MODULE 8: DOCUMENTATION, FINANCIAL ASSERTIONS AND AUDIT EVIDENCE

Question 1

1. When reviewing audit working papers, the primary responsibility of an audit supervisor is to detemine that:
   A. each worksheet is properly identified with a descriptive heading.
   B. working papers are properly referenced and kept in logical groupings.
   C. standard departmental procedures are adhered to with regard to working paper
   preparation and technique.
   D. working papers adequately support the audit findings, conclusions, and report.

Answer 1

D. working papers adequately support the audit findings, conclusions, and report.

Question 2

2. A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor who is and the senior auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably be
   A. silent on the matter because it is an internal matter for the auditing firm.
   B. expanded to document that the assistant auditor is completely disassociated from
   responsibility for the auditor’s opinion.
   C. expanded to document the additional work required because all disagreements of this
   type will require further substantive testing.
   D. expanded to document the assistant auditor’s position and the manner in which the
   difference of opinion was resolved.

Answer 2

D. expanded to document the assistant auditor’s position and the manner in which the
difference of opinion was resolved.

Question 3

3. During the course of an audit engagement, an auditor prepares and accumulates audit working papers. The primary purpose of audit working papers is to
   A. aid the auditor in adequately planning his work.
   B. serve as a reference for future audit engagements.
   C. support the underlying concepts included in the preparation of the basic financial
   statements.
   D. support the auditor’s opinion.

Answer 3

D. support the auditor’s opinion.

Question 4

4. Which of the following characteristics is most important in assuring the achievement of the primary purpose of working papers?
   A. Working papers must be of standard format and standard content.
   B. Working papers must be properly indexed and cross-referenced to the draft of audit
   report.
   C. Working papers must provide sufficient, competent, and useful information to support the audit report.
   D. Working papers must be arranged in logical order following the audit program
   sequence.

Answer 4

C. Working papers must provide sufficient, competent, and useful information to support the audit report.

Question 5

5. The primary purpose of the auditor’s working papers is to
   A. provide evidence of planning and execution of audit procedures performed.
   B. serve as a means with which to prepare the financial statements.
   C. document the deficiencies in internal control with recommendations to management for
   improvement.
   D. comply with the auditing standards of the profession.

Answer 5

A. provide evidence of planning and execution of audit procedures performed.

Question 6

6. What is (are) the purpose(s) of audit documentation?
   A. Provide a reasonable assurance that the audit is conducted in accordance with PSAs.
   B. Provide a basis for determining the appropriate audit report.
   C. Provide the supervisory personnel an opportunity to assess the suffciency of evidence obtained duting an audit.
   D. Audit documentation serves all the given choices.

Answer 6

D. Audit documentation serves all the given choices.

Question 7

7. Which of the following is not a primary purpose of audit working papers?
   A. Coordinate the examination
   B. Assist in the preparation of the audit report
   C. Support the financial statements
   D. Provide evidence of the audit work performed

Answer 7

C. Support the financial statements

Question 8

8. Which of the following conditions constitues inappropriate working paper preparation?
   A. All forms and memoranda used/issued by the auditee department are included in the
   working papers.
   B. Flowcharts are included in the working papers.
   C. The findings are cross-referenced to the supporting documentation.
   D. Tick marks are explained in the working papers.

Answer 8

A. All forms and memoranda used/issued by the auditee department are included in the
working papers.

Question 9

9. Working papers that record the procedures used by the auditor to gather evidence should be
   A. considered the primary support for the financial statements being audited.
   B. viewed as the connecting link between the books of accounts and the financial
   statements.
   C. designed to meet the circumstances of the particular engagement.
   D. destroyed when the particular audit engagement is terminated.

Answer 9

C. designed to meet the circumstances of the particular engagement.

Question 10

10. Which of the following factors will least affect the independent auditor’s judgment as to the quantity, type, and content of the working papers desirable for a particular engagement?
    A. Nature of the auditor’s report.
    B. Nature of the financial statements, schedules, or other information upon which the
    auditor is reporting.
    C. Need for supervision and review.
    D. Number of personnel assigned to the audit.

Answer 10

D. Number of personnel assigned to the audit.

Question 11

11. During an audit engagement, data are compiled and included in the audit working papers. The working papers are
    A. a client-owned record of conclusions reached by the auditors who performed the
    engagement.
    B. evidence supporting financial statements
    C. support for the auditor’s compliance with generally accepted auditing standards.
    D. a record to be used as a basis for the following year’s engagement.

Answer 11

C. support for the auditor’s compliance with generally accepted auditing standards.

Question 12

12. Which of the following is not a factor affecting the independent auditor’s judgment about the quantity, type, and content of audit working papers?
    A. The need for supervision and review of the work performed by assistants.
    B. The nature and condition of the client’s records and internal controls.
    C. The expertise of the client personnel and their participation in preparing the schedules.
    D. The type of financial statements, schedules, or other information on which the auditor is
    reporting.

Answer 12

C. The expertise of the client personnel and their participation in preparing the schedules.

Question 13

13. Which of the following factors most likely affects the auditor’s judgment about the quantity, type, and content of working papers?
    A. The assessed level of control risk
    B. The content of the client’s representation letter
    C. The timing of substantive tests completed prior to the balance sheet date.
    D. The usefulness of the working papers as a reference source for the client

Answer 13

A. The assessed level of control risk

Question 14

14. Audit working papers are used to record the results of the auditor’s evidence-gathering procedures. When preparing working papers, the auditor should remember that working papers should be
    A. kept on the client’s premises so that the client can have access to them for reference
    purposes.
    B. the primary support for the financial statements being examined.
    C. considered as part of the client’s accounting records that are retained by the auditor.
    D. designed to meet the circumstances and the auditor’s needs on each engagement.

Answer 14

D. designed to meet the circumstances and the auditor’s needs on each engagement.

Question 15

15. Audit working papers are indexed by means of reference numbers. The primary purpose of indexing is to
    A. permit cross-referencing and simplify supervisory review.
    B. support the audit report.
    C. eliminate the need for follow-up reviews.
    D. determine that working papers adequately support the findings, conclusions, and reports.

Answer 15

A. permit cross-referencing and simplify supervisory review.

Question 16

16. The principal purpose for cross-indexing the audit working papers is to
    A. give the working papers a professional apperance.
    B. explain the use of tick marks.
    C. provide an explanation on the audit steps performed.
    D. provide a trail for the auditor and the reviewer.

Answer 16

D. provide a trail for the auditor and the reviewer.

Question 17

17. Documentation may not be deleted from the working papers after the
    A. audit report delivery date.
    B. date of the audit report.
    C. Completion of the assembly of final audit file.
    D. final day of fieldwork.

Answer 17

C. Completion of the assembly of final audit file.

Question 18

18. The reason why the auditors accumulate evidence is to
    A. defend themselves in the event of a lawsuit.
    B. justify the conclusions they have otherwise reached.
    C. satisfy the requirements of the Bureau of Internal Revenue.
    D. enable them to reach conclusions about the fairness of the financial statements and
    issue an appropriate audit report.

Answer 18

D. enable them to reach conclusions about the fairness of the financial statements and
issue an appropriate audit report.

Question 19

19. To be competent, evidence must be all of the folowing except:
    A. Sufficient
    B. Reliable
    C. Relevant
    D. Unbiased

Answer 19

A. Sufficient

Question 20

20. Which of the following is not one of the determinants of the persuasiveness of evidence?
    A. Competence
    B. Physical examination
    C. Relevance
    D. Sufficiency

Answer 20

B. Physical examination

Question 21

21. In determining the sufficiency of evidential matter, which of the following would not normally be a factor?
    A. Cost/benefit considerations
    B. The sampling technique used
    C. Audit risk
    D. Materiality of the account

Answer 21

B. The sampling technique used

Question 22

22. Which of the following statements is not true regarding the competence of audit evidence?
    A. Relevance is enhanced by an effective information system.
    B. To be competent, evidence must be both valid and relevant.
    C. Validity is related to the quality of the client’s information system.
    D. Relevance must always relate to audit objectives.

