AUDITING THEORY

OCTOBER 1988
1.

Danilo Castro, a partner in a CPA firm performs free

accounting service for a club of which he is treasurer.
The most preferable way for Castro to issue the yearly
statements of the club is :
a. On the firm's letterhead with a disclaimer of lack of
independence.
b. On the firm's letterhead with caption that the
statement is unaudited.
c. On the club's letterhead with Castro signing as
treasurer.
d. On plain paper with no reference to Castro as a CPA.

2.

Anticipate no profits and provide for all losses is an

example of the doctrine of :
a. Conservatism.
b. Consistency.
c. Materiality.
d. Independence.

3.

The difference between auditing standards and audit

procedures is that procedures relates to :
a. Measures of performance.
b. Audit principles.
c. Accounting principles.
d. Acts to be performed.

4.

Independent auditing can best be described as :

a. A branch of management services.
b. A branch of accounting.
c. A professional activity that measures and
communicates financial and business data.
d. A discipline which attests to the results of
accounting and other functional operations data.

5.

The CPA should not undertake an engagement if his fee

is to be based upon :

a.
b.
c.
d.

Rates set by a City ordinance.

A percentage of audited net income.
Per diem rates plus expenses.
The findings of a tax authority.

6.

When engaged in the practice of public accounting the

most fundamental and corner stone of philosophical
structure of auditing is :
a. General competence.
b. Independence.
c. Dues professional care.
d. Familiarity with business practices and concept.

7.

Accounts receivable which mature within one year

should be stated in the balance sheet at :
a. Estimated net realizable value of receivables.
b. Original cost service rendered or item sold.
c. Modified cash basis.
d. Gross selling price of items sold.
e. Amount discounted for interest or cost of money.

8.

Current assets are usually listed in the balance sheet in

the order of their :
a. Liquidity.
b. Materiality.
c. Profitability.
d. General acceptability.

9.

A CPA reject a management advisory services

engagement to a client he audits if :
a. His recommendations are to be subject to review by
the client.
b. It would require him to make management decisions
for a client.
c. The proposed engagement is not accounting
related.
d. It requires the installation of an EDP system.

10.

The CPA who regularly examine the Marcos corporate

financial statements was asked to prepare pro forma
income statements for the next three years based on
the corporations operating assumptions for the internal
use of the client. The CPA should :
a. Reject the engagement since the statements are to
be based on assumptions.
b. Reject the engagement because of lack of
independence.
c. Reject the engagement because the statements are
for internal use only.
d. Accept the engagement provided full disclosure is
made of the assumptions used and the ext4ent of
the responsibility of the CPA.

11.

These are the basic doctrines which indicate the

objective of auditing and suggests the manner in which
the objectives are accomplished. Example: Proper
matching current period costs and expenses to
determine periodic net income:
a. Auditing principles.
b. Accounting principles.
c. Auditing standards.
d. Audit procedures.

12.

It constitutes the courses of action available to the

auditor to determine adherence to standards and the
validity of the application of accounting principles.
a. Auditing standards.
b. Working papers.
c. Audit procedures.
d. Substantive tests.

13.

Auditing procedures differ from auditing standards in

that standards relate to:
a. Measures of performance.
b. Acts to be performed.
c. Determination of compliance.
d. Audit principles.

14.

An
a.
b.
c.
d.

audit program contains procedures intended to:

Detect errors and frauds.
Serve as a guide for the conduct of the audit.
Obtain evidence.
Test the adequacy of internal control.

15.

The amount of audit fees depend largely on the:

a. Size and capitalization of the company under audit.
b. Amount of profit for the year.
c. Availability of cash.
d. Volume of audit work and degree of competence
and responsibility involved.

16.

Evidential matters supporting the financial statements

consist of underlying accounting data and all
corroborating information available to the auditor.
Corroborating information can be found in:
a. The subsidiary ledgers.
b. Worksheet supporting cost allocation.
c. Minutes of director's meetings.
d. Accounting manuals.

17.

The CPA's opinion on the financial statements of his

client should be dated as of the:
a. Closing of the client's books.
b. Receipt of client's letter of representation.
c. Completion of all important audit procedures.
d. Submission of the report to the client.

18.

The auditor may, if necessary and appropriate, express

an opinion on specific items in the financial statements.
This is referred to as a:
a. Qualified opinion.
b. Disclaimer of opinion.
c. Piecemeal opinion.
d. Unqualified opinion.

19.

The examination of underlying documentary evidence

in order to verify the entries which are based upon the
evidence is called:
a. Internal audit.
b. Testing.
c. Auditing.
d. Vouching.

