1