CASH

MULTIPLE CHOICE QUESTIONS-THEORY

1. Which of the following is not an audit objective related to cash?

a. Reported cash exists
b. The client has ownership rights in the reported cash.
c. Compensating cash balances are reported as other assets.
d. The reported cash balance includes all cash transaction that should have been recorded.
2. The process of transferring money from one bank account to another and improperly recording
the transaction
a. Lapping
b. Embezzling
c. Kiting
d. Defalcation
3. An auditor who is engaged to examine the financial statements of a business enterprise will
request a cut-off bank statement primarily in order to
a. Verify the cash balance reported on the bank confirmation inquiry form.
b. Verify reconciling items on the clients bank reconciliation.
c. Detect lapping
d. Detect kiting
4. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would
examine all of the following except
a. cut-off bank statement
b. bank confirmation
c. year-end bank statement
d. general ledger
5. The auditor should ordinarily mail confirmation requests to all banks which the client has
conducted any business during the year, regardless of the year-end balance, since
a. The confirmation form also seeks information about indebtedness to the bank.
b. This procedure will detect kiting activities which would otherwise not be detected.
c. The mailing confirmation forms to all such banks are required by PSA.
d. Tis procedure relieves the auditor of any responsibility with respect to non-detection of forged
checks.
6. Which of the following sets of information does an auditor usually confirm on one form?
a. Accounts payable and purchase commitments.
b. Cash in bank and collateral for loans.
c. Inventory on consignments and contingent liabilities.
d. Accounts receivable and accrued interest receivable
7. In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a
one year bank loan with a debit to cash and credit to miscellaneous revenue. Select the most
effective method for detecting this type of error.
a. Foot the cash receipts journal for October
b. Send a bank confirmation as of the year-end
c. Prepare bank reconciliation as of the year-end.
d. Prepare a bank transfer schedule as of the year-end
8. Which of the following error will be discovered as a result of the audit of the bank reconciliation?
a. Failure to record bank deposits
b. Billing customer for an improper amount
 c. Payment for raw materials that were not received
d. Payment of interest to an affiliate for an amount in excess of the existing rate
9. An auditor ordinarily sends a standard confirmation request to all banks with which the client has
done business during the year under audit, regardless of the year-end balance. A purpose of this
procedure is to
a. Provide the data necessary to prepare a proof of cash
b. Request that cut-off bank statement and related checks be sent to the auditor.
c. Detect kiting activities that may otherwise no bet discovered.
d. Seek information about other deposit and loan amounts that come to the attention of the
institution in the process of completing the confirmation
10. As one of the year-end audit procedures, the auditor instructed the clients personnel to prepare a
standard bank confirmation request for a bank account that had been closed during the year.
After the clients treasurer had signed the request, it was mailed by the assistant treasurer. What
is the major flaw in this audit procedure?
a. The confirmation request was signed by the treasurer
b. Sending the request was meaningless because the account was closed before the year-end
c. The request was mailed by assistant treasurer.
d. The CPA did not sign the confirmation request before it was mailed.
11. The auditors count of cash should be coordinated with the:
a. Consideration of the internal controls with respect to cash.
b. Close business on the balance sheet date
c. Count of marketable securities
d. Count of inventories
12. The receipt of the completed standard bank confirmation form would provide the auditor with all of
the following items except
a. The balances in all bank accounts with that bank
b. Any restrictions on withdrawals
c. The adjusted cash balances
d. Loan balances with that bank
13. An auditor should trace bank transfers for the last part of the audit period and first part of the
subsequent period to detect whether
a. The cash receipts journal was held open for a few days after year-end.
b. The last checks recorded before the year-end were actually mailed by the year-end
c. Cash balances were overstated because of kiting.
d. Any unusual payments to or receipts from related parties occurred.

***The information below was taken from the bank transfer schedule prepared during the audit of BAY
Co.s financial statement for the year ended December 31, 2013. Assume all checks are dated and
issued on December 30, 2013.

Disbursement date Receipt date

Check no. From To Per books Per bank Per books Per bank
101 National Federal Dec. 30 Jan.4 Dec.30 Jan. 3
202 Country State Jan.3 Jan.2 Dec.30 Dec.31
303 Federal American Dec. 31 Jan.3 Jan.2 Jan. 2
404 State Republic Jan. 2 Jan.2 Jan.2 Dec.31

14. Which of the above checks might indicate kiting?

a. #101 and #303
 b. #202 and #404
c. #101 and #404
d. #202 and #303
15. A cash shortage may be concealed by transporting funds from one location to another or by
converting negotiable assets to cash. Because of this, which of the following is vital?
a. simultaneous confirmations
b. simultaneous bank reconciliations
c. simultaneous verifications
d. simultaneous surprise cash count.
16. When negotiable instrument securities are of considerable volume, planning by the auditor is
necessary to guard against
a. Unauthorized negotiation of the securities before they are counted.
b. Unrecorded sales of securities after they are counted.
c. Substitution of securities already counted for other securities which should be on hand but
are not.
d. Substitution of authentic securities with counterfeit securities.
17. A client has large and active investment portfolio that kept in bank safe deposit box. If the auditor
is unable to count the securities at the balance sheet date, the auditor most likely will
a. Request the bank to confirm to the auditor the contents of the safe deposit box at the balance
sheet date.
b. Examine supporting evidence for transactions occurring during the year.
c. Count the securities at the subsequent date and confirm with the bank whether securities
were added or removed since the balance sheet date.
d. Request the client to have the bank seal the safe deposit until the auditor can count the
securities at a subsequent date.
18. By preparing a four-column reconciliation (proof of cash) for the last month of the year, an
auditor will generally be able to detect:
a. An unrecorded check written at the beginning of the month which was cashed during the
period covered by the reconciliation.
b. A cash sale which was not recorded on the books and was stolen by a bookkeeper
c. An embezzlement of unrecorded cash receipts on receivables before they had been
deposited into the bank.
d. A credit sale which has been recorded twice in the sales journal.
19. Jones embezzled P10, 000 from his companys account in Bank A. At year-end he did the
shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded
the transaction on the books. This an example of
a. Lapping
b. Effective cash management
c. Kiting
d. Related party transactions
20. Which of the following is most likely to be effective in detecting kiting?
a. Bank confirmation
b. Bank transfer schedule prepared using only the cash receipts and cash disbursements
journals
c. Comparison of bank cut-off statement to the cash receipts and disbursements records
d. Receivable confirmation
21. Which of the following manipulations of cash transactions would overstate the cash balance on
the financial statements?
a. Understatement of outstanding checks
 b. Overstatement of outstanding checks
c. Understatement of deposit in transit
d. Overstatement of deposit in transit
22. The standard form to confirm account balances with Financial Institutions includes information on
all of the following except:
a. Date due of direct liability
b. The principal amount paid on direct liability
c. Description of collateral for direct liability
d. The interest date of the direct liability
23. Which of the following is one of the better auditing techniques that might be used by an auditor to
detect kiting?
a. Review composition of authenticated deposit slips
b. Review subsequent bank statements and cancelled checks received directly from the banks
c. Prepare a schedule of bank transfers
d. Prepare year-end bank reconciliations
24. On receiving the bank cut-off statement, the auditor should trace:
a. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal
b. Checks dated prior to year end to the outstanding checks listed on the year-end reconciliation
c. Deposits listed on the cut-off statement to deposits in the cash receipts journal
d. Checks dated subsequent to year end to the outstanding checks listed on the year-end bank
reconciliation
25. Which of the following cash transfers result in a misstatement of cash at December 31, 2011?
Disbursement Receipts
Recorded in Paid by bank Recorded in Received by
books books bank
A. 12/31/11 01/04/12 12/31/11 12/31/11
B. 01/04/12 01/05/12 12/31/11 12/31/11
C. 12/31/11 01/05/12 12/31/11 01/04/12
D. 01/04/12 01/11/12 01/04/12 01/04/12
PROBLEM NO. 15

Select the best answer for each of the following:

1. An auditor would consider a cashiers job description to contain compatible duties if

the cashier receives remittance from the mailroom and also prepares the
a. Daily deposit slip. c. Remittance advices.

b. Prelist of individual checks. d. Monthly bank reconciliation.

