Philippine School of Business Administration CPA Review Quezon City Auditing Theory R. C.

Pre-Week Dalioan Page 1

1. Which of the following is an example of a related-party transactions? a. An action is taken by the directors of company A to provide additional compensation for vice presidents in charge of the principal business function of company A b. A long term agreement is made by company A to provide merchandise or services to company B, a longtime, friendly competitor c. A short-term loan is granted to company A by a bank that has a depositor who is a member of the board of directors of Company A d. A nonmonetary exchange occurs whereby company A exchanges property for similar property owned by company B, an unconsolidated subsidiary of company A: For a reporting entity that has participated in material relatedparty transactions, disclosure in the financial statements should include which of the following? a. The nature of the relationship involved and a description of transactions b. Details of the history of all related-party relationships c. A statement to the effect that a transaction was consummated on term no different than those that would have been obtained if the transaction had been with an unrelated party: d. A reference to deficiencies in the entitys internal control Which of the following would not necessarily be a related-party transaction? a. Sales to another corporation with a similar name b. Purchases from another corporation that is controlled by the corporations chief stockholder c. A loan from the corporation to a major stockholder d. Sale of land to the corporation by the spouse of a director Which of the following auditing procedures most likely would assist an auditor in identifying related-party transactions? a. Retesting ineffective internal control procedures previously reported to the audit committee b. Sending second requests for unanswered positive confirmations of accounts receivable c. Reviewing accounting records for nonrecurring transactions recognized near the balance sheet date d. Inspecting communications with law firms for evidence of unreported contingent liabilities When scheduling the work to be performed on an audit, the auditor should consider confirming accounts receivable balances at an interim date if which of the following situations exist? a. Subsequent collections are to be reviewed b. Internal controls over receivables are good

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c. Negative confirmations are to be used d. A simultaneous audit of cash and accounts receivable will occur In which of the following instances would an auditor be least likely to require the assistance of a specialist? a. Assessing the valuation of inventories of artworks b. Determining the quantities of materials stored in piles on the ground c. Determining the value of unlisted securities d. Ascertaining the assessed valuation of fixed assets Which of the following situations would most likely require special audit planning by the auditor? a. Some items of factory and office equipment do not bear identification numbers b. Depreciation methods used on the clients tax return differ from those used on the books c. Assets costing less than P500 are expensed even though the expected life exceeds one year d. Inventory comprises precious stones Which of the following errors would cause a misstatement under the existence or occurrence assertion for sales transactions? a. A sales invoice is incorrectly extended for P500 instead of P5,000 b. The credit manager mistakenly approved a credit sale to a customer who is bankrupt c. A sale of company land was erroneously recorded as a sale of merchandise d. A shipment of goods in July was billed to the customer in July, paid, and billed again in August Carolina Sales Corporation maintains large full-time internal audit staff that reports directly to the company president. Audit reports the internal auditors prepared indicate that internal control is suitably designed and operating effectively. The independent auditor will probably a. Eliminate tests of controls b. Avoid duplicating work the internal audit staff performed c. Use the work the internal audit staff performed in assessing control risk d. Perform more substantive tests Which of the following is one of the better auditing techniques an auditor can use to detect kiting? a. Review a composition of deposit slips stamped by the bank b. Review subsequent bank statements and canceled checks received directly from the bank c. Prepare a schedule of bank transfers from the clients books d. Prepare a year-end bank reconciliations An auditor is testing sales transactions. One step is to trace a sample of debit entries from the account receivable subsidiary ledger back to the supporting sales invoices. What would the auditor intend to establish by this step? a. The sales invoices represent bona fide sales b. All sales have been recorded c. All sales invoices have been properly posted to customer accounts d. Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoices

