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Auditing Reviewer Lecture Notes 1 - Compress
Auditing Reviewer Lecture Notes 1 - Compress
REVIEW QUESTIONS-THEORETICAL
Audit is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic
actions and events to ascertain the degree of correspondence between these assertions and established criteria and
communicating the results thereof. (AAA)
Audit Process is the sequence of different activities involved in an audit.
- Pre-engagement require decision from the auditor whether or not to accept a new client or continue relationship
with an existing one. It requires evaluation of the auditor’s qualification, but also the integrity of management and
auditability of the client’s financial statements.
Primary objective: To minimize the likelihood of being associated to a client whose management lacks integrity.
- Audit planning involves the development of an overall audit strategy, audit plan and audit program. The auditor
will usually obtain more detailed knowledge about the client’s business and industry.
Primary Objective: To assess the different risks associated with the auditor to determine the nature, timing and
extent of further audit procedures.
- Consideration of internal controls involves the study and evaluation of internal controls whether it can prevent,
detect or correct material misstatements in a timely manner.
Primary objective: To establish a basis for reliance on internal controls in determining the nature, timing and
extent of audit procedures to be performed.
- Evidence- Gathering (Substantive testing) Using the information obtained in audit planning and consideration
of internal controls, the auditor performs substantive test to detect material misstatements as a basis in
concluding whether the entity's financial statements are presented fairly in accordance with financial reporting
standards. Substantive procedures could either be analytical procedures or test of details of transactions and
balances. This phase will always be performed by the auditor.
Primary objective: To ascertain the degree of correspondence between the financial statements prepared by
client's management and the financial reporting framework.
- Completing the audit Wrap-up procedures are performed; conclusions reached are reviewed; and an overall
opinion is formed during this phase.
Primary objective: To assist the auditor in assessing whether the conclusion reached is consistent with evidence
gathered.
- Issuance of the audit report In this phase, the auditor drafts and issues the audit report which states the
auditor's opinion regarding the fairness of the financial statements.
Primary objective: To communicate the results of the work of the auditor to various intended users
- Post-audit responsibilities After completion of the audit engagement, the auditor performs procedures to
determine compliance with quality controls and to identify areas for improvement in the current and future audit
engagements.
Primary objective: To assess and evaluate the quality or the audit services delivered by the engagement team.
PRE-ENGAGEMENT
Acceptance of an engagement
In making a decision whether to accept or reject an engagement, the auditor should perform the following:
1. Evaluate preconditions for an audit
Preconditions of an audit is the use by management of an acceptable financial reporting framework in the
preparation of the financial statements and the agreement of management and, where appropriate, those charged
with governance to the premise on which an audit is conducted
2. Evaluate auditability of the prospective client.
3. Investigate the integrity of the client's management through inquiry to appropriate parties or communication with the
predecessor auditor.
Continuance of an Engagement
To ensure the audit firm's continuing compliance with the continuance procedures, the auditor needs to consider
significant matters that have arisen during the current or previous engagements, and their implications for continuing the
relationship.
It is in the interest of both client and the auditor that the auditor sends an engagement letter, preferably before the
commencement of the engagement to help avoid misunderstandings with respect to the engagement. The engagement
letter documents and confirms:
a. Auditor's acceptance of the engagement
b. Objective and scope of the audit
c. Extent of auditor's responsibilities to the client
d. Form of any reports
Audit of Components
When the auditor of a parent entity is also the auditor of its subsidiary, branch, or division (component), the factors that
influence the decision whether to send a separate engagement letter to the component include the following:
-Who appoints the component auditor;
-Legal requirements in relation to audit appointments;
-Degree of ownership by parent;
-Whether a separate auditor's report is to be issued on the component; and
-Degree of independence of the component's management from the parent entity
Recurring Audits
On recurring audits, the auditor should consider whether circumstances require the terms of the engagement to be
revised and whether there is a need to remind the client of the existing terms of the engagement. The auditor may decide
not to send a new engagement letter each period.
However, the following factors may make it appropriate to send a new letter:
-Any indication that the client misunderstands the objective and scope of the audit.
-Any revised or special terms of the engagement.
-A recent change of top level management or board of directors.
-A significant change in ownership.
-A significant change in nature or size of the client's business.
-A change in legal or regulatory requirements.
-A change in financial reporting framework adopted in the preparation of the financial statements.
-A change in other reporting requirements.
No
a. Continue the original audit engagement
b. When prohibited to continue, withdraw from the audit engagement
Note: Every time withdrawal is made, the auditor should consider the necessity of communicating the reasons to
appropriate level of management.
REVIEW QUESTIONS-THEORETICAL
4. Which of the following procedures should be performed by the auditor prior to starting an initial audit? I. Perform
procedures regarding the acceptance of the client relationship and the specific audit engagement.
II. Communicate with the previous auditor, where there has been a change of auditors, in compliance with relevant ethical
requirements.
a. I only c. Both I and II
b. II only d. Neither I nor
6. Which of the following would not be a consideration of a CPA firm in deciding whether to accept a new client?
a. The client's financial ability.
b. The client's relations with its previous CPA firm.
c. The client's standing in the business community.
d. The client's probability of achieving an unqualified opinion.
7. Management's integrity affects all of the following risks except:
a. Business risk
b. Audit risk
c. Financial reporting risk
d. All of these risks are affected
8. Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor
auditor, the CPA should
a. Contact the predecessor auditor without advising the prospective client and request a complete report of the
circumstances leading to the termination of the engagement with an understanding that all information disclosed
will be kept confidential.
b. Accept the engagement without contacting the predecessor auditor since the CPA can include audit procedures
to verify the reason given by the client for the termination.
c. Not communicate with the predecessor auditor because this would in effect be asking the auditor to violate the
confidential relationship between an auditor and the client.
d. Advise the client of the intention to contact the predecessor auditor and request a permission for the
contact.
9. When an independent auditor is approached to perform an audit for the first time, he or she should make inquiries of
the predecessor auditor. Inquiries are necessary because the predecessor may be able to provide the successor with
information that will assist the successor in determining whether
a. The company rotates auditors
b. The engagement should be accepted
c. The predecessor's work should be used
d. In the predecessor's opinion, control risk is less than high
10. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor
regarding:
a. The predecessor's evaluation of matters of continuing accounting significance
b. Disagreement which the predecessor had with the client concerning auditing procedures and
accounting principles
c. The degree of cooperation the predecessor received concerning the inquiry of the client's legal counsel
d. The predecessor's assessment of inherent risk and judgments about materiality
11. If the prospective client refuses to permit the predecessor to respond or limits the predecessor's response, the
successor should:
a. Continue to ask the predecessor auditor questions on facts that might bear on the integrity of management
b. Accept the engagement but only after an equitable increase in the professional fee
c. Inquire as to the reasons and consider the implications in deciding whether to accept the engagement
d. Issue a disclaimer of opinion because the limited response of the predecessor auditor constitutes a significant
scope limitation
12. If permission from the client to discuss its affairs with the proposed auditor is denied by the client, the predecessor
auditor should:
a. Keep silent of the denial
b. Disclose the fact that the permission to disclosure is denied by the client
c. Disclose adequately to proposed auditor all noncompliance made by the client
d. Seek legal advice before responding to the proposed auditor
13. Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement?
a. The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit
techniques.
b. Management's disregard of its responsibility to maintain an adequate internal control environment.
c. The CPA's inability to determine whether related-party transactions were consummated on terms equivalent to
arm's-length transactions.
d. Management's refusal to permit the CPA to perform substantive tests before the year-end.
