POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

COLLEGE OF ACCOUNTANCY AND FINANCE

Manila

P R A C T I C E E X A M I N A T I O N I N
A U D I T I N G T H E O R Y

“Why won’t you choose me” – Best Answer

Audit of Cash

1. Which of the following misstatements is most likely to be uncovered during an audit of a client’s bank
reconciliation?
a. Duplicate payment of a vendor’s invoice.
b. Billing a customer at a lower price than indicated by company policy.
c. Failure to record a collection of a note receivable by the bank on the client’s behalf.
d. Payment to an employee for more than the hours actually worked.

2. Which of the following is the focus of an audit of cash for most companies?
a. General cash account.
b. Payroll cash account.
c. Petty cash account.
d. Money market account.

3. Which of the following cycles does not affect cash in bank?

a. Capital acquisitions cycle.
b. Inventory and warehousing.
c. Payroll and personnel cycle.
d. Acquisitions and disbursements.

4. The audit objective of determining that cash in bank, as stated on the reconciliation, foots correctly
and agrees with the general ledger can be tested by which of the following procedures?
a. Performing tests for kiting.
b. Receiving and testing a cutoff bank statement.
c. Footing the outstanding checks list and the list of deposits in transit.
d. Examining the minutes of the board of directors for restrictions on the use of cash.

5. When the auditor believes the year-end bank reconciliation may be intentionally misstated, it is
appropriate to perform extended tests of the year-end bank reconciliation. Assuming the client has a
December 31 year-end, these extended tests would include
a. comparing all November 30 reconciling items with canceled checks and other documents in the
December bank statement.
b. comparing all canceled checks and deposit slips in the December bank statement with the
December cash disbursements and receipts records.
c. carrying out procedures subsequent to the end of the year with the use of the bank cutoff
statement.
 d. all three of the above.

6. Which of the following statements is correct?

a. Bank personnel are responsible for providing reasonable assurance that a response to a bank
confirmation is accurate.
b. Bank personnel are responsible for providing complete assurance that a bank confirmation is
complete.
c. Bank personnel are not responsible for searching their records for bank balances or loans
beyond those included on the bank confirmation.
d. All of the above are incorrect.

7. The auditor uses a proof of cash to determine whether

a. all cash receipts were deposited and all deposits were recorded in the accounting records.
b. all recorded cash disbursements were paid by the bank.
c. all amounts that were paid by the bank were recorded.
d. All three of the above.

8. A proof of cash represents

a. a test of controls and substantive test of transactions.
b. a substantive test of transactions.
c. a substantive test of transactions and test of details of balances.
d. a test of details of balances.

9. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine
all of the following except
a. general ledger.
b. bank confirmation.
c. cutoff bank statement.
d. year-end bank statement.

10. Which of the following balance-related audit objectives typically is assessed as having high inherent
risk for cash?
a. Existence.
b. Cutoff.
c. Detail tie-in.
d. Presentation and disclosure.

11. Which of the following is not a “cash equivalent”?

a. Time deposits.
b. Certificates of deposit.
c. Money market funds.
d. Marketable securities.

12. The general cash account is considered significant in almost all audits
a. where the ending balance is material.
b. even when the ending balance is immaterial.
c. except those of not-for-profit organizations.
d. where either the beginning or ending balance is material.
13. Which of the following errors would be least likely to be discovered during the audit of the acquisitions
and payments cycle?
a. Duplicate payment of a vendor’s invoice.
b. Improper payments of officers’ personal expenditures.
c. Payment of interest to a related party for an amount in excess of the going rate.
d. Payment for raw materials that were not received.

14. Because cash is the most desirable asset for people to steal, it has a higher
a. control risk.
b. inherent risk.
c. detection risk.
d. All of the above.

15. Which of the following audit objectives is typically assessed as having low inherent risk for the audit
of cash?
a. Existence.
b. Completeness.
c. Accuracy.
d. Cutoff.

16. Testing the reasonableness of the cash balance at year-end is less important when the year-end bank
reconciliation is verified
a. on a 100% basis.
b. by someone in client’s organization who is independent of the treasurer’s function.
c. by someone in client’s organization who is independent of the controller’s function.
d. by the owner/manager.

17. A major consideration in the audit of the general cash balance is the possibility of fraud. The auditor
must extend his or her procedures in the audit of year-end cash to determine the possibility of a
material fraud when there are
a. large cash balances at the end of the year.
b. large cash receipts and disbursements during the year.
c. no imprest accounts used for payroll.
d. inadequate internal controls.

