Auditing Theory

1. A control which relates to all parts of the EDP system is called a(n)

a.
Systems control
c. Applications control
b.
General control
d. Universal control

Which of the following is not an output control?

Proper authorization of transaction

Control totals

Check digits

Adequate documents

Should the auditor feel, after obtaining an understanding of the EDP internal control
structure, that control risk cannot be reduced, he or she will

Issue a disclaimer

Issue an adverse opinion

Increase the sample size for tests of controls

Expand the substantive testing portion of the audit

The real-time feature normally would be least useful when applied to accounting for
a firms

Bank-account balances

Property and depreciation

Customer accounts receivable

Merchandise inventory

A sample in which the characteristics in the sample are the same as those of the
population is a

a.
Random sample
c. Attributes sample
b.
Variables sample
d. Representative sample

Establishing a route through the random number table

Is an arbitrary decision

Needs to be done in advance of choosing the numbers

Is essential and the route must be followed consistently

Requires that all three of the above is true

When an auditor goes through a population and selects items for the sample
without regard to their size, source, or other distinguishing characteristics, it is
called

Block selection

Haphazard selection

Systematic selection

Statistical selection

Which of the following may be used to reduce the risk of non sampling errors?

Increasing the size of audit samples

Stratifying audit samples

Adequately planning audit samples

Using statistical sampling techniques

A number of factors influences the sample size for a substantive test of details of
an account balance. All other factors being equal, which of the following would
lead to larger sample size?

Greater reliance on internal control

b.

c.
Smaller reliance o analytical procedures

d.
Smaller measures of tolerable misstatement
10.
Fraudulent financial reporting is often called

a.

Management fraud
c. Defalcation

b.
Theft of assets
d. Employee fraud
11.
The most important general ledger account included in and affecting several
cycles is the

a.
General cash account
c. Income tax expense ad liability accounts

b.
Inventory accounts
d. Retained earnings account

In testing for cut-off , the objective is to determine

Whether all of the current periods transactions are recorded

That no transactions from the prior period are included in the current periods
balances

That no transactions of the curret period have been delayed and recorded in
the future period.

Whether transactions are recorded in the proper period.

The primary difference between an audit of the balance sheet and an audit of
the income

statement lies in the fact that the audit of the income statement deals with the
verification of

a.
Transactions
c. Costs
b.
Authorization
d. Cutoffs

Documentation is a form of evidence

Used in every financial statement audit

Used in most financial statement audit

Used o the rate occasions when it is both readily available ad less costly than
other procedures

Used when nothing is available that is more competent

The current file of the auditors working papers generally should include

a flowchart of internal controls

organization charts

a copy of the financial statements

copies of bond and note indentures

16. An audit working paper that reflects the major components of an amount
reported in the financial statements is referred to as(an)

a.
Lead schedule
c. Audit control schedule
b.
Supporting schedule
d. Working trial balance

The major reason an independent auditor gathers audit evidence is to

Form an opinion on the financial statements

Detect fraud

Evaluate management

Evaluate internal control

An auditor most likely would analyze inventory turnover rates to obtain evidence
concerning managements assertions about

Existence or occurrence

Rights and obligations

Presentation and disclosure

Valuation and allocation

To which type of the following matters would materiality limits not apply when
obtaining client representations?

Losses from sales commitments.

Unasserted claims and assessments

Irregularities involving management

Noncompliance with contractual agreements

Which of the following procedures is more likely to be performed i a review

engagement of a non-public entity that i n a compilation engagement?

Gaining an understading of the entitys business transactions

Making a preliminary assessment of control risk

Obtaining a representation letter from the chief executive officer

Assisting the entity i adjusting the accounting records

In auditing accounts payable, an auditors procedures most likely would focus

primarily o managements assertion of

Existence or occurrence

Presentation and disclosure

Completeness

Valuation or allocation

Before goods are shipped on account, a properly authorized person must

Prepare the sales invoice

Approve the journal entry

Approve credit

Verify that the unit price is accurate

Which of the following is not a auditors concern about a key authorization point
in the sales/collection cycle

The receiving room must have authorization before releasing items to inventory
control

Credit must be authorized before sale

Goods must be shipped after the authorization

Prices must be authorized

Whenever footing ad comparisons are restricted to journals, master file records,

and ledgers,

the process is

a.
Valuation
c. Cutoff
b.
Summarization
d. Completeness

The most significant effect of the results of the tests of controls substantive tests
of transactions in tha sales and collection cycle is on

Allowance for uncollectible accounts

Bad debts expense account

Confirmation of accounts receivable

Income tax payable

There is a difference between internal control objectives and audit objectives.

