PSBA Manila CPA Refresher Quiz 2 – October, 2022 Batch

Auditing Theory

Multiple Choice:

1. 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 management’s assertion of
a. Rights
b. Completeness
c. Existence
d. Valuation

2. To gain assurance that all inventory items in a client’s inventory listing schedule are valid, an
auditor most likely would trace
a. Inventory tags noted during the auditor’s observation to items listed in the inventory listing
schedule.
b. Inventory tags noted during the auditor’s observation to items listed in receiving reports and
vendors’ invoices.
c. Items listed in the inventory listing schedule to inventory tags and the auditor’s recorded
count sheets.
d. Items listed in receiving reports and vendors’ invoices to the inventory listing schedule.

3. Which of the following statements is correct concerning the use of negative confirmation
requests?
a. Unreturned negative confirmation requests rarely provide significant explicit evidence.
b. Negative confirmation requests are effective when detection risk is low.
c. Unreturned negative confirmation requests indicate that alternative procedures are
necessary.
d. Negative confirmation requests are effective when understatements of account balances
are suspended.

4. When inventory is material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding its existence and condition by attendance at physical
inventory counting unless impracticable. Where attendance is impracticable, due to factors
such as the nature and location of the inventory, the auditor should
a. Take or observe some physical counts on an alternative date and, when necessary,
perform tests of intervening transactions.
b. Consider whether alternative procedures provide sufficient appropriate audit evidence of
existence and condition to conclude that the auditor need not make reference to a scope
limitation.
c. Issue qualified or disclaimer of opinion.
d. Issue qualified or adverse opinion.

5. When litigation or claims have been identified or when the auditor believes they may exist, the
auditor should
a. Seek direct communication with the entity’s lawyers.
b. Disclose the litigation and claims in the auditor’s report.
c. Issue unqualified opinion with explanatory paragraph.
d. Issue qualified or adverse opinion.

6. Confirmations are less effective than tests of transactions for discovering

a. Omitted accounts.
b. Disputed amounts.
c. Invalid accounts.
d. Uncollected amounts where the debtor has moved and left no forwarding address.

7. Which of the following statements is correct regarding external confirmation?

a. The auditor need not tailor external confirmation requests to the specific audit objective.
b. Confirmation requests ordinarily do not include management’s authorization to the
respondent to disclose the information to the auditor.
c. A positive external confirmation request asks the respondent to reply to the auditor in all
cases.
d. A negative external confirmation request asks the respondent to reply to the auditor in all
cases.
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8. The auditor, in attending the physical count conducted by a client in its warehouse to ascertain
existence of inventory, shall perform the following, except
a. Evaluate management’s instructions for recording/controlling count results.
b. Inspect the inventory and perform test counts.
c. Reconcile changes in inventory between the count date and period end.
d. Request confirmations as to quantities/condition of inventory held.

9. When requiring a letter of audit inquiry, which is mailed by the auditor after having prepared by
the client and reviewed by the auditor, from the client’s attorney, which of the following
information will be requested?
a. A statement about conflicts of interest that the attorney may have with client.
b. The attorney’s expert opinion of proper PFRS treatment.
c. An evaluation of the likelihood of unfavorable outcome of, and estimated losses from
contingencies.
d. Possible auditor defenses for litigation related to ordinary negligence claims.

10. When auditing contingent liabilities, which of the following procedures would be least
effective?
a. Reading the minutes of the board of directors.
b. Reviewing the bank confirmation letter.
c. Examining invoices for professional services or analyzing legal expense and review
invoices and statements from outside legal counsel.
d. Examining customer confirmation replies.

11. The primary source of information to be reported about litigation, claims and assessments is
the client’s management. The primary reason an auditor requests that letters of inquiry be
sent to a client’s attorneys is to provide the auditor with
a. The probable outcome of claims and litigation.
b. Corroboration of information furnished by management about litigation, and claims.
c. The attorneys’ opinions of the client’s historical experiences.
d. A description and evaluation of litigation, claims and assessments that existed at the
balance sheet date.

