AUt 1088

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.