NAMES:____________________________________________________________SCORE: _______________ SET 1

I. Multiple Choice (100 PTS)

Directions: Choose only one answer for each item and write the letter of your choice, in CAPITAL LETTER, on the answer sheet
provided. Strictly NO ERASURES ALLOWED.
1 11 21 31 41 51 61 71 81 91
2 12 22 32 42 52 62 72 82 92
3 13 23 33 43 53 63 73 83 93
4 14 24 34 44 54 64 74 84 94
5 15 25 35 45 55 65 75 85 95
6 16 26 36 46 56 66 76 86 96
7 17 27 37 47 57 67 77 87 97
8 18 28 38 48 58 68 78 88 98
9 19 29 39 49 59 69 79 89 99
10 20 30 40 50 60 70 80 90 100

1. Company A has recently converted its manual payroll to a computer-based system. Under the old system, employees
who had resigned or been terminated were occasionally kept on the payroll and their checks were claimed and
cashed by other employees, in collusion with shop foremen. The controller is concerned that this practice not be
allowed to continue under the new system. The best control for preventing this form of "payroll padding" would be to
a. Conduct exit interviews with all employees leaving the company, regardless of reason
b. Require foremen to obtain a signed receipt from each employee claiming a payroll check
c. Require the human resources department to authorize all hires and terminations, and to forward a current
computerized list of active employee numbers to payroll prior to processing. Program the computer to reject
inactive employee numbers
d. Install time clocks for use by all hourly employees

2. When the auditor encounters sophisticated computer-based systems, he or she may need to modify the audit
approach. Of the following conditions, which one is not a valid reason for modifying the audit approach?
a. More advanced computer systems produce less documentation, thus reducing the visibility of the audit trail
b. In complex computer-based systems, computer verification of data at the point of input replaces the manual
verification found in less sophisticated data processing systems
c. Integrated data processing has replaced the more traditional separation of duties that existed in manual and
batch processing systems
d. Real-time processing of transactions has enabled the auditor to concentrate less on the completeness assertion

3. Which of the following is not a technique for testing data processing controls?
a. The auditor develops a set of payroll test data that contain numerous errors. The auditor plans to enter these
transactions into the client's system and observe whether the computer detects and properly responds to the
error conditions
b. The auditor utilizes the computer to randomly select customer accounts for confirmation
c. The auditor creates a set of fictitious customer accounts and introduces hypothetical sales transactions, as well as
sales returns and allowances, simultaneously with the client's live data processing
d. At the auditor's request, the client has modified its payroll processing program so as to separately record any
weekly payroll entry consisting of 60 hours or more. These separately recorded ("marked") entries are locked into
the system and are available only to the auditor

4. On-line real-time systems and electronic data interchange systems have the advantages of providing more timely
information and reducing the quantity of documents associated with less automated systems. The advantages,
however, may create some problems for the auditor. Which of the following characteristics of these systems does not
create an audit problem?
a. The lack of traditional documentation of transactions creates a need for greater attention to programmed
controls at the point of transaction input
b. Hard copy may not be retained by the client for long periods of time, thereby necessitating more frequent visits
by the auditor
c. Control testing may be more difficult given the increased vulnerability of the client's files to destruction during
the testing process
d. Consistent on-line processing of recurring data increases the incidence of errors

5. Are the following risks greater in CIS than in manual systems?

a. Erroneous data conversion (Yes), Erroneous source document preparation (Yes); Repetition of errors (No);
Concentration of data (Yes)
b. Erroneous data conversion (Yes), Erroneous source document preparation (Yes); Repetition of errors (No);
Concentration of data (No)
c. Erroneous data conversion (Yes), Erroneous source document preparation (Yes); Repetition of errors (Yes);
Concentration of data (Yes)
 d. Erroneous data conversion (Yes), Erroneous source document preparation (No); Repetition of errors (Yes);
Concentration of data (Yes)

6. After the preliminary phase of the review of a client’s computer controls, an auditor may decide not to perform tests
of controls related to the controls within the computer portion of the client’s internal control. Which of the following
would not be a valid reason for choosing to omit such tests?
a. The controls duplicate operative controls existing elsewhere in the structure
b. There appear to be major weaknesses that would preclude reliance on the stated procedure
c. The time and peso costs of testing exceed the time and peso savings in substantive testing if the tests of controls
show the controls to be operative
d. The controls appear adequate

7. A procedure that involves tracing a transaction from its origination through the company's information systems until
it is reflected in the company's financial report is referred to as a(n)
a. Analytical analysis c. Test of control
b. Substantive procedure d. Walk-through

8. The electronic transmission of documents between organizations in a machine-readable form.

a. Cryptography c. Short messaging service
b. Computer processing d. Electronic data interchange

9. Which of the following is not a major reason for maintaining an audit trail for a computer system?
a. Deterrent to irregularities c. Analytical procedures
b. Monitoring purposes d. Query answering

10. Which of the following errors would be detected by batch controls?

a. A fictitious employee as added to the processing of the weekly time cards by the computer operator.
b. An employee who worked only 5 hours in the week was paid for 50 hours.
c. The time card for one employee was not processed because it was lost in transit between the payroll department
and the data entry function.

11. Unicode uses ____ bits and provides codes for 65,000 characters-a real bonus for representing the alphabets of
multiple languages.
a. 8 b. 12 c. 16 d. 18

12. For protection against power outages, you can connect your computer to a(n) ____ power supply that offers battery
backup along with surge protection.
a. Uninterruptible c. corrupt-proof
b. Interruptible d. metered

13. If a control total were to be computed on each of the following data items, which would best be identified as a hash
total for a payroll CBIS application?
a. Net pay c. Hours worked
b. Department numbers d. Total debits and total credits

14. In which sentence does the subject agree with the verb?
a. The boys and their mother studies together every evening.
b. The boys and their mother study together every evening.
c. The mother and her boys studies together every evening.
d. The boys and their mother reads together every evening.

15. Which of the following correctly uses a coordinating conjunction to form a simple sentence?
a. The word game is easy to play, and it is a lot of c. The word game is easy to play and it is a lot of
fun. fun.
b. The word game is easy to play and a lot of fun. d. The word game is easy to play, a lot of fun.

16. Which of the following correctly uses a coordinating conjunction to form a compound sentence?
a. Lisa played the flute in the band; Ryan sang in the school choir.
b. Lisa played the flute in the band and Ryan sang in the school choir.
c. Lisa played the flute in the band and Ryan sang in the school choir.
d. Lisa played the flute in the band, Ryan sang in the school choir.

17. Which of the following errors would be least likely to be discovered during the tests of the bank reconciliation?
a. Payment was made to an employee for more hours than he worked
b. Cash received by the client subsequent to the balance sheet date was recorded as cash receipts in the current
year
 a. Payments on notes payable were debited directly to the bank balance by the bank were not entered in
the client’s records
c. Deposits were recorded in the cash receipts records near the end of the year, deposited in the bank, and were
included in the bank reconciliation as a deposit in transit

18. When a customer fails to include a remittance advice with a payment, it is common practice for the person opening
the mail to prepare one. Consequently, mail should be opened by which of the following four company employees?
a. Receptionist c. Credit manager
b. Sales manager d. Accounts receivable clerk

19. A proof of cash is not an effective procedure for identifying which of the following types of misstatements?
a. All recorded disbursements were paid by the bank
b. All recorded cash receipts were deposited
c. All amounts that were paid by the bank were recorded
d. Some checks were written for incorrect amounts

20. Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the
corporate:
a. Board of directors c. Controller
b. Treasurer d. Executive committee

