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Roque Quick Auditing Theory Chapter 12 PDF
Roque Quick Auditing Theory Chapter 12 PDF
Roque Quick Auditing Theory Chapter 12 PDF
CHAPTER 12
Practice
Examinations
PRACTICE EXAMINATION 1
1. Prior to, or in conjunction with, the information-gathering
procedures for an audit, audit team members should discuss
the potential for material misstatement due to fraud. Which
of the following best characterizes the mindset that the audit
team should maintain during this discussion?
A. Presumptive
B. Judgmental
C. Criticizing
D. Questioning
I
5. Determine whether disbursements are properly approved.
Y?u are a senior auditor with JST and Co. CPAs. Tanya, a,, new
hire, has come to you with questions concerning "assertions and
ER 12 Practice Examinations 817
cHAPT
7. completeness
10. Valuation
13. When using the cycle approach to segmenting the audit, the
reason for treating capital acquisition and repayment sepa-
rately from the acquisition of gouds and services is that:
A. The transactions are related to financing a company ra-
ther than to its operations.
B. Most capital acquisition and repayment cycle accoun~
involve few transactions, but each is often highly materi-
al and therefore should be audited extensively.
C. Both A and B are correct.
D. Neither A nor B is correct.
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CPA EXAMINATION REVIEWER: AUDITING THEORY
18. Which one of the following statements about the cycle ap-
proach to auditing is not correct?
A. There are differences among cycles in the frequency and
size of expected errors.
B. There are differences among cycles in the effectiveness
of internal controls.
C. There are differences among cycles on the auditor's will-
ingness to accept risk that material errors exist after the
auditing is complete.
D. It is common for auditors to want an equally low likeli-
hood of errors for each cycle after the auditor is finished.
'
822 CPA EXAMINATION REVIEWER: AUDITING THEORY
27. The auditor normally does not need to test the accuracy or
classification of fixed assets recorded in prior periods be-
cause
A. They are rarely material to the audit.
B. They rarely contain misstatements.
c. They are verified in previous audits.
D. They don't affect the balance sheet.
_ ....... A"
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824 CPA EXAMINATION REVIEWER: AUDITING THEORY
69. Which of the following is not a reason why the auditor re-
quests that th~ client provide a letter of representation?
A. Professional auditing standards require the auditor to ob-
tain a letter of representation .
B. It impresses upon management its responsibility for the
accuracy of the information in the financial statements.
C. It provides written documentation of the oral responses
. already received to inquiries of management.
D. It provides written documentation, which is a higher
quality of evidence than management's oral responses to
inquiries.
836 CPA EXAMINATION REVIEWER: AUDITING THEORY
84. Which of the following statements is true when the CPA has
been engaged to perform an audit of financial statements?
A. The CPA firm is engaged and paid by the client; there·
fore, the firm has primary responsibility to be an advo·
cate for the client.
B. The CPA firm is engaged and paid by the client, but the
primary beneficiaries of the audit are those who rely on
the financial statements.
C. Should a situation arise where there is no convincing auf
tho_ritative ~tandard available, and there is a ~hOiC~t~
act1ons which could impact a client's financ1a! st_ in
15
ments, the CPA is free to endorse the choice which
the investors' interests. ·
D. The CPA fi rm has primary responsibility to the FRSC.
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846 CPA EXAMINATION REVIEWER: AUDITING THEORY
100. Copies of sales invoices show different unit prices for appar-
ently identical items. .
A. All sales invoices are checked as to all details after their
preparat.ion.
B. Differences reported by customers are satisfactorily in·
vestigated.
C. Statistical sales data are compiled and reconciled with
recorded sales. ·
D. All sales invoices are compared with the customers' pur-
chase orders. ·
...c:R 12 Practice Examinations 847
ct'fAP• ..
l(EY ANSWERS-1
PRACTICE EXAMINATION 2
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I
II
850 CPA EXAMINATION REVIEWER: AUDITING THEORY
15. Which of the following conditions most likely would pose the
greatest risk in accepting a new audit engagement? .
