Auditing Theory

1. In determining the quantity and quality of evidence to gather,

the auditor will be satisfied when the evidence is

A. Irrefutable.
B. Highly persuasive.
C. Conclusive.
D. Completely convincing.

2. It refers to the detailed instructions for the collection of a

particular type of audit evidence that is to be obtained at some
time during the audit

A. Sampling plan.
B. Audit procedure
C. Audit program
D. Audit plan

3. Although the quantity and content of audit working papers vary

with each particular engagement, an auditor‘s permanent files
most likely include

A. Schedules that support the current year‘s adjusting entries.

B. Prior years‘ accounts receivable confirmations that are
classified as exceptions.
C. Documentation indicating that the audit work is adequately
planned and supervised.
D. Analysis of capital stock and other owners‘ equity accounts.

4. An auditor ordinarily uses a working trial balance resembling

the financial statements without footnotes, but containing
columns for

A. Cash flow increases and decreases

B. Audit objectives and assertions
C. Reclassifications and adjustments
D. Reconciliation and tick marks

5. Which of the following analyses appearing in a predecessor‘s

working papers would the successor auditor least likely review?

A. Analysis of noncurrent balance sheet accounts

B. Analysis of current balance sheet accounts
C. Analysis of contingencies
D. Analysis of income statement accounts
6. In an internal audit, the audit supervisor determines that the
working papers are complete

A. When satisfied that the audit objectives have been met and the
working papers support the conclusions
B. When working papers refer to the steps outlined in the audit
program
C. Only after the auditor who prepared the working papers has
signed and dated them
D. When proper cross-references to other working papers are
noted.

7. After the fieldwork audit procedures are completed, a partner

of the CPA firm who has not been involved in the audit performs a
second or wrap-up working paper review. This second review
usually focuses on

A. The fair presentation of the financial statements in

conformity with GAAP
B. Fraud involving the client‘s management and its employees
C. The materiality of the adjusting entries proposed by the audit
staff
D. The communication of internal control weaknesses to the
client‘s audit committee

8. The detailed description of the results of the various

evidence decisions for a specific audit‖ is called an

A. Audit procedure.
B. Audit plan
C. Audit program
D. Audit guide

9. Which of the following is an invalid description of why

working papers are developed?

A. Facilitates third-party reviews

B. Aids in the planning, performance, and review of audits
C. Provides the principal evidential support for the auditor‘s
report
D. Aids in the professional development of the operating staff

10. The main advantage of properly indexed working papers is to

A. Reduce the size of the file

B. Better organize the working papers
C. Allow division of labor within the audit team
D. Facilitate the efficient use of audit staff

11. Which of the following is an incorrect statement about audit

objectives?

A. There should be a one-to-one relationship between audit

objectives and procedures
B. Audit objectives should be developed on the basis of
management assertions about the financial statement components
C. Selection of tests to meet audit objectives should depend upon
the understanding of internal control
D. The auditor should resolve any substantial doubt about any of
the management‘s material financial statement assertions

12. Assuming a low assessed level of control risk, which of the

following audit procedures is least likely to be performed?

A. Physical inspection of a sample of inventory

B. Search for unrecorded cash receipts
C. Obtaining a client representation letter
D. Confirmation of accounts receivable

13. Which of the following is not one of the broad categories of

assertions?

A. General or specific transaction objectives

B. Existence or occurrence
C. Valuation or allocation
D. Presentation and disclosure

14. For a particular assertion, control risk is the risk that

A. Control will now detect a material misstatement that occurs

B. Audit procedures will fail to detect a weak control system
C. The prescribed control procedures will not be applied
uniformly
D. A material misstatement will occur in the accounting process

15. A distinction must be made between general audit objectives

and specific audit objectives for each account balance. Which of
the following is an incorrect statement?

A. The general audit objectives are applicable to every account

balance on the financial statements
B. The specific audit objectives are applicable to every account
balance on the financial statements
C. The general audit objectives are tailored to the engagement
D. The specific audit objectives are tailored to the engagement

16. The permanent file section of the working papers that is

kept for each audit client most likely contains

a. Review notes pertaining to questions and comments

regarding the audit work performed.
b. A schedule of time spent on the engagement by each
individual auditor.
c. Correspondence with the client's legal counsel
concerning pending litigation.
d. Narrative descriptions of the client's internal control
policies and procedures

17. Of the following procedures, which is not considered part of

“obtaining an understanding of the client’s environment?”

a. Examining trade publications to gain a better

understanding of the client's industry.
b. Confirming customer accounts receivable for existence
and valuation.
c. Touring the client's manufacturing and warehousing
facilities to gain a clearer understanding of
operations.
d. Studying the internal controls over cash receipts and
disbursements.