2. Which of the following internal control procedures will most likely prevent the
concealment of a cash shortage resulting from improper write-off of a trade account
receivable?
 a. Write-offs must be supported by an aging schedule showing that only receivables
overdue for several months have been written off.
b. Write-offs must be approved by the cashier who is in a position to know if the
receivables have, in fact, been collected.
c. Write-offs must be approved by a responsible officer after review of credit
department recommendations and supporting evidence.
d. Write-offs must be authorized by company field sales employees who are in a
position to determine the financial standing of the customers.

3. An entitys internal control structure requires every check request that there be an
approved voucher, supported by a prenumbered purchase order and a prenumbered
receiving report. To determine whether checks are being issued for unauthorized
expenditures, an auditor most likely would select items for testing from the
population of all
a. Cancelled checks. c. Purchase orders.

b. Approved vouchers. d. Receiving reports.

4. Which of the following auditing procedures would the auditor not apply to a cutoff
bank statement?
a. Trace year end outstanding checks and deposits in transit to the cutoff bank
statement.
b. Reconcile the bank account as of the end of the cutoff period.
c. Compare dates, payees and endorsements on returned checks with the cash
disbursements record.
d. Determine that the year end deposit in transit was credited by the bank on the
first working day of the following accounting period.

5. A client maintains two bank accounts. One of the accounts, Bank A, has an
overdraft of P100,000. The other account, Bank B, has a positive balance of
P50,000. To conceal the overdraft from the auditor, the client may decide to
a. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the
receipt but not the disbursement and list the receipt as a deposit in transit.
Record the disbursement at the beginning of the following year.
b. Draw a check for at least P100,000 on Bank B for deposit in Bank A. Record the
receipt but not the disbursement and list the receipt as a deposit in transit.
Record the disbursement at the beginning of the following year.
c. Draw a check for P100,000 on Bank B for deposit in Bank A. Record the
disbursement but not the receipt. List the disbursement as an outstanding check,
but do not list the receipt as a deposit in transit. Record the receipt at the
beginning of the following period.
d. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the
disbursement but not the receipt and list the disbursement as an outstanding
check. Record the receipt at the beginning of the following year.
6. While performing an audit of cash, an auditor begins to suspect check kiting. Which
of the following is the best evidence that the auditor could obtain concerning whether
kiting is taking place?
a. Documentary evidence obtained by vouching credits on the latest bank
statement to supporting documents.
b. Documentary evidence obtained by vouching entries in the cash account to
supporting documents.
c. Oral evidence obtained by discussion with controller personnel.
d. Evidence obtained by preparing a schedule of interbank transfers.

7. Two months before year-end, the bookkeeper erroneously recorded the receipt of a
long-term bank loan by a debit to cash and a credit to sales. Which of the following
is the most effective procedure for detecting this type of error?
a. Analyze bank confirmation information.
b. Analyze the notes payable journal.
c. Prepare year-end bank reconciliation.
d. Prepare a year-end bank transfer schedule.

8. Postdated checks received by mail in settlement of customers accounts should be

a. Returned to customer.
b. Stamped with restrictive endorsement.
c. Deposited immediately by the cashier.
d. Deposited the day after together with cash receipts.

9. The cashier of Milady Jewelries covered a shortage in the cash working fund with
cash obtained at December 31 from a bank by cashing but not recording a check
drawn on the company out of town bank. How would you as an auditor discover the
manipulation?
a. By confirming all December 31 bank balances.
b. By counting the cash working fund at the close of business on December 31.
c. By investigating items returned with the bank cut-off statements of the succeeding
month.
d. By preparing independent bank reconciliations as of December 31

10. An essential phase of the audit of the cash balance at the end of the year is the
auditor's review of cutoff bank statement. This specific procedure is not useful in
determining if
a. Kiting has occurred.
b. Lapping has occurred.
c. The cash receipts journal was held open.
d. Disbursements per the bank statement can be reconciled with total checks written.
Audit of Receivables

Multiple Choice Questions -Theory

1. The purpose of test of controls over billing is to determine whether

A. billed goods have been shipped

B. shipments are billed

C. billing department personnel are competent

D. credit is approved before goods are shipped

2. Proper authorization of write-offs of uncollectibles should be approved in which of the

following department?

A.Accounts Receivable

B.Credit

C.Accounts Payable

D.Treasurer

3. The purpose of tests of controls over shipping is to determine whether

A.Billed goods have been shipped

B.Shipments are billed

C.Shipping department personnel are competent

D.Credit is approved before goods are shipped

4. Which of the following might be detected by an auditor's review of the client's sales cut-off?

A.Excessive goods returned for credit

B.Unrecorded sales discount

C.Lapping of year-ends accounts receivable

D.Inflated sales for the year

5. An auditor most likely would review an entity's periodic accounting for numerical sequence
of shipping documents and invoices to support management's financial statement assertion of

A.Existence or occurrence

B.Valuation

C.Right and obligation

D.Completeness

6. An inappropriate audiy objective relative to accounts receivable is to determine that

A.The accounts exist and are properly valued

B.The client has rights in the receivable

C.The accounts represent the complete transaction process

D.The accounts are collected by the balance sheet date

7. All of the following are examples of substantive tests to verify valuation of net accounts
receivable except the

A.Recomputation if allowance for bad debts

B.Inspection of accounts for current versus non-current status in the statement of financial
position

C.Inspection of aging schedule and credit records of past due accounts

D.Comparison of tge allowance for bad debts with past records

8.Confirmation,which is a specific type of inquiry,is the process of obtaining a representation of
information or of an existing condition directly from a third party. Two assertion for which
confirmation of accounts receivable balances provides primary evidence are

A.Completeness and valuation

B.Rights and obligation existence

C.Valuation and rights and obligations

D.Existence and completeness

9. An auditor who has confirmed accounts receivable may discover that the sales journal was
held open past year-end if

A.Positive confirmations sent to debtor are not returned

B.Negative confirmations sent to debtors are not returned

lC.Most of the returned negative confirmations indicate that the debtor owes larger balance
that the amount being confirmed

D.Most of the returned positve confirmations indicate that the debtor owes a smaller balance
that the amount being confirmed.

10. The auditor finds situation in which one person has the ability to collect
receivables,makedeposits,issue credit memos and record receipt if payments. The auditor
suspects the individual may be stealing from cash receipts. Which of the following audit
procedures would be most effective in discovering fraud in this scenario?

