Auditing Theory c.

Systematic selection
d. Statistical selection

8. Which of the following may be used to reduce the risk of non sampling errors?
1. A control which relates to all parts of the EDP system is called a(n) a. Increasing the size of audit samples
a. Systems control c. Applications control b. Stratifying audit samples
b. General control d. Universal control c. Adequately planning audit samples
d. Using statistical sampling techniques
2. Which of the following is not an output control?
a. Proper authorization of transaction 9. A number of factors influences the sample size for a substantive test of details of an
b. Control totals account balance. All other factors being equal, which of the following would lead to
c. Check digits larger sample size?
d. Adequate documents a. Greater reliance on internal control
b.
3. Should the auditor feel, after obtaining an understanding of the EDP internal control c. Smaller reliance o analytical procedures
structure, that control risk cannot be reduced, he or she will d. Smaller measures of tolerable misstatement
a. Issue a disclaimer
b. Issue an adverse opinion 10. Fraudulent financial reporting is often called
c. Increase the sample size for tests of controls a. Management fraud c. Defalcation
d. Expand the substantive testing portion of the audit b. Theft of assets d. Employee fraud

4. The real-time feature normally would be least useful when applied to accounting for a 11. The most important general ledger account included in and affecting several cycles is the
firm’s a. General cash account c. Income tax expense ad liability accounts
a. Bank-account balances b. Inventory accounts d. Retained earnings account
b. Property and depreciation
c. Customer accounts receivable 12. In testing for cut-off , the objective is to determine
d. Merchandise inventory a. Whether all of the current period’s transactions are recorded
b. That no transactions from the prior period are included in the current period’s
5. A sample in which the characteristics in the sample are the same as those of the balances
population is a c. That no transactions of the curret period have been delayed and recorded in the
a. Random sample c. Attributes sample future period.
b. Variables sample d. Representative sample d. Whether transactions are recorded in the proper period.

6. Establishing a route through the random number table 13. The primary difference between an audit of the balance sheet and an audit of the income
a. Is an arbitrary decision statement lies in the fact that the audit of the income statement deals with the verification
b. Needs to be done in advance of choosing the numbers of
c. Is essential and the route must be followed consistently a. Transactions c. Costs
d. Requires that all three of the above is true b. Authorization d. Cutoffs
7. When an auditor goes through a population and selects items for the sample without 14. Documentation is a form of evidence
regard to their size, source, or other distinguishing characteristics, it is called a. Used in every financial statement audit
a. Block selection b. Used in most financial statement audit
b. Haphazard selection
 c. Used o the rate occasions when it is both readily available ad less costly than other 21. In auditing accounts payable, an auditor’s procedures most likely would focus primarily o
procedures management’s assertion of
d. Used when nothing is available that is more competent a. Existence or occurrence
b. Presentation and disclosure
15. The current file of the auditor’s working papers generally should include c. Completeness
a. a flowchart of internal controls d. Valuation or allocation
b. organization charts
c. a copy of the financial statements 22. Before goods are shipped on account, a properly authorized person must
d. copies of bond and note indentures a. Prepare the sales invoice
b. Approve the journal entry
16. An audit working paper that reflects the major components of an amount reported in the c. Approve credit
financial statements is referred to as(an) d. Verify that the unit price is accurate
a. Lead schedule c. Audit control schedule
b. Supporting schedule d. Working trial balance 23. Which of the following is not a auditor’s concern about a key authorization point in the
sales/collection cycle
17. The major reason an independent auditor gathers audit evidence is to a. The receiving room must have authorization before releasing items to inventory
a. Form an opinion on the financial statements control
b. Detect fraud b. Credit must be authorized before sale
c. Evaluate management c. Goods must be shipped after the authorization
d. Evaluate internal control d. Prices must be authorized

18. An auditor most likely would analyze inventory turnover rates to obtain evidence 24. Whenever footing ad comparisons are restricted to journals, master file records, and
concerning managements assertions about ledgers, the process is
a. Existence or occurrence a. Valuation c. Cutoff
b. Rights and obligations b. Summarization d. Completeness
c. Presentation and disclosure
d. Valuation and allocation 25. The most significant effect of the results of the tests of controls substantive tests of
transactions in tha sales and collection cycle is on
19. To which type of the following matters would materiality limits not apply when obtaining a. Allowance for uncollectible accounts
client representations? b. Bad debts expense account
a. Losses from sales commitments. c. Confirmation of accounts receivable
b. Unasserted claims and assessments d. Income tax payable
c. Irregularities involving management
d. Noncompliance with contractual agreements 26. There is a difference between internal control objectives and audit objectives. Which of
the following is not an audit objective?
20. Which of the following procedures is more likely to be performed i a review engagement a. Validity c. Valuation
of a non-public entity that i n a compilation engagement? b. Completeness d. Authorization
a. Gaining an understading of the entity’s business transactions
b. Making a preliminary assessment of control risk 27. For effective internal control, employees maintaining the accounts receivable subsidiary
c. Obtaining a representation letter from the chief executive officer ledger should not also approve
d. Assisting the entity i adjusting the accounting records a. Employee overtime wages
b. Credit granted to customers
c. Write-offs of customer accounts
 d. Cash disbursement
35. In planning an audit engagement, which of the following is a factor that affects the
28. The general cash account is considered significant in almost all audits independent auditor’s judgement as to the quantity, type, and content of working papers?
a. Where the ending balance’ is material a. The estimated occurrence rate of attributes
b. Where either the beginning balance is material b. The preliminary evaluation based upon initial substantive testing
c. Even when the ending balance is immaterial c. The content of the client’s representation letter
d. Except those of not-for-profit organizations d. The anticipated nature of the auditor’s report