15. Ultimately, the decision about whether or not an auditor is independent must be made by
a. Auditor
b. Client's management
c. Public
d. Audit committee
17. Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's
financial statements?
a. The operating effectiveness of control procedures
b. The existence of related-party transactions
c. The complexity of the accounting system
d. The adequacy of the accounting records
18. A firm has obtained information that would have caused it to decline an engagement had the information been
available earlier. Actions available to the auditor would include the following, except:
a. Reporting the information and its implications to the person/s who appointed
b. Withdraw from the client relationship
c. Withdraw from the engagement
d. Issue a disclaimer of opinion
19. According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed terms would
need to be recorded in a(n)
a. Memo placed in the permanent section of the working papers
b. Client representation letter
c. Engagement letter
d. Comfort letter
21. Engagement letter that documents and confirms the auditor's acceptance of the engagement would normally be sent
to the client.
a. Before the commencement of the engagement
b. Before the auditor report is issued
c. After the audit report is issued
d. At the end of the fieldwork
25. Which of the following matters is generally included in an auditor's engagement letter?
a. The factors to be considered in setting preliminary judgments about materiality
b. Management's vicarious liability for illegal acts committed by its employees
c. Management's responsibility for the entity's compliance with laws and regulations
d. The auditor's responsibility to search for significant internal control deficiencies
26. Arrangements concerning with which of the following are least likely to be included in the engagement letter?
a. Fees and billing
b. A predecessor auditor
c. CPA investment in client securities
d. Other services to be provided in addition to the audit
28. When a CPA is the auditor of a parent entity and also the auditor of its subsidiary, branch or division (component),
which of need not be considered in deciding whether to send a separate letter to the component?
a. Who appoints the auditor of the component.
b. Legal requirements
c. Number of reports to be prepared during the peak audit season
d. Whether a separate audit report is to be issued on the component
30. On recurring audit engagements, the auditor may decide not to send a new engagement letter each
period. In which of the following situations will there be no need to send a new letter?
a. Revisions or special terms of the engagement
b. Significant change in nature or size of client's business
c. Indications of misunderstanding of the objective and scope of the audit
d. Recent change of middle management and rank and file organizational structure
31. If the auditor concludes that there is reasonable justification for the change in engagement, the report to be issued
would
a. Include reference to the original engagement
b. Be appropriate for the revised terms of the engagement
c. Include reference to any procedures that may have been performed in the original form
d. Not include reference to any procedures that may have been performed, particularly when the new
engagement is to undertake agreed-upon procedures
33. If a change in the type of engagement from higher to lower of assurance is not justified, the auditor should:
a. Withdraw from the engagement.
b. Qualify the report on the original engagement
c. Continue with the revised engagement, but make explicit about the original engagement reference
d. Refuse to agree to management's request on the change of engagement and continue with the original
engagement.
34. One of the first things that the auditor will do after accepting a new client is:
a. Contact the client's attorney to discover legal obligations
b. Communicate with the predecessor auditor.
c. Study the client's internal control structure.
d. Tour the client's facilities.
35. If a company's external auditor expresses an unqualified opinion as a result of the audit of the company's financial
statements, readers of the audit report can assume that
a. The company is financially sound and the financial statements are accurate
b. The external auditor found no fraud
c. Internal control is effective
d All material disagreements between the company and the auditor about the application of accounting
principles were resolved in the satisfaction of the external auditor.\
The nature and extent of planning activities will vary according to the: (SECTA)
- Size and complexity of the entity
- Previous Experience with the entity of key engagement team members (partner, manager, and staff-in-charge)
- Changes in circumstances that occur during the audit engagement
- Timing of the Appointment of the independent auditor
Audit Plan
After the overall audit strategy has been established, an audit plan can be developed to address the various matters
identified in the overall audit strategy taking into account the need to achieve the audit objectives trough the efficient use
of the auditor's resources.
The audit plan is more detailed than the overall audit strategy in that it includes the nature, timing and extent of audit
procedures to be performed by engagement team members. These procedures may be documented in an audit program
Planning documentation
The auditor shall document:
- the overall audit strategy
- the audit plan
- any significant changes made during the audit engagement to the overall strategy or audit plan, and the reasons for such
changes
The nature, timing and extent of the direction and supervision or engagement team members and review of their work
vary depending on many factors, including the
- assessed risks of material misstatement;
- size and complexity of the entity;
- the area of audit; and
- capabilities and competence of personnel performing the audit work.
Identifying And Assessing The Risks Of Material Misstatement Through Understanding The Entity And Its
Environment
It is the objective of the auditor to identify and assess risks of material misstatements, whether due to fraud or error, at the
financial statement and assertion levels, through understanding the entity and its environment, including the entity's
internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material
misstatements.
Note: Risk assessment procedures by themselves, however, do not provide sufficient appropriate audit evidence on which
to base the audit opinion.
Analytical Procedures during Planning Stage
Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among
both financial and non-financial data. Analytical procedures also encompass the investigation of identified fluctuations and
relationships that are consistent with other relevant information or that differ from expected values by a significant amount.
Analytical procedure is required to be performed during planning stage and overall review stage of the audit. Analytical
procedures performed during audit planning is designed to:
1. Enhance the auditor's understanding of the entity's business and transactions to help plan the nature, timing, and
extent of substantive auditing procedures that will be used to gather audit evidence.
2. Identify areas that may represent specific risks (such as unusual transactions and events or abnormal/significant
fluctuations in amounts, ratios, or trends) that the auditor may need to investigate further
Materiality
Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis
of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its
omission or misstatement.
The concept of materiality recognizes that some matters, but not all, are important for fair presentation of the financial
statements in conformity with PFRS.
In planning the audit, the auditor makes judgments about the size of misstatements that will be considered material.
These judgments provide a basis for:
a. Determining the nature, timing and extent of risk assessment procedures;
b. Identifying and assessing the risks of material misstatement; and
C. Determining the nature, timing and extent of further audit procedures
Using professional judgment, the auditor shall determine the following materiality:
1. Financial statement level materiality the smallest aggregate amount of misstatement applicable to all financial
statements.
2. Assertion level materiality materiality level for individual or particular class of transactions, account balance, or
disclosure where appropriate; this is also known as tolerable misstatement
3. Performance materiality amount or amounts set by the auditor at less than materiality for the financial statements as a
whole, and if applicable, at less than materiality level or levels for particular classes of transactions, account balances or
disclosures
Audit Risk
Audit risk is the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially
misstated.
3. Adequate planning of the audit work helps the auditor of accomplishing the following objectives, except:
a. Ensuring that appropriate attention is devoted to important areas the audit.
b. Identifying the areas that need a service of an expert
c. Gathering of all corroborating audit evidence.
d. The audit work is completed efficiently.