12. The appropriate date for the client to specify as the effective date in the audit inquiry to a lawyer
is
a. The balance sheet date
b. Seven working days after the request is received by the lawyer.
c. The date of the audit inquiry itself.
d. The expected date of the completion of audit field work.

13. In obtaining evidence about presentation and disclosure of operating segment information in
the financial statements, the auditor shall perform the following except
a. Obtain an understanding of methods in determining segment information.
b. Evaluate whether appropriate disclosure is made.
c. Testing management’s methods in determining segment information.
d. Confirming with outside creditors.

14. Which of the following types of evidence would an auditor most likely examine to determine
whether internal controls are operating as designed?
a. Gross margin information regarding the client's industry.
b. Confirmations of receivables verifying account balances.
c. Client records documenting the use of computer information system programs.
d. Anticipated results documented in budgets or forecasts.

15. Which statement is correct regarding the audit evidence?

a. The greater the risk, the less audit evidence is likely to be required.
b. The higher the quality, the more may be required
c. Merely obtaining more audit evidence may not compensate for its poor quality.
d. Obtaining audit evidence relating to a particular assertion is a substitute for obtaining
audit evidence regarding another assertion.

16. The independent auditor selects several transactions in each financial area and traces them
through the entire system, paying special attention to evidence about whether or not the
controls are in operation. This is an example of a (n)
a. Application test.
b. Test of a control.
c. Substantive test.
d. Test of a function.
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17. Because the concepts of audit risk and materiality are interrelated, they must be considered
together by the auditor. Which of the following statements is correct?
a. The phrase in the auditor’s report “present fairly, in all material respects, in conformity
with generally accepted accounting principles” indicates the auditor’s belief that the
financial statements taken as a whole are not materially misstated.
b. If misstatements are not individually material, but are material when aggregated with
other misstatements, the concept of materiality does not apply.
c. Audit risk is the risk that the auditor may unknowingly modify his/her opinion when, in
fact, the financial statements are fairly presented.
d. Only material errors cause financial statements to be materially misstated.

18. Reprocessing (also known as tracing), which is a test for understatement, of transactions
helps establish that all valid items have been recorded. Reprocessing tests which of the
following assertions?
a. Occurrence
b. Rights
c. Existence
d. Completeness

19. The process of vouching, which is a test for overstatement, helps establish that all recorded
transactions
a. Have been recorded
b. Are complete
c. Are valid
d. Are presented properly

20. Which of the following statements is true?

a. Audit objectives follow and are closely related to management assertions.
b. Management’s assertions follow and are closely related to the audit objectives.
c. The auditor’s primary responsibility is to find and disclose fraudulent management
assertions.
d. Assertions about presentation and disclosure deal with whether the accounts have
been included in the financial statements at appropriate amounts.

21. Observation
a. Consists of looking at a process or procedure being performed by others.
b. Consists of seeking information of knowledgeable persons, both financial and non-
financial, throughout the entity or outside the entity.
c. Is the process of obtaining a representation of information or of an existing condition
directly from a third party.
d. Is the auditor’s independent execution of procedures or controls that were originally
performed as part of the entity’s internal control.

22. The primary emphasis in most tests of details of balances is on the:

a. Balance sheet accounts
b. Revenue accounts
c. Cash flow statement accounts
d. Expense accounts

23. How does the extent of substantive tests required to constitute sufficient evidential matter
with the auditor’s reliance on internal control?
a. Randomly
b. Directly
c. Disproportionately
d. Inversely

24. Theoretically, which of the following would not have an effect on the amount of audit
evidence gathered by the auditor?
a. The type of opinion to be issued.
b. The auditor’s evaluation of internal control.
c. The types of evidence available to the auditor.
d. Whether the client reports to the SEC.

25. Which of the following types of audit evidence is the least persuasive?
a. Prenumbered purchase order forms.
b. Bank statements obtained from client.
c. Test counts of inventory performed by the auditor.
d. Correspondence from the client’s attorney about litigation.
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26. An auditor’s decision either to apply analytical procedures as substantive tests or to perform
tests of transactions and account balances usually is determined by the
a. Availability of data aggregated at a high level.
b. Potentially unrecorded items to the financial statements.
c. Accounting records to the supporting evidence.
d. Supporting evidence to the accounting records.99

27. Which of the following tends to be most predictable for purposes of analytical procedures
applied as substantive tests?
a. Relationships involving balance sheet accounts.
b. Transactions subject to management discretion.
c. Relationships involving income statement accounts.
d. Data subject to audit testing in the prior year.

