ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 41  May 2021 CPALE  Summary Lecture (16 May 2021)

AUDITING (Auditing Problems) C. Espenilla  S. Ireneo

RESA BATCH 41
AP SUMMARY LECTURE (MCQS)
RISK ASSESSMENT PROCEDURES

1. Which of the following statements is true?

A. If control risk is assessed at maximum, the nature of related substantive tests should be
changed from more to less effective.
B. If control risk is assessed at maximum, the nature of related substantive tests
should be changed from less to more effective.
C. If control risk is assessed at maximum, the timing of related substantive tests should be
changed from year-end to an interim date.
D. If control risk is assessed at maximum, the extent of related substantive tests should be
changed from a larger to a smaller sample.

2. After the audit planning procedures, your audit team decided to place the preliminary audit risk
at a high level. Which of the following is correct?
A. The risk the planned further audit procedures will not be able to detect misstatement should
be increased.
B. The audit materiality levels should be decreased.
C. The auditors should plan extensive substantive testing through analytical procedures.
D. The auditors should plan set the timing of its extensive compliance testing at year-end.

3. In rendering a preliminary financial ratio analysis on Atom Inc.’s financials, you have observed
that the clients’ accounts receivable turn-over ratio decreased from 10 times last year (based on
audited financial statement) to 6 times this year (based on unaudited figures). Which of the
following is correct regarding the implication of this information in your audit plan?
A. Accounts receivables may be materially misstated thus the auditor should issue a qualified
opinion due to departure from PFRS.
B. Accounts receivables are materially misstated thus the auditor should issue an adverse
opinion due to material and pervasive departure from PFRS.
C. The auditor increases his assessment of inherent risk in the financial statement thus shall
plan to do extensive substantive analytical procedures.
D. The auditor increases his assessment of risk of misstatement in the financial
statement thus shall plan to render test of details at year-end.

4. To obtain an understanding of the client’s internal control over its revenue/receipt transactions,
an audit staff was assigned to do inquiries with the department’s involved (Sales Department, for
order processing; Credit Department, for credit authorization; Warehouse, for determining the
availability of goods; Shipping, for the preparation and actual shipment of goods, and; Billing
Department, for the invoice preparation). Which of the following shall be rendered next?
A. Assessment of control risk at below the maximum level if the staff is satisfied that the design,
operation and effectiveness of internal control can reasonably detect/prevent potential
misstatements in the financial statements.
B. Assessment of the control risk at the maximum level if the design and operations of the
internal controls are inappropriate to detect or prevent potential misstatement in the financial
statements.
C. Confirm his understanding of the internal control through inspection of documents
and/or observation of the performance of policies and procedures.
D. Test the effectiveness of the controls as to consistency of their application.

5. After obtaining and understanding of the Atom Inc.’s internal control policies and procedures
over its purchasing and disbursements transactions, the auditor was satisfied regarding’s the
internal control’s potential reliability. Which of the following shall be rendered next?
A. Test the effectiveness of the internal control in terms of their consistent application by
extending the analytical procedures done during the audit planning.
B. Sending confirmation letters to suppliers to confirm their agreements with Atom Inc.’s
reported balances.

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C. Examine the consistency of the application of the control by inspecting documents

where control performance are documented.
D. Render purchases cut-off to ascertain whether purchases were recorded in the correct period.

REVENUE AND RECEIPT CYCLES

6. Which of the following is not a significant process in the conventional revenue/receipt transaction
cycle of a company in the merchandising industry?
A. Order processing.
B. Voucher preparation.
C. Billing.
D. Customer remittance acceptance.

7. While understanding the client revenue/receipt cycle, as part of his audit planning activities, the
auditor learned that the client has no system of approving customer orders in terms of the
potential customer’s credit worthiness, what will be a possible implication of this information in
the auditor’s audit substantive testing audit program?
A. Increase substantive test procedure focusing on existence on receivables.
B. Decrease extent of substantive test procedures focusing on valuation assertion on
receivables.
C. Increase the number of customer accounts to be confirmed.
D. Obtain more persuasive evidence that focus on the valuation assertion on
receivables.

8. While testing the effectiveness of internal control over the billing process, the auditor discovered
that the controls were not consistently observes as there were instances where sales entries
based on sales invoices were not supported by delivery receipt, what will be a possible
implication of this TOC findings to the auditor’s substantive testing audit program?
A. Decrease substantive test procedure focusing on existence on receivables.
B. Increase extent of substantive test procedures focusing on valuation assertion on receivables.
C. Increase the number of customer accounts to be confirmed.
D. Obtain more persuasive evidence that focus on the valuation assertion on receivables.