4. The auditor should plan the audit work so that the audit will be performed in an effective manner. The extent of planning
will vary according to any of the following except:
a Auditor's experience with the entity and knowledge of the business.
b. The nature and complexity of the audit engagement
c. The assessed level of control risk
d. Size of the audit client.
10. In planning the audit engagement, the auditor should consider each of the following except
a. The kind of opinion (unqualified, qualified, or adverse) that is likely to be expressed.
b. Matters relating to the entity's business and the industry in which operates
c. The entity's accounting policies and procedures.
d. Materiality level and audit risk.
11. Which of the following matters should be considered by the auditor in developing the overall audit strategy?
a. Important characteristics of the entity, its business, its financial performance and its reporting requirements
including changes since the date of the prior audit
b. All of the choices
c. Conditions requiring special attention, such as the existence of the related parties
d. The setting of materiality level for audit purposes
12. In developing the overall audit strategy, the focus of the engagement team's efforts is considered. Which of the
following is not appropriately classified as a factor affecting the focus of the team's efforts?
a. The financial reporting framework on which the financial information to be audited has been prepared,
including any need for reconciliation to another reporting framework.
b. Setting materiality for planning purposes.
c. Audit areas where there is a higher risk of material misstatement.
d. Volume of transactions, which may determine whether it is more efficient for the auditor to rely on internal
control.
13. Which of the following is least likely considered by the CPA when he makes an overall audit plan?
a. The nature and timing of reports and other communication with the entity that are expected under the
engagement
b. Identification of complex accounting areas including those involving accounting estimates
c. The effect of information technology on the audit
d. The content of the representation letters.
14. With respect to planning an audit, which of the following statements is always true?
a. An inventory count must be observed at year-end.
b. An engagement should not be accepted after the client's year-end.
c. Final staffing decisions must be made prior to completion of the planning stage.
d. It is acceptable to perform a portion of the audit of a continuing client at interim dates.
15. Which of the following procedures would an auditor most likely perform in planning an audit of financial statements?
a. Inquiring of the client's legal counsel concerning pending litigation.
b. Comparing the financial statements to anticipated results.
c. Examining computer generated exception reports to verify the effectiveness of internal controls.
d. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.
16. This serves as the set of instructions to assistants involved in the audit and as a means to control and record the
proper execution of the work of the personnel involved in the service.
a. Audit procedures
b. Audit program
c. Audit plan
d. Audit risk model
17. The auditor should design the written audit program, so that:
a. All material transactions will be selected for substantive testing.
b. Substantive tests prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either tests of controls or tests of transactions.
18. In designing audit programs, an auditor should establish specific audit objectives that related primarily to the.
a. Selected audit techniques
b. Financial statement assertions
c. Timing of audit procedures.
d. Cost-benefit gathering evidence
19. The auditor should document the overall audit strategy and the audit plan, including significant changes made during
the audit engagement. Which of the following statements on documentation is incorrect?
a. Documentation of the overall audit strategy may be made in the form of a memorandum that contains key
decisions regarding the overall scope, timing and conduct of the audit.
b. The auditor may use standard audit programs or audit completion checklists, but such programs and checklists
need to be tailored to the particular client.
c. The auditor's documentation of any significant changes to the originally planned overall audit strategy
and to the detailed audit plan need not include the reasons for the significant changes.
d. The form and extent of documentation depend on such matters as the size and complexity of the entity,
materiality, the extent of other documentation, and the circumstances of the specific engagement.
20. Audit procedures may be classified as risk assessment procedures and further audit procedures. Which of the
following best describes risk assessment procedures?
a. These procedures are used detect material misstatements at the assertion level.
b. These procedures include tests of details of classes of transactions, account balances, and disclosures and
analytical procedures.
c. These procedures test the operating effectiveness of controls in preventing detecting and correcting, material
misstatements at the assertion level.
d. These are procedures for obtaining an understanding of the entity and its environment, including its
internal control, to assess the risks of material misstatement at the financial statement and assertion
levels.
22. Which of the following procedures is not performed as a part of planning an audit engagement?
a. Reviewing working papers of the prior year. c. Designing an audit program
b. Performing analytical procedures d. Test of controls
23. Cost-benefit considerations are part of audit planning. In relation to this, which of the following audit procedures is
usually the least costly to perform?
a. Tests of balances
b. Analytical procedures
c. Tests of transactions
d. Tests of controls
26. Which of the following procedures would an auditor least likely perform planning a financial statement audit?
a. Coordinating the assistance of personnel in data preparation.
b. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity.
c. Selecting a sample of vendor's invoices for comparison to receiving report
d. Reading the current year's interim financial statements.
27. Audit risk has three components: inherent risk, control risk and detection risk. Which of the following statements is
correct?
a. Detection risk is a function of the efficiency of an audit procedure.
b. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
c. The risk that material misstatement will not prevent or detected on a timely basis by internal control can be
reduced to a zero by effective controls.
d. The existing levels of inherent risk, control risk and detection risk can be changed at the discretion of the
auditor.
28. Some accounts balances, such as those for retirement benefits and finance lease, are the results of complex
calculations. The susceptibility to material misstatements in these types of accounts is referred to as
a. Audit risk
b. Control risk
c. Detection risk
d. Inherent risk
29. Inherent risk and control risk differ from detection risk in that inherent risk and control risk area are:
a. Elements of audit risk while detection risk is not.
b. Changes at the auditor's discretion while detection risk is not.
c. Functions of the client and its environment while detection risk is not
d. Considered at the individual account balance level while detection risk is not.
31. There is an inverse relationship that exist between the acceptable level of detection risk and the
a. Risk of failing to discover material misstatement
b. Preliminary judgments about materiality levels
c. Assurance provided by substantive tests
d. Risk of misapplying audit process
32. In considering materiality for planning purposes, Ash, auditor believes that misstatements aggregating P60, 000 would
have material effect on an entity's income statement, but that misstatements would have to aggregate P40, 000 to
materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be
expected to detect misstatements that aggregate:
a. P40, 000
b. P50, 000
c. P60, 000
d. P100, 000
33. Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about
materiality?
a. The anticipated sample size of the planned substantive tests.
b. The entity's annualized interim financial statements.
c. The results of the internal control questionnaire
d. The contents of the management representation letter.
35. In performing an audit of financial statements, the auditor should obtain a sufficient knowledge of a client's business
and industry to
a. Develop an attitude of professional skepticism concerning management's financial statement assertions. b.
Make constructive suggestions concerning improvements to the client's internal control.
c. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to
be materially misstated.
d. Understand the events and transactions that may have an effect on the client's financial statements
1. It is the process designed and effected by those charged with governance, management, and other personnel to
provide reasonable assurance about the achievement of the entity's objectives.
a. Internal auditing
b. Business strategy
c. Internal control
d. Accounting process.
3. This is a basic concept of internal control which recognizes that the cost of internal control should not exceed the
benefits expected to be derived from it:
a. Management by exception.
b. Limited liability
c. Management responsibility
d. Reasonable assurance
5. Which of the following is an example of an inherent limitation in a client's internal control system?
a. The effectiveness of procedures depends on the segregation of employee duties.
b. Procedures are designed to assure the execution and recording of transactions in accordance with
management's authorization.
c. In the performance of most control procedures, there are possibilities of errors arising from mistakes in
judgment.
d. Procedures for handling large numbers of transactions are processed by information technology (IT)
equipment.