A.Send positive confirmations to all random selection of customers

B.Send negative confirmations to all outstanding accounts receivable customers

C.Perform a detailed review of debits to customer discounts,sales returns, or other debit

accounts excluding cash posted to the cash receipts

D.Take a sample of bank deposits and trace the detail in each bank deposit back to the entry in
the cash receipta journal
11. The positive request form of accounts receivable confirmation may be used when the

Combined Assessed Level of Inherent and Control Risk is Individual Account Receivable Balance are

A. L o w L a r g e

B. L o w S m a l l

C. H i g h S m a l l

D. H i g h L a r g e

12. The negative request form of accounts receivable confirmation may be used whan the

Combined Assessed Level of Inherent and Control Risks Number of Small Balances Is Consideration by the Recipient

A . L o w M a n y L i k e l y

B . L o w F e w U n l i k e l y

C . H i g h F e w L i k e l y

D . H i g h M a n y L i k e l y
13. Which of the following is the greatest drawback of uaing the subsequent collections
evidenced only by a deposit slip as an alternative procedure when responces to positive
accounts receivable confirmation are not received?

A.Checking of subsequent collections can never be used as an alternative auditing procedure

B. By examininy a deposit slip only,the auditor does not know whther the payment is for the
receivable at the balance sheet date or subsequent transaction

C.A depositor slip is not received directly by the auditor

D.A customer may not have made a payment in a timely basis.

14. Confirmation of accounts receivable is generally accepted auditing procedure. The

presumption that an auditor will confirm accounts receivable is not overcome if

A.Based on a prior year's audit experience response rates will be inadequate

B.Based in experience with similar engagements, responses are expected to be unreliable

C.The accounts receivable are immaterial

D.The combined assessed level of inherent and control risk is high

15.Which of the following procedures would an auditor most likely perform for year-end
accounts receivable confirmations when the auditor did not receive repkies ti second request?

A.Review the cash receipts journal for the month prior to year-end

B.Intensify the study of internal control concerning revenue cycle

C.Increased the assessed level of detection risk for existence assertion

D.Inspect the shipping records documenting the merchandise sold to the debtors
16.An auditor should perform alternative procedures to substantiate the existence of accounts
receivable when

A.No reply to a positive confirmation request is received

B.No reply to a negative confirmation request is received

C.Collectibility of the receivables is in doubt

D.Pledging of the receivables is probable

17.An auditor's purpose in reviewing credit ratings of customers with deliquent accounts
receivable most likely is to obtain evidence concerning management's assertion about

A.Valuation or allocation

B.Presentation and disclosure

C.Existence and occurence

D.Rights and obligations

18. An aged trial balance of accounts receivable is usually used by the auditor to

A.Verify the validity of recorded receivables

B.Ensure that all accounts are promptly credited

C.Evaluate the results of compliance test

D.Evaluate type of provision for bad debt expense

19. In verifying a November 30, 2011 sales cut offdate , an auditor would be most
cincernedwuth comparing records of

A.November 2011 cash receipts with December 2011 bank deposits

B.November 2011 purchases with December 2011 shipments

C.November 2011 accounts receivable with November2011 sales

D.November 2011 sales with November 2011 shipping documents

20. To conceal defalcation involving receivables, the auditor would expect an experienced
bookkeeper to charge which of the following accounts

A.Miscellaneous income

B.Petty cash

C.Miscellaneous expense

D.Sales returns

PROBLEM NO. 15

Select the best answer for each of the following:

1. An auditor is testing sales transactions. One step is to trace a sample of debit entries from the
accounts receivable subsidiary ledger back to the supporting sales invoices. What would the
auditor intend to establish by this step?
a. Sales invoices represent bona fide sales.
b. Debit entries in the accounts receivable subsidiary ledger are properly supported by sales
invoices.
c. All sales invoices have been recorded.
d. All sales invoices have been properly posted to customer accounts.

2. Tracing bills of lading to sales invoices provides evidence that

a. Shipments to customers were recorded as sales.
b. Shipments to customers were invoiced.
c. Recorded sales were shipped.
d. Invoiced sales were shipped.

3. Proper authorization procedures in the revenue/receipt cycle usually provide for approval of
write-offs by an employee in which of the following departments?
a. Accounts receivable c. Billing

b. Treasurer d. Sales

4. To gather audit evidence about the proper credit approval of sales, the auditor would select a
sample of documents from the population represented by the
a. Subsidiary customers' accounts ledger.
b. Sales invoice file.
c. Customer order file.
d. Bill of lading file.
5. In determining validity of accounts receivable, which of the following would the auditor consider
most reliable?
a. Direct telephone communication between auditor and debtor.
b. Documentary evidence that supports the accounts receivable balance.
c. Confirmation replies received directly from customers.
d. Credits to accounts receivable from the cash receipts book after the close of business at year
end.

6. When the objective of the auditor is to evaluate the appropriateness of adjustments to sales, the
best available evidence would normally be
a. Documentary evidence obtained by inspecting documents supporting entries to adjustment
accounts.
b. Oral evidence obtained by discussing adjustment-related procedures with controller
personnel.
c. Analytical evidence obtained by comparing sales adjustments to gross sales for a period of
time.
d. Physical evidence obtained by inspection of goods returned for credit.

7. Which source document should an auditor use to verify the correct sales date for an item sold
FOB shipping point?
a. Sales invoice. c. Customer's payment document.
b. Carrier's bill of lading. d. Customer's purchase order.

8. Which of the following procedures would an auditor most likely rely on to verify management's
assertion of completeness?
a. Confirm a sample of recorded receivables by direct communication with the debtors.
b. Observe the client's distribution of payroll checks.
c. Compare a sample of shipping documents to related sales invoices.
d. Review standard bank confirmations for indications of kiting.
9. The negative form of accounts receivable confirmation request is particularly useful except when
a. Individual account balances are relatively large.
b. Internal control surrounding accounts receivable is considered to be effective.
c. A large number of small balances are involved.
d. The auditor has reason to believe the persons receiving the request are likely to give them
consideration.
10. An auditor who wishes to substantiate the gross balance of the account "Trade Notes
Receivable" is considering the advisability of performing the four procedures listed below. Which
pair of procedures is best suited to this objective?
I. Age the receivables.
II. Confirm the notes with the makers.
III. Inspect the notes.
IV. Trace a sample of postings from the sales journal to the notes receivable ledger.
a. I and III. b. II and III c. I and IV. d. I and I

(AUDIT OF INVENTORIES)

MULTIPLE CHOICE QUESTIONS - THEORY

1. When auditing inventories, an auditor would least likely verify that

A. The financial statement presentation of inventories is appropriate.
B. Damaged goods and obsolete items have been properly accounted for.
 C. All inventory owned by the client is on hand at the time of the count.
D. The client has used proper inventory pricing.

2. The primary objective of a CPA;s observation of the clients physical inventory count is
to
A. Discover whether a client has counted particular inventory items or group of items.
B. Obtain direct knowledge that the inventory exists and has been properly counted.
C. Provide an appraisal of the quality of merchandise on hand on the day of physical
count.
D. Allow the auditor to supervise the conduct of the count so as to obtain assurance that
inventory quantities are reasonably accounted.

3. A client maintains perpetual inventory records in both quantities and pesos. If the
assessed level of control risk is high, an auditor would probably
A. Increase the extent of tests of controls of the inventory cycle.
B. Request the client to schedule the physical inventory count at the end of the year.
C. Insist that the client perform counts of inventory items several times during the year.
D. Apply gross profit tests to ascertain the reasonableness of the physical counts.