A. Staff will need to be rescheduled to cover this new client.
B. There will be a client-imposed scope limitation.
C. The firm will have to hire .an expert in one audit area.
Q. The client's financial reporting system has been in place
for 10 years.
,-ER 12 Practice Examinations 853
ctJAP .
27. Which of the following procedures most likely would give the
greatest assurance that securities held as investments are
safeguard~d? . d
A. There 1s no access to securities between the year en
and the date of the auditor's security count. . b
B. Proceeds from the sale of investments are received Y
an employee who does not have access to securities. f
0
C. Investment acquisitions are authorized by a member
the Board of Directors before execution.
TER 12 Practice Examinations
cHAP 857
30. Which of the following factors would least likely affect the
extent of the auditor's consideration of the client's internal
controls?
A. The amount of time budgeted to complete the enga~~-
ment.
B. The size and complexity of the client.
C. The nature of specific relevant controls.
D. The auditor's prior experience with client operations.
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ER
cHAPT
12 Practice Examinations 859
D. Single manager.
68. Assuming cash receipts from credit sales have been misap-
propriated. Which of the following is likely to conceal the
misappropriation and unlikely to be detected?
A. Understating the sales journal.
8. Overstating the accounts receivable control account.
C. Overstating the accounts receivable subsidiary ledger.
D. Overstating the cash receipts journal.
TER
ct-iAP
12 Practice Examinations 871
71. The best argument against the use of negative accounts re-
ceivable confirmations is
A. The cost-per-response is excessively high.
B. There is no way of knowing if the intended recipients re-
ceived them.
c. Recipients are likely to feel that in reality the confirma-
tion is a subtle request for payment.
D. The inference drawn from receiving no reply may not be
correct.
for which of the following audit tests would a CPA most like-
81. ly use attri b ute sampling?
A. Identifying entries posted to incorrect accounts.
8. Estimating the amount in an expense account.
c. Evaluating the reasonableness of depreciation expense.
o. Selecting receivables for confirmation of account balanc-
es.
KEY ANSWERS-2
pR.ACTICE EXAMINATION 3
10.
·c~nfirmation is most likely to be a relevant form of evidence
with re~ard to assertions about accounts receivable when
the auditor has concerns about the receivables'
A. Valuation
B. Classification
C. Existence
D. Completeness
24. An auditor who uses the work of an expert may refer to the
expert in the auditor's report if the
890 CPA EXAMINATION REVIEWER: AUDITING THEORY
D. External auditors
32. Which of the following actions should the auditor take in re-
sponse to discovering a deviation from the prescribed con-
trol procedure?
A. Make inquiries to understand the potential consequence
of the deviation.
B. Assume that the deviation is an isolated occurrence
without audit significance.
C. Report the matter to the next ·higher level of authority
within the entity.
D. Increase sample size of tests of controls.
33. Which of the following events least likely would indicate the
existence of related party transactions?
A. Making a loan with no scheduled date for the funds to be
repaid.
B. Maintaining compensating balance arrangements for the
benefit of principal shareholders.
C. Borrowing funds at an interest rate significantly below
prevailing market: rates.
I'
cHAP
TER 12 Practice Examinations 893
35. Which of the following factors is most likely to affect the ex-
tent of the documentation of the auditor's understanding of
a client's system of internal controls? _
A. The industry and the business and regulatory environ-
ments in which the client operates.
B. The degree to which information technology is used in
the accounting function.
C. The relationship between management, the board of di-
rectors, and external stakeholders.
D. The degree to which the auditor intends to use internal
audit personnel to perform substantive tests.
Presentation Existence or
and disclosure occurrence
A. Yes - Yes
B. Yes No
c. No Yes
D. No No
60. Which of the following factors most likely would cause a CPA
to decline to accept a new audit engagement?
cHAP
TER 12 Practice Examinations 901
o. Hash total
81. The most reliable procedure for an auditor to use to test the
existence of a client's inventory at an outside location would
be to
A. Observe physical counts of the inventory items.
B. Trace the total on the inventory listing to the general
ledger inventory account.
C. Obtain a confirmation from the client indicating inventory
ownership.
D. Analytically compare the current-year inventory balance
to the prior-year balance.