Answer 22

A. Relevance is enhanced by an effective information system.

Question 23

23. Which of the following statements concerning evidence is correct?
    A. Competent evidential matter supporting management’s assertions should be convincing
    rather than merely persuasive.
    B. Effective internal control unlikely contributes to the reliability of the evidence created
    within the entity.
    C. The cost of obtaining evidence is not an important consideration to an auditor in
    deciding what evidence should be obtained.
    D. A client’s accounting data cannot be considered a sufficient audit evidence to support the financial statements.

Answer 23

D. A client’s accounting data cannot be considered a sufficient audit evidence to support the financial statements.

Question 24

24. Which of the following statements is incorrect about audit evidence?
    A. Evidence obtained from an independent source outside the client organization is more reliable than that obtained from within.
    B. Documentary evidence is more reliable, when it is received by the auditor derectly from an
    independent third party.
    C. Documents the originate outside the company are considered more reliable than those that originate within the client’s organization.
    D. External evidence, such as communications from banks, is generally regarded as more reliable than the information obtained from the client.

Answer 24

B. Documentary evidence is more reliable, when it is received by the auditor derectly from an
independent third party.

Question 25

25. Which of the following factors is most important in determining the competence of audit evidence?
    A. The reliability of the evidence in meeting the audit objective
    B. The objectivity of the auditor in gathering the evidence
    C. The quantity of the evidence obtained
    D. The independence of the source of evidence

Answer 25

A. The reliability of the evidence in meeting the audit objective

Question 26

26. Which of the following pertains to the reliability of audit evidence?
    A. The independence of the source of evidenceB. The experience level of the auditor who obtains the evidence
    C. Whether the audit client uses a manual or computerized accounting system
    D. The quantity of the evidence obtained

Answer 26

A. The independence of the source of evidence

Question 27

27. Which of the following is not one of the characteristics of competent evidence?
    A. Independence of the source of the evidence
    B. Effectiveness of internal control structure under which the internal evidence has been
    developed
    C. Size of the sample
    D. Degree of objectivity of the auditor

Answer 27

C. Size of the sample

Question 28

28. Which of the following presumptions does not relate to the competence of audit evidence?
    A. The more effective the internal control is, the more assurance it provides about the
    accounting data and financial statements.
    B. An auditor’s opinion, to be economically useful, is formed within a reasonable time and
    based on evidence obtained at a reasonable cost.
    C. Evidence obtained from independent sources outside the entity is more reliable than
    evidence secured solely within the entity.
    D. The independent auditor’s direct personal knowledge, obtained through observation
    and inspection, is more persuasive than information obtained indirectly.

Answer 28

B. An auditor’s opinion, to be economically useful, is formed within a reasonable time and
based on evidence obtained at a reasonable cost.

Question 29

29. Which of the following statements relating to the competence of evidential matter is always true?
    A. Evidential matter gathered by an auditor from outside an enterprise is reliable.
    B. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory conditions.
    C. Oral representations made by management are not valid.
    D. Evidence gathered by auditors must be both valid and relevant to be considered competent.

Answer 29

D. Evidence gathered by auditors must be both valid and relevant to be considered competent.

Question 30

30. Although the validity of evidential matter is dependent on the circumstances under which it is obtained, there are three general presumptions that have some usefulness. The situations given below indicate the relative reliability that a CPA has placed on two types of evidence obtained in different situations. Which of these is an exception to one of the general presumptions?
    A. The CPA places more reliance on the balance in the scrap sales account at Plant A,
    where the CPA has made limited tests of transactions because of effective controls, than
    at Plant B, where the CPA has made extensive tests of transactions because of
    ineffective controls.
    B. The CPA places more reliance on the CPAs computation of interest payable on
    outstanding bonds than on the amount confirmed by the trustee.
    C. The CPA places more reliance on the report of an expert on an inventory of precious
    gems than on the CPA’s physical observation of the gems.
    D. The CPA places more reliance on a schedule of insurance coverage obtained from the
    company’s insurance agent than on one prepared by the internal audit staff.

Answer 30

C. The CPA places more reliance on the report of an expert on an inventory of precious gems than on the CPA’s physical observation of the gems.

Question 31

31. Which of the following would not be a factor in determining the competence of evidential matter?
    A. The source of the evidence
    B. The relevance of the evidence
    C. The cost of gathering the evidence
    D. Timeliness of the evidence

Answer 31

C. The cost of gathering the evidence

Question 32

32. Which of the following statements is incorrect?
    A. There are many ways an auditor can accumulate evidence to meet the overall audit
    objectives.
    B. Sufficient competent evidence must be accumulated to meet the auditor’s professional
    responsibility.
    C. The cost of accumulating the evidence should be minimized.
    D. Gathering evidence and minimizing costs are equally important.

Answer 32

D. Gathering evidence and minimizing costs are equally important.

Question 33

33. Each of the following might, by itself, form a valid basis for an auditor of deciding to omit a test except for the:
    A. Difficulty and expense involved in testing a particular item
    B. Assessment of control risk at a low level
    C. Inherent risk involved
    D. Relationship between the cost of obtaining evidence and its usefulness

Answer 33

A. Difficulty and expense involved in testing a particular item

Question 34

34. The following statements were made in a discussion of audit evidence by two independent auditors. Which of these statements is not valid?
    A. “I am seldom convinced beyond all doubt about all aspects of the financial statements
    being audited.”
    B. “I would not undertake that procedure because at best the results would only be
    persuasive and I’m looking for convincing evidence.”
    C. “I evaluate the degree of risk involved in deciding the kind of evidence I will gather.”
    D. “I evaluate the usefulness of the evidence I can obtain against the cost to obtain it.”

Answer 34

B. “I would not undertake that procedure because at best the results would only be
persuasive and I’m looking for convincing evidence.”

Question 35

35. Management assertions that are embodied in the financial statements are
    A. directly related to standards on auditing.
    B. directly related to financial reporting framework.
    C. indirectly related to standards on auditing.
    D. indirectly related to financial reporting framework.

Answer 35

B. directly related to financial reporting framework.

Question 36

36. Management assertions are
    A. stated in the footnotes to the financial statements.
    B. implied or expressed representations about the financial statements.
    C. explicit representations about the financial statements.
    D. provided to the auditor in the assertions letter, but are not disclosed in the financial
    statements.

Answer 36

B. implied or expressed representations about the financial statements.

Question 37

37. As used in auditing, which of the following statements best describes “assertions”?
    A. Assertions are the representations of management as to the reliability of the infromation system.
    B. Assetions are the auditor’s findings to be communicated in his audit report.
    C. Assertions are the representations of management as to the fairness of presentation of the financial statements.
    D. Assertions are found only in the notes to the financial statements.

Answer 37

C. Assertions are the representations of management as to the fairness of presentation of the financial statements.

Question 38

38. Financial statement assertions include all of the following except:
    A. Occurrence
    B. Presentation and disclosure
    C. Consistency and comparability
    D. Completeness

Answer 38

C. Consistency and comparability

Question 39

39. The audit objective “that all transactions and accounts that should be presented in the financial statements are included” is related to which assertion?
    A. Occurrence
    B. Rights and obligations
    C. Completeness
    D. Presentation and disclosure

Answer 39

C. Completeness

Question 40

40. The audit objective “that all footnotes have been included in the financial statements” is related most closely to which assertion?
    A. Existence or occurrence
    B. Rights and obligations
    C. Completeness
    D. Presentation and disclosure

Answer 40

D. Presentation and disclosure

Question 41

41. Which of the following is a management assertion that relates to the valuation or allocation of fixed assets?
    A. Fixed assets are properly classified as noncurrent assets
    B. Fixed asset depreciation has been correctly calculated
    C. The client has title to the machinery and equipment
    D. Lienor encumbrance on fixed assets is appropriately disclosed in the notes to the
    financial statements

Question 42

42. Which of the following statements about the existence and completeness objectives is incorrect?
    A. The existence and completeness objectives emphasize opposite audit concerns.
    B. Existence deals with overstatements and completeness deals with understatements.
    C. Existence deals with understatements and completeness deals with overstatements.
    D. The completeness objective deals with unrecorded transactions.

