FINAL EXAM

Question 1
 Indicate the treatment of the transaction indicated below in computing for the inventory
balance at December 31, 2020.

Merchandise costing P16,666 was received on January 5, 2021, and the related
purchase invoice was recorded January 6, 2021. The shipment of this merchandise was
made on December 31, 2020, FOB destination.
Correct answer: Exclude

Question 2
 Purchase cutoff procedures should be designed to test whether all inventory
Correct answer: purchased and received before year-end was recorded

Question 3
 Once the initial audit of a newly constructed industrial plant has been performed, with
respect to consistency, which of the following is of least concern to the continuing
auditor in the following year?
Correct answer: Prior years’