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SecondDepartmental Examination – AUDTG411

Mabini Street, Tagum City Summer/ SY 2017-2018 (May 4, 2018)

General Instructions:
a. Read carefully each problem given and choose the correct answer from the choices.
b. Use Number 2 pencil in shading in your answer sheet.
c. A test booklet will be provided, no other papers allowed during the examination. Other unnecessary
markings on your answer sheet will invalidate your result thus any form of such shall not be
d. Only calculators allowed by the PRC shall be used in solving problems requiring solutions, no other
electronic device allowed during the examination.
e. Cellphones shall be turned off or in silent mode and shall be placed at the teacher’s table.

Part I: Multiple Choice Questions (1 point each)
1. Adequate planning of the audit work helps the auditor of accomplishing the following objectives,
a. Gathering of all corroborating audit evidence.
b. Ensuring that appropriate attention is devoted to important areas of the audit.
c. Identifying the areas that need a service of an expert.
d. The audit work is completed efficiently.
2. The extent of planning will vary according to any of the following, except:
a. Size of the audit client.
b. Auditor’s experience with the entity and knowledge of the business.
c. The nature and complexity of the audit engagement
d. The assessed level of control risk.
3. Which of the following is least likely considered by the auditor in developing the overall audit plan?
a. Understanding of the accounting and internal control systems.
b. Relevant risk and materiality.
c. The involvement of other auditors in the audit of major component of financial statements
d. The general level of competence of audit assistants.
4. Which of the following is not considered by the CPA when he makes an overall audit plan?
a. Identification of complex accounting areas including those involving accounting estimates.
b. The information technology used by the client.
c. The content of the representation letters.
d. The nature and timing of reports or other communication with the entity that are
expectedunder the engagement.
5. Audit plan should
A. Precede action Yes No Yes No
B. Be fixed Yes No No Yes
C. Be cost beneficial Yes Yes Yes Yes
6. Which of the following least likely affect the form and content of the overall audit plan?
a. Complexity of the audit engagement.
b. Methodology and technology used by the auditor.
c. The entity’s form of business organization.
d. The size of the entity.
7. The audit program should contain the following, except:
a. Audit objective
b. Time budget for the various audit areas
c. Set of planned audit procedures
d. The combined assessed level of inherent and control risk
8. PSA 310 - Knowledge of Business
Which of the following will most likely help the auditor to identify and understand the
events,transactions and practices of his audit client?
a. Obtaining a sufficient knowledge of the business of his client.
b. Understanding of accounting and internal control.
c. Testing control policies and procedures.
d. Obtaining a representation letter from the client management.
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9. The auditor should have or obtain a knowledge of the client’s business sufficient to:
a. Evaluate whether the financial statements are materially misstated.
b. Document material weaknesses in accounting and internal control systems.
c. Identify and understand events, transactions and practices that may have effect on
financial statements.
d. Have an overall evaluation of whether financial assertions are fairly presented in
thefinancial statements.
10. The auditor is not expected to have
a. A particular knowledge of the economy and the industry within which the entity operates.
b. A particular knowledge of how the entity operates.
c. A level of knowledge of business ordinarily less than that possessed by management.
d. A knowledge of business which is used in assessing inherent and control risk.
11. Which statement is incorrect regarding the timing of further audit procedures?
a. Timing refers to when audit procedures are performed or the period or date to which the
audit evidence applies.
b. The auditor may perform tests of controls or substantive procedures at an interim date or at
period end.
c. If the auditor performs tests of controls or substantive procedures prior to period end,
theauditor considers the additional evidence required for the remaining period.
d. All audit procedures can be performed prior to period end.
12. Which statement is incorrect regarding the extent of further audit procedures?
a. Extent includes the quantity of a specific audit procedure to be performed.
b. The extent of an audit procedure is determined by the judgment of the auditor
afterconsidering the materiality, the assessed risk, and the degree of assurance the
auditorplans to obtain.
c. The auditor ordinarily decreases the extent of audit procedures as the risk of material
misstatement increases.
d. Increasing the extent of an audit procedure is effective only if the audit procedure itself
isrelevant to the specific risk.
13. Which statement is incorrect regarding tests of controls?
a. Tests of controls are required under certain circumstances.
b. Tests of controls are required when an entity conducts its business using IT and
nodocumentation of transactions is produced or maintained, other than through the IT
c. Tests of the operating effectiveness of controls are performed only on those controls thatthe
auditor has determined are suitably designed to prevent, or detect and correct, amaterial
misstatement in an assertion.
d. Testing the operating effectiveness of controls is the same as obtaining audit evidence that
controls have been implemented.
14. Which statement is incorrect regarding the nature of tests of controls?
a. As the planned level of assurance increases, the auditor seeks more reliable auditevidence.
b. Those controls subject to testing by performing inquiry combined with inspection
orreperformance ordinarily provide more assurance than those controls for which the
auditevidence consists solely of inquiry and observation.
c. The absence of misstatements detected by a substantive procedure provides audit evidence
that controls related to the assertion being tested are effective.
d. A material misstatement detected by the auditor’s procedures that was not identified by
theentity ordinarily is indicative of the existence of a material weakness in internal control.
15. Which statement is incorrect regarding the timing of tests of controls?
a. Audit evidence pertaining only to a point in time may be sufficient for the auditor’s
purpose,for example, when testing controls over the entity’s physical inventory counting at
the periodend.
b. If the auditor plans to rely on controls that have changed since they were last tested,
theauditor should test the operating effectiveness of such controls in the current audit.
c. If the auditor plans to rely on controls that have not changed since they were last tested,
the auditor should test the operating effectiveness of such controls at least once in every
second audit.
d. When there are a number of controls for which the auditor determines that it is
appropriateto use audit evidence obtained in prior audits, the auditor should test the
operatingeffectiveness of some controls each audit.