21. If the client fails to record disposals of property, plant, and equipment, both the original cost of the asset account and
the net book value will be incorrect
a. Both will be overstated indefinitely
b. The original cost will be overstated indefinitely, and the net book value will be overstated until the asset is fully
depreciated
c. The original cost will be overstated indefinitely, and the net book value will be understated indefinitely
d. The original cost will be overstated indefinitely, and the net book value will be understated until the asset is fully
depreciated

22. Which of the following is the most important internal control procedure over acquisitions of property, plant, and
equipment?
a. Requiring acquisitions to be made by user departments
b. Using a budget to forecast and control acquisitions and retirements
c. Analyzing monthly variances between authorized expenditures and actual costs
d. Establishing a written company policy distinguishing between capital and revenue expenditures

23. The auditor interviews the plant manager. The auditor is most likely to rely upon this interview as primary support for
an audit conclusion on:
a. Capitalization vs. Expensing policy
b. Allocation of fixed and variable cost
c. The necessity to record a provision for deferred maintenance costs
d. The adequacy of the depreciation expense

24. When should auditors not perform alternative procedures in testing the accounts receivable balance?
a. When customers do not return positive confirmation requests
b. When customers do not return negative confirmation requests
c. When confirmations are deemed to be ineffective as an audit procedure
d. When confirmations are too costly to use

25. The emphasis in verifying petty cash is normally on which of the following?
a. Year-end balance c. Transactions for the period
b. Controls over petty cash d. Balance sheet classifications

26. The auditor normally does not need to test the accuracy or classification of fixed assets recorded in prior periods
because:
a. They are rarely material to the audit c. They are verified in previous audits
b. They rarely contain misstatements d. They don’t affect the balance sheet

27. Which of the following would provide the best form of evidential matter pertaining to the annual valuation of a long-
term investment in which the independent auditor's client owns a 30% voting interest?
a. Market quotations of the investee company's stock
b. Current fair value of the investee company's assets
c. Historical cost of the investee company's assets
d. Audited financial statements of the investee company

28. The audit of ______ is often the most difficult and complex part of an audit.
 a. property, plant and equipment c. inventory
b. cash d. prepaid insurance

29. Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that
additions to the equipment account are not understated?
a. Repairs and maintenance expense c. Gain on disposal of equipment
b. Depreciation expense d. Accounts payable

30. _____ is cash stolen from an organization before it is recorded in the accounting records.
a. Theft b. Cash larceny c. Skimming d. Floating

31. Tests of the perpetual inventory master files for the purpose of reducing the tests of physical inventory or changing
their timing are done through the use of:
a. Inquiry b. Observation c. Confirmation d. Documentation

32. The auditor’s main concerns in verifying transfers of inventory do not include whether:
a. recorded transfers exist
b. transfers represent appropriate uses of company resources
c. all actual transfers are recorded
d. the details of the transfer are accurately recorded

33. Instead of taking a physical inventory count on the balance sheet date, the client may take physical counts prior to the
year end if internal controls are adequate and
a. Computerized records of perpetual inventory are maintained
b. Inventory is slow moving
c. CBIS error reports are generated for missing pre-numbered inventory tickets
d. Obsolete inventory items are segregated and excluded

34. In auditing investments for proper valuation, the auditor should do all but the following
a. Confirm securities held in safekeeping off the client's premises
b. Vouch purchases and sales of securities by tracing to brokers' advices and canceled checks
c. Compare cost and market by reference to year end market values for selected securities
d. Recalculate gain or loss on disposals

35. Which of the following statements is correct?

a. When a company has treasury share certificates on hand, a year-end count of the certificates by the auditor is
always required.
b. When a company has treasury share certificates on hand, a year-end count of the certificates by the auditor is
required when the company classifies treasury shares with other assets.
c. When a company has treasury share certificates on hand, a year end count of the certificates by the auditor is not
required if the treasury shares is a deduction from stockholders’ equity
d. When a company has treasury share certificates by the auditor is required when the company had treasury
shares transactions during the year.

36. The existence of a related party transaction may be indicated when another entity
a. Sells real estate to the corporation at a price that is comparable to its appraised value
b. Absorbs expenses of the corporation
c. Borrows from the corporation at a rate of interest which equals the current market rate
d. Lends to the corporation at a rate of interest which equals the current market rate

37. After discovering that a related party transaction exists, the auditor should be aware that the
a. Substance of the transaction could be significantly different from its form
b. Adequacy of disclosure of the transaction is secondary to its legal form
c. Transaction is assumed to be outside the ordinary course of business
d. Financial statements should recognize the legal form of the transaction rather than its substance

38. 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 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

39. All corporate capital stock transactions should ultimately be traced to the
a. Minutes of the Board of Directors c. Cash disbursements journal
b. Cash receipts journal d. Numbered stock certificates
40. Which of the following is incorrect regarding PSA 315?
a. The purpose of this PSA is to establish standards and to provide guidance on obtaining an understanding of the
entity and its environment, including its internal control, and on assessing the risks of material misstatement in a
financial statement audit.
b. This PSA requires the auditor to make risk assessments at the financial statement and assertion levels based on
an appropriate understanding of the entity and its environment, including its internal control.
c. The requirements and guidance of this PSA are to be applied in conjunction with the requirements and guidance
provided in other PSAs.
d. This PSA discusses the auditor's responsibility to determine overall responses and to design and perform further
audit procedures whose nature, timing, and extent are responsive to the risk assessments.

41. Which statement is incorrect regarding obtaining an understanding of the entity and its environment?
a. Obtaining an understanding of the entity and its environment is an essential aspect of performing an audit in
accordance with PSAs.
b. That understanding establishes a frame of reference within which the auditor plans the audit and exercises
professional judgment about assessing risks of material misstatement of the financial statements and responding
to those risks throughout the audit.
c. The auditor's primary consideration is whether the understanding that has been obtained is sufficient to assess
the risks of material misstatement of the financial statements and to design and perform further audit
procedures.
d. The depth of the overall understanding that is required by the auditor in performing the audit is equal to that
possessed by management in managing the entity.

42. Which statement is incorrect regarding the discussion among the engagement team about the susceptibility of the
entity's financial statements to material misstatements?
a. The members of the engagement team should discuss the susceptibility of the entity's financial statements to
material misstatements.
b. The objective of this discussion is for members of the engagement team to gain a better understanding of the
potential for material misstatements of the financial statements resulting from fraud or error in the specific areas
assigned to them, and to understand how the results of the audit procedures that they perform may affect other
aspects of the audit.
c. The discussion provides an opportunity for more experienced engagement team members, including the
engagement partner, to share their insights based on their knowledge of the entity, and for the team members to
exchange information about the business risks.
d. All the team members should have a comprehensive knowledge of all aspects of the audit.

43. Which statement is incorrect regarding significant risks that require special audit consideration?
a. The auditor should determine which of the risks identified are, in the auditor's judgment, risks that require
special audit consideration.
b. The auditor excludes the effect of identified controls related to the risk to determine whether the nature of the
risk, the likely magnitude of the potential misstatement including the possibility that the risk may give rise to
multiple misstatements, and the likelihood of the risk occurring are such that they require special audit
consideration.
c. Routine, non-complex transactions that are subject to systematic processing are more likely to give rise to
significant risks because they have higher inherent risks.
d. Significant risks are often derived from business risks that may result in a material misstatement.

44. When considering internal control, an auditor should be aware of the concept of reasonable assurance, which
recognizes that the:
a. Segregation of incompatible functions is necessary to ascertain that internal control is effective
b. Employment of competent personnel provides assurance that the objectives of internal control will be achieved
c. Establishment and maintenance of internal control is an important responsibility of the management and not of
the auditor
d. Costs of internal control should not exceed the benefits expected to be derived from internal control.

