Philippine School of Business Administration CPA Review Quezon City Auditing Theory Pre-Week (Substantive Testing Procedures-BBB)

(1) Which of the following control procedures may prevent the failure to bill customers for some shipments? (a) Each shipment should be supported by a prenumbered sales invoice that is accounted for: (b) Each sales order should be approved by authorized personnel (c) Sales journal entries should be reconciled to daily sales summaries (d) Each sales invoice should be supported by a shipping document (2) For the most effective internal control, monthly bank statements should be received directly from the banks and reviewed by the: (a) Controller (b) Cash receipts accountant (c) Cash disbursement accountant (d) Internal auditor: (3) Which of the following most likely would be the result of ineffective internal control policies and procedures in the revenue cycle? (a) Final authorization of credit memos by personnel in the Sales Department could permit an employee defalcation scheme: (b) Fictitious transactions could be recorded, causing an understatement of revenues and an overstatement of receivables (c) Irregularities in recording transactions in the subsidiary accounts could result in a delay in goods shipped (d) Omission of shipping documents could go undetected, causing an understatement of inventory (4) Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control? (a) Preparation of monthly statements to customers and maintenance of the accounts receivable subsidiary ledger (b) Posting to the general ledger and approval of additions and terminations relating to the payroll (c) Custody of unmailed signed checks and maintenance of expense subsidiary ledgers (d) Collection of receipts on account and maintaining accounts receivable records: (5) At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization be of least concern to the auditor in the conduct of an audit? (a) Granting of credit (b) Shipment of goods (c) Determination of discounts (d) Selling of goods for cash:

(6) To determine whether the system of internal accounting control operated effectively to minimize errors of failure to invoice a shipment, the auditor would select a sample of transactions from the population represented by the: (a) Customer order file (b) Bill of lading file: (c) Open invoice file (d) Sales invoice file (7) An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31, 2002. by this procedure, the auditor would be most likely to learn of which of the following? (a) An October invoice was improperly computed (b) An October check from a customer was posted in error to the account of another customer with a similar name (c) An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period: (d) An account balance is past due and should be written off (8) Which of the following procedures would ordinarily be expected to best reveal unrecorded sales at the balance sheet date? (a) Compare shipping documents with sales records: (b) Apply gross profit rates to inventory disposed of during the year (c) Trace payments received subsequent to the balance sheet date (d) Send accounts receivable confirmation request (9) The audit working papers often include a client-prepared aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditor to: (a) Evaluate internal control over credit sales (b) Test the accuracy of recorded charge sales (c) Estimate credit losses: (d) Verify the validity of the recorded receivables (10) In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following? (a) The credit managers opinion: (b) An aging schedule of past due accounts (c) Collection experience of the clients collection agency (d) Ratios calculated showing the past relationship of the valuation allowance to net credit sales (11) Once a CPA has determined that accounts receivable have increased due to slow collection in a tight money environment, the CPA would be likely to: (a) Increase the balance in the allowance for bad debts account (b) Review the going concern ramifications (c) Review the credit and collection policy (d) Expand tests of collectibility: (12) Which of the following is the best argument against the use of negative accounts receivable confirmations? (a) The cost-per-response is excessively high (b) There is no way of knowing if the intended recipients received them

(c) Recipients are likely to feel that in reality the confirmation is a subtle request for payment (d) The inference drawn from receiving no reply may not be correct: (13) In connection with the examination of financial statements by an independent auditor, the client suggests that members of the internal audit staff be utilized to minimize audit costs. Which of the following tasks could most appropriately be delegated to the internal audit staff? (a) Selection of accounts receivable for confirmation, based upon the internal auditors judgment as to how many accounts and which accounts will provide sufficient coverage (b) Preparation of schedules for negative accounts receivable responses: (c) Evaluation of the internal control for accounts receivable and sales (d) Determination of the adequacy of the allowance for doubtful accounts (14) RCD Corporation has just completely computerized its billings and accounts receivable record keeping. You want to make maximum use of the new computer in your audit of RCD Corporation. Which of the following audit techniques could not be performed through a computer program? (a) Tracing audited cash receipts to accounts receivable credits (b) Selecting on a random number basis accounts to be confirmed (c) Examining sales invoices for completeness, consistency between different items, valid conditions, and reasonable amounts (d) Resolving differences reported by customers on confirmation requests: (15) Which of the following statements regarding the examination of negotiable notes receivable is correct? (a) Confirmation from the customer of a note is not an acceptable alternative to inspection: (b) Notes receivable discounted without recourse are confirmed via the standard bank confirmation form used in the audit of cash (c) Physical inspection of a note by the auditor provides conclusive evidence (d) Notes receivable discounted with recourse need not be confirmed (16) PASBA Company uses a batch processing method to process its sales transactions. Data on PASBAs sales transaction tape are electronically sorted by customer number and are subjected to programmed edit checks in preparing its invoices, sales journals, and updated customer account balances. One of the direct outputs of the creation of this tape most likely would be a: (a) Report showing exceptions and control totals: (b) Printout of the updated inventory records (c) Report showing overdue accounts receivable (d) Printout of the sales price master file (17) If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the: (a) Cash receipts journal to the sales journal (b) Sales journal to the cash receipts journal

