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CEBU CPAR CENTER

AUDITING PROBLEMS

Cash
Select the best answer for each of the following:
1. An auditor would consider a cashier’s job description to contain compatible duties if the cashier receives
remittance from the mailroom and also prepares the
a. Daily deposit slip. c. Remittance advices.
b. Prelist of individual checks. d. Monthly bank reconciliation.

2. Which of the following internal control procedures will most likely prevent the concealment of a cash
shortage resulting from improper write-off of a trade account receivable?
a. Write-offs must be supported by an aging schedule showing that only receivables overdue for several
months have been written off.
b. Write-offs must be approved by the cashier who is in a position to know if the receivables have, in
fact, been collected.
c. Write-offs must be approved by a responsible officer after review of credit department
recommendations and supporting evidence.
d. Write-offs must be authorized by company field sales employees who are in a position to determine
the financial standing of the customers.

3. An entity’s internal control structure requires every check request that there be an approved voucher,
supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether
checks are being issued for unauthorized expenditures, an auditor most likely would select items for
testing from the population of all
a. Cancelled checks. c. Purchase orders.
b. Approved vouchers. d. Receiving reports.

4. Which of the following auditing procedures would the auditor not apply to a cutoff bank statement?
a. Trace year end outstanding checks and deposits in transit to the cutoff bank statement.
b. Reconcile the bank account as of the end of the cutoff period.
c. Compare dates, payees and endorsements on returned checks with the cash disbursements record.
d. Determine that the year end deposit in transit was credited by the bank on the first working day of
the following accounting period.

5. A client maintains two bank accounts. One of the accounts, Bank A, has an overdraft of P100,000. The
other account, Bank B, has a positive balance of P50,000. To conceal the overdraft from the auditor, the
client may decide to
a. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the receipt but not the
disbursement and list the receipt as a deposit in transit. Record the disbursement at the beginning
of the following year.
b. Draw a check for at least P100,000 on Bank B for deposit in Bank A. Record the receipt but not the
disbursement and list the receipt as a deposit in transit. Record the disbursement at the beginning
of the following year.
c. Draw a check for P100,000 on Bank B for deposit in Bank A. Record the disbursement but not the
receipt. List the disbursement as an outstanding check, but do not list the receipt as a deposit in
transit. Record the receipt at the beginning of the following period.
d. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the disbursement but
not the receipt and list the disbursement as an outstanding check. Record the receipt at the
beginning of the following year.

6. While performing an audit of cash, an auditor begins to suspect check kiting. Which of the following is
the best evidence that the auditor could obtain concerning whether kiting is taking place?
a. Documentary evidence obtained by vouching credits on the latest bank statement to supporting
documents.
b. Documentary evidence obtained by vouching entries in the cash account to supporting documents.
c. Oral evidence obtained by discussion with controller personnel.
d. Evidence obtained by preparing a schedule of interbank transfers.

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7. Two months before 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 bank confirmation information.

b. Analyze the notes payable journal.
c. Prepare year-end bank reconciliation.
d. Prepare a year-end bank transfer schedule.

8. Postdated checks received by mail in settlement of customer’s accounts should be

a. Returned to customer.
b. Stamped with restrictive endorsement.
c. Deposited immediately by the cashier.
d. Deposited the day after together with cash receipts.

9. The cashier of Milady Jewelries covered a shortage in the cash working fund with cash obtained at
December 31 from a bank by cashing but not recording a check drawn on the company out of town bank.
How would you as an auditor discover the manipulation?
a. By confirming all December 31 bank balances.
b. By counting the cash working fund at the close of business on December 31.
c. By investigating items returned with the bank cut-off statements of the succeeding month.
d. By preparing independent bank reconciliations as of December 31

10. An essential phase of the audit of the cash balance at the end of the year is the auditor's review of cutoff
bank statement. This specific procedure is not useful in determining if
a. Kiting has occurred.
b. Lapping has occurred.
c. The cash receipts journal was held open.
d. Disbursements per the bank statement can be reconciled with total checks written.