28. The basic premise underlying the application of analytical procedures is that
a. The study of financial ratios is an acceptable alternative to the investigation of unusual
fluctuations
b. Statistical tests of financial information may lead to the discovery of material errors in the
financial statements
c. Plausible relationships among data may reasonably be expected to exist and continue in
the absence of known conditions to the contrary
d. These procedures cannot replace tests of balances and transactions

29. To gather the evidence regarding the balance per bank in a bank reconciliation, an auditor
would examine all of the following except
a. Cut-off bank statement
b. Year-end bank statement
c. Bank confirmation
d. General ledger

30. Confirmation is most likely to be a relevant form of evidence with regard to assertions about
accounts receivable when the auditor has concerns about the receivables’
a. Valuation
b. Classification
c. Existence
d. Completeness

31. Which of the following errors would not be discovered during the audit of the acquisitions and
payments cycle?
a. Duplicate payment of a vendor’s invoice.
b. Improper payments of officer’s personal expenditures.
c. Payment of interest to related party for an amount in excess of the going rate.
d. Payment for raw materials that were not received.

32. 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 journal is performed to satisfy the audit objective of
a. Mechanical accuracy
b. Validity
c. Completeness
d. Cut-off

33. For effective internal control, the accounts payable department generally should
a. Stamp, perforate, or otherwise cancel supporting documentation after payment is
mailed.
b. Ascertain that each requisition is approved as to price, quantity and quality by an
authorized employee.
c. Obliterate the quantity ordered on the receiving department copy of the purchase order.
d. Establish the agreement of the vendor’s invoice with the receiving report and purchase
order.

34. A client erroneously recorded a large purchase twice. Which of the following internal control
measures would be most likely to detect this error in a timely and efficient manner?
a. Footing the purchases journal.
b. Reconciling the vendor’s monthly statements with subsidiary payable ledger accounts.
c. Tracing totals from the purchases journal to the ledger accounts.
d. Sending written quarterly confirmations to all vendors.
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35. Which of the following is a standard internal accounting control for cash disbursements?
a. Checks should be signed by the controller and at least one other employee of the
company.
b. Checks should be sequentially numbered and the numerical sequence should be
accounted for by the person preparing bank reconciliation.
c. Checks and supporting documents should be marked “paid” immediately after check is
returned with the bank statement.
d. Checks should be sent directly to payee by the employee who prepares documents
that authorize check preparation.

36. Which of the following is an effective internal control measure that encourages receiving
department personnel to count and inspect all merchandise received?
a. Quantities are ordered are excluded from the receiving department copy of the
purchase order.
b. Vouchers are prepared by accounts payable department personnel only after they
match item counts on the receiving report with purchase order.
c. Receiving department personnel are expected to match and reconcile the receiving
report with the purchase order.
d. Internal auditors periodically examine on a surprise basis, the receiving department
copies of receiving reports.

37. The two phases of the auditor’s study of internal accounting control are referred to as
“review of the system” and “tests of compliance”. In the tests of compliance phase, the
auditor attempts to
a. Obtain reasonable degree of assurance that the client’s system of controls is in use
and is operating as planned.
b. Obtain sufficient, competent evidential matter to afford a reasonable basis for the
auditor’s opinion.
c. Obtain assurances that informative disclosures in the financial statements are
reasonably adequate.
d. Obtain knowledge and understanding of the client’s prescribed procedures and
methods.

38. Which of the following is an effective internal accounting control over accounts receivable?
a. Only persons who handle cash receipts should be responsible for the preparation of
documents that reduce accounts receivable balances.
b. Responsibility for approval of the write-off of uncollectible accounts receivable should
be assigned to the cashier.
c. Balances in the subsidiary accounts receivable ledger should be reconciled to general
ledger control account once a year, preferably at the year-end.
d. The billing function should be assigned to persons other than those responsible for
maintaining accounts receivable subsidiary record.