(c) Source documents to the accounting records (d) Accounting records to the source documents: ########################################################### (1) When an auditor selects a sample of items from the vouchers payable register for the last month of the period under audit and traces these items to underlying documents, the auditor is gathering evidence primarily in support of the assertion that: (a) Recorded obligations were paid (b) Incurred obligations were recorded in the correct period (c) Recorded obligations were valid: (d) Cash disbursements were recorded as incurred obligations (2) The accounts payable department receives the purchase order form to accomplish all of the following except: (a) Compare invoice price to purchase order price (b) Ensure the purchase had been properly authorized (c) Ensure the goods had been received by the party requesting the goods: (d) Compare quantity ordered to quantity purchased (3) As an in-charge auditor you are reviewing a summary of control weaknesses in cash disbursement procedures. Which one of the following weaknesses, standing alone, should cause you the least concern? (a) Checks are signed by only one person: (b) Signed checks are distributed by the controller to approved payees (c) Treasurer fails to establish bona fides of names and addresses of check payees (d) Cash disbursements are made directly out of cash receipts (4) An examination of the balance in the accounts payable account is ordinarily not designed to: (a) Detect accounts payable which are substantially past due (b) Verify that accounts payable were properly authorized: (c) Ascertain the reasonableness of recorded liabilities (d) Determine that all existing liabilities at the balance sheet date have been recorded (5) A clients procurement system ends with the assumption of a liability and the eventual payment of the liability. Which of the following best describes the auditors primary concern with respect to liabilities from the procurement system? (a) Accounts payable are not materially misstated: (b) Authority to incur liabilities is restricted to one designated person (c) Acquisition of materials is not made from one vendor or one group of vendors (d) Commitments for all purchases are made only after established competitive bidding procedures are followed (6) Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the clients employees? (a) Test footings in the accounts payable ledger (b) Reconcile unpaid invoices to vendors statements

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Prepare schedule of accounts payable: Mail confirmations for selected account

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Which of the following audit procedures is least likely to detect an unrecorded liability? (a) Analysis and recomputation of interest expense (b) Analysis and recomputation of depreciation expense: (c) Mailing of standard bank confirmation form (d) Reading of the minutes of meetings of the board of directors The audit procedures used to verify accrued liability differ from those employed for the verification of accounts payable because: (a) Accrued liabilities usually pertain to services of a continuing nature, while accounts payable are the result of completed transactions: (b) Accrued liability balances are less material than accounts payable balances (c) Evidence supporting accrued liabilities is nonexistent, while evidence supporting accounts payable is readily available (d) Accrued liabilities at year end will become accounts payable during the following year The auditor is most likely to verify accrued commissions payable in conjunction with the (a) Sales cutoff review: (b) Verification of contingent liabilities (c) Review of post balance sheet date disbursements (d) Examination of trade accounts payable An auditor wishes to perform tests of controls on a clients cash disbursements procedures. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by: (a) Inquiry an analytical procedures (b) Confirmation and observation (c) Observation and inquiry: (d) Analytical procedures and confirmation When searching for unrecorded liabilities at year end, an auditor most likely would examine: (a) Cash receipts from related parties recorded before year end (b) Confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable (c) Cash disbursements recorded in the prior subsequent to year end: (d) Invoices dated a few days before and after year end to ascertain whether they have been properly recorded

(1) It would be appropriate for the payroll accounting department to be responsible for which of the following functions? (a) Approval of employee time records
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(b) Maintenance of records of employment, discharges, and pay increases (c) Preparation of periodic governmental reports as to employees earnings and withholding taxes: (d) Distribution of pay checks to employees Effective internal control over unclaimed payroll checks that are kept by the Treasury Department would include Accounting Department procedures that require: (a) Effective cancellation and stop payment orders for checks representing unclaimed wages (b) Preparation of a list of unclaimed wages on a periodic basis (c) Accounting for all unclaimed wages in a current liability account (d) Periodic accounting for the actual checks representing unclaimed wages: A large retail enterprise has established a policy, which requires that the paymaster deliver all unclaimed payroll checks to the Internal Auditing Department at the end of each payroll distribution day. This policy was most likely adopted in order to: (a) Assure that employees who were absent on a payroll distribution day are not paid for that day (b) Prevent the paymaster from cashing checks which are unclaimed for several weeks (c) Prevent a bona fide employees check from being claimed by another employee (d) Detect any fictitious employee who may have been placed on the payroll: In the weekly computer run to prepare payroll checks, a check was printed for an employee who had been terminated the previous week. Which of the following controls, if properly utilized, would have been most effective in preventing the error or ensuring its prompt detection? (a) A control total for hours worked, prepared from time cards collected by the Timekeeping Department: (b) Requiring the treasurers office to account for the numbers of the prenumbered checks issued to the EDP department for the processing of the payroll (c) Use of a check digit for employee numbers (d) Use of a header label for the payroll input sheet A surprise observation by an auditor of a clients regular distribution of paychecks is primarily designed to satisfy the auditor that: (a) All unclaimed payroll checks are properly returned to the cashier (b) The paymaster is not involved in the distribution of payroll checks (c) All employees have in their possession proper employee identification (d) Names on the company payroll are those of bona fide employees presently on the job: Which of the following is the best reason why an auditor should consider observing a clients distribution of regular payroll checks? (a) Separation of payroll duties is less than adequate for effective internal control: (b) Total payroll costs are a significant part of total operating costs (c) The auditor did not observe the distribution of the entire regular payroll during the audit in the prior year

(d) Employee turnover is excessive (7) Which of the following is the best way for an auditor to determine that every name of a companys payroll is that of a bona fide employee presently on the job? (a) Examine personnel records for accuracy and completeness (b) Examine employees names listed on payroll accounting records (c) Make a surprise observation of the companys regular distribution of paychecks: (d) Visit the working areas and confirm with employees their badge or identification numbers (8) RCAD, Inc., has changed from a conventional to a computerized payroll clock card system. Factory employees now record time in and out with magnetic cards and the IT system automatically updates all payroll records. Because of this change: (a) The auditor must audit through the computer (b) Internal control has improved (c) Part of the audit trail has been lost: (d) The potential for payroll related fraud has been diminished (9) Which of the following internal accounting control procedures could best prevent direct labor from being charged to manufacturing overhead? (a) Reconciliation of work in process inventory with cost records (b) Comparison of daily journal entries with factory labor summary: (c) Comparison of period costs budgets and time cards (d) Reconciliation of unfinished job summary and production cost records (10) Which of the following internal control procedures most likely would prevent direct labor hours from being charged to manufacturing overhead? (a) Periodic independent counts of work in process for comparison to recorded amounts (b) Comparison of daily journal entries with approved production orders (c) Use of time tickets to record actual labor worked on production orders: (d) Reconciliation of work-in-process inventory with periodic cost budgets ########################################################### (1) RCD Manufacturing Corporation mass produces eight different products. The controller who is interested in strengthening internal controls over the accounting for material used in production would be most likely to implement: (a) An economic order quantity (EOQ) system (b) A job order cost accounting system (c) A perpetual inventory system: (d) A separation of duties among production personnel (2) If preparation of a periodic scrap report is essential in order to maintain adequate control over the manufacturing process, the data for this report should be accumulated in the: (a) Accounting Department