45. An auditor should consider two key issues when obtaining an understanding of a client’s internal controls. These
issues are:
a. The effectiveness and efficiency of the controls d. The implementation and efficiency of the
b. The frequency and effectiveness of the controls controls
c. The design and utilization of the controls

46. To obtain an understanding of an entity’s control environment, an auditor should concentrate on the substance of
management’s policies and procedures rather than their form because:
a. Management may establish appropriate policies and procedures but not act on them
b. The board of directors may not be aware of management’s attitude toward the control environment
c. The auditor may believe that the policies and procedures are inappropriate for that particular entity
d. The policies and procedures may be so weak that no reliance is contemplated by the auditor
47. Which of the following is false concerning an auditor’s test of internal controls?
a. Internal controls are tested to identify types of potential misstatements
b. Internal controls are tested to determine the nature, timing, and extent of audit procedures
c. Internal controls are tested to calculate the acceptable audit risk
d. Control risk is assessed at the financial statement assertion level

48. If internal control is properly designed, the same employee should not be permitted to
a. Sign checks and cancel supporting documents
b. Receive merchandise and prepare a receiving report
c. Prepare disbursement vouchers and sign checks
d. Initiate a request to order merchandise and approve merchandise ordered

49. Which statement is incorrect regarding the discussion among the engagement team about the susceptibility of the
entity's financial statements to material misstatements?
a. The members of the engagement team should discuss the susceptibility of the entity's financial statements to
material misstatements.
b. The objective of this discussion is for members of the engagement team to gain a better understanding of the
potential for material misstatements of the financial statements resulting from fraud or error in the specific areas
assigned to them, and to understand how the results of the audit procedures that they perform may affect other
aspects of the audit.
c. The discussion provides an opportunity for more experienced engagement team members, including the
engagement partner, to share their insights based on their knowledge of the entity, and for the team members to
exchange information about the business risks.
d. All the team members should have a comprehensive knowledge of all aspects of the audit.

50. Which statement is incorrect regarding significant risks that require special audit consideration?
a. The auditor should determine which of the risks identified are, in the auditor's judgment, risks that require
special audit consideration.
b. The auditor excludes the effect of identified controls related to the risk to determine whether the nature of the
risk, the likely magnitude of the potential misstatement including the possibility that the risk may give rise to
multiple misstatements, and the likelihood of the risk occurring are such that they require special audit
consideration.
c. Routine, non-complex transactions that are subject to systematic processing are more likely to give rise to
significant risks because they have higher inherent risks.
d. Significant risks are often derived from business risks that may result in a material misstatement.

51. The auditor's assessment of the identified risks at the assertion level provides a basis for considering the appropriate
audit approach for designing and performing further audit procedures. Which of the following is incorrect?
a. The auditor may determine that only by performing tests of controls may the auditor achieve an effective
response to the assessed risk of material misstatement for a particular assertion.
b. The auditor may determine that performing only substantive procedures is appropriate for specific assertions
and, therefore, the auditor excludes the effect of controls from the relevant risk assessment.
c. The auditor needs to be satisfied that performing only substantive procedures for the relevant assertion would be
effective in reducing the risk of material misstatement to an acceptably low level.
d. The auditor designs and performs substantive procedures for each material class of transactions, account
balance, and disclosure only when the auditor uses the substantive approach.

52. When considering internal control, an auditor should be aware of the concept of reasonable assurance, which
recognizes that the:
a. Segregation of incompatible functions is necessary to ascertain that internal control is effective
b. Employment of competent personnel provides assurance that the objectives of internal control will be achieved
c. Establishment and maintenance of internal control is an important responsibility of the management and not of
the auditor
d. Costs of internal control should not exceed the benefits expected to be derived from internal control

53. The financial statements are not likely to correctly reflect GAAP if the:
a. Controls affecting the reliability of financial reporting are inadequate
b. Company’s controls do not promote efficiency
c. Company’s controls do not promote effectiveness
d. Company’s control do not promote compliance with applicable rules and regulations

54. The primary emphasis by auditors is on controls over:

a. Classes of transactions
b. Account balances
c. Both a and b, because they are equally important
d. Both a and b, because they vary from client to client
55. Hanlon Corp. Maintains a large internal audit staff that reports directly to the chief financial officer. Audit reports
prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records
are reliable. An independent auditor will probably:
a. Eliminate tests of controls
b. Increase the depth of the study and evaluation of administrative controls
c. Avoid duplicating the work performed by the internal audit staff
d. Place limited reliance on the work performed by the internal audit staff

56. After considering a client’s internal controls, an auditor has concluded that it is well designed and is functioning as
intended. Under these circumstances the auditor would most likely:
a. Perform tests of controls to the extent outlined in the audit program
b. Determine the control procedures that should prevent or detect errors and irregularities
c. Not increase the extent of predetermined substantive tests
d. Determine whether transactions are recorded to permit preparation of financial statements in conformity with
generally accepted accounting principles

57. To obtain an understanding of an entity’s control environment, an auditor should concentrate on the substance of
management’s policies and procedures rather than their form because:
a. Management may establish appropriate policies and procedures but not act on them
b. The board of directors may not be aware of management’s attitude toward the control environment
c. The auditor may believe that the policies and procedures are inappropriate for that particular entity
d. The policies and procedures may be so weak that no reliance is contemplated by the auditor

58. Which of the following is false concerning an auditor’s test of internal controls?
a. Internal controls are tested to identify types of potential misstatements
b. Internal controls are tested to determine the nature, timing, and extent of audit procedures
c. Internal controls are tested to calculate the acceptable audit risk
d. Control risk is assessed at the financial statement assertion level

59. The auditor's assessment of the identified risks at the assertion level provides a basis for considering the appropriate
audit approach for designing and performing further audit procedures. Which of the following is incorrect?
a. The auditor may determine that only by performing tests of controls may the auditor achieve an effective
response to the assessed risk of material misstatement for a particular assertion.
b. The auditor may determine that performing only substantive procedures is appropriate for specific assertions
and, therefore, the auditor excludes the effect of controls from the relevant risk assessment.
c. The auditor needs to be satisfied that performing only substantive procedures for the relevant assertion would be
effective in reducing the risk of material misstatement to an acceptably low level.
d. The auditor designs and performs substantive procedures for each material class of transactions, account
balance, and disclosure only when the auditor uses the substantive approach.

60. When a compensating control exists, the absence of a key control:

a. Is no longer a concern because there is no longer a significant deficiency or material weakness
b. Is still a major concern to the auditor
c. Could cause a material loss, so it must be tested using substantive procedures
d. Is magnified and must be removed from the sampling process and examined in its entirety

61. Competence as a certified public accountant includes all of the following except
a. Having the technical qualifications to perform an engagement.
b. Possessing the ability to supervise and evaluate the quality of staff work.
c. Warranting the infallibility of the work performed.
d. Consulting others if additional technical information is needed.

62. With respect to the auditor's planning of a year-end audit, which of the following statements is always true?
a. An engagement should not be accepted after the fiscal year-end
b. An inventory count must be observed at the balance sheet date.
c. The client's audit committee should not be told of the specific audit procedures that were performed.
d. It is an acceptable practice to carry out part of the audit at interim dates.

63. A challenge associated with the Ethical Principles stated in the Code of Professional Conduct is:
a. the emphasis on positive activities.
b. that they identify ideal conduct.
c. the difficulty of enforcing principles, or general ideals.
d. that there are too many to remember.

64. Interpretations of the rules regarding independence allow an auditor to serve as:
a. a director or officer of an audit client.
 b. an underwriter for the sale of a client’s securities
c. trustee of a client’s pension fund.
d. an honorary director for a not-for-profit charitable or religious organization.

