AUDITING THEORY

CPA Review School of the Philippines

1. An audit that involves obtaining and evaluating evidence about the efficiency and effectiveness
of an entitys operating activities in relation to specified objectives is a(n):
A. internal audit
C. operational audit
B. external audit
D. compliance audit
2. An audit that involves obtaining and evaluating evidence in order to determine whether certain
financial or operating activities of an entity conform to specified conditions, rules, or regulations
is a(n):
A. internal audit
C. operational audit
B. external audit
D. compliance audit
3. Which one of the following is not among the conditions that give rise to a demand by external
users for independent audits of financial statements?
A. remoteness of users
B. complexity of subject matter
C. the securities acts, administered by the SEC
D. potential conflict of interest between users and preparers of the statements
E. Consequences for making decision
4. Within the generally accepted auditing standards, the general standards relate primarily to:
A. Qualifications of the auditor and the quality of the auditors work
B. Qualifications of the auditor
C. the relationship between GAAS and generally accepted accounting principles
D. the fairness of the financial statements
E. the general distribution of audit reports
5. The essence of the due care standard is that the auditor should not be guilty of:
A. bias
C. errors in judgment
B. negligence
D. fraud
6. Which of the following is an incorrect statement concerning one of the field work standards?
A. Audit planning includes the development of audit strategies.
B. Audit planning is aimed primarily at effectiveness, with little effect on efficiency.
C. Understanding of the internal control structure is necessary in order to plan the audit.
D. Proper supervision is essential because major portions of the audit are often executed by
staff assistants with limited experience.

May 2004 (PW1029)

Preweek Quizzer

7. Every independent audit engagement involves both auditing standards and auditing
procedures. The relationship between the two may be illustrated by how they apply from
engagement to engagement. The best representation of this application is that, from one audit
engagement to the next,
A.
B.
C.
D.
Auditing Standards
Apply uniformly
May vary
Apply uniformly
May vary
Auditing Procedures
Apply uniformly Apply uniformly
May vary
May vary
8. The exercise of due professional care requires that an auditor
A. use error-free judgment
B. study and review internal control, including tests of controls
C. critically review the work done at every level of supervision
D. examine all corroborating evidence available
9. The generally accepted standards of reporting encompass all of the following except
A. consideration of an entitys internal control structure
B. consistent application of accounting principles
C. informative disclosures
D. conformity of financial statements with GAAP
10. An objective of the fourth generally accepted standard of reporting, relating to the expression
of an opinion, is to
A. prohibit the auditor from issuing a report that does not include an opinion on the financial
statements taken as a whole
B. inform users that the financial statements and related notes are the joint responsibility of
the auditor and management
C. prevent users of financial statements from misinterpreting the degree of responsibility
assumed by the auditor
D. ensure adequate informative disclosure in the financial statements
11. When financial statements are presented that are not in conformity with generally accepted
accounting principles, an auditor may issue a(n)
A.
B.
C.
D.
Qualified opinion
Yes
Yes
No
No
Adverse opinion
No
Yes
Yes
No

Page 1 of 18

AUDITING THEORY

CPA Review School of the Philippines

12. Under which of the following sets of circumstances might an auditor disclaim an opinion?
A. the financial statements contain a departure from GAAP, the effect of which is material
B. the principal auditor decides to make reference to the report of another auditor who
audited a subsidiary
C. there has been a material change between periods in the method of the application of
accounting principles
D. there were significant limitations on the scope of the audit
13. A CPA should comply with applicable GAAS on every engagement
A. without exception
B. except in examinations that result in a qualified report
C. except in engagement where the CPA is associated with unaudited financial statements
D. except in examinations of interim financial statements
14. An auditor may issue a qualified opinion for
A.
Inadequate disclosure
Yes
Scope limitation
Yes

B.
Yes
No

C.
No
Yes

D.
No
No

15. Which of the following does not pertain to the standards of fieldwork
A. adequate planning and supervision
B. obtaining sufficient competent evidential matter
C. proper study and evaluation of internal control as a basis for reliance thereon
D. technical competence
16. To be competent, evidence must be both:
A. Timely and substantial
B. Reliable and documented

C.
Valid and relevant
D. Useful and objective

17. An auditor uses the knowledge provided by the understanding of the internal control structure
and the final assessed level of control risk primarily to determine the nature, timing, and extent
of the:
A. Attribute tests
C. Tests of controls
B. Compliance tests
D. Substantive tests

May 2004 (PW1029)

Preweek Quizzer

18. Which one of the following assertions is not made by management in placing an item in the
financial statements?
A. Existence or occurrence
C.
Rights and obligations
B. Direct controls
D.
Presentation and disclosure
19. If reported sales for 20X0 erroneously include sales that occurred in 20X1, the assertion
violated on the 20X0 statements would be:
A. existence or occurrence
C. valuation or allocation
B. completeness
D. presentation
20. Dual-purpose tests are audit tests designed to:
A. test more than one control with a single procedure
B. provide evidence for more than a single accounting period
C. test dual controls with multiple procedures
D. test for monetary errors while testing for compliance with controls
21. In the final analysis, the amount and kinds of evidential matters required to support the
auditors opinion should be determined by:
A. professional standards
B. the audit committee
C. auditor judgment
D. generally accepted auditing standards
22. The primary factor that distinguishes errors from irregularities is
A. whether the underlying cause of misstatement relates to misapplication of accounting
principles or to clerical processing
B. whether the misstatement is perpetrated by an employee or by a member of management
C. whether the misstatement is concealed
D. whether the underlying cause of misstatement is intentional or unintentional
23. The term error refers to unintentional misrepresentation of financial information. Examples of
errors are when
I. Assets have been misappropriated
II. Transactions without substance have been recorded
III.
Records and documents have been manipulated and falsified
IV.
The effects of the transactions have been omitted from the records
A. all of the above statements are true
C. all of the above statements are false
Page 2 of 18

AUDITING THEORY

CPA Review School of the Philippines

B. only statements I and III are true

D. only statements II and IV are true
24. Which of the following statements best describes an auditors responsibility to detect errors
and irregularities?
A. An auditor should design an audit to provide reasonable assurance of detecting errors and
irregularities that are material to the financial statements.
B. An auditor is responsible to detect material errors, but has no responsibility to detect
material irregularities that are concealed through employee collusion or management
override of the internal control structure.
C. An auditor has no responsibility to detect errors and irregularities unless analytical
procedures or tests of transactions identify conditions causing a reasonably prudent
auditor to suspect that the financial statements were materially misstated.
D. An auditor has no responsibility to detect errors and irregularities because an auditor is
not an insurer and an audit does not constitute a guarantee
25. What assurance does an auditor provide that illegal acts that are material to the clients
financial statements will be detected?
A.
B.
C.
D.
Direct
Reasonable
Reasonable
Reasonable
Limited
Indirect
Reasonable
Limited
None
Limited
26. If specific information comes to an auditors attention that implies the existence of possible
illegal acts that could have a material, but indirect effect on the financial statements, the
auditor should next.
A. Apply audit procedure specifically directed to ascertaining whether an illegal act has
occurred.
B. Seek the advice of an informed expert qualified to practice law as to possible contingent
liabilities.
C. Report the matter to an appropriate level of management at least one level above those
involved.
D. Discuss the evidence with the clients audit committee, or others with equivalent authority
and responsibility.
27. The auditor will most likely perform extensive tests for possible understatement of
A. Revenues
C. Liabilities
B. Assets
D. Capital

May 2004 (PW1029)

28. The four major steps in conducting an audit are:

A. Testing internal controls
C.
B. Audit report
D.
The proper sequence in applying the above steps is:
A. CADB
C.
B. CDAB
D.