4. The audit of year-end physical inventories should include steps to verify that the clients
purchases and sales cut-offs are adequate. The audit should be designed to detect whether
merchandise included in the physical count at year-end was not recorded as a
A. Sale in the subsequent period.
B. Purchase in the current period.
C. Sale in the current period.
D. Purchase return in the subsequent period.

5. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to
the physical inventory listing to obtain evidence that all items
A. Included in the listing have been counted.
B. Represented by inventory tags are included in the listing.
C. Included in the listing are represented by inventory tags.
D. Represented by inventory tags are bona fide.
6. An auditor selected items for test counts while observing a clients physical inventory.
The auditor then traced the test counts to the clients inventory listing. This procedure
most likely obtained evidenced concerning managements assertion of
A. Rights and obligations
B. Existence and occurrence
C. Completeness
D. Valuation
7. To gain assurance that all inventory items in a clients inventory listing schedule are
valid, an auditor most likely would trace
A. Inventory tags noted during auditor observation to items listed in the inventory
listing schedule.
B. Inventory tags noted during the auditors observation to items listed in receiving
reports and vendors invoices.
C. Items listed in the inventory listing schedule to inventory tags and the auditors
recorded count sheets.
D. Items listed in receiving report and vendors invoices to the inventory listing
schedule.

8. 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 retailers 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.

9. For several years a clients 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 weaknesses in
internal control that led to the failure to record some
A. Purchases returned to vendors.
B. Sales returns received.
C. Sales discounts allowed.
D. Cash purchases.

10. Which of the following is the best audit procedure for the discovery of damaged
merchandised in a clients inventory?
A. Compare the physical quantities of slow-moving items with corresponding quantities
of the prior year.\
B. Observe merchandise and raw material during the clients physical inventory taking.
C. Review the managements inventory representation letter of accuracy.
D. Test overall fairness of inventory values by comparing the companys turnover ratio
with the industry average.
11. An inventory turnover ratio is useful to the auditor because it may detect
A. Inadequacies in inventory pricing.
B. Methods of avoiding cyclical holding costs.
C. The optimum automatic reorder points.
D. The existence of obsolete merchandise.

12. Which of the following auditing procedures most likely would provide assurance about a
manufacturing entitys inventory valuation?
A. Testing the entitys computation of standard OH rates.
B. Obtaining confirmation of inventories pledged under loan agreements.
C. Reviewing shipping and receiving cut-off procedures for inventories.
D. Tracing tests counts to the entitys inventory listing.

13. When auditing merchandise inventory at year-end, the auditor performs a purchase cut-
off test to obtain evidence that:
A. All goods purchased before year-end are received before the physical count.
B. No goods held on consignment for customers are included in the inventory balance.
C. No goods observed during the physical count are pledged or sold.
D. All goods owned at year-end are included in the inventory balance.

14. In a manufacturing company, which one of the following audit procedures would give
the least assurance of the valuation of inventory at the audit date?
A. Testing the computation of standard OH rates.
B. Examining paid vendors invoices.
C. Reviewing direct labor rates.
D. Obtaining confirmation of inventories pledged under loan agreements.

15. Observation of inventories is a generally accepted auditing procedure. Which of the

following statements concerning this accepted auditing procedure is not correct?
A. Regardless of the inventory system maintained by the client, an annual physical count
must be made of each item in the inventory, and test counts must be made by the
auditor
B. The independent auditor, when he asked to audit financial statements covering the
current period and one or more periods for which (s)he had not observed or made
some physical counts, may be able to become satisfied as to such prior inventories
through appropriate alternative procedures.
 C. When the well-kept perpetual inventory records are checked by the client periodically
by comparisons with physical counts, the auditors observation procedures usually
can be performed either during or after the end of the period under audit.
D. Inventories, which in the ordinary course of business are physically located in public
warehouses, may be verified by direct confirmation in writing form the custodians,
provided that, when the amount involved is a significant portion of the current assets
or the total assets, additional procedures are applied as deemed necessary.

16. An auditor is most likely to inspect loan agreements under which an entitys inventories
are pledged to support managements assertion of
A. Existence and occurrence
B. Presentation and disclosure
C. Completeness
D. Valuation or allocation

17. Which of the following is the best audit test to evaluate the accuracy of the inventory
records for materials inventory in a production operation?
A. Trace selected inventory receipts to perpetual inventory records.
B. Vouch selected postings in the perpetual inventory records to source documents.
C. Perform turnover tests for materials inventory.
D. Reconcile quantities on hand per physical counts of selected items with perpetual
inventory records and verify pricing.

18. Some firms that dispose of only a small part of their total output by consignment
shipments fail to make any distinction between consignment shipments and regular sales.
Which of the following suggests to the auditor that the clients good have been shipped
on consignment?
A. Numerous shipments of small quantities.
B. Numerous shipments of large quantities and few returns.
C. Large debits to accounts receivable and small periodic credits.
D. Large debits to accounts receivable and large periodic credits.
Select the best answer for each of the following:

1. Otso Manufacturing Corporation mass produces eight different products. The controller, who is
interested in strengthening internal controls over the accounting for materials used in
production, would be most likely to implement
a. A separation of duties among production personnel.
b. A perpetual inventory system.
c. An economic order quantity (EOQ) system.
d. A job order cost accounting system.
2. Which of the following control procedures would most likely be used to maintain accurate
perpetual inventory records?
a. Independent matching of purchase orders, receiving reports, and vendors' invoices.
b. Independent storeroom count of goods received.
c. Periodic independent reconciliation of control and subsidiary records.
d. Periodic independent comparison of records with goods on hand.

3. The accuracy of perpetual inventory records may be established in part by comparing perpetual
inventory records with
a. Purchase requisitions. c. Receiving reports.

b. Purchase orders. d. Vendor payments.

4. The auditor tests the quantity of materials charged to work in process by tracing these
quantities to
a. Receiving reports. c. Materials requisition forms.

b. Perpetual inventory records. d. Cost ledgers.

5. An auditor would analyze inventory turnover rates to obtain evidence concerning managements
assertion about
a. Valuation or allocation. c. Presentation and disclosure.

b. Rights and obligations. d. Completeness

6. In auditing inventories, a major objective relates to the existence assertion. Of the following
audit procedures relating to inventories, which does not support the existence assertion?
a. The auditor reviews the client's inventory-taking instructions for such matters as proper
arrangement of goods, separation of consigned goods, and limits on movements of goods
during inventory.
b. The auditor observes the client's inventory and performs test counts as appropriate.
c. The auditor confirms inventories not on the premises.
d. The auditor performs a lower of cost or market test for major categories of inventory.

7. In a manufacturing company, which one of the following audit procedures would give the least
assurance of the valuation of inventory at the audit date?
a. Obtaining confirmation of inventories pledged under loan agreements.
b. Testing the computation of standard overhead rates.
c. Examining paid vendors' invoices.
d. Reviewing direct labor rates.

8. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test
to obtain evidence that
a. No goods held on consignment for customers are included in the inventory balance.
b. No goods observed during the physical count are pledged or sold.
c. All goods owned at year end are included in the inventory balance
d. All goods purchased before year end are received before the physical inventory count.

9. Which of the following items should not be included in a physical inventory?

a. Materials in transit from vendors.
b. Goods in a private warehouse.
c. Goods received for repairs under warranty.
d. Consignment to an agent.
10. You were engaged to conduct an annual examination for the fiscal year ended October 31, 2006.
Because of the expected holiday, you were able to convince your client to take a complete physical
inventory, in which you were present on October 15. Perpetual inventory records are kept and the
client considers a sale to be made in the period in which goods are shipped. You had a sales cut-
off test worksheet prepared. Which item among those listed below will not require an adjusting
entry to reconcile the client's detailed inventory record with the physical inventory?
a. b. c. d.

