Audting Theory Section (30 items) B.

Controls over the reliability of financial reporting are

ordinarily most directly relevant to an audit, but other
1. Which of the following factors would most likely cause a controls may also be relevant.
CPA to decide not to accept a new audit engagement? C. Controls over safeguarding assets and liabilities are of
A. Lack of understanding of the potential client's internal primary importance, while controls over the reliability of
auditors' computer-assisted audit techniques. financial reporting may also be relevant.
B. Management's disregard for internal control. D. All controls are ordinarily relevant to an audit.
C. The existence of related party transactions.
D. Management's attempt to meet earnings per share 8. Which of the following sets of duties would ordinarily be
growth rate goals. considered basically incompatible in terms of good internal
control?
2. A predecessor auditor is required to attempt to initiate A. Preparation of monthly statements to customers and
communication with the successor auditor: maintenance of the accounts payable subsidiary ledger.
I- Prior to the Acceptance of the engagement B. Posting to the general ledger and approval of additions
II- Subsequent to the acceptance of the engagement and terminations relating to the payroll.
a. Yes, Yes c. Yes, No C. Custody of unmailed signed checks and maintenance of
b. No, Yes d. No, No expense subsidiary ledger.
D. Collection of receipts on account and maintaining
3. Which of the following procedures is not performed as a accounts receivable records.
part of planning an audit engagement?
A. Reviewing the working papers of the prior year. 9. Which of the following fraudulent activities most likely
B. Performing analytical procedures. could be perpetrated due to the lack of effective internal
C. Confirmation of all major accounts. control over the revenue cycle?
D. Designing an audit program A. Fictitious transactions may be recorded that cause an
understatement of revenues and an overstatement of
4. The auditors are planning an audit engagement for a new receivables.
client in a business that is unfamiliar to the auditors. Which B. Claims received from customers for goods returned (and
of the following would be the most useful source of unpaid for) may be intentionally recorded in other
information for the auditors during the preliminary customers' accounts permitting a misappropriation of cash.
planning stage when they are trying to obtain a general C. Authorization of credit memos by personnel who receive
understanding of audit problems that might be cash may permit the misappropriation of cash.
encountered? D. The failure to prepare shipping documents may lead to
A. Client manuals of accounts and charts of accounts. an understatement of inventory balances.
B. AICPA Industry Audit Guides.
C. Prior-year working papers of the predecessor auditors. 10. Which of the following would be least likely to be regarded
D. Latest annual and interim financial statements issued by as a test of a control?
the client A. Tests of the additions to property by physical inspection.
B. Comparisons of the signatures on cancelled checks to the
5. Which of the following is least likely to be considered a authorized check signer list.
financial statement audit risk factor? C. Tests of signatures on purchase orders.
A. Management operating and financing decisions are D. Recalculation of payroll deductions.
dominated by top management.
B. A new client with no prior audit history. 11. When tests of controls reveal that controls are operating as
C. Rate of change in the entity's industry is rapid. anticipated, it is most likely that the assessed level of
D. Profitability of the entity relative to its industry is control risk will:
inconsistent. A. Be less than the preliminary assessed level of control
risk.
6. A client's internal control appears strong, but the CPA has B. Equal the preliminary assessed level of control risk.
elected not to perform any tests of controls. The planned C. Equal the actual control risk.
assessed level of control risk is at what level? D. Be less than the actual control risk.
A. Zero. C. Low.
B. Moderate. D. Maximum 12. Tests for unrecorded assets typically involve tracing from:
A. Source documents to recorded journal entries.
7. Which statement is correct concerning the relevance of B. Source documents to observations.
various types of controls to a financial statement audit? C. Recorded journal entries to documents.
A. An auditor may ordinarily ignore the consideration of D. Recorded journal entries to observations.
controls when a substantive audit approach is used.
13. Which of the following is not used by auditors to establish
the completeness of recorded assets?
 A. Assessing control risk. 18. Which of the following audit procedures most likely would
B. Tracing from source documents to entries in the provide assurance that a manufacturing entity's inventory
accounting records. valuation is proper? 
C. Performing analytical procedures. A. Testing the entity's computation of standard overhead
D. Vouching transactions rates.
B. Obtaining confirmation of inventories pledged under
14. By preparing a four-column bank reconciliation ("proof of loan agreements.
cash") at year-end, an auditor will generally be able to C. Reviewing a cutoff procedure for inventories.
detect: D. Tracing test counts to the entity's inventory listing
A. An unrecorded deposit made at the bank at the end of
the month. 19. Which of the following is least likely to be accurate
B. A second payment of an account payable which had statement concerning characteristics of an audit? 
already been paid in full two months earlier. A. An analysis of inventory turnover addresses whether the
C. An embezzlement of cash receipts not recorded in the proper method of determining inventory costs--as
cash receipts journal before they had been deposited into contrasted to market values--is being applied.
the bank. B. Characteristics of the double entry bookkeeping system
D. A receivable collected that had previously been written make it possible to test for overstated sales when tests of
off as uncollectible. accounts receivable are being performed.
C. The direction of tests for overstatement errors is
15. An internal control questionnaire indicates that an generally directed from the recorded entry to source
approved receiving report is required to accompany every documents.
check request for payment of merchandise. Which of the D. Use of a perpetual rather than a periodic inventory
following procedures provides the best evidence on system is likely to affect the nature of cutoff errors made at
operating effectiveness?  year-end.
A. Select and examine receiving reports and test whether
the related canceled checks are dated no earlier than the 20. An auditor has identified numerous debits to accumulated
receiving reports. depreciation of equipment. Which of the following is most
B. Select and examine receiving reports and test whether likely? 
the related canceled checks are dated no later than the A. The estimated remaining useful lives of equipment were
receiving reports. increased.
C. Select and examine canceled checks and test whether B. Plant assets were retired during the year.
the related receiving reports are dated no earlier than the C. The prior year's depreciation expense was erroneously
checks. understated.
D. Select and examine canceled checks and test whether D. Overhead allocations were revised at year-end.
the related receiving reports are dated no later than the
checks. 21. The auditors are least likely to learn of retirements of
equipment through which of the following? 
16. If the business environment is experiencing a recession, the A. Review of the purchase returns and allowances account.
auditor most likely would focus increased attention on B. Review of depreciation.
which of the following accounts?  C. Analysis of the debits to the accumulated depreciation
A. Purchase returns and allowances. account.
B. Allowance for doubtful accounts. D. Review of insurance policy riders.
C. Common stock.
D. Non-controlling interest of a subsidiary purchased during 22. If the projected misstatement in a nonstatistical sampling is
the year. Php8,000, while the tolerable misstatement is Php9,000,
what would an auditor likely conclude? 
17. Which of the following procedures is least likely to help A. Since the projected misstatement is less than the
auditors to assess the adequacy of management's tolerable misstatement, the account is not misstated.
accounting estimate of the allowance for doubtful B. Since the projected misstatement is less than the
accounts?  tolerable misstatement, the account is misstated.
A. Investigate confirmation exceptions for indication of C. The risk is high that the account is materially misstated.
amounts in dispute. D. The analysis has been improperly performed since the
B. Review accounts which have been written off as projected misstatement is unequal to the tolerable
uncollectible prior to year-end. misstatement.
C. Investigate credit ratings for large accounts receivable.
D. Discuss with the credit manager the current status of
doubtful accounts.