Preweek Quizzer

Planning
Testing transactions and balances
BCDA
ADCB

29. Which of the following auditor concerns most likely could be so serious that the auditor
concludes that a financial statement audit cannot be conducted?
A. The entity has no formal written code of conduct
B. The integrity of the entitys management is suspect
C. Procedures requiring segregation of duties are subject to management override
D. Management fails to modify prescribed controls for changes in conditions
30. The scope and nature of an auditors contractual obligation to a client is ordinarily set forth in
the
A. Scope paragraph of the auditors report C. Management letter
B. Opinion paragraph of the auditors report D. Engagement letter
31. Which of the following statements would least likely appear in an auditors engagement letter?
A. Fees for our services are based on our regular per diem rates, plus travel and other outof-pocket expenses
B. During the course of our audit we may observe opportunities for economy in or improved
controls over, your operations
C. Our engagement is subjected to the risk that material errors or irregularities, including
fraud and defalcations, if they exist, will not be detected
D. After performing our preliminary analytical procedures we will discuss with you the other
procedures we consider necessary to complete the engagement.
32. In the communication with the predecessor auditor, the potential successor should make
specific and reasonable inquiries regarding matters that may affect the decision to accept the
engagement.
Which of the following items is least likely to be included in the inquiries?
A. The integrity of management
B. Disagreements with management about accounting matters
C. Specific areas of audit difficulty and cost
D. The predecessors understanding of the reasons for a change in auditors
Page 3 of 18

AUDITING THEORY

CPA Review School of the Philippines

33. Concerning such matters as the integrity of management, errors and illegal acts, the auditor
should plan the audit with an attitude of:
A. cautious mistrust
C.
seasoned pessimism
B. professional skepticism
D. adversarial pursuit
34. Which one of the following is not a key step in planning the audit?
A. Perform analytical procedures
B. Consider audit risk
C. Make preliminary judgments about materiality levels
D. Obtain an understanding of the clients external controls
35. Professional standards require the use of analytical procedures in the:
A. planning and testing phases
B. testing phase and at the conclusion of the audit
C. planning phase and at the conclusion of the audit
D. planning and testing phases, and at the conclusion of the audit
36. A basic premise underlying the use of analytical procedures in auditing is that relationship
among data may be expected to:
A. vary randomly
B. vary in linear fashion
C. vary in a predictable and orderly fashion
D. continue in the absence of known conditions to the contrary
36. Which of the following elements underlies the application of generally accepted auditing
standards, particularly the standards of field work and reporting
A. Internal accounting control
C. Quality control
B. Corroborating evidence
D. Materiality and relative risk
38. In making a preliminary judgment about materiality, the auditor initially determines the
aggregate (overall) level of materiality for each statement. For planning purposes, the auditor
should use the:
A. Levels separately
B. Level he or she judges to be the more reliable
C. Largest aggregate level
D. Smallest aggregate level
May 2004 (PW1029)

Preweek Quizzer

39. Tolerable misstatement is the termed used to indicate materiality at the:

A. Balance sheet level
C. Income statement level
B. Account balance level
D. Company wide level
40. The risk that the auditor may unknowingly fail to appropriately modify his or her opinion on
financial statements that are materiality misstated is:
A. Detection risk
C. Inherent risk
B. Control risk
D. Audit risk
41. All else being equal, as the level of materiality decreases, the amount of evidence required
will:
A. remain the same
C. decrease
B. increase
D. change in an unpredictable fashion
42. In general, as an account balance decreases, the amount of evidence required will:
A. remain the same
C. decrease
B. increase
D. change in an unpredictable fashion
43. Which of the following would be considered the most conservative settings for inherent risk
and control risk?
A.
B.
C.
D.
Inherent Risk
1.0
1.0
0.0
0.5
Control Risk
1.0
0.0
1.0
0.5
44. What is the likely effect of an audit of an increase in the acceptable level of detection risk?
A. An auditor may change the nature of substantive tests from a less effective to more
effective procedure.
B. An auditor may change the timing of substantive tests from year-end to interim.
C. An auditor may change the assurance provided by test of control by using a larger sample
size than planned.
D. An auditor may change the assessed level of control risk from below the maximum to the
maximum level.
45. Inherent and control risks are functions of the client and its environment while detection risk is
not.
Detection risk relates to the auditors procedures and can be changed at the auditors
discretion.
Page 4 of 18

AUDITING THEORY

CPA Review School of the Philippines

A. Both statements are false

C. True; False
B. Both statements are true
D. False; True
46. Which of the following audit risk components may be assessed in nonquantitative terms?
A.
B.
C.
D.
Control risk
Yes
Yes
Yes
No
Detection risk
Yes
No
Yes
Yes
Inherent risk
No
Yes
Yes
Yes
47. As the acceptable level of detection risk decreases, the assurance directly provided from
A. Substantive tests should increase
C. Tests of control should increase
B. Substantive tests should decrease
D. Tests of control should decrease
48. As the acceptable level of detection of risk decreases, an auditor may
A. Reduce substantive testing relying on the assessment 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 of assessed level of control risk from the maximum level to below the maximum.
49. Analytical procedures are:
A. Statistical tests of financial information designed to identify areas requiring intensive
investigation
B. Analytical tests of financial information made by a computer
C. Evaluation of financial information made by a study of plausible relationships among both
financial and nonfinancial data
D. Diagnostic tests of financial information which may not be classified as evidential matter
50. Which of the following would not be considered an analytical procedure?
A. Estimating payroll expense by multiplying the number of employees by the average hourly
wage rate and the total hours worked.
B. Projecting an error rate by comparing the results of statistical sample with the actual
population characteristics
C. Computing accounts receivable turnover by dividing credit sales by the average net
receivables
D. Developing the expected current year sales based on the sales trend of the prior 5 years.
51. As a result of analytical procedures, the independent auditor determines that the gross profit
percentage has declined from 30 percent in the preceding year to 20 percent in the current
year. The auditor should:
May 2004 (PW1029)

