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Auditing Theory 7.

When an auditor goes through a population and selects items for the sample without
regard to their size, source, or other distinguishing characteristics, it is called
a. Block selection
b. Haphazard selection
1. A control which relates to all parts of the EDP system is called a(n)
c. Systematic selection
a. Systems control c. Applications control
d. Statistical selection
b. General control d. Universal control
8. Which of the following may be used to reduce the risk of non sampling errors?
2. Which of the following is not an output control?
a. Increasing the size of audit samples
a. Proper authorization of transaction
b. Stratifying audit samples
b. Control totals
c. Adequately planning audit samples
c. Check digits
d. Using statistical sampling techniques
d. Adequate documents
9. A number of factors influences the sample size for a substantive test of details of an
3. Should the auditor feel, after obtaining an understanding of the EDP internal control
account balance. All other factors being equal, which of the following would lead to larger sample
structure, that control risk cannot be reduced, he or she will
size?
a. Issue a disclaimer
a. Greater reliance on internal control
b. Issue an adverse opinion
b.
c. Increase the sample size for tests of controls
c. Smaller reliance o analytical procedures
d. Expand the substantive testing portion of the audit
d. Smaller measures of tolerable misstatement

4. The real-time feature normally would be least useful when applied to accounting for a
10. Fraudulent financial reporting is often called
firm’s
a. Management fraud c. Defalcation
a. Bank-account balances
b. Theft of assets d. Employee fraud
b. Property and depreciation
c. Customer accounts receivable
11. The most important general ledger account included in and affecting several cycles is the
d. Merchandise inventory
a. General cash account c. Income tax expense ad liability accounts
b. Inventory accounts d. Retained earnings account
5. A sample in which the characteristics in the sample are the same as those of the
population is a
12. In testing for cut-off , the objective is to determine
a. Random sample c. Attributes sample
a. Whether all of the current period’s transactions are recorded
b. Variables sample d. Representative sample
b. That no transactions from the prior period are included in the current period’s balances
c. That no transactions of the curret period have been delayed and recorded in the future
6. Establishing a route through the random number table
period.
a. Is an arbitrary decision
d. Whether transactions are recorded in the proper period.
b. Needs to be done in advance of choosing the numbers
c. Is essential and the route must be followed consistently
13. The primary difference between an audit of the balance sheet and an audit of the income
d. Requires that all three of the above is true
statement lies in the fact that the audit of the income statement deals with the verification of
a. Transactions c. Costs c. Irregularities involving management
b. Authorization d. Cutoffs d. Noncompliance with contractual agreements

14. Documentation is a form of evidence 20. Which of the following procedures is more likely to be performed i a review engagement
a. Used in every financial statement audit of a non-public entity that i n a compilation engagement?
b. Used in most financial statement audit a. Gaining an understading of the entity’s business transactions
c. Used o the rate occasions when it is both readily available ad less costly than other b. Making a preliminary assessment of control risk
procedures c. Obtaining a representation letter from the chief executive officer
d. Used when nothing is available that is more competent d. Assisting the entity i adjusting the accounting records