Receivables
1. In the audit of which of the following general ledger accounts will tests of controls be particularly
appropriate?
a. Equipment b. Bonds payable c. Bank charges d. Sales

2. An auditor most likely would review an entity’s periodic accounting for the numerical sequence of
shipping documents and invoices to support management’s financial statement assertion of
a. Existence or occurrence c. Valuation
b. Rights and obligations d. Completeness

3. Which of the following might be detected by an auditor’s review of the client’s sales cut-off?
a. Excessive goods returned for credit
b. Unrecorded sales discounts
c. Lapping of year-end accounts receivable
d. Inflated sales for the year

4. Cut-off tests designed to detect credit sales made before the end of the year that have been recorded in
the subsequent year provide assurance about management’s assertion of
a. Presentation b. Completeness c. Rights d. Existence

5. The auditor finds situation in which one person has the ability to collect receivables, make deposits,
issue credit memos and record receipt of payments. The auditor suspects the individual may be stealing
from cash receipts. Which of the following audit procedures would be most effective in discovering fraud
in this scenario?
a. Send positive confirmations to a random selection of customers.
b. Send negative confirmations to all outstanding accounts receivable customers.
c. Perform a detailed review of debits to customer discounts, sales returns, or other debit accounts,
excluding cash posted to the cash receipts journal.
d. Take a sample of bank deposits and trace the detail in each bank deposit back to the entry in the
cash receipts journal.

6. Which of the following most likely would give the most assurance concerning the valuation assertion of
accounts receivable?

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a. Vouching amounts in the subsidiary ledger to details on shipping documents.
b. Comparing receivable turnover ratios with industry statistics for reasonableness.
c. Inquiring about receivables pledged under loan agreements.
d. Assessing the allowance for uncollectible accounts for reasonableness.

7. In confirming accounts receivable, an auditor decided to confirm customers’ account balances rather
than individual invoices. Which of the following most likely would be included with the client’s
confirmation letter?
a. An auditor prepared letter explaining that a non-response may cause an inference that the account
balance is correct.
b. A client prepared letter reminding the customer that a non-response will cause a second request to
be sent.
c. An auditor prepared letter requesting the customer to supply missing and incorrect information
directly to the auditor.
d. A client prepared statement of account showing the details of the customer’s account balance.

8. Which of the following statements would an auditor most likely to add to the negative form of
confirmations of accounts receivable to encourage timely consideration by the recipient?
a. “This is not a request for payment; remittances should not be sent to our auditors; in the enclosed
envelope”
b. “Report any difference on the enclosed statement directly to our auditors; no reply is necessary if this
amount agrees with your records.”
c. “If you do not report any difference within 15 days, it will be assumed that this statement is correct.”
d. “The following invoices have been selected for confirmation and represent amounts that are overdue.”

9. Auditing standards define a confirmation as “the process of obtaining and evaluating a direct
communication from a third party in response to a request for information about a particular item
affecting financial statement assertions” Two assertions for which confirmation of accounts receivable
balances provides primary evidence are
a. Completeness and valuation c. Rights and obligations and existence
b. Valuation and rights and obligations d. Existence and completeness

10. Auditor may use positive or negative forms of confirmations requests for accounts receivable. An auditor
most likely will use
a. The positive form to confirm all balances regardless of the size.
b. A combination of the two forms, with the positive form used for large balances and the negative for
the small balances
c. A combination of the two forms, with the positive form used for trade receivables and the negative
form for other receivables.
d. The positive form when the combined assessed level of inherent and control risk for assertions
related to receivables is acceptably low, and the negative form when it is unacceptably high.

11. The negative request form of accounts receivable confirmation may be used when the
Combined Assessed Level Of Inherent Number of Small Consideration by the
and Control Risk Is Balances is Recipient is
a. Low Many Likely
b. Low Few Unlikely
c. High Few Likely
d. High Many Likely

12. In the confirmation of accounts receivable, the auditor would most likely
a. Request confirmation of a sample of the inactive accounts
b. Seek to obtain positive confirmations for at least 50% of the total dollar amount of the receivables.
c. Require confirmation of all receivables from agencies of the federal government.
d. Require that confirmation requests be sent within 1 month of the fiscal year-end.