Preweek Quizzer

A. Include an explanatory paragraph in his audit report indicating the inability of the client
company to continue as a going concern
B. Evaluate managements performance in causing this decline
C. Require footnote disclosure
D. Consider the possibility of a misstatement in the financial statements
52. Analytical procedures used in planning an audit should focus on identifying:
A. Material weaknesses in the internal control structure
B. The predictability of financial data from individual transactions
C. The various assertions that are embodied in the financial statements
D. Areas that may represent specific risk relevant to the audit
53. Analytical procedures performed in the overall review stage of an audit suggest several
accounts have unexpected relationships. The results of these procedures most likely would
indicate that
A. irregularities exist among the relevant account balances
B. Internal control activities are not operating effectively
C. Additional tests of details are required
D. The communication with the audit committee should be
54. Which of the following actions should be taken by a CPA who has been asked to examine the
financial statements of a company whose fiscal year has ended?
A. Discuss with the client the possibility of an adverse opinion because of the late
engagement date
B. Ascertain whether circumstances are likely to permit an adequate examination and
expression of an unqualified opinion
C. Inform the client of the need to issue a qualified opinion if the physical inventory has
already been taken
D. Ascertain whether a proper study and evaluation of internal control can be conducted after
completion of the field work
55. Which of the following procedures would an auditor normally plan only for a first-time-audit?
A. Review litigation against the company that was settled in prior years
B. Review capital stock transactions from inception of the company
C. Review accounts receivable transactions from inception of the company
D. Review long-term debt repayment in prior years

Page 5 of 18

AUDITING THEORY

CPA Review School of the Philippines

56. The practice of auditing firms to spread work throughout the year by carrying out as many
auditing procedures as practicable before the balance sheet date, in order to minimize the load
during the peak period. This is called
A. Test of recorded transactions
B. Confirmation of receivable and payables
C. Observation and test-check of inventories
D. Interim work
57. At interim dates an auditor evaluates a clients internal accounting control procedures and
finds them to be effective. The auditor then performs a substantial part of the audit
engagement on a continuous basis throughout the year. At a minimum, the auditors year-end
audit procedures must include
A. Determination that the clients internal accounting, control procedures are still effective at
year end
B. Confirmation of those year-end accounts that were examined at interim dates.
C. Test of compliance with internal control in the same manner as those tests made at the
interim dates
D. Comparison of the responses to the auditors internal control questionnaire with a detailed
flowchart at year end
58. Which item below would not be contained in an audit program?
A. List of specific tasks to be performed
B. Documentation of system being reviewed
C. Staff assigned to the audit
D. Estimated time required to perform each task
59. An auditor should design the written program so that
A. All material transactions will be selected for substantive testing
B. Substantive tests prior to the balance sheet date will be minimized
C. The audit procedures selected will achieve specific audit objectives
D. Each account balance will be tested under either tests of controls or tests of transactions
60. In an audit of financial statements, an auditors primarily consideration regarding an internal
control policy or procedure is whether the policy or procedure
A. Reflects managements philosophy and operating cycle.
B. Affects managements financial statement assertions
May 2004 (PW1029)

Preweek Quizzer

C. Provide adequate safeguards over access to assets

D. Enhances management decision-making process
61. When considering the internal control structure, an auditor should be aware of the concept of
reasonable assurance, which recognizes that
A. Procedures requiring segregation of duties may be circumvented by employee collusion
and management.
B. Establishing and maintaining the internal control structure is an important responsibility of
management
C The cost of an entitys internal control structure should exceed the benefits expected to be
derived.
D. Adequate safeguards over access to assets and records should permit an entity to
maintain proper accountability.
62. Which of the following is not an element of an entitys internal control structure?
A. Control risk
C. The accounting system
B. Control procedure
D. The control environment
63. Which of the following most likely would not be considered an inherent limitation of the
potential effectiveness of an entitys internal control structure
A. incompatible duties
C. management override
B. mistakes in judgment
D. collusion among employee
64. Proper segregation of functional responsibilities in an effective structure of internal control calls
for separation of the functions of
A. Authorization, execution and payment
C. Authorization, payment, and reporting
B. Authorization, recording, and custody
D. Custody, execution, and reporting
65. The principal purposes in conducting a study and evaluation of existing internal control system
is
A. For independent audit to maintain a state of independence in mental attitude in all matters
related to the audit
B. To assure compliance with GAAP
C. To enable independent auditor to assess and be assured of managements efficiency and
effectiveness
D. To develop an audit plan and determine the nature, timing and extent of audit work
required

Page 6 of 18

AUDITING THEORY

CPA Review School of the Philippines

66. Which of the following is not an auditor should obtain an understanding of the elements of an
entitys internal control structure in planning an audit?
A. Identify the types of potential misstatements that can occur
B. Design substantive tests
C. Consider the operating effectiveness of the internal control structure
D. Consider the factors that affect the risks of material misstatements
67. In determining whether transactions have been recorded, the direction of the audit testing
should be form the
A. General ledger balances
C. Adjusted trial balance
B. Original source documents
D. General journal entries
68. Which of the following statements is not true regarding the competence of audit evidence?
A. Relevance is enhanced by an effective information system.
B. To be competent, evidence must be both valid and relevant
C. Validity is related to the quality of the clients information system
D. Relevance must always relate to audit objectives
69. As used in auditing, which of the following statements best describes assertions?
A. Assertions are the representations of management as to the reliability of the information
system
B. Assertions are the auditors findings to be communicated in the audit report.
C. Assertions are the representations of management as to the fairness of the financial
statements.
D. Assertions are found only in the footnotes to the financial statements.
70. Which of the sets of information does an auditor usually confirm on one form?
A. Accounts payable and purchase commitments
B. Cash in bank and collateral for loans
C. Inventory on consignment and contingent liabilities
D. Accounts receivable and accrued interest receivable
71. Confirmation is most likely to be a relevant form of evidence with regard to assertion about
accounts receivable when the auditor has concerns about the receivables
A. Valuation
C. Existence
B. Classification
D. Completeness
May 2004 (PW1029)

Preweek Quizzer

72. An auditor should perform alternative procedures to substantiate the existence of accounts
receivable when
A. No reply to a positive confirmation request is received
B. No reply to a negative confirmation request is received
C. Collectibility of the receivables is in doubt
D. Pledging of the receivables is probable
73. Which of the following procedures would an auditor most likely perform for year-end accounts
receivable confirmations when the auditor did not receive replies to second requests?
A. Review the cash receipts journal for the month prior to the year end
B. Intensify the study of internal control concerning the revenue cycle
C. Increase the assessed level of detection
D. Inspect the shipping records documenting the merchandise sold to the debtors.
74. In auditing accounts receivable, the negative form of confirmation request most likely would be
used when
A. The total recorded amount of accounts receivable is immaterial to the financial statements
taken as a whole.
B. Response rates in prior years to properly designed positive confirmation requests were
inadequate.
C. Recipients are likely to return positive confirmation requests without verifying the accuracy
of the information.
D. The combined assessed level of inherent risk and control risk relative to account
receivables is low.
75. An auditor most likely would make inquiries
possible obsolete or slow-moving inventory
assertion of
A. Valuation or allocation
B. Rights and obligations

of production and sales personnel concerning

to support managements financial statement
C. Existence or occurrence
D. Presentation and disclosure

76. To gain assurance that all inventory items in a clients inventory listing schedule are valid, an
auditor most likely would trace
A. Inventory tags noted during the auditors observation to items listed in the inventory listing
schedule
B. Inventory tags noted during the auditors observation to items listed in receiving reports
and vendors invoices.
Page 7 of 18

AUDITING THEORY

CPA Review School of the Philippines

Preweek Quizzer

C. Items listed in the inventory listing schedule to inventory tags and the auditors recorded
count sheets.
D. Items listed in receiving reports and vendors invoices to the inventory listing schedule.