Question 43

43. If reported sales for 2009 erroneously include sales that occurred in 2010, the assertion violated on the 2009 statements would be
    A. occurrence
    B. completeness
    C. presentation and disclosure
    D. rights and obligation

Question 44

44. The complteness assertion would be violated if:
    A. fictitious sales transactions were included in accounts receivable.
    B. unbilled shipments had occurred during the period.
    C. the balance of accounts payable was overstated.
    D. disclosure in the statements of pledged receivable was inadequate.

Question 45

45. The rights and obligations assertion applies to
    A. current liability items only.
    B. balance sheet items only.
    C. both income statement and balance sheet items.
    D. assets that are not owned by the company.

Question 46

46. Which of the following is incorrect?
    A. It would be a violation of the completeness assertion if management would record a sale that did not take place.
    B. The completeness assertion deals with matters opposite from those of the
    existence/occurrence assertion.
    C. The completeness assertion is concerned with the possibility of omitting items from the financial statements that should have been included.
    D. The existence/occurrence assertion is concerned with inclusion of amounts that should not have been included.

Question 47

47. Which of the following best describes the primary purpose of audit procedures?
    A. To detect errors or irregularities
    B. To comply with financial reporting standards
    C. To gather corroborative evidence
    D. To verify the accuracy of account balances

Question 47

48. Physical examination of assets is not a sufficient form of evidence when the auditor wants to determine the
    A. existence of the asset
    B. quantity and description of the asset
    C. condition or quality of the asset
    D. ownership of the asset

Question 48

49. Physical examination is not an objective means of ascertaining an asset’s
    A. quantity
    B. description
    C. condition or quality
    D. ownership

Question 48

50. Which one of the following statements is not true? “The evidence gathering technique of observation
    A. is useful in most parts of the audit.”
    B. is rarely sufficient by itself.”
    C. is limited to what the auditor sees.”
    D. requires the gathering of corroborative evidence.”

Question 48

51. A letter to the auditor in response to an inquiry is an example of
    A. physical evidence
    B. confirmation evidence
    C. documentary evidence
    D. analytical evidence

Question 49

52. A CPA, who is performing an independent audit, would most likely use recalculation as a substantive test for which of the following expense-related accounts?
    A. Purchase of supplies
    B. Interest expense
    C. Advertising expense
    D. Repairs and maintenance expense

Question 50

53. “Evaluation of financial information made by a study of plausible relationships among financial and nonfinancial data involving comparisons of recorded amounts to expectations developed by the
    auditor” refers to:
    A. auditing
    B. tests of balances
    C. tests of transactions
    D. analytical procedures

Question 51

54. External auditors often confirm assertions contained in the organization’s financial statements and accounting records with third parties. Which of the following best explains why confirmation produces an evidence of high quality?
    A. Written assertions from knowledgeable third parties provide sufficient evidence to
    achieve most audit objectives.
    B. Confirmation by knowledgeable third parties is usually the most relevant evidence available.
    C. Confirmation by knowledgeable third parties is usually the least costly evidence to obtain.
    D. Confirmation by knowledgeable third parties is highly competent because of its
    independent source.

Question 52

55. When comparing the reliability of external versus internal documents, the external documents are generally considered
    A. more reliable
    B. less reliable
    C. equally reliable
    D. unreliable

Question 53

56. Traditionally, confirmations are used to verify
    A. individual transactions between organizations, such as sales transactions
    B. fixed asset addition
    C. bank balances and accounts receivable
    D. any of the given responses

Question 54

57. Analytical procedures are so important that they are required during
    A. planning and completion phases
    B. planning and testing phases
    C. testing and completion phases
    D. planning, testing, and completion phases

Question 55

58. Analytical procedures used in planning an audit should focus on
    A. evaluating the adequacy of evidence gathered concerning unusual balances
    B. testing individual account balances that depend on accounting estimates
    C. enhancing the auditor’s understanding of the client’s business
    D. Identifying material weaknesses in internal control

Question 56

59. Analytical procedures are
    A. substantive tests designed to evaluate a system of internsl control.
    B. tests of controls designed to evaluate the validity of management’s representation letter.
    C. substantive tests designed to evaluate the reasonableness of financial information.
    D. tests of controls designed to evaluate the reasonableness of financial information.

Question 56

1. In determining the quantity and qualify of evidence to gather, the auditor will be satisfied when the evidence is
   A. irrefutable
   B. highly persuasive
   C. conclusive
   D. completely convincing

Question 56

2. The current file of the auditor’s working papers generally should include
   A. a flowchart of the internal controls
   B. a copy of the financial statements
   C. organization charts
   D. copies of bond and note indentures

Question 57

3. It refers to the detailed instructions for the collection of a particular type of audit evidence that is to be obtained at some time during the audit
   A. sampling plan
   B. audit procedure
   C. audit program
   D. audit plan

Question 58

4. The auditor’s working papers will least likely include documentation showing how the
   A. schedules are prepared by the client personnel.
   B. engagement is planned.
   C. understanding of the client’s internal control is obtained and control risk was assessed.
   D. unusual matters are resolved.

Question 59

5. Although the quantity and content of audit working papers vary with each particular engagement, 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 are classified as exceptions.
   C. documentation indicating that the audit work is adequately planned and supervised.
   D. analyses of capital stock and other owner’s equity accounts.

Question 59

6. The audit working paper that reflects the major components of an amount reported in the financial statements is the
   A. interbank transfer schedule.
   B. supporting schedule.
   C. carry forward schedule.
   D. lead schedule.

Question 59

7. An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for
   A. cash flow increases and decreases.
   B. audit objectives and assertions.
   C. reclassifications and adjustments.
   D. reconciliation and tick marks.

Question 59

8. In the course of an audit of financial statements for the purpose of expressing an opinion thereon, the auditor will normally prepare a schedule of unadjusted differences for which he did not propose adjustments when they were uncovered. The primary purpose of this schedule is to
   A. point out to the responsible client officials the errors made by various company personnel.
   B. summarize the adjustments that must be made before the company can prepare and submit its income tax returns.
   C. identify the potential effects on the financial statement of errors or disputed items that were considered immaterial when discovered.
   D. summarize the errors made by the company so that corrections can be made after the audited financial statements are released.

Question 60

9. Which of the following analyses appearing in a predecessor’s working papers would the successor auditor least likely review?
   A. Analysis of noncurrent balance sheet accounts
   B. Analysis of current balance sheet accounts
   C. Analysis of contingencies
   D. Analysis of income statement accounts

Question 61

10. Using personal computers in auditing may affect the methods used to review the work of staff assistants because
    A. the audit fieldwork standards for supervision may differ.
    B. documenting the supervisory review may require assistance of consulting services personnel.
    C. supervisory personnel may not have an understanding of the capabilities and limitations of personal computers.
    D. working paper documentation may not contain readily observable details of
    calculations.

Question 61

11. In an internal audit, the audit supervisor determines that the working papers are complete
    A. when satisfied that the audit objectives have been met and the working papers support the conclusions.
    B. when working papers refer to the steps outlined in the audit program.
    C. only after the auditor who prepared the working papers has signed and dated them.
    D. when proper cross-references to other working papers are noted.

Question 62

12. Standardized working papers are often used, chiefly because they allow working papers to be prepared more
    A. efficiently.
    B. comprehensively.
    C. neatly.
    D. accurately.

Question 62

13. After the fieldwork audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up working paper review. This second review usually
    focuses on
    A. the fair presentation of the financial statements in conformity with GAAP.
    B. fraud involving the client’s management and its employeess.
    C. the materiality of the adjusting entries proposed by the audit staff.
    D. the communication of internal control weaknesses to the client’s audit committee

Question 63

14. An auditor’s working papers should
    A. not be permitted to serve as a reference source for the client.
    B. not contain comments critical of management.
    C. show that the accounting records agree or reconcile with the financial statements.
    D. be considered the primary support for the financial statements being audited.

Question 64

15. “The detailed description of the results of the various evidence decisions for a specific audit” is called an
    A. audit procedure.
    B. audit plan.
    C. audit program.
    D. audit guide.