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(b) Production Department: (c) Warehousing Department (d) Budget Department The audit of year-end physical inventories should include steps to verify that the clients purchases and sales cutoffs were adequate. The audit steps 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 return in the subsequent period In order to efficiently establish the correctness of the accounts payable cutoff, an auditor will be most likely to: (a) Coordinate cutoff tests with physical inventory observation: (b) Compare cutoff reports with purchase orders (c) Compare vendors invoices with vendors statements (d) Coordinate mailing of confirmations with cutoff tests Which one of the following procedures would not be appropriate for an auditor in discharging his or her responsibilities concerning the clients physical inventories? (a) Confirmation of goods in the hands of public warehouses (b) Supervising the taking of the annual physical inventory: (c) Carrying out physical inventory procedures at an interim date (d) Obtaining written representation from the client as to existence, quality, and dollar amount of the inventory An auditor will usually trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are: (a) Owned by the client (b) Not obsolete (c) Physically present at the time of the preparation of the final inventory schedule (d) Included in the final inventory schedule: When outside firms of nonaccountants specializing in the taking of physical inventories are used to count, list, price and subsequently compute the total peso amount of inventory on hand at the date of the physical count, the auditor will ordinarily: (a) Consider the report of the outside inventory-taking firm to be an acceptable alternative procedure to the observation of physical inventories (b) Make or observe some physical counts of the inventory, recomputed certain inventory calculations, and test certain inventory transactions: (c) Not reduce the extent of work on the physical count of inventory (d) Consider the reduced audit effort with respect to the physical count of inventory as a scope limitation Which of the following is the best audit procedure for the discovery of damaged merchandise in a clients ending inventory? (a) Compare the physical quantities of a slow-moving items with corresponding quantities of the prior year

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(b) Observe merchandise and raw materials during the clients physical inventory taking: (c) Review the managements inventory representation letter for accuracy (d) Test overall fairness of inventory values by comparing the companys turnover ratio with the industry average For several years a clients physical inventory count has been lower than what was shown on the books at the time of the count so that downward adjustments to the inventory account were required. Contributing to the inventory problem could be weaknesses in internal control that led to the failure to record some: (a) Purchases returned to vendors: (b) Sales returns received (c) Sales discounts allowed (d) Cash purchases An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the physical inventory sheets. The purpose of this procedure is to obtain assurance that: (a) The final inventory is valued a t cost (b) All inventory represented by an inventory tag is listed on the inventory sheets: (c) All inventory represented by an inventory tag is bona fide (d) Inventory sheets do not include untagged inventory items In a manufacturing company, which one of the following audit procedures would give the least assurance of the valuation of inventory at the audit date? (a) Testing the computation of standard overhead rates (b) Examining paid vendors invoices (c) Reviewing direct labor rates (d) Obtaining confirmation of inventories pledged under loan agreements: Which of the following is a question that the auditor would expect to find on the production cycle section of an internal accounting control questionnaire? (a) Are vendors invoices for raw materials approved for payment by an employee who is independent of the cash disbursements function? (b) Are signed checks for the purchase of raw materials mailed directly after signing without being returned to the person who authorized the invoice processing? (c) Are all releases by storekeepers of raw materials from storage based on approved requisition documents?: (d) Are details of individual disbursements for raw materials balanced with the total to be posted to the appropriate general ledger account? Which of the following audit procedures would provide the least reliable evidence that the client has legal title to inventories? (a) Confirmation of inventories at locations outside the clients facilities (b) Analytical review of inventory balances compared to purchasing and sales activities:

(c) Observation of physical inventory counts (d) Examination of paid vendors invoices (14) In obtaining an understanding of a manufacturing entitys internal control structure concerning inventory balances, an auditor most likely would: (a) Review the entitys description of inventory policies and procedures: (b) Perform test counts of inventory during the entitys physical count (c) Analyze inventory turnover statistics to identify slow-moving and obsolete items (d) Analyze monthly production reports to identify variances and unusual transactions (15) To gain assurance that all inventory items in a clients inventory listing schedule are valid, an auditor most likely would trace: (a) Inventory tags noted during auditors observation to items listed in the inventory listing schedule (b) Inventory tags noted during the auditors observation to items listed in receiving reports and vendors invoices (c) Items listed in the inventory listing schedule to inventory tags and the auditors recorded count sheets: (d) Items listed in receiving reports and vendors invoices to the inventory listing schedule ########################################################### (1) Which of the following is the most important internal control procedure over acquisitions of property, plant, and equipment? (a) Establishing a written company policy distinguishing between capital and revenue expenditures (b) Using a budget to forecast and control acquisitions and retirements: (c) Analyzing monthly variances between authorized expenditures and actual costs (d) Requiring acquisitions to be made by user departments (2) Which of the following is an internal control weakness related to factory equipment? (a) A policy exists requiring all purchases of factory equipment to be made by the department in need of the equipment: (b) Checks issued in payment of purchases of equipment are not signed by the controller (c) Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired (d) Proceeds from sales of fully depreciated equipment are credited to other income (3) With respect to an internal control measure that will assure accountability for fixed asset retirements, management should implement a system that includes: (a) Continuous analysis of miscellaneous revenue to locate any cash proceeds from sale of plant assets (b) Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired

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(c) Continuous utilization of serially numbered retirement work orders: (d) Periodic observation of plant assets by the internal auditors The controller of RCD Manufacturing, Inc., wants to use ratio analysis to identify the possible existence of idle equipment or the possibility that equipment has been disposed of without having been written off. Which of the following ratios would best accomplish this objective? (a) Depreciation expense/book value of manufacturing equipment (b) Accumulated depreciation/book value of manufacturing equipment (c) Repairs and maintenance cost/direct labor cost (d) Gross manufacturing equipment cost/units produced: RCD Company violated company policy by erroneously capitalizing the cost of painting its warehouse. The CPA examining RCDs financial statements would likely learn of this error by: (a) Discussing RCDs capitalization policies with its controller (b) Reviewing the titles and descriptions for all construction work orders issued during the year: (c) Observing during the physical inventory observation that the warehouse has been painted (d) Examining in detail a sample of construction work orders Which of the following explanation might satisfy an auditor who discovers significant debits to an accumulated depreciation account? (a) Extraordinary repairs have lengthened the life of an asset: (b) Prior years depreciation charges were erroneously understated (c) A reserve for possible loss on retirement has been recorded (d) An asset has been recorded at its fair value Which of the following best describes the independent auditors approach to obtaining satisfaction concerning depreciation expense in the income statement? (a) Verifying the mathematical accuracy of the amounts charged to income as a result of depreciation expense (b) Determining the method for computing depreciation expense and ascertaining that it is in accordance with generally accepted accounting principles (c) Reconciling the amount of depreciation expense to those amounts credited to accumulated depreciation accounts (d) Establishing the basis for depreciable assets and verifying the depreciation expense: Which of the following is the best evidence of real estate ownership at the balance sheet date? (a) Title insurance policy (b) Original deed held in the clients safe (c) Paid real estate tax bills: (d) Closing statement Which of the following audit procedures would be least likely to lead the auditor to find unrecorded fixed asset disposals? (a) Examination of insurance policies (b) Review of repairs and maintenance expense: (c) Review of property tax files (d) Scanning of invoices for fixed asset additions

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(10) The auditor may conclude that depreciation charges are insufficient by noting: (a) Insured values greatly in excess of book values (b) Large amounts of fully depreciated assets (c) Continuous trade-ins of relatively new assets (d) Excessive recurring losses on assets retired: (11) When there are numerous property and equipment transactions during the year, an auditor planning to assess control risk at the minimum level usually plans to obtain an understanding of the internal control structure and to perform: (a) Tests of controls and extensive tests of property and equipment balances at the end of the year (b) Extensive tests of current year property and equipment transactions (c) Tests of controls and limited tests of current year property and equipment transactions: (d) Analytical procedures for property and equipment balances at the end of the year (12) Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control procedure that provides for: (a) Segregation of duties of employees in the accounts payable department (b) Independent verification of invoices for disbursements recorded as equipment acquisitions (c) Investigation of variances within a formal budgeting system: (d) Authorization by the board of directors of significant equipment acquisitions (13) Which of the following questions would an auditor least likely to include on an internal control questionnaire concerning the initiation and execution of equipment transactions? (a) Are requests for major repairs approved at a higher level than the department initiating the request? (b) Are prenumbered purchase orders used for equipment and periodically accounted for? (c) Are requests for purchase of equipment reviewed for consideration of soliciting competitive bids? (d) Are procedures in place to monitor and properly restrict access to equipment?: ########################################################### (1) A company issued bonds for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditors best course of action is to: (a) Request a statement from the bond trustee as to the amount of the bonds issued and outstanding (b) Confirm the results of the issuance with the underwriter or investment banker

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(c) Trace the cash received from the issuance to the accounting records: (d) Verify that the net cash received is credited to an account entitled Bonds Payable Many of the RCD Corporations convertible bondholders have converted their bonds into stock during the year under examination. The independent auditor should review the RCD Corporations statement of cash flows to ascertain that it shows: (a) Only cash used to reduce convertible debt (b) Only cash provided by issuance of stock (c) Cash provided by the issuance of stock and used to reduce convertible debt: (d) Nothing relating to the conversion because it does not affect cash During its fiscal year, a company issued, at a discount, a substantial amount of first-mortgage bonds. When performing audit work in connection with the bond issue, the independent auditor should: (a) Confirm the existence of the bondholders (b) Review the minutes for authorization: (c) Trace the net cash received from the issuance to the bond payable account (d) Inspect the records maintained by the bond trustee In connection with the audit of a current issue of long-term bonds payable, the auditor should: (a) Determine whether bondholders are persons other than owners, directors, or officers of the company issuing the bond (b) Calculate the effective interest rate to see if it is substantially the same as the rates for similar issues (c) Decide whether the bond issue was made without violating state or local law (d) Ascertain that the client has obtained the opinion of counsel on the legality of the issue: The primary reason for preparing reconciliation between interestbearing obligations outstanding during the year and interest expense presented in the financial statements is to: (a) Evaluate internal control over securities (b) Determine the validity of prepaid interest expense (c) Ascertain the reasonableness of imputed interest (d) Detect unrecorded liabilities: Overall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly: (a) Income statement ratios to balance sheet ratios (b) Revenue and expense account balances to the monthly reported net income (c) Income statement ratios to published industry averages (d) Revenue and expense account totals to the corresponding figures of the preceding years: Of the following procedures, which is the most important that an auditor should use when making an overall review of the income statement?