9. The auditor, upon examining controls over the billing process, observed that the pre-numbering
of the delivery receipts are not closely monitored as evident in the review done by the auditor of
the December sales journal entries and its supporting documents (sales invoice, customer orders
and delivery receipt). Which of the following may be a valid conclusion as a result of this audit
observation?
A. There may be possible unbilled deliveries which affect the completeness assertion
of AR and Sales.
B. There may be possible fictitious deliveries which affect the existence/occurrence assertion of
AR and Sales.
C. There may be possible unbilled deliveries which affect the valuation assertion of AR and
Sales.
D. There may be possible fictitious deliveries which affect the completeness assertion of AR and
Sales.

10. A client suspects that certain subsidiary ledger postings of collections from customers were
posted to wrong customer subsidiary account, which the following internal controls most likely
the detection of such posting error?
A. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
B. Each sales invoice is supported by a pre-numbered shipping document.
C. The accounts receivable ledger is reconciled daily to the control account in the general ledger.
D. Sending of monthly statement of accounts to customers.

11. The following are consistent with the requirement of the imprest system, except:
A. Customers are primarily requested to may remittances directly to the bank.
B. Customers are requested to pay through checks.

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C. Employee who receives the checks first should automatically restrictively endorse the check.
D. Collections should be deposited in-tact, preferably on a weekly basis.

12. In designing the audit program for Accounts Receivables and Sales, the auditor acknowledges
that there is a higher risk of ___________, thus should design audit procedures that shall focus
on validating ___________ assertion/s?
A. Overstatement; Completeness and Existence/Occurrence
B. Understatement; Existence/Occurrence and Valuation
C. Understatement; Completeness and Valuation
D. Overstatement; Existence/Occurrence and Valuation

13. Which of the following is correct regarding the use of Accounts Receivable confirmation letter?
A. A positive confirmation request is necessary where audit risk assessment over receivables is
low and that the auditor expects little or no misstatement in receivables.
B. A negative confirmation request provides the more persuasive evidence regarding existence
and rights assertion over receivables.
C. A blank confirmation request is useful when an account balance is suspected to be
overstated.
D. When a confirmation reply is received from the customer through the client, such a reply
should be considered invalid.

14. As part of auditing the company’s revenue/receipt cycle, the auditor decided to render a sales
cut-off by tracing entries several days before and after the balance sheet date from the
company’s sales journal to the source documents which include the sales order, the sales invoice
and the delivery receipt. Which of the following is correct regarding the sales cut-off procedures?
A. Vouching entries several days before the balance sheet date to the source documents is
necessary to gather evidence regarding completeness assertion of receivables while vouching
entries several days after the balance sheet date to the source documents is necessary to
gather evidence regarding the existence assertion of receivables.
B. Vouching entries several days before and after the balance sheet date to the source
documents is necessary to gather evidence regarding valuation assertion of receivables.
C. Vouching entries several days before the balance sheet date to the source documents is
necessary to gather evidence regarding existence assertion of receivables while vouching
entries several days after the balance sheet date to the source documents is necessary to
gather evidence regarding the completeness assertion of receivables.
D. Vouching entries several days before the balance sheet date to the source
documents is necessary to gather evidence regarding rights assertion of receivables
while vouching entries several days after the balance sheet date to the source
documents is necessary to gather evidence regarding the valuation assertion of
receivables.

15. In gathering evidence regarding the valuation assertion of an audit client’s accounts receivable,
the auditor should inquire with the management regarding their policy of providing bad debt
expense and the corresponding allowance and more importantly, gather evidence regarding the
reasonableness of such policy. Which of the following may be a possible source of evidence
regarding the reasonableness of an audit client’s policy of providing bad debts?
A. Subsequent events happening after the balance sheet date but before the issuance of the
financial statements.
B. Historical experience of the audit client regarding writing off uncollectible accounts.
C. Bad debt experience of similar company within the same industry.
D. All of the above.

PURCHASING/EXPENDITURE AND DISBURSEMENT CYCLES

16. The following are the relevant processes in the purchasing and disbursement cycle in the
financial statements auditor’s perspective, except:
A. Requisitioning.
B. Purchase order processing.
C. Billing.
D. Voucher preparation and recording.

