AUDITING THEORY 2019-2020

7-AUDIT OBJECTIVES, PROCEDURES, EVIDENCE & DOCUMENTATION

NAME :______________________________ SECTION ____________DATE _______________SCORE _______/65___

Instructions:
Please follow instructions carefully. Select the best answer to each of the following questions. WRITE the letter corresponding to your answer at the left
side of the test paper. ERASURES NOT ALLOWED Asst. Professor – Daisy B. Medina-Cruz, CPA, MBA

1. An entity’s accounting records generally include the records of initial entries and supporting records including
A. Confirmation from third parties.
B. Invoices, Books of original entry, Purchase orders
C. Information obtained by the auditor from such audit procedures as inquiry, observation and inspection.
D. Other information developed by, or available to, the auditor to permit him/her to reach conclusions through valid reasoning.
2. Which of the following statements concerning the management’s expert’s competence, capabilities, and objectivity is correct?
A. Objectivity relates to the ability of the management’s expert to exercise the competence in the circumstances.
B. Capability relates to the nature and level of expertise of the management’s expert.
C. Competence relates to the possible effects that bias, conflict of interest or the influence of others may have on the professional or
business judgment of the management’s expert.
D. The management’s expert competence, capabilities, and objectivity are importance factors in relation to the reliability of any
information prepared by the management’s expert.
3. Which of the following statements concerning audit evidence is correct?
A. An audit usually involves the authentication of documentation/
B. Audit evidence obtained from an independent external source is always reliable.
C. A given set of procedures may provide audit evidence that is relevant to certain assertions, but not others.
D. An entity’s accounting records can be sufficient audit evidence to support the financial statements.
4. Which of the following statements concerning audit evidence is FALSE?
A. The auditor uses professional judgment and exercises professional skepticism in evaluating the quantity and quality of audit evidence,
and this its sufficiency and appropriateness, to support the audit opinion.
B. The auditor ordinarily finds it necessary to rely on audit evidence that is persuasive rather than conclusive.
C. In forming the audit opinion, the auditor does not examine all the information available because conclusions ordinarily can be
reached by using sampling approaches and other means of selecting items for testing.
D. The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test.
5. The auditor is required to use assertions for classes of transactions, account balances, and presentation and disclosures in sufficient detail
to form a basis for the assessment of risks of material misstatement and the design and performance of further audit procedures. Assertions
about classes of transactions, include occurrence, completeness, accuracy, cutoff and
A. Existence B. Classification C. Valuation and allocation D. Rights and obligation
6. Which of the following statements concerning the auditor’s use of assertions is CORRECT?
A. The auditor may combine the assertions about transactions and events with the assertions about account balances.
B. In every audit engagement, the auditor should use the assertion as described in PSA 500. i.e. the assertions should always fall into
three categories: assertions about transactions and events, account balances and presentation and disclosure.
C. There should always be a separate assertion related to cutoff of transactions and events.
D. The completeness assertion deals only with whether all transactions and events that should have been recorded have been recorded.
7. Which of the following would least likely affect the appropriateness of evidence available to an auditor?
A. The timeliness of such evidence.
B. The sampling method employed by the auditor to obtain a sample of such evidence.
C. The relevance of such evidence to the financial statement assertion being verified.
D. The relationship of the preparer of such evidence to the entity being audited.
8. Which of the following forms of documentary evidence would be considered the most reliable by an auditor?
A. Prenumbered C. Authorized by a responsible official
B. Internally generated D. Easily duplicated
9. The objective of tests of details of transactions performed as substantive tests is to
A. Comply with Philippine Standards on Auditing (PSAs).
B. Detect material misstatements in the financial statements.
C. Attain assurance about the reliability of the accounting system.
D. Evaluate whether management’s policies and procedures operated effectively.
10. In testing the existence assertion for an asset, an auditor ordinarily works from
A. Potentially unrecorded items to the financial statements.
B. Financial statements to the potentially unrecorded items.
C. Supporting evidence to the accounting records.
D. Accounting records to the supporting evidence.
11. The following statements related to the use of analytical procedures as substantive procedures. Which is FALSE?
A. The presence of relationships among data provides evidence as to the completeness, accuracy, and occurrence of transactions
captured in the information produced by the entity’s information system.
B. Substantive analytical procedures are applicable when there is only a small volume of transactions.
C. The application of substantive analytical procedures is based on the expectation that relationships among data exist and continue in
the absence of known conditions to the contrary.