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The auditor obtains corroborating evidential matter for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful? a. A substantial number of accounts are in dispute b. Control risk for accounts receivable is high c. Client records include a large number of relatively small balances d. The auditor believes recipients of the requests are unlikely to give them consideration When determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following? a. The credit managers opinion b. An aging schedule of past-due accounts c. Collection experience of the clients collection agency d. Ratios calculated showing the past relationship of the valuation allowance to net credit sales Which of the following procedures ordinarily would be expected to best reveal unrecorded sales at the balance sheet date? a. Compare shipping documents with sales records b. Apply gross margin rates to inventory disposed of during the period c. Trace payments received subsequent to the balance sheet date d. Send accounts receivable confirmation requests Customers having substantial year-end past-due balances fail to reply after second request confirmation forms have been mailed directly to them. Which of the following is the most appropriate audit procedure? a. Examine shipping documents b. Review collections for the year being examined c. Extend tests of controls for assertions related to receivables d. Increase the balance in the accounts receivable allowance (contra) account To verify that all sales transactions have been recorded, a test of transactions should be completed on a representative sample drawn from which of the following? a. Entries in the sales journal b. The billing clerks file of sales orders c. A file of duplicate copies of sales invoices for which all prenumbered forms in the series have been accounted for d. The shipping clerks file of duplicate copies of bills of lading During the process of confirming receivables as of December 31, 2003, a positive confirmation was returned indicating the balance owed as of December 31 was paid on January 9, 2004. The auditor most likely would a. Determine whether any changes in the account occurred between January 1 and January 31, 2004 b. Determine whether the customer took a customary trade discount c. Reconfirm the zero balance as of January 10, 2004 d. Verify that the amount was received Which of the following is the best argument against the use of negative accounts receivable confirmations? a. The cost per response is excessively high

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b. The auditor has no way of knowing if the intended recipients received them c. Recipients are likely to feel that in reality the confirmation is a subtle request for payment d. The inference drawn from receiving no reply may not be correct e. are unlikely to confirm the information Which of the following is not a primary objective of the auditor in the audit of accounts receivable? a. To determine the approximate realizable value b. To establish existence of the receivables c. To determine the approximate time of collectibility of the receivables d. To determine that receivables are from trade customers, not officers or employees For the confirmation of accounts receivable, the auditor most likely would a. Request confirmation of a sample of the inactive accounts b. Seek positive confirmation for at least 50% of the total peso amount of receivables c. Require confirmation of all receivables from federal government agencies d. Send confirmation requests within one month of the fiscal year-end Which of the following sets of duties would be considered an improper segregation of duties in the expenditure cycle? a. Receiving, counting, and inspecting goods and also preparing the receiving report b. Preparing, approving, and issuing purchase orders and also following up on unfilled orders c. Approving vouchers for payment and also preparing and signing checks d. Comparing vendor invoices with purchase orders, requisitions, and receiving reports and also approving vouchers for payment Fagan Products, Inc., requires that an approved receiving report be prepared before an entry is made in the voucher register to record a purchase and related account payable. To test the effectiveness of this control, the auditor compares the date on the receiving report with the date of the entry in the voucher register. The auditor would be most likely to question the effectiveness of this control when the test of controls reveals that a. Voucher register entries are dated on or after the corresponding receiving report dates b. Receiving reports are dated on or before the corresponding voucher register entry dates c. Receiving reports are dated after the corresponding voucher register entry dates d. Voucher register entries are dated after the corresponding receiving report dates Which of the following internal controls would least likely prevent or detect a misstatement of the existence or occurrence assertion for cash payments caused by the duplicate payment of a voucher? a. Cancelling documentation supporting the voucher immediately after the voucher is paid