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16. Which statement is incorrect regarding the extent of tests of controls?
a. The auditor designs tests of controls to obtain sufficient appropriate audit evidence that
thecontrols operated effectively throughout the period of reliance.
b. The more the auditor relies on the operating effectiveness of controls in the assessment of
risk, the lesser is the extent of the auditor’s tests of controls.
c. If the rate of expected deviation is expected to be too high, the auditor may determine
thattests of controls for a particular assertion may not be effective.
d. Because of the inherent consistency of IT processing, the auditor may not need to
increasethe extent of testing of an automated control.
17. Which statement is incorrect regarding substantive procedures?
a. Substantive procedures are performed in order to detect material misstatements at the
assertion level, and include tests of details of classes of transactions, account balances,and
disclosures and substantive analytical procedures.
b. The auditor always performs substantive procedures for each class of transactions, account
balance, and disclosure.
c. When the auditor has determined that an assessed risk of material misstatement at
theassertion level is a significant risk, the auditor should perform substantive procedures
thatare specifically responsive to that risk.
d. In order to obtain sufficient appropriate audit evidence, the substantive procedures
relatedto significant risks are most often designed to obtain audit evidence with high
18. The auditor’s substantive procedures should include the following audit procedures related tothe
financial statement closing process:
I. Agreeing the financial statements to the underlying accounting records.
II. Examining material journal entries and other adjustments made during the course ofpreparing
the financial statements.
a. I and II b. I only c. II only d. Neither I nor II
19. Which statement is incorrect regarding the nature, timing and extent of substantive procedures?
a. Substantive analytical procedures are generally more applicable to large volumes of
transactions that tend to be predictable over time.
b. Tests of details are ordinarily more appropriate to obtain audit evidence regarding
certainassertions about account balances, including existence and valuation.
c. Substantive procedures cannot be performed at an interim date.
d. The greater the risk of material misstatement, the greater the extent of
20. Which statement is incorrect regarding evaluation of the sufficiency and appropriateness ofaudit
evidence obtained?
a. Based on the audit procedures performed and the audit evidence obtained, the
auditorshould evaluate whether the assessments of the risks of material misstatement at
theassertion level remain appropriate.
b. As the auditor performs planned audit procedures, the audit evidence obtained may
causethe auditor to modify the nature, timing, or extent of other planned audit procedures.
c. In developing an opinion, the auditor considers only the audit evidence which corroborate
the assertions in the financial statements.
d. If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor
shouldexpress a qualified opinion or a disclaimer of opinion.
21. The evaluation of deviations that were observed upon completing tests of controls
a. May require the need for doing more extensive understanding of control.
b. May require more extensive tests of controls.
c. Always requires documentation of the basis of assessment of control risk.
d. May require modification of the nature, timing, and extent of planned substantive
22. The following statements are true about observation when used as tests of control
a. The auditor may supplement his observations with other tests of control capable of
providingaudit evidence.
b. Audit evidence obtained by doing observation pertains only to the point in time at which
theprocedure was applied.
c. Observation of who applies a control procedure is useful as a test of control procedures
whenevaluating control effectiveness of both computerized and manual system
d. Ordinarily, making inquiries provides more reliable audit evidence than doing observation
when testing segregation of functional responsibilities.
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23. Tests of controls may include the following, except:
a. Reperformance of internal control procedures
b. Inquiries about, and observation of, internal controls which leave no audit trail.
c. Inspection of documentary support for transactions evidencing authorization
d. Analytical procedures involving comparison of operating expenses with budgeted amount.
24. Tests of controls are performed to obtain audit evidence about the effectiveness of the
a. Operation of the internal controls at the time the tests are being applied.
b. Operations of the internal controls in eliminating fraud and errors.
c. Design of the internal controls in eliminating fraud and errors.
d. Design of the accounting and internal controls systems.
25. The auditor should consider whether the assessment of control risk is confirmed
a. Upon completion of understanding of internal control.
b. Upon completion of tests of controls
c. Before the final audit program is completed.
d. Upon the conclusion of the audit, based on the results of substantive procedures and other
audit evidence obtained.
26. Which of the following is least likely considered by the auditor in determining the significance of
service organization activities to the client and the relevance to the audit?
a. Terms of contract and relationship between the client and the service organization.
b. The material financial statement assertions that are affected by the use of the
c. Client's internal controls that are applied to the transactions processed by the
d. The control policies and procedures of the client of requiring that all payments for goods
and services be supported by receiving reports.
27. When the auditor considers that the service organization activities are significant to the client
andrelevant to the audit and he concludes that it would be efficient to obtain audit evidence from
testsof control to support an assessment of control risk at a lower level. Such evidence may
beobtained by, except
a. Performing tests of the client's controls over activities of the service organization.
b. Obtaining a service organization auditor's report that expresses an opinion as to the
operating effectiveness of the service organization's accounting and internal control systems
for theprocessing applications relevant to the audit.
c. Visiting the service organization and performing tests of control.
d. Review the service contract between the client and the service organization.
28. Which statement is incorrect regarding the client auditor’s use of service organization
a. When using a service organization auditor’s report, the client auditor should consider
thenature of and content of that report.
b. The client auditor should consider the scope of work performed by the service
organizationauditor and should assess the usefulness and appropriateness of reports
issued by the serviceorganization auditor.
c. When a Type B report is to be used as evidence to support a lower control risk assessment,
aclient auditor would consider whether the controls tested by the service organization
auditor are relevant to the client's transactions (significant assertions in the client's
financialstatements) and whether the service organization auditor's tests of control and the
results areadequate.
d. Since Type A reports may be useful to a client auditor in gaining the required
understanding of the accounting and internal control systems, an auditor may use such
reports as a basis for reducing the assessment of control risk.
29. Which of the following is the least concern of the client auditor in reviewing the report of
serviceorganization auditor on suitability of internal control design of the service organization?
a. The accuracy of description of the service organization's accounting and internal
controlsystems ordinarily prepared by the management of the service organization.
b. The systems' controls have been placed in operation.
c. The accounting and internal control systems are suitably designed to achieve their
d. The type of documentation of the understanding of the service organization’s control