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17. The auditor observed, while understanding a clients purchasing and disbursement cycle, that it
has no appropriate policy of requisitioning inventory as a result, there is a risk that it usually hold
unnecessary volumes of inventories, what is the possible implication of this audit observation to
the planned substantive testing?
A. The auditor should extend substantive test procedure in validating year-end existence
assertion on inventories.
B. The auditor should reduce extend of audit procedure in validating year-end valuation
assertion on inventories.
C. The auditor should plan to gather more persuasive evidence regarding the year-end
valuation assertion on inventories
D. The auditor should plan to gather more persuasive evidence regarding the year-end
completeness assertion on inventories

18. Which of the following is incorrect regarding the control objectives in receiving goods purchased?
A. The primary control objective in the receiving department is to ensure that goods received
are physically inspected and counted.
B. One control objective in the receiving department is to ensure that goods received
are what are actually ordered from the suppliers.
C. To ensure that goods received are in fact physically inspected and counted, the receiving
department copy of purchase order is blank in terms of the quantity ordered from suppliers.
D. The manifestation of the performance of control in the receiving department is the
accomplishment of the pre-numbered receiving report.

19. Comparing the documents in a the voucher package including suppliers’ sales invoice, purchase
order and receiving reports has an objective of __________ and is the responsibility of
_____________.
A. Ensuring that all payments being authorized are only for valid purchases only; Treasury
department.
B. Ensuring that only valid purchases and liabilities are to be requested payment of;
Accounting (Account payable) department.
C. Ensuring that only valid purchases and liabilities are to be requested payment of; treasury
department.
D. Ensuring that all valid purchases and liabilities are being requested payment of; purchasing
department.

20. Which of the following is not a standard internal accounting control for cash disbursements?
A. All disbursements, no exception, should be made through the banks by checks under the
imprest system.
B. Checks should be sequentially numbered and the numerical sequence should be accounted
for by the person preparing the bank reconciliation statement.
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 signs the check last.

21. In designing the audit program for Accounts Payables and Purchases, the auditor acknowledges
that there is a higher risk of ___________, thus should design audit procedures that shall focus
on validating ___________ assertion/s?
A. Overstatement; Completeness and Existence/Occurrence
B. Understatement; Existence/Occurrence and Valuation
C. Understatement; Completeness and Valuation
D. Overstatement; Existence/Occurrence and Valuation

22. The auditor wants to obtain evidence in support to the financial statement assertion of
completeness of purchase transactions and the corresponding accounts payable balance. The
auditor would most likely do which of the following substantive test procedure?
A. Trace back journal entries to the purchases journal to the supplier’s sales invoice and
shipping documents and receiving reports.
B. Trace the approved purchases orders to the receiving reports.
C. Send accounts payable confirmation letter to a sample of suppliers whose account balances
remain outstanding as of the balance sheet date.
D. Trace the receiving reports to the supplier sales invoices, then to the entries in the
purchases journal.

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23. As part of auditing the company’s purchasing/disbursement cycle, the auditor decided to render
a purchases cut-off by tracing back entries several days before and after the balance sheet date,
December 31, from the company’s purchases journal to the source documents, which include the
purchase order, the sales invoice of the supplier and the receiving report. Which of the following
is correct regarding the purchases cut-off procedures?
A. December entries are traced back to the source documents to gather evidence
regarding the existence assertion over payables; January entries are traced back to
the source documents to gather evidence regarding the completeness assertion
over payables.
B. December entries are traced back to the source documents to gather evidence regarding the
completeness assertion over payables; January entries are traced back to the source
documents to gather evidence regarding the existence assertion over payables.
C. December entries are traced back to the source documents to gather evidence regarding the
valuation assertion over payables; January entries are traced back to the source documents
to gather evidence regarding the existence assertion over payables.
D. December and January entries are traced back to the source documents to gather evidence
regarding the valuation assertion over payables.

24. Which of the following procedures would an auditor most likely do to perform search for
unrecorded liabilities and which financial statement assertion is mostly validated by the
procedure?
A. Vouching a sample of entries in the purchases journal just before year end to the unmatched
receiving report file which is consistent in gathering evidence about the existence assertion of
the recorded liabilities.
B. Comparing a sample of purchase orders issued just after year-end with the year-
end accounts payable entries which is consistent in gathering evidence about the
completeness of the recorded liabilities.
C. Scanning the cash disbursements entries recorded just after year-end for indications of
unusual transactions which is consistent in gathering evidence about the existence of the
recorded liabilities.
D. Vouching a sample of cash disbursements recorded just after year-end to receiving reports
and supplier’s invoices which is consistent in gathering evidence about the completeness of
the recorded liabilities.