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b. Reconciling monthly vendor statements with the accounts payable subsidiary ledger c. Individuals responsible for signing checks also preparing and approving vouchers d. Attaching a check copy to the voucher immediately after the voucher is paid For comparing the confirmation of accounts payable with suppliers and confirmation of accounts receivable with debtors, which of the following is statements is true? a. Confirmation of accounts payable with suppliers is a more widely accepted auditing procedure than is confirmation of accounts receivable with debtors b. Statistical sampling techniques are more widely accepted for the confirmation of accounts payable than for the confirmation of accounts receivable c. As compared with the confirmation of accounts payable, the confirmation of accounts receivable 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 the supplier than that the request sent to the debtor will show the amount due from the debtor Why do the audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable? a. Accrued liabilities usually pertain to services of a continuing nature, whereas accounts payable are the result of completed transactions b. Accrued liability balances are less material than accounts payable balances c. Evidence supporting accrued liabilities is nonexistent, whereas evidence supporting accounts payable is readily available d. Accrued liabilities at year-end will become accounts payable during the following year Under which of the following circumstances would be advisable for the auditor to confirm accounts payable with creditors? a. Internal controls for accounts payable are adequate and sufficient evidence is on hand to minimize the risk of a material misstatement b. Confirmation response is expected to be favorable, and accounts payable balances are of immaterial amounts c. Creditor statements are not available, and internal control over accounts payable is unsatisfactory d. The majority of accounts payable balances are with associated companies 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 standard bank confirmation forms d. Reading the minutes of board of directors meetings Which of the following internal controls would be least effective in preventing the accumulation of obsolete or slow-moving inventory? a. Using perpetual inventory records b. Using secured storage areas for inventory c. Using sales forecasts
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d. Using authorized production orders 29. Lutel Manufacturing Corporation mass-produces 12 different products. The controller interested in strengthening internal control for the existence assertion for finished inventory would be most likely to implement which of the following? a. A separation of duties among production personnel b. The use of sales forecasts c. A job-order cost accounting system d. A perpetual inventory system Holly, Inc., uses time clocks and time cards to help ensure that employee work time is accurately recorded. Which internal control would be most effective for determining whether production employees are properly recording their time on the payroll time cards at a time clock station? a. The production supervisor should approve daily time charged to job orders and compare that time with hours recorded on the time cards b. Payroll checks should be distributed by the internal auditing department c. Hours recorded on the time cards should be compared to payroll computations by an independent employee d. The duties of hiring, payroll computation, and paying employees should be segregated Purchase cutoff procedures should be designed to test whether merchandise is included in the client companys inventory if the company a. Has paid for the merchandise b. Has physical possession of the merchandise c. Holds legal title to the merchandise d. Holds the shipping documents for the merchandise issued in the companys name 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 listed on the inventory sheets c. All inventory represented by an inventory tag is bona fide d. Inventory sheets do not include untagged inventory items The physical count of a retailers inventory 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 customers returned 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 F.O.B. shipping point had not arrived at the date of the inventory count and had not been reflected in the perpetual records Purchase cutoff procedures should be designed to test whether or not all inventory
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a. Purchased and received before year-end was recorded b. On the year-end balance sheet was carried at lower of cost or market c. On the year-end balance sheet was paid for the company d. The company owns is in the companys possession The audit of year-end physical inventories should include steps to verify that the clients purchase and sales cutoffs were adequate. The audit steps 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 An auditor usually will trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule. This audit procedure is meant to provide evidence that items physically present and the auditor observed at the time of the physical inventory count are a. Owned by the client b. Not obsolete c. Physically present at the time of the final-inventory-schedule preparation d. Included in the final inventory schedule After accounting for a sequence of inventory tags, An Auditor traces a sample of the 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 listings c. Included in the listing are represented by inventory tags d. Represented by inventory tags are bona fide Which of the following is not one of the independent auditors objectives when auditing inventories? a. Verifying the client owns the inventory counted b. Verifying the client has used proper inventory pricing c. Ascertaining the physical quantities of inventory on hand d. Verifying that all inventory the client owns is on hand at the time of the count Where no independent stock transfer agents are employed and the corporation issues its own stocks and maintains stock records, cancelled stock certificates should a. Be defaced to prevent reissuance and attached to their corresponding stubs b. Not be defaced but be segregated from other stock certificates and retained in a cancelled certificates file c. Be destroyed to prevent fraudulent reissuance d. Be defaced and sent to the secretary Which of the following is an internal control weakness related to factory equipment? a. A policy exists requiring all purchases of factory equipment to be made by the department in need of the equipment b. Checks issued in payment of equipment purchases are not signed by the controller c. Factory equipment replacements generally are made when estimated useful lives, as indicated in depreciation schedules, have expired