Date Goods Shipped Oct 31 Nov 2 Oct 14 Oct 10

Transaction Recorded as Sale Nov 2 Oct 31 Oct 16 Oct 19

Date Inventory Control Credited Oct 31 Oct 31 Oct 16 Oct 12

Answers: 1) B; 2) D; 3) C; 4) C, 5) A; 6) D; 7) A; 8) C; 9) C; 10) D

11. Which of the following is not a control that is designed to protect investment securities?
a. Access to securities should be vested in more than one individual.
b. Securities should be properly controlled physically in order to prevent unauthorized usage.
c. Securities should be registered in the name of the owner.
d. Custody over securities should be limited to individuals who have recordkeeping
responsibility over the securities.

12. Which of the following controls would a company most likely use to safeguard investment
securities when an independent trust agent is not employed?
a. The chairman of the board verifies the investment securities, which are kept in a bank safe
deposit box, each year on the balance sheet date.
b. The investment committee of the board of directors periodically reviews the investment
decisions delegated to the treasurer.
c. Two company officials have joint control of investment securities, which are kept in a bank
safe deposit box.
d. The internal auditor and the controller independently trace all purchases and sales of
investment securities from the subsidiary ledgers to the general ledger.

13. Which of the following controls would an entity most likely use to assist in satisfying the
completeness assertion related to long-term investments?
a. The controller compares the current market prices of recorded investments with the brokers
advices on file.
b. Senior management verifies that securities in the bank safe deposit box are registered in the
entitys name.
c. The internal auditor compares the securities in the bank safe deposit box with recorded
investments.
d. The treasurer vouches the acquisition of securities by comparing brokers advices with
canceled checks.

14. Which of the following controls would an entity most likely use in safeguarding against the loss
of investment securities?
a. A designated member of the board of directors controls the securities in a bank safe deposit
box.
 b. An independent trust company that has no direct contact with the employees who have
record-keeping responsibilities has possession of securities.
c. The internal auditor verifies the investment securities in the entitys safe each year on the
balance sheet date.
d. The independent auditor traces all purchases and sales of investment securities through the
subsidiary ledgers to the general ledger.

15. When negotiable securities are of considerable volume, planning by the auditor is necessary to
guard against
a. Substitution of securities already counted for other securities which should be on hand but
are not.
b. Substitution of authentic securities with counterfeit securities.
c. Unauthorized negotiation of the securities before they are counted.
d. Unrecorded sales of securities after they are counted.

16. In auditing investments for proper valuation, the auditor should do all but the following:
a. Vouch purchases and sales of securities by tracing to brokers' advices and canceled checks.
b. Compare cost and market by reference to year end market values for selected securities.
c. Confirm securities held in safekeeping off the client's premises.
d. Recalculate gain or loss on disposals.

17. An audit procedure that provides evidence about proper valuation of trading securities arising
from a short-term investment of excess cash is
a. Recalculation of investment carrying value by applying the equity method.
b. Comparison of carrying value with current market quotations.
c. Confirmation of securities held by broker.
d. Calculation of premium or discount amortization.

18. The auditee has acquired another company by purchase. Which of the following would be the
best audit procedure to test the appropriateness of the allocation of cost to tangible assets?
a. Evaluate procedures used to estimate and record fair market values for purchased assets.
b. Determine whether assets have been recorded at their book value at the date of purchase.
c. Evaluate the reasonableness of recorded values by discussion with operating personnel.
d. Evaluate the reasonableness of recorded values by use of replacement cost data.

19. The auditee has just acquired another company by purchasing all its assets. As a result of the
purchase, "goodwill" has been recorded on the auditee's books. Which of the following
comparisons would be the most appropriate audit test for the amount of recorded goodwill?
a. The purchase price and the fair market value of assets purchased.
b. The purchase price and the book value of assets purchased.
c. The figure for goodwill specified in the contract for purchase.
d. Earnings in excess of 15% of net assets for the past five years.

20. Of the following, which is the most efficient audit procedure for testing accrued interest earned
on bond investments?
a. Vouching the receipt and deposit of interest checks.
b. Tracing interest declarations to an independent record book.
c. Recomputing interest earned.
d. Confirming interest rate with the issuer of the bonds.

Answers: 1) D; 2) C; 3) C; 4) B, 5) A; 6) C; 7) B; 8) A; 9) A; 10) C

21. Which of the following questions would an auditor least likely include on an internal control
questionnaire concerning the initiation and execution of equipment transactions?
a. Are procedures in place to monitor and properly restrict access to equipment?
 b. Are requests for major repairs approved at a higher level than the department initiating the
request?
c. Are prenumbered purchase orders used for equipment and periodically accounted for?
d. Are requests for purchases of equipment reviewed for consideration of soliciting competitive
bids?

22. Property acquisitions that are misclassified as maintenance expense would most likely be
detected by internal control procedures that provide for
a. Review and approval of the monthly depreciation entry by the plant supervisor.
b. Investigation of variances within a formal budgeting system.
c. Examination by the internal auditor of vendor invoices and canceled checks for property
acquisitions.
d. Segregation of duties of employees in the accounts payable department.

23. A weakness in internal accounting control over recording retirements of equipment may cause
the auditor to
a. Trace additions to the "other assets" account to search for equipment that is still on hand
but no longer being used.
b. Inspect certain items of equipment in the plant and trace those items to the accounting
records.
c. Select certain items of equipment from the accounting records and locate them in the plant.
d. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of
equipment during the year.

24. The most significant audit step in substantiating additions to the office furniture account
balance is
a. Comparison to prior year's acquisitions.
b. Examination of vendors' invoices and receiving reports for current year's acquisitions.
c. Review of transactions near the balance sheet date for proper period cutoff.
d. Calculation of ratio of depreciation expense to gross office equipment cost.

25. An auditor is verifying the existence of newly acquired fixed assets recorded in the accounting
records. Which of the following is the best evidence to help achieve this objective?
a. Oral evidence obtained by discussions with operating management.
b. Documentary support obtained by vouching entries to subsidiary records and invoices.
c. Documentary support obtained by reviewing titles and tax returns.
d. Physical examination of a sample of newly recorded fixed assets.

26. In auditing plant assets and accumulated depreciation for proper valuation, the auditor should
do all except the following:
a. Physically inspect major plant assets additions.
b. Recalculate depreciation expense on a test basis.
c. Vouch repairs and maintenance expense on a test basis.
d. Vouch major additions by reference to underlying documentation.

27. To verify the proper value of costs charged to real property records for improvements to the
property, the best source of evidence would be:
a. A letter signed by the real property manager asserting the propriety of costs incurred.
b. Original invoices supporting entries into the accounting records.
c. A comparison of billed amounts to contract estimates.
d. Inspection by the auditor of real property improvements.

28. To test the accuracy of the current year's depreciation charges, an auditor should rely most
heavily on
 a. Comparison of depreciation schedule detail with schedules supporting the income tax
return.
b. Re-computation of depreciation for a sample of plant assets.
c. Tracing of totals from the depreciation schedule to properly approved journal entries and
ledger postings.
d. Vouching of the current year's fixed asset acquisitions.