D. Reliance on the results of substantive analytical procedures will depend on the auditor’s assessment of the risk that the analytical
procedures may identify relationships as expected when, in fact, a material misstatement exists.
12. According to PSA 520, when analytical procedures identify significant fluctuations or relationships that are inconsistent with other
relevant information or that deviated from predicted amounts, the auditor should investigate and obtain adequate explanations and
appropriate corroborative audit evidence. The auditor’s investigation of unusual fluctuations and relationships ordinarily begins with
inquires of management, followed by
I. Corroboration of management’s responses.
II. Consideration of the need to not apply other audit procedures based on the results of such inquiries, if management is unable to
provide an explanation of if the explanation is not considered adequate.
A. I only B. II only C. Both I and II D. Neither I nor II
13. If the objective of a test of details of transactions is to detect overstatements of sales, the auditor’s direction of testing should be from the
A. Cash receipts journal to the sales journal. C. Source documents to the accounting entries.
B. Accounting records to the source documents. D. Sales journal to the cash receipts journal.
14. An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence
assertion concerning sales transactions and the auditor has already gathered evidence supporting
A. Beginning and ending inventory balances C. Cutoffs of sales and purchases.
B. Shipping and receiving activities. D. Cash receipts and accounts receivable.
15. The auditor finds a 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 cash receipts. Which of the following audit procedures would be
most effective in discovering fraud in this scenario?
A. Send negative confirmations to all outstanding accounts receivable customers.
B. Send positive confirmations to a random selection of customers.
C. Perform detailed review of debits to sales discounts, sales returns and allowances, or other debit accounts, excluding cash posted to
the cash receipts journal.
D. Take a sample of bank deposits and trance the detail in each bank deposit back to the entry in the cash receipts journal.
16. Which of the following is NOT a principal objective in auditing accounts receivable?
A. To determine whether receivables are carried at their net realizable value.
B. To determine whether receivables are properly classified, described, and disclosed in the financial statements, including notes, in
accordance with the applicable financial reporting framework.
C. To determine whether the entity has real claims in all receivables on the balance sheet.
D. To determine whether the accounts are collected by the balance sheet date.
17. A large university has relatively ineffective internal control. To obtain assurance that all tuition revenue has been recorded, the auditor
should
A. Confirm a sample of tuition payments with the students.
B. Prepare a year-end bank reconciliation.
C. Compare business office revenue records with registrar’s office record of students enrolled.
D. Observe tuition payment procedures on a surprise basis.
18. The process of obtaining and evaluating audit evidence through direct communication from a third party in response to a request for
information about a particular item affecting assertions made by management in the financial statements is called
A. Inquiry B. External confirmation C. Recalculation D. Reperformance
19. Auditors may use positive and/or negative forms of confirmation requests. An auditor most likely will use
A. The negative form for small balances.
B. The positive form, when the combined assessed level of inherent and control risk for related assertions is acceptably low, and the
negative form when it is unacceptable high.
C. The positive form to confirm all balances regardless of size.
D. A combination of the two forms, with the positive form used for trade balances and the negative form for other balances.
20. In confirming accounts receivable, an auditor decided to confirm customers’ accounts 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 nonresponsive may cause an inference that the account balance is correct.
B. An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to auditor.
C. A client-prepared letter reminding the customer that a nonresponsive will cause a second request to be sent
D. A client-prepared statement of account showing the details of the customer’s account balance.
21. Which of the following statements would an auditor most likely add to the negative form of confirmations of accounts receivable to
encourage timely consideration by the recipient?
A. “The following invoices have been selected for confirmation and represent amounts that are overdue.”
B. “This is not a request for payment; remittances should not be sent to our auditors in the enclosed envelope.”
C. “If you do not report any difference within 15 days, it will be assumed that the statement is correct.”
D. “Report any differences on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your
records.”