29. Sales order form and invoice blanks should be controlled in the 36. A listing of all the things which the auditor will use to gather sufficient, competent
a. Sales order section of the sales department evidence is the
b. Billing clerk in the accounting department a. audit procedure
c. Credit manager in the credit department b. audit plan
d. Sales manager in the sales department c. audit program
d. audit risk model
30. Which of the following is a substantive test of transactions
a. Review personnel policies 37. The primary emphasis in most tests of details of balances is on the
b. Account for a sequence of payroll checks a. balance sheet accounts
c. Reconcile the disbursements i the payroll journal with the disbursements on the b. income statement accounts
payroll bank statement c. cash flow statement accounts
d. Examine printouts of transactions rejected by the computer as having invalid d. three statements above
employee numbers
38. Tracing recorded sales transactions in the sales journal to the shipping documents (bills of
31. The information typically needed to prepare a production order would not include a lading) provides evidence about the
a. Sales forecast c. Inventory plan a. Completeness of recording of sales transactions
b. Production plan d. Bill of materials b. Occurrence of sales transactions
c. billing of all sales transactions
32. The substantive test which requires the auditor to “trace from a file of receiving reports to d. presentation of payables
the acquisitions journal” satisfies the objective of
a. Validity c. Completeness 39. Which of the following is the best audit procedure for the detection of lapping?
b. Authorization d. Valuation a. Comparison of postings of cash receipts to accounts with the details of cash deposits
b. Confirmation of the cash balance
33. An auditor usually examines receiving reports to support entries in the c. Reconciliation of the cash account balances
a. Voucher register and sales return journal d. Preparing a proof of cash
b. Sales journal and sales return journal
c. Voucher register and sales journal 40. To gather evidence regarding the balance per bank in the bank reconciliation, an auditor
d. Check register and sales journal could examine all of the following except
a. Cut-off bank statement
34. The inventory and warehousing cycle can be thought of as comprising two separate but b. year-end bank statement
closely related systems, one involving the actual physical flow of goods, and the other the c. bank confirmation
a. internal control over those goods d. general ledger
b. related costs
c. storing of the goods 41. The confirmation of accounts receivable is most closely associated with
d. prevention of wastes, obsolenscence, and theft a. business risk
 b. detection risk
c. inherent risk 47. Unqualified financial statements for the prior year presented in comparative form with
d. relative risk audited financial statements for the current year should be clearly marked to indicate their
status and
42. The client’s physical count of inventories is lower than the inventory quantities in the I. The report on the prior period should be reissued to accompany
perpetual records. This could be the result of a failure to record the current period report
a. purchases II. The report on the current period should include as a separate
b. purchases discounts
paragraph description of the responsibility assumed for the prior
c. sales
d. sales discounts period’s financial statements

43. The most likely technique for the current year audit of goodwill which was not acquired a. I only
b. II only
three years ago by a continuing audit client.
c. Both I and II
a. Confirmation
d. Either I or II
b. Observation
c. Recomputation
48. Compilation services are intended to enable a CPA firm to compete with
d. Inquiry
a. Management advisory service firms
b. Tax preparation businesses
44. The auditor will most likely perform extensive tests for possible understatement of
c. Computer service business
a. revenues
d. Bookkeeping firms
b. assets
c. liabilities
49. A modification of the CPA’s report on a review of the interim financial statements of a
d. capital
publicly-held company would be necessitated by which of the following?
45. If the auditor is determined to lack independence, a disclaimer of opinion must be issued a. An uncertainty
a. in all cases b. Lack of consistency
b. only if it is highly material c. Reference to another accountant
c. only if it is material d. Inadequate disclosure
d. if the client requests it
50. Comfort letters ordinarily are signed by the client’s
46. The use of negative assurances in audit reports of historical financial statements is a. independent auditor
a. a violation of the standards of reporting b. underwriter of securities
b. encouraged by the Philippine Institute of CPAs c. audit committee
c. a help in clarifying the degree of responsibility by being assumed by the auditor d. senior management
d. properly located in the opinion paragraph of the unqualified report

4) B 11) A 18) D
5) D 12) D 19) C
ANSWER KEY 6) D 13) A 20) C
7) B 14) A 21) C
1) B 8) C 15) C 22) C
2) B 9) D 16) D 23) A
3) D 10) A 17) A 24) B
25) D 38) B 45) A
26) D 32) C 39) A 46) A
27) D 33) A 40) D 47) D
28) D 34) B 41) B 48) D
29) A 35) D 42) D 49) A
30) C 36) D 43) C 50) A
31) D 37) A 44) C