Auditing Theory

Quizzer

Coverage: Performing Substantive Tests

Audit Sampling
Completing the Audit
Audit Reports on Financial Statements

I. Alternate Response
Instruction: Complete the table below. First column are statements related to auditing.
Place on the second column whether the statement presented are TRUE or FALSE. Then
provide a brief justification of your answer in column three.
“TRUE” or
Statements “FALSE”? Justification
1. Accounting data alone may be FALSE In addition to the accounting data, the auditor
considered sufficient appropriate must obtain corroborating audit evidence.
audit evidence to issue an
unmodified opinion on financial
statements.

2. External evidence, such as TRUE Audit evidence obtained from external sources
communications from banks, is serves as verification of information handed by
generally regarded as more reliable the auditee.
than answers obtained from
inquiries of the client.

3. Accounting data developed under TRUE Internal evidence is used extensively when it is
satisfactory conditions of internal produced under satisfactory conditions of
control are more relevant than data internal control.
developed under unsatisfactory
internal control conditions.

4. Information obtained indirectly FALSE Information is more persuasive when obtained

from independent outside sources directly rather than indirectly.
is more persuasive than the
auditor’s direct personal knowledge
obtained through observation and
inspection.

5. A practical and effective audit FALSE For lapping, having customers send payments
procedure for the detection of directly though the company’s depository bank is
lapping is preparing a proof of more practical and effective.
cash.

6. To test the existence assertion for FALSE A written confirmation from the customer is the
recorded receivables, an auditor evidence needed for accounts receivable.
would select a sample from the
shipping documents file.

7. In verifying debits to perpetual TRUE Invoices contain data about the actual goods
inventory records of a non- received.
manufacturing firm, the auditor
would be interested in examining
the vendors’ invoices.

8. In testing for unrecorded FALSE Tracing it in the ledger is unlikely to reveal the
retirements of equipment an unrecorded retirements. The proper testing
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 auditor might trace equipment would be is to select items of equipment from the
items observed during the plant accounting records and then locate them during
tour to the equipment subsidiary the plant tour.
ledger.

9. Auditors may choose not to TRUE External evidences are more reliable than
confirm accounts payable because internal evidences
other reliable external evidence to
support the balances is likely to be
available.

10. An example of an external FALSE Bank statements are more reliable.

document that provides reliable
information for the auditor is
purchase order for company
purchases.

11. A primary purpose of audit working FALSE It is to support the AUDITOR’S OPINION on
papers is to support the financial financial statements.
statements.

12. In some instances, other types of TRUE

evidence may be reduced when
analytical procedures indicate that
an account balance appears
reasonable.

13. Although the quantity, type, and TRUE As a general rule, working papers should contain
content of working papers will vary the results and scope of the auditor’s
with the circumstances, the examinations and be clear and understandable.
working papers generally would
include the auditing procedures
followed and the testing performed
in obtaining audit evidence.

14. Audit documents may be regarded FALSE Certain audit documentation may sometimes
as a substitute for the client’s serve as a useful reference source for the client,
accounting records. but it should not be regarded as a part of, or a
substitute for, the client's accounting records.
15. In evaluating an entity’s TRUE Ian auditor’s objectives are to obtain sufficient
accounting estimates, one of the appropriate audit evidence that:
auditor’s objectives is to determine 1. Material accounting estimates have developed;
whether the estimates are 2. Those accounting estimates are reasonable;
reasonable in the circumstances. and
3. Those accounting estimates are in conformity
with generally accepted accounting principles.
16. Audit documents should be kept FALSE Audit documents are prepared to facilitate the
on the client’s premises so that the review supervision of work done by auditors
client can have access to them for assigned to the engagement.
reference purposes.

17. A client’s accounting data cannot FALSE Audit evidence consists of the underlying
be considered sufficient audit accounting data and all corroborating
evidence to support the financial information available to the auditor. A client's
statements. accounting data by itself is not considered
sufficient audit evidence to support the financial
statements.
18. The permanent audit file usually FALSE It includes organizational chart of the company’s
includes working trial balance. employees.

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19. Significant unexpected fluctuations Significant unexpected fluctuations identified by
identified by analytical procedures analytical procedures will usually necessitate
will usually necessitate an audit investigation by the auditor.
report modification.

20. Where no independent stock TRUE This is the objective of reissuance.

transfer agents are employed and
the corporation issues its own
stocks and maintains stock
records, cancelled stock certificates
should be defaced to prevent
reissuance and attached to their
corresponding stubs.

II. Multiple Choice

Instruction: Complete the table below. First column are questions related to auditing.
Select the letter that corresponds to the best answer. Write this letter on the second
column. Then provide a brief justification of your answer in column three.

Statements Answer Justification

1. The purpose of a proof of cash is to D When used for each line item in a bank
a. Validate that the client’s bank did reconciliation, the proof of cash highlights areas
not make an error during the in which there are discrepancies, and which may
period being examined. therefore require further investigation, and
b. Confirm that the client has perhaps some adjusting entries.
properly separated the custody
function from the recording
function with respect to cash.
c. Prove that the client’s year-end
balance of cash is fairly stated.
d. Determine whether any
unauthorized disbursements or
unrecorded deposits were made
for the given time period.