22. During the process of confirming receivables as of December 31, 200A, a positive confirmation was returned indicating the “balance
owed as of December 31 was paid on January 6, 200B”. The auditor will most likely
A. Reconfirm the zero balance as of January 7, 200B.
B. Verify that the amount was received.
C. Determine whether a cash discount was taken by the customer.
D. Determine whether there were any changes in the account between January 1 and January 6, 200B.
23. Which of the following is the most effective procedure for determining the collectability of an account receivable?
A. Confirmation of the account.
B. Examination of the related sales invoice(s).
C. Review of the subsequent cash collections.
D. Review of authorization of credit sales to the customer and the previous history of collections.
24. Once a CPA has determined that accounts receivable have increased because of slow collections in a tight money environment, the CPA is
likely to
A. Expand tests of credibility.
B. Review the going concern ramifications.
C. Review the entity’s credit and collection policy.
D. Increase the balance in the allowance for bad debts account.
25. The best evidence regarding year-end bank balances is documented in
A. Cutoff bank statement C. Interbank transfer schedule
B. Cash in bank lead schedule D. Bank reconciliations
26. The purpose of a proof of cash is to
A. Validate that the client’s bank did not make an error during the period being examined.
B. Confirm that the client has properly separated the custody function from the recording function with respect to cash.
C. Prove that the client’s year-end balance of cash is fairly stated.
D. Determine whether any unauthorized disbursements or unrecorded deposits were made for the given time period.
27. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on management’s assertion of
A. Existence C. Completeness
B. Valuation and allocation D. Presentation and disclosure
28. Which of the following is a substantive procedure that an auditor would most likely perform to verify the existence and valuation of
recorded accounts payable?
A. Confirming accounts payable balances with known suppliers who have zero balances.
B. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
C. Investigating hta open purchase order file to ascertain that prenumbered purchase orders are used and accounted for.
D. Receiving the client’s mail, unopened, for a reasonable period of time after the year-end to search for unrecorded vendor’s invoices.
29. Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
A. Reconciling vendors’ statements to the file of receiving reports to identify items received just prior to the balance sheet date.
B. Examining unusual relationships between monthly accounts payable balances and recorded cash payments.
C. Investigating payables recorded prior to and just subsequent to the balance sheet date to determine whether they are supported by
receiving reports.
D. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to prior
period.
30. In an audit of purchasing department, which of the following is usually considered a risk factor?
A. Purchases are made from parties related to buyers or other company officials.
B. Purchase specifications are developed by the department requesting the material.
C. Purchases are not rotated among suppliers included in an approved vendor list.
D. Purchases are made against blanket or open purchase orders for certain type of items.
31. In an audit of inventories, an auditor is least likely to verify that
A. The client has used proper inventory pricing.
B. Damaged goods and obsolete items have been properly accounted for.
C. All the inventory owned by the client is on hand at the time of the count.
D. The financial statement presentation on inventories is appropriate.
32. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of control risk is high, an auditor will
probably
A. Increase the extent of tests of control relevant to the inventory cycle.
B. Request the client to schedule the physical inventory count at the end of the year.
C. Apply the gross profit tests to ascertain the reasonableness of the physical counts.
D. Insist that the client perform physical counts of inventory items several times during the year.
33. To obtain evidence as to the reasonableness and completeness of inventory balances, auditors perform analytical procedures. Which of the
following quantitative relationship is not applicable to inventory balances?
A. Inventory turnover ratios C. Debt-to-equity ratio
B. Number of days’ sales in inventory D. The gross profit percentage
34. An auditor’s attendance at the physical inventory at the client’s main plant at year-end provides direct evidence to support which of the
following objectives?
A. Accuracy of the priced-out inventory.
B. Determination of goods in the hands of consignees.
C. Evaluation of lower of cost or net realizable value test.
D. Identification of obsolete or damaged merchandise to evaluate allowance (reserve) for obsolescence.
35. Which of the following audit procedures probably provides the most reliable evidence concerning the entity’s assertion of rights and
obligations related to inventories?
A. Inspect the open purchase order file for significant commitments that should be considered for disclosure.
B. Trace test counts noted during the entity’s physical count to the entity’s summarization of quantities.
C. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.
D. Select the last few shipping advices used before the physical count and determine whether shipments were recorded as sales.
36. When outside firms of nonaccountants specializing in the taking of physical inventories are used to count, list, price and subsequently
compute the total peso amount of the inventory on hand at the date of the physical count, the auditor will ordinarily
A. Make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory
transactions.
B. Not reduce the extent of work on the physical count of inventory.
C. Consider the reduced audit effort with respect to the physical count of inventory as a scope limitation.
D. Consider the report of the outside inventory-taking firm to be an acceptable alternative procedure to the observation of physical
inventories.
37. Which of the following is the best audit test to evaluate the accuracy of the inventory records for materials inventory in a production
operation?