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(a) Select sales and expense items and trace amounts to related supporting documents (b) Compare actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences: (c) Obtain from the proper client representative, inventory certificates for the beginning and ending inventory amounts that were used to determine cost of sales (d) Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement Before expressing an opinion concerning the results of operations, the auditor would best proceed with the examination of the income statement by: (a) Applying a rigid measurement standard designed to test for understatement of net income (b) Analyzing the beginning and ending balance sheet inventory amounts (c) Making net income comparisons to published industry trends and ratios (d) Examining income statement accounts concurrently with the related balance sheet accounts: An audit program for the examination of the retained earnings account should include a step that requires verification of the: (a) Gain or loss from disposition of treasury shares (b) Market value used to charge retained earnings to account for a two-for-one stock split (c) Authorization for both cash and stock dividends: (d) Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable Which of the following is the most important consideration of an auditor when examining the stockholders equity section of a clients balance sheet? (a) Changes in the capital stock account are verified by an independent stock transfer agent (b) Stock dividends and/or stock splits during the year under audit were approved by the stockholders (c) Stock dividends are capitalized at par or stated value on the dividend declaration date (d) Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors meeting: An audit of stockholders equity ordinarily should include: (a) Tracing individual dividend payments to the capital stock records (b) Reviewing minutes of board meetings to determine the number of shares outstanding (c) Confirming shares outstanding with state officials (d) Determining that dividend declarations comply with debt agreements:

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An internal management tool that aids in the control of the financial management function is a cash budget. The principal aim of a cash budget is to: (a) Insure that sufficient funds are available at all times to satisfy maturing liabilities: (b) Measure adherence to company budgetary procedures (c) Prevent the posting of cash receipts and disbursements to incorrect accounts (d) Assure that the accounting for cash receipts and disbursements is consistent from year to year

(2) The cashier of RCD Company covered a shortage in the cash working fund with cash obtained on December 31 from a local bank by cashing but not recording a check drawn on the Companys out-of-town bank. How would the auditor discover this manipulation? (a) Confirming all December 31 bank balances (b) Counting the cash working fund at the close of business on December 31 (c) Preparing independent bank reconciliations as of December 31 (d) Investigating items returned with the bank cutoff statements: (3) Which of the following is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? (a) Proof of cash: (b) Bank reconciliation (c) Cash confirmation (d) Evaluate ratio of cash to current liabilities (4) The auditor should ordinarily mail confirmation requests to all banks with which the client has conducted any business during the year, regardless of the year-end balance, since (a) The confirmation form also seeks information about indebtedness to the bank: (b) This procedure will detect kiting activities which would otherwise not be detected (c) The mailing of confirmation forms to all such banks is required by generally accepted auditing standards (d) This procedure relieves the auditor of any responsibility with respect to non-detection of forged check (5) As one of the year-end audit procedures, the auditor instructed the clients personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the clients 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 the request was meaningless because the account was closed before the year-end (c) The request was mailed by the assistant treasurer: (d) The CPA did not sign the confirmation request before it was mailed (6) In a manufacturing company which one of the following audit procedures would give the least assurance of the validity of the

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general ledger balance of investment in stocks and bonds at the audit date? (a) Confirmation from the broker (b) Inspection and count of stocks and bonds (c) Vouching all changes during the year to brokers advices and statements (d) Examination of paid checks issued in payment of securities purchased: Which of the following is not one of the auditors primary objective in an examination of marketable 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 When negotiable securities are of considerable volume, planning by the auditor is necessary to guard against: (a) Unauthorized negotiation of the securities before they are counted (b) Unrecorded sales of securities after they are counted (c) Substitution of securities already counted for other securities which should be on hand but are not: (d) Substitution of authentic securities with counterfeit securities Of the following, which is the most efficient audit procedure for verification of interest earned on bond investments? (a) Tracing interest declarations to an independent record book (b) Recomputing interest earned: (c) Confirming the interest rate with the issuer of the bonds (d) Vouching the receipt and deposit of interest checks An auditor testing long-term investments would ordinarily use analytical review as the primary audit procedure to ascertain the reasonableness of the: (a) Valuation of the marketable equity securities (b) Classification of gains and losses on the disposal of securities (c) Completeness of recorded investment income: (d) Existence and ownership of investments Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed? (a) The investment committee of the board of directors periodically reviews the investment decisions delegated to the treasurer (b) Two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box: (c) The internal auditor and the controller independently trace all purchases and sales of marketable securities from the subsidiary ledgers to the general ledger (d) The chairman of the board verifies the marketable securities, which are kept in a bank safe-deposit box, each year on the balance sheet date

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(4)

(5)

RCD, Inc., is an affiliate of the audit client and is audited by another firm of auditors. Which of the following is most likely to be used by the auditor to obtain assurance that all guarantees of the affiliates indebtedness have been detected? (a) Send the standard bank confirmation request to all the clients lender banks (b) Review client minutes and obtain a representation letter: (c) Examine supporting documents for all entries in intercompany accounts (d) Obtain written confirmation of indebtedness from the auditor of the affiliate Which of the following subsequent events will be least likely to result in an adjustment to the financial statements? (a) Culmination of events affecting the realization of accounts receivable owned as of the balance sheet date (b) Culmination of events affecting the realization of inventories owned as of the balance sheet date (c) Material changes in the settlement of liabilities which were estimated as of the balance sheet date (d) Material changes in the quoted market prices of listed investment securities since the balance sheet date: The audit inquiry letter to the clients legal counsel should be mailed only by the: (a) Client after the auditor has reviewed it for appropriate content (b) Auditor after preparation by the client and review by the auditor: (c) Auditors attorney after preparation by the client and review by the auditor (d) Client after review by the auditors attorney Which of the following is not an audit procedure which the independent auditor would perform with respect to litigation, claims, and assessments? (a) Inquire of and discuss with management the policies and procedures adopted for identifying, evaluating, and accounting for litigation, claims, and assessments (b) Obtain from management a description and evaluation of litigation, claims, and assessments that existed at the balance sheet date (c) Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are probable of assertion and must be disclosed (d) Confirm directly with the clients lawyer that all claims have been recorded in the financial statements: An attorney is responding to an independent auditor as a result of the audit clients letter of inquiry. The attorney may appropriately limit the response to: (a) Asserted claims and litigation (b) Matters to which the attorney has given substantive attention in the form of legal consultation or representation: (c) Asserted, overly threatened, or pending claims and litigation (d) Items which have an extremely high probability of being resolved to the clients detriment