d. Proceeds from sales of fully depreciated equipment are credited to other income 41. The financial management of a company should take steps to see the company investment securities are protected. Which of the following is not a step designed to protect investment securities? a. Custody of securities should be assigned to persons who have the accounting responsibility for securities b. Securities should be properly controlled physically to prevent unauthorized use c. Access to securities should be vested in more than one person d. Securities should be registered in the name of the owner Which of the following is the most important internal control over acquisitions of property, plant, and equipment? a. Establishing a written company policy distinguishing between capital and revenue expenditures b. Using a budget to forecast and control acquisitions and retirements c. Analyzing monthly variances between authorized expenditures and actual costs d. Requiring acquisitions to be made by user departments Which of the following audit procedures would least likely lead the auditor to find unrecorded fixed asset disposals? a. Examination of insurance policies b. Review of repairs and maintenance expense c. Review of property tax files d. Scanning of invoices for fixed asset additions The controller of Excello Manufacturing, Inc., wants to use ratio analysis to identify the possible existence of idle equipment or the possibility that equipment has been disposed of without having been written off. Which of the following ratios would best accomplish this objective? a. Depreciation expense to book value of manufacturing equipment b. Accumulated depreciation to book value of manufacturing equipment c. Repairs and maintenance cost to direct-labor costs d. Gross manufacturing equipment cost to units produced Which of the following is the best evidence of real estate ownership at the balance sheet date? a. Title insurance policy b. Original deed held in the clients safe c. Paid real estate tax bill d. Closing statement In the audit of property, plant, and equipment, the auditor tries to determine all of the following except the a. Design of internal controls b. Extent of property abandoned during the year c. Adequacy of replacement funds d. Reasonableness of depreciation expense During the year under audit, a company has completed a private placement of a substantial amount of bonds. Which of the following is the most important step in the auditors program for the examination of bonds payable? a. Confirming the amount issued with the bond trustee
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b. Tracing the cash received from the issue to the accounting records c. Examining the bond records the transfer agent maintains d. Recomputing the annual interest cost and the effective yield An auditor compares 19X9 revenues and expenses with those of the prior year and investigates all changes exceeding 10%. By this procedure the auditor would be most likely to learn that a. An increase in property tax rates has not been recognized in the clients accrual b. The 19X9 provision for uncollectible accounts is inadequate because of worsening economic conditions c. Fourth-quarter payroll taxes were not paid d. The client changed its capitalization policy for small tools in 19X9 An auditor determines that a client has capitalized properly a leased asset (and corresponding lease liability) as representing, in substance, an installment purchase. As part of the auditors procedures, the auditor should a. Substantiate the cost of the property to the lessor and determine whether this is the cost the client recorded b. Evaluate the propriety of the interest rate used to discount the future lease payments c. Determine whether the leased property is being amortized over the life of the lease d. Evaluate whether the total amount of lease payments represents the fair market value of the property Which of the following best describes the independent auditors approach to obtaining satisfaction concerning depreciation expense in the income statement? a. Verify the mathematical accuracy of the amounts charged to income as a result of depreciation expense b. Determine the method for computing depreciation expense, and ascertain whether it is in accordance with generally accepted accounting principles c. Reconcile the amount of depreciation expense to amounts credited to accumulated depreciation accounts d. Establish the basis for depreciable assets, and verify the depreciation expense The auditor may conclude that depreciation charges are insufficient by noting a. Large amounts of fully depreciated assets b. Continuous trade-ins of relatively new assets c. Excessive recurring losses on retired assets d. Insured values greatly in excess of book values Which of the following internal controls would be most effective for maintaining proper custody of financing cycle assets? a. Access to securities in the safe deposit box is limited to only one officer b. Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger c. The purchase and sale of investments are executed only after the specific authorization of the board of directors d. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe-deposit box by independent personnel