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CPA EXAMINATION REVIEWER: AUDITING THEORY
- 2
ANSWERS-3
KEY
1. c
26. c 51. c 76. c
2. D
27. B 52. B 77. D
28. c 53. D 78. D
3. B
4. B 29. A 54. A 79. c
s. c 30. A 55. B 80. A
6. A 31. D 56. D 81. A
7. A 32. A 57. B 82. B
8. A 33. D 58. B 83. D
9. c 34. c 59. B 84. A
10. c 35. B 60. D 85. c
11. B 36. c 61. c 86. A
12. B 37. c 62. D 87. B
13. c 38. A 63. D 88. B
14. B 39. D 64. A 89. B
15. c 40. A 65. A 90. D
16. A 41. A 66. B 91. D
17. c 42. B 67. B 92. c
18. B 43. B 68. B 93. B
19. A 44. ·o 69. D 94. A
20. D 45. B 70. c 95. B
21. c 46. A 71. A 96. A
22. B 47. D 72. D 97. D
23. D 48. A 73. A 98. B
24. c 49. B 74. c 99. D
25. B 50. c 75. D 100. A
• -· ... "8 - '
PRACTICE EXAMINATION 4
1. If the obj~ctive of an auditor's test of details is to detect a
possible understatement of sales, the auditor most likely
would trace transactions from the
A. Sales invoices to the shipping documents.
B. Cash receipts journal to the sales journal.
C. Shipping documents to the sales invoices.
D. Sales journal to the cash receipts journal.
12. The ultimate risk against which the auditor requires reason-
able protection is a combination of two separate risks. The
first of these is that material errors will occur in .the account-
ing process by which the financial statements are developed,
and the second is that
A. A company's system of internal control is not adequate
to detect errors and irregularities.
B. Those errors that occur will not be detected in the audi-
tor's examination.
C. Management may possess an attitude that lacks integri-
ty.
D. Evidential matter is not competent enough for the audi-
tor to form an opinion based on reasonable assurance.
17. The CPA analyzes the accrued interest payable account for
the year, recomputes the amount~ of payments and begin-
ning and ending balances and reconciles to the interest ex-
pense account.
A. Interest income of P8,000 on a note receivable was cred-
ited against miscellaneous expense.
B. A provision of a loan agreement was violated. Dividends
on ordinary shares are prohibited if income available for
interest and dividends is not three times interest re-
quirements.
C. Interest paid on an open account was charged to the
raw material purchases account.
D. A note payable had not been recorded. Interest of
Pl,500 on the note was properly paid and charged to the
interest expense account.
21. . The audit step most likely to reveal the existence of .contin-
gent liabilities is
A. A review of vouchers paid during the month following
the year-end.
B. Account payable confirmations.
c. An inquiry directed to legal counsel.
D. .Mortgage note confirmation.
24. In performing audit test, the auditor may use either nonsta-
tistical or statistical sampling. The critical difference be-
tween the two types of sampling is that
A. The sampling plan for nonstatistical sampling eliminates
procedures required for statistical sampling.
B. Statistical sampling enables quantification and control of
sampling risk.
C. Nonsampling risk is lower in statistical sampling.
D. Statistical sampling eliminates both sampling and
nonsampling risk.
33. Inherent and control risk differ from detection risk in that
inherent risk and control risk are
A. Elements of audit risk while detection risk is not.
B. Changed at the auditor's discretion while detection risk is
r:iot.
C. Considered at the individual account balance level while
detection risk is not.
926 CPA EXAMINATION REVIEWER: AUDITING THEORY
o. Sales invoice
930
CPA EXAMINATION REVIEWER: AUDITING THEORY
B. Evidence will be bt · d .
. o ame to determine an assessed level
of control nsk.
C. Errors and fraud are prevented and detected in a timely
manner.
D. The auditor has an understanding of the control envi-
ronment.
77. The letter of audit inquiry to the client's legal counsel should
be mailed only by the
cHAPTER 12 Practice Examinations 939
D. Conversion verification.·
lI
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942 CPA EXAMINATION REVIEWER: AUDITING THEORY
o. Internal auditor.
K EY A N 5 W E RS - 4·
REFERENCES