9. Risks can arise or change due to circumstances such as the following except:
a. There is a change in the regulatory or operating environment (.e. a new law has been passed which prohibits
the use of a chemical which is a main ingredient of the company's major product).
b. New employees have been hired by the company.
c. The company switched from manual information systems to a computerized system.
d. The accounting and financial reporting framework has remained stable for the past five years, and no
new pronouncements have been made.
10. As part of a periodic planning exercise, Cedric Naranjo Company discovers that a political dispute may interfere with
the company's supply sources. This is an example of:
11. Control activities constitute one of the five components of internal control. Which of the following is not included in this
internal control component?
a. Segregation of duties c. An internal audit function
b. Performance reviews d. Authorization
12. Control activities are the policies and procedures that help ensure that management directives are carried out. These
include activities relating authorization, performance reviews, information processing, physical controls and segregation of
duties. There is proper segregation of duties when an individual who
a. Authorizes a transaction records it.
b. Maintains custody of an asset has access to the accounting records for the asset
c. Authorizes transaction maintains custody of the asset that resulted from the transaction.
d. Records a transaction do not compare the accounting record of the asset with the asset itself.
13. Under PSA 315, monitoring of controls is an internal control component that involves a process of assessing the
quality of internal control performance over time. It involves assessing the design and operation of controls on a timely
basis and taking necessary corrective actions. Monitoring of controls is accomplished through ongoing monitoring
activities, separate evaluations, or a combination of the two. An entity's ongoing monitoring activities often include
a. Periodic reporting by the entity's internal auditors about the functioning of internal control
b. The audit of the annual financial statements
c. Periodic audits by the audit committee
d. Reviewing the purchasing account
14. The primary purpose of the auditor's consideration of internal control is to provide a basis for
a. Determining whether procedures and records that are concerned with the safeguarding of assets are reliable.
b. Constructive suggestions to clients concerning deficiencies in internal control.
c. Determining the nature, timing and extent of audit tests to be applied
d. The expression of an opinion.
15. Which of the following statements concerning the relevance of various types of controls to a financial statement audit
is correct?
a. All controls are ordinarily relevant to a financial statement audit.
b. Controls over the reliability of assets and liabilities are of primary importance, while controls over the reliability
of financial reporting may also be relevant.
c. Controls over the reliability of financial reporting are ordinarily most directly relevant to a financial
statement audit, but other controls may also be relevant.
d. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken.
16. PSA 315 Redrafted requires the auditor to obtain an understanding of the client's internal controls
a. For every audit
b. For first-time audits
c. Whenever it would be appropriate
d. Sufficient to find any frauds which may exist
17. When obtaining knowledge about an entity's internal control, it is important for the auditor to consider the competence
of its employees because their competence bears directly and importantly upon the
a. Cost-benefit relationship of internal control
b. Comparison of recorded accountability with assets
c. Achievement of the objectives of internal control
d. Timing of substantive tests to be performed
18. Obtaining an understanding of internal control involves:
A B C D
Evaluating the design of a control Yes Yes Yes No
Determining whether the control has been implemented Yes Yes No Yes
Testing the effectiveness of a control Yes No Yes Yes
19. The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor
with
a. Information necessary to prepare flowcharts.
b. Evidence to use in reducing detection risk.
c. Knowledge necessary to plan the audit.
d. A basis for modifying test of controls.
20. To obtain an understanding of the relevant policies and procedures of internal control, the auditor performs all of the
following except:
a. Make inquiries
b. Make observations
c. Design substantive tests
d. Inspect documents and records
21. After obtaining an understanding of an entity's internal control, an auditor may assess control risk at the maximum
level for some assertions because the auditor
a. Believes the internal control policies and procedures are unlikely to be effective.
b. Determines that the pertinent internal control components are not well documented.
c. Performs tests of controls to restrict detection risk to an acceptable level.
d. Identifies internal control policies and procedures that are likely to prevent material misstatements.
22. After obtaining an understanding of internal control and assessing control risk, an auditor decided to perform tests of
controls. The auditor most likely decided that
a. Additional evidence to support a further reduction in control risk is not available.
b. It would be efficient to perform tests of controls that would result in a reduction in planned substantive
tests.
c. An increase in the assessed level of control risk is justified for certain financial statement assertions,
d. There were many internal control weaknesses that could allow errors to enter the accounting system.
24. In conducting an audit in accordance with PSAs, the auditor is required to identify and assess the risks of material
misstatement at the financial statements level, and at the assertion level for classes of transactions, account balances,
and disclosure. Some of these risks, in the auditor's judgment, require special audit consideration, such as those that
involve fraud or complex transactions. Such risks are called
a. Business risks c. Audit risks
b. Significant risks d. Material risks
25. The auditor's primary objective in obtaining an understanding of the client's control over the purchasing function is to
a. Investigate the recording of unusual transactions regarding raw materials.
b. Determine the reliability of financial reporting by the purchasing function.
c. Observe the annual physical count.
d. Ascertain that raw material paid for are on hand.
26. When obtaining an understanding of an entity's internal control, an auditor should concentrate on the substance of
controls rather than their form because:
a. The controls may be operating effectively but may not be documented.
b. Management may establish appropriate controls but not act on them.
c. The controls may be so inappropriate that no reliance is contemplated by the auditor.
d. Management may implement controls with costs in excess of benefits.
27. When obtaining an understanding of the accounting and internal the accounting control system the auditor may trace
a few transactions through the accounting system. This technique is:
a. Reperformance
b. Control test
c. Walk-through
d. Validity test
28. Control risk assessment procedures include all of the following, except
a. Inspection of documents
b. Confirmation of bank balances
c. Observation of procedures
d. Inquiry of client personnel
29. Evidence of the performance of control risk assessment procedures includes all of the following, except:
a. Flowcharts
b. Questionnaires
c. Lead schedule
d. Memoranda
30. Which of the following statements regarding auditor documentation of the client's internal control structure is correct?
a. Documentation must include flowcharts.
b. Documentation must include procedural write-ups.
c. No documentation is necessary although it is desirable.
d. No one particular form of documentation is necessary, and the extent of documentation may vary.
31. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that:
a. Specified controls requiring segregation of duties may be circumvented by collusion.
b. Tests of controls may fail to identify controls relevant to assertions.
c. Material misstatement may exist in the financial statements.
d. Entity policies may be circumvented by senior management.
32. An auditor may decide to assess control risk at the maximum level certain assertions because the auditor believes
a. Evaluating the effectiveness of policies and procedures is inefficient.
b. Sufficient evidential matter to support the assertions is likely to be available.
c. More emphasis on tests of controls than substantive tests is warranted.
d. Considering the relationship of assertions to specific account balances is more efficient.