13. Negative confirmations of accounts receivable is less effective than positive confirmation of accounts
receivable because
a. A majority of recipients usually lack the willingness to respond objectively.
b. Some recipients may report incorrect balances that require extensive follow-up.
c. The auditor cannot infer that all non-respondents have verified their account information.
d. Negative confirmations do not produce evidence that is statistically quantifiable.

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14. To reduce the risks associated with accepting fax responses to request for confirmation of accounts
receivable, an auditor most likely would
a. Examine the shipping documents that provide evidence for the existence assertion.
b. Verify the sources and contents of the faxes in telephone calls to the senders.
c. Consider faxes to the non-responses and evaluate them as unadjusted differences.
d. Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted.

15. An auditor confirms a representative number of open accounts receivable as of December 31 and
investigates respondents’ exceptions and comments. By this procedure, the auditor is 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 processing control has been removing all sales invoices applicable to this
account from the data file.
d. The credit manager has misappropriated remittances from customers whose accounts have been
written off.

16. An auditor who has confirmed accounts receivable may discover that the sales journal was held open
past year-end if
a. Positive confirmations sent to debtors are not returned
b. Negative confirmations sent to debtors are not returned
c. Most of the returned negative confirmations indicate that the debtor owes a larger balance that the
amount being confirmed.
d. Most of the returned positive confirmations indicate that the debtor owes a smaller balance than the
amount being confirmed.

17. During the process of confirming accounts receivable as of December 31, 2005 a positive confirmation
was returned indicating the “balance owed as of December 31, 2005 was paid on January 9, 2006”. The
auditor will most likely
a. Determine whether there were any changes in the account between January 1 and January 9, 2006.
b. Determine whether a customary trade discount was taken by the customer.
c. Reconfirm the zero balances as of January 10, 2006.
d. Verify that the amount was received.

18. Confirmation of accounts receivable is a generally accepted auditing procedure. The presumption that
an auditor will confirm accounts receivable is not overcome if
a. Based on prior’s years’ audit experience response rates will be inadequate.
b. Based on experience with similar engagements, responses are expected to be unreliable.
c. The accounts receivable are immaterial.
d. The combined assessed level of inherent and control risk is high.

19. A company has computerized sales and cash receipts journals. The computer programs for these
journals have been properly debugged. The auditor discovered that the total of the accounts receivables
subsidiary accounts differs materially from the accounts receivable control account. This discrepancy
could indicate
a. Credit memoranda being improperly recorded.
b. Lapping of receivables
c. Receivables not being properly aged.
d. Statements being intercepted prior to mailing.

20. Which of the following procedures would an auditor most likely perform for year-end accounts receivable
confirmations when the auditor did not receive replies to second requests?
a. Review the cash receipts journal for the month prior to year-end.
b. Intensify the study of internal control concerning the revenue cycle.
c. Increase the assessed level of detection risk for the existence assertion
d. Inspect the shipping records documenting the merchandise sold to the debtors.

21. Which of the following is the greatest drawback of using subsequent collections evidenced only by a
deposit slip as an alternative procedure when responses to positive accounts receivable confirmations are
not received?
a. Checking of subsequent collections can never be used as an alternative auditing procedure.
b. By examining a deposit slip only, the auditor does not know whether the payment is for the
receivable at the balance sheet date or a subsequent transaction.
c. A deposit slip is not received directly by the auditor.

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d. A customer may not have made a payment on a timely basis.

22. The CPA learns that collections of accounts receivable during the last 10 days of December were not
recorded. The effect will be to
a. Leave both working capital and the current ratio unchanged at December 31.
b. Overstate both working capital and the current ratio at December 31.
c. Overstate working capital with no effect on the current ratio at December 31.
d. Overstate the current ratio with no effect on working capital at December 31.

23. All of the following are examples of substantive tests to verify valuation of net accounts receivable except
the
a. Re-computation of the allowance for bad debts.
b. Inspection of accounts for current versus non-current status in the statement of financial position.
c. Inspection of the aging schedule and credit records of past due accounts.
d. Comparison of the allowance for bad debts with past records.

24. Once a CPA has determined that the accounts receivable have increased because of slow collections in a
tight money environment, the CPA is likely to
a. Increase the balance in the allowance for bad debts account
b. Review the going concern ramifications.
c. Review the credit and collection policy.
d. Expand tests of collectibility.