25. An auditor decided to render circularization/confirmation of trade payable balance as of

December 31, 2020 which of the following is appropriate, if the auditor wants to gather evidence
to validate the completeness assertion over trade payables?
A. Send confirmation letters to selected supplier accounts with significant balances as of
December 31, 2020.
B. Send confirmation letters to selected supplier accounts with outstanding balances as of
December 31, 2020 regardless of the amount involved.
C. Send confirmation letters, preferably blank confirmation letters, to selected
supplier accounts whether with outstanding balance or not as of December 31,
2020 as long as the client had transacted with them in the past.
D. Send confirmation letters to selected suppliers account with significant balances as of
December 31, 2019 (prior year).

26. The following statements relate to the audit of cash

Statement 1: An improper bank reconciliation designed to conceal a cash shortage is more likely
to overstate than to understate the amount of outstanding checks.
Statement 2: The bank confirmation request used by auditors is a means of obtaining
documentary evidence of both assets and liabilities.
Statement 3: Contact with banks for purpose of opening company bank accounts should
normally be the responsibility of the corporate treasurer.
Statement 4: An auditor will request cut-off bank statement primarily in order to verify
reconciling items on the client’s bank reconciliation statement.

A. All statements are true.

B. All statements are false.
C. Only one statement is false.
D. Only one statement is true.

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27. In rendering cash counts for cash on hand, the custodians accountability may no longer include:
A. The imprest balance of petty cash fund, where the accountability is petty cash fund.
B. The depositable collections from customers as of the count date, where the accountability is
undeposited collections.
C. Any other money held by the custodian other than the petty cash fund imprest
balance and depositable collections from customers, if held in-tact.
D. Any other money held by the custodian other than the petty cash fund imprest balance and
depositable collections from customers, if not held in-tact.

28. In rendering cash counts, which of the following shall be acceptable support to the
accountability:
A. Unused postage stamps where the accountability is petty cash fund.
B. Post-dated checks where the accountability is undeposited collections.
C. NSF checks where the accountability is undeposited collections.
D. Post-dated and NSF checks accommodated by the petty cash fund.

29. In his audit of the client cash in bank account as of and for the period ended June 30, 2020, the
auditor requested for a cut-off bank statement for the 15-day period ended July 15, 2020. The
purpose of the cut-off bank statement is to gather evidence regarding the propriety of which of
the following reconciliation items as of June 30?
A. Deposits in transits and unrecorded bank credits.
B. Unrecorded bank debits and outstanding checks.
C. Unrecorded bank credits and unrecorded bank debits.
D. Deposits in transits and outstanding checks.

PRODUCTION/CONVERSION CYCLE
30. Which of the following is not a relevant process in the auditor’s perspective in his understanding
and review of a client’s production/conversion cycle?
A. Production planning.
B. Materials, labor and OH requisition.
C. Cost accounting.
D. Order processing.

31. The auditor, while understanding internal control over production/conversion cycle noted that the
client has no production planning policy in place and that you have noted that most of the time
the client tended to run over-production of its products in the past, what is the possible
implication of this information to the auditors planned substantive testing audit program?
A. The auditor should schedule inventory count procedures at year-end in validating existence
and completeness assertion on inventories.
B. The auditor should schedule inventory count at an interim date in validating existence and
completeness’ assertion on inventories.
C. The auditor should plan to perform more extensive audit procedure to validate the
valuation assertion on inventories.
D. The auditor maybe allowed to heavily rely on analytical procedures, such as the use of
inventory estimation procedures in validating the valuation assertion on inventories.

32. Which of the following most likely would be an internal control procedure designed to detect
errors and irregularities concerning the custody of inventories?
A. Periodic reconciliation of work-in-process with job cost sheets.
B. Segregation of functions between general accounting and cost accounting.
C. Independent comparisons of finished goods records with counts of goods on hand.
D. Approval of inventory journal entries by bookkeeper.

33. The auditor, while reviewing cost accounting records, noted that there has been a recurring entry
to close over-applied overhead cost allocated to cost of sales, work-in process inventory and
finished goods inventories, what is the possible implication of this observation to the auditor’s
substantive testing audit program?
A. The auditor should determine, where applicable, that any over-applied overhead
cost has been closed to the appropriate accounts at year-end for all production
during the year to ensure no material misstatement in the valuation assertion for
inventories.