33. An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the auditor's
a. Assessment of control environment's effectiveness
b. Identification of weaknesses in the system
c. Understanding of the system
d. Assessment of control risk
35. After documenting internal control in an audit engagement, the auditor may perform tests on:
a. Those controls that the auditor plans to rely on.
b. Those controls that were reviewed (selected on a random basis).
c. Those controls in which deficiencies or weaknesses were identified.
d. Those controls that have a material effect on the balances in the
36. In a financial statement audit, the auditor is required to perform test of controls when
I. The auditor's risk assessment includes expectation of the operating effectiveness of controls.
II. When substantive procedures alone do not provide sufficient appropriate audit evidence at the assertion level.
a. I only.
b. Either I or II
c. II only
d. Neither I nor II
39. An auditor intends to perform test of controls on a client’s control procedures that leaves no audit trail of documentary
evidence. The auditor most likely will test the procedure by
a. Inquiry and inspection
b. Inquiry and observation
c. Confirmation and reperformance
d. Analytical procedures and confirmation
40. Which of the following is the auditor's purpose of further testing internal control procedures?
a. Provide a basis for reducing the assessed level of control risk below that which resulted from the
auditor's initial understanding of internal control.
b. Reduce the risk that errors or fraud which are not prevented or reduce detected by internal control are not
detected by the independent audit
c. Provide assurance that transactions are executed in accordance with management's authorization and access
to assets is limited by a proper segregation of functions.
d. Provide assurance that transactions are recorded as necessary to permit the preparation of the financial
statements in accordance with PERS
41. Which of the following is not a characteristic of the lower control risk approach?
a. The auditor usually plans to place considerable reliance on the controls.
b. The auditor plans to perform extensive tests of controls.
c. Control risk is usually assessed at maximum level.
d. Substantive tests are usually restricted.
42. A control that reduces the risk that an existing or potential control weakness will result in a failure to meet a control
objective is referred to as
a. Compensating control
b. Non-routine control
c. Conditional control
d. Offset control
44. If no changes have occurred since the controls were last tested, a CPA should
a. Rely on the prior year audit's assessment of internal controls and use this assessment in the current year.
b. Test the operating effectiveness of such controls at least once in every fourth audit
c. Rely entirely on the performance of substantive audit procedures.
d. Test the operating effectiveness of such controls at least once in every third audit
45. Regardless of the assessed level of control risk, an auditor would perform some
a. Test of controls to determine the operating effectiveness of internal control policies
b. Analytical procedures to verify the design of internal control procedures
c. Substantive test to restrict detection risk for significant classes of transactions
d. Dual-purpose test to evaluate both the risk of monetary misstatement and preliminary control risk
1. The transaction cycles approach leads to efficient processing of large number of transactions because
a. Transaction cycles are easy to understand.
b. Transaction cycles are easier to computerize.
c. The transaction cycle approach represents natural order of the business.
d. A large number of transactions within a given cycle can be categorized into a relatively small number of
distinct types.
2. What is the major difference between the revenue and the expenditure cycle?
a. The revenue cycle includes marketing activities; the expenditure cycle does not.
b. In the revenue cycle, cash is received; in the expenditure cycle cash paid out.
c. The expenditure cycle includes paying employees.
d. The revenue cycle includes the activity of obtaining funds from investors.
3. The business owners obtain financing from outside investors, which result to an inflow of cash into the company. This
transaction is considered to be part of which cycle?
a. Revenue cycle c. Production cycle
b. Payroll cycle d. Financing cycle
4. The basic "give and take functions of a business have been grouped into transaction cycles. The cycle that includes the
events of hiring employees and paying them is known as the
a. Human resources cycle c. Expenditure cycle
b. Financing cycle d. Revenue cycle
5. The transaction cycles relate to one another and interface with this to generate information for both management and
external parties.
a. General ledger and reporting system c. Human resources cycle
b. Accounting information systems d. Computer processor
2. Which of the following is not normally considered a step in the credit sales functions?
a. Approving credit
b. Accepting customer orders
c. Shipping the sales orders
d. Acquiring goods to fill the order
3. Which of the following is not typically included in the sales and collection cycle?
a. Bad debt expense.
b. Sales returns and allowances.
c. Allowance for uncollectible accounts.
d. Cash credits from the cash disbursement journal.
4. The overall objective in the audit of the sales and collection cycle is to evaluate whether
a. The sales account and the accounts receivable account are free of errors.
b. The sales account and the accounts receivable are free of material errors
c. The account balances affected by the cycle are fairly presented in accordance with GAAP.
d. The sales account and the accounts receivable account are presented fairly in accordance with GAAP.
5. The internal controls surrounding the revenue cycle provide the organization with several assurances that include all of
the following except the
a. Approval of all credit sales transactions after they are processed.
b. Accurate recording, shipping, and billing of all valid sales transactions.
c. Proper authorization of all sales and sales return and allowance transactions.
d. Proper safeguarding of finished goods inventories while in stock and during the shipment process.
6. The internal control objectives of the revenue cycle include all of the following except
a. Revenue cycle transactions are properly executed.
b. Transactions relating to revenue are properly recorded.
c. Appropriate goods are ordered so that sales can be made.
d. Custody over assets resulting from the revenue cycle is properly maintained
7. Which of the following control procedures would most likely assure that access to shipping, billing, inventory control,
and accounting records is restricted to personnel authorized by management?
a. Segregate responsibilities for authorization, execution and recording and prenumber and control custody of
documents
b. Establish cash receipts function in a centralized location and require daily reconciliation of cash receipts records with
deposit slips.
c. Establish policy and procedures manuals, organization charts, and supporting documentation
d. Periodically substantiate and evaluate recorded account balances.
9. In a credit merchandising organization, the best place to vest credit approval is in:
a. Accounts receivable department.
b. Sales department.
c. A completely separate department.
d. The cashier area where receipts will eventually be sent.
10. To achieve good internal control, which department should perform the activities of matching shipping documents with
sales orders and preparing daily summaries?
a. Billing department c. Credit department
b. Shipping department. d. Sales order department
11. Which of the following control procedures may prevent the failure to bill customers for some shipments?
a. Each shipment should be supported by a pre-numbered sales invoice that is accounted for.
b. Each sales order should be approved by authorized personnel.
c. Sales journal entries should be reconciled to daily sales summaries.
d. Each sales invoice should be supported by a shipping document.
12. Which of the following control procedures could prevent or detect errors or frauds arising from shipments made to
unauthorized parties?
a. Document policies and procedures for scheduling shipments.
b. Establish procedures for reviewing and approving prices and sales terms before sale.
c. Prenumber bills of lading and assure that related billings are made on a periodic basis.
d. Prepare and periodically update lists of authorized customers.
13. Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize
sales volume at the expense t high bad debt write-offs?
a. Employees responsible for authorizing bad debt write-offs are denied access to cash.
b. Employees involved in the credit granting are separated from sales function
c. Shipping documents and sales invoices are matched by an employee who does not have authority to write-off
bad debts.
d. Subsidiary accounts receivable records are reconciled to the control account by an employee independent of
the authorization of credit
14. The use of pre-numbered invoices, then accounting for their numeric sequence, meets primarily the
a. Completeness assertion
b. Rights and obligations assertion
c. Valuation or allocation assertion
d. Existence or occurrence assertion
15. Which of the following controls most likely would assure that all billed sales are correctly posted to the account's
receivable ledger?
a. Each shipment on credit is supported a prenumbered sales invoice.
b. Each sales invoice is supported by prenumbered shipping document
c. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
d. The accounts receivable ledger is reconciled daily to the control account in the general ledger.
