Question 1

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The responsibility for adopting sound accounting policies, maintaining adequate
internal control, and making fair presentation in the financial statement rests

Question 1Answer

a.
With the management

b.
Equally with management and the auditor

c.
With the independent auditor

d.
With the internal audit department

Question 2
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Which of the following observations, made during the preliminary survey of a
local department store's disbursement cycle, reflects a control strength?

Question 2Answer

a.
The receiving department is given a copy of the purchase order complete with a
description of goods, quantity ordered, and extended price for all merchandise
ordered.

b.
Individual department managers are responsible for the movement of
merchandise from the receiving dock to storage or sales areas as appropriate.

c.
Individual department managers use pre-numbered forms to order merchandise
from vendors.

d.
The treasurer's office prepares checks for suppliers based on vouchers prepared
by the accounts payable department.

Question 3
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What form of analytical review might uncover the existence of obsolete
merchandise?

Question 3Answer

a.
Decrease in the ratio of gross profit to sales.

b.
Comparison of inventory values to purchase invoices.

c.
Inventory turnover rates.

d.
Ratio of inventory to accounts payable.

Question 4
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Which of the following errors is most likely to be detected by examining
unrecorded expenditure invoices on randomly selected dates during the month
after fiscal year-end?

Question 4Answer

a.
Expenses are overstated for the fiscal year just ended.
b.
Accounts payable are overstated at fiscal year end.

c.
Sales are overstated for the current month.

d.
Accounts payable are understated at fiscal year end.

Question 5
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The level of assurance provided by an audit of detecting a material
misstatement is referred to as

Question 5Answer

a.
Negative assurance

b.
Moderate assurance

c.
Reasonable assurance

d.
Absolute assurance

Question 6
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When auditing inventories of raw materials, purchased parts, and/or
merchandise inventory, the auditor's most effective means for evaluating the
valuation assertion is to

Question 6Answer
a.
Scan inventory listings for large extended amounts, and trace related quantities
to auditor's copy of the inventory tag or listing.

b.
Examine recent invoices from vendors, along with freight bills and compare with
client's unit costs, as adjusted for freight and discount.

c.
Trace quantities from tags or count sheets to final inventory listings.

d.
Compare purchases with prior year and with industry averages and account for
significant fluctuations.

Question 7
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This waste also includes using components that are more precise, complex,
higher quality, or expensive than required.

Question 7Answer

a.
Unnecessary processing or paperwork

b.
Defects

c.
Excess motion

d.
Waiting

Question 8
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ACTI have an accounts payable system, in which a voucher is prepared after the
invoice, purchase order, requisition, and receiving report are verified. The next
step in the system is to

Question 8Answer

a.
Post the voucher amount to the expense ledger.

b.
Approve the voucher for payment.

c.
Enter the check amount in the check register.

d.
Cancel the supporting documents.

Question 9
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Which of the following is an example of fraudulent financial reporting?

Question 9Answer

a.
An employee omitted an entry to record a bank transfer to cover cash shortage.

b.
The treasurer diverts customer payments to his personal due, concealing his
actions by debiting an expense account, thus overstating expenses.

c.
Company management changes inventory count tags and overstates ending
inventory, while understating cost of goods sold.

d.
An employee steals small tools from the company and neglects to return them,
the cost is reported as a miscellaneous operating expense.

Question 10
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Auditor confirmation of accounts payable balances at the balance sheet date
may be unnecessary because

Question 10Answer

a.
This is a duplication of cutoff tests.

b.
There is likely to be other reliable external evidence to support the balances.

c.
Correspondence with the audit client's attorney will reveal all legal action by
vendors for nonpayment.

d.
Accounts payable balances at the balance sheet date may not be paid before
the audit is completed.

Question 11
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When an Internal Auditor observed physical inventories at the main plant at
year-end, it would provide direct evidence to support which of the following
objectives?

Question 11Answer

a.
Identification of obsolete or damaged merchandise to evaluate allowance for
obsolescence.

b.
Evaluation of lower of cost or market test.

c.
Accuracy of the priced out inventory.

d.
Determination of goods on consignment at another location.

Question 12
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Which of the following is not one of the independent auditor's objectives
regarding the audit of inventories?

Question 12Answer

a.
Verifying that the client has used proper inventory pricing.

b.
Ascertaining the physical quantities of inventory on hand.

c.
Verifying that all inventory owned by the client is on hand at the time of the
count.

d.
Verifying that inventory counted is owned by the client.

Question 13
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The management responsibility to detect and prevent fraud and error is
accomplished by

Question 13Answer

a.
Having an annual audit of financial statements

b.
Implementing adequate accounting and internal control system

c.
Implementing adequate quality control system
d.
Issuing representation letter to the auditor

Question 14
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Which of the following characteristics most likely would heighten an auditor’s
concern about the risk of intentional manipulation of financial statements?

Question 14Answer

a.
The arte of change in the entity’s industry is low

b.
Insiders recently purchased additional shares of the entity’s stocks

c.
Turnover of senior accounting personnel is low

d.
Management places substantial emphasis on meeting earnings projections

Question 15
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Which of the following is not an assurance that the auditors give to the parties
who rely on the financial statements?

Question 15Answer

a.
Auditors gathered enough evidence to provide a reasonable basis for forming an
opinion

b.
Auditors know how the amounts and disclosures in the financial statements
were produced.
c.
If the evidence allows the auditors to do so, auditors give assurance in the form
of opinion, as to whether the financial statements taken as a whole are fairly
presented in conformity with PFRS.

d.
Auditors give assurance that the financial statements are accurate

Question 16
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When auditing merchandise inventory at year end, the auditor performs a
purchase cutoff test to obtain evidence that

Question 16Answer

a.
No goods observed during the physical count are pledged or sold.

b.
All goods purchased before year end are received before the physical inventory
count.

c.
All goods owned at year end are included in the inventory balance.

d.
No goods held on consignment for customers are included in the inventory
balance.