18. The starting point for the verification of the balance in the general bank account is to obtain
a. a bank reconciliation from the client.
b. client’s cash account from the general ledger.
c. a cutoff bank statement directly from the bank.
d. the client’s December bank statement and reconcile it.

19. In an effort to satisfy the completeness objective, the auditor could perform which of the following
test of details of balance procedures for general cash in the bank?
a. Trace the book balance on the reconciliation to the general ledger.
b. Trace outstanding checks to subsequent period bank statements.
c. Perform a four-column proof of cash.
d. Review financial statements to make sure that material savings accounts and certificates of
deposit are disclosed separately.
20. The audit procedure which requires the auditor to record the last check number used on the last day
of the year and subsequently trace to the outstanding checks and the cash disbursements records is
performed to satisfy the audit objective of
a. detail tie-in.
b. existence.
c. completeness.
d. cut-off.

21. The reason for testing the client’s bank reconciliation is to verify whether the client’s recorded bank
balance is the same amount as the actual cash in bank, except for deposits in transit, checks
outstanding, and other reconciling items. The information needed to complete the tests of the
reconciliation are provided by the
a. client’s records and ledgers for the year under audit.
b. cutoff bank statement.
c. client’s records and ledgers for the subsequent year.
d. canceled checks for the year under audit.

22. The concern in an interim-month proof of cash is with

a. adjusting account balances.
b. reconciling the amounts per books and bank.
c. both a and b.
d. neither a nor b.

23. A proof of cash is not effective at identifying which of the following misstatements?
a. Checks written for incorrect amounts.
b. Checks issued to invalid vendors.
c. Fraudulent checks.
d. A proof of cash is ineffective at identifying all of the above misstatements.

24. The emphasis in verifying petty cash is normally on which of the following?
a. Year-end balance.
b. Controls over petty cash.
c. Transactions for the period.
d. All of the above.

25. The process of transferring money from one bank account to another and improperly recording the
transaction is referred to as
a. kiting.
b. lapping.
c. scamming.
d. embezzling.

26. The most important control for petty cash is

a. the use of payment slips that describe each disbursement.
b. the clear responsibility for the petty cash being assigned to one person.
c. the use of an imprest fund.
d. b and c, but not a.
27. Petty cash tests can ordinarily be performed at any time during the year, but as a matter of
convenience they are typically done
a. on an interim date.
b. on the balance sheet date.
c. near the end of the field work.
d. at the same time as the observation of inventory, since both auditor and client must be present
at that time.

28. Which of the following cash transfers results in a misstatement of cash at December 31, 2018?

Bank Transfer Schedule

Recorded Disbursement Recorded Date

transfer paid by transfer received
in books by bank in books by bank
a. 12/31/18 1/04/19 12/31/18 12/31/18
b. 1/04/19 1/05/19 12/31/18 1/04/19
c. 12/31/18 1/05/19 12/31/18 1/04/19
d. 1/04/19 1/11/19 1/04/19 1/04/19

29. An auditor who is engaged to examine the financial statements of a business enterprise will request
a cutoff bank statement primarily in order to
a. detect kiting.
b. detect lapping.
c. verify reconciling items on the client’s bank reconciliation.
d. verify the cash balance reported on the bank confirmation inquiry form.

30. For good internal control, the monthly bank statements should be reconciled by someone under the
direction of the
a. credit manager.
b. controller.
c. cashier.
d. treasurer.

31. During his examination of a January 19, 2019 cutoff bank statement, an auditor noticed that the
majority of checks listed as outstanding at December 31, 2018, had not cleared the bank. This would
indicate
a. a high probability of kiting.
b. a high probability of lapping.
c. that the 2018 cash disbursements records had been closed prior to December 31, 2018.
d. that the 2018 cash disbursements records had been held open past December 31, 2018.

32. Which of the following errors would be least likely to be discovered during the tests of the bank
reconciliation?
a. Payment to an employee for more hours than he worked.
b. Cash received by the client subsequent to the balance sheet date was recorded as cash receipts
in the current year.
 c. The existence of payments on notes payable that were debited directly to the bank balance by
the bank but were not entered in the client’s records.
d. Deposits recorded in the cash receipts records near the end of the year, deposited in the bank,
and included in the bank reconciliation as a deposit in transit.

33. When a customer fails to include a remittance advice with a payment, it is common practice for the
person opening the mail to prepare one. Consequently, mail should be opened by which of the
following four company employees?
a. Receptionist.
b. Sales manager.
c. Credit manager.
d. Accounts receivable clerk.