16. To achieve control when there is no billing department, the billing function should be performed by the
a. Accounting department
b. Shipping department
c. Sales department
d. Credit and collection department
17. The person who opens the mail commonly prepares a remittance advice when a customer fails to return one with a
payment. Consequently, mail should be opened by the
a. Credit manager
b. Sales manager
c. Receptionist
d. Accounts receivable clerk
18. Which of the following is an effective internal control over accounts receivable?
a. Balances in the subsidiary accounts receivable ledger should be c reconciled to the general ledger control
account once a year, preferably at year-end.
b. Responsibility for approval of the write-off of uncollectible accounts receivable should be assigned to the
cashier.
c. The billing function should be assigned to persons other than those responsible for maintaining
accounts receivable subsidiary records.
d. Only persons who handle cash receipts should be responsible for the preparation of documents that reduce
accounts receivable balances.
19. Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances
from the mail room?
a. The cashier endorses the checks.
b. The cashier prepares the daily deposit.
c. The cashier makes the daily deposit at a local bank
d. The cashier posts the receipts to the accounts receivable subsidiary ledger.
20. Which of the following would best protect a company that wishes to prevent lapping?
a. Having customers send payments directly to the company's bank
b. Segregating duties so that accounting has no access to an incoming mail
c. Requesting that customers checks be made payable to the company and be addressed to the treasurer
d. Segregating duties so that no employee has access both to checks from customers and to currency from daily
cash receipts
21. Which of the following is not a universal rule for achieving control over cash?
a. Separate the cash-handling and record-keeping functions.
b. Decentralize the receiving of cash as much as possible.
c. Deposit each day's cash receipts by the end of the day.
d. Have bank reconciliation's performed by employees who do not handle cash.
22. Which of the following fraudulent activities most likely could be perpetrated due to lack of effective control in the
revenue cycle?
a. The failure to prepare shipping documents may cause an overstatement of inventory balances
b. Authorization of credit memos by personnel who receives cash may permit the misappropriation of
cash.
c. Fictitious transactions may be recorded that may cause an understatement of revenues and overstatement of
receivables.
d. Claims received from customers for goods returned may be intentionally recorded in other customer's
accounts.
23. Assuming cash receipts from credit sales have been misappropriated, which of the following is likely to conceal the
misappropriation and unlikely to be detected?
a. Understating the sales journal
b. Overstating the accounts receivable control account
c. Overstating the accounts receivable subsidiary ledger
d. Overstating the cash receipts journal
24. Which of the following control procedures will likely prevent the concealment of a cash shortage that was perpetrated
by improperly writing off a trade accounts receivable?
a. Write-offs must be approved by the cashier.
b. Write-offs must be authorized by the field sales representatives.
c. Write-offs must be supported by an aging schedule showing that only receivables months overdue have been
written off.
d. Write-offs must be approved by a responsible officer after reviewing credit department
recommendations and supporting evidence.
25. During the review of a small owner-managed company's internal controls the auditor discovers that the accounts
receivable clerk approves credit memos and has access to cash. Which of the following controls would offer this
deficiency?
a. The owner reviews errors in billings to customers and postings to subsidiary records.
b. The owner reviews credit memos after they are recorded.
c. The controller reconciles the detailed receivables records to the general ledger.
d. The controller reviews the monthly bank statement directly and reconciles the checking accounts.
27. Sales invoices may be recorded in the incorrect accounting period. A computer comparison of the invoice date with the
accounting period when the goods were shipped relates to the
a. Valuation or allocation assertion.
b. Completeness assertion
c. Existence or occurrence assertion.
d. Existence or occurrence assertion and to the completeness assertion
30. To determine whether internal control operates effectively to minimize errors of failure to invoice a shipment, the
auditor would select a sample of transactions from the population represented by the
a. Sales invoice
b. Bill of lading file.
c. Customer order file
d. Subsidiary customer accounts ledger
31. Tracing copies of sales invoice to shipping documents provides evidence that
a. Shipments were billed
b. Billed sales were shipped
c. Shipments were recorded as receivables
d. Debits to accounts receivable were for sales shipped
32. Tracing shipping documents to sales invoices provides evidence that
a. Shipments were recorded as sales
b. Recorded sales were shipped
c. Invoiced sales were shipped
d. Shipments were billed
33. To test for recorded sales for which there were no actual shipments, the auditor traces from the
a. Bill of lading to the sales journal
b. Sales journal to the bill of lading
c. Sales journal to the accounts receivable subsidiary ledger
d. Bill of lading to the supporting customer order and sales order
34. To test for the possibility of a shipment to a fictitious customer, the auditor traces from the
a. Sales journal to the accounts receivable ledger
b. Accounts receivable ledger to the bill of lading
c. Credit authorization to the bill of lading
d. Bill of lading to the credit authorization
35. From the standpoint of good internal control, the credit manager should be responsible to the
a. Treasurer
b. Sales manager
c. Controller
d. Customer-service manager
2. The primary audit objective regarding the purchasing of materials by the client is to
a. Observe the annual physical count.
b. Ascertain that materials paid for are on hand.
c. Investigate the recording of unusual transactions regarding materials.
d. Determine the reliability of financial reporting by the purchasing function.
5. If internal control is well-designed, employees in the same department most likely would approve purchase orders and
also
a. Inspect goods upon receipt
b. Negotiate terms with vendors
c. Authorize requisition of goods
d. Reconcile the open invoice file
6. The authority to accept incoming goods in receiving should be based on a(n)
a. Bill of lading
b. Materials requisitions
c. Vendor's invoice
d. Approved purchase order
7. Internal control is improved when the quantity of merchandise ordered is omitted from the copy of the purchase order
sent to the
a. Department that initiated the requisition
b. Accounts payable department i
c. Receiving department
d. Purchasing agent
8. When goods are received, the receiving clerk should match the goods with the
a. Purchase order and requisition
b. Vendor's invoice and the receiving report
c. Vendor's shipping document and the purchase order
d. Receiving report and the vendor's shipping documents
9 The accounts payable department receives a purchase order form to accomplish all of the following, except
a. Comparing invoice price to purchase order price
b. Comparing quantity ordered to quantity purchased
c. Ensuring that the purchase had been properly authorized
d. Ensuring that the goods had been received by the party requesting the goods
10. Matching the suppliers' invoice, the purchase order, and the receiving report normally should be the responsibility of
the
a. Treasury function
b. Receiving department.
c. Accounting function.
d. Purchasing department
11. Accounts payable department usually has responsibility for verifying the propriety of acquisitions by comparing the
details on the
a. Vendor's invoice and the receiving report
b. Vendor's invoice and the purchase requisition
c. Purchase order, receiving report, and vendor's invoice
d. Purchase requisition, purchase order, and receiving report
12. What is the reason for ensuring that every copy of a vendor's invoice has a receiving report?
a. To ascertain that merchandise billed by the vendor was received by the company
b. To ascertain that merchandise received by the company was billed by the vendor
c. To ascertain that a check was prepared for every invoice
d. To ascertain that the invoice was correctly prepared
13. Which of the following is the most effective control procedure to detect vouchers that were prepared for the payment of
goods that were not received?