Question 17
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Which of the following would be the best procedure to determine whether
purchases were properly authorized?

Question 17Answer
a.
Vouch payments for selected purchases to supporting receiving reports.

b.
Discuss authorization procedures with personnel in the controller's and
purchasing functions.

c.
Determine whether a sample of entries in the purchase journal is supported by
properly executed purchase orders.

d.
Review and evaluate a flowchart of purchasing procedures.

Question 18
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Which of the following is an example of an error?

Question 18Answer

a.
Misapplication of accounting policies

b.
Defalcation

c.
Recording of transactions without substance

d.
Suppression or omission of the effects of transactions from the records or
documents

Question 19
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In the context of financial statement presentation, fraud occurs when
Question 19Answer

a.
A misstatement is made and there is both knowledge of its falsity and the intent
to deceive

b.
The auditor has an absence of reasonable care in the performance of the audit.

c.
The auditor fails to comply with PSA

d.
A misstatement is made and there is knowledge of its falsity but no intent to
deceive

Question 20
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Instead of taking a physical inventory count on the balance sheet date, the
client may take physical counts prior to the year end if internal controls are
adequate and

Question 20Answer

a.
Inventory is slow moving.

b.
Obsolete inventory items are segregated and excluded.

c.
Computerized records of perpetual inventory are maintained.

d.
Accounting System error reports are generated for missing pre-numbered
inventory tickets.

Question 21
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 Question text
Material misstatements may emanate from all of the following except?

Question 21Answer

a.
Fraud

b.
Error

c.
Noncompliance with laws & regulations

d.
Inadequacy of accounting records

Question 22
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The most effective control for ensuring that customers are billed only for goods
shipped is to

Question 22Answer

a.
Require that all shipments be approved by accounting.

b.
Require that carriers sign properly completed bills of lading.

c.
Implement a policy that prevents the mailing of sales invoices to customers in
the absence of a properly approved shipping order and a bill of lading signed by
the carrier.

d.
Prohibit goods from leaving the warehouse without being accompanied by a
signed bill of lading and a properly approved shipping order.

Question 23
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Which of the following accounts would most likely be reviewed by the auditor to
gain reasonable assurance that additions to the equipment account are not
understated?

Question 23Answer

a.
Depreciation expense.

b.
Gain on disposal of equipment.

c.
Repairs and maintenance expense.

d.
Accounts payable.

Question 24
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Which of the following is an indicator of possible fraudulent financial reporting
for the purpose of inflating earnings?

Question 24Answer

a.
A ratio analysis discloses: (1) sales of Php 50 million and (2) cost of goods sold
of Php 25 million.

b.
A trend analysis discloses: (1) sales increases of 50 percent and (2) cost of
goods sold increases of 25 percent.

c.
A cross-sectional analysis of common size statements discloses: (1) the firm's
ratio of cost of goods sold to sales is .5 and (2) the industry average ratio of cost
of goods sold to sales is .4.
d.
A cross-sectional analysis of common size statements discloses: (1) the firm's
ratio of cost of goods sold to sales is .4 and (2) the industry average ratio of cost
of goods sold to sales is .5.

Question 25
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This waste can double the cost of one single product. If this cost is passed on to
the consumer, it will inflate production costs and could make the organization
less competitive overall.

Question 25Answer

a.
Defects

b.
Excess motion

c.
Waiting

d.
Unnecessary processing or paperwork

Question 26
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The internal audit staff has been asked to conduct an audit of the purchasing
department. Top management feels that there have been some production
bottlenecks recently because of out-of-stock situations. What is the primary
objective of the auditors in this assignment?

Question 26Answer

a.
To review the means of safeguarding assets and verifying the existence of such
assets.
b.
To ascertain whether results are consistent with established objectives and
whether operations are being carried out as planned.

c.
To review the reliability and integrity of financial and operating information.

d.
To appraise the economy with which resources are employed.

Question 27
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The probability of an auditor's procedures leading to the conclusion that a
material error does not exist in an account balance when, in fact, such error
does exist is referred to

Question 27Answer

a.
Control risk

b.
Inherent risk.

c.
Prevention risk.

d.
Detection risk

Question 28
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An intentional act by one or more individuals among management, employees,
or third parties which results in misrepresentation of financial statements refers
to

Question 28Answer
a.
Error

b.
Noncompliance with laws & regulations

c.
Fraud

d.
Illegal acts

Question 29
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Which of the following statements best describes the auditor’s responsibility
regarding the detection of material errors and frauds

Question 29Answer

a.
The auditor is responsible for the failure to detect material error and frauds only
when such failure results from the misapplication of PSA

b.
The audit should be designed to provide reasonable assurance that material
errors and frauds will be detected.

c.
Extended auditing procedures are required to detect unrecorded transactions
even if there is no evidence that material errors and frauds may exist.

d.
The auditor is responsible for the failure to detect material errors and fraud only
when the auditor fails to confirm receivables or observe inventories.

Question 30
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 Question text
For manufactured inventories, the valuation assertion is best tested by

Question 30Answer

a.
Comparing unit prices with recent vendors' invoices.

b.
Tracing unit costs appearing on final inventory listings to auditor's copy of
audited finished goods unit costs.

c.
Inquiring as to inventory obsolescence.

d.
Testing for purchases and sales cutoff.