Question 65

16. In using the work of a specialist, an understanding should exist among the auditor, the client, and the specialist as to the nature of the work to be performed by the specialist. Preferebly, the understanding should be documented and would include all of the following except
    A. the objectives and scope of the specialist’s work.
    B. the specialist’s representations as to his relationship, if any, to the client.
    C. the specialist’s understanding of the auditor’s corroborative use of the specialist’s findings in relation to the representations in the financial statements.
    D. a statement that the methods or assumptions to be used are not inconsistent with those used by the client.

Question 66

17. Which of the following is an invalid description of why working papers are developed?
    A. Facilitates third-party reviews
    B. Aids in the planning, performance, and review of audits
    C. Provides the principal evidential support for the auditor’s report
    D. Aids in the professional development of the operating staff

Question 67

18. During the working paper review, an audit supervisor finds that the auditor’s reported findings are not adequately cross-referenced to supporting documentation. The supervisor will most likely instruct the
    auditor to
    A. prepare a working paper to indicate that the full scope of the audit was carried out.
    B. familiarize himself with the sequence of working papers so that he will be able to answer questions about the conclusions stated in the report.
    C. eliminate any cross-references to other working papers since the system is unclear.
    D. provide a working paper indexing system that shows the relationship between findings, conclusions, and the related facts.

Question 68

19. The main advantage of properly indexed working papers is to
    A. reduce the size of the file.
    B. better organize the working papers.
    C. allow division of labor within the audit team.
    D. facilitate the efficient use of audit staff.

Question 69

20. Which of the following statements about working papers is correct?
    A. Working papers are not permitted to be used as a reference source by the client.
    B. The auditor should document his understanding of the client’s internal control which is to be used to plan the audit.
    C. Working papers may be regarded as a substitute for the client’s accunting records.
    D. When reporting on comparative financial statements, the independent auditor may discard working papers after two years.

Question 70

21. Which of the following is a basic tool used by the auditor to control the audit work and review the progress of the audit?
    A. Time and expense summary
    B. Engagement letter
    C. Progress flowchart
    D. Audit program

Question 71

22. Which of the following working papers would one normally expect to find in the permanent file?
    A. A copy of a long-term bond indenture
    B. The working trial balance
    C. An analysis of additions and disposals relating to marketable securities
    D. A workpaper analyzing customer replies to confirmation requests.

Question 71

23. The permanent file section of the working papers that is kept for each audit client most likely contains
    A. review notes pertaining to questions and comments regarding the audit work performed.
    B. a schedule of time spent on the engagement by each individual auditor.
    C. correspondence with the client’s legal counsel concerning pending litigation.
    D. narrative descriptions of the client’s internal control policies and procedures.

Question 71

24. Which of the following statements is correct with respect to ownership of audit documentation?
    A. The audit firm owns the audit documentation.
    B. The audit client owns the audit documentation.
    C. The audit client and audit firm jointly own the audit documentation.
    D. The law is not explicit with respect to the ownership of audit documentation.

Question 71

25. Which of the following statements is true?
    A. The auditor’s objectives follow and are closely related to management assertions.
    B. Management’s assertions follow and are closely related to the auditor’s objectives.
    C. The auditor’s primary responsibility is to find and disclose fraudulent managemetn assertions.
    D. Assertions about presentation and disclosure deal with whether the accounts have been included in the financial statements at appropriate amounts.

Question 72

26. Which of the following is an incorrect statement about audit objectives?
    A. There should be a one-to-one relationship between audit objectives and procedures.
    B. Audit objectives should be developed on the basis of management assertions about the financial statement components.
    C. Selection of tests to meet audit objectives should depend upon the understanding on internal control.
    D. The auditor should resolve any substantial doubt about any of the management’s material financial statement assertions.

Question 73

27. Which of the following asseertions is least likely to be tested exclusively at an interim date?
    A. Existence for inventory
    B. Completeness for accounts receivable
    C. Existence for equipment
    D. Valuation for marketable securities

Question 74

28. Assuming a low assessed level of control risk, which of the following audit procedures is least likely to be performed?
    A. Physical inspection of a sample of inventory
    B. Search for unrecorded cash receipts
    C. Obtaining a client representation letter
    D. Confirmation of accounts receivable

Question 75

29. Which of the following auditing procedures is ordinarily performed last?
    A. Reading the minutes of the directors’ meetingd held during the audit year
    B. Confirming accounts payable balances
    C. Obtaining a management representation letter
    D. Testing of control procedures on purchasing function

Question 76

30. Which of the following is not one of the broad categories of assertions?
    A. General or specific transaction objectives
    B. Existence or occurrence
    C. Valuation or allocation
    D. Presentation and disclosure

Question 77

31. Determining whether amounts are in conformity with GAAP addresses the proper measurement of assets, liabilities, revenues, and expenses which includes all of the following except:
    A. The reasonableness of management’s accounting estimates
    B. Proper application of valuation principles
    C. Proper application of matching principle
    D. The reasonableness of management’s accounting policies

Question 78

32. For a particular assertion, control risk is the risk that
    A. controls will not detect a material misstatement that occurs.
    B. audit procedures will fail to detect a weak control system.
    C. the prescribed control procedures will not be applied uniformly.
    D. a material misstatement will occur in the accounting process.

Question 79

33. Which of the following is an incorrect statement?
    A. An example of a completeness addertion would be that notes payable in the balance
    sheet includes all such obligations of the entity.
    B. An example of an occurrence assertion would be that sales in the income statement represent exchanges of goods or services that actually take place.
    C. An example of a rights/obligations assertion would be that amounts capitalized for leases in the balance sheet represent the cost of the entity’s rights to leased property.
    D. An example of a valuation/allocation assertion would be that property, plant, and
    equipment are recorded at market value.

Question 79

34. A distinction must be made between general audit ojectives and specific audit objectives for each account balance. Which of the following is an incorrect statement?
    A. The general audit objectives are applicable to every account balance on the financial statements.
    B. The specific audit objectives are applicable to every account balance on the financial statements.
    C. The general audit objectives are tailored to the engagement.
    D. The specific audit objectives are tailored to the engagement.

Question 79

35. Which of the following “general transaction-related audit objectives” is not part of the valuation or allocation assertion?
    A. Completeness
    B. Accuracy
    C. Classification
    D. Timing

Question 80

36. Only three of the following management assertions are associated with transaction-related audit objectives. Which one of the following is not?
    A. Existence or occurrence
    B. Completeness
    C. Valuation or allocation
    D. Presentation and disclosure

Question 81

37. Which of the following statements is incorrectly stated?
    A. Balance-related audit objectives are applied to account balance.
    B. Transaction-related audit objectives are applied to classes of transactions.
    C. Balance-related audit objectives are applied to the ending balance in balance sheet accounts.
    D. Balance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts.

Question 81

38. The detail tie-in objective is not concerned that the details in the account balance
    A. agree with related subsidiary ledger accounts.
    B. are properly disclosed, in accordance with PFRS.
    C. foot to the total in the account balance.
    D. agree with the total in he general ledger.

Question 82

39. The disclosure objective is concerned that
    A. the account balance is properly presented in the financial statements.
    B. disclosure requirements are properly presented in the financial statements and in the footnotes.
    C. both responses are correct.
    D. both responses are incorrect.

Question 82

40. If a long-term note receivable is included in the account receivable listing, there is a violation of the
    A. existence objective.
    B. completeness objective.
    C. classification objective.
    D. timing objective.

Question 83

41. After the general objectives are understood, specific objectives for each account balance on the financial statements can be developed. Which of the following statements is true?
    A. There should be at least one specific objective for each relevant general objective.
    B. There will be only one specific objective for each relevant general objective.
    C. There will be many specific objectives developed for each relevant general objective.
    D. There must be one specific objective for each general objective.