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B. The auditor should determine, where applicable, that any over-applied overhead cost has
been closed to the appropriate account at year-end for all production during the year to
ensure no material misstatement in the existence assertion for inventories.
C. Independent comparisons of finished goods records with counts of goods on hand to ensure
no material misstatement in the existence and completeness assertions for inventories.
D. Perform purchases and sales cut-of procedures at year-end to ascertain whether goods are
appropriately included in the records at year-end to ensure no material misstatements in the
existence and completeness assertions for inventories.

34. Which of the following is incorrect regarding the physical count of inventories of the client in the
context of the independent audit of financial statements?
A. The best timing for observing physical count of inventories from the auditor’s perspective is
at year-end.
B. The primary responsibility of the independent auditor with regard inventory physical count is
to observe the conduct of the physical count of inventories done by the client personnel.
C. The auditor may decide to perform test-count on inventories as part of his substantive test
procedure for inventories.
D. The auditor traces test-counts noted during his physical count observation to the
client’s inventory summary and records in support of the existence assertion on
inventories.

35. Which of the following procedures carried out at an inventory count by an auditor is a test
primarily for overstatement of inventory?
A. Agree items that have been test-counted to inventory sheets.
B. Ensure completeness of sequence of pre-numbered inventory sheets at the conclusion of the
count.
C. Check that inventory held a third party locations is included in the count.
D. Agree items appearing in the inventory summary prepared by the client after the
inventory count to the test counts done the by the auditor.

36. Which of the following procedures carried out at an inventory count by an auditor is a test
primarily for overstatement of inventory?
A. Agree items that have been test-counted to inventory sheets.
B. Identify slow-moving obsolete inventory items.
C. Ensure completeness of sequence of pre-numbered inventory sheets at the conclusion of the
count.
D. Check that inventory held a third party locations is included in the count.

37. PAS 2, Inventories require that inventories be valued at lower of cost or net realizable value as at
the balance sheet date. Which of the following shall be the auditor’s best source of corroborating
evidence to determine the reasonableness of the client’s estimate of the inventories’ net
realizable value?
A. Vouching client estimates to the last sales invoices for finished goods inventory sales and
supplier’s purchase invoices for raw materials purchases.
B. Benchmarking by comparing client estimates against industry’s current prices of similar
inventories.
C. Tracing test counts noted during the physical count of inventories to the client’s inventory
summary.
D. Subsequent events review.

38. You were assigned to audit a merchandising client’s inventory for the period ended December 31,
2018. After your complete review of the client’s internal control over inventories, you have
ascertained that the internal controls are effective thus maintained the internal control risk at
below the maximum level. In connection to this, you decided further, as a substantive test
procedure, to simply test the reasonableness of the reported inventory balance by rendering
inventory estimation using the gross profit method of creating an expectation of how much the
client’s inventory balance should be. Which of the following is correct, if the auditor’s expected
balance using the gross profit method is materially different from the reported balance per books
as a result of the physical count?

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A. The auditor should propose to the audit client to adjust the books to equal the result of the
analytical procedure-inventory estimation.
B. The auditor should issue a qualified opinion due to the material misstatement in the inventory
and indicate in the audit report the extent of the material misstatement.
C. The auditor should extend further the audit procedure by rendering additional test
of details of account balance and transactions to ascertain the source of the
material misstatement
D. The auditor should propose to the audit client that an audit adjustment is necessary as a
result of your audit procedure and if the client is not willing to make the necessary
adjustment, communicate the possible implication of the material misstatement to the type of
audit opinion you will be issuing on the financial statements.

FINANCING AND INVESTING CYCLES

39. When auditing stockholders’ equity transactions and related balances, there is higher risk of
_____________, thus the auditor most likely would be focusing on _________ assertions?
A. Understatement error; Completeness and valuation assertions
B. Understatement error; Existence/occurrence and valuation assertions
C. Overstatement error; Completeness and valuation assertions
D. Overstatement error; Existence/occurrence and valuation assertions

40. Significant stockholders’ equity transactions such as share issuance, treasury share transactions,
share rights issuances, dividend declaration, among others, usually undergo authorization of the
no less that the board of directors of a corporation, as a result the auditor usually obtains
evidence regarding authorization of these transactions through:
A. Transfer agent’s records
B. Inter-office memoranda
C. Minutes of meetings of the BOD
D. Stock certificate files

41. In tests concerning the valuation of stock options, an auditor should:

A. Trace the authorization for the transaction to a vote of the board of directors.
B. Refer to market quotations
C. Verify existence of option holders in the entity’s payroll records or stock ledgers.
D. Determine that sufficient treasury stock is available to cover any new stock issued.