25. An auditor reconciles the total of the accounts receivables subsidiary ledger to the general ledger control
account as of October 31. By this procedure, the auditor is most likely to learn of which of the following?
a. An October invoice was improperly computed.
b. An October check from a customer was posted in error to the account of another customer with a
similar name.
c. An opening balance is a subsidiary ledger account was improperly carried forward from the previous
accounting period.
d. An account balance is past due and should be written off.

Inventory
1. Otso Manufacturing Corporation mass produces eight different products. The controller, who is
interested in strengthening internal controls over the accounting for materials used in production, would
be most likely to implement
a. A separation of duties among production personnel.
b. A perpetual inventory system.
c. An economic order quantity (EOQ) system.
d. A job order cost accounting system.

2. Which of the following control procedures would most likely be used to maintain accurate perpetual
inventory records?
a. Independent matching of purchase orders, receiving reports, and vendors' invoices.
b. Independent storeroom count of goods received.
c. Periodic independent reconciliation of control and subsidiary records.
d. Periodic independent comparison of records with goods on hand.

3. The accuracy of perpetual inventory records may be established in part by comparing perpetual
inventory records with
a. Purchase requisitions. c. Receiving reports.
b. Purchase orders. d. Vendor payments.

4. The auditor tests the quantity of materials charged to work in process by tracing these quantities to
a. Receiving reports. c. Materials requisition forms.
b. Perpetual inventory records. d. Cost ledgers.

5. An auditor would analyze inventory turnover rates to obtain evidence concerning management’s
assertion about
a. Valuation or allocation. c. Presentation and disclosure.
b. Rights and obligations. d. Completeness

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6. In auditing inventories, a major objective relates to the existence assertion. Of the following audit
procedures relating to inventories, which does not support the existence assertion?
a. The auditor reviews the client's inventory-taking instructions for such matters as proper
arrangement of goods, separation of consigned goods, and limits on movements of goods during
inventory.
b. The auditor observes the client's inventory and performs test counts as appropriate.
c. The auditor confirms inventories not on the premises.
d. The auditor performs a lower of cost or market test for major categories of inventory.

7. In a manufacturing company, which one of the following audit procedures would give the least assurance
of the valuation of inventory at the audit date?
a. Obtaining confirmation of inventories pledged under loan agreements.
b. Testing the computation of standard overhead rates.
c. Examining paid vendors' invoices.
d. Reviewing direct labor rates.

8. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to obtain
evidence that
a. No goods held on consignment for customers are included in the inventory balance.
b. No goods observed during the physical count are pledged or sold.
c. All goods owned at year end are included in the inventory balance
d. All goods purchased before year end are received before the physical inventory count.

9. Which of the following items should not be included in a physical inventory?

a. Materials in transit from vendors.
b. Goods in a private warehouse.
c. Goods received for repairs under warranty.
d. Consignment to an agent.

10. You were engaged to conduct an annual examination for the fiscal year ended October 31, 2006. Because
of the expected holiday, you were able to convince your client to take a complete physical inventory, in
which you were present on October 15. Perpetual inventory records are kept and the client considers a
sale to be made in the period in which goods are shipped. You had a sales cut-off test worksheet prepared.
Which item among those listed below will not require an adjusting entry to reconcile the client's detailed
inventory record with the physical inventory?
a. b. c. d.
Date Goods Shipped Oct 31 Nov 2 Oct 14 Oct 10
Transaction Recorded as Sale Nov 2 Oct 31 Oct 16 Oct 19
Date Inventory Control Credited Oct 31 Oct 31 Oct 16 Oct 12

Cash Receivables
1. A 1. D 11. A 21. B
2. C 2. D 12. A 22. A
3. A 3. D 13. C 23. B
4. B 4. B 14. B 24. D
5. B 5. C 15. A 25. C
6. D 6. D 16. D
7. A 7. D 17. D
8. B 8. C 18. D
9. C 9. C 19. A
10. B 10. B 20. D

Inventories
1. B
2. D
3. C
4. C
5. A
6. D
7. A
8. C
9. C

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10. D

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