Question 84

42. Which of the following is not a proper matching of auditor’s objective with management’s assertion?
    A. Validity matches with existence or occurrence
    B. Completeness matches with completeness
    C. Ownership matches with rights and obligations
    D. Classification matches with presentation/disclosure

Question 85

43. An audit process is a well-defined methodology for organizing an audit to ensure that
    A. The evidence gathered is both sufficient and competent.
    B. All appropriate audit objectives are specified.
    C. All appropriate audit objectives are met.
    D. All of the responses are correct.

Question 86

44. Which of the following is correct?
    a. The evidence that the auditor accumulates remains the same from audit to audit, but the general objectives vary, depending on the circumstances.
    b. The general audit objectives remain the same from audit to audit, but the evidence varies, depending on the circumstances.
    c. The circumstances may vary from audit to audit, but the evidence accumulated remains the same.
    d. The general audit objectives may vary from audit to audit, but the circumstances remain the same.

Question 87

45. Auditing standards require the auditor to accumulate sufficient competent evidence to support the opinion issued. Because of the nature of audit evidence, it is
    a. unlikely that the auditor will be completely convinced that the opinion is correct.
    b. likely that the auditor will be completely convinced that the opinion is correct.
    c. unlikely that the auditor will arrive at a conclusion.
    d. likely that the auditor would change his/her mind about the opinion if he/she takes the time to gather additional evidence

Question 88

46. Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion?
    a. The audit program
    b. The auditor’s judgment
    c. Philippine Standards on Auditing
    d. The auditor’s working papers

Question 89

47. In the final analysis, the amount and kinds of evidential matter that are required to support the auditor’s opinion should be determined by
    a. the audit committee.
    b. auditor’s judgment.
    c. professional standards.
    d. standards of auditing.

Question 90

48. To adequately plan the extent of the audit evidence to gather, the generally accepted auditing standards require the auditor to gain an understanding of
    a. the internal control structure.
    b. client’s organization charts.
    c. client’s procedural manuals.
    d. All of these

Question 91

49. When unable to obtain sufficient competent evidential matter to determine whether certain client management’s acts are non-compliance to laws and regulations, the auditor would most likely issue
    a. an unqualified opinion with a separate explanatory paragraph.
    b. either a qualified opinion or an adverse opinion.
    c. either a disclaimer of opinion or a qualified opinion.
    d. either an adverse opinion or a disclaimer of opinion.

Question 91

50. An audit evidence is generally considered relevant when it is
    a. derived through valid statistical sampling.
    b. objective and unbiased.
    c. factual, adequate, and convincing.
    d. consistent with the audit objectives.

Question 92

51. Two overriding considerations that affect an auditor’s judgment in accumulating evidence are:
52. Sufficient competent evidence must be accumulated to meet the auditor’s professional responsibility.
53. Cost of accumulating evidence should be minimized In evaluating these conditions,
    a. the first is more important than the second.
    b. the second is more important than the first.
    c. they are equally important.
    d. it is impossible to prioritize one.

Question 92

52. Most of the independent auditor’s work in formulating an opinion on the financial statement consists of
    a. studying and evaluating internal control.
    b. obtaining and examining evidential matter.
    c. examining cash transactions.
    d. comparing recorded accountability with assets.

Question 93

53. There are four subcategories of decisions that the auditors must make in accumulating audit evidence. Which of the following is not one of those subcategories?
    a. Audit procedures to be used
    b. Reasons for deciding not to test controls
    c. Sample size
    d. Timing of the audit procedures

Question 94

54. Evidential matter supporting the financial statements consists of the underlying accounting data and all corroborating information available to the auditor. Which of the following is an example of corroborating information?
    a. Minutes of meetings of the board of directors
    b. General and subsidiary ledgers
    c. Accounting manuals
    d. Worksheets supporting cost allocations

Question 94

55. Which of the following is not one of the major phases in an audit process?
    a. Plan and design an audit approach
    b. Test controls and transactions
    c. Inform client of any adjustments or corrections to be made in the financial statements
    d. Complete the audit and issue the report

Question 95

56. Evidential matter is generally considered sufficient when
    a. it is competent.
    b. there is enough of it to afford a reasonable basis for an opinion on the financial statements.
    c. it has the qualities of being relevant, objective, and free from known bias.
    d. it has been obtained through random selection.

Question 95

57. In making decisions about evidence for a given audit, the auditor’s goal is to obtain a sufficient amount of timely, reliable evidence that is relevant to the information being verified, and to do so
    a. no matter what the cost involved in obtaining such evidence.
    b. only if the cost is reasonable.
    c. at the lowest possible total cost.
    d. at any cost because the costs are billed to the client.

Question 96

58. Which of the following is not a distinguishing feature of risk-based auditing?
    a. Identifying areas posing the highest risk of financial statements errors
    b. Analysis of internal control
    c. Collecting and evaluating evidence
    d. Concentrating audit resources in those areas presenting the highest risk of financial statement errors

Question 97

59. The competence of evidence available to an auditor is least likely affected by
    a. the relevance of such evidence to the financial statement assertion being investigated.
    b. the relationship of the source of such an evidence to the entity being audited.
    c. the timeliness of the audit evidence obtained.
    d. the sampling method employed by the auditor to obtain a number of samples as evidence

Question 98

60. Which of the following procedures would provide the auditor the most reliable audit evidence?
    a. Inquires of the client’s internal audit staff held in private.
    b. Inspection of prenumbered client purchase orders filled in the vouchers payable department.
    c. Analytical procedures performed by the auditor on the entity’s trial balance.
    d. Inspection of bank statements obtained directly from the client’s financial institution.

Question 99

61. The most reliable forms of documentary evidence are those documents that are
    a. prenumbered.
    b. easily duplicated.
    c. internally generated.
    d. authorized by a responsible official.

Question 100

62. You have been assigned to audit the maintenance department of an organization. Which of the following is likely to produce the least reliable audit evidence?
    a. Notes on discussions with mechanics in the maintenance operation.
    b. A schedule comparing actual maintenance expenses with budgeted expenses and those of the prior period and disclosing important differences.
    c. A narrative covering review of user reports on maintenance service.
    d. An analysis of changes in certain maintenance department ratios.

Question 100

63. Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess
    a. control risk at below the maximum level.
    b. inherent risk at the maximum level.
    c. the difficulty in controlling the incremental audit risk.
    d. materiality for the accounts tested as insignificant.

Question 101

64. Before applying principal substantive tests to the details of accounts at an interim date, an auditor should
    a. assess control risk as below the maximum for the assertions embodied in the accounts selected for interim testing.
    b. determine that the accounts selected for interim testing are not material to the financial statements taken as a whole.
    c. consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.
    d. obtain written representations from management that all financial records and related data will be made available.

Question 101

65. If an auditor conducts an audit of financial statements in accordance with generally accepted auditing standards, which of the following will the auditor most likely detect?
    a. Misposting of recorded transactions
    b. Forgery
    c. Unrecorded transactions
    d. Collusive fraud

Question 101

66. Which of the following best explains the difference between audit objectives and audit procedures?
    a. Audit objectives establish broad general goals; audit objectives specify the detailed work to be performed.
    b. Audit objectives are tailor-made for each assignment; audit procedures are generic in application.
    c. Audit objectives define specific desired accomplishments; audit procedures provide the means of achieving audit objectives.
    d. Audit procedures and audit objectives are essentially the same.

Question 102

67. In gathering audit evidence in the performance of substantive tests, the auditor
    a. should use the test month approach.
    b. relies on persuasive rather than convincing evidence in the majority of cases.
    c. would consider the client’s documentary evidence more competent than evidence gathered from
    observation and physical inspection.
    d. would express an adverse opinion if he has substantial doubt as to any significant assertion.

Question 102

68. The auditor will not ordinarily initiate discussion with the audit committee concerning the
    a. extent to which the work of internal auditors will affect the scope of the examination.
    b. extent to which a change in the company’s organization will influence the scope of the examination.
    c. details of potential problems that the auditor believes might cause a qualified opinion.
    d. details of the procedures that the auditor intends to apply.

Question 103

69. With respect to the auditor’s planning of a year-end examination, which of the following statements is always true?
    a. An engagement should not be accepted after the fiscal year ends.
    b. An inventory count must be observed at the balance sheet date.
    c. The client’s audit committee should not be told of the specific audit procedures that will be performed.
    d. It is an acceptable practice to carry out substantial parts of the examination at interim dates.

