Auditing and Assurance

Final Examination December 27, 2022

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Students are required to maintain academic integrity. Cheating, lying, and other unethical or
immoral conduct will not be tolerated. Any student found guilty of cheating on quizzes or exams
will get (at a minimum) a 60% on the said test.

Submission: December 29, 2022

Part 1: Multiple Choice Theories

Instruction: Encircle the letter that corresponds to the best answer.
1. Sending accounts receivable confirmation letters to the client's customers is consistent with
the auditor's objective of validating client's receivable assertion on:
a. Existence and rights
b. Completeness and valuation
c. Completeness and rights
d. Existence and valuation

2. What action should the auditors take if a reply to a positive confirmation request letter for a
material amount is not received from the customer within two or three weeks of being sent
out?
a. Send out a second request to the customer.
b. Qualify the audit opinion due to lack of sufficient appropriate for audit evidence
c. Inform the entity's internal audit department.
d. Qualify the audit opinion due to material misstatement in the financial statement.

3. Which of the following procedures would an auditor most likely perform for year-end
accounts confirmation when the auditor did not receive replies to second request?
a. Inspect the shipping records documenting the merchandise sold to customers.
b. Review the cash receipt journal for the month prior to year-end.
c. Intensify the study of internal control concerning the revenue cycle.
d. Increase the assessed level of detection risk for the existence assertion.

4. Which of the following is correct statement regarding the use of a negative confirmation
request?
a. Unreturned negative confirmation requests rarely provide significant explicit evidence.
b. Negative confirmation requests are effective when detection risk is low.
c. Unreturned negative confirmation request indicate that alternative procedures are
necessary.
d. D. Negative confirmation request are effective when understated of account balances are
suspected.
5. Under which of the following circumstances would the use of the blank form of confirmations of
accounts receivable most likely be preferable to positive confirmation?
a. The recipients are likely to sign the confirmations without devoting proper attention to them
b. Subsequent cash receipts are unusually difficult to verify.
c. Analytical procedures indicate that few exceptions are expected.
d. The combined assessed level of inherent risk and control risk is low.

6. As part of auditing the company's revenue/receipt cycle, the auditor decided to render a sales
cut-off by tracing entries several days before and after the balance sheet date from the
company's sales journal to the source documents which include the sales order, the sales
invoice and the delivery receipt. Which of the following is correct regarding the sales cut-off
procedures?
a. Vouching entries several days before the balance sheet date to the source documents is
necessary to gather evidence regarding existence assertion of receivables while vouching
entries several days after the balance sheet date to the source documents is necessary to
gather evidence regarding the completeness assertion of receivables.
b. Vouching entries several days before the balance sheet date to the source documents is
necessary to gather evidence regarding completeness assertion of receivables while
vouching evidence regarding the existence assertion of receivables.

c. Vouching entries several days before and after the balance sheet date to the source
documents is necessary to gather evidence regarding valuation assertion of receivables.

d. Vouching entries several days before the balance sheet date to the source documents is
necessary to gather evidence regarding rights assertion of receivables while vouching
entries several days after the balance sheet date to the source documents is necessary to
gather

7. Which of the following populations should the auditor start form when testing for the
completeness of reported sales of a manufacturing company and to ascertain that all valid
sales are appropriately billed to customers and are ultimately recorded as sales?
a. Goods dispatch notes
b. Sales receipts
c. Sales invoices
d. Sales orders

8. Sales records or invoices should be traced back to and compared with shipping documents to:
a. Ascertain that all recorded sales pertain to goods that are actually delivered to
customers.
b. Ensure that shipments to customers are billed.
d. Determine whether payments are properly applied to customer accounts.
c. Determine whether unit prices billed are in accordance with sales contracts.
9. The auditor wants to obtain evidence in support to the financial statement assertion of
occurrence of sales transactions and the corresponding existence of the related receivable
balance. The auditor would most likely do which of the following substantive test
procedure?
a. Trace back journal entries to the sales journal to the sales invoice and shipping
documents.
b. Trace the shipping documents and sales invoices to the entry in the sales journal.
c. Trace the approved customer orders to the shipping documents and the sales
invoices.
d. . Trace the sales invoice to the daily sales summary.