65. The exercise of due professional care requires that an auditor

a. Examine all available corroborating evidence
b. Critically review the judgment exercised at every level of supervision
c. Reduce control risk below the maximum
d. Attain the proper balance of professional experience and formal education

66. In determining estimates of fees, an auditor may take into account each of the following, except the
a. Value of the service to the client
b. Degree of responsibility assumed by undertaking the engagement
c. Skills required to perform the service
d. Attainment of specific findings

67. The third general standard states that due care is to be exercised in the performance of the examination. This
standard means that a CPA who undertakes an engagement assumes a duty to perform each audit
a. As a professional possessing the degree of skill commonly possessed by others in the field
b. In conformity with generally accepted accounting principles
c. With reasonable diligence and without fault or error
d. To the satisfaction of governmental agencies and investors who rely upon the audit

68. A CPA firm studies its personnel advancement experience to ascertain whether individuals meeting stated criteria are
assigned increased degrees of responsibility. This is evidence of the firm's adherence to prescribed standards of
a. Supervision and review c. Professional development
b. Continuing professional education d. Quality control

69. In a common law action against an accountant, the lack of privity is a viable defense if the plaintiff
a. Bases his action upon fraud
b. Is the accountant's client
c. Is a creditor of the client who sues the accountant for negligence
d. Can prove the presence of gross negligence which amounts to a reckless disregard for the truth

70. A CPA firm issues an unqualified opinion on financial statements not prepared in accordance with GAAP. The CPA firm
will have acted with scienter in all the following circumstances except where the firm
a. Intentionally disregards the truth d. Intends to gain monetarily by concealing the
b. Has actual knowledge of fraud fraud
c. Negligently performs auditing procedures

71. ____ software helps computers manage files, interact with peripheral devices, send data over networks, and filter out
viruses.
a. System b. Application c. Productivity d. Database

72. ____ gather, format, and present information in the database, and can typically be printed, published on the Web, or
e-mailed to other people.
a. Queries b. Forms c. Reports d. Links

73. Digital audio is music, speech, and other sounds represented in ____ format for use in digital devices.
a. Analog b. Binary c. Both a and b d. Neither a nor b

74. The Windows Registry keeps track of ____.

a. software that's added or removed c. hardware that's connected or disconnected
b. settings that customize your work environment d. all of the above

75. Companies supplying software that runs from the Internet are referred to as ____ service providers.
a. Internet b. Application c. Client d. Server

76. Which of the following errors would be least likely to be discovered during the tests of the bank reconciliation?
a. Payment was made to an employee for more hours than he worked
b. Cash received by the client subsequent to the balance sheet date was recorded as cash receipts in the current
year
c. Payments on notes payable were debited directly to the bank balance by the bank were not entered in the
client’s records
d. Deposits were recorded in the cash receipts records near the end of the year, deposited in the bank, and were
included in the bank reconciliation as a deposit in transit
77. When a customer fails to include a remittance advice with a payment, it is common practice for the person opening
the mail to prepare one. Consequently, mail should be opened by which of the following four company employees?
a. Receptionist c. Credit manager
b. Sales manager d. Accounts receivable clerk

78. A proof of cash is not an effective procedure for identifying which of the following types of misstatements?
a. All recorded disbursements were paid by the bank
b. All recorded cash receipts were deposited
c. All amounts that were paid by the bank were recorded
d. Some checks were written for incorrect amounts

79. On the last day of the fiscal year, the cash disbursements clerk drew a company check on bank A and deposited the
check in the company account in bank B to cover a previous theft of cash. The disbursement has not been recorded.
The auditor will best detect this form of kiting by:
a. Examining the composition of deposits in both bank A and bank B subsequent to year-end
b. Examining paid checks returned with the bank statement of the next account period after year-end
c. Preparing, from the cash disbursements records, a summary of bank transfers for one week prior to and
subsequent to year-end
d. Comparing the detail of cash receipts as shown by the client’s cash receipts records with the detail on the
confirmed duplicate deposit tickets for three days prior to and subsequent to year-end

80. If an auditor “proves” the bank statement in the month subsequent to the balance sheet date, it is primarily a test for:
a. Errors c. Kiting
b. Omissions d. Intentional Misstatements

81. An auditor concluded that no excessive costs for idle plant were charged to inventory. This conclusion most likely
related to the auditors objective to obtain evidence about the financial statement assertions regarding inventory:
a. Rights and obligation c. Existence
b. Valuation d. Completeness

82. When auditing inventories, an auditor would least likely verify that:
a. The financial statement presentation of inventories is appropriate
b. Damaged goods and obsolete items have been properly accounted for
c. All inventories owned by the client is on hand by the time of the count
d. The client has proper inventory pricing

83. An auditor who physically examines securities should insist that the client representative be present in order to
a. Detect fraudulent securities
b. Lend authority to the auditor's directives
c. Acknowledge the receipt of securities returned
d. Coordinate the return of securities to the proper location

84. No employee should be able to visit the corporate safe deposit box containing investment securities without being
accompanied by another corporate employee. What consequence might follow if this rule were not enforced?
a. An employee could pledge corporate investments as security for a short-term personal bank loan
b. An employee could steal securities and the theft would never be discovered
c. It would be impossible to get a fidelity bond on the employee
d. There would be no record of when company personnel visited the safe deposit box.

85. An auditor traced a sample of purchased orders and the related receiving reports to the purchases journal and the
cash disbursements journal. The purpose of this substantive audit procedure most likely was to
a. identify usually large purchase that should be investigated further
b. verify the cash disbursements were for goods actually received
c. determine that purchases were properly recorded
d. test whether payments were for goods actually ordered

86. An auditor is testing the reasonableness of dividend income from investments in publicly-held companies. The auditor
most likely would compute the amount that should have been received and recorded by the client by:
a. Reading the details of the board of directors' meetings.
b. Confirming the details with the investee companies' registrars.
c. Electronically accessing the details of dividend records on the Internet.
d. Examining the details of the clients' most recent cutoff bank statement.

87. Which one of the following would the auditor's concern with when examining the billing function of the client?
a. All shipments made have been billed c. Each shipment has been billed of the proper
b. No shipment has been billed more than once amount
d. All of the above are of concern to the auditor
88. Perpetual inventory master files provide a record:
a. Of items on hand
b. Of the use of raw materials and the sale of finished goods
c. That can be used to pinpoint responsibility for custody
d. For all three of the above

89. Which of the following is not generally included in the working papers file?
a. An indication as to who performed the audit procedures and when they were performed.
b. Documentation of the auditor's understanding of the accounting and internal control systems.
c. Copy of the internal audit's audit program.
d. Analyses of significant ratios and trends.