34. Which of the following balance-related objectives is not a problem when auditing the general cash
account?
a. Rights.
b. Classification.
c. Realizable value.
d. All of the above.

35. A proof of cash is not an effective procedure for identifying which of the following types of
misstatements?
a. All recorded disbursements were paid by the bank.
b. All recorded cash receipts were deposited.
c. All amounts that were paid by the bank were recorded.
d. Some checks were written for incorrect amounts.

36. Which of the following do not appear on a standard bank confirmation.

a. Client’s signature.
b. Auditor’s signature.
c. Bank account numbers.
d. Loan numbers.

37. Listing all interbank transfers made a few days before and after the balance sheet date and tracing
each to the accounting records for proper recording is a useful approach to test for
a. kiting.
b. unintentional errors in recording interbank transfers.
c. both a and b.
d. kiting and lapping.

38. The most important internal control for petty cash is

a. the use of an imprest fund that is the responsibility of one individual.
b. keeping it in a safe or locked drawer.
c. keeping the amount of cash to a minimum.
d. accessibility so that checks won’t have to be written for small amounts.
39. Under which of the following circumstances would an auditor be most likely to intensify an
examination of a $500 imprest petty cash fund?
a. Reimbursement occurs twice each week.
b. The custodian endorses reimbursement checks.
c. Reimbursement vouchers are not prenumbered.
d. The custodian occasionally uses the cash fund to cash employee checks.

40. Contact with banks for the purpose of opening company bank accounts should normally be the
responsibility of the corporate
a. board of directors.
b. treasurer.
c. controller.
d. executive committee.

41. On the last day of the fiscal year, the cash disbursements clerk drew a company check on bank A and
deposited the check in the company account in bank B to cover a previous theft of cash. The
disbursement has not been recorded. The auditor will best detect this form of kiting by
a. examining the composition of deposits in both bank A and bank B subsequent to year-end.
b. examining paid checks returned with the bank statement of the next accounting period after
year-end and trace each to accounting records for proper recording.
c. preparing, from the cash disbursements records, a summary of bank transfers for one week
prior to and subsequent to year-end.
d. comparing the detail of cash receipts as shown by the client’s cash receipts records with the
detail on the confirmed duplicate deposit tickets for three days prior to and subsequent to year-
end.

42. The best evidence regarding year-end bank balances is documented in the

a. Cutoff bank statement

b. Bank reconciliations
c. Interbank transfer schedule
d. Bank deposit lead schedule

43. A cash shortage may be concealed by transporting funds from one location to another or by
converting negotiable assets to cash. Because of this, which of the following is vital?

a. Simultaneous confirmation
b. Simultaneous bank reconciliation
c. Simultaneous verification
d. Simultaneous surprise cash count

44. As one of the year-end audit procedures, the auditor instructed the client’s personnel to prepare a
standard bank confirmation request for a bank account that had been closed during the year. After
the client’s treasurer had signed the request, it was mailed by the assistant treasurer. What is the
major flaw in this audit procedure?

a. The confirmation request was signed by the treasurer

b. Sending request was meaningless because the account was closed before year-end
 c. The request was mailed by the assistant treasurer
d. The CPA did not sign the confirmation request before it was mailed

45. On receiving the bank cut off statement, the auditor trace

a. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal
b. Checks dated prior to year-end to the outstanding checks listed on the year end bank
reconciliation
c. Deposits listed on the cut off bank statement to deposits in the cash receipts journal
d. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank
reconciliation

46. An unrecorded check issued during the last week of the year would most likely be discovered by the
auditor when

a. Check register for the last month is reviewed

b. Cutoff bank statement is reconciled
c. Bank confirmation is reviewed
d. Search for unrecorded liabilities is performed

47. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine
all of the following except

a. Cutoff bank statement

b. Year-end bank statement
c. Bank reconciliation
d. General ledger

48. And auditor compares information on cancelled checks with information contained in the cash
disbursements journal. The objective of this test is to determine that

a. Recorded cash disbursement transactions are properly authorized

b. Proper cash purchase discounts have been recorded
c. Cash disbursements are for goods and services actually rendered
d. No discrepancies exists between data on the checks and the data in the journal

49. When counting cash on hand, the auditor must exercise control over all cash and other negotiable
assets to prevent

a. Theft
b. Irregular endorsement
c. Substitution
d. Deposit in transit
50. An independent auditor asked a client’s internal auditor to assist in preparing a standard bank
confirmation request for payroll account that had been closed during the year under audit. After the
internal auditor prepared the form, the controller signed it and mailed it to the bank. What is the
major flaw in this procedure?