29. The audit procedure of analyzing the repairs and maintenance accounts is primarily designed to
provide evidence in support of the audit proposition that all
a. Capital expenditures have been properly authorized.
b. Expenditures for fixed assets have been recorded in the proper period.
c. Expenditures for fixed assets have been capitalized.
d. Non-capitalizable expenditures have been properly expensed.

30. Assets may suffer an impairment in value for a variety of reasons, but not likely as a result of:
a. A corporate restructuring.
b. Slumping demand for uncompetitive products.
c. Significant increases in market share.
d. Obsolescence.

Answers: 1) A; 2) B; 3) C; 4) B, 5) D; 6) A; 7) B; 8) B; 9) C; 10) C

5. Carrying value of Customer list as of December 31, 2005

a. P220,000 b. P146,667 c. P176,000 d. P0

PROBLEM NO. 9

Select the best answer for each of the following:

1. Property, plant and equipment is typically judged to be one of the accounts least

susceptible to fraud because

a. The amounts recorded on the balance sheet for most companies are immaterial.

b. The inherent risk is usually low.

c. The depreciated values are always smaller than cost.

d. Internal control is inherently effective regarding this account.

2. Which is the best audit procedure to obtain evidence to support the legal ownership

of real property?

a. Examination of corporate minutes and board resolutions with regard to approvals

to acquire real property.

b. Examination of closing documents, deeds and ownership documents registered

and on file at the register of deeds.

c. Discussion with corporate legal counsel concerning the acquisition of a specific

piece of property.

d. Confirmation with the title company that handled the escrow account and

disbursement of proceeds for the closing of the property.

3. When few property and equipment transactions occur during the year the continuing

auditor usually obtains and understanding of internal control and performs

a. Tests of controls

b. Analytical procedures to verify current year additions to property and equipment

c. A thorough examination of the balances at the beginning of the year.

d. Extensive tests of current year property and equipment transactions.

4. Which of the following combinations of procedures is an auditor most likely to perform

to obtain evidence about fixed asset addition?

a. Inspecting documents and physically examining assets.

b. Recomputing calculations and obtaining written management representations.

c. Observing operating activities and comparing balances to prior period balances.

d. Confirming ownership and corroborating transactions through inquiries of client

personnel.

Page 9 of 10

AP-5903

5. If an auditor tours a production facility, which of the misstatements or questionable

practices is most likely to be detected by the audit procedures specified?

a. Depreciation expense on fully depreciated machinery has been recognized.

b. Overhead has been overapplied.

c. Necessary facility maintenance has not been performed.

d. Insurance coverage on the facility has lapsed.

6. In testing for unrecorded retirements of equipment, an auditor is most likely to

a. Select items of equipment from the accounting records and then locate them

during the plant tour.

b. Compare depreciation journal entries with similar prior-year entries in search of

fully depreciated equipment.

c. Inspect items of equipment observed during the plant tour and then trace them to

the equipment subsidiary ledger.

d. Scan the general journal for unusual equipment additions and excessive debits to

repairs and maintenance expense.

7. Determining that proper amounts of depreciation are expensed provides assurance

about managements assertions of valuation and

a. Presentation and disclosure. c. Rights and obligations.

b. Completeness. d. Existence or occurrence.

8. The auditor may conclude that depreciation charges are insufficient by noting

a. Insured values greatly in excess of book values.

b. Large numbers of fully depreciated assets.

c. Continuous trade-in of relatively new assets.

d. Excessive recurring losses on assets retired.

9. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in

support of the audit assertion that all

a. Noncapitalizable expenditures for repairs and maintenance have been recorded in

the proper period.

b. Expenditures for property and equipment have been recorded in the proper

period.
c. Noncapitalizable expenditures for repairs and maintenance have been properly

charged to expense.

d. Expenditures for property and equipment have not been charged expense.

10. In violation of company policy, Coatsen Company erroneously capitalized the cost of

painting its warehouse. An auditor would most likely detect this when

a. Discussing capitalization policies with Coatsen's controller.

b. Examining maintenance expense accounts.

c. Observing that the warehouse had been painted.

d. Examining construction work orders that support items capitalized during the year.

11. Additions to equipment are sometimes understated. Which of the following accounts

would be reviewed by the auditor to gain reasonable assurance that additions are not

understated?

a. Accounts payable c. Depreciation expense

b. Gain on disposal of equipment d. Repair and maintenance expense

12. When an auditor interviews the plant manager, he will most likely seek from the plant

manager information regarding

a. Appropriateness of physical inventory observation procedures.

b. Existence of obsolete machinery.

c. Deferral of procurement of certain necessary insurance coverage.

d. Adequacy of the provision for uncollectible accounts.

Page 10 of 10

AP-5903

13. The auditor is least likely to learn of retirements of equipment through which of the

following?

a. Review of the purchase return and allowance account.

b. Review of depreciation.

c. Analysis of the debits to the accumulated depreciation account.

d. Review of insurance policy riders.

14. Which of the following is not likely a motive for management to manipulate the timing

and amount of impaired asset writedowns?

a. Steady increases in earnings per share over the past 5 years.

b. Income smoothing.

c. A "big bath."

d. An abnormally unprofitable year.

15. There is goodwill involved in the acquisition of a business if the purchase price paid is

in excess of the proprietorship of the business acquired.

Goodwill might be viewed as the enjoyment of a profit by a company in excess of the

normal or usual return for the industry as a whole but such goodwill is not recorded if

it has not been purchased or paid for.

a. False; True. c. True; False.

b. False; False. .d True; True.

16. In auditing intangible assets, an auditor most likely would review or recompute

amortization and determine whether the amortization period is reasonable in support

of managements financial statement assertion of

a. Valuation. c. Completeness.

b. Existence or occurrence. d. Rights and obligations

PROBLEM NO. 8

Select the best answer for each of the following:

1. In auditing accounts payable, an auditors procedures most likely will focus primarily on

managements assertion of
a. Existence or occurrence c. Completeness=

b. Presentation and disclosure d. Valuation or allocation

2. An auditor performs a test to determine whether all merchandise for which the client was

billed was received. The population for this test consists of all

a. Merchandise received c. Canceled checks

b. Vendors invoices= d. Receiving reports

3. The primary audit test to determine if accounts payable are valued properly is

a. Confirmation of accounts payable

b. Vouching accounts payable to supporting documentation=

c. An analytical procedure=

d. Verification that accounts payable was reported as a current liability in the balance

sheet.

4. Which of the following procedures is least likely to be performed before the balance sheet

date?

a. Observation of inventory c. Search for unrecorded liabilities=

b. Testing of internal control over cash d. Confirmation of receivables

Page 9 of 10

AP-5902

5. An audit assistant found a purchase order for a regular supplier in the amount of P5,500.

The purchase order was dated after receipt of goods. The purchasing agent had

forgotten to issue purchase order. Also a disbursement of P450 for materials did not have

a receiving report. The assistant wanted to select additional purchase orders for

investigation but was unconcerned about lack of receiving report. The audit director

should

a. Agree with the assistant because the amount of the purchase order exception was
considerably larger than the receiving report exception

b. Agree with the assistant because the cash disbursement clerk had been assured by

the receiving clerk that the failure to fill out a report didnt happen very often.

c. Disagree with the assistant because two problems have an equal risk of loss

associated with them.

d. Disagree with the assistant because the lack of a receiving report has a greater risk

of loss associated with it.=

6. When using confirmation to provide evidence about completeness assertion for accounts

payable, the appropriate population most likely is

a. Vendors with whom the entity has previously done business.=

b. Amounts recorded in the accounts payable subsidiary ledger.

c. Payees of checks drawn in the month after the year end.

d. Invoices filed in the entitys open invoice file.