90. A failure to record acquisitions of goods most likely will affect all but which of the following?
a. Accounts payable. c. Retained earnings
b. Net income d. Cash

91. Company A has recently converted its manual payroll to a computer-based system. Under the old system, employees
who had resigned or been terminated were occasionally kept on the payroll and their checks were claimed and
cashed by other employees, in collusion with shop foremen. The controller is concerned that this practice not be
allowed to continue under the new system. The best control for preventing this form of "payroll padding" would be to
a. Conduct exit interviews with all employees leaving the company, regardless of reason
b. Require foremen to obtain a signed receipt from each employee claiming a payroll check
c. Require the human resources department to authorize all hires and terminations, and to forward a current
computerized list of active employee numbers to payroll prior to processing. Program the computer to reject
inactive employee numbers
d. Install time clocks for use by all hourly employees

92. When the auditor encounters sophisticated computer-based systems, he or she may need to modify the audit
approach. Of the following conditions, which one is not a valid reason for modifying the audit approach?
a. More advanced computer systems produce less documentation, thus reducing the visibility of the audit trail
b. In complex computer-based systems, computer verification of data at the point of input replaces the manual
verification found in less sophisticated data processing systems
c. Integrated data processing has replaced the more traditional separation of duties that existed in manual and
batch processing systems
d. Real-time processing of transactions has enabled the auditor to concentrate less on the completeness assertion

93. Which of the following is not a technique for testing data processing controls?
a. The auditor develops a set of payroll test data that contain numerous errors. The auditor plans to enter these
transactions into the client's system and observe whether the computer detects and properly responds to the
error conditions
b. The auditor utilizes the computer to randomly select customer accounts for confirmation
c. The auditor creates a set of fictitious customer accounts and introduces hypothetical sales transactions, as well
as sales returns and allowances, simultaneously with the client's live data processing
d. At the auditor's request, the client has modified its payroll processing program so as to separately record any
weekly payroll entry consisting of 60 hours or more. These separately recorded ("marked") entries are locked into
the system and are available only to the auditor

94. On-line real-time systems and electronic data interchange systems have the advantages of providing more timely
information and reducing the quantity of documents associated with less automated systems. The advantages,
however, may create some problems for the auditor. Which of the following characteristics of these systems does not
create an audit problem?
a. The lack of traditional documentation of transactions creates a need for greater attention to programmed
controls at the point of transaction input
b. Hard copy may not be retained by the client for long periods of time, thereby necessitating more frequent visits
by the auditor
c. Control testing may be more difficult given the increased vulnerability of the client's files to destruction during
the testing process
d. Consistent on-line processing of recurring data increases the incidence of errors

95. Are the following risks greater in CIS than in manual systems?
a. Erroneous data conversion (Yes), Erroneous source document preparation (Yes); Repetition of errors (No);
Concentration of data (Yes)
b. Erroneous data conversion (Yes), Erroneous source document preparation (Yes); Repetition of errors (No);
Concentration of data (No)
c. Erroneous data conversion (Yes), Erroneous source document preparation (Yes); Repetition of errors (Yes);
Concentration of data (Yes)
 d. Erroneous data conversion (Yes), Erroneous source document preparation (No); Repetition of errors (Yes);
Concentration of data (Yes)

96. After the preliminary phase of the review of a client’s computer controls, an auditor may decide not to perform tests
of controls related to the controls within the computer portion of the client’s internal control. Which of the following
would not be a valid reason for choosing to omit such tests?
a. The controls duplicate operative controls existing elsewhere in the structure
b. There appear to be major weaknesses that would preclude reliance on the stated procedure
c. The time and peso costs of testing exceed the time and peso savings in substantive testing if the tests of controls
show the controls to be operative
d. The controls appear adequate

97. Which of the following is unique to EDP systems?

a. Flowcharts c. Error listings
b. Questionnaires d. Pre-numbered documents

98. This is the individual responsible in preparing specifications for the systems to guide programmer, and writes
procedures and user instructions.
a. Network administrator c. Systems analyst
b. IT control group supervisor d. None of these

99. Using microcomputers in auditing may affect the methods used to review the work of staff assistants because
a. The audit fieldwork standards for supervision may differ
b. Documenting the supervisory review may require assistance of consulting services personnel
c. Supervisory personnel may not have an understanding of the capabilities and limitations of microcomputers
d. Working paper documentation may not contain readily observable details of calculations

100. The development of CIS will generally result in design and procedural characteristics that are different from
those found in manual systems. These different design and procedural aspects of CIS include, except:
a. Consistency of performance.
b. Programmed control procedures.
c. Vulnerability of data and program storage media
d. Multiple transaction update of multiple computer files or databases.

NAMES:____________________________________________________________SCORE: _______________ SET 2

II. Multiple Choice (80 PTS)
Directions: Choose only one answer for each item and write the letter of your choice, in CAPITAL LETTER, on the answer sheet
provided. Strictly NO ERASURES ALLOWED.
1 11 21 31 41 51 61 71
2 12 22 32 42 52 62 72
3 13 23 33 43 53 63 73
4 14 24 34 44 54 64 74
5 15 25 35 45 55 65 75
6 16 26 36 46 56 66 76
7 17 27 37 47 57 67 77
8 18 28 38 48 58 68 78
9 19 29 39 49 59 69 79
10 20 30 40 50 60 70 80

1. The auditor’s judgment concerning the overall fairness of the presentation of financial position, results of operations,
and statement of cash flows is applied within the framework of
a) Quality control.
b) Generally accepted auditing standards which include the concept of materiality.
c) The auditor’s consideration of the auditor company’s internal control.
d) Philippine Financial Reporting Standards.

2. A major customer of an audit client suffers a fire just prior to completion of year-end fieldwork. The audit client
believes that this event could have a significant direct effect on the financial statements. The auditor should
a) Advise management to disclose the event in notes to the financial statements.
b) Disclose the event in the auditor’s report.
c) Withhold submission of the auditor’s report until the extent of the direct effect on the financial statements is known.
d) Advise management to adjust the financial statements.

3. When a contingency is resolved immediately subsequent to the issuance of a report which was qualified with respect
to the contingency, the auditor should
a) Insist that the client revised financial statements.
 b) Inform the audit committee that the report cannot be relied upon.
c) Take no action regarding the event.
d) Inform the appropriate authorities that the report cannot be relied upon.

4. Under which of the following circumstances may audited financial statements contain a note disclosing a subsequent
event which is labeled unaudited?
a) When the subsequent event does not require adjustment of the financial statements.
b) When the event occurs after completion of fieldwork and before issuance of the auditor’s report.
c) When audit procedures with respect to the subsequent event were not performed by the auditor.
d) When the event occurs between the date of the auditor’s original report and the date of the reissuance of the
report.

5. Subsequent events affecting the realization of assets ordinarily will require adjustment of the financial statements
under examination because such events typically represent
a) The culmination of conditions that existed at the balance sheet date.
b) The final estimates of losses relating to casualties occurring in the subsequent events period.
c) The discovery of new conditions occurring in the subsequent events period.
d) The preliminary estimate of losses to new events that occurred subsequent to the balance sheet.

6. Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor’s report
would not require disclosure in the financial statements?
a) Sale of the bond or capital stock issue.
b) Loss of plant or inventories as result of fire or flood.
c) A major drop in the quoted market price of the stock of the corporation.
d) Settlement of litigation when the event giving rise to the claim took place after the balance sheet date.

7. When the report of a principal auditor makes reference to the examination made by another auditor, the other
auditor may be named if express permission to do so is given and
a) The report of the principal auditor names the other auditor in both the scope and opinion paragraphs.
b) The principal auditor accepts responsibility for the work of the other auditor.
c) The report of the other auditor is presented together with the report of the principal auditor.
d) The other auditor is not an associate or correspondent firm whose work is done at the request of the principal
auditor.

8. Which of the following matters is an auditor required to communicate to an entity’s audit committee?
a) The basis for assessing control risk below the maximum.
b) The process used by management in formulating sensitive accounting estimates.
c) The auditor’s preliminary judgments about materiality levels.
d) The justification for performing substantive procedures at interim dates.

9. When an auditor concludes there is substantial doubt about an entity’s ability to continue as a going concern for a
reasonable period of time, the auditor’s responsibility is to
a) Prepare prospective financial information to verify whether management’s plans can be effectively implemented.
b) Project future conditions and events for a period of time not to exceed 1 year following the date of the financial
statements.
c) Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial
statements.
d) Consider the adequacy of disclosure about the entity’s possible inability to continue going concern.

10. The auditor who wishes to point out that the entity has sufficient transactions with related parties should disclose this
fact in
a) An explanatory paragraph to the auditor’s report.
b) An explanatory note to the financial statements.
c) The body of the financial statements.
d) The “summary of significant accounting policies” section of the financial statements.