a. The internal auditor did not sign the form

b. The form was mailed by the controller
c. The form was prepared by the internal auditor
d. The account was closed, so the balance was zero

51. The usefulness of the standard bank confirmation requests may be limited because the bank
employee who completes the form may

a. Not believe that the bank is obligated to verify confidential information to a third party
b. Sign and return the form without inspecting the accuracy of the client’s bank reconciliation
c. Not have access to the client’s cut off bank statement
d. Be unaware of all the financial relationship that the bank has with the client

Audit of receivables

52. 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 recipients?

a. This is not a request for payment; remittances should not be sent to our auditors in the enclosed
envelope
b. Report any differences on the enclosed statement directly to our auditors; no reply is necessary
if this amount agrees with your records
c. If you do not report any differences within fifteen days, it will be assumed that this statement is
correct
d. The following invoices have been selected for confirmation and represent amounts that are
overdue

53. Who should receive the confirmation replies?

a. The audit client

b. The auditor
c. The regulators
d. Either a or b

54. All of the following are examples of substantive tests to verify the valuation of net accounts receivable
except the

a. Recomputation of the allowance for bad debts

b. Inspection of accounts for current versus non-current status in the statement of financial
position
c. Inspection of the aging schedule and credit records of past due accounts
d. Comparison of the allowance for bad debts with pas records
55. 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 from cash receipts. Which of the following audit procedures would be most effective in
discovering fraud in this scenario?

a. Send positive confirmations to a random selection of customers

b. Send negative confirmations to all outstanding accounts receivable customers
c. Perform a detailed review of debits to customer accounts, sales return, or other debit accounts,
excluding cash posted to the cash receipts journal
d. Take a sample of bank deposits and trace the detail in each bank deposit to the entry in the cash
receipts journal

56. In confirming accounts receivable, and auditor decided to confirm customer’s account balances rather
than individual invoices. Which of the following most likely would be included with the client’s
confirmation letter?

a. An auditor-prepared letter explaining that a non-response may cause inference that the account
balance is correct.
b. A client-prepared letter reminding the customer that a non-response will cause a second request
to be sent
c. An auditor-prepared letter requesting the customer to supply missing an incorrect information
directly to the auditor
d. A client prepared statement of account showing the details of the customer’s account balance

57. Auditors may use positive or negative forms of confirmation requests for accounts receivable. And
auditor most likely will use

a. The positive form to confirm all balances regardless of size

b. A combination of the two forms with the positive form used for large balances and the negative
form for the small balances
c. A combination of the two forms, with the positive form used for trade receivables and the
negative form for other receivables
d. The positive form when the combined assessed level of inherent and control risk for assertions
related to receivables is acceptably low, and the negative form when it is unacceptably high.

58. The negative request form of accounts receivable confirmation may be used when the

Combined assessed level

of inherent and control risk Consideration by the
is Number of small balances is recipient is
A Low Many Likely
B Low Few Unlikely
C High Few Likely
D High Many Likely
59. In the confirmation of accounts receivable, the auditor would most likely

a. Request confirmation of a sample of the inactive accounts

b. Seek to obtain positive confirmation for at least 50% of the total peso amount of the receivables
c. Require confirmation of all receivables from agencies of the government
d. Require that confirmation requests be sent within 1 month of the fiscal year end

60. Negative confirmation of accounts receivable is less effective than positive confirmation of accounts
receivable because

a. A majority of recipients usually lack the willingness to respond objectively

b. Some recipients may report incorrect balances that require extensive follow-up
c. The auditor cannot infer that all nonrespondents have verified their account information
d. Negative confirmation do not procedure evidence that is statistically quantifiable

61. To reduce the risks associated with accepting fax responses to requests for confirmations of accounts
receivable, an auditor most likely would

a. Examine the shipping documents that provide evidence for the existence assertion
b. Verify the sources and contents of the faxes in telephone calls to the senders
c. Consider the faxes to be nonresponses and evaluate them as unadjusted differences
d. Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted

62. An auditor who has confirmed accounts receivable may discover that the sales journal was held open
past year-end if

a. Positive confirmation sent to debtors are not returned

b. Negative confirmations sent to debtors are not returned
c. Most of the returned negative confirmations indicate that the debtor owes a larger balance that
the amount being confirmed
d. Most of the returned positive confirmations indicate that the debtor owes a smaller balance than
the amount being confirmed

63. What audit procedures is generally viewed as the most important test of details of accounts
receivable?

a. Alternative procedures applied to non-confirmed accounts.

b. Confirmation of accounts receivable.
c. Both a and b are equally important.
d. Neither a nor b.