Question 103

70. An auditor test counts a batch of inventory. This is an example of what kind of evidence?
    a. Analytical
    b. Documentary
    c. Physical
    d. Testimony

Question 103

71. The audit program is basically a list of
    a. detailed audit procedures.
    b. account balances and their related assertions.
    c. audit procedures to be performed.
    d. audit controls.

Question 104

72. Each audit program should have a column for all of the following except:
    a. Audit procedures to be performed
    b. The initials of the auditor who performs each procedure
    c. The date that the performance of the procedure is performed and completed
    d. The test of controls related to each procedure

Question 104

73. Which of the following is not an example of confirmation as an evidence?
    a. Requesting the client’s outside legal counsel to evaluate the possible outcome of pending litigation.
    b. Questioning the client’s employees about existing internal control policies and procedures.
    c. Requesting the client’s customers to verify year-end account receivable balances.
    d. Requesting payees to respond in writing to the terms contained in notes payable appearing in the client’s ledger.

Question 105

74. Accounting for the numeric sequence in the issuance of the sales invoices meets primarily the
    a. completeness assertion.
    b. valuation or allocation assertion.
    c. occurrence.
    d. presentation or disclosure assertion.

Question 106

75. Which of the following factors affects the competence of evidence obtained by an auditor?
    a. The independence of the information source
    b. The competence of the information source
    c. The timeliness of the information
    d. All of these factors affect the competence of evidence

Question 107

76. Which one of the following is the least persuasive type of audit evidence?
    a. Documents mailed by outsiders to the auditor
    b. Correspondence between the auditor and vendors
    c. Copies of sales invoices inspected by the auditor
    d. Computations made by the auditor

Question 107

77. Audit evidence takes different forms and varies in persuasiveness. Which of the following is the least persuasive type of evidence?
    a. Vendor’s evidence
    b. Computations made by the auditor
    c. Bank statement obtained from the client
    d. Canceled checks

Question 107

78. Which of the following statements is true?
    a. Evidence must pertain to the objective that the auditor is testing before it can be persuasive.
    b. Relevance can be considered only in terms of specific audit objectives.
    c. Evidence may be relevant to one objective but not to other objective.
    d. All the responses are true.

Question 108

79. A term which is synonymous with competence is
    a. relevance.
    b. reliability of evidence.
    c. sufficient.
    d. any of the given choices.

Question 109

80. Which of the following statements about the competence of evidence is not correct?
    a. To be competent, an evidence must be both valid and relevant.
    b. Competence can be improved by selecting a larger sample size.
    c. Competence can be improved by selecting audit procedures that contain a higher quality of the characteristics sought.
    d. Competence cannot be improved by selecting different population items to include in the sample size.

Question 110

81. Which one of the following forms of evidence would be least reliable?
    a. Monthly bank statement
    b. Positive confirmation of customer’s balance
    c. A letter from the client’s attorney stating that there are no known lawsuits pending against the client
    d. Client’s file copy of a purchase requisition

Question 111

82. Which one of the following forms of evidence would be most reliable?
    a. An insurance policy in the client’s file
    b. The file copy of a purchase requisition
    c. The file copy of a receiving room report
    d. The file copy of sales invoices

Question 112

83. Evidence obtained directly by the auditor is more competent than information obtained indirectly.
    Which of the following is not an example of the auditor’s direct knowledge about an evidence?
    a. Physical examination
    b. Observation
    c. Computation
    d. Inquiry

Question 113

84. When the auditor is gathering evidence, he will conclude that if the source of information is independent, the evidence will
    a. be reliable.
    b. not be reliable.
    c. be reliable if the provider has no reason to be biased.
    d. not be reliable unless the provider is qualified.

Question 114

85. Evidence obtained directly by the auditor will not be reliable if
    a. it is provided by the client’s attorney.
    b. the auditor lacks the qualifications to evaluate the evidence.
    c. it is impossible for the auditor to obtain additional corroborating evidence.
    d. The client denies its veracity.

Question 115

86. Evidence is usually more persuasive for balance sheet accounts when it is obtained
    a. from various times throughout the client’s year.
    b. only from transactions occurring on the balance sheet date.
    c. as close to the balance sheet date as possible.
    d. from the time period when transactions in that account were most numerous during the fiscal period.

Question 116

87. For income statement accounts; evidence is more persuasive if there is a sample from
    a. the entire period under audit.
    b. the period closest to the end of the fiscal period.
    c. at least three months of the fiscal year.
    d. December, since this would include large holiday sales.

Question 117

88. Which of the following statements is not true?
    a. A large sample of highly competent evidence is not persuasive unless it is relevant to the objective being tested.
    b. A large sample of evidence that is neither competent nor timely is not persuasive.
    c. A small sample of only one or two pieces of relevant, competent, and timely evidence lacks persuasiveness.
    d. The persuasiveness of evidence can be evaluated after considering its competence and its sufficiency.

Question 118

89. Generally, what source of evidence would most persuasively support audit conclusions?
    a. External
    b. Inquiry
    c. Oral
    d. Informal

Question 118

90. Observation, though considered a reliable audit procedure, has limited usefulness. However, it is used in a number of different audit situations. Which of the following statements is true regarding
    observation as an audit technique?
    a. It is the most effective audit methodology to use in filling out internal control questionnaires.
    b. It is the most persuasive technique to learn how transactions are really processed during the period under audit.
    c. It is rarely sufficient to satisfy any audit assertion other than existence.
    d. It is the most persuasive audit technique for determining if fraud has really occurred.

Question 118

91. Which of the following would be the most relevant form of evidence to evaluate the reasonableness of account balances?
    a. Analytical
    b. Documentary
    c. Physical
    d. Representation

Question 119

92. When an auditor calculates the gross margin as a percent of sales and compares it with previous periods, this type of evidence is called
    a. physical examination.
    b. computation.
    c. observation.
    d. inquiry.

Question 120

93. Objective evidence is more reliable than evidence that requires considerable judgment to determine whether it is correct. Which of the following is not an example of an objective evidence?
    a. Confirmation of accounts receivable
    b. Confirmation of bank balances
    c. Confirmation by client’s attorney of the likely outcome of outstanding lawsuits against the client.
    d. Adding a list of accounts payable to determine the total reconciles with the general ledger balance.

Question 121

94. Which of the following is an example of subjective evidence?
    a. A positive confirmation of an account receivable
    b. A bank confirmation
    c. Inquiries of the credit manager about the collectibility of noncurrent accounts receivable
    d. The physical count of securities and cash

Question 122

96. The distinction between physical examination of assets and examination of documents is dependent on the item being examined. If the object being examined has no inherent value, the
    evidence is called
    a. physical examination.
    b. documentation.
    c. confirmation.
    d. garbage.

Question 122

95. Physical examination refers to the inspection or count by the auditor of assets such as
    a. cash or inventory only.
    b. cash, inventory, canceled checks, and sales documents.
    c. cash, inventory, securities, notes receivable, and tangible fixed assets.
    d. cash, inventory, canceled checks, and tangible fixed assets

Question 123

97. Confirmations are a highly regarded and often-used type of evidence because
    a. they are inexpensive.
    b. cause no inconvenience for auditor or third party.
    c. come from independent sources.
    d. all of the given sources.

Question 124

98. Three common types of confirmations used by auditors are:
99. Negative confirmations
100. Positive confirmations with a request for information
101. Positive confirmations with the information included
     If they were placed in the order of their reliability, from highest to lowest, the sequence would be
     a. 1, 2, 3
     b. 3, 2, 1
     c. 2, 3, 1
     d. 3, 1, 2

Question 125

99. Whenever practicable and reasonable, the CPA must confirm a sample of
    a. accounts receivable.
    b. accounts payable.
    c. both accounts receivable and accounts payable.
    d. client’s bank accounts.

Question 126

100. Confirmations lose their value if the client
     a. controls the preparation of the confirmation.
     b. does the mailing of the confirmation.
     c. receives the responses
     d. does any of the given choices.