11. When management refuses to disclose illegal activities which were identified by the independent auditor, the
independent auditor may be charged with violating the CPA Code of Professional Conduct for
a) Withdrawing from the engagement.
b) Issuing a disclaimer of opinion.
c) Failure to uncover the illegal activities during prior audits.
d) Reporting these activities to the audit committee.

12. Because of the pervasive effects of laws and regulations on the financial statements of governmental units, an auditor
should obtain written management representations acknowledging that management has
a) Identified and disclosed all laws and regulations that have a direct material effect on its financial statements.
b) Implemented internal control policies and procedures designed to detect all illegal acts.
 c) Expressed both positive and negative assurance to the auditor that the entity complied with all laws and regulations.
d) Employed internal auditor who can report their findings, opinion, and conclusions objectively without fear of political
repercussion.

13. Which of the following is generally included or shown in the auditor’s working papers?
a) The procedures used by the auditor to verify the personnel financial status of members of the client’s management
team.
b) Analyses that are designed to be a part of, or a substitute for, the client’s accounting records.
c) Excerpts from authoritative pronouncements that support the underlying generally accepted accounting principles
used in preparing the financial statements.
d) The manner in which exceptions and unusual matters disclosed by the auditor’s procedure were resolved or treated.

14. An auditor compares information on canceled checks with information contained in the cash disbursement journal.
The objective of this test is to determine that
a) Recorded cash disbursement transactions are properly authorized.
b) Proper cash purchase discounts have been recorded.
c) Cash disbursements are for goods and services actually received.
d) No discrepancies exist between the data on the checks and the data in the journal.

15. Under which of the following circumstances would an auditor be most likely to intensify an examination of petty cash
fund?
a) Reimbursement vouchers are not prenumbered.
b) Reimbursement occurs twice each week.
c) The custodian occasionally uses the cash fund to cash employee checks.
d) The custodian endorses reimbursement checks.

16. Which of the following areas would ordinarily be expected to require the most time when performing an audit of a
continuing client?
a) Accounts receivable. c) Retained earnings.
b) Common stock. d) Revenues.

17. An auditor confirms a representative number of open accounts receivable as of December 31, 2008, and investigates
respondents’ exceptions and comments. By this procedure the auditor would be most likely to learn of which of the
following?
a) One of the cashiers has been covering a personal embezzlement by lapping.
b) One of the sales clerks has not been preparing charge slips for credit sales to family and friends.
c) One of the computer control clerks has been removing all sales invoices applicable to his account from the data file.
d) The credit manager has misappropriated remittances from customers whose accounts have been written off.

18. Which of the following most likely would give the most assurance concerning the valuation assertion of accounts
receivable?
a) Tracing amounts in the subsidiary ledger to details on shipping documents.
b) Comparing receivable turnover rations to industry statistics for reasonableness.
c) Inquiring about receivables pledged under loan agreements.
d) Assessing the allowances for uncollected accounts for reasonableness.

19. Some firms which dispose of only a small part of their total output by consignment shipments fail to make any
distinction between consignment shipments and regular sales. Which of the following would suggest that goods have
been shipped on consignment?
a) Numerous shipments of small quantities.
b) Numerous shipments of large quantities and few returns.
c) Large debits to accounts receivable and small periodic credits.
d) Large debits to accounts receivable and large periodic credits.

20. An inventory turnover analysis is useful to the auditor because it may detect
a) Inadequacies in inventory pricing. c) The optimum automatic reorder points.
b) Methods of avoiding cyclical holding costs. d) The existence of obsolete merchandise.

21. When title to merchandise in transit has passed to the audit client, the auditor engaged in the performance of a
purchase cutoff on December 31, the last day of the client’s year, will encounter the greatest difficulty in gaining
assurance with respect to the
a) Quantity. c) Price.
b) Quality. d) Terms.

22. Which of the following audit procedures would provide the least reliable evidence that the client has legal title to
inventories?
a) Confirmation of inventories at location outside the client’s facilities.
 b) Analytical procedures comparing inventory balances to purchasing and sales activities.
c) Observation of physical inventory counts.
d) Examination of paid vendors’ invoices.

23. In verifying debits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested
in examining the purchase
a) Journal. c) Orders.
b) Requisitions. d) Invoices.

24. During the first part of the current fiscal year, the client company began dealing with certain customers on a
consignment basis. Which of the following audit procedures is least likely to bring this new fact to the auditor’s
attention?
a) Tracing of shipping documents to the sales c) Confirmation of accounts receivable.
journal. d) Observation of physical inventory.
b) Test of cash receipts transactions.

25. To establish the existence and ownership of a long-term investment in the common stock of a publicly traded
company, an auditor ordinarily performs a security count or
a) Relies on the client’s internal controls if the auditor has reasonable assurance that the control procedures are being
applied as prescribed.
b) Confirms the number of shares owned that are held by an independent custodian.
c) Determine the market price per share at the balance sheet date from published quotations.
d) Confirms the number of shares owned with the issuing company.

26. The audit procedure of analyzing the repairs and maintenance accounts is primarily designed to provide evidence in
support of the audit proposition that all
a) Expenditures for fixed assets have been recorded in the proper period.
b) Capital expenditure has been properly authorized.
c) Noncapitalizable expenditures have been properly expensed.
d) Expenditures for fixed assets have been capitalized.

27. For which of the following ledger accounts would the auditor be most likely to analyze the details?
a) Service revenue. c) Repairs and maintenance expense.
b) Sales. d) Sales salaries expense.

28. The auditor is least likely to learn of retirements of equipment through which of the following?
a) Review of the purchase return and allowance account.
b) Review of depreciation.
c) Analysis of the debits to the accumulated depreciation account.
d) Review of insurance policy riders.

29. UCANDOIT developed a new secret formula which is of great value because it resulted in a virtual monopoly.
UCANDOIT has capitalized all research and development costs associated with this formula. QUENNIE, CPA, who is
examining this account, will probably
a) Confer with management regarding transfer of the amount from the balance sheet to the income statement.
b) Confirm that the secret formula is registered and on file with the county clerk’s office.
c) Confer with management regarding a change in the title of the account to “goodwill”.
d) Confer with management regarding ownership of the secret formula.

30. In verifying the amount of goodwill recorded by a client, the most convincing evidence which an auditor can obtain is
by comparing the recorded value of assets acquired with the
a) Assessed value as evidence by tax bills.
b) Seller’s book value as evidence by financial statements.
c) Insured value as evidences by insurance policies.
d) Appraised value as evidence by independent appraisals.

31. In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the
a) Adequacy of internal control. c) Adequacy of replacement funds.
b) Extent of property abandoned during the year. d) Reasonableness of the depreciation.

32. An auditor would be least likely to use confirmations in connection with the examination of
a) Inventories. c) Property, plant and equipment.
b) Long-term debt. d) Stockholders’ equity.

33. Which of the following procedures relating to the examination of accounts payable could the auditor delegate
entirely to the client’s employees?
a) Test footings in the accounts payable ledger.
 b) Reconcile unpaid invoices to vendors’ d) Mail confirmation for selected account
statements. balances.
c) Prepare a schedule of accounts payable.

34. Once satisfied that the balance sheet and income statement are fairly presented in accordance with generally
accepted accounting principles, an auditor who is examining the statement of cash flows would be most concerned
with details of transactions in
a) Cash. c) Notes payable.
b) Trade receivables. d) Dividends payable.

35. Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because
a) This is a duplication of cutoff tests.
b) Accounts payable balances at the balance sheet date may not be paid before the audit is completed.
c) Correspondence with the audit client’s attorney will reveal all legal action by vendor for nonpayment.
d) There is likely to be other reliable external evidence to support the balances.