a. Match the purchase order, receiving report and vendor's invoice for each voucher in accounts payable
department
b. Compare goods received with goods requisitioned in receiving department
c. Verify vouchers for accuracy and approval in internal audit department
d. Count goods upon receipt in the storeroom
14. Which of the following controls is not usually performed in the vouchers payable department?
a. Approving vouchers for payment by having an authorized employee sign the vouchers
b. Accounting for unused prenumbered purchase orders and receiving reports
c. Matching the vendor's invoice with the related receiving report
d. Indicating the asset and expense accounts to be debited
15. Which of the following controls is not usually performed in the treasurer's department?
a. Verifying the accuracy of checks and vouchers
b. Controlling the mailing of checks to vendors
c. Approving vendor's invoices for payment
d. Cancelling payment vouchers when paid
16. When processing and recording cash disbursements, it is important to have a method of cancelling the supporting
documents to prevent their reuse at support for another check at a later time. A common method is to
a. Transfer the possession of the documents to a bank vault such as a safety deposit box
b. Move the documents to a permanent off-site facility warehouse.
c. Write the check number on the supporting documents
d. Shred the documents so that they can't be reused
17. For good internal control, the person who should sign checks is the
a. Person preparing the checks
b. Purchasing agent
c. Accounts payable clerk.
d. Treasurer
18. Operating control of the check-signing machine normally should be the responsibility of the
a. General accounting
b. Treasury function
c. Internal audit function
d. Legal counsel
19. The mailing of disbursement checks and remittance advices should be controlled by the employee who
a. Signed the checks last
b. Approved the vouchers for payment
c. Matched the receiving reports, purchase orders, and vendor invoices
d. Verified the mathematical accuracy of the vouchers and remittance advices
20. The procedure that would discourage the resubmission of vendor invoices after they have been paid is
a. A requirement for double endorsement of checks.
b. The cancellation of vouchers by accounting personnel.
c. The cancellation of vouchers by treasurer personnel.
d. The mailing of payments directly to payees by accounting personnel.
23. The receipt of goods and services in the normal course of business represents the date clients normally recognize
a. Liability
b. Warranty
c. Income
d. Expenses
24. The internal control objective to determine that existing acquisition transactions are recorded" satisfies the objective of
a. Validity:
b. Authorization
c. Valuation
d. Completeness
25. The internal control which requires "examination of supporting documentation before signing of checks by an
authorized person satisfies the objective of
a. Validity
b. Valuation and allocation
c. Completeness
d. Posting and summarization
27. How can an auditor test to determine whether Receiving Department procedures are applied properly?
a. Review procedures manuals
b. Test a sample of receiving documents
c. Interview Receiving department personnel
d. Observe receiving procedures on a surprise basis
28. An auditor performs a test to determine whether all merchandise for which of the client was billed was received. The
population for this test consists all
a. Merchandise received
b. Cancelled checks
c. Vendor's invoices
d. Receiving reports
29. In assessing control risk for purchases, an auditor vouches a sample t entries in the voucher register to the supporting
documents. What assertion would this test of controls most likely support?
a. Completeness
b. Existence or occurrence
c. Valuation or allocation
d. Rights and obligations
30. An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash
disbursement journal. The purpose of this substantive audit procedure most likely was to
a. Identify unusually large purchases that should be investigated further.
b. Verify that the cash disbursements were for goods actually received
c. Test whether payments were for goods actually ordered.
d. Determine that purchases were properly recorded.
1. Which of the following departments most likely would approve changes in pay rates and deductions from employee
salaries?
a. Payroll c. Controller
b. Treasurer d. Personnel
2. For appropriate segregation of duties, journalizing and posting payroll transactions should be assigned to
a. Payroll accounting c. General accounting
b. Treasury department d. Timekeeping department
3. Which of the following is not a common activity within personnel and payroll?
a. Initiating terminations
b. Preparing and recording payroll
c. Distributing paychecks to employees.
d. Preparing and updating personnel records
4. Which of the following best describes proper internal control over payroll
a. The preparation of the payroll must be under the control of the personnel department.
b. The confidentiality of employee payroll data should be carefully protected to prevent fraud.
c. The duties of hiring, payroll computation, and payment to employees should be segregated
d. The payment of cash checks to employees should be replaced with payment by checks
5. The proper use of pre-numbered termination notice forms by the payroll department should provide assurance that all
a. Personnel files are kept up to date.
b. Terminated employees are removed from the payroll.
c. Employees who have not been terminated receive their payroll checks.
d. Uncashed payroll checks were issued to employees who have not been terminated.
6. The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the
a. Human resources function from the controllership function
b. Administrative controls from the internal accounting controls
c Authorization of transactions from the custody of related assets
d. Operational responsibility from the record keeping responsibility
7. Which of the following procedures is most likely to ensure that employee job time tickets are accurate?
a. Check the employee check cards against the job time tickets.
b. Approve the payroll voucher in the accounts payable department.
c. Keep employment information in the human resources department.
d. Make sure that the number of hours per week on each employee's job time ticket is 49.
9. In the weekly computer run to prepare payroll checks, a check was printed for an employee who had been terminated
the previous week. Which of the following control procedures, if properly utilized, would have been most effective in
preventing the error or assuring prompt detection?
a. Use of a check digit for employee numbers
b. Use of a header label for the payroll input sheet
c. A control total for hours worked, prepared from time cards collected by the timekeeping department
d. Requiring the treasurer's office to account for the numbers of the pre numbered checks issued to the computer
department for the processing of the payroll
10. Which of the following control procedures could best prevent direct labor from being charged to manufacturing
overhead?
a. Comparison of daily journal entries with factory labor summary.
b. Examination of routing tickets from finished goods on delivery.
c. Reconciliation of work in process inventory with cost records.
d. Recomputation of direct labor based on inspection of time cards.
11. In the audit of the following types of profit-oriented enterprises, which one would the auditor be most likely to place
special emphasis on testing the internal controls over proper classification of payroll transactions?
a. A service organization
b. A wholesaling organization
c. A retailing organization
d. A manufacturing organization
12. Which of the following procedures is most effective in providing reasonable assurance that payroll checks are
distributed only to bona fide employees?
a. An employee independent of payroll preparation compares endorsements on canceled payroll checks with
employee signatures in personnel records
b. All changes in pay rates and deductions are reviewed and approved by a responsible official independent of
payroll preparation and distribution,
c. All unclaimed paychecks are returned to an employee independent of payroll preparation and distribution.
d. All personnel and payroll records and documents are prenumbered and physically protected from
unauthorized access.