64. When do most companies record sales returns and allowances?

a. During the month in which the sale occurs.

b. During the accounting period in which the return occurs.
c. Whenever the customer contacts the company regarding the credit.
d. Any of the above is correct.
Audit of inventories

65. An auditor selected items for test counts while observing a client’s physical inventory. The auditor
then traced the test counts to the client’s inventory listing. This procedure most likely obtained
evidence concerning

a. Existence
b. Completeness
c. Rights and obligations
d. Valuation and allocation

66. Purchase cut-off procedures should be designed to test whether all inventory

a. Purchased and received before year-end was paid for

b. Ordered before year-end was received
c. Purchased and received before year-end was recorded
d. Owned by the company is in the possession of the company at year–end

67. Which of the following is not one of the independent auditor’s objectives regarding the audit of
inventories?

a. Verifying that inventory counted is owned by the client

b. Verifying that the client has used proper inventory pricing
c. Ascertaining the physical quantities of inventory on hand
d. Verifying that all inventory owned by the client is on hand at the time of the count

68. 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. Trace test counts noted during the entity’s physical count to the entity’s summarization of
quantities
b. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any
liens
c. Select the last few shipping advices used before the physical count and determine whether
shipments were recorded as sales
d. Inspect the open purchase order file for significant commitments that should be considered for
disclosures

69. An auditor most likely would inspect loan agreements under which an entity’s inventories are pledged
to support management’s financial statement assertion of

a. Existence
b. Completeness
c. Presentation and disclosure
d. Valuation and allocation
70. Periodic cycle counts of selected inventory items are made at various times during the year rather
than a single inventory count at year end. Which of the following is necessary if the auditor plans to
observe inventories at interim dates?

a. Complete recounts by independent teams are performed

b. Perpetual inventory records are maintained
c. Unit cost records are integrated with production accounting records
d. Inventory balances are rarely at low levels

71. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of
control risk is high, and auditor will probably

a. Apply gross profit tests to ascertain the reasonableness of the physical counts
b. Increase the extent of test of control relevant to the inventory cycle
c. Requests the client to schedule the physical inventory count at the end of the year
d. Insist that the client perform physical counts of inventory items several times during the year

72. After accounting for a sequence of inventory tags, and auditor traces a sample of tags to the physical
inventory listing to obtain evidence that all items

a. Included in the listing have been counted

b. Represented by inventory tags are included in the listing
c. Included in the listings are represented by inventory tags
d. Represented by inventory tags are bona fide

73. 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. Inventory items has been counted but the tags placed on the items had not been taken off the
items and added to the accumulation sheets
b. Credit memos for several items returned by customers had not been recorded
c. No journal entry had been made on the retailer’s books for several items returned to its suppliers
d. An item purchases FOB shipping point had not arrived at the date of the inventory count and had
not been reflected in the perpetual records

74. An auditor is most likely to learn of slow-moving inventory through

a. Inquiry is sales personnel

b. Inquiry of warehouse personnel
c. Physical observation of inventory
d. Review of perpetual records

75. The audit of year-end inventories should include steps to verify that the client purchases and sales
cutoff were adequate. This audit step should be designed to detect whether merchandise included in
the physical count at year-end was not recorded as a

a. Sale in the subsequent period

b. Purchase in the current period
 c. Sale in the current period
d. Purchase in the subsequent period

76. An auditor’s observation of physical inventories at the main plant at year end provides direct evidence
to support which of the following objectives

a. Accuracy of the priced-out inventory

b. Evaluation of the lower of cost or market tests
c. Identification of obsolete or damaged merchandise to evaluate allowance (reserve) for
obsolescence
d. Determination of goods on consignment at another location

77. What form of analytical review might uncover the existence of obsolete merchandise

a. Inventory turnover rates

b. Decrease in the ratio of gross profit to sales
c. Ratio of inventory to accounts payable
d. Comparison of inventory values to purchase invoices

78. Which of the following is the best audit test to evaluate the accuracy of the inventory records for
materials inventory in production operation?

a. Trace selected inventory receipts to perpetual inventory records

b. Vouch selected postings in the perpetual inventory records to source documents
c. Perform turnover tests for materials inventory
d. Reconcile quantities on hand per physical counts of selected items with perpetual inventory
records and verify pricing

