AUDIT QUESTIONS FOR REGION 8

1. If objectives of a test of details is to detect overstatement of sales, the

auditor should trace transactions from the
a.
b.
c.
d.

cash receipts journal to the sales journal

sales journal to the cash receipts journal
source documents to the accounting records
accounting records to the source documents

2. Which of the following is least likely considered when assessing inherent

risk?
a.
b.
c.
d.

Nonroutine transactions
Estimation transactions
Susceptibility to theft
Expected effectiveness of controls

3. The overall attitude of an entitys board of directors concerning

importance of internal control usually is reflected in its
a.
b.
c.
d.

computer-based controls
system of aggregation of duties
control environment
safeguards over access to assets

4. The date of the CPAs opinion on the financial statements of his or her
client should be the date of the
a.
b.
c.
d.

closing of the clients books

receipt of the clients letter of representation
completion of all important audit procedures
submission of the report to the client

5. A procedure that involves tracing a transaction from its origination through

the companys information systems until it is reflected in the companys
financial report is referred to as a(n)
a. analytical analysis
b. substantive procedures
c. test of a control
d. walk-through
6. A professional accountant is required to comply with fundamental
principles which include the following except:
I.
Honesty
II.
Integrity
III.
Objectivity
IV.
Perseverance
a. I only
b. III only
c. I and IV

d. II and III
7. Issues such as limiting the ability of auditors to solicit clients, price cutting
to obtain new clients, and having one firm provide both auditing and
management consulting services to the same client are of current concern
to the auditing profession because:
a. they violate existing code of ethics
b. these practices are viewed by some as threatening the independence
of the auditor
c. these practices result in the profession receiving adverse publicity
d. they make it difficult for audit practices to earn profits
8. If all other factors specified in a sampling plan remain constant, changing
the tolerable exception rate from 8 percent to 12 percent would cause the
required sample size to
a.
b.
c.
d.

increase
remain the same
decrease
become indeterminate

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

procedures to prospective financial statements provided that
a. distribution of the report is to be restricted to the specified parties
involved.
b. the prospective financial statements are also examined.
c. the accountant takes responsibility for the adequacy of the procedures
performed.
d. negative assurance is expressed on the prospective financial
statements taken as a whole.
10.In an IT system, controls over application software are often categorized
into input controls, processing controls, and out controls. Input controls
are used to protect the integrity of the data entered into the system.
Which of the following control objectives would not normally be associated
with an input control?
a. document processing is accompanied by an appropriate form of
authorization
b. access to the system is limited to authorized users
c. Both A and B
d. Neither A nor B
11.Microcomputer environments can be especially difficult for auditors since
microcomputers lack many of the controls that are standard with
mainframe computers. Which of the following is not a common control
weakness associated with microcomputers?
a. the lack of proper segregation of duties

b. improper safeguards over access to the system

c. insufficient protection from improper or unauthorized manipulation of
files
d. commercial software purchased for use on microcomputers is more
likely to contain bugs than proprietary software developed by the
client
12.When planning an audit, the auditor must take steps to provide reasonable
assurance that any material frauds will be detected. This level of
assurance is less than that provided for the detection of nonfraudulent
material misstatements because:
a. auditors face less liability for failure to detect fraud
b. frauds are extremely rare and therefore a lower level of assurance is
appropriate
c. most frauds are detected by means other than the audit
d. those committing frauds usually take steps to prevent the detection of
the frauds
13.During 2015, Christine Company sold assets that were originally
purchased at Php600,000 for Php250,000. This resulted in a gain of
Php50,000. The balance in accumulated depreciation on January 1, 2015
was Php1,200,000, and the balance on December 31, 2015 was
Php1,450,000. There was no other disposal or acquisition of depreciable
assets during 2015.
What was Christine Companys depreciation expense for 2015?
A: 650,000
14.Moon Company is experiencing financial difficulty and is negotiating a
debt restructuring with its creditor. Moon Company has an outstanding
financial liability of P2,500,000. Stars Financing Company accepted an
equity interest in Moon Company in the form of 400,000, P5 par value
ordinary shares which at the time of restructuring was quoted at P6.00 per
share.
The fair value of the obligation at the time of the restructuring was
P2,450,000.
The amount of gain to be recognized arising from the debt restructuring
by way of an equity swap is
A: 100,000
15.Due to extreme financial difficulties Cloud Company negotiated to
restructure its 10%, P5,000,000 note obligation maturing on December 31,
2010. The following modifications are to be applied in relation to the debt
restructuring agreement as approved by Nimbus Financing.

Waiver of the unpaid interest amounting to P500,000

Reduction of the principal amount to P4,000,000

Reduction of the original interest rate to 8%
Extension of the due date three years from December 31, 2010

The amount of gain to be recognized arising from the debt restructuring by

way of a modification of terms is (Round-off PV factors into 2 decimal
places)
A: 1,703,200

16.The most effective means for the auditor to determine whether a recorded
intangible asset possesses the characteristics of an asset is to

a. Vouch the purchase by reference to underlying documentation.

b. Inquire as to the status of patent applications.
c. Evaluate the future revenue-producing capacity of the intangible
asset.
d. Analyze research and development expenditures to determine
that only those expenditures possessing future economic benefit
have been capitalized.
17.An auditor is verifying the existence of newly acquired fixed assets
recorded in the accounting records. Which of the following is the best
evidence to help achieve this objective?

a. Documentary support obtained by vouching entries to subsidiary

records and invoices.
b. Physical examination of a sample of newly recorded fixed assets.
c. Oral evidence obtained by discussions with operating
management.
d. Documentary support obtained by reviewing titles and tax
returns.
ANSWER: B
18.An attorney responding to an auditor as a result of the client's letter of
audit inquiry may appropriately limit the response to

a. Items which have high probability of being resolved to the

client's detriment.
b. Asserted claims and pending or threatened litigation.
c. Legal matters subject to unsettled points of law,
uncorroborated information, or other complex judgments.
d. Matters to which the attorney has given substantive attention
in the form of legal consultation or representation.
19.When auditing contingent liabilities, which of the following procedures
would be least effective?

a.
b.
c.
d.