20.

An inventory turnover analysis should be utilized by the

auditor to find out if there are:
a. Deficiencies in inventory pricing.
b. Stocks of obsolete or shopworn merchandise.
c. Methods of determining automatic reorder levels.
d. Sound merchandising policies.

21.

A CPA who commits himself to audit and render an

opinion on the financial operations of a business,
represented himself as possessing the desire
competence and required skills when in fact he does
not have them. This is a violation of:
a. Accounting standards.
b. Standards of field work.
c. Standards of reporting.
d. The general standards.

22.

A written request showing the amount of receivable per

subsidiary ledger card as of a given date, and requiring
a letter reply only in the event of a discrepancy is
called:
a. Positive confirmation.
b. Negative confirmation.
c. Letter of confirmation.
d. Client's representation letter.

23.

A system for tracing items of data from processing step

to processing, step, particularly from a machine
produced report or other machine output back to the
original source data is called:
a. Compliance testing.

b. Batch processing.
c. Audit trail.
d. Auditing around the computer.
24.

Auditing of computerized records where the computer

is used as a tool in the audit is called:
a. Batch processing.
b. Audit trail.
c. Auditing around the computer.
d. Auditing through the computer.

25.

Which of the given sampling methods is most useful to

an auditor when testing for compliance:
a. Variable sampling.
b. Attribute sampling.
c. Stratified random sampling.
d. Cluster sampling.

26.

The main objective of operations auditing is:

a. To evaluate the integrity of accounting information.
b. To verify fulfillment of plans and sound business
practices.
c. To measure and evaluate the effectiveness of
controls.
d. To produce results as desired or directed.

27.

A cash shortage may be concealed by transferring

funds from one location to another or by converting
negotiable assets to cash. Based on this premise which
of the following procedure is vital to prevent
substitution for cash shortage:
a. Simultaneous bank reconciliation.
b. Simultaneous verification.
c. Simultaneous confirmation.
d. Simultaneous surprise cash count.

28.

Which of the following best describe a fundamental

control weakness often associated with electronic data
processing system (EDP)?

a. EDP equipment is more subject to system error than

manual processing is subject to human error.
b. Monitoring is not an adequate substitute for the use
of test data.
c. EDP equipment processes and records similar
transactions in a similar manner.
d. EDP procedures for the detection of invalid and
unusual transactions are less effective than manual
control procedures.
29.

A CPA should not issue a report on his evaluation of

internal control if:
a. The report is to be sent to stockholders with audited
financial statements.
b. The report is to be given to creditors without any
financial statements.
c. The report is issued to the general public in a
document that includes unaudited
financial
statements.
d. The report is to be given to prospective investors
without any financial statements.

30.

The cashier of Milady Jewellers covered a shortage in

the cash working fund with cash obtained at December
31 from a bank by cashing but not recording a check
drawn on the company's out of town bank. How would
you as auditor discover the manipulation?
a. By confirming all December 31 bank balances.
b. By counting the cash working fund at the close of
business on December 31.
c. By preparing independent bank reconciliation as of
December 31.
d. By investigating items returned with the bank cutoff statements of the succeeding month.

31.

The best way for an auditor to detect kit6ing is to :

a. Request a cut-off bank statement.
b. Send a bank confirmation.
c. Prepare a bank transfer working paper.

d. Prepare a bank reconciliation at year end.

32.

During his examination of a January 20, 1987 cut-off

bank statement, an auditor noticed that the majority of
checks listed as outstanding at December 31, 1986 had
not cleared the bank. This would indicate :
a. A high possibility of kiting.
b. A high possibility of lapping.
c. That the cash disbursements journal had been held
open past December 31, 1986.
d. That the cash disbursement journal has been closed
prior to December 31, 1986.

33.

During a positive confirmation of accounts receivable

as of the balance sheet date, approximately 95 % of
the confirmation letters returned, indicated that the
customer owed a smaller balance than the amount for
confirmation. This might be explained by the fact that :
a. There is a large number of unrecorded liabilities.
b. There is a large number of unrecorded sales.
c. The cash receipt journal was held open after yearend.
d. The sales journal was held open after year-end.

34.

One of the major audit procedures for determining

whether the allowance for doubtful receivables is
adequate is :
a. Vouching and tracing the collection of a receivable
written-off in a prior period.
b. Confirming all receivable with a credit balance.
c. Confirming any account receivable written-off
during the year.
d. Preparing a list of aged accounts receivable.

35.