C. Noncapitalizable expenditures for repairs and maintenance have been properly charged to
expense.
D. Expenditures for property and equipment have not been charged to expense.

77. An auditor selected items for test counts while observing a clients physical inventory. The
auditor then traced the test counts tot eh clients inventory listing. This procedure most likely
obtained evidence concerning managements assertion of
A. Rights and obligations
C. Existence or occurrence
B. Completeness
D. Valuation

82. Which of the following procedures would an auditor most likely perform in searching for
unrecorded liabilities?
A. Trace a sample of accounts payable entries recorded just before year end to the
unmatched receiving report file.
B. Compare a sample of purchase orders issued just after year end with the year-end
accounts payable trial balance.
C. Vouch a sample of cash disbursements recorded after year end to receiving reports and
vendor invoices.
D. Scan the cash disbursement entries recorded just before year end for indications of
unusual transactions

78. An auditor most likely would analyze inventory turnover rates to obtain evidence concerning
managements assertions about
A. Existence or occurrence
C. Existence or occurrence
B. Completeness
D. Valuation
79. In testing long-term investments, an auditor ordinarily would use analytical procedures to
ascertain the reasonableness of the
A. Completeness of recorded in investment income
B. Classification between current and noncurrent portfolios
C. Valuation of marketable equity securities
D. Existence of unrealized gains or losses in the portfolio
80. In testing for unrecorded retirements of equipment, an auditor most likely would
A. Select items of equipment from the accounting records and then locate them during the
plant tour.
B. Compare depreciation journal entries with similar prior-year entries in search of fully
depreciated equipment
C. Inspect items of equipment observed during the plant tour and then trace them to the
equipment subsidiary ledger.
D. Scan the general journal for unusual equipment additions and excessive debits to repairs
and maintenance expense.
81. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support
of the audit assertion that all
A. Noncapitalizable expenditures for repairs and maintenance have been recorded in the
proper period.
B. Expenditures for property and equipment have been recorded in the proper period.
May 2004 (PW1029)

83. Auditor confirmation of accounts payable balances at the balance sheet data may be
unnecessary because
A. This is a duplication of cutoff tests.
B. Accounts payable balances at the balance sheet data may not be paid before the audit is
completed.
C. Correspondence with the audit clients attorney will reveal all legal action by vendors for
nonpayment.
D. There is likely to be other reliable external evidence to support the balance.
84. In auditing accounts payable, an auditors procedure most likely would focus primarily on
managements assertion of
A. Existence or occurrence
C. Completeness
B. Presentation and disclosure
D. Valuation or allocation
85. When a CPA observes that the recorded interest expense seems to be excessive in relation to
the balance in the bonds payable account, the CPA might suspects that
A. Discounts on bonds payable is understated
B. Bonds payable are understated
C. Bonds payable are overstated
D. Premium on bonds payable are overstated.

Page 8 of 18

AUDITING THEORY

CPA Review School of the Philippines

86. An audit program for the examination of the retained earnings account should include a step
that requires verification of the
A. Market value used to charge retained earnings to account for a two-for-one stock split.
B. Approval of the adjustment to the beginning balance as a result of a write-down of an
account receivable
C. Authorization for both cash and stock dividends
D. Gain or loss resulting from disposition of treasury shares
87. Which of the following most likely would be detected by an auditors review of a clients sales
cutoff?
A. Shipments lacking sales invoices and shipping documents
B. Excessive write-offs of accounts receivable
C. Unrecorded sales at year end
D. Lapping of year-end accounts receivable
88. A limitation on the scope of the auditors examination sufficient to preclude an unqualified
opinion will always result when management
A. Prevents the auditor from reviewing the working papers of the predecessor auditor.
B. Engages the auditor after the year-end physical inventory count is completed
C. Fails to correct a reportable condition of internal control that had been identified during the
prior years audit.
D. Refuses to furnish a management representation letter to the auditor.
89. A purpose of a management representation letter is to reduce
A. Audit risk to an aggregate level of misstatement that could be considered material
B. An auditors responsibility to detect material misstatements only to the extent that the
letter is relied on.
C. The possibility of a misunderstanding concerning managements responsibility for the
financial statements.
D. The scope of an auditors procedures concerning related-party transactions and
subsequent events.
90. Which of the following is not a specialist upon whose work an auditor may rely?
A. Actuary C.
Internal auditor
B. Appraiser
D.
Engineer

May 2004 (PW1029)

Preweek Quizzer

91. To maximize independence, the director of internal auditing should report to the
A. Audit committee
C. Chief financial officer
B. Controller
D. Director of information systems
92. The primary reason an auditor requests letters of inquiry be sent to a clients attorneys is to
provide the auditor with
A. The probable outcome of asserted claims and pending or threatened litigation.
B. Corroboration of the information furnished by management about litigation, claims and
assessments.
C. The attorneys opinions of the clients historical experience in recent similar litigation.
D. A description and evaluation of litigation, claims, and assessments that existed at the
balance sheet date.
93. A CPA has received an attorneys letter in which no significant disagreements with the clients
assessments of contingent liabilities were noted. The resignation of the clients lawyer shortly
after receipt of the letter should alert the auditor that
A. Undisclosed unasserted claims may have arisen
B. The attorney was unable to form a conclusion with respect to the significance of litigation,
claims, and assessments.
C. The auditor must begin a completely new examination of contingent liabilities.
D. An adverse opinion will be necessary.
94. Cooper, CPA, believes there is a substantial doubt about the ability of Zero Corp. to continue
as a going concern for a reasonable period of time. In evaluation Zeros plans for dealing with
the adverse effects of future conditions and events. Cooper most likely would consider, as a
mitigating factor, Zeros plans to
A. Discuss with lenders the terms of all debt and loan agreements.
B. Strengthen controls over cash disbursements.
C. Purchase production facilities currently being leased from a related party.
D. Postpone expenditures for research and development projects.
95. Which of the following audit procedures would most likely assist an auditor in identifying
conditions and events that may indicate there could be substantial doubt about an entitys
ability to continue as going concern?
A. Review compliance with the terms of debt agreements.
B. Confirmation of accounts receivable from principal customers.
C. Reconciliation of interest expense with debt outstanding.
D. Confirmation of bank balances.
Page 9 of 18