15. The current file of the auditor’s working papers generally should include
a. a flowchart of internal controls 21. In auditing accounts payable, an auditor’s procedures most likely would focus primarily o
b. organization charts management’s assertion of
c. a copy of the financial statements a. Existence or occurrence
d. copies of bond and note indentures b. Presentation and disclosure
c. Completeness
16. An audit working paper that reflects the major components of an amount reported in the d. Valuation or allocation
financial statements is referred to as(an)
a. Lead schedule c. Audit control schedule 22. Before goods are shipped on account, a properly authorized person must
b. Supporting schedule d. Working trial balance a. Prepare the sales invoice
b. Approve the journal entry
17. The major reason an independent auditor gathers audit evidence is to c. Approve credit
a. Form an opinion on the financial statements d. Verify that the unit price is accurate
b. Detect fraud
c. Evaluate management 23. Which of the following is not a auditor’s concern about a key authorization point in the
d. Evaluate internal control sales/collection cycle
a. The receiving room must have authorization before releasing items to inventory control
18. An auditor most likely would analyze inventory turnover rates to obtain evidence b. Credit must be authorized before sale
concerning managements assertions about c. Goods must be shipped after the authorization
a. Existence or occurrence d. Prices must be authorized
b. Rights and obligations
c. Presentation and disclosure 24. Whenever footing ad comparisons are restricted to journals, master file records, and
d. Valuation and allocation ledgers, the process is
a. Valuation c. Cutoff
19. To which type of the following matters would materiality limits not apply when obtaining b. Summarization d. Completeness
client representations?
a. Losses from sales commitments. 25. The most significant effect of the results of the tests of controls substantive tests of
b. Unasserted claims and assessments transactions in tha sales and collection cycle is on
a. Allowance for uncollectible accounts a. Sales forecast c. Inventory plan
b. Bad debts expense account b. Production plan d. Bill of materials
c. Confirmation of accounts receivable
d. Income tax payable 32. The substantive test which requires the auditor to “trace from a file of receiving reports to
the acquisitions journal” satisfies the objective of
26. There is a difference between internal control objectives and audit objectives. Which of a. Validity c. Completeness
the following is not an audit objective? b. Authorization d. Valuation
a. Validity c. Valuation
b. Completeness d. Authorization 33. An auditor usually examines receiving reports to support entries in the
a. Voucher register and sales return journal
27. For effective internal control, employees maintaining the accounts receivable subsidiary b. Sales journal and sales return journal
ledger should not also approve c. Voucher register and sales journal
a. Employee overtime wages d. Check register and sales journal
b. Credit granted to customers
c. Write-offs of customer accounts 34. The inventory and warehousing cycle can be thought of as comprising two separate but
d. Cash disbursement closely related systems, one involving the actual physical flow of goods, and the other the
a. internal control over those goods
28. The general cash account is considered significant in almost all audits b. related costs
a. Where the ending balance’ is material c. storing of the goods
b. Where either the beginning balance is material d. prevention of wastes, obsolenscence, and theft
c. Even when the ending balance is immaterial
d. Except those of not-for-profit organizations 35. In planning an audit engagement, which of the following is a factor that affects the
independent auditor’s judgement as to the quantity, type, and content of working papers?
29. Sales order form and invoice blanks should be controlled in the a. The estimated occurrence rate of attributes
a. Sales order section of the sales department b. The preliminary evaluation based upon initial substantive testing
b. Billing clerk in the accounting department c. The content of the client’s representation letter
c. Credit manager in the credit department d. The anticipated nature of the auditor’s report
d. Sales manager in the sales department
36. A listing of all the things which the auditor will use to gather sufficient, competent
30. Which of the following is a substantive test of transactions evidence is the
a. Review personnel policies a. audit procedure
b. Account for a sequence of payroll checks b. audit plan
c. Reconcile the disbursements i the payroll journal with the disbursements on the payroll c. audit program
bank statement d. audit risk model
d. Examine printouts of transactions rejected by the computer as having invalid employee
numbers 37. The primary emphasis in most tests of details of balances is on the
a. balance sheet accounts
31. The information typically needed to prepare a production order would not include a b. income statement accounts
c. cash flow statement accounts a. Confirmation
d. three statements above b. Observation
c. Recomputation
38. Tracing recorded sales transactions in the sales journal to the shipping documents (bills d. Inquiry
of lading) provides evidence about the
a. Completeness of recording of sales transactions 44. The auditor will most likely perform extensive tests for possible understatement of
b. Occurrence of sales transactions a. revenues
c. billing of all sales transactions b. assets
d. presentation of payables c. liabilities
d. capital
39. Which of the following is the best audit procedure for the detection of lapping?
a. Comparison of postings of cash receipts to accounts with the details of cash deposits 45. If the auditor is determined to lack independence, a disclaimer of opinion must be issued
b. Confirmation of the cash balance a. in all cases
c. Reconciliation of the cash account balances b. only if it is highly material
d. Preparing a proof of cash c. only if it is material
d. if the client requests it
40. To gather evidence regarding the balance per bank in the bank reconciliation, an auditor
could examine all of the following except 46. The use of negative assurances in audit reports of historical financial statements is
a. Cut-off bank statement a. a violation of the standards of reporting
b. year-end bank statement b. encouraged by the Philippine Institute of CPAs
c. bank confirmation c. a help in clarifying the degree of responsibility by being assumed by the auditor
d. general ledger d. properly located in the opinion paragraph of the unqualified report

41. The confirmation of accounts receivable is most closely associated with 47. Unqualified financial statements for the prior year presented in comparative form with
a. business risk audited financial statements for the current year should be clearly marked to indicate their status
b. detection risk and
c. inherent risk I. The report on the prior period should be reissued to accompany the current period report
d. relative risk II. The report on the current period should include as a separate paragraph description of the
responsibility assumed for the prior period’s financial statements
42. The client’s physical count of inventories is lower than the inventory quantities in the
perpetual records. This could be the result of a failure to record a. I only
a. purchases b. II only
b. purchases discounts c. Both I and II
c. sales d. Either I or II
d. sales discounts
48. Compilation services are intended to enable a CPA firm to compete with
43. The most likely technique for the current year audit of goodwill which was not acquired a. Management advisory service firms
three years ago by a continuing audit client. b. Tax preparation businesses
c. Computer service business
d. Bookkeeping firms 50. Comfort letters ordinarily are signed by the client’s
a. independent auditor
49. A modification of the CPA’s report on a review of the interim financial statements of a b. underwriter of securities
publicly-held company would be necessitated by which of the following? c. audit committee
a. An uncertainty d. senior management
b. Lack of consistency
c. Reference to another accountant
d. Inadequate disclosure
11) A 25) D 38) B
12) D 26) D 39) A
ANSWER KEY 13) A 27) D 40) D
14) A 28) D 41) B
1) B 15) C 29) A 42) D
2) B 16) D 30) C 43) C
3) D 17) A 31) D 44) C
4) B 18) D 45) A
5) D 19) C 32) C 46) A
6) D 20) C 33) A 47) D
7) B 21) C 34) B 48) D
8) C 22) C 35) D 49) A
9) D 23) A 36) D 50) A
10) A 24) B 37) A