18. If working papers are to have the characteristics that will

ensure that they achieve their primary purposes, which of the
following is the most important?

a. Working papers must be of standard format and standard

content.
b. Working papers must be properly indexed and cross-
referenced to the draft audit report.
c. Working papers must provide sufficient, competent, and
useful information to support the audit report.
d. Working papers must be arranged in logical order
following the audit program sequence.

19. Which of the following is not an example of analytical

evidence?
 a. Compared inventory turnover by major class with the
prior year on a monthly and quarterly basis.
b. Compared gross profit percentages by major product
classes with the prior year.
c. Examined invoices for plant asset additions to
determine whether the client had erroneously recorded
ordinary repairs as plant assets.
d. Examined monthly performance reports and investigated
significant variations from budgeted amounts.

20. Choose the best illustration of objective audit evidence

from the following

a. The paid invoice file containing invoices matched with

receiving reports and purchase orders.
b. Management's assertion that payment procedures require
matching of invoice with receiving report and purchase
order.
c. Clerical staff assurances that management policy
regarding payment of invoices--matching of invoice with
receiving report and purchase order--is always
followed.
d. The treasurer's statement of not remembering any
exceptions in which an invoice was submitted for
payment that was not accompanied by a matching
receiving report and purchase order.

21. An initial (first-time) audit requires more audit time to

complete than a recurring audit. One of the reasons for
this is that

a. New auditors are usually assigned to an initial audit.

b. Predecessor auditors need to be consulted.
c. The client's business, industry, and internal control
are unfamiliar to the auditor and need to be carefully
studied.
d. A larger proportion of customer accounts receivable
need to be confirmed on an initial audit.

22. Which of the following is a basic tool used by the auditor

to control the audit work and review the progress of the
audit?
a. Time and expense summary.
b. Engagement letter.
c. Progress flowchart.
d. Audit program.
23. An auditor wants to develop an audit test to evaluate the
reasonableness of the quantity of scrap material resulting
from a certain production process compared to industry
standards. Which would be the most competent type of
evidence available to satisfy this objective?

a. Documentary.
b. Hearsay.
c. Physical.
d. Analytical.

24. As part of audit planning, CPAs should design audit programs

for each individual audit and should include audit steps and
procedures to

a. Detect and eliminate fraud.

b. Increase the amount of management information
available.
c. Provide assurances that the objectives of the audit are
met.
d. Ensure that only material items are audited.

25. Of the following audit procedures, which best supports the

valuation objective?

a. Performing a lower of cost or market test of the

client's inventories.
b. Reviewing a contingent liability footnote for proper
wording.
c. Searching for unrecorded liabilities.
d. Observing the client's year-end physical inventory
taking.

26. An assumption underlying analytical procedures is that

a. These procedures cannot replace tests of balances and

transactions.
b. Statistical tests of financial information may lead to
the discovery of material errors in the financial
statements.
c. The study of financial ratios is an acceptable
alternative to the investigation of unusual
fluctuations.
d. Relationships among data may reasonably be expected to
exist and continue in the absence of known conditions
to the contrary.
27. An auditor is examining accounts receivable. What is the
most competent type of evidence in this situation?

a. Interviewing the personnel who record accounts

receivable.
b. Verifying that postings to the receivable account from
journals have been made.
c. Receipt by the auditor of a positive confirmation.
d. No response received for a request for a negative
confirmation.

28. With respect to the auditor's planning of a year-end

examination, which of the following statements is always
true?

a. An engagement should not be accepted after the fiscal

year-end.
b. An inventory count must be observed at the balance
sheet date.
c. The client's audit committee should not be told of the
specific audit procedures that will be performed.
d. It is an acceptable practice to carry out substantial
parts of the examination at interim dates.

29. A letter to the auditor in response to an inquiry is an

example of

a. Physical evidence.
b. Confirmation evidence.
c. Documentary evidence.
d. Analytical evidence.