AUDITING THEORY

CPA Review School of the Philippines

96. When considering the use of managements written representations as audit evidence about
the completeness assertion, an auditor should understand that such representations
A. Complement, but do not replace, substantive tests designed to support the assertion
B. Constitute sufficient evidence to support the assertion when considered in combination
with reliance on internal control.
C. Are not part of the evidential matter considered to support the assertion.
D. Replace reliance on internal control as evidence to support the assertion.
97. To which of the following matters would materiality limits not apply in obtaining written
management representations?
A. The availability of minutes of stockholders and directors meetings.
B. Losses from purchase commitments at prices in excess of market value.
C. The disclosure of compensating balance arrangements involving related parties.
D. Reductions of obsolete inventory to net realizable value.
98. The date of the management representation letter should coincide with the date of the
A. Balance sheet C.
Auditors report
B. Latest interim financial information D.
Latest related-party transactions
99. Which of the following matters would an auditor most likely include in a management
representation letter?
A. Communications with the audit committee concerning weaknesses in internal control.
B. The completeness and availability of minutes of stockholders and directors meetings
C. Plans to acquire or merge with other entities in the subsequent year
D. Managements acknowledgment of its responsibility for detection of employee fraud.
100. Which of the following pairs of accounts would an auditor most likely analyze on the same
working paper?
A. Notes receivable and interest income
B. Accrued interest receivable and accrued interest payable.
C. Notes payable and notes receivable
D. Interest income and interest expense

Preweek Quizzer

102. The permanent file of an auditors working papers generally would not include
A. Bond indenture agreements
C. Lease agreements
B. Working trial balance
D. Flowchart of internal control
103. An auditor ordinarily uses a working trial balance resembling the financial statements without
footnotes, but containing columns for
A. Cash flow increases and decreases
C. Reclassifications and adjustments
B. Audit objectives and assertions
D. Reconciliations and tickmarks
104. Which of the following factors would least likely affect the quantity and content of an auditors
working papers?
A. The condition of the clients records.
C. The nature of the auditors report
B. The assessed level of control risk
D. The content of the representation letter
105. Which of the following is required documentation in an audit in accordance with generally
accepted auditing standards?
A. A flowchart or narrative of the accounting system describing the recording and
classification of transactions for financial reporting.
B. An audit program setting forth in detail the procedures necessary to accomplish the
engagements objectives.
C. A planning memorandum establishing the timing of the audit procedures and coordinating
the assistance of entity personnel.
D. An internal control questionnaire identifying controls that assure specific objectives will be
achieved.
106. Which of the following procedures should an auditor generally perform regarding subsequent
events?
A. Compare the latest available interim financial statements with the financial statements
being audited.
B. Send second requests to the clients customers who failed to respond to initial accounts
receivable confirmation requests.
C. Communicate material weaknesses in internal control to the clients audit committee.
D. Review the cutoff bank statements for several months after the year end

101. An auditors working papers serve mainly to

A. Provide the principal support for the auditors report
B. Satisfy the auditors responsibilities concerning the Code of Professional Conduct
C. Monitor the effectiveness of the CPA firms quality control procedures
D. Document the level of independence maintained by the auditor
May 2004 (PW1029)

Page 10 of 18

AUDITING THEORY

CPA Review School of the Philippines

107. Which of the following subsequent events will be least likely to result in an adjustment to the
financial statements?
A. Culmination of events affecting the realization value of accounts receivable owned as of
the balance sheet date.
B. Culmination of events affecting the realization of inventories owned as of the balance
sheet date.
C. Material changes in the settlement of liabilities which were estimated as of the balance
sheet date.
D. Material changes in the quoted market prices of listed investment securities since the
balance sheet date.
108. Zero Corp. suffered a loss that would have a material effect on its financial statements on an
uncollectible trade account receivable due to a customers bankruptcy. This occurred
suddenly due to a natural disaster 10 days after Zeros balance sheet date, but 1 month before
the issuance of the financial statements and the auditors report. Under these circumstances.
The financial
The event requires financial
The auditors report
statements
statement disclosure but no
should be modified for a
should be adjusted
adjustment
lack of consistency
A.
Yes
No
No
B.
Yes
No
Yes
C.
No
Yes
Yes
D.
NO
Yes
No
109.Which of the following procedures would an auditor ordinarily perform during the review of
subsequent events?
A. An analysis of related party transactions for the discovery of possible fraud.
B. A review of the cut-off bank statements for the period after the year-end
C. An inquiry of the clients legal counsel concerning litigation.
D. An investigation of material weaknesses in internal control previously communicated to
the client.
110.Which of the following events occurring after the issuance of an auditors report most likely
would cause the auditor to make further inquiries about the previously issued financial
statements?
A. An uninsured natural disaster occurs that may affect the entitys ability to continue as a
going concern.
B. A contingency is resolved that had been disclosed in the audited financial statements.
May 2004 (PW1029)

Preweek Quizzer

C. New information is discovered concerning undisclosed lease transactions of the audited

period.
D. A subsidiary is sold that accounts for 25% of the entitys consolidated net income.
111. Six months after issuing an unqualified opinion on audited financial statements, an auditor
discovered that the engagement personnel failed to confirm several of the clients material
accounts receivable balances. The auditor should first
A. Request the permission of the client to undertake the confirmation of accounts receivable.
B. Perform alternative procedures to provide a satisfactory basis for the unqualified opinion.
C. Assess the importance of the omitted procedures to the auditors ability to support the
previously expressed opinion.
D. Inquire whether there are persons currently relying, or likely to rely, on the unqualified
opinion.
112. On March 15, 1998, Kent, CPA, issued an unqualified opinion on a clients audited financial
statements for the year ended December 31, 1997. On May 4, 1998, Kents internal
inspection program disclosed that engagement personnel failed to observe the clients physical
inventory. Omission of this procedure impairs Kents present ability to support the unqualified
opinion. If the stockholders are currently relying on the opinion, Kent should first
A. Advise management to disclose to the stockholders that Kents unqualified opinion should
not be relied on.
B. Undertake to apply alternative procedures that would provide a satisfactory basis for the
unqualified opinion.
C. Reissue the auditors report and add an explanatory paragraph describing the departure
from generally accepted auditing standards.
D. Compensate for the omitted procedure by performing tests of controls to reduce audit risk
to a sufficiently low level.
113. An audit report contains the following paragraph: Because of the inadequacies in the
companys accounting records during the year ended June 30, 2003, it was not practicable to
extend our auditing procedures to the extent necessary to enable us to obtain certain
evidential matter as it relates to classification of certain items in the consolidated statements of
operations.
This paragraph most likely describes
A. A material departure from GAAP requiring a qualified audit opinion.
B. An uncertainty that should not lead to a qualified opinion.
C. A matter that the auditor wishes to emphasize and that does not lead to a qualified audit
opinion.
Page 11 of 18