13. Which of the following statements best explains why the accuracy of payroll calculations and of payroll account
distribution is critical to auditor?
a. Employees will complain to management if their paychecks do not reflect wages or salaries earned.
b. Payroll is paid in cash, an account that is highly susceptible to frauds.
c. Auditing standards require that tests of cash and payroll be coordinated
d. Payroll impacts several statement of financial position and statement of comprehensive income accounts
14. Test of controls over personnel and payroll focus on the preparation distribution, and recording of earned salaries and
wages. Which of the following is the primary source from which tests of personnel and payroll are derived?
a. Payroll register
b. Employee earnings record
c. Time records
d. Labor distribution summary
15. On a surprise basis, an auditor may elect to distribute paychecks to employees personally. What is the primary
purpose of this audit procedure?
a. To assure that no extra payroll checks are prepared and distributed
b. To test whether all paid employees exist
c. To assure that paychecks are not distributed to an employee absent on the day the auditor distributes checks.
d. To test the procedures for distributing paychecks
2. Which of the following policies is an internal control weakness related to the acquisition of factory equipment?
a. Depreciation policies are reviewed only once a year
b. Advance executive approvals are required for equipment acquisitions
c. Acquisitions are to be made through and approved by the department in need of the equipment
d. Variances between authorized equipment expenditures and actual costs are to be immediately reported to
management
3. When perpetual inventory records are maintained in quantities and in peso, and internal control procedures over
inventory are deficient, the auditor would probably
a. Have to disclaim an opinion on the income statement that year
b. Increase the extent of tests for unrecorded liabilities at the end of the year
c. Want the client to schedule the physical inventory count at the end of the year
d. Insist that the client perform physical counts of inventory items several times during the year
4. An auditor's tests of a client's cost accounting system are designed primarily to determine that
a. Physical inventories substantially agree with book inventories
b. The system complies with generally accepted accounting principles and functions as planned
c. Costs have been assigned properly to finished goods, work in process, and cost of goods sold
d. Quantities on hand have been computed based on acceptable methods that reasonably approximate actual
quantities on hand
5. An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative
number of tags to the physical Inventory sheets. The purpose of this procedure is to obtain assurance that
a. The final inventory is valued at cost
b. All inventory represented by an inventory tag is bona fide
c. Inventory sheets do not include untagged inventory items
d. All inventory represented by an inventory tag is listed on the inventory sheets
6. When verifying debits to a manufacturing company's perpetual inventory records, an auditor would be most interested
in testing a sample of purchase
a. Orders:
b. Invoices.
c. Approvals
d. Requisitions
7. The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following
could explain the difference?
a. Inventory items had been counted, but the tags placed on the items had not been taken off the items and
added to the inventory accumulation sheets.
b. Credit memos for several items returned by customers had not been recorded.
c. No journal entry had been made on the retailer's books for several items returned to its suppliers.
d. An item purchased "FOB shipping point" had not arrived at the date of the inventory count and had not been
reflected in the perpetual records
8. For several years, a client's physical inventory count has been lower than what was shown on the books at the time of
the count so that downward adjustments to the inventory account were required. Contributing to the inventory problem
could be deficiencies in internal control that led to the failure to record some
a. Cash purchases
b. Sales discounts
c. Sales returns received
d. Purchases returned to vendors
9. A client's physical count of inventories was higher than the inventory quantities per the perpetual records. This situation
could be the result of the failure to record
a. Sales
b. Purchases
c. Sales discounts
d. Purchase returns
2. A company has additional funds to invest. The Board of Directors decided to purchase marketable securities and
assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to make periodic
reviews of the investment activity should be
a. An investment committee of the Board of Directors.
b. The chief operating officer.
c. The corporate controller.
d. The treasurer.
3. Which of the following is a responsibility that should not be assigned to only one employee?
a. Access to securities in the company's safe deposit box
b. Custodianship of tools and small equipment
c. Custodianship of the cash working fund
d. Reconciliation of bank statements
4. In reviewing and evaluating internal control over marketable securities auditor would be specially concerned about:
a. Recording of stock investments by the controller.
b. Approval of stock investment purchases by the Board of Directors.
c. Access to stock certificates by the corporate treasurer.
d. Access to stock certificates by the controller.
5. When no independent stock transfer agents are employed and the corporation issues its own stocks and maintains
stock records, canceled stock certificates should
a. Not be defaced but segregated from other stock certificates and retained in a canceled certificates file.
b. Be destroyed to prevent fraudulent reissuance
c. Be defaced and sent to the secretary of state,
d. Be defaced to prevent reissuance and attached to their corresponding stubs.
Pre-engagement activities
1. Client's business reputation
2. Changes in client's ownership or management
3. Client's reporting practices
4. Audit team considerations
Audit Planning
Obtaining an understanding of the client, its business, industry and accounting policies;
Obtaining understanding of the client's internal control system;
Assessing materiality and audit risk;
Identifying audit objectives;
Determining whether reliance can be placed on certain controls in the system;
Determining the nature, extent and timing of substantive tests to be performed; and
designing and finalizing the audit program
Reporting
Determination of the audit report appropriate in the circumstances
1. An audit is conducted on the premise that management and, where appropriate, those charged with governance,
have acknowledged and understand that they have responsibilities that are fundamental to the conduct of an audit in
accordance with PSAs. Which of the following is not one of those responsibilities?
- The preparation of financial statements in accordance with relevant pronouncements issued by the AASC.
2. Which of the following matters would an auditor most likely consider when establishing the scope of the audit?
- The expected audit coverage, including the number and locations of the entity’s components to be included.
3. Which of the following is the least likely procedure to be performed in planning a financial statement audit?
- Selecting a sample of sales invoices for comparison with shipping documents.
4. In using the work of an expert, an auditor referred to the work of an expert’s findings in the auditor’s report. This is an
appropriate reporting practice if the
- Auditor, as a result of the expert’s work, issues a report that contains a modified opinion.
5. Which of the following statements concerning audit planning is incorrect?
- Planning is a discrete phase of an audit.
6. An auditor is required to establish an understanding with client regarding the services to be performed for each
engagement. This understanding generally includes
- The auditor’s responsibility for ensuring that those charged with governance are aware of any significant
deficiencies in internal control that may come to the auditor’s attention.
7. The auditor’s risk assessment procedures
- By themselves, do not provide sufficient appropriate audit evidence on which to base the audit opinion.
8. There is an inverse relationship that exists between the acceptable level of detection risk and the
- Assurance provided by substantive tests.
9. Based on 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
- Decrease detection risk.
10. A basic premise underlying analytical procedures is that
- Plausible relationships among data may reasonably be expected to exist and continue in the absence of known
conditions to the contrary.
11. An entity’s internal control system contains manual elements and often contains automated elements. Manual
elements in internal control may be less reliable that automated elements because
- Manual control elements can be more easily bypassed, ignored, or overridden and they are also more prone to
simple errors and mistakes.
12. Inherent risk is ________ related to detection risk and ________ related to the amount of audit evidence
- Inversely, directly
13. Which of the following is not an objective of the revenue/receipt cycle?
- Received goods are counted and inspected for quality.
14. Which of the following is an essential control procedure to ensure the accuracy of the recorded inventory quantities?
- Establishing a cutoff for goods received and shipped.
15. The following controls are appropriate for property, plant and equipment (PPE), except
- Disposal of fully depreciated PPE items.
16. Which of the following questions is most likely to be included by an auditor on an internal control questionnaire for
notes payable?
- Are direct borrowings on notes payable authorized by the board of directors?
17. Organization independence in the processing of payroll can be achieved by segregating the functions of
authorizations, record-keeping, and custody of assets. Which one of the following functional separations is not
required for internal control purposes?
- Separation of payroll preparation and maintenance of year-todate records.