7. Which of the following is a substantive test that an auditor is most likely to perform to

verify the existence and valuation of recorded accounts payable?

a. Investigating the open purchase order file to ascertain that pre-numbered purchase

orders are used and accounted for.

b. Receiving the clients mail, unopened, for a reasonable period of time after year end

to search for unrecorded vendors invoices.

c. Vouching selected entries in the accounts payable subsidiary ledger to purchase =

orders and receiving reports.

d. Confirming accounts payable balances with known suppliers who have zero

balances.

8. Only one of the following four statements, which compare confirmation of accounts

payable with suppliers and confirmation of accounts receivable with debtors is false. The
false statement is that

a. Confirmation of accounts receivable with debtors is a more widely accepted auditing

procedures than is confirmation of accounts payable with suppliers.

b. Statistical sampling techniques are more widely accepted in the confirmation of

accounts payable than in the confirmation of accounts receivable.=

c. As compared with the confirmation of accounts receivable, the confirmation of

accounts payable will tend to emphasize accounts with zero balances at the

balance sheet date.

d. It is less likely that the confirmation request sent to the supplier will show the

amount owed than that request sent to the debtor will show the amount due.

9. When title to merchandise in transit has passed to the audit client the auditor engaged in

the performance of a purchase cut-off will encounter the greatest difficulty in gaining

assurance with respect to the

a. Quantity b. Quality= c. Price d. Terms

10. Which of the following audit procedures is least likely to detect an unrecorded liability?

a. Analysis and recomputation of interest expense.

b. Analysis and recomputation of depreciation expense.=

c. Mailing of standard bank confirmation forms.

d. Reading of the minutes of meetings of the board directors.

11. Unrecorded liabilities are most likely to be found during the review of which of the

following documents?

a. Unpaid bills= c. Bills of lading

b. Shipping records d. Unmatched sales invoices

Page 10 of 10

AP-5902
12. Which of the following audit procedures is best for identifying unrecorded trade accounts

payable?

a. Reviewing cash disbursements recorded subsequent to the balance sheet date to

determine whether the related payables apply to the prior period.=

b. Investigating payables recorded just prior to and just subsequent to the balance

sheet date to determine whether they are supported by receiving reports.

c. Examining unusual relationships between monthly accounts payable balances and

recorded cash payments.

d. Reconciling vendors statement to the file of receiving reports to identify items

received just prior to the balance sheet date.

13. In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor

is most interested in examining the purchase

a. Journal b. Requisitions c. Orders d. Invoices=

14. Which of the following procedures relating to the examination of accounts payable could

the auditor delegate entirely to the clients employees?

a. Test footings in the accounts payable ledger

b. Reconcile unpaid invoices to vendors statements

c. Prepare a schedule of accounts payable=

d. Mail confirmations for selected account balances

15. An auditors purpose in reviewing the renewal of a note payable shortly after the balance

sheet date most likely is to obtain evidence concerning managements assertions about

a. Existence or occurrence c. Completeness

b. Presentation and disclosur= d. Valuation or allocation.

16. An auditors program to audit long term debt should include steps that require

a. Examining bond trust indentures=

b. Inspecting the accounts payable subsidiary ledger.

c. Investigating credits to the bond interest income account.

d. Verifying the existence of the bondholders.

17. In an audit of bonds payable, an auditor expects the trust indenture to include the

a. Auditees debt-to-equity ratio at the time of issuance.

b. Effective yield of the bonds issued.

c. Subscription list.

d. Description of the collateral=

18. In auditing long-term bonds payable, an auditor most likely will

a. Perform analytical procedures on the bond premium and discount accounts.=

b. Examine documentation of assets purchased with bond proceeds or liens

c. Compare interest with the bond payable amount for reasonableness.

d. Confirm the existence of individual bondholders at year-end.

19. The audit procedures used to verify accrued liabilities differ from those employed for the

verification of accounts payable because

a. Accrued liabilities usually pertain to services of a continuing nature while accounts

payable are the result of completed transactions=

b. Accrued liability balances are less material than accounts payable balances.

c. Evidence supporting accrued liabilities in nonexistence while evidence supporting

accounts payable is readily available.

d. Accrued liabilities at year-end will become accounts payable during the following

year.

20. The auditor is most likely to verify accrued commissions payable in conjunction with the

a. Sales cutoff test=

b. Verification of contingent liabilities

c. Review of post balance sheet date disbursements

d. Examination of trade accounts payable

Select the best answer for each of the following:

1. In an examination of shareholders equity, an auditor is most concerned that

a. Capital stock transactions are properly authorized.
b. Stock splits are capitalized at par or stated value on the dividend declaration date.
c. Dividends during the year under audit were approved by the shareholders.
d. Changes in the accounts are verified by a bank serving as a registrar and stock
transfer agent.

2. In audit of a medium-sized manufacturing concern, which one of the following areas can
be expected to require the least amount of audit time?
a. Owners equity b. Assets c. Revenue d. Liabilities

3. When a corporate client maintains its own stock records, the auditor primarily will rely
upon
a. Confirmation with the company secretary of shares outstanding at year-end.
b. Review of the corporate minutes for data as to shares outstanding.
c. Confirmation of the number of shares outstanding at year-end with the appropriate
state official.
d. Inspection of the stock book at year-end and accounting for all certificate numbers.

4. When a client company does not maintain its own stock records, the auditor should obtain
written confirmation from the transfer agent and registrar concerning
a. Restrictions on the payment of dividends.
b. The number of shares issued and outstanding.
c. Guarantees of preferred stock liquidation value.
d. The number of shares subject to agreement to repurchase

5. The auditor is concerned with establishing that dividends are paid to client corporation
shareholders owning stock as of the
a. Issue date c. Record date
b. Declaration date d. Payment date

6. An audit program for the retained earnings account should include a step that requires
verification of the
a. Fair value used to charge retained earnings to account for a two-for-one-stock split.
b. Approval of the adjustment to the beginning balance as a result of a write-down of an
account receivable.
c. Authorization for both cash and stock dividends.
 d. Gain or loss resulting from disposition of treasury shares.

7. During an audit of an entitys shareholders equity accounts, the auditor determines

whether there are restrictions on retained earnings resulting from loans, agreements, or
law. This audit procedure most likely is intended to verify managements assertion of
a. Existence c. Valuation
b. Completeness d. Presentation and disclosure

8. If the auditee has a material amount of treasury stock on hand at year-end, the auditor
should
a. Count the certificates at the same time other securities are counted.
b. Count the certificates only if the company had treasury stock transactions during the
year.
c. No count the certificates if treasury stock is a deduction from shareholders equity.
d. Count the certificates only if the company classifies treasury stock with other assets.

9. In performing tests concerning the granting of stock options, an auditor should

a. Confirm the transaction with the Securities and Exchange Commission.
b. Verify the existence of option holders in the entitys payroll records or stock ledgers.
c. Determine that sufficient treasury stock is available to cover any new stock issued.
d. Trace the authorization for the transaction to a vote of the board of directors.

10. The auditor would not expect the client to debit retained earnings for which of the following
transactions?
a. A 4-for 1 stock split.
b. "Loss" resulting from disposition of treasury shares.
c. A 1-for 10 stock dividend.
d. Correction of error affecting prior year's earnings.