Reading the minutes of the board of directors.

Reviewing the bank confirmation letter.
Examining customer confirmation replies.
Examining invoices for professional services.

20.The variability of a population, as measured by the standard deviation, is

the

a. Extent to which the individual values of the items in the

population are spread about the mean.
b. Degree of asymmetry of a distribution.
c. Tendency of the means of large samples (at least 30 items) to
be normally distributed.
d. Measure of the closeness of a sample estimate to a
corresponding population characteristic.
21.Sample size

a.
b.
c.
d.

Increases with the use of higher confidence levels.

Decreases with the use of higher confidence levels.
Remains unchanged with changes in confidence levels.
Increases with the use of lower confidence levels.

22.A population that is physically separated into two or more

groups
based on the sample variation being less than that for the entire
population is called a

a.
Systematic sample.
Judgment sample.
random sample.

d.

b.
c.
Simple
Stratified sample.

23.In testing accounts receivable, an auditor sends out positive confirmation

requests to 100 randomly selected customers. A customer returns the
confirmation indicating
that the balance is correct when, in fact, the
balance is
overstated. This is an example of

a.

Tainting.

error.

c.
d.

b.
Standard error.

Sampling

Non-sampling error.

24.A limitation on the scope of the auditor's examination sufficient to

preclude an unqualified opinion will always result when management

a. Asks the auditor to report on the balance sheet and not on the
other basic financial statements.
b. Refuses to permit its lawyer to respond to the letter of audit
inquiry.
c. Discloses material related party transactions in the footnotes
to the financial statements.
d. Knows that confirmation of accounts receivable is not feasible.
25.An auditor may reasonably issue an "except for" qualified opinion for

Inadequate

Scope

a.
b.
c.
d.

disclosure
Yes
Yes
No
No

limitation
Yes
No
Yes
No

26.The Vin Egar Company, which qualified as an SME, commenced the

construction of a new packaging plant on 1 February 2014. The cost of
P1,800,000 was funded from existing borrowings. The construction was
completed on 30 September 2014. Vin Egar's borrowings during 2014
comprised:
Loan from RCBCD Bank: P80,000 at 6% per annum;
Loan from BDOPQ Bank: P100,000 at 6.6% per annum; and
Loan from BPIJK Bank: P300,000 at 7% per annum.
The amount of borrowing costs to be capitalized in relation to the
packaging plant is
a.
b.
c.
d.

0
P121,500
P81,000
P91,125

The answer is P0. No borrowing costs are recognized under PFRS for SMEs.
27.The movement in present value of the retirement benefit obligation
recognized in the books of Langit Bank for the year ended December 31,
2014 follows:

Balance at beginning of year

Current service cost
Interest expense
Remeasurements Actuarial losses(gains)
arising from:
Changes in financial assumptions
- Experience adjustments
Balance at end of year

P14,625,119
853,051
975,495

1,606,819
4,657,987

P13,402,497

How much will be reported as Retirement expense(income) in 2014?

a.
b.
c.
d.

P0
P853,051
P1,828,546
(P1,222,622)
Solution: Only current service cost is reflected as retirement expense.
Interest expense is presented as part of finance cost. (PAS 19 Amended)
28.The Stone Company has an account receivable from The Knowles
Company of P55,000. Stone also has an account payable to Knowles of

P15,000. Local law allows the enforceable right of set-off of the recognized
amounts. It is not normal business practice to settle the amounts net.
What amount for accounts receivable and accounts payable should be
presented in Stone's statement of financial position, according to IAS32
Financial instruments: presentation?
a.
b.
c.
d.

Accounts receivable
P55,000
P40,000
P55,000
0

Accounts payable
P15,000
0
0
P15,000

IAS32 para 42 allows the offset of financial assets and financial liabilities in
restricted circumstances where there is both a legally enforceable right of
setoff and an intention to settle on a net basis.
29.When an auditor tests a computerized accounting system, which of the
following is true of the test data approach?
a.
Test data must consist of all possible valid and invalid
conditions.
b.
The program tested is different from the program used
throughout the year by the client.
c.
Several transactions of each type must be3 tested.
d.
Test data are processed by the clients computer programs
under the auditors control.
30.A primary advantage of using generalized audit software packages to
audit the financial statements of a client that uses an EDP system is that
the auditor may
a.
Consider increasing the use of substantive test of
transactions in place of analytical procedures.
b.
Substantiate the accuracy of data through spellchecking
digits and hash totals.
c.
Reduce the level of required tests of controls to a relatively
small amount.
d.
Access information stored on computer files while having a
limited understanding of the clients hardware and software
features.