Audit of investments

79. Which statement is correct regarding audit of investment securities?

a. An auditor’s objective is to determine whether the securities are authentic

b. Examination of paid checks issued in payments of securities purchased is the most effective
procedure to verify existence
c. In performing tests of the carrying amount of investment in equity securities, the auditor would
usually refer to the quoted market prices of the securities
If a client has a large and active investment portfolio that is kept in a bank safe-deposit box and
the auditor is unable to count the securities at the end of the reporting period, the auditor most
likely will

80. 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 are the property of the client
c. To determine whether securities actually exist
d. To determine whether securities are properly classified on the balance sheet date
81. An auditor is most likely to verify the interest earned on bond investment by

a. Verifying the receipt and deposit of interest checks

b. Confirming the bond interest rate with the issuer of the bonds
c. Recomputing the interest earned on basis of face amount, interest rate, and period held
d. Testing controls relevant to cash receipts

82. A client has a large and active investment portfolio that is kept in a bank safe-deposit box. If the
auditor is unable to count the securities at the balance sheet date, the auditor most likely will

a. Request the bank to confirm to the auditor the contents of the safe-deposit box at the balance
sheet date
b. Examine supporting evidence for transactions occurring during the year
c. Count the securities at a subsequent date and confirm with bank whether securities were added
or revamped since the balance date
d. Requests the client to have the bank seal the safe deposit-box until the auditor can count the
securities at a subsequent date.

83. When an auditor is unable to inspect and count a client’s investment securities until after the balance
sheet date, the bank where the securities are held in a safe-deposit box should be asked to

a. Verify any difference between the contents of the box and the balance in the client’s subsidiary
ledger
b. Provide a list of securities added and removed from the box between the balance sheet date and
the security count date
c. Count the securities in the box so that the auditor will have an independent direct verification
d. Confirm that there has been no access to the box between the balance sheet date and the security
count date

84. Which of the following is the least effective audit procedure regarding the existence assertion for the
securities held by the auditee?

a. Examination of paid checks issued in payment of securities purchased

b. Voicing all changes during the year to supporting documents
c. Simultaneous count of liquid assets
d. Confirmation from the custodian

85. An auditee is holding equity securities as collateral for a debt. The auditor should

a. Determine from data published in the financial press that the auditee has recorded dividend
income from the collateral
b. Ascertain the value of the securities
c. Ascertain that the amount recorded for the collateral in the investment account is equal to its fair
value at the balance sheet date
d. Verify that the client has taken title to the securities
86. Which of the following is the most effective procedure for verification of dividends earned on
investment in equity securities?

a. Tracing deposited dividend checks to the cash receipts book

b. Reconciling the amounts received with published dividend records
c. Comparing the amounts received with preceding year dividends received
d. Recomputing selected extensions and footings of dividends schedules and comparing totals to the
general ledger

87. Which of the following provides the best form of evidence pirating to the annual valuation of an
investment in which the independent auditor’s client owns a 30% voting interest?

a. Market quotations of the investee company’s stock

b. Current fair value of the investee company’s assets
c. Historical cost of the investee company’s assets
d. Audited financial statement of the investee company

88. The auditor can best verify a client’s bond sinking fund transactions and year-end balance by

a. Confirmation with individual holders of retired bonds

b. Confirmation with the bond trustee
c. Recomputation of interest expense, interest payable, and amortization of bond discount or
premium
d. Examination and count of the bonds retired during the year

89. An auditor who physically examines securities should insist that a client representative be present in
order to

a. Detect fraudulent activities

b. Lend authority to the auditor’s directives
c. Coordinate the return of securities to the proper locations
d. Acknowledge the receipt of securities returned

90. In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain
the reasonable of the

a. Classification between current and non-current portfolios

b. Valuation of marketable equity securities
c. Existence of unrealized gains or losses in the portfolio
d. Completeness of recorded investment income

Audit of property, plant, and equipment

91. Property, plant, and equipment is typically judged to be one of the accounts least susceptible to fraud
because

a. The amounts recorded on the balance sheet for most companies are immaterial
b. The inherent risk is usually low
 c. The depreciated values are always smaller than cost
d. Internal cost is inherently effective regarding this account

92. Which of the following combinations of procedures is an auditor most likely to perform to obtain
evidence about fixed asset additions?

a. Inspecting documents and physically examining assets

b. Recomputing calculations and obtaining written management representations
c. Observing operating activities and comparing balances to prior period balances
d. Confirming ownership and corroborating transactions through inquiries of client