10. Your audit of the account receivable through analytical procedures revealed that the accounts
receivable turnover ratio had fallen from 7.5 times to 4.4 times from the previous year.
Which of the following is a valid audit insight from the said information?
a. There might have been a more liberal credit Policy thus the auditor should gather further
audit evidence in support of the valuation assertion on accounts receivable.
b. There might have been e more liberal credit Policy thus the auditor should increase
sample size on accounts receivable confirmation to gather further audit evidence on
accounts receivable existence and rights assertion.
c. There might have been a more stringent credit Policy thus the auditor should gather
further audit evidence in support of the valuation ass ertion on accounts
receivabl e increase
d. There might have been a mere stringent credit Policy t thus the auditor should increase
sample size on accounts receivable confirmation to gather further audit evidence on
accounts receivable existence and rights assertion.

11. In gathering evidence regarding the valuation assertion of an audit client's accounts
receivable, the auditor should inquire with the management regarding their policy of
providing bad debt expense and the corresponding allowance and more importantly,
gather evidence regarding the reasonableness of such policy. Which of the following
may be a possible source of evidence regarding the reasonableness of an audit client's
policy of providing bad debts?
a. Subsequent events happening after the balance sheet date but before the Issuance of
the financial statements.
b. Historical experience of the audit client regarding writing off uncollectible
accounts.
c. Bad debt experience of similar company within the same industry
d. All of the above.

12. To gather evidence regarding the deposits in transit in a client-prepared bank reconciliation
statement, an auditor would examine
a. Cut-off bank statement
b. Year-end bank statement
 c. Bank confirmation reply
d. General ledger

13. In validating the bank reconciliation statements of the client, the auditor should trace back the
unrecorded debits, like service charges to the:
a. Bank statement of the current month.
b. Accounts payable voucher.
c. Cancelled checks returned by the bank.
d. Cut-off bank statement of the subsequent month.

14. In validating bank reconciliation statements of the client, the auditor should trace back
outstanding checks to the
a. Cut-off bank statement of the subsequent month.
b. Accounts payable voucher.
c. Cancelled checks returned by the bank.
d. Bank statement of the current month.

15. In his audit of the client cash in bank account as of and for the period ended June 30, 2014,
the auditor requested for a cut-off bank statement for the 15-day period ended July 15,
2014. The purpose of the cut-off bank statement is to gather evidence regarding the
propriety of which of the following reconciliation items as of June 30?
a. Deposits in transits and outstanding checks.

16. Which of the following will least likely create a threat to independence?

A. A member of the assurance team, partner or former partner of the firm has joined the
assurance client.
B. Deposits made by, or brokerage accounts of, a firm or a member of the assurance team
with an assurance client that is a bank, broker or similar institution, provided the
deposit or account is held under normal commercial terms.
C. Arrangements to combine one or more services or products of the firm with one or
more services or products of the assurance client and to market the package with
reference to both parties.
D. Family and personal relationships between a member of the assurance team and a
director, an officer or certain employees.
17. Before accepting an engagement to audit a new client, a CPA is required to obtain

a. an understanding of the prospective client's industry and business.

b. the prospective client's signature to the engagement letter.
c. a preliminary understanding of the prospective client's control environment.
d. the prospective client's consent to make inquiries of the predecessor auditor, if
any.
18. Which of the following factors most likely would cause a CPA not to accept a new
audit engagement?

a. The prospective client's unwillingness to permit inquiry of its legal council

b. The inability to review the predecessor auditor's working papers
c. The CPA's lack of understanding of the prospective client's operations and
industry
d. The indications that management has not investigated employees in key positions
before hiring them

19. Which of the following characteristics would most likely heighten an auditor's concern
about the risk of material misstatements in an entity's financial statements?

a. The entity's industry is experiencing declining customer demand.

b. Employees who handle cash receipts are not bonded.
c. Bank reconciliations usually include in-transit deposits.
d. Equipment is often sold at a loss before being fully depreciated.

20. An accountant may accept an engagement to apply agreed-upon procedures to

prospective financial statements provided that:

A. distribution of the report is limited to the specified parties involved.

B. the prospective financial statements are also examined.
C. the responsibility for the adequacy of the procedures performed is taken by the
accountant.
D. negative assurance is expressed on the prospective financial statements taken as a
whole.

21. An auditor obtains knowledge about a new client's business and its industry to

a. make constructive suggestions concerning improvements to the client's internal

control.
b. develop an attitude of professional skepticism concerning management's financial
statement assertions.
c. evaluate whether the aggregation of known misstatements causes the financial
statements taken as a whole to be materially misstated.
d. understand the events and transactions that may have an effect on the client's
financial statements.