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What is the major reason an independent auditor gathers evidence? a. To form an opinion on the financial statements b. To detect fraud c. To evaluate management d. To assess control risk When is evidential matter generally considered sufficient? a. When it is competent b. When enough of it is present to afford a reasonable basis for an opinion on the financial statements c. When it has the qualities of being relevant, objective, and free from unknown bias d. When the auditor uses professional judgment in its selection Evidential matter supporting the financial statements consists of the underlying accounting data and all corroborating information available to the auditor. Which of the following is an example of corroborating information? a. Minutes of meetings b. General ledgers c. Accounting manuals d. Worksheets supporting consolidated financial statements When is evidential matter generally considered competent? a. When it has the qualities of being relevant, objective, and free from known bias b. When enough of it is present to afford a reasonable basis for an opinion on the financial statements c. When it has been obtained by random selection d. When it consists of written statements made by managers of the enterprise under audit Which of the following circumstances is most likely to cause an auditor to consider whether a material misstatement exists? a. Transactions selected for testing are not supported by proper documentation b. The turnover of senior accounting personnel is exceptionally low c. Management places little emphasis on meeting earnings projections d. Operating and financing decisions are dominated by several persons Which of the following types of documentary evidence should the auditor consider the most reliable? a. A sales invoice the client issued and supported by a delivery receipt from an outside trucker b. Confirmation of an account payable balance mailed by and returned directly to the auditor c. A check the company issued bearing the payees endorsement, which is included with the bank statements mailed directly to the auditor d. A working paper the clients controller prepared and the clients treasurer reviewed The strongest criticism of the reliability of audit evidence the auditor physically observes is that a. The client may conceal items from the auditor b. The auditor may not be qualified to evaluate the items observed c. Such evidence is too costly in relation to its reliability

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d. The observation must occur at a specific time, which is often difficult to arrange Audit working papers are used to record the results of the auditors evidence-gathering procedures. What should the auditor remember when preparing working papers? a. Working papers should be kept on the clients premises so that the client can have access to them for reference purposes b. Working papers should be the primary support for the financial statements being audited c. Working papers should be considered a substitute for the clients accounting records d. Working papers should be designed to meet the circumstances and the auditors needs on each audit Although the quantity, type, and content of working papers will vary with the circumstances, the working papers generally would include which of the following? a. Copies of client records the auditor examined during the course of the audit b. Evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit c. Auditors comments concerning the efficiency and competence of client management personnel d. The auditing procedures followed and the testing performed to obtain evidential matter Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence? a. Documents third parties mailed to the auditor b. Correspondence between the auditor and vendors c. Sales invoices the auditor inspected d. Computations the auditor made Which of the following factors will least affect the independent auditors judgment as to the quantity, type, and content of working papers desirable for a particular audit? a. Nature of the auditors report b. Nature of the financial statements, schedules, or other information the auditor is reporting on c. Need for supervision and review d. Number of personnel assigned to the audit Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence? a. Vendors invoice b. Bank statement obtained from the client c. Calculations the auditor made d. Prenumbered client invoices For what minimum period should audit working papers be retained by the independent CPA? a. For the period the entity remains a client of the independent CPA b. For the period an auditor-client relationship exits, but not more than seven years c. For the statutory period when legal action may be brought against the independent CPA d. For as long as the CPA is in public practice