36. Which of the following procedures is least likely to be performed before the balance sheet date?
a) Observation of inventory. c) Search for unrecorded liabilities.
b) Review of internal control over cash d) Confirmation of receivables.
disbursements.

37. When an auditor selects a sample of items from the vouchers payable register for the last month of the period under
audit and traces these items to underlying documents, the auditor is gathering evidence primarily in support of the
assertion that
a) Recorded obligations were paid.
b) Incurred obligations were recorded in the correct period.
c) Recorded obligations were valid.
d) Cash disbursements were recorded as incurred obligations.

38. A client’s procurement system ends with the assumption of a liability and the eventual payment of the liability.
Which of the following best describes the auditor’s primary concern with respect to liabilities resulting from the
procurement system?
a) Accounts payable are not materially understated.
b) Authority to incur liabilities is restricted to one designed person.
c) Acquisition of materials is not made from one vendor or one group of vendor.
d) Commitments for all purchases are made only after established competitive bidding procedures are followed.

39. An examination of the balance in the accounts payable account is ordinarily not designed to
a) Detect accounts payable which are substantially past due.
b) Verify that accounts payable were properly authorized.
c) Ascertain the reasonableness of recorded liabilities.
d) Determine that all existing liabilities at the balance sheet date have been recorded.

40. During an examination of a publicly held company, the auditor should obtain written confirmation regarding
debenture transactions from the
a) Debenture holders. c) Internal auditors.
b) Client’s attorney. d) Trustee.
41. Two months before the year-end the bookkeeper erroneously recorded the receipt of a long-term bank loan by a
debit to cash and a credit to sales. Which of the following is the most effective procedure for detecting this type of
error?
a) Analyze the notes payable journal. c) Prepare a year-end bank reconciliation.
b) Analyze bank confirmation information. d) Prepare a year-end bank transfer schedule.

42. DONTQUIT Corporation acquired a building and arranged mortgage financing during the year. Verification of the
related mortgage acquisition costs would be least likely to include an examination of the related
a) Deed. c) Closing statement.
b) Cancelled checks. d) Interest expense.

43. An auditor’s program for the examination of long-term debt should include steps that require the
a) Inspection of the accounts payable subsidiary ledger.
b) Investigation of credits to the bond interest income account.
c) Verification of the existence of the bondholders.
d) Examination of any bond trust indenture.

44. During the year under audit, a company has completed a private placement of a substantial amount of bonds. Which
of the following is the most important step in the auditor’s program for the examination of bonds payable?
a) Confirming the amount issued with the bond trustee.
 b) Tracing the cash received from the issue to the accounting records.
c) Examining the bond records maintained by the transfer agent.
d) Recomputing the annual interest cost and the effective yield.

45. In connection with the audit of a current issue of long-term bonds payable, the auditor should
a) Determine whether bondholders are persons other then owners, directors, or officers of the company issuing the
bond.
b) Calculate the effective interest rate to see if it is substantially the same as the rates for similar issues.
c) Decide whether the bond issue was made without violating state or local law.
d) Ascertain that the client has obtain the opinion of counsel on the legally of the issue.

46. The letter of audit inquiry addressed to the client’s legal counsel will not ordinarily be
a) Sent lawyer who was engaged by the audit client during the year and soon thereafter resigned the engagement.
b) A source of corroboration of the information originally obtained from management concerning litigation, claims,
and assessments.
c) Limited to reference concerning only pending or threatened litigation with respect to which the lawyer has been
engaged.
d) Needed during the audit of client whose securities are not registered with the SEC.

47. After discovering that a related-party transaction exists, the auditor should be aware that the
a) Substance of the transaction could be significantly different from its form.
b) Adequacy of disclosure of the transaction is secondary to its legal form.
c) Transaction is assumed to be outside the ordinary course of business.
d) Financial statements should recognize the legal form of the transaction rather than its substance.

48. When auditing related-party transactions, an auditor places primary emphasis on

a) Confirming the existence of the related parties.
b) Verifying the valuation of the related-party transactions.
c) Evaluating the disclosure of the related-party transactions.
d) Ascertaining the rights and obligations of the related parties.

49. 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 entity’s ability to continue as a going concern?
a) Review compliance with terms of debt agreements.
b) Confirmation of account receivable from principal customers.
c) Reconciliation of interest expense with debt outstanding.
d) Confirmation of bank balances.

50. A client acquired 25% of its outstanding capital stock after year-end and prior to completion of the auditor’s
fieldwork. The auditor should
a) Advise management to adjust the balance sheet to reflect the acquisition.
b) Issue pro forma financial statements giving effect to the acquisition as if it had occurred at year-end.
c) Advise management to disclose the acquisition in the notes to the financial statements.
d) Disclose the acquisition in the opinion paragraph of the auditor’s report.

51. Which of the following procedures would an auditor most likely perform to obtain evidence about an entity’s
subsequent events?
a) Reconcile bank activity for the month after the balance sheet date with cash activity reflected in the accounting
records.
b) Examine on a test basis the purchase invoices and receiving reports for several days after the inventory date.
c) Review the treasurer’s monthly reports on temporary investment owned, purchased, and sold.
d) Obtain a letter from the entity’s attorney describing any pending litigation of unasserted claims, or loss
contingencies.

52. After issuance of the auditor’s report, the auditor has no obligation to make any further inquiries with respect to
audited financial statements covered by that report unless
a) A final resolution of a contingency that had resulted in a qualification of the auditor’s report is made.
b) A development occurs that may affect the client’s ability to continue as a going concern.
c) An investigation of the auditor’s practice by a peer review committee ensues.
d) New information is discovered concerning undisclosed related-party transactions of the previously audited period.

53. An auditor concludes that a substantive auditing procedure considered necessary during the prior period’s audit was
omitted. Which of the following factors would most likely cause the auditor promptly to apply the omitted
procedure?
a) There are on alternative procedures available to provide the same evidence as the omitted procedure.
b) The omission of the procedures impairs the auditor’s present ability to support the previously expressed opinion.
c) The source documents needed to perform the omitted procedure are still available.
 d) The auditor’s opinion on the prior period’s financial statements was unqualified.

54. Which of the following auditing procedures is ordinarily performed last?

a) Reading of the minutes of the directors’ c) Obtaining a management representation letter.
meetings. d) Testing of the purchasing function.
b) Confirming accounts payable.

55. Independent internal verification of inventory occurs when employees who

a) Issue raw materials obtain material requisition for each issue and prepare daily totals of material issued.
b) Compare records of goods on hand with physical quantities do not maintain the records or have custody of the
inventory.
c) Obtain receipts for the transfer of completed work to finished goods prepares a completed report.
d) Are independent of issuing production orders updated records from completed job cost sheets and production cost
reports on a timely basis.

56. Well functioning internal control for the inventory/production functions would provide that finished goods are to be
accepted for stock only after presentation of a completed production order and a(n)
a) Shipping order. c) Bill of lading.
b) Material requisition. d) Inspection report.

57. Which of the following procedures would best detect the theft of valuable items from an inventory that consists of
hundreds of different items selling for P1 to P10 and a few items selling for hundreds of pesos?
a) Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the validity of
the perpetual inventory record.
b) Have an independent CPA firm prepare a report on the effectiveness of internal control over inventory.
c) Have separate warehouse space for the more valuable items with sequentially numbered tags.
d) Require an authorized officer’s signature on all requisitions for the more valuable items.

58. Effective internal control over the purchasing of raw materials should usually include all of the following procedures
except
a) Systematic reporting of product changes which will affect raw materials.
b) Determining the need of the raw materials prior to preparing the purchase order.
c) Obtaining third-party written quality and quantity reports prior to payment for the raw materials.
d) Obtaining financial approval prior to making a commitment.