2. An internal auditor would be concerned B

about the possibility of fraud if
a. Only one person has access to the
petty cash fund.
b. Cash receipts, net of the amounts
used to pay petty cash-type
expenditures, are deposited in the
bank daily.
c. The monthly bank statement
reconciliation is performed by the
same employee who maintains the
perpetual inventory records.
d. The accounts receivable
subsidiary ledger and accounts
payable subsidiary ledger are
maintained by the same person.
3. Purchase cutoff procedures test the B This depicts that the ownership of the inventory
completeness assertion. An entity is in the hands of the entity claiming the
should include goods in its inventory if inventory.
it
a. Has paid for the goods.
b. Holds legal title to the goods.
c. Has physical possession of the
goods.

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 d. Has sold the goods.
4. In auditing accounts payable, an C Completeness assertion focuses upon whether
auditor’s procedures most likely will payables have been omitted, thereby overstating
focus primarily on management’s income.
assertion of
a. Existence
b. Valuation and allocation
c. Completeness
d. Presentation and disclosure

5. Which of the following is the primary A Relatively few problems are encountered by the
audit test to determine if accounts auditor in meeting the objective of determining
payable are valued properly? the proper valuation of accounts payable. The
a. Vouching accounts payable to auditor vouches the recorded accounts payable
supporting documentation. to the supporting documentation, the invoice
b. An analytical procedure. and purchase order, to determine if the accounts
c. Verification that accounts payable are accurately valued.
are reported as a current liability
in the balance sheet.
d. Examination of cash
disbursements subsequent to
year-end.

6. Which of the following procedures is A Search for unrecorded liabilities relies upon
least likely to be performed before the review of documents unrecorded at year-end, as
balance sheet date? well as inspection of purchases and
a. Search for unrecorded liabilities. disbursements recorded after year-end to
b. Confirmation of accounts determine whether a proper cutoff of
receivable. transactions between periods has occurred.
c. Attendance at the physical
inventory count.
d. Testing internal control over cash.

7. An auditor performs a test to determine B Vendors’ invoices serve as official receipt for the
whether all merchandise for which the merchandise which was purchased from them.
client was billed was received. The
population for this test consists of all
a. Receiving reports
b. Vendors’ invoices
c. Cancelled checks
d. Merchandise received

8. Which of the following is a substantive D Existence pertains to whether or not the

procedure that an auditor would most liabilities are valid, while valuation addresses the
likely perform to verify the existence accurate reporting of the amount. Vouching
and valuation of recorded accounts selected entries in the accounts payable
payable? subsidiary ledger to purchase orders and
a. Confirming accounts payable receiving reports enables the auditor to verify
balances with known suppliers both existence and valuation. By starting with
who have zero balances. recorded payables and then tracing to
b. Investigating the open purchase supporting documentation, the auditor verifies
order file to ascertain that pre- existence. The supporting documentation also
numbered purchase orders are provides proof of proper valuation.
used and accounted for.
c. Receiving the client’s mail,
unopened, for a reasonable period
of time after year-end to search for
unrecorded vendor’s invoices.
d. Vouching selected entries in the
accounts payable subsidiary
ledger to purchase orders and
receiving reports.

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9. When using confirmations to provide A To address completeness, the auditor attempts
evidence about the completeness to determine that all accounts payable are
assertion for accounts payable, the reflected and a company potentially may be
appropriate population most likely liable to any of its vendors.
a. Amounts recorded in the accounts
payable subsidiary ledger.
b. Vendors with whom the entity has
previously done business.
c. Invoices filed in the entity’s open
invoice file.
d. Payees of checks drawn in the
month subsequent to the balance
sheet date.

10. Unrecorded liabilities are most likely to B

be found during the review of which of
the following documents?
a. Bills of lading
b. Unpaid bills
c. Unmatched sales invoices
d. Shipping records

11. If an accounting change has no B If an accounting change has no material effect

material effect on the financial on the financial statements in the current year,
statements in the current year but the but the change is reasonably certain to have
change is reasonably certain to have substantial effect in later years, the change
material effect in later years, the change should be disclosed in the notes to the financial
should be statements whenever the statements of the
a. Treated as a consistency period of change are presented, but the
modification in the auditor’s report independent auditor need not recognize the
for the current year change in his report. [Paragraph renumbered by
b. Disclosed in the notes to the the issuance of Statement on Auditing Standards
financial statement of the current No. 43, August 1982. Paragraph subsequently
year renumbered to reflect the conforming changes
c. Disclosed in the notes to financial necessary due to the issuance of Statement on
statements and referred to in the Auditing Standards Nos. 53 through 62.
audit report for the current year Paragraph subsequently renumbered by the
d. Treated as a subsequent event issuance of Statement on Auditing Standards
No. 88, December 1999.]
12. In which of the following situations B Failure to disclose information that is required
would an auditor ordinarily choose by GAAP is a departure from GAAP. Departures
between expressing a qualified opinion from GAAP result in a qualified or an adverse
or an adverse opinion? opinion.
a. The auditor wishes to emphasize an
unusually important subsequent
event
b. The financial statement failed to
disclose information that is required
by the Philippine Financial
Reporting Standards
c. Event disclosed in the financial
statement cause the auditor to have
a substantial doubt about the
entities ability to continue as a
going concern
d. The auditor did not observe the
entity’s physical inventory and is
unable to become satisfied as to its
balance by other auditing
procedures