93. Which of the best audit procedure to obtain evidence to support the legal ownership of real property

a. Examination of corporate minutes and board resolutions with regard to approvals to acquire real
property
b. Examination of closing documents, deeds and ownership documents registered and on file at the
register of deeds
c. Discussion with corporate legal counsel concerning the acquisition of a specific piece of property
d. Confirmation with the title company that handled the escrow account and disbursement of
proceeds for the closing of the property

94. When few property and equipment transactions occur during the year, the continuing auditor usually
obtains an understanding of internal control and performs

a. Tests of controls
b. Analytical procedures to verify current year additions to property and equipment
c. A thorough examination of the balances at the beginning of the year
d. Extensive tests of current year property and equipment transactions

95. If an auditor tours a production facility, which of the misstatements or questionable practices is most
likely to be detected by the audit procedure specified?

a. Depreciation expense on fully depreciated machinery has been recognized

b. Overhead has been over-applied
c. Necessary facility maintenance has not been performed
d. Insurance coverage on the facility has lapsed

96. In testing for unrecorded retirements of equipment, an auditor most likely to

a. Select items of equipment from the accounting records and then locate them during the plant
tour
b. Compare depreciation journal entries with similar prior-year entries in search of July depreciated
equipment
c. Inspect items of equipment observed during the plant tour and then trace them to the equipment
subsidiary ledger
d. Scan the general journal for unusual equipment additions and excessive debits to repairs and
maintenance expense
 97. Determining that proper amounts of depreciation are expensed provides assurance about
management’s assertion of valuation and allocation and

a. Presentation and disclosure

b. Completeness
c. Rights and obligations
d. Existence

98. The auditor may conclude that depreciation charges are insufficient by noting

a. Insured values greatly in excess of book values

b. Large number of fully depreciated assets
c. Continuous trade-in of relatively new assets
d. Excessive recurring losses on assets retires

99. Which of the following questions would an auditor least likely include on an internal control
questionnaire concerning the initiation and execution of equipment transaction?

a. Are requests for major repairs approved at a higher level than the department initiating the
request
b. Are prerenumbered purchases orders used for equipment and periodically accounted for
c. Are requests for purchases of equipment reviewed for consideration of soliciting competitive bids
d. Are procedures in place to monitor and properly restrict access to equipment

100. In violation of company policy, Campus Company erroneously capitalized the cost of painting its
warehouse. An auditor most likely detect this when

a. Discussing capitalization policies with the client

b. Examining maintenance expense accounts
c. Observing that the warehouse had been repainted
d. Examining construction work orders that support items capitalized during the year

101. In line with your audit of the company’s property plant and equipment, your requested the client to
furnish you with the schedule of repairs and maintenance expense for the year. This request is
consistent to satisfy which audit objective and to gather evidence regarding which assertion?

a. To determine whether additional capitalizable cost were otherwise recognized by the company
as outright expense necessary to validate completeness assertion over PPE
b. To ascertain the propriety of capitalized expenditures necessary to validate existence assertion
over PPE.
c. To determine whether additional capitalizable cost were otherwise recognized by the company
as outright expense necessary to validate existence assertion over PPE.
d. To ascertain propriety of capitated expenditures necessary to validate completeness assertion
over PPE.
 Audit of Intangibles

102. In auditing intangible assets, an auditor most likely would review or recomputed amortization and
determine whether the amortization period is reasonable in support of management’s financial
statement assertion to

a. Valuation
b. Existence
c. Completeness
d. Rights and obligations

103. A corporate balance sheet indicates that one of the corporate assets is a patent. An auditor will most
likely obtain evidence regarding the continuing validity and existence of this patent by obtaining a
written representation from

a. A patent attorney
b. The SEC
c. The patent inventor
d. The patent owner

104. The most effective means for the auditor to determine whether a recorded intangible asset possesses
the characteristics of an asset is

a. Vouched the purchase by reference to underlying documentation

b. Inquire as to the status of patent application
c. Evaluate the future revenue-producing capacity of the intangible asset
d. Analyze the research and development expenditures to determine that only those expenditures
possessing future economic benefit have been capitalized

105. Assuming LT has capitalized all research and development costs associated with patent. NewYou, CPA,
who is examining this account will probably

a. Confer management regarding transfer of the amount from the balance sheet to the income
statement
b. Confirm that the patent is registered an on file with the intellectual property office
c. Confer with management regarding a change in the title of the account to goodwill
d. Confer with management regarding ownership of the patent