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During an audit, pertinent data are compiled and included in the audit working papers. The working papers primarily are considered a. A client-owned record of conclusions reached by the auditors who performed the audit b. Evidence supporting financial statements c. Support for the auditors representation as to compliance with generally auditing standards d. A record to be used as a basis for the following years audit Which of the following statements is true regarding an auditors working papers? a. They should not be permitted to serve as a reference source for the client b. They should not contain critical comments concerning management c. They should show that the accounting records agree or reconcile with the financial statements d. They should be considered the primary support for the financial statements being audited. In general, which of the following statements is correct with respect to ownership, possession, or access to working papers a CPA firm prepared in connection with an audit? a. The working papers may be obtained by third parties when they appear to be relevant to issues raised in litigation b. The working papers are subject to the privileged communication rule which, in a majority of jurisdictions, prevents third-party access to the working papers c. The working papers are the property of the client after the client pays the fee d. The working papers must be retained by the CPA firm for a period of ten years Which of the following is an advantage of a systematic sampling over random-number sampling? a. It provides a stronger basis for statistical conclusions b. It enables the auditor to use the more efficient sampling-withreplacement tables c. A correlation among the location of items in the population, the feature of sampling interest, and the sampling interval may exist d. It does not require the auditor to establish correspondence between random numbers and items in the population Tests of controls are intended to provide reasonable assurance that the internal control procedures are being applied as prescribed. Which sampling method is most useful when testing controls? a. Haphazard sampling b. Attribute sampling c. Sampling with replacement d. Stratified random sampling Which of the following best describes what the auditor means by the rate of deviation in an attribute sampling plan? a. The number of deviations that reasonably can be expected to be found in a population b. The frequency a certain characteristics occurs within a population: c. The degree of confidence that the sample is representative of the population
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d. The dollar range the true population total can be expected to fall within If an auditor, planning to use statistical sampling, is concerned with the number of client sales invoices that contain mathematical misstatements, which method would the auditor most likely use? a. Random sampling with replacement b. Sampling for attributes: c. Sampling for variables d. Stratified random sampling Rachel Jones, CPA, believes the expected deviation rate of client billing errors is 3% and has established a tolerable deviation rate of 5%. In the review of client invoices, which method should Jones use? a. Discovery sampling b. Attribute sampling: c. Stratified sampling d. Variable sampling An auditor selects a preliminary sample of 100 items out of a population of 1,000 items. The sample statistics generate an arithmetic mean of P120, a standard deviation of P12, and a standard error of the mean of P1.20. If the sample was adequate for the auditors tolerable misstatement was plus or minus P2,000, what would be the minimum acceptable peso value of the population? a. P122,000 c. P118,000: b. P120,000 d. P117,600 In which of the following cases would the auditor be most likely to conclude that all of the items in an account under consideration should be examined rather than tested on a sample basis? The Measure of Misstatements Are Tolerable Misstatement Is Expected To be a. Large Low b. Large High a. Small High: b. Small Low Parts A and B are based on the following information: The following diagram depicts the auditors estimated deviation rate compared with the tolerable rate, and it also depicts the true population deviation rate compared with the tolerable rate. True State of Population Auditors Estimate Deviation Rate Deviation Rate Based on Exceeds Tolerable Is Less Than Sample Results Rate Tolerable Rate Deviation rate Exceeds Tolerable Rate

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Deviation Rate Is Less Than Tolerable Rate III IV A. In which of the situations would the auditor have properly assessed the level of control risk? a. I: b. II c. III d. IV