59. An auditor will ordinarily ascertain whether payroll checks are properly endorsed during the examination of
a) Time cards. c) Cash in bank.
b) The voucher system. d) Accrued payroll.

60. In the audit of which of the following types of profit-oriented enterprises would the auditor be most likely to place
special emphasis on testing the controls over proper classification of payroll transactions?
a) A manufacturing organization. c) Wholesaling organization.
b) Retailing organization. d) A service organization.

61. A large retail enterprise has established a policy which requires that the paymaster deliver all unclaimed payroll
checks to the internal auditing department at the end of each payroll distribution day. This policy was most likely
adopted in order to
a) A assure that employees who were absent on a payroll distribution day are not paid for that day.
b) Prevent the paymaster from cashing checks which are unclaimed fro several weeks.
c) Prevent a bona fide employee’s check from being claimed by another employee.
d) Detect any fictitious employee who may have been placed on the payroll.

62. One of the auditor’s objectives in observing the actual distribution of payroll checks is to determine that every name
on the payroll is that of a bona fide employee. The payroll observation is an auditing procedure that is generally
performed for which of the following reasons?
a) The professional standards that are generally accepted require the auditor to perform the payroll observation.
b) The various phases of payroll work are not sufficiently segregated to afford effective internal control.
c) The independent auditor uses personal judgment and decides to observe the payroll distribution on a particular
audit.
d) The standards that are generally accepted by the profession are interpreted to mean that payroll observation is
expected on an audit unless circumstances dictate otherwise.

(63) An auditor may decide to increase the risk of incorrect rejection when
a) Increase reliability form the sample is desired.
b) Many differences (audit value minus recorded value) are expected.
c) Initial sample results do not support the planned level of control risk.
d) The cost and effort of selecting additional sample items is low.
(64) The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the
a) Operational responsibility from the recordkeeping responsibility.
b) Responsibility of recording a transaction at its origin from the ultimate posting in the general ledger.
c) Authorization of transactions from the custody or related assets.
d) Human resources function from the controllership function.

(65) A CPA reviews a client’s payroll procedures. The CPA would consider internal control to be less than effective if a
payroll department supervisor was assigned the responsibility for
a) Reviewing and approving time reports for subordinate employees.
b) Distributing payroll checks to employees.
c) Hiring subordinate employees.
d) Initiating requests for salary adjustments for subordinate employees.

(66) In the audit of which of the following types of profit-oriented enterprises would the auditor be most likely to place
special emphasis on testing the controls over proper classification of payroll transactions?
a) A manufacturing organization. c) Wholesaling organization.
b) Retailing organization. d) A service organization.

(67) One of the auditor’s objectives in observing the actual distribution of payroll checks is to determine that every name on
the payroll is that of a bona fide employee. The payroll observation is an auditing procedure that is generally
performed for which of the following reasons?
a) The professional standards that are generally accepted require the auditor to perform the payroll observation.
b) The various phases of payroll work are not sufficiently segregated to afford effective internal control.
c) The independent auditor uses personal judgment and decides to observe the payroll distribution on a particular
audit.
d) The standards that are generally accepted by the profession are interpreted to mean that payroll observation is
expected on an audit unless circumstances dictate otherwise.

(68) Which of the following questions would an auditor most likely include on an internal control questionnaire for notes
payable?
a) Are assets that collateralize notes payable critically needed for the entity’s continued existence?
b) Are two or more authorized signatures required on checks that repay notes payable?
c) Are the proceeds from notes payable used for the purchase of noncurrent assets?
d) Are direct borrowings on notes payable authorized by the board of directors?
(69) The primary responsibility of a bank acting as registrar of capital stock is to
a) Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation.
b) Account for stock certificates by comparing the total shares outstanding to the total in the shareholders subsidiary
ledger.
c) Act as an independent third party between the board of directors and outside investors concerning merger,
acquisitions, and the sale of treasury stock.
d) Verify that stock is issued in accordance with the authorization of the board of directors and the articles of
incorporation.

(70) A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of
coupons for periodic interest collections probably should be delegated to the
a) Chief accountant. c) Cashier.
b) Internal auditor. d) Treasurer.

(71) In order to avoid the misappropriation of company-owned marketable securities, which of the following is the best
course of action that can be taken by the management of a company with a large portfolio of marketable securities?
a) Require that one trustworthy and bonded employee be responsible for access to the safekeeping area, where
securities are kept.
b) Require that employees who enter and leave the safekeeping area sign and record in a log the exact reasons for
their access.
c) Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a
current basis.
d) Require that the safekeeping function for securities be assigned to a bank that will act as a custodial agent.

(72) A company has additional temporary funds to invest. The board of directors decided to purchase marketable securities
and assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to make
periodic reviews of the investment activity should be
a) The investment committee of the board of c) The corporate controller.
directors. d) The chief operating officer.
b) The treasurer.
(73) When there are numerous property and equipment transactions during the year, an auditor planning to assess control
risk at the minimum level usually plans to obtain an understanding of the internal control and to perform
a) Tests of control and extensive tests of property and equipment at the end of the year.
b) Extensive tests of current year property and equipment transactions.
c) Tests of controls and limited tests of current year property and equipment transactions.
d) Analytical procedures for property and equipment balances at the end of the year.

(74) To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a
policy requiring a periodic
a) Increase in insurance coverage.
b) Inspection of equipment and reconciliation with accounting records.
c) Verification of liens, pledges, and collateralizations.
d) Accounting for work orders.

(75) A weakness in internal control over recording retirements of equipment may cause the auditor to
a) Inspect certain items of equipment in the plant and trace those items to the accounting records.
b) Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the
year.
c) Trace additions to the “other assets” account to search for equipment that still on hand but no longer being used.
d) Select certain items of equipment from the accounting records and locate them in the plant.

(76) Which of the following procedures is most likely to prevent the improper disposition of equipment?
a) A separation of duties between those authorized to dispose of equipment and those authorized to approve removal
work orders.
b) The use of serial numbers to identify equipment that could be sold.
c) Periodic comparison of removal work orders to authorizing documentation.
d) A periodic analysis of the scrap sales and the repairs and maintenance accounts.

(77) Which of the following is the most important internal control activity over acquisitions of property, plant, and
equipment?
a) Establishing a written company policy distinguishing between capital and revenue expenditures.
b) Using a budget to forecast and control acquisitions and retirements.
c) Analyzing monthly variances between authorized expenditures and actual costs.
d) Requiring acquisitions to be made by users departments.

(78) Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by a control that
provides for
a) Segregation of duties of employees in the accounts payable department.
b) Independent verification of invoices for disbursements reported as equipment acquisitions.
c) Investigation of variances within a formal budgeting system.
d) Authorization by the board of directors of significant equipment acquisitions.

(79) It would not be appropriate for the auditor to initiate discussion with the audit committee concerning
a) The extent to which the work of internal auditors will influence the scope of the examination.
b) Details of the procedures which the auditor intends to apply.
c) The extent to which change in the company’s organization will influence the scope of the examination.
d) Details of potential problems which the auditor believes might cause a qualified opinion.

(80) When communicating internal control related matters noted in an audit, an auditor’s report issued on reportable
conditions should indicate that
a) Errors or irregularities may occur and not be detected because there are inherent limitations in any internal control.
b) The issuance of an unqualified opinion on the financial statements may be dependent on corrective follow-up
action.
c) The deficiencies noted were not detected within a timely period by employees I in the normal course of performing
their assigned functions.
d) The purpose of the audit was to report on the financial statements and not to provide assurance on internal
control.

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