AUDITING THEORY

CPA Review School of the Philippines

D. A material scope restriction requiring a qualification of the audit opinion.

114. The auditor issued a qualified opinion covering the financial statements of Client A for the year
ended December 31, 2002. The reason for the qualification was a departure from GAAP. In
presenting comparative statements for the years ended December 31, 2002 and 2003, the
client revised the 2002 financial statements to correct the previous departure from GAAP. The
auditors 2003 report on the 12/31/02 and 12/31/03 comparative financial statements will
A. Express a qualified opinion on the 2002 financial statements and an unqualified opinion
on the 2003 statements.
B. Express unqualified opinions on both the 2002 and 2003 financial statements.
C. Retain the qualified opinion covering the 2002 statements, but add an explanatory
paragraph describing the correction of the prior departure from GAAP.
D. Render qualified audit opinions for both 2002 and 2003 financial statements given the
2003 carryover effect of the 2002 error.
115. Restriction imposed by a client prohibits the observation of physical inventories, which account
for 35% of all assets. Alternative audit procedures cannot be applied, although the auditor was
able to examine satisfactory evidence for all other items in the financial statements. The
auditor should issue a (n)
A. Except for qualified opinion
B. Disclaimer of opinion
C. Unqualified opinion with a separate explanatory paragraph
D. Unqualified opinion with an explanation in the scope paragraph.
116. Under which of the following circumstances would a disclaimer of opinion not be appropriate?
A. The auditor is engaged after fiscal year-end and is unable to observe physical inventories
or apply alternative procedures to verify their balances.
B. The auditor is unable to determine the amounts associated with illegal acts committed by
the clients management.
C. The financial statements fail to contain adequate disclosure concerning related party
transactions.
D. The client refuses to permit its attorney to furnish information requested in a letter of audit
inquiry.
117. An auditors report would be designated as a special report when it is issued in connection
with financial statements that are
A. For an interim period and are subjected to a limited review
B. Unaudited and are prepared from a clients accounting records.
May 2004 (PW1029)

Preweek Quizzer

C. Prepared in accordance with a comprehensive basis of accounting other than generally

accepted accounting principles.
D. Purported to be in accordance with generally accepted accounting principles but do not
include a presentation of the Statement of Cash Flows.
118. An auditor concludes that there is substantial doubt about an entitys ability to continue as a
going concern for a reasonable period of time. If the entitys disclosures concerning this
matter are not adequate, the audit report may include a (an)
A.
B.
C.
D.
Disclaimer of opinion
Yes
No
No
Yes
Except for Qualified opinion
Yes
No
Yes
No
119. Under which of the following circumstances would an unqualified audit opinion followed by an
explanatory paragraph not be appropriate?
A. The auditor wishes to emphasize that the client has entered into material transactions with
related parties. The substance of the related party transactions is properly disclosed in
the audited financial statements.
B. The client has completed material transactions with related parties and the auditor is
unable to persuade management to properly reflect the economic substance of the
transactions in the financial statements.
C. The client has used a method of revenue recognition that is at variance with promulgated
accounting standards. The auditor, however, agrees with the departure on the basis that
use of the promulgated standard would make the financial statements materially
misleading.
D. The auditor believes that substantial doubt exists concerning the ability of the client to
continue as a going concern.
120. An audit report contains the following paragraph: Since the company did not take physical
inventories and we were not able to apply auditing procedures to satisfy ourselves as to
inventory quantities and the cost of property and equipment, the scope of our work was not
sufficient to enable us to express, and we do not express, an opinion on these financial
statements. This paragraph illustrates a (an)
A. Disclaimer of opinion due to uncertainty
B. Disclaimer of opinion due to scope restrictions
C. Adverse audit opinion
D. Audit opinion qualified for material scope restrictions.
Page 12 of 18

AUDITING THEORY

CPA Review School of the Philippines

121. When a principal auditor decides to make reference to another auditors examination, the
principal auditors report should always indicate clearly, in the introductory, scope, and opinion
paragraphs, the
A. Magnitude of the portion of the financial statements examined by the other auditor.
B. Disclaimer of responsibility concerning the portion of the financial statements examined by
the other auditor.
C. Name of the other auditor.
D. Division of responsibility.
122. In which of the following circumstances may the auditor issue the standard audit report?
A. The principal auditor assumes responsibility for the work of another auditor.
B. The financial statements are affected by a departure from a generally accepted
accounting principle.
C. Substantial doubt exists concerning the ability of the entity to continue as a going concern.
D. The auditor wishes to emphasize a matter regarding the financial statements.
123. An auditor should disclose the substantive reasons for expressing an adverse opinion in an
explanatory paragraph
A. Preceding the scope paragraph
B. Preceding the opinion paragraph
C. Following the opinion paragraph
D. Within the notes of the financial statements.
124. Which of the following statements is correct concerning both an engagement to compile and
an engagement to review a nonpublic entitys financial statements?
A. The accountant does not contemplate obtaining an understanding of internal control.
B. The accountant must be independent in fact and appearance.
C. The accountant expresses no assurance on the financial statements.
D. The accountant should obtain a written management representation letter.
125. When providing limited assurance that the financial statements of a nonpublic entity require no
material modifications to be in accordance with generally accepted accounting principles, the
accountant should
A. Assess the risk that a material misstatement could occur in a financial statement
assertion.
B. Confirm with the entitys lawyer that material loss contingencies are disclosed.
C. Understand the accounting principles of the industry in which the entity operates.
May 2004 (PW1029)

Preweek Quizzer

D. Develop audit programs to determine whether the entitys financial statements are fairly
presented.
126. Which of the following procedures would an accountant least likely perform during an
engagement to review the financial statements of a nonpublic entity?
A. Observing the safeguards over access to and use of assets and records.
B. Comparing the financial statements with anticipated results in budgets and forecasts.
C. Inquiring of management about actions taken at the board of directors meetings.
D. Studying the relationships of financial statement elements expected to conform to
predictable patterns.
127. Of the following statements, which best distinguishes ordinary negligence from gross
negligence?
A. Failure to detect material errors, whether internal control is strong or weak, suggests
gross negligence.
B. Failure to exercise reasonable care denotes ordinary negligence, whereas failure to
exercise minimal care indicates gross negligence.
C. Gross negligence is most probable when the auditor fails to detect errors that occurred
under conditions of strong internal control.
D. The more material the undetected error the greater the likelihood of ordinary negligence.
128. Which of the following is not an example of analytical evidence?
A. Compared inventory turnover by major class with the prior year on a monthly and
quarterly basis.
B. Compared gross profit percentages by major product classes with the prior year.
C. Examined invoices for plant asset additions to determine whether the client had
erroneously recorded ordinary repairs as plant assets.
D. Examined monthly performance reports and investigated significant variations from
budgeted amounts.
129. Which of the following is a basic tool used by the auditor to control the audit work and review
the progress of the audit?
A. Time and expense summary
C. Progress flowchart
B. Engagement letter
D. Audit program
130. Of the following audit procedures, which best supports the valuation objective?
A. Performing a lower of cost or market test of the clients inventories.
B. Reviewing a contingent liability footnote for proper wording.
C. Searching for unrecorded liabilities.
Page 13 of 18