22. Which of the following factors would least influence an auditor’s consideration of the
reliability of data for purposes of analytical procedures?
 A. Whether the data were processed in a computer system or in a manual accounting
system
B. Whether sources within the entity were independent of those who are responsible for
the amount being audited
C. Whether the data were subjected to audit testing in the current or prior year
D. Whether the data were obtained from independent sources outside the entity or from
sources within the entity

23. In evaluating the reasonableness of an entity's accounting estimates, an auditor

normally would be concerned about assumptions that are:

a. susceptible to bias.
b. consistent with prior periods.
c. insensitive to variations.
d. similar to industry guidelines.

24. The primary objective of the procedures performed to obtain an understanding of

internal control is to provide an auditor with:

a. knowledge necessary for audit planning.

b. evidential matter to use in assessing inherent risk
c. a basis for modifying tests of controls.
d. an evaluation of the consistency in the application of management's policies.

25. Management philosophy and operating style most likely would have a significant
influence on an entity's control environment when:

a. the internal auditor reports directly to management.

b. management is dominated by one individual.
c. accurate management job descriptions delineate specific duties.
d. the audit committee actively oversees the financial reporting process.

26. The control environment includes which of the following?

A. Control activities.
B. Management philosophy and operating style.
C. Assessing activity level risks.
D. Application level controls.
27. Which of the following would an audit of a company's internal control include?

A. An engagement to perform internal audit procedures.

B. Implementation of key financial controls.
C. Concluding on the accuracy of the statements of cash flows.
D. Testing of management's risk assessment procedures.

28. Which one of the following is considered an adequate documentation in an internal

control system?

A. The accounting clerk initials the bank reconciliation.

B. The mailroom mails commissions checks.
C. Invoices are prepared without sequential numbering.
D. Fixed assets are assigned useful lives at random.
29. A material weakness in the design of the operation of controls that is discovered in an
audit of internal controls results in:

A. not submitting a management letter.

B. an unfavorable opinion.
C. the firing of the auditors.
D. adjusting audit journal entries.

30. As the acceptable level of detection risk decreases, an auditor may:

a. reduce substantive testing by relying on the assessments of inherent risk and

control risk.
b. postpone the planned timing of substantive tests from interim dates to the year-
end.
c. eliminate the assessed level of inherent risk from consideration as a planning
factor.
d. lower the assessed level of control risk from the maximum level to below the
maximum.

31. In an audit of financial statements, an auditor's primary consideration regarding

internal control is whether the control:

a. reflects management's philosophy and operating style.

b. affects management's financial statement assertions.
c. provides adequate safeguards over access to assets.
d. enhances management's decision-making processes.

32. Assessing control risk at below the maximum level most likely would involve:

a. performing more extensive substantive tests with larger sample sizes than
originally planned.
b. reducing inherent risk for most of the assertions relevant to significant account
balances.
c. changing the timing of substantive tests by omitting interim-date testing and
performing the tests at year-end.
d. identifying specific internal controls relevant to specific assertions.
33. In planning an audit, the auditor's knowledge about the design of relevant internal
controls should be used to:

a. identify the types of potential misstatements that could occur.

b. assess the operational efficiency of internal control.
c. determine whether controls have been circumvented by collusion.
d. document the assessed level of control risk.

34. To determine whether the client's system of internal control is operating effectively in
minimizing an error of failure to invoice a shipment, the auditor would select a sample
of transactions from the population represented by the

a. Customer order file.

b. Bill of lading file.
c. Open invoice file.
d. Sales invoice file.

35. Tracing copies of sales invoices to shipping documents will provide evidence that all

a. Shipments to customers were recorded as receivables.

b. Billed sales were shipped.
c. Debits to the subsidiary accounts receivable ledger are for sales shipped.
d. Shipments to customers were billed.

36. Controls over approving credit relate to the:

A. Completeness assertion.
B. Rights and obligation.
C. Valuation or allocation.
D. Occurrence.

37. The following are the four steps that an auditor undertakes in assessing control risk

A. Determine what control procedures are used by the entity

B. Identify the system’s control objectives
C. Design tests of controls
D. Consider the potential errors or irregularities that could result

In what order would an auditor perform these steps?