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As a result of testing controls, the auditor assesses control risk too high and thereby increases substantive testing. Which situation illustrates this result? a. I b. II: c. III d. IV If all other factors specified in an attribute sampling plan remain constant, changing the tolerable rate from 6% to 10% and changing the specified reliability from 97% to 93% (changing the risk of assessing control risk too low from 3% to 7%) would cause the required sample size to a. Increase c. Decrease: b. Remain the same d. Change by 4% In estimation sampling for variables, which of the following must be known to estimate the appropriate sample size required to meet the auditors needs in a given situation? a. The total amount of the population: b. The desired standard deviation c. The desired confidence level d. The estimated rate of misstatement in the population If statistical sampling methods are used by a client to take physical inventory, the CPA must a. Insist that the client take a complete physical inventory at least once each year and observe the inventory count if it is reasonable and practicable to do so b. Observe such test counts as he or she deems necessary to obtain satisfaction that the sampling plan has statistical validity, that it was properly applied, and that the resulting precision and reliability are reasonable in the circumstances: c. Either observe a complete inventory count sometime during the year to obtain satisfaction that the statistical procedures are valid or qualify or disclaim an opinion on the financial statements taken as a whole d. Either observe a statistical inventory count each year or qualify or disclaim an opinion on the financial statements taken as a whole The estimated deviation rate obtained from attribute sampling is most useful for satisfying the auditing standard that states a. The work is to be adequately planned, and assistants, if any, are to be properly supervised b. Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion c. The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor d. A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed: Anthony Hill has decided to use PPS sampling, sometimes called peso-unit sampling, in the audit of a clients accounts receivable balances. Hill plans to use the following PPS sampling table: Reliability Factors for Errors of Overstatement Number of Overstatement Risk of Incorrect Acceptance Errors 1% 5% 10% 15% 20% 0 4.61 3.00 2.31 1.90 1.61
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1 6.64 4.75 3.89 2 8.41 6.30 5.33 3 10.05 7.76 6.69 4 11.61 9.16 8.00 Additional Information Tolerable misstatement (net of effect of expected misstatement) Risk of incorrect acceptance Number of errors allowed Recorded amount of accounts receivable Number of accounts

3.38 4.72 6.02 7.27

3.00 4.28 5.52 6.73 P24,000 20% 1 P240,000 360

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What sample size should Hill use? a. 120 c. 60 b. 108: d. 30 In a probability-proportional-to-size sample with a sampling interval of P10,000, an auditor discovered that a selected account receivable with a recorded amount of P5,000 had an audit amount of P2,000. What was the projected error of this sample? a. P3,000 c. P6,000: b. P4,000 d. P8,000 Auditors sometimes use comparisons of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities? a. Unrecorded purchases b. Unrecorded sales: c. Merchandise purchases being charged to selling and general expense d. Fictitious sales The auditor notices significant fluctuations in key elements of the companys financial statements. If management cannot provide an acceptable explanation, what should the auditor do? a. Consider the matter a scope limitation b. Perform additional audit procedures to investigate the matter further: c. Intensify the audit, expecting to detect management fraud d. Withdraw from the engagement Of the following, which is the most efficient audit procedure for verification of interest earned on bond investments? a. Tracing interest declarations to an independent record book b. Recomputing interest earned: c. Confirming interest rate with the issuer of the bonds d. Vouching the receipt and deposit of interest checks An auditor testing long-term investments ordinarily would use analytical procedures as the primary audit procedures to ascertain the reasonableness of the a. Valuation of the marketable equity securities b. Classification of gains and losses on the disposal of securities c. Completeness of recorded investment income: d. Existence and ownership of investments