Question 126

102. Documentation is the form of evidence used
     a. in every financial statement audit.
     b. in most financial statement audit.
     c. when it is both readily available and less costly than other procedures.
     d. used when nothing is available that is more competent.

Question 127

103. A document which the auditor receives from the client, but which is prepared by someone outside
     the client’s organization, is a(n)
     a. confirmation.
     b. internal document.
     c. external document.
     d. inquiry.

Question 128

101. When the auditor examines the client’s documents and records to substantiate the information on the financial statements, it is commonly referred to as
     a. inquiry.
     b. confirmation.
     c. vouching.
     d. physical examination.

Question 129

104. An example of vouching would be
     a. trace from receiving reports to the acquisition journal.
     b. trace from the acquisitions journal to the supporting vendor’s invoices.
     c. trace from duplicate bank deposit slips to the cash receipts journal.
     d. trace from canceled checks to the cash disbursements journal

Question 129

105. Which of the following statements is not true? “The evidence-gathering technique of inquiry
     a. cannot be regarded as conclusive.”
     b. requires the gathering of corroborative evidence.”
     c. is the auditor’s principal method of evaluating the client’s internal control structure.”
     d. does not provide evidence from an independent source.

Question 129

106. An auditor would be least likely to use confirmations in connection with the examination of
     a. inventories.
     b. long-term debt.
     c. property, plant, and equipment.
     d. stockholders’ equity.

Question 130

108. Ordinarily, what source of evidence should least affect audit conclusions?
     a. External
     b. Inquiry of management
     c. Auditor-prepared analysis
     d. Inquiry of company legal counsel

Question 130

107. Which of the following is an example of internal evidence that the auditor would obtain in an audit of
     accounts receivable?
     a. The carrier’s bill of lading
     b. Sales invoice copies
     c. A customer’s purchase order
     d. A vendor’s month-end statement

Question 131

109. A list of audit procedures that the auditors need to perform to produce evidence is called an
     a. audit plan.
     b. audit program.
     c. audit standard.
     d. audit budget

Question 131

110. The procedures specifically outlined in an audit program are primarily designed to
     a. protect the auditor in the event of litigation.
     b. detect errors or irregularities.
     c. test internal control structure.
     d. gather evidence.

Question 132

111. In the context of an audit of financial statements, substantive tests are audit procedures that
     a. may be eliminated under certain conditions.
     b. are designed to discover significant subsequent events.
     c. may be either tests of transactions, direct tests of financial balances, or analytical tests.
     d. will increase proportionately with the auditor’s assessment of control risk.

Question 133

112. When evaluating the planned level of substantive tests for each significant assertion, the auditor will consider the evidence obtained from all of the following except:
     a. Procedures to understand the business and industry and related analytical procedures that have been completed.
     b. Evidence about the effectiveness of internal controls gained while obtaining an understanding of internal control structure.
     c. The assessment of detection risk.
     d. Evidence of effectiveness of computer control procedures and related follow-up.

Question 133

113. A revision of the planned level of detection risk will be necessary whenever
     a. accounts are affected by more than one transaction class.
     b. the multiple control risk assessments for the same account balance assertion differ.
     c. the final assessed control risk is not the same as the actual level.
     d. the final assessed control risk does not support the planned level.

Question 133

114. Tests of details of transactions primarily involve
     a. tracing and vouching.
     b. confirmation with outsiders.
     c. observation.
     d. scanning.

Question 134

115. The objective of dual-purpose tests is to
     a. evaluate whether internal controls are operating effectively.
     b. detect material misstatements in the financial statements.
     c. identify unusual trends or patterns in comparative financial statements.
     d. test internal controls as well as transactions and balances using the same test procedures.

Question 135

116. To test for unsupported entries in the ledger, the direction of audit testing should be from the
     a. ledger entries.
     b. journal entries.
     c. externally generated documents.
     d. original source documents.

Question 136

117. The least costly form of testing is usually
     a. tests of controls.
     b. tests of details of balances.
     c. tests of detais of transactions.
     d. analytical procedures.

Question 137

120. Choices about audit evidence are influenced by all of the following except:
     a. The auditor’s understanding of the business and industry
     b. Assessment of inherent and control risk
     c. Comparisons of the auditor’s expectation of the financial statements with the client’s books and records
     d. Decisions about immaterial risk factors

Question 137

118. Tracing from source documents to journals most directly addresses which financial statement assertion?
     a. Valuation
     b. Competence
     c. Existence
     d. Rights

Question 138

119. An auditor is examining the detailed debit and credit entries in an account. The auditor is most likely performing
     a. analytical procedures.
     b. tests of details of balances.
     c. tests of details of transactions.
     d. tests of controls.

Question 139

122. In testing the existence assertion for an asset, an auditor ordinarily works from the
     a. financial statements to the potentially unrecorded items.
     b. potentially unrecorded items to the financial statements.
     c. accounting records to the supporting evidence.
     d. supporting evidence to the accounting records.

Question 139

121. The auditor is performing substantive tests several months before the end of the year. This most likely means that
     a. inherent risk is set at moderate to high.
     b. detection risk is set at moderate to high.
     c. control risk is set at maximum.
     d. detection risk at low to very low.

Question 140

123. WB Industries has significant information that is transmitted, processed, maintained, and accessed electronically. The auditor has concluded that it is not possible to reduce detection risk to an
     acceptable level by performing only substantive tests for a number of financial statement assertions. The auditor’s alternative strategy is to
     a. increase the acceptable audit risk.
     b. focus audit tests on other assertions for which substantive tests prove to be effective.
     c. require management to change its information system to provide appropriate evidence.
     d. perform tests of controls to gather evidential matter to be used as basis of assessing control risk related to those assertions.

Question 141

124. The decision on the part of the auditor to perform substantive tests during the interim period will be based upon
     a. audit risk control and cost effectiveness.
     b. the approach followed in the past.
     c. the auditor’s time convenience.
     d. the cooperation extended by the client staff.

Question 141

125. Choose the best illustration of objective audit evidence from the following:
     a. The paid invoice file containing invoices matched with receiving reports and purchase orders.
     b. Management’s assertion that payment procedure requires matching of invoice with receiving report and purchase order.
     c. Clerical staff assurances that management policy regarding payment of invoices—matching of invoice with receiving report and purchase order—is always followed.
     d. The treasurer’s statement of not remembering any exceptions in which an invoice was submitted for payment that is not accompanied by a covering receiving report and purchase order.

Question 142

126. Which of the following audit procedures best supports the valuation objective?
     a. Performing a lower of cost or market test of the client’s inventories
     b. Reviewing a contingent liability disclosure for proper wording
     c. Searching for unrecorded liabilities
     d. Observing the client’s year-end physical inventory taking

Question 143

127. Which of the following is not an appropriate auditing procedure supporting the fairness of financial statement presentation?
     a. Inspecting plant asset additions for existence
     b. Recalculating accrued interest on notes payable
     c. Examining invoices in support of legal fees recorded during the fiscal year.
     d. Reviewing the client’s production quality control program

Question 144

128. Audit procedures are normally performed
     a. early in the accounting period being examined.
     b. throughout the accounting period being examined, but with emphasis on the transactions near the end.
     c. within one to three months after the close of the accounting period.
     d. During all three of the above periods.

Question 145

129. The auditor would unlikely perform early substantive testing of account balances when:
     a. A number of significant deviations from control policies and procedures were detected during tests of controls.
     b. Due to economic factors, the fourth quarter activity this year is expected to be somewhat sluggish.
     c. The client uses a natural business year.
     d. The taking of the client’s inventory is performed at an early date.

Question 146

130. As the acceptable level of detection risk decreases, an auditor may change the
     a. timing of substantive tests by performing them at an interim date rather than at year-end.
     b. nature of substantive tests from a less effective to a more effective procedure.
     c. timing of tests of controls by performing them at several dates rather at one time.
     d. assessed level of inherent risk to a higher amount.