30. Which of the following statements about working papers is

correct?

a. Working papers are not permitted to be used as a

reference source by the client.
b. The auditor should document the understanding of the
client's internal control obtained to plan the audit
c. Working papers may be regarded as a substitute for
the client's accounting records.
d. When reporting on comparative financial statements,
the independent auditor may discard working
papers after two years.
31. Which of the following factors is most important in
determining the competence of audit evidence?

a. The reliability of the evidence in meeting the audit

objective.
b. The objectivity of the auditor gathering the evidence.
c. The quantity of the evidence obtained.
d. The independence of the source of evidence.

32. The procedures specifically outlined in an audit program are

primarily designed to

a. Protect the auditor in the event of litigation.

b. Detect errors or fraud.
c. Test internal evidence.
d. Gather evidence.

33. When reviewing audit working papers, the primary

responsibility of an audit supervisor is to determine
that?

a. Each worksheet is properly identified with a

descriptive heading.
b. Working papers are properly referenced and kept in
logical groupings.
c. Standard departmental procedures are adhered to with
regard to work paper preparation and technique.
d. Working papers adequately support the audit findings,
conclusions, and report.

34. Auditors apply analytical procedures to the client's

operations in order to identify

a. Improper separation of accounting and other financial

duties.
b. Weaknesses of a material nature in the client's
internal control.
c. Unusual transactions.
d. Noncompliance with prescribed control procedures.

35. Which of the following workpapers would one normally expect

to find in the permanent file?

a. A copy of a long-term bond indenture.

b. The working trial balance.
c. An analysis of additions and disposals relating to
marketable securities.
 d. A workpaper analyzing customer replies to confirmation
requests.

36. The in-charge auditor decides that work papers are complete

a. When satisfied that the audit objectives have been met

and the working papers support the conclusions.
b. When working papers make reference to the steps
outlined in the audit program.
c. Only after the auditor who prepared the working papers
has signed and dated them.
d. When proper cross-references to other working papers
are noted.

37. Of the following procedures, which does not produce

analytical evidence?

a. Compare revenue, cost of sales, and gross profit with

the prior year and investigate significant variations.
b. Examine monthly performance reports and investigate
significant revenue and expense variances.
c. Confirm customers' accounts receivable and clear all
material exceptions.
d. Compare sales trends and profit margins with industry
averages and investigate significant differences.

38. Audit evidence can come in different forms with different

degrees of persuasiveness. Which of the following is the
least persuasive type of evidence?

a. Documents mailed by outsiders to the auditor.

b. Correspondence between the auditor and vendors.
c. Sales invoices inspected by the auditor.
d. Computations made by the auditor.

39. Which of the following statements relating to the

competence of evidential matter is always true?

a. Evidential matter gathered by an auditor from outside

an enterprise is reliable.
b. Accounting data developed under satisfactory conditions
of internal control are more relevant than data
developed under unsatisfactory internal control
conditions.
c. Oral representations made by management are not valid
evidence.
 d. Evidence gathered by auditors must be both valid and
relevant to be considered competent.

40. An auditor test counted a batch of inventory. This is an

example of what kind of evidence?

a. Analytical.
b. Documentary.
c. Physical.
d. Hearsay.

41. In evaluating the reasonableness of advertising expense,

which of the following would be the best evidence?

a. Oral evidence obtained through discussions with company

marketing executives and representatives of the
advertising agency retained.
b. Documentary evidence obtained by vouching charges to
the account and by retracing charges from source
documents to the account.
c. Analytical evidence developed by comparing the ratio
of advertising expenses to sales with historical data
for the company and industry.
d. Arithmetical evidence developed by re-computing charges
submitted by the advertising agency and paid by the
company.

42. Audit working papers are used to record the results of the
auditor's evidence-gathering procedures. When preparing
working papers, the auditor should remember that working
papers should be
a. Kept on the client's premises so that the client can
have access to them for reference purposes.
b. The primary support for the financial statements
being examined.
c. Considered as a part of the client's accounting records
that are retained by the auditor.
d. Designed to meet the circumstances and the auditor's
needs on each engagement.