17

(6) A CPA has received an attorneys letter in which no significant disagreements with the clients assessments of contingent liabilities were noted. The resignation of the clients lawyer shortly after receipt of the letter should alert the auditor that: (a) Undisclosed unasserted claims may have arisen: (b) The attorney was unable to form a conclusion with respect to the significance of litigation, claims and assessments (c) The auditor must begin a completely new examination of contingent liabilities (d) An adverse opinion will be necessary (7) Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued? (a) Sale of long-term debt or capital stock (b) Loss of a plant as a result of a flood (c) Major purchase of a business which is expected to double the sales volume (d) Settlement of litigation, in excess of the recorded liability: (8) A major customer of an audit client suffers a fire just prior to completion of year-end field work. The audit client believes that this event could have a significant direct effect on the financial statements. The auditor should: (a) Advise management to disclose the event in notes to the financial statements: (b) Disclose the event in the auditors report (c) Withhold submission of the auditors report until the extent of the direct effect on the financial statements is known (d) Advise management to adjust the financial statements (9) RCD, CPA, is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in conformity with generally accepted accounting principles. Which one of the following procedures would be least appropriate for this purpose? (a) Confirm as of the completion of fieldwork accounts receivable which have increased significantly from the year-end date: (b) Read the minutes of the board of directors (c) Inquire of management concerning events which may have occurred (d) Obtain a lawyers letter as of the completion of fieldwork (10) An auditors decision concerning whether or not to dual date the audit report is based upon the auditors willingness to: (a) Extend auditing procedures: (b) Accept responsibility for subsequent events (c) Permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditors report (d) Assume responsibility for events subsequent to the issuance of the auditors report (11) If an auditor dates the auditors report on financial statements for the year ended December 31, 2001, as of February 10, 2002, except for Note J, as to which the date is March 3, 2002, the auditor is taking responsibility for:

18

(a) All subsequent events occurring through March 3, 2002 (b) All subsequent events occurring through February 10, 2002, only (c) All subsequent events occurring through February 10, 2002, and the specific subsequent event referred to in Note J through March 3, 2002: (d) Only the specific subsequent event referred to in Note J through March 3, 2002 (12) An auditor issued an audit report that was dual dated for a subsequent event occurring after the completion of field work but before issuance of the auditors report. The auditors responsibility for events occurring subsequent to the completion of field work was: (a) Limited to the specific event referenced: (b) Limited to include only events occurring before the date of the last subsequent event referenced (c) Extended to subsequent events occurring through the date of issuance of the report (d) Extended to include all events occurring since the completion of field work (13) As part of an audit, a CPA often requests a representation letter from the client. Which one of the following is not a valid purpose of such a letter? (a) To provide audit evidence (b) To emphasize to the client the auditors responsibility for the fairness of the financial statements (c) To satisfy himself or herself by means of other auditing procedures when certain customary auditing procedures are not performed: (d) To provide possible protection to the CPA against a charge of knowledge in cases where fraud is subsequently discovered to have existed in the accounts (14) Which of the following expressions is least likely to be included in a clients representation letter? (a) No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements (b) The company has complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance (c) Management acknowledges responsibility for illegal actions committed by employees: (d) Management has made available all financial statements and related data (15) When an examination is made in accordance with generally accepted auditing standards, the auditor should always: (a) Document the auditors understanding of the clients internal accounting control system (b) Employ analytical review procedures (c) Obtain certain written representations from management: (d) Observe the taking of physical inventory on the balance sheet date

19

(16) In the course of the examination of the financial statements for the purpose of expressing an opinion thereon, the auditor will normally prepare a schedule of unadjusted differences for which the auditor did not propose adjustment when they were uncovered. What is the primary purpose served by this schedule? (a) To point out to the responsible client officials the errors made by various company personnel (b) To summarize the adjustments that must be made before the company can prepare and submit its tax return (c) To identify the potential financial statement effects of errors or disputed items that were considered immaterial when discovered: (d) To summarize the errors made by the company so that corrections can be made after the audited financial statements are released (17) In evaluating an entitys accounting estimates, one of an auditors objectives is to determine whether the estimates are: (a) Not subject to bias (b) Consistent with industry guidelines (c) Based on objective assumptions (d) Reasonable in the circumstances: (18) Which of the following statements is correct about an auditors required communication with an entitys audit committee? (a) Any matters communicated to the entitys audit committee are also required to be communicated to the entitys management (b) The auditor is required to inform the entitys audit committee about significant errors discovered by the auditor and subsequently corrected by management: (c) Disagreements with management about the application of accounting principles are required to be communicated in writing to the entitys audit committee (d) Weaknesses in internal control previously reported to the entitys audit committee are required to be communicated to the audit committee after each subsequent audit until the weaknesses are corrected (19) Which of the following statements is correct about an auditors required communication with an entitys audit committee? (a) This communication is required to occur before the auditors report on the financial statements is issued (b) This communication should include management changes in the application of significant accounting policies: (c) Any significant matter communicated to the audit committee also should be communicated to management (d) Significant audit adjustments proposed by the auditor and recorded by management need not be communicated to the audit committee (20) When considering the use of managements written representations as audit evidence about the completeness assertion, an auditor should understand that such representations: (a) Complement, but do not replace, substantive tests designed to support the assertion:

20

(b) Constitute sufficient evidence to support the assertion when considered in combination with reliance on internal accounting controls (c) Are not part of the evidential matter considered to support the assertion (d) Replace reliance on internal accounting controls as evidence to support the assertion ########################################################### (1) If the size of the sample to be used in a particular test of controls has not been determined by utilizing statistical concepts, but the sample has been chosen in accordance with random selection procedures: (a) No inferences can be drawn from the sample (b) The auditor has committed a nonsampling error (c) The auditor may or may not achieve desired precision at the planned level of assessing control risk too low: (d) The auditor will have to evaluate the results by reference to the principles of discovery sampling (2) As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was: (a) More than the risk of assessing control risk too low based on the auditors sample (b) More than the deviation rate in the auditors sample: (c) Less than the risk of assessing control risk too low based on the auditors sample (d) Less than the deviation rate in the auditors sample (3) The likelihood of assessing control risk too high is the risk that the sample selected to test controls: (a) Does not support the auditors planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment: (b) Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes (c) Contains proportionately fewer deviations from prescribed internal controls than exist in the balance or class as a whole (d) Does not support the tolerable misstatement for some or all of managements assertions ########################################################### (1) In examining cash disbursements, an auditor plans to choose a sample using systematic selection with a random start. The primary advantage of such a systematic selection is that population items: (a) Which include fraud will not be overlooked when the auditor exercises compatible reciprocal options (b) May occur in a systematic pattern, thus making the sample more representative (c) May occur more than once in a sample

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(d) Do not have to be prenumbered in order for the auditor to use the technique: (2) What is the primary objective of using stratification as a sampling method in auditing? (a) To increase the audit risk at which a decision will be reached from the results of the sample selected (b) To determine the tolerable deviation rate for a given characteristic in the population being studied (c) To decrease the effect of variance in the total population: (d) To determine the precision range of the sample selected (3) In statistical sampling, setting the appropriate confidence level and desired sample precision are decisions made by the auditor that will affect sample size for a substantive test. Which of the following should not be a factor in the choice of desired precision? (a) The sampling risk (b) The size of an account balance misstatement considered material (c) The audit resources available for execution of the sampling plan: (d) The objectives of the audit test being conducted (4) An auditor has taken a large sample from an audit population that is skewed in the sense that it contains a large number of small dollar balances. The auditor can conclude: ########################################################### (1) Which of the following is not a characteristic of a batch processed computer system? (a) The collection of like transactions which are sorted and processed sequentially against a master file (b) Keypunching of transactions, followed by machine processing (c) The production of numerous printouts (d) The posting of a transaction, as it occurs, to several files, without intermediate printouts: (2) What type of IT system is characterized by data that are assembled from more than one location and records that are updated immediately? (a) Microcomputer system (b) Minicomputer system (c) Batch processing system (d) Online real-time system: (3) When erroneous data are detected by computer program controls, such data may be excluded from processing and printed on an error report. The error report should most probably be reviewed and followed up by the: (a) Supervisor of computer operations (b) Systems analyst (c) IT control group: (d) Computer programmer (4) One of the major problems in an IT system is that incompatible functions may be performed by the same individual. One compensating control for this is use of: (a) A tape library

22

(5)

(6)

(7)

(8)

(9)

(10)

(b) A self-checking digit system (c) Computer-generated hash totals (d) A computer log: Totals of amounts in computer-record data fields which are not usually added for other purposes but are used only for data processing control purposes are called: (a) Records totals (b) Hash totals: (c) Processing data totals (d) Fields totals If a control total were to be continued on each of the following data items, which would best be identified as a hash total for a payroll IT application? (a) Gross pay (b) Hours worked (c) Department number: (d) Number of employees Which of the following best describes a fundamental control weakness often associated with electronic data processing systems? (a) Electronic data processing equipment is more subject to systems error than manual processing is subject to human error (b) Electronic data processing equipment processes and records similar transactions in a similar manner (c) Electronic data processing procedures for detection of invalid and unusual transactions are less effective than manual control procedures (d) Functions that would normally be separated in a manual system are combined in the electronic data processing system: Assume that an auditor estimates that 10,000 checks were issued during the accounting period. If an IT application control which performs a limit check for each check request is to be subjected to the auditors test data approach, the sample should include: (a) Approximately 1,000 test items (b) A number of test items determined by the auditor to be sufficient under the circumstances (c) A number of test items determined by the auditors reference to the appropriate sampling tables (d) One transaction: Which of the following would lessen internal control in an IT system? (a) The computer librarian maintains custody of computer program instructions and detailed program listings (b) Computer operators have access to operator instructions and detailed program listings: (c) The control group maintains sole custody of all computer output (d) Computer programmers write and debug programs which perform routines designed by the systems analyst First RCD S&L has an on-line real-time system, with terminals installed in all of its branches. This system will not accept a customers cash withdrawal instructions in excess of P4,000 without the use of a terminal audit key. After the instruction is authorized by a supervisor, the bank teller then processes the transaction with the audit key. This control can be strengthened by:

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(11)

(12)

(13)

(14)

(15)

(16)

(a) On-line recording of transaction on an audit override sheet: (b) Increasing the peso amount to P5,000 (c) Requiring manual, rather than on-line, recording of all such transactions (d) Using parallel simulation An IT input control is designed to ensure that: (a) Machine processing is accurate (b) Only authorized personnel have access to the computer area (c) Data received for processing are properly authorized and converted to machine-readable form: (d) Electronic data processing has been performed as intended for the particular application When a database administrators position exists within a client organization, the auditor must be aware of the: (a) Output effectiveness/efficiency considerations (b) Need for coded program files (c) Use of encrypted dialog in a two-way authentication process (d) Inherent violation of the principle of separation of duties: For control purposes, which of the following should be organizationally segregated from the computer operations functions? (a) Data conversion (b) Surveillance of CRT messages (c) Systems development: (d) Minor maintenance according to a schedule A small client recently put its cash disbursement system on a microcomputer. About which of the following internal control features would an auditor most likely be concerned? (a) Programming of this microcomputer is in BASIC, although COBOL is the dominant standard language for business processing (b) The microcomputer is operated by employees who have other, non-data processing job responsibilities: (c) The microcomputer terminal is physically close to the computer and directly connected to it (d) There are restrictions on the amount of data that can be stored and on the length of time that data can be stored Which of the following most likely constitutes a weakness in the internal controls of an IT system? (a) The control clerk establishes control over data received by the IT department and reconciles control totals after processing (b) The application programmer identifies programs required by the systems design and flowcharts the logic of these programs (c) The systems analyst reviews output and controls the distribution of output from the IT department: (d) The accounts payable clerk prepares data from computer processing and enters the data into the computer To obtain evidence that user identification and password controls are functioning as designed, an auditor would most likely: (a) Review the online transaction log to ascertain whether employees using passwords have access to data files and computer programs