A. Trace the selected inventory receipts to perpetual inventory records.
B. Perform turnover tests for material inventory.
C. Reconcile quantities on hand per physical counts or selected items with perpetual inventory records and verify pricing.
D. Vouch selected postings in the perpetual inventory records to source documents.
38. An auditor is most likely to learn of slow-moving inventory through
A. Inquiry of sales personnel. C. Inquiry of warehouse personnel.
B. Review of perpetual inventory records. D. Physical observation of inventory.
39. The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the
difference?
A. No journal entry had been made on the retailer’s books for several items returned to the suppliers.
B. Inventory items had been counted but the tags placed on the items had not been taken off the items and added to the inventory
accumulation sheets.
C. An item purchased “FOB shipping point” had not arrived yet at the date of the inventory count and had not been reflected in the
perpetual records.
D. Credit memos for several items returned by customers had not been recorded.
40. Which of the following is NOT one of the auditor’s primary objectives in an audit of trading securities?
A. To determine whether securities are authentic.
B. To determine whether securities actually exist.
C. To determine whether securities are the property of the client.
D. To determine whether securities are properly classified on the balance sheet.
41. In establishing the existence and ownership of an investment held by a corporation in the form of publicly traded stock, an auditor should
inspect the securities or
A. Determine that the investment is carried at the lower of cost or market.
B. Confirm the number of shares owned that are held by the independent custodian.
C. Inspect the audited financial statements of the investee company.
D. Obtain written representations from management confirming that the securities are properly classified as trading securities.
42. Which of the following audit procedures would give the least assurance of the existence of securities held by an entity?
A. Confirmation from the custodian.
B. Simultaneous count of liquid assets.
C. Vouching all changes during the year to supporting documentation.
D. Examination of paid checks issued in payment of securities purchased.
43. In establishing the existence and ownership of an investment held by a corporation in the form of publicly traded stock, an auditor should
inspect the securities or
A. Confirm the number of shares owned that are held by an independent custodian.
B. Determine that the investment is carried at the lower of cost or market.
C. Inspect the audited financial statements of the investee company.
D. Obtain written representations from management confirming that the securities are properly classified as trading securities.
44. Which of the following provides the best form of evidence pertaining to the annual valuation of an investment in which the client owns a
30% voting interest?
A. Historical cost of the investee company’s assets.
B. Market quotations of the investee company’s stock.
C. Audited financial statements of the investee company.
D. Current fair value of the investee company’s assets.
45. An auditor is most likely to verify the interest earned on bond investment by
A. Testing controls relevant to cash receipts.
B. Verifying the receipt and deposit of interest checks.
C. Confirming the bond interest rate with the issuer of the bonds.
D. Recomputing the interest earned on the basis of face amount, interest rate, and period held.
46. In the audit of property, plant and equipment, the auditor tries to do all of the following EXCEPT
A. Obtain an understanding of internal control.
B. Assess the adequacy of replacement funds.
C. Judge the reasonableness of the depreciation.
D. Determine the extent of property abandoned during the year.
47. If an auditor tours a production facility, which of the following misstatements or questionable practices is most likely to be detected by the
audit procedure specified?
A. Overhead has been overapplied.
B. Insurance coverage on the facility has lapsed.
C. Necessary facility maintenance has not been performed.
D. Depreciation expense on fully depreciated machinery has been recognized.
48. Determining that proper amounts of depreciation are expensed provides assurance about management’s assertions of valuation and
allocation and
A. Rights and obligations B. Existence C. Completeness D. Presentation and disclosure
49. When few property and equipment transactions occur during the year, the continuing auditor usually obtains an understanding of the
related internal controls and performs
A. Tests of control.
B. A thorough examination of the balances at the beginning of the current year.
C. Analytical procedures to substantiate current year additions to property and equipment.
D. Extensive tests of current year property and equipment transactions.
50. A bond trust indenture is the contractual agreement between bondholders and the issuing company. In an audit of bonds payable, an
auditor expects the trust indenture to include
A. Subscription list.
B. Description of the collateral.
C. Effective yield of the bonds issued.
D. Issuing company’s debt-to-equity ratio at the time of issuance.
51. In auditing long-term bonds payable, an auditor most likely will
A. Compare interest expense with the bond payable amount for reasonableness.
B. Confirm the existence of individual bondholders at year-end.
C. Examine documentation of assets purchased with bond proceeds for liens.
D. Perform analytical procedures on the bond premium and discount accounts.
52. In an audit of a medium-sized manufacturing concern, which of the following areas can be expected to require the least amount of audit
time?