Which of the

following is not an audit objective?

a.
Validity
c. Valuation
b.
Completeness
d. Authorization

For effective internal control, employees maintaining the accounts receivable

subsidiary ledger should not also approve

Employee overtime wages

Credit granted to customers

Write-offs of customer accounts

Cash disbursement

The general cash account is considered significant in almost all audits

Where the ending balance is material

Where either the beginning balance is material

Even when the ending balance is immaterial

Except those of not-for-profit organizations

Sales order form and invoice blanks should be controlled in the

Sales order section of the sales department

Billing clerk in the accounting department

Credit manager in the credit department

Sales manager in the sales department

Which of the following is a substantive test of transactions

Review personnel policies

Account for a sequence of payroll checks

Reconcile the disbursements i the payroll journal with the disbursements on the
payroll bank statement

Examine printouts of transactions rejected by the computer as having invalid

employee numbers

The information typically needed to prepare a production order would not include
a

a.
Sales forecast
c. Inventory plan
b.
Production plan
d. Bill of materials

32. The substantive test which requires the auditor to trace from a file of
receiving reports to the acquisitions journal satisfies the objective of

a.
Validity
c. Completeness

b.
Authorization
d. Valuation

An auditor usually examines receiving reports to support entries in the

Voucher register and sales return journal

Sales journal and sales return journal

Voucher register and sales journal

Check register and sales journal

The inventory and warehousing cycle can be thought of as comprising two

separate but closely related systems, one involving the actual physical flow of
goods, and the other the

internal control over those goods

related costs

storing of the goods

prevention of wastes, obsolenscence, and theft

In planning an audit engagement, which of the following is a factor that affects

the independent auditors judgement as to the quantity, type, and content of
working papers?

The estimated occurrence rate of attributes

The preliminary evaluation based upon initial substantive testing

The content of the clients representation letter

The anticipated nature of the auditors report

A listing of all the things which the auditor will use to gather sufficient,
competent evidence is the

audit procedure

audit plan

audit program

audit risk model

The primary emphasis in most tests of details of balances is on the

balance sheet accounts

income statement accounts

cash flow statement accounts

three statements above

Tracing recorded sales transactions in the sales journal to the shipping

documents (bills of lading) provides evidence about the

Completeness of recording of sales transactions

Occurrence of sales transactions

billing of all sales transactions

presentation of payables

Which of the following is the best audit procedure for the detection of lapping?

Comparison of postings of cash receipts to accounts with the details of cash

deposits

Confirmation of the cash balance

Reconciliation of the cash account balances

Preparing a proof of cash

To gather evidence regarding the balance per bank in the bank reconciliation, an
auditor could examine all of the following except

Cut-off bank statement

year-end bank statement

bank confirmation

general ledger

The confirmation of accounts receivable is most closely associated with

business risk

detection risk

inherent risk

relative risk

The clients physical count of inventories is lower than the inventory quantities in
the perpetual records. This could be the result of a failure to record

purchases

purchases discounts

sales

sales discounts

The most likely technique for the current year audit of goodwill which was not
acquired three years ago by a continuing audit client.

Confirmation

Observation

Recomputation

Inquiry

The auditor will most likely perform extensive tests for possible understatement
of

revenues

assets

liabilities

capital

If the auditor is determined to lack independence, a disclaimer of opinion must

be issued

in all cases

only if it is highly material

only if it is material

if the client requests it

The use of negative assurances in audit reports of historical financial statements

is

a violation of the standards of reporting

encouraged by the Philippine Institute of CPAs

a help in clarifying the degree of responsibility by being assumed by the auditor

properly located in the opinion paragraph of the unqualified report

Unqualified financial statements for the prior year presented in comparative

form with audited financial statements for the current year should be clearly
marked to indicate their status and

I. The report on the prior period should be reissued to accompany the

current period report

The report on the current period should include as a separate paragraph

description of the responsibility assumed for the prior periods financial
statements

I only

II only

Both I and II

Either I or II

Compilation services are intended to enable a CPA firm to compete with

Management advisory service firms

Tax preparation businesses

Computer service business

Bookkeeping firms

A modification of the CPAs report on a review of the interim financial statements

of a publicly-held company would be necessitated by which of the following?

An uncertainty

Lack of consistency

Reference to another accountant

Inadequate disclosure

Comfort letters ordinarily are signed by the

clients

independent auditor

underwriter of securities

audit committee

senior management

D
B
B
B
C
D
D
B
A

A
D

A
NS
W
ER
KE
Y

26)
D

35) D

36) D

37) A

38) B
27)
D
39) A
28)
D

29)
A

30)
C

40) D

41) B

42) D

43) C
31)
D
44) C
32)
C

33)
A

45) A

46) A

47) D
34)
B

48)
D

49) A

50) A