Question 147

131. The auditor is concerned that a client usually fails to bill customers for shipments. An audit procedure that would gather relevant evidence would be to
     a. select a sample of duplicate sales invoices and trace each to related shipping documents.
     b. trace a sample of shipping documents to related duplicate sales invoices.
     c. trace a sample of Sales Journal entries to Accounts Receivable subsidiary ledger.
     d. compare the total of the Schedule of Accounts Receivable with the balance of the Accounts Receivable account in the general ledger.

Question 148

132. The extent of testing normally applies
     a. exhaustively to the number of items to be tested.
     b. to both the number of items tested and the number of tests performed.
     c. exclusively to the number of substantive tests performed.
     d. to both the nature of items tested and the number of tests performed.

Question 149

133. Which of the following, when performed by the auditor, is not a test of mechanical accuracy?
     a. Extending sales invoices
     b. Adding journals and ledgers
     c. Tracing amounts from journals to ledgers
     d. Calculating the current ratio

Question 150

134. Which of the following audit procedures would provide the least reliable evidence about legal title to inventories?
     a. Confirmation of inventories at locations outside the client’s facilities
     b. Analytical procedures comparing inventory balances to purchasing and sales activities
     c. Observation of physical inventory counts
     d. Examination of paid vendors’ invoices

Question 151

135. Which of the following is not a substantive procedure?
     a. Tests of details of transactions
     b. Tests of purchasing function
     c. Tests of details of balances
     d. Analytical reviews

Question 152

136. Which of the following types of audit tests are not used to satisfy planned detection risk?
     a. Analytical procedures
     b. Tests of controls
     c. Substantive tests of transactions
     d. Tests of details of balances

Question 153

137. Substantive tests aid the auditor in all, but which of the following ways?
     a. Identify monetary misstatements in an account
     b. Obtain an understanding of internal control structure
     c. Satisfy planned detection risk
     d. All of the given choices

Question 154

138. Auditors usually try to plan the audit to minimize the use of tests of details of balances because
     a. other types of audit tests are more reliable.
     b. other types of audit tests are less costly.
     c. other types of audit tests require less experienced audit personnel.
     d. All of the given choices are true

Question 155

139. The independent auditor selects several transactions in each functional are and traces them through the entire accounting system, paying special attention to evidence about whether or not the control features are in operation. This audit procedure is an example of a
     a. sequence test.
     b. test of controls.
     c. substantive test.
     d. functional test.

Question 156

140. Ending account balances may be audited through the use of which of the following types of audit procedures?
     a. Tests of details of balances
     b. Analytical procedures
     c. Tests of controls
     d. Analytical procedures and tests of details of balances

Question 157

141. Which of the following represents an incorrect pairing of a type of audit test and evidence?
     a. Procedures to obtain an understanding of internal controls – Documentation
     b. Analytical procedures – Ratio analysis
     c. Substantive tests of transactions – Confirmation
     d. Tests of details of balances – Physical examination

Question 158

142. After finishing the procedures to obtain an understanding of internal control, the auditor should perform tests of control on
     a. key controls that have a material effect on the financial statements.
     b. a random sample of key controls that were reviewed.
     c. key controls upon which the auditor intends to rely and plans to assess control risk below maximum.
     d. key controls which represent material weaknesses.

Question 159

143. Where the auditor has assessed control risk of a particular area at a reduced level, he will then
     a. eliminate the need to gather evidence in that area.
     b. test the effectiveness of the controls in that area.
     c. proceed to expand the sample sizes in that area.
     d. negotiate with management to determine which controls will be tested in that area.

Question 160

144. Many test of controls involve inspecting documents. These tests are commonly referred to as
     a. tests of transactions.
     b. tests of documentation.
     c. tests of balances.
     d. tests of analytical procedures.

Question 161

145. Upon completion of all the necessary audit procedures, the auditor should combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly
     presented. This is a highly subjective process that relies heavily on
     a. Philippine Standards on Auditing.
     b. Philippine financial reporting standards.
     c. the auditor’s professional judgment.
     d. the management’s representation letter.

Question 162

146. Which of the following is not an information source for developing analytical procedures used in the
     audit?
     a. Relationships among financial statement elements
     b. Relationships between financial and relevant nonfinancial data
     c. Comparison of financial data with anticipated results (e.g. budgets and forecasts)
     d. Comparison of current year financial data with projections for next year’s financial resorts.

Question 163

147. The objective of performing analytical procedures in planning and audit is to identify the existence of
     a. unusual transactions and events,
     b. noncompliance to laws that went undeleted because of internal control weaknesses.
     c. related party transactions.
     d. recorded transactions that were not properly authorized.

Question 164

148. A major benefit provided by computerized analytical procedures is
     a. the ease of doing the calculations.
     b. the ease of updating the calculations.
     c. the ease of correcting math calculations.
     d. the ability to push the work down to lower levels of the audit staff to do the analysis.

Question 165

149. When performing analytical procedures, an auditor observes that operating income has declined
     significantly between the preceding year and the current year, the auditor should
     a. require that the decline be disclosed in the financial statements.
     b. consider the possibility that the financial statements may be materially misstated.
     c. inform the management that a qualified opinion on the financial statements will be necessary.
     d. determine the management’s responsibility for the decline and discuss the issue with the audit committee.

Question 165

151. Which of the following statements is not correct?
     a. Analytical procedures use comparisons and relationships to determine which account balances are in error.
     b. For certain immaterial accounts, analytical procedures may be the only evidence needed.
     c. In some instances, other types of evidence may be reduced when analytical procedures indicate that an account balance appears reasonable.
     d. Analytical procedures are used to isolate accounts or transactions that should be investigated more extensively.

Question 165

152. Which of the following statements regarding analytical procedures is not correct?
     a. The definition of analytical tests places of the emphasis on whether the client’s recorded data comply with PFRS.
     b. Analytical procedures are required on all audits.
     c. Analytical procedures are required on all review service engagements.
     d. For small accounts with small balances, analytical procedures alone may be sufficient evidence.

Question 165

150. Which of the following is ordinarily designed to detect possible material misstatements in the financial statements?
     a. Tests of controls
     b. Computer controls
     c. Analytical procedures
     d. Post audit working paper review

Question 165

153. An aspect of analytical procedure is referred to as “attention directing” when it highlights
     a. errors.
     b. irregularities.
     c. areas of improvements.
     d. areas that need more detailed procedures.

Question 166

154. When an analytical procedure reveals no unusual fluctuations, the implication is that
     a. there are no material errors or irregularities.
     b. there are no material errors.
     c. there are no material irregularities.
     d. the possibility of a material error or irregularity is minimized.

Question 167

155. Which of the following is not one of the major types of analytical procedures?
     a. Compare client’s financial information with industry averages
     b. Compare client’s financial information with prior year
     c. Compare client’s actual data with budget
     d. Compare client’s data with SEC averages

Question 167

159. A schedule set up to combine similar general ledger accounts, the total of which appears on the working trial balance as a single amount is referred to as a:
     a. Supporting schedule
     b. Lead schedule
     c. Audit note
     d. Reconciling schedule

Question 168

157. Most auditors prefer to replace tests of details with analytical procedures whenever possible because
     a. the analytical procedures are more reliable.
     b. the tests of details are more expensive.
     c. the analytical procedures are more persuasive.
     d. the tests of details are more difficult to interpret.

Question 168

156. Analytical procedures are usually
     a. less expensive to perform than tests of details.
     b. more expensive to perform than tests of details.
     c. just as expensive as tests of details.
     d. none of them is necessarily correct.

Question 169

158. An example of an analytical procedure is the comparison of
     a. financial information with similar information regarding the industry in which the entity operates.
     b. recorded amounts of major disbursements with appropriate invoices.
     c. results of a statistical sample with the expected characteristic of the actual population.
     d. EDP-generated data with similar data generated by a manual accounting system.

Question 170

160. The auditors use analytical procedures during the course of an audit. The most important phase of performing these procedures is the:
     a. Vouching of all data supporting various ratios.
     b. Investigation of significant variations and unusual relationships.
     c. Comparison of client computed statistics with the industry data on quarterly basis.
     d. Recalculation of industry data.