AUDITING THEORY

CPA Review School of the Philippines

D. Observing the clients year-end physical inventory taking.

131.Which of the following factors in most important in determining the competence of audit
evidence?
A. The reliability of the evidence in meeting the audit objective.
B. The objectivity of the auditor gathering the evidence.
C. The quantity of the evidence obtained.
D. The independence of the source of evidence.
132. When reviewing audit working papers, the primary responsibility of an audit supervisor is to
determine that:
A. Each worksheet is properly identified with a descriptive heading.
B. Working papers are properly referenced and kept in logical groupings.
C. Standard departmental procedures are adhered to with regard to work paper preparation
and technique.
D. Working papers adequately support the audit findings, conclusion, and report.
133. The main advantage of properly indexed working papers is to
A. Reduce the size of the file
B. Better organize the working papers
C. Allow division of labor within the audit team
D. Facilitate the efficient use of audit staff.
134. Which of the following is not an example of confirmation evidence?
A. Requesting the clients outside legal counsel to evaluate the possible outcome of pending
litigation.
B. Questioning the clients employees about existing internal control policies and procedures.
C. Requesting the clients customers to verify year-end accounts receivable balances.
D. Requesting payees to respond in writing to the terms contained in notes payable
appearing in the clients ledger.
135. The principal reason for developing a written audit program is to help assure that the
A. Audit work is properly supervised
B. Audit work is properly planned and documented
C. Audit report contains only significant findings.
D. Work of different auditors is properly coordinated.
136. Audit information is generally considered relevant when it is:
May 2004 (PW1029)

A.
B.
C.
D.

Preweek Quizzer

Derived through valid statistical sampling.

Objective and unbiased
Factual, adequate, and convincing
Consistent with the audit objectives

137. External auditors often confirm assertions contained in the organizations financial statements
and accounting records with third parties. Which of the following best explains why
confirmation produces evidence of high quality?
A. Written assertions from knowledgeable third parties provide sufficient evidence to achieve
most audit objectives.
B. Confirmation by knowledgeable third parties is usually the most relevant evidence
available.
C. Confirmation by knowledgeable third parties is usually the least costly evidence available.
D. Confirmation by knowledgeable third parties is highly competent because of its
independent source.
138. Having evaluated inherent risk and control risk, the auditor determines detection risk
A. As the complement of overall audit risk.
B. By performing substantive audit tests.
C. As a product of further study of the business and industry and application of analytical
procedures
D. At a level equates the joint probability of inherent risk, control risk, and detection risk with
overall audit risk.
139. Which of the following is not a purpose served by the application of analytical procedures?
A. As part of audit planning to assist in locating significant changes in revenues and
expenses.
B. To provide a basis for lowering materiality thresholds where significant earnings inflation is
indicated.
C. To determine the economic substance of related party transactions.
D. As part of audit review to determine that all significant abnormalities have been resolved
to the auditors satisfaction.
140. Which of the following is not a component of audit planning?
A. Observing the clients annual physical inventory taking and making test counts of selected
items.
B. Making arrangements with the client concerning the timing of audit field work and use of
the clients staff in completing certain phases of the examination.
Page 14 of 18

AUDITING THEORY

CPA Review School of the Philippines

C. Obtaining an understanding of the business.

D. Developing audit programs.
141. Audit risk consists of all but the following components:
A. Inherent risk
C. Substantive risk
B. Detection risk
D. Control risk
142. Which of the following conditions supports an increase in detection risk?
A. Internal control over cash receipts is excellent.
B. Application of analytical procedures reveals a significant increase in sales revenue in
December, the last month of the fiscal year.
C. Internal control over shipping, billing, and recording of sales revenue is weak.
D. Study of the business reveals that the client recently acquired a new company in an
unrelated industry.
143. Why should the auditor plan more work on individual accounts as lower acceptable levels of
both audit risk and materiality are established?
A. To find smaller errors.
B. To find larger errors.
C. To increase the tolerable error in the accounts
D. To decrease the risk of overreliance.
144. The risk of fraudulent financial reporting increases in the presence of
A. Incentive system based on operating income
B. Improved control systems
C. Substantial increases in sales
D. Frequent changes in suppliers.
145. The most effective control to prevent unbilled and unrecorded shipments of finished goods is
to
A. Require all outgoing shipments to be accompanied by a prenumbered shipping order and
bill of lading (signed by the carrier). Forward a copy of these documents to accounting, to
be placed in an open file awaiting receipt of the customer invoice copy.
B. Forward a copy of the shipping order and bill of lading to billing.
C. Implement a policy that prevents sales invoices from being mailed to customers in the
absence of a properly approved shipping order and bill of lading signed by the carrier.
D. Forward a copy of the signed bill of lading to the stores manager.
146. Which of the following, if material, would be considered fraud?
May 2004 (PW1029)

A.
B.
C.
D.

Preweek Quizzer

Mistakes in the application of accounting principles.

Clerical mistakes in the accounting data underlying the financial statements.
Misappropriation of an asset or groups of assets.
Misinterpretations of facts that existed when the financial statements were prepared.

147. Proper segregation of functional responsibilities calls for the separation of the
A. Authorization, recording, and custodial functions
B. Authorization, execution and payment functions
C. Receiving, shipping and custodial functions
D. Authorization, approval and execution functions.
148. For good internal control, which of the following functions should not be the responsibility of
the treasurers department?
A. Data processing
C. Custody of securities
B. Handling of cash
D. Establishing credit policies
149.For effective internal control, the accounts payable department should compare the
information on each vendors invoice with the
A. Receiving report and the purchase order.
B. Receiving report and the voucher
C. Vendors packing slip and the purchase order
D. Vendors packing slip and the voucher
150.Which of the following is an internal control procedure that would prevent a paid disbursement
voucher from being presented for payment a second time?
A. Vouchers should be prepared by individuals who are responsible for signing disbursement
checks.
B. Disbursement vouchers should be approved by at least two responsible management
officials.
C. The date on a disbursement voucher should be within a few days of the date the voucher
is presented for payment.
D. The official signing the check should cancel the paid voucher after examining the
documentation supporting the disbursement.
151. Which of the following control procedures would most likely be used to maintain accurate
perpetual inventory records?
A. Independent storeroom count of goods received.
B. Periodic independent reconciliation of control and subsidiary records.
Page 15 of 18