42. When auditing non-trade liability transactions and related balances, there is higher risk of
_____________, thus the auditor most likely would be focusing on _________ assertions?
A. Understatement error; Completeness and valuation assertions
B. Understatement error; Existence/occurrence and valuation assertions
C. Overstatement error; Completeness and valuation assertions
D. Overstatement error; Existence/occurrence and valuation assertions

43. As part of auditing an audit clients’ property plant and equipment account, the auditor requested
from the client a schedule of property additions and a schedule of repairs and maintenance
expense during the period under audit. Which of the following is correct regarding the two
schedules?
A. The schedule of property additions during the year is essential in gathering evidence
regarding the completeness assertion over PPE while the schedule of repairs and maintenance
expense account is necessary in gathering evidence regarding the existence assertion over
PPE.
B. The schedule of property additions during the year is essential in gathering evidence
regarding the valuation assertion over PPE while the schedule of repairs and maintenance
expense account is necessary in gathering evidence regarding the existence assertion over
PPE.
C. The schedule of property additions during the year is essential in gathering
evidence regarding the existence assertion over PPE while the schedule of repairs
and maintenance expense account is necessary in gathering evidence regarding the
completeness assertion over PPE.
D. The schedule of property additions during the year and the schedule of repairs and
maintenance expense account is necessary in gathering evidence regarding the valuation
assertion over PPE.

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44. The auditor suspects that the depreciation/amortization charges may have been overstated in
the previous as well as in the current year. Which of the following observations made is
consistent with this suspicion?
A. The auditor has discovered through inspection of property, plant and equipment records that
the company has consistently incurred significant losses on retirement of property, plant and
equipment.
B. The auditor has discovered continuous trade-ins of relatively new assets.
C. The auditor has observed that the carrying values of the properties are significantly in excess
of their insured values.
D. The auditor has discovered through the property, plant and equipment records that
there are many fully depreciated assets that are still in operations.

45. In testing for unrecorded retirement of equipment, an auditor most likely would _____ which is a
test of ______ assertion on PPE.
A. Compare depreciation journal entries with similar prior year entries in search of fully
depreciated equipment; Existence
B. Inspect items of equipment observed during the plant tour and then trace them to the
equipment subsidiary ledger; Completeness
C. Select items of equipment from the accounting records and then locate them during
the plant tour; Existence
D. Scan the general journal for unusual equipment additions and excessive debits to repairs and
maintenance expense; Completeness

46. An auditor requests a schedule of research and development expense from the client, in relation
to his audit of intangible assets, which of the following is correct?
A. The auditor should trace the items on the schedule to the supporting documentations to
ascertain propriety of the expenses consistent with validating the completeness assertion for
research and development expense.
B. The auditor should ascertain as to whether there are items on the schedule that should have
been capitalized as intangible asset which is consistent with validating the existence assertion
for intangible assets.
C. The auditor should trace the items on the schedule to the supporting documentations to
ascertain propriety of the expenses consistent with validating the existence assertion for
intangible assets.
D. The auditor should ascertain as to whether there are items on the schedule that
should have been capitalized as intangible asset which is consistent with validating
the completeness assertion for intangible assets.

47. Which of the following will the auditor least likely do if an he wants establish existence and
ownership of the non-trading equity securities subjected to the audit?
A. Corresponding with the investee company to verify the number of shares owned.
B. Confirming the number of shares owned that are held by an independent custodian.
C. Inspecting the documentation of the acquisition of the securities.
D. Inspecting securities on hand if held by an employed custodian.

48. Which of the following would provide the best form of evidence pertaining to the annual valuation
of a long-term investment in which the independent auditor’s client owns a 30 percent in non-
voting interest?
A. Audited financial statements of the investee company
B. Market quotations of the investee company’s shares
C. Current fair value of the investee company’s assets
D. Historical cost of the investee company’s assets

49. Which of the following would provide the best form of evidence pertaining to the annual valuation
of an investment in bonds where the client’s business model is consistent with an objective of
collecting contractual cash flows but is applying the fair market value option to eliminate
accounting mismatch?
A. Current fair value of the investee company’s assets
B. Historical cost of the investee company’s assets
C. Recomputation of the amortization of any premium or discounts.
D. Market quotations of the investee company’s bonds.

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