39. Which of the following internal accounting control procedures is effective in preventing duplicate
payment of vendors’ invoices?
a. The invoices should be stamped, perforated or otherwise effectively cancelled before
submission for approval of the voucher.
b. Unused voucher forms should be prenumbered and accounted for.
c. Cancelled checks should be sent to persons other than the cashier or accounting
department personnel.
d. Properly authorized and approved vouchers with appropriate documentation should be
the basis for check presentation.

40. Which of the following is generally true about the sufficiency of audit evidence?
a. The amount of evidence that is sufficient varies inversely with the risk of material
misstatement.
b. The amount of evidence concerning a particular account varies inversely with the
materiality of the account.
c. The amount of evidence concerning a particular account varies inversely with the
inherent risk of the account.
d. When evidence is appropriate with respect to an account it is also sufficient.

41. Which of the following is correct about the appropriateness of evidence?

a. Audit evidence from external sources is more relevant than evidence generated
internally.
b. Audit evidence is more persuasive when items of evidence from different sources or of
different nature are not consistent.
c. Audit evidence generated internally is more reliable when the related accounting and
internal control systems are effective.
d. Sufficiency refers to the amount of evidence needed.
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42. Which of the following statements is most correct regarding the primary purpose of audit
procedures?
a. To detect all errors or fraudulent activities as well as illegal activities.
b. To comply with the SEC.
c. To gather corroborative audit evidence about management’s assertion regarding the
client’s financial statements.
d. To determine the amounts of errors in the balance sheet accounts in order to adjust
the accounts to accrual.

43. Which of the following is true?

a. Tests of details of balances focus on the ending balances of accounts in the client’s trial
balance.
b. Tests of details of balances focus on the transactions during the period.
c. Tests of details of balances focus on the auditor’s understanding of internal controls.
d. Tests of details of balances focus on compliance of recorded amounts to
expectations developed by the auditor.

44. Which of the following types of audit evidence generally is the most reliable?
a. Inquiries made of management.
b. Confirmation of account information.
c. Analytical procedures.
d. Review of prior-year audit procedures.

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

46. Which statement is incorrect regarding the auditor’s attendance at physical inventory
counting?
a. When inventory is material to the financial statements, the auditor should obtain
sufficient appropriate audit evidence regarding its existence and condition by
attendance at physical inventory counting unless impracticable.
b. When the quantities are to be determined by a physical inventory count and the auditor
attends such a count, the auditor would ordinarily observe count procedures and
perform test counts.
c. To obtain assurance that management’s procedures are adequately implemented, the
auditor would observe employees’ procedures and perform test counts.
d. The physical inventory count cannot be conducted at a date other than period end.

47. The auditor considers the status of legal matters up to

a. The date of the audit report.
b. The issuance of financial statements.
c. The balance sheet date.
d. Up to the date of receipt of letter from lawyers.

48. Even with the most effectively designed internal control, the auditor must obtain audit
evidence, beyond testing the controls, for every:
a. transaction.
b. financial statement account.
c. material financial statement account.
d. financial statement account that will be relied upon by third parties

49. Which statement is incorrect regarding the nature of further audit procedures?
a. The nature of further audit procedures refers to their purpose and their type.
b. Certain audit procedures may be more appropriate for some assertions than others.
c. The higher the auditor’s assessment of risk, the less reliable and relevant is the audit
evidence sought by the auditor from substantive procedures.
d. The auditor is required to obtain audit evidence about the accuracy and completeness
of information produced by the entity’s information system when that information is
used in performing audit procedures.
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50. Which of the following internal controls most likely would be used to maintain accurate
inventory records?
a. Perpetual inventory records are periodically compared with the current cost of individual
inventory items.
b. A just-in-time inventory ordering system keeps inventory levels to a desired minimum.
c. Requisitions, receiving reports, and purchase orders are independently matched before
payment is approved.
d. Periodic inventory counts are used to adjust the perpetual inventory records.

***End of Examination***