A. DBAC
 B. BCDA
C. BDAC
D. DCAB

38. Which of the following statements is correct concerning an auditor's assessment of

control risk?

a. Assessing control risk may be performed concurrently during an audit while

obtaining an understanding of the entity's internal control.
b. Evidence about the operation of controls in prior audits may not be considered
during the current year's assessment of control risk.
c. The basis for an auditor's conclusions about the assessed level of control risk
should be documented if the control risk is assessed at the maximum level.
d. The lower the assessed level of control risk, the less assurance the evidence must
provide that the controls are operating effectively.

39. After assessing control risk at below the maximum level, an auditor desires to seek a
further reduction in the assessed level of control risk. At this time, the auditor would
consider whether:

a. it would be efficient to obtain an understanding of the entity's information system

relevant to financial reporting.
b. the entity's internal controls have been placed in operation.
c. the entity's internal controls pertain to any financial statement assertions.
d. additional evidential matter sufficient to support a further reduction is likely to be
available.

40. Proper authorization of write-offs of uncollectible accounts should be approved in

which of the following departments?

a. Accounts receivable
b. Credit
c. Accounts payable
d. Treasury

41. Which of the following controls most likely could prevent EDP personnel from
modifying programs to bypass programmed controls?

a. Periodic management review of computer utilization reports and systems

documentation
 b. Segregation of duties within EDP for computer programming and computer
operations
c. Participation of user department personnel in designing and approving new
systems
d. Physical security of EDP facilities in limiting access to EDP equipment

42. Misstatements in a batch computer system caused by incorrect programs or data may
not be detected immediately because:

a. errors in some transactions may cause rejection of other transactions in the batch.
b. the identification of errors in input data typically is not part of the program.
c. there are time delays in processing transactions in a batch system.
d. the processing of transactions in a batch system is not uniform.

43. Which of the following input controls is a numeric value computed to provide
assurance that the original value has not been altered in construction of transmission?

a. Hash total
b. Parity checks
c. Encryption
d. Check digit

44. Which of the following tasks could not be performed by generalized audit software?

a. Choosing a sample of accounts receivable for confirmation

b. Footing the bank reconciliation
c. Summarizing data
d. Reading the minutes of the board of directors' meeting

45. Which of the following tasks may be performed by generalized audit software?

a. Selection of a sample
b. Extraction of information
c. Obtaining file statistics
d. All of the given tasks may be performed

46. It involves the application of audit procedures to less than 100 percent of items within
an account balance or class of transactions.

A. Analytical procedures
 B. Substantive testing
C. Audit sampling
D. Tests of controls

47. The likelihood of an account balance or class of transactions to misstatements that

could be material, individually or when aggregated with misstatements in other
balances or transaction classes, assuming there were no related internal controls.

A. Audit risk
B. Inherent risk
C. Control risk
D. Detection risk

48. If the auditor is concerned that a population may contain exceptions, the determination
of a sample size sufficient to include at least one such critical exception is a
characteristic of:

A. Random sampling
B. Variable sampling
C. Discovery sampling
D. Probability-proportional-to-size sampling
 49. Uncertainties that still exist even if the auditor examines 100 percent of an account
balance is

A. Sampling risk
B. Nonsampling risk
C. Inherent risk
D. Control risk

50. As the expected population deviation rate increases (all other factors remaining the
same).

A. The sample size should increase.

B. The sample size should decrease.
C. The sample size should remain constant.
The change in the sample size cannot be determined.

Part 2: Case Problem: 25 points each

1. Download the COA’s report on the Annual Financial Statement of DMMMSU La Union
as of December 31, 2021. Read the context how the audit report works including how the
COA make their observations and recommendations.

Audit note from your superior:

a. You were assign as incoming auditor, what are the necessary steps you are going
consider. Apply all the concepts in auditing your auditee including legal responsibility of
both parties.
b. After gathering all necessary information from the audit report, enumerate all the
findings and how you will address them.
c. Make a preliminary audit plan.

2. Download the Metrobank’s audit report on the Annual Financial Statement as of

December 31, 2021. Read the context how the audit report works.
Audit note from your superior:
a. You were assign as incoming auditor, what are the necessary steps you are going
consider. Apply all the concepts in auditing your auditee including legal responsibility of
both parties.
b. After gathering all necessary information from the audit report, enumerate all the
findings and how you will address them.
c. Make a preliminary audit plan.

"If you think you are different, you can probably do things differently."

Prepared by:
HERNAN L. PARROCHA, CPA, MBA, CTT
Licensed Accounting Professor
PRC – CPA 0155263
Board of Accountancy Accredited Licensed
Accountancy Teacher No. F21 - 1252