AUDITING THEORY

CPA Review School of the Philippines

C. Periodic independent comparison of records with goods on hand.

D. Independent matching of purchase orders, receiving reports, and vendors invoices.
152. After the study and evaluation of a clients internal control policies and procedures has been
completed, an auditor might decide to
A. Increase the extent of substantive testing in areas where the internal control policies and
procedures are strong.
B. Reduce the extent of control testing in areas where the internal control policies and
procedures are strong.
C. Reduce the extent of both substantive and control testing in areas where the internal
control policies and procedures are strong.
D. Increase the extent of substantive testing in areas where the internal controls are weak.
153. If the independent auditors decide that the work performed by the internal auditor may have a
bearing on their own procedures, they should consider the internal auditors
A. competence and objectivity
C. independence and review skills
B. efficiency and experience
D. training and supervisory skills
154.Regardless of whether the auditor decides to test controls for operating effectiveness, he/she
must fully document his or her understanding of the internal control policies and procedures
obtained through whatever means. Which of the following does not describe an appropriate
means for documenting such understanding?
A. internal control flowchart
C. internal control memorandum
B. internal control implementation
D. internal control questionnaire
155. Which of the following is not an auditing procedure that is commonly used in performing
control tests?
A. inquiring
C. confirming
B. observing
D. inspecting
156. It is important for the CPA to consider the competence of the audit clients employees because
their competence bears directly and importantly upon the
A. cost/benefit relationship of the internal control system.
B. achievement of the objectives of the internal control system
C. comparison of recorded accountability with assets
D. timing of the tests to be performed
157. The possibility of losing a large amount of information stored in computer files most likely
would be reduced by the use of
May 2004 (PW1029)

Preweek Quizzer

A. back-up files
C. completeness tests
B. check digits
D. conversion verification
158.An integrated test facility (ITF) would be appropriate when the auditor needs to
A. Trace a complex logic path through an application system.
B. Verify processing accuracy concurrently with processing
C. Monitor transactions in an application system continuously
D. Verify load module integrity for production programs
159. When auditing around the computer, the independent auditor focuses solely upon the source
documents and
A. test data
C. processing
B. control techniques
D. output
160. Which of the following methods of testing application controls utilizes a generalized audit
software package prepared by the auditors?
A. parallel simulation
C. integrated testing facility approach
B. test data approach
D. exception report tests
161. An unauthorized employee took computer printouts from output bins accessible to all
employees. A control which would have prevented this occurrence is
A. A storage/ retention control
C. a spooler file control
B. an output review control
D. a report distribution control
162. A hash total of employee numbers is part of the input to a payroll master file update program.
The program compares the hash total to the total computed for transactions applied to the
master file. The purpose of this procedure is to:
A. Verify that employee numbers are valid
B. Verify that only authorized employees are paid
C. Detect errors in payroll calculations
D. Detect the omission of transaction processing
163. Which of the following is a disadvantage of the integrated test facility approach?
A. In establishing fictitious entities, the auditor may be compromising audit independence.
B. Removing the fictitious transactions from the system is somewhat difficult and, if not done
carefully, may contaminate the clients files.
C. ITF is simply an automated version of auditing around the computer
D. The auditor may not always have a current copy of the authorized version of the clients
program
Page 16 of 18

AUDITING THEORY

CPA Review School of the Philippines

164. An account payable program posted a payable to a vendor not included in the on-line vendor
master file. A control which would prevent this error is a
A. validity check
C. range check
B. reasonableness test
D. parity check
165. While entering data into a cash receipts transaction file, an employee transposed two
numbers in a customer code. Which of the following controls could prevent input of this type of
error?
A. sequence check
C. record check
B. self-checking digit
D. field-size check
166. Auditors who prefer statistical sampling to non-statistical sampling may do so because
statistical sampling helps the auditor
A. Measure the sufficiency of the evidential matter obtained
B. Eliminate subjectivity in the evaluation of sampling results
C. Reduce the level of tolerable error to a relatively low amount.

Preweek Quizzer

support the auditors preconceived notion of a tolerable occurrence rate when, in fact, the
actual error rate in the population does meet the auditors notion of effectiveness. This
situation illustrates the risk of
A. Underassessment of control risk
C. Overassessment of control risk
B. Incorrect rejection
D. Incorrect acceptance
170. Which of the following factors is generally not considered in determining the sample size for a
test of controls?
A. Population size
C. Tolerable rate
B. Risk of underassessment
D. Expected population occurrence rate.
171. Sampling risk refers to the possibility that:
A. The auditor may use a less than optimal statistical method for the circumstances, e.g.
difference estimation instead of ration estimation.
B. The auditor may fail to recognize an error that is included in the sample.
C. Even thought a sample is properly chosen it may not be representative of the population.
D. The confidence level and/or precision established by the auditor are not appropriate.

167. Of the following statements, which one best differentiates statistical sampling from
nonstatistical sampling?
A. Statistical sampling is a mathematical approach to inference, whereas nonstatistical
sampling is a more subjective approach.
B. Nonstatistical sampling has greater applicability to large populations than does statistical
sampling.
C. Nonstatistical sampling is more subjective, but produces greater consistency in the
application of audit judgment.
D. Nonstatistical sampling has greater applicability to populations that lend themselves to
random selection.

172. In conducting a substantive test of an account balance, an auditor hypothesizes that no

material error exists. The risk that sample results will support the hypothesis when a material
error actually does exist is the risk of
A. Incorrect rejection
C. Alpha error
B. Incorrect acceptance
D. Type I error

168. Which of the following sampling methods is most useful to auditors when testing for internal
control effectiveness?
A. Stratified random sampling
B. Variables sampling
C. Attribute sampling
D. Unrestricted random sampling with replacement

174. Which of the following sampling plans would be designed to estimate a numerical
measurement of a population such as a peso value?
A. Discovery sampling
C. Numerical sampling
B. Sampling for variables
D. Sampling for attributes

169. In the examination of the financial statements of Delta Company, the auditor determines that
in performing a test of internal control effectiveness, the rate of error in the sample does not
May 2004 (PW1029)

173. The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to
the
A. Effectiveness of an audit
C. Preliminary estimates of materiality levels
B. Efficiency of the audit
D. Allowable risk of tolerable error

175. 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
C. Judgment sample
B. Simple random sample
D. Stratified sample
Page 17 of 18

AUDITING THEORY
Answer Key
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.

31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.

May 2004 (PW1029)

CPA Review School of the Philippines

61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.

91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.

121.
122.
123.
124.
125.
126.
127.
128.
129.
130.
131.
132.
133.
134.
135.
136.
137.
138.
139.
140.
141.
142.
143.
144.
145.
146.
147.
148.
149.
150.

Preweek Quizzer

151.
152.
153.
154.
155.
156.
157.
158.
159.
160.
161.
162.
163.
164.
165.
166.
167.
168.
169.
170.
171.
172.
173.
174.
175.

Page 18 of 18