43. The main advantage of properly indexed working papers is to

a. Reduce the size of the file.
b. Better organize the working papers.
c. Allow division of labor within the audit team.
d. Facilitate the efficient use of audit staff.
AUDITING PROBLEMS:

Problem 1
In connection of your audit of the liabilities of CPAKaNaSana E. CovidKasi Company, you
noted that on December 31, 2015. The company issued P2,000,000 8% serial bonds. To be
repaid in the amount of P400,000 each year. Interest is payable annually on December 31. The
bonds were issued to yields 10% a year. The bond proceeds were P1,902,800 based on the
present value at December 31, 2015 of five annual payments as follows:

Due dates Principal Interest

12/31/16 P400,000 P160,000

12/31/17 400,000 128,000

12/31/18 400,000 96,000

12/31/19 400,000 64,000

12/31/20 400,000 32,000

The company uses the effective method in amortizing bond premium or discount.

Questions:

1. How much is the amortization of discount for 2018?

a. P 19,440 b. P 30,326 c. P 47,770 d. P 97,200

2. How much is the carrying value of the bonds payable as of December 31, 2019?
a. P 1,933,080 b. P 392,723 c. P 778,839 d. P 1,533,586

3. How much is the carrying value of the bonds payable as of December 31, 2020?
a. P 1,933,080 b. P 392,723 c. P 778,839 d. P 0
 Problem 2
On January 1, 2020, GraduateKaNa SANA Inc. issued P100,000, 10%, 10-year bonds when the
market rate of interest was 8%. Interest is payable on June 30 and December 31. The following
financial information is available.
Sales P300,000
Cost of Sales 180,000
Gross profit 120,000
Interest expense ?
Depreciation expense (14,500)
Other expenses (82,000)
Net income ?

December 31, 2020 Jan. 1, 2020

Accounts receivable P55,000 P48,000
Inventory 87,000 93,000
Accounts payable 60,000 58,000

All purchases of inventory are on account. Other expenses are paid for in cash.

The following are present value factors of P1.00 for 20 periods:

4% 5%
PV of 1 0.4564 0.3769
PV of an ordinary annuity of 1 13.5903 12.4622

Questions:
1. What is the carrying value of bonds on January 1, 2020?
a. P 113,592 b. P 100,000 c. P 86,408 d. P 112,223
2. How much was paid to bondholders for interest during 2020?
a. P 8,000 b. P 11,087 c. P 10,000 d. P 9,087
3. What is the carrying value of the bonds on December 31, 2020?
a. P 113,135 b. P 113,592 c. P 100,000 d. P 112,661
4. What is the interest expense for 2020?
a. P 9,069 b. P 10,000 c. P 5,000 d. P 9,087
5. How much was paid for inventory purchases?
a. P 172,000 b. P 186,000 c. P 184,000 d. P 174,000
6. What is the net income for 2020?
a. P 13,500 b. P 14,431 c. P 23,000 d. P 14,859
7. How much was received from customers in 2020?
a. P 283,000 b. P 245,000 c. P 293,000 d. P 307,000
Problem 3

KapagodMagSagot Company reported net income for the current year 2019 at 10,000,000 before
taxes. Included in the determination of the said net income were:

Permanent Differences
Non-deductible expenses P 100,000
Non-taxable expenses 500,000
Temporary Differences
Accrued Warranty Expenses 250,000
Rental payment made in advance 400,000
Advance collection from customers 500,000
Provision for probable losses 900,000

The income tax rate is 40% and is expected to change in the future.

1.How much is the total tax expense?

a.3,840,000 b.4,340,000 c.4,000,000 d. 3,340,000
2.How much is the current tax expense?
a.3,840,000 b.4,340,000 c.4,000,000 d. 3,340,000
3.What is the total deferred tax liability to be presented in the 2019 SFP?
a.660,000 b.160,000 c.460,000 d.360,000
4.What is the total deferred tax asset to be presented in the 2019 SFP?
a.660,000 b.160,000 c.460,000 d.360,000
5.Assuming that the expected income tax rate for the following year is 30%, what is the current
tax expense?
a. 3,902,500 b. 4,340,000 c. 4,777,500 d.3,340,000
6.In relation to question #5, what is the total deferred tax liability?
a.120,000 b.577,500 c.495,000 d.160,000
7.In relation to question #6, what is the total deferred tax asset?
a.120,000 b.577,500 c.495,000 d.160,000