The audit procedures used to verify accrued liabilities

differ from those employed for the verification of
accounts payable because :
a. Accrued liability balances are less materials than
accounts payable balances.

b. Accrued liabilities usually pertain to services of a

continuing nature whereas accounts payable are the
result of completed transactions.
c. Evidence supporting accrued liabilities is nonexistent, whereas evidence supporting accounts
payable is readily available.
d. Accrued liabilities at year-end will become accounts
payable during the succeeding year.
36.

In spreading out the audit work to be performed on an

engagement, the auditor should consider confirming
accounts receivable balances at an interim date if :
a. Subsequent collections are to be reviewed.
b. Internal control over receivables is good.
c. Negative confirmation is being used.
d. Positive confirmation is being used.

37.

A CPA observes his client's physical inventory count on

December 31, 1986. The inventory teams consisting of
five teams used a tag system. The CPA's observation
and presence may be expected to result in the
det3ection of :
a. The inventory takers forgot to count all of the items
in one shelf of the store.
b. Some of the items included in the inventory were
received on consignment.
c. An error is made in the count of one inventory item.
d. The inventory omitted some items on consignment
to wholesalers.

38.

In conducting an audit, errors that arouse suspicion of

fraud should be given greater attention than other
errors. This is an example of applying the criterion of :
a. Materiality.
b. Consistency.
c. Reliability of evidence.
d. Relative risk.

39.

When auditors trace a sample of entries from the cash

receipts listings to the customer' ledger cards, they
actually are performing a :
a. Substantive test.
b. Compliance test.
c. Vouching.
d. Dual purpose test.

40.

It comprises the plan of organization and all of the

coordinate methods and measures adopted within the
organization to safeguard its assets, check the
accuracy and reliability of is accounting data, promote
operational efficiency and encourage adherence to
prescribed managerial policies :
a. Effectiveness audit.
b. Public accounting.
c. Government accounting.
d. Internal control.

41.

It is a managerial control which functions by measuring

and evaluating the effectiveness of other controls.
a. Effectiveness audit.
b. Government auditing.
c. Compliance audit.
d. Internal auditing.

42.

When a company has treasury stock certificates on

hand at year-end, a count by the auditor is :
a. Always required.
b. Not necessary if it is in the minutes of the corporate
meetings.
c. Required when the company had treasury stock
transactions during the year.
d. Required when the company classifies treasury
stock as an asset.

43.

State Steel Products violated company policy when it

erroneously capitalized the cost of repainting its

warehouse. The CPA auditing State Steel Products

would most likely learn of the error by :
a. Talking to the maintenance man.
b. Discussing capitalization policies with the controller.
c. Reviewing the titles and description of all
construction work orders issued during the year.
d. Noticing during the physical inventory observation
that the warehouse has just been painted.
44.

The CPA's examination normally need not include :

a. Determining that dividend declaration is in
compliance with debt agreements.
b. Detailed checking from the dividend payment list to
the capital stock records.
c. Tracing the authorization for the dividends from the
directors' meetings.
d. Reviewing the bank reconciliation for the imprest
dividend account.

45.

An audit step that will most likely reveal the existence

of contingent liabilities is :
a. A review of vouchers paid during the month
following the year-end.
b. Accounts payable confirmation.
c. Review of minutes of Board of Directors meetings.
d. An inquiry directed to legal counsel.
A client whose accounting period ends with the
calendar year might have to adjust its year-end
financial statements because of subsequent events
that occurred after December. Which of these
subsequent event will necessitate the adjustment?
a. The
adaptation
of
accelerated
depreciation
methods.
b. Collection of 90% of the accounts receivable.
c. Sale of a major subsidiary.
d. Admission that a substantial portion of inventory is
obsolete.

46.

47.

''Precision'' is a statistical measure of the maximum

likely difference between the sample estimate and the
true but unknown population total and is directly
related to :
a. Relative risk.
b. Materiality.
c. Cost-benefit of evidence.
d. Standard deviation.

48.

An important statistic to consider when using a

statistical sampling audit plan is the population
variability. The population variability is measured by
the :
a. Sample mean.
b. Standard deviation.
c. Standard error of the sample mean.
d. Estimated population total minus the actual
population total.

49.

An
a.
b.
c.
d.

50.

A long form audit report generally includes the basic

financial statements but would not include :
a. Explanatory comments.
b. Statistical data.
c. Details of items in basic financial statements
d. Exceptions or reservations to the standard shortform report.

auditor's ''except for'' report is a type of :

Unqualified opinion.
Qualified opinion.
Adverse opinion.
''Subject to'' opinion.