End of AP-5901

CHAPTER 1 - Accounting Process &

Working Paper Preparation

Exercises: Indicate your answer by encircling the letter that contains your choice in each
of the following questions.
One is using periodic inventory system. For the year, its total purchases amounted to
P250,000. Its unsold merchandise at the end of the year has a cost of P5,000 which is
80% of its beginning inventory. Ones cost of sale is
a. P 250,000 b. P 251,250 c. P 249,000 d. P 248,750

Twos purchase per purchase invoice is P150,000. The purchase discount is 2/10, n/30.
Freight is P500, FOB shipping point collect. The net purchase amounts under net
method is
a. P P147,000 b. P 147,500 c. P 148,500 d. P 150,500

Using the information in Item 2, the amount paid by the buyer is

a. P P147,000 b. P 147,500 c. P 148,500 d. P 150,500

The purchase invoice shows the amount of P250,000, 2/10, 1/20, n/30; FOB destination
collect, P200. If the account is paid 15 days after the invoice date, the net payment
should be
a. P 245,000 b. P 247,500 c. P 247,300 d. P 244,800

Using the information in Item 4, the net purchase is

a. P 245,000 b. P 247,500 c. P 247,300 d. P 244,800

Three purchased merchandise for P5,000 and paid P200 for freight, FOB destination collect.
The merchandise was sold at 120% of cost. The gross profit is
a. P 1,000 b. P 1,040 c. P 6,000 d. P 6,240

The total purchase is P1,176, net of 2% cash discount. Unsold portion of purchase is P176.
The sale is at mark-up of 10%. The gross profit is
a. P 117.60 b. P 88.24 c. P 115.25 d. P 100.00

The term of a P300,000 purchase is 2/20, n/60, FOB shipping point prepaid, P300. If the
account is paid on the 25th day from the invoice date, the total payment would be
a. P 294,000 b. P 299,700 c. P 294,300 d. P 300,300

Four paid freight for P200 on its purchase on account from Five, FOB shipping point. The
journal entry in both books of Four and Five would be
Books of Four Books of Five
a. Freight-out 200 Freight-in 200
Cash 200 Accounts payable 200
b. Freight-in 200 No entry
Accounts receivable 200
c. Freight-in 200 No entry
Cash 200
d. Freight-in 200 Freight-out 200
Cash 200 Accounts receivable 200
Six sold merchandise at list price of P250,000; 10; 5; n/30. Part of the sale amounting to
P10,000 was returned due to defect. The amount to be collected by Six is
a. P 205,200 b. P 203,750 c. P 204,000 d. P 195,200

Amar Company received P96,000 on April 1, 2002 for one years rent in advance and
recorded the transaction with a credit to a nominal account. The December 31, 2002
adjusting entry is
a. Debit rent revenue and credit unearned rent revenue, P24,000.
b. Debit rent revenue and credit unearned rent revenue, P72,000.
c. Debit unearned rent revenue and credit rent revenue, P24,000.
d. Debit unearned rent revenue and credit rent revenue, P72,000.

Andoy Company paid P72,000 on June 1, 2002 for a two-year insurance policy and recorded
the entire amount as insurance expense. The December 31, 2002 adjusting entry is
a. Debit insurance expense and credit prepaid insurance, P21,000.
b. Debit insurance expense and credit prepaid insurance, P51,000.
c. Debit prepaid insurance and credit insurance expense, P21,000.
d. Debit prepaid insurance and credit insurance expense, P51,000.

Antipuesto Company purchase equipment on November 1, 2002 and gave a 12-month, 9%

note with a face value of P480,000. The December 31, 2002 adjusting entry is
a. Debit interest expense and credit interest payable, P7,200.
b. Debit interest expense and credit interest payable, P10,800.
c. Debit interest expense and credit cash, P7,200.
d. Debit interest expense and credit interest payable, P43,200.

On December 31, 2002, Asilo Companys bookkeeper made an adjusting entry debiting
supplies expense and credit supplies inventory for P12,600. The supplies inventory
accounts had a P15,300 debit balance on December 31, 2001. The December 31, 2002
balance sheet showed supplies inventory of P11,400. Only one purchase of supplies was
made during the month, on account. The entry for that purchase was
a. Debit supplies inventory and credit cash, P8,700.
b. Debit supplies expense and credit accounts payable, P8,700.
c. Debit supplies inventory and credit accounts payable, P8,700.
d. Debit supplies inventory and credit accounts payable, P16,500.

Astillo Company loaned P300,000 to another company on December 1, 2002 and received a
3-month, 15%, interest-bearing note with a face value of P300,000. What adjusting
entry should Astillo Company make on December 31, 2002?
a. Debit interest receivable and credit interest income, P7,500.
b. Debit cash and credit interest income, P3,750.
c. Debit interest receivable and credit interest income, P3,750.
d. Debit cash and credit interest receivable, P7,500.
.
The supplies inventory account balance at the beginning of the period was P66,000.
Supplies totaling P128,250 were purchased during the period and debited to supplies
inventory. A physical count shows P38,250 of supplies inventory at the end of the
period. The year-end adjusting entry is
a. Debit supplies inventory and credit supplies expense, P90,000.
b. Debit supplies expense and credit supplies inventory, P128,250.
c. Debit supplies inventory and credit supplies expense, P156,000.
d. Debit supplies expense and credit supplies inventory, P156,000.
At the end of 2002, Avila Company made four adjusting entries for the following items: (1)
depreciation expense, P35,000; (2) expired insurance, P2,200 (originally recorded as
prepaid insurance); (3) interest payable, P9,000; and (4) rental revenue receivable,
P10,000.

In the normal situation, to facilitate subsequent entries, the adjusting entry or entries
that may be reversed is/are
a. Entry 1 c. Entries 3 and 4
b. Entry 4 d. Entries 2, 3, and 4

Bagaipo Company reported an allowance for doubtful accounts of P12,000 (credit) at

December 31, 2002 before performing an aging of accounts receivable. As a result of
the aging, Bagaipo Company determined that an estimated P20,000 of the December
31, 2002 accounts receivable would prove uncollectible. The adjusting entry at
December 31, 2002 would be
a. Doubtful accounts expense 8,000
Allowance for doubtful accounts 8,000
b. Doubtful accounts expense 20,000
Accounts receivable 20,000
c. Allowance for doubtful accounts 8,000
Doubtful accounts expense 8,000
d. Doubtful accounts expense 8,000
Interest revenue 8,000

Assuming that the company does not reverse the adjusting entries, what should be made on
April 1, 200 when the annual interest payment is received?
a. Debit cash and credit interest revenue, P9,375.
b. Debit cash and credit interest receivable, P28,125.
c. Debit cash, P37,500; credit interest receivable, P28,125; and interest revenue,
P9,375.
d. Debit cash and credit interest revenue, P37,500.

Using the data of No. 19, but assuming that the company does reverse its adjusting entries,
what entry should be made on April 1, 2003 when the annual interest payment is
received?
a. Debit cash and credit interest revenue, P9,375.
b. Debit cash and credit interest receivable, P28,125.
c. Debit cash, P37,500; credit interest receivable, P28,125; and interest revenue,
P9,375.
d. Debit cash and credit interest revenue, P37,500.

Answer:

1. b 2. b 3. a 4. c 5. b 6. a 7. d 8. d 9. c 10. a

11.a 12.d 13.a 14.c 15.c 16.d 17.c 18.a 19.c 20.d