########################################################### 1. Which of the following would lessen the effectiveness of internal control in an electronic data-processing system? a. The computer librarian maintains custody of computer program instructions and detailed program listings: b. Computer operators have access to operator instructions and detailed program listings
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The control group maintains sole custody of all computer output d. Computer programmers write and debug programs that perform routines the systems analyst designs To update a computerized accounts receivable file, which of the following would be used as a batch control to verify the accuracy of the posting of cash receipts remittances? a. The sum of the cash deposits plus the discounts less the sales returns b. The sum of the cash deposits c. The sum of the cash deposits less the discounts taken by the customers d. The sum of the cash deposits plus the discounts taken by the customers: When an online, real-time electronic data-processing system is in use, which of the following could strengthen internal control? a. Providing for the separation of duties between data entry and error-listing operators b. Using read-only protection on all hard drives before new data can be entered on the file c. Making a validity check of an identification number before a user can obtain access to the computer files: d. Preparing batch totals to insure that file updates are made for the entire input When erroneous data are detected by computer program controls, such data may be excluded from processing and printed on an error report. Who should most probably review and follow up on the error report? a. The supervisor of computer operations b. The systems analyst c. The EDP control group: d. The computer programmer In clients EDP system, the auditor will encounter general controls and application controls. Which of the following is an application control? a. Password c. Systems flowchart b. Hash total: d. Control over program changes Control activities within EDP activity may leave no visible evidence indicating they were performed. In such instances, the auditor should test these controls by a. Making corroborative inquiries b. Observing the separation of personnel duties: c. Reviewing transactions submitted for processing and comparing them to related output d. Reviewing the run manual Which of the following is likely to be least important to an auditor who is obtaining an understanding of internal control surrounding the automated data-processing function? a. Disposition of source documents b. Operator competence c. Bit storage capacity: d. Segregation of duties After obtaining an understanding of a clients internal control, an auditor may decide not to perform tests of controls related to the controls within the EDP portion of the clients internal control. Which of the following would not be a valid reason for choosing to omit tests of controls?
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a. b.

9.

10.

11.

12.

13.

14.

The controls appear adequate: The controls duplicate controls existing elsewhere in the system c. Major weaknesses appear to exist that would be preclude an assessment of control risk at below the maximum d. The time and dollar costs of testing exceed the time and dollar savings in substantive testing if the tests of controls show the controls to be operative Which of the following constitutes a weakness in an EDP systems internal control? a. One generation of backup files is stored outside the premises b. Machine operators distribute error messages to the control group c. Machine operators do not have access to the complete systems manual d. Machine operators are supervised by the programmer: The internal control activity of segregation of duties exists when computer department personnel do which of the following? a. Participate in making decisions about acquiring computer software b. Design documentation for computer applications c. Initiate changes in master files: d. Provide physical security for program files Which of the following is true of generalized audit software programs? a. They can be used only for auditing online computer systems b. They can be used on any computer without modification c. Each has its own characteristics that the auditor must carefully consider before using it in a given audit situation: d. They cannot be used on microcomputers Smith T. Enterprises has changed from a manual to a computerized payroll clock card system. Factory employees now record time in and out with magnetic cards, and the computer system automatically updates all payroll records. Because of this change, a. The auditor must use a computer-assisted audit technique b. Internal control has improved c. Part of the audit trail has been lost: d. The potential for payroll-related fraud has been diminished When a computerized accounting system is tested, which of the following is not true of the test data approach? a. Test data are processed by the clients computer program under the auditors control b. The test data must consist of all possible valid and invalid conditions: c. The test data need consist only of the valid and invalid conditions the auditor is interested in d. Only one transaction of each type need be tested A primary advantage of using GASPs in the audit of an entity with an advanced computer system is that they enable the auditor to a. Substantiate the accuracy of data through self-checking digits and hash totals b. Use the speed and accuracy of the computer: c. Verify the performance of machine operations that leave visible evidence of occurrence d. Gather and store large quantities of supportive evidential matter in machine-readable form

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15.

16.

17.

Which of the following is true of tests of controls for a computer system? a. They only can be performed using actual transactions because testing of simulated transactions is of no consequence b. They can be performed using actual transactions or simulated transactions: c. They are impractical because many procedures within the computer activity leave no visible evidence of having been performed d. They are inadvisable because they may distort the evidence in master files Which of the following computer-assisted auditing techniques allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process? a. Parallel simulation b. Generalized audit software programming c. Integrated test facility: d. Test data approach Which of the following statements best describes why the CPA profession has deemed essential to promulgate a code of ethics and to establish a mechanism for enforcing observance of the code? a. A distinguishing mark of a profession is its acceptance of responsibility to the public: b. A prerequisite for success is the establishment of an ethical code that stresses primarily the professionals responsibility to clients and colleagues c. Most state laws require the profession to establish a code of ethics d. An essential means of self-protection for the profession is its establishment of flexible ethical standards

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