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13. A note to the financial statements of the B The bank’s failure to have backup records does
Prudent Bank indicates that all of the not affect the fairness of the financial
records relating to the banks business statements. Hence, an unmodified opinion is
operation are stored on magnetic disk appropriate.
and that no emergency back-up system
or duplicate disks are stored because
the bank and its auditor consider the
occurrence of a catastrophe to be
remote. Based upon this note, the
auditor’s should express
a. A qualified opinion
b. An unqualified opinion
c. An adverse opinion
d. Scope qualification

14. Which of the following statements B Not expressing of an opinion is one way to
indicates a disclaimer opinion? determine whether the auditor had issued a
a. The financial statements do not disclaimer of opinion.
present fairly in all material
respects the financial position,
results of operation, and cash flows
in conformity with PFRS
b. The auditor does not express an
opinion on the financial statements
c. The financial statements present
fairly in all material respect the
financial position, result of
operation, and cash flows in
conformity with PFRS
d. Except for the effect of a matter, the
financial statement presents fairly
in all material respects the financial
position, results of operation, and
cash flows in conformity with PFRS

15. An independent auditor discovers that a A The auditor is likely to express an unmodified
payroll supervisor of the company being opinion for two reasons. First, the
audited has misappropriated P50,000. misappropriated amount is immaterial relative to
The company’s total assets and income assets and income. Second, as long as the
before tax are P70M and P15M, misappropriation is accounted for properly, the
respectively. Assuming no other issues financial statements will be fairly presented.
affect the report, the auditor’s report
will most likely contain a/an
a. Unqualified opinion
b. Disclaimer of opinion
c. Adverse opinion
d. Scope qualification

III. Essay:
Instruction: Provide what is required. All answers should be related specifically to
the organization you are supposed to be auditing this semester.

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 A. Performing Substantive Tests: Provide at least five (5) procedures you should be
performing in conducting an audit. Explain how and why these procedures are
supposed to be done.
1. Inspection of Records or Documents- it involves the examination of records,
documents, or tangible assets. Records and documents are inspected to provide audit
evidence of varying degrees or reliability depending on their nature an source and the
effectiveness of internal controls over their processing. This procedure is to be done in
order to confirm whether documents needed for the audit are sufficient enough to
evidence the transactions that the organization dealt with.
2. Inquiry- obtaining of oral or written information from the client in response to
questions from the auditor. This is done in order to clarify some information that is
questionable or those that are in need of explanation.
3. Recalculation- consists of checking the mathematical accuracy of source documents
and accounting records or of performing independent calculations. This is done in order
to check if computations in the totals coincide with the computations in the totals of the
source documents.
4.
5.

B. Audit Sampling: What audit sampling should you use when conducting the
audit? Why? Explain the steps you should be doing to apply the audit sampling
you choose.
The audit sampling which will be used in the conduct of the audit is statistical sampling.
Statistical sampling is a mathematically derived tool which provides the auditor with an
objective basis for expressing conclusions about population characteristic based upon a
sample of items from the population.
STEPS IN APPLYING THE PROCEDURE
1. Select items for testing to gather audit evidence.
In this case, all items were selected for testing. Since there is only a small
number of a large item, this procedure can be done.
2. Apply audit procedure
Calculate the total actual receipts and disbursements and compare it with those
in the financial statements given by the client. Check if there are any differences within
the two and review the documents if there are discrepancies.

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 C. Completing the Audit: Provide an example of subsequent event that can possibly
occur in the organization. What audit procedure can be conducted to undercover
such event? How does this event affect the financial statements of the
organization? How do you account for such event?

D. Audit Reports on Financial Statements: What opinion are you going to issue?
Why? Provide the draft of your audit report.
All organizations given for us to audit were issued a QUALIFIED OPINION. This is
because there are some items in the actual computation that are different from those
that were stated in the organizations’ financial statements. There were also some source
documents that are missing.
Draft of Audit Report
JAG Team 3 has reviewed the financial statements of the organizations and they were
presented fairly in accordance with Philippine Financial Reporting Standards. The
auditing committee had audited the financial statements in accordance with Philippine
Standards of Auditing and has complied with the ethical requirements of the Code of
Ethics for Professional Accountants in the Philippines. A qualified opinion was issued for
all three organizations because of some missing source documents or insufficient
evidence pertaining to transactions that the organizations made.

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