106. Which of the following comparison would be the most appropriate audit test for the amount of
recorded goodwill?

a. The purchase price and the book value of net tangible and identifiable assets purchased
b. The purchase price and the fair value of net tangible and identifiable assets purchased
c. The figure for goodwill specified in the contract of purchase
d. Earnings in excess of 5% of net assets for the past five years
 Audit of liabilities

107. Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

a. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine
whether the related payables apply to the prior period
b. Investigating payables recorded just prior to and just subsequent to the balance sheet date to
determine whether they are supported by receiving reports
c. Examining unusual relationships between monthly accounts payable balances and recorded
cash payments
d. Reconciling vendor’s statement to the file of receiving reports to identify items received just
prior to the balance sheet date

108. Which of the following is a substantive test that an auditor is most likely to perform to verify the
existence and valuation of recorded accounts payable?

a. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are
used and accounted for
b. Receiving the client’s mail, unopened, for a reasonable period of time after year end to search
for unrecorded vendor’s invoices
c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and
receiving reports
d. Confirming accounts payable balances with known suppliers who have zero balances

109. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on
management’s assertions of

a. Existence
b. Presentation and disclosure
c. Completeness
d. Valuation and allocation

110. The primary audit test to determine if accounts payable are valued properly is

a. Confirmation of accounts payable

b. Vouching accounts payable to supporting documents
c. An analytical procedure
d. Verification that accounts payable was reported as a current liability in the balance sheet

111. Which of the following procedure is least likely to be performed before the balance sheet date

a. Observation of inventory count

b. Testing of internal control over cash
c. Search for unrecorded liabilities
d. Confirmation of receivables
112. An audit assistance found a purchase order for a regular supplier in the amount of P5,500. The
purchase order was dated after receipt of goods. The purchasing agent had forgotten to issue the
purchase order. Also, a disbursement of P450 for materials did not have a receiving report. The
assistant wanted to select additional purchase orders for investigation but was unconcerned about
lack of receiving report. The auditor director should

a. Agree with the assistance because the amount of the purchase order exception was considerably
larger that the receiving report exception
b. Agree with the assistance because the cash disbursement had been assured by the receiving clerk
that the failure to fill out a report didn’t happen very often
c. Disagree with the assistance because two problems have an equal risk of loss associated with
them
d. Disagree with the assistance because the lack of a receiving report has a greater risk of loss
associated with it

113. Which of the following procedure relating to the examination of accounts payable could the auditor
delegates entirely to the client’s employees?

a. Test footings in the accounts payable ledger

b. Reconcile unpaid invoices to vendor’s statements
c. Prepare a schedule of accounts payable
d. Mail confirmation for selected account balances

Audit of shareholder’s equity

114. In an examination of shareholders’ equity, an auditor is most concerned that

a. Capital stock transactions are properly authorized

b. Stock splits are capitalized at par or stated value on the dividend declaration date
c. Dividends during the year under audit were approved by the shareholders
d. Changes in the accounts are verified by a bank serving as a registrar and stock transfer agent

115. The auditor does not expect the client to debit retained earnings for which of the following
transactions?

a. A 10% stock dividend

b. An appropriation of retained earnings for treasury shares
c. A large stock dividend
d. A four for one stock split

116. In an audit of a medium-sized manufacturing concern, which one of the following areas can be
expected to require the least amount of time?

a. Owner’s equity
b. Assets
c. Revenue
d. Liabilities
117. When a corporate client maintains its own stock records, the auditor primarily will rely upon

a. Confirmation with the company secretary of shares outstanding

b. Review of the corporate minutes for data as to shares outstanding
c. Confirmation of the number of shares outstanding at year-end with the appropriate state official
d. Inspection of the stock b0ok at year-end and accounting for all certificate numbers

118. When a client company does not maintain its own stock records, the auditor should obtain written
confirmation from the transfer agent and registrar convening

a. Restriction on the payment of dividends

b. The number of shares issued and outstanding
c. Guarantees of preferred stock liquidation value
d. The number of shares subject to agreement to repurchase

119. Where no independent stock transfer agents are employed and the corporation issues its own stocks
and maintains stock records, cancelled stock certificates should

a. Not be defaced, but segregated from other stock certificates and retained in a cancelled
certificate file
b. Be destroyed to prevent fraudulent reissuance
c. Be defaced and sent to the Secretary of the Department of Finance
d. Be defaced to prevent reissuance and attached to their corresponding stubs

120. With respect to treasury shares, the auditor should not object to which of the following?

a. Restrictions on retained earnings have not been met

b. Dividends have been paid on treasury shares
c. The treasury share certificate have been destroyed
d. Treasury shares are recovered at cost rather than par value