A. Assets B. Liabilities C. Revenue D. Shareholders’ equity
53. In an audit of shareholders’ equity, an auditor is most concerned that
A. Share splits are changed to retained earnings at par or stated value.
B. Dividends declared during the year were approved by the shareholders.
C. Share capital transactions are properly authorized.
D. All changes in the shareholders’ equity accounts are monitored by an independent transfer agent and registrar.
54. An audit program for the retained earnings account should include a step that requires verification of the
A. Gain or loss resulting from disposition of treasury shares.
B. Authorization for both cash and stock dividends.
C. Fair value used to charge retained earnings to account for a two-for-one share split.
D. Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable.
55. An auditor is most likely to perform substantive tests of details of payroll transactions and balances when
A. Analytical procedures indicate unusual fluctuations in recurring payroll entries.
B. Cutoff tests indicate a substantial amount of accrued payroll expenses.
C. The assessed level of control risk relative to payroll transactions is low.
D. Accrued payroll expense consists primarily of unpaid commissions.
56. One payroll audit objective is to determine whether the employees received pay in amounts recorded in the payroll journal. To achieve this
objective, the auditor should
A. Reconcile the payroll bank account.
B. Compare cancelled payroll checks with the payroll journal.
C. Requesting that a company official distribute all payroll checks.
D. Determine whether a proper segregation of duties exists between recording payroll and reconciling the payroll bank account.
57. An auditor found that employee time cards in one department are not properly approved by the supervisor. Which of the following could occur?
A. Duplicate paychecks might be issued.
B. The wrong hourly rate could be used to calculate gross pay.
C. Employees might be paid for hours they did not work.
D. Payroll checks might not be distributed to the appropriate payees.
58. The primary purpose of audit working papers is to
A. Provide evidence of the planning and execution of audit procedures performed.
B. Comply with the Philippine Standards on Auditing (PSAs).
C. Document weaknesses in internal control with recommendations to management for improvement.
D. Serve as a means for the preparation of the financial statements.
59. An auditor’s working papers will ordinarily be least likely to include documentation showing how the
A. Engagement was planned.
B. Client’s schedules were prepared.
C. Unusual matters resolved.
D. Understanding of the client’s internal control was obtained and control risk was assessed.
60. Audit working papers are indexed by means of reference numbers. Which of the following is the primary purpose of indexing?
A. Support the audit opinion.
B. Eliminate the need for follow-up reviews.
C. Permit cross-referencing and simplify supervisory review.
D. Determine that working papers adequately support findings, conclusions and reports.
61. The audit working paper that reflects the major components of an amount reported in the financial statements is the and to indicate the
procedure/s done by the auditor working papers are marked with ___________.
A. Lead schedule, tickmarks C. Supporting schedule, tickmarks
B. Interbank transfer schedule, flowchard D. Carryforward schedule, symbols
62. An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for
A. Cash flow increases and decreases C. Audit objectives and assertions.
B. Reclassifications and adjustments D. Reconciliations and tickmarks
63. Using personal computers in auditing may affect the methods used to review the work of staff assistants because
A. The quality control standards may differ.
B. Working paper documentation may not contain readily observable details of calculations.
C. Documenting the supervisory review may require assistance of consulting services of personnel.
D. Supervisory personnel may not have been understanding the capabilities and limitations of personal computers.
64. Which of the following analyses appearing in a predecessor’s working papers is the successor auditor least likely to be interested in
reviewing?
A. Analysis of current assets and liabilities. C. Analysis of income statement accounts.
B. Analysis of shareholders’ equity accounts. D. Analysis of noncurrent assets and liabilities.
65. The auditor is required to complete the administrative process of assembling the final audit file on a timely basis after the data of the
auditor’s report. The time limit within which to complete the assembly of the audit file is ordinarily
A. Not more than 60 days after the date of the auditor’s report.
B. Not more than 30 days after the date of the auditor’s report.
C. Not more than 90 days after the end of the entity’s reporting period.
D. Not more than 60 days after the date of the entity’s financial statements are authorized for issue.
66. The completion of the assembly of the final audit file after the date of the auditor’s report does NOT ordinarily involve
A. Deleting or discarding superseded documentation.
B. Sorting, collating and cross-referencing working papers.
C. Signing off on completion checklists relating to the file assembly process.
D. The performance of new audit procedures or the drawing of new conclusions.