AUDITING THEORY

MAY 1990
1.

The confirmation of the client's accounts receivable is a

means of obtaining evidential matter and is specifically
considered to be a generally auditing
a. Practice.
b. Procedure.
c. Principle.
d. Standard.

2.

Which of the following individuals is the most

appropriate person to be assigned the responsibility of
distributing payroll checks in an envelope?
a. Internal Auditor.
b. Member of Accounting Department.
c. Representative of the bank servicing the company's
payroll.
d. Paymaster.

3.

A basic tool used by the auditor to control the audit

work and review the progress of the audit.
a. Audit Program.
b. Progress Flowchart.
c. Engagement Letter.
d. Time and Expense Summary.

4.

The basic concept of internal accounting control which

recognizes that the cost of internal control should not
exceed the benefits expected to be derived is known as
a. Limited Liability.
b. Management by exception.
c. Reasonable assurance.
d. Management responsibility.

5.

The internal control environment may be affected by:

a. Organizational structure.
b. Personnel.
c. Management supervision.

6.

d. All of the above.

Material errors which occur in the accounting process
may not be detected by the auditor in his examination
of the firm is quite a big risk. In order to minimize this
risk, the auditor relies on
a. Compliance tests.
b. Internal control.
c. Substantive tests.
d. Statistical analysis.

7.

A sale cut-off test of

verification of
a. Sales returns.
b. Sales allowances.
c. Cash.
d. Accounts receivable.

billing

completeness

the

8.

The auditor should evaluate a change in accounting

principle to satisfy himself that
a. The newly adopted principle is generally accepted
accounting principle.
b. The method of accounting for the effect of the
change is in conformity with generally accepted
accounting principles.
c. Management's justification for the change is
reasonable.
d. All of the above.

9.

The auditor is concerned with establishing that

dividends are paid to stockholders of the client
corporation owning stocks as of
a. Record date.
b. Issue date.
c. Declaration date.
d. Payment date.

10.

Transferring funds from one location to another or

converting negotiable assets to cash are ways of
concealing cash shortage. It is vital for the auditor to do

a.
b.
c.
d.

Simultaneous
Simultaneous
Simultaneous
Simultaneous

confirmation.
verification.
bank reconciliation.
surprise cash count.

11.

Generally, the date of the report of an auditor on

comparative financial statements should be dated as of
a. Completion of the auditor's recent field work.
b. Issuance of the report.
c. Latest financial statements being reported on.
d. None of the above.

12.

Assertions are representations of management that are

embodied in financial statement components. They can
be either explicit or implicit. Which of these assertions
is not about valuation or allocation?
a. Property is recorded at historical cost.
b. Trade accounts receivables in the balance sheet are
stated at net realizable value.
c. Notes payable in the balance sheet include all such
obligations of the entity.
d. Property cost is systematically allocated to
appropriate accounting period.

13.

Substantive procedures are performed by the auditor to

support his opinion regarding the existence of
inventories included in the balance sheet. Which of the
following procedures does not prove the existence of
inventories?
a. Observing physical inventory counts.
b. Testing shipping and receiving cut-off procedures.
c. Obtaining confirmation of inventories at locations
outside the entity.
d. Testing of inventory transactions between a
preliminary physical inventory date and the balance
sheet date.

14.

In the audit of a medium-sized manufacturing concern

with less than one hundred (100) stockholders, which

one of the following areas would require the least

amount of audit time?
a. Revenues.
b. Assets.
c. Liabilities.
d. Owners' Equity.
15.

The sufficiency and competenc6y of evidential matter

is based on the
a. Availability of corroborating data.
b. Judgment of the auditor.
c. Pertinence of the evidence.
d. Generally accepted auditing standards.

16.

Liabilities not recorded are most likely to be found

during the review of which of the following documents?
a. Shipping records.
b. Unpaid bills.
c. Bills of lading.
d. Unmatched sales invoices.

17.

An auditor would be lest likely to use confirmations in

connection with the examination of
a. Long-term debt.
b. Inventories.
c. Refundable income tax.
d. Stockholders' Equity.

18.

An auditor must obtain from his predecessor which one

of the following, prior to accepting an engagement?
a. Analysis of income statement accounts.
b. Analysis of balance sheet accounts.
c. Facts that might bear on the integrity of
management.
d. All matters of continuing accounting significance.

19.

Additions to equipment are sometimes understated.

Which of the following accounts would be reviewed by

the auditor to gain reasonable assurance that additions

are not understated?
a. Accounts Payable.
b. Gain on Disposal of Equipment.
c. Depreciation Expense.
d. Repair and Maintenance expense.
20.

When counting cash on hand, the auditor must exercise

control over cash and other negotiable assets to
prevent:
a.
b.
c.
d.

Substitution.
Irregular endorsement.
Theft.
Deposits in transit.

21.

One of the generally accepted auditing standards

specifies that the auditor:
a. Charges audit fees based on cost.
b. Inspects all assets acquired during the year.
c. Counts client petty cash funds.
d. Makes proper study and evaluation of existing
internal control.

22.

The primary differences between an audit of the

balance sheet and an audit of the income statements
lies in the fact that the audit of the income statement
deals with verification of:
a. Costs.
b. Transactions.
c. Cut-offs.
d. Authorization.

23.

A written understanding between the auditor and the

client concerning the auditor's responsibility for the
discovery of illegal acts is usually found in a (an):
a. Client representation letter.
b. Management letter.
c. Engagement letter.

d. Letter of audit inquiry.

24.

In order that sound internal accounting control could be

achieved, which department should perform the
activities of matching shipping documents with sales
orders and preparing daily sales summaries?
a. Billing.
b. Shipping.
c. Credit.
d. Sales order.

25.

Which of the following statistical sampling methods is

most useful to auditors when testing for compliance?
a. Ratio estimation.
b. Variable sampling.
c. Discovery sampling.
d. Difference estimation.