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(b) Examine a sample of assigned passwords and access authority to determine whether password holders have access authority incompatible with their other responsibilities: (c) Extract a random sample of processed transactions and ensure that transactions are appropriately authorized (d) Observe the file librarians activities to discover whether other systems personnel are permitted to operate computer equipment without restriction (17) After a preliminary review of a clients IT control, an auditor may decide not to perform tests of controls related to the control procedures within the IT portion of the clients internal control system. Which of the following would not be a valid reason for choosing to omit tests of controls? (a) The controls duplicate operative controls existing elsewhere in the system (b) There appear to be major weaknesses that would preclude reliance on the stated procedure (c) The time and peso costs of testing exceed the time and peso savings in substantive testing if the controls show the controls to be operative (d) The controls appear adequate enough to be relied upon: (18) The primary purpose of a generalized computer audit program is to allow the auditor to: (a) Use the clients employees to perform routine audit checks of the electronic data processing records that otherwise would be done by the auditors staff accountants (b) Test the logic of computer programs used in the clients electronic data processing systems (c) Select larger samples from the clients electronic data processing records than would otherwise be selected without the generalized program (d) Independently process client electronic data processing records: (19) A primary advantage of using generalized audit packages in the audit of an advanced IT system is that it enables the auditor to: (a) Substantiate the accuracy of data through self-checking digits and hash totals (b) Utilize the speed and accuracy of the computer: (c) Verify the performance of machine operations which leave visible evidence of occurrence (d) Gather and store large quantities of supportive evidential matter in machine-readable form (20) Which of the following is an advantage of generalized computer audit packages? (a) They are all written in one identical computer language (b) They can be used for audits of clients that use differing IT equipment and file formats: (c) They have reduced the need for the auditor to study input controls for IT-related procedures (d) Their use can be substituted for a relatively large part of the required compliance testing

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(21) Which of the following is true of generalized audit software packages? (a) They can be used only in auditing on-line computer systems (b) They can be used on any computer without modification (c) They each have their own characteristics which the auditor must carefully consider before using in a given audit situation: (d) They enable the auditor to perform all manual test procedures less expensively (22) Which of the following methods of testing application controls utilizes a generalized audit software package? (a) Parallel simulation: (b) Integrated testing facility approach (c) Test data approach (d) Exception report tests (23) Which of the following audit procedures would an auditor be least likely to perform using a generalized computer audit program? (a) Searching records of accounts receivable balances for credit balances (b) Investigating inventory balances for possible obsolescence: (c) Selecting accounts receivable for positive and negative confirmation (d) Listing of unusually large inventory balances (24) The least likely use by the auditor of generalized audit software is to: (a) Perform analytical procedures on the clients data (b) Access information stored on the clients IT files (c) Identify weaknesses in the clients IT controls: (d) Test the accuracy of the clients computations (25) An auditor will use the IT test data method in order to gain certain assurances with respect to the: (a) Input data (b) Machine capacity (c) Procedures contained within the program: (d) Degree of keypunching accuracy (26) Auditing by testing the input and output of an IT system instead of the computer program itself will: (a) Not detect program errors which do not show up in the output sampled: (b) Detect all program errors, regardless of the nature of the output (c) Provide the auditor with the same type of evidence (d) Not provide the auditor with confidence in the results of the auditing procedures (27) When testing a computerized accounting system, which of the following is not true of the test data approach? (a) Test data are processed by the clients computer programs under the auditors control (b) The test data must consist of all possible valid and invalid conditions: (c) The test data need consist of only those valid and invalid conditions in which the auditor is interested (d) Only one transaction of each type need be tested (28) When auditing around the computer, the independent auditor focuses solely upon the source documents and (a) Test data

26

(29)

(31)

(32)

(33)

(34)

(35)

(b) IT processing (c) Compliance techniques (d) IT output: Processing simulated file data provides the auditor with information about the reliability of controls from evidence that exists in simulated files. One of the techniques involved in this approach makes use of: (a) Controlled processing (b) Program code checking (c) Printout reviews (d) Integrated test facility: Which of the following is not a major reason why and accounting audit trail should be maintained for a computer system? (a) Monitoring purposes (b) Analytical procedures: (c) Query answering (d) Deterrent to fraud Which of the following statements most likely represents a disadvantage for an entity that keeps microcomputer-prepared data files rather than manually-prepared files? (a) It is usually more difficult to detect transposition errors (b) Transactions are usually authorized before they are executed and recorded (c) It is usually easier for unauthorized persons to access and alter the files: (d) Random error associated with processing similar transactions in different ways is usually greater Which of the following is a general control that would most likely assist an entity whose systems analyst left the entity in the middle of a major project? (a) Grandfather-father-son record retention (b) Input and output validation routines (c) Systems documentation: (d) Check digit verification Which of the following represents an additional cost of transmitting business transactions by means of electronic data interchange (EDI) rather than in a traditional paper environment? (a) Redundant data checks are needed to verify that individual EDI transactions are not recorded twice (b) Internal audit work is needed because the potential for random data entry errors is increased (c) Translation software is needed to convert transactions from the entitys internal format to a standard EDI format: (d) More supervisory personnel are needed because the amount of data entry is greater in an EDI system Many entities use the Internet as a network to transmit electronic data interchange (EDI) transactions. An advantage of using the Internet for electronic commerce rather than a traditional value-added network (VAN) is that the Internet: (a) Permits EDI transactions to be sent to trading partners as transactions occur: (b) Automatically batches EDI transactions to multiple trading partners

27

(c) Possesses superior characteristics regarding disaster recovery (d) Converts EDI transactions to a standard format without translation software

28