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30. Which of the following is least likely entitled to the report of the service organization auditor on
thesuitability of the design and operating effectiveness of the service organization?
a. Service organization’s management c. Client’s auditors
b. Service organization’s customers d. Service organization’s stockholders
31. An employee in the receiving department keyed in a shipment from a remote terminal
andinadvertently omitted the purchase order number. The best systems control to detect this
errorwould be
a. Batch total c. Sequence check
b. Completeness test d. Reasonableness test
32. The reporting of accounting information plays a central role in the regulation of business
operations. Preventive controls are an integral part of virtually all accounting processing systems,
and much of the information generated by the accounting system is used for preventive control
purposes. Which one of the following is not an essential element of a sound preventive control
a. Separation of responsibilities for the recording, custodial, and authorization functions.
b. Sound personnel policies.
c. Documentation of policies and procedures.
d. Implementation of state-of-the-art software and hardware.
33. The most critical aspect regarding separation of duties within information systems is between
a. Project leaders and programmers
b. Programmers and computer operators
c. Programmers and systems analysts
d. Data control and file librarians
34. Whether or not a real time program contains adequate controls is most effectively determined by
the use of
a. Audit software c. A tracing routine
b. An integrated test facility d. A traditional test deck
35. Compatibility tests are sometimes employed to determine whether an acceptable user is allowed to
proceed. In order to perform compatibility tests, the system must maintain an access control
matrix. The one item that is not part of an access control matrix is a
a. List of all authorized user code numbers and passwords.
b. List of all files maintained on the system.
c. Record of the type of access to which each user is entitled.
d. Limit on the number of transaction inquiries that can be made by each user in a specified
time period.
36. Which one of the following input validation routines is not likely to be appropriate in a real
a. Field check c. Sequence check
b. Sign check d. Redundant data check
37. Which of the following controls is a processing control designed to ensure the reliability
andaccuracy of data processing?
Limit test Validity check test
a. Yes Yes
b. No No
c. No Yes
d. Yes No
38. Which of the following characteristics distinguishes computer processing from manualprocessing?
a. Computer processing virtually eliminates the occurrence of computational error
normallyassociated with manual processing.
b. Errors or irregularities in computer processing will be detected soon after their occurrences.
c. The potential for systematic error is ordinarily greater in manual processing than
incomputerized processing.
d. Most computer systems are designed so that transaction trails useful for audit do not exist.
39. Which of the following activities would most likely be performed in the EDP Department?
a. Initiation of changes to master records.
b. Conversion of information to machine-readable form.
c. Correction of transactional errors.
d. Initiation of changes to existing applications.

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40. Which of the following most likely represents a significant deficiency in the internal
a. The systems analyst review applications of data processing and maintains
b. The systems programmer designs systems for computerized applications and
maintainsoutput controls.
c. The control clerk establishes control over data received by the EDP department
andreconciles control totals after processing
d. The accounts payable clerk prepares data for computer processing and enters the data
intothe computer.
41. Which of the following generalizations in assessing the reliability of audit evidence is incorrect?
a. Audit evidence is more reliable when it is obtained from independent sources outside
b. Audit evidence that is generated internally is not affected by the effectiveness of the controls
imposed by the entity.
c. Audit evidence obtained directly by the auditor is more reliable than audit evidence
obtainedindirectly or by inference.
d. Audit evidence is more reliable when it exists in documentary form.
42. Which statement is incorrect regarding audit evidence?
a. The auditor should obtain sufficient appropriate audit evidence to be able to
drawreasonable conclusions on which to base the audit opinion.
b. Accounting records alone do not provide sufficient audit evidence.
c. The auditor uses professional judgment and exercises professional skepticism in
evaluatingthe quantity and quality of audit evidence, and thus its sufficiency and
appropriateness, tosupport the audit opinion.
d. The matter of difficulty or expense involved is a valid basis for omitting an audit procedure
for which there is no alternative.
43. The auditor uses assertions in assessing risks by considering the different types of
potentialmisstatements that may occur, and thereby designing audit procedures that are
responsive tothe assessed risks. Assertions used by the auditor fall into the following categories:
I. Assertions about classes of transactions and events for the period under audit.
II. Assertions about account balances at the period end.
III. Assertions about presentation and disclosure.
a. I, II and III b. I and II only c. II and III only d. II only
44. Assertions about classes of transactions and events for the period under audit least likelyinclude
a. Transactions and events that have been recorded have occurred and pertain to the entity.
b. All transactions and events that should have been recorded have been recorded.
c. Transactions and events have been recorded in the correct accounting period.
d. All assets, liabilities and equity interests that should have been recorded have been
45. Assertion about account balances at period end which means assets, liabilities, and equity
interests are included in the financial statements at appropriate amounts is
a. Existence c. Completeness
b. Rights and obligations d. Valuation and allocation
46. An auditor’s working papers will ordinarily be least likely to include documentation showing how
a. Client’s schedules were prepared.
b. Engagement was planned.
c. Understanding of the client’s internal control was obtained and control risk was assessed.
d. Unusual matters were resolved.
47. Which of the following is usually included or shown in the auditor’s working papers?
a. The procedures used by the auditor to verify the personal financial status of members of
theclient’s management team
b. Analyses that are designed to be a part of, or a substitute for, the client’s accountingrecords
c. Excerpts from authoritative pronouncements that support the underlying generally
acceptedaccounting principles used in preparing the financial statements
d. The manner in which exceptions and unusual matters disclosed by the auditor’s
procedures were resolved or treated

48. The form and content of working papers are affected by matters such as the:
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I. Nature of the engagement.
II. Form of the auditor’s report.
III. Nature and complexity of the business.
IV. Nature and condition of the entity’s accounting and internal control systems.
V. Needs in the particular circumstances for direction, supervision and review of workperformed by
VI. Specific audit methodology and technology used in the course of the audit.
a. All of the above c. I, II and III only
b. All except V and VI d. All except VI
49. 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
c. Copy of the internal audit’s audit program.
d. Analyses of significant ratios and trends.
50. Although the quantity and content of audit working papers vary with each particularengagement,
an auditor’s permanent files most likely include
a. Schedules that support the current year’s adjusting entries.
b. Prior years’ accounts receivable confirmations that were classified as exceptions.
c. Documentation indicating that the audit work was adequately planned and supervised.
d. Analyses of capital stock and other owners’ equity accounts.

Part II: Essay/Discussion (3 points each item)

1-3 Give three(3) importance of Audit Planning and discuss each briefly.

4Discuss the purpose of “Understanding the client/entity’s business, industry and its environment” as
part of Audit Planning.

5 What is “Materiality” and explain its importance in planning the audit.

6 Explain the relationship of materiality on Audit Risk and planned audit procedures.

7 Explain the relevance of “Consideration of Client’s Internal Control” to the Substantive Tests to

8-10 Give three (3) out of five(5) Components of Internal control, and explain each briefly

11-13 Give just three (3) characteristics of a ComputerizedInformation System and describe each briefly

14 Describe “Substantive Test”

15 Discuss the primary and secondary functions of an Audit Working Paper.

End of Examination… God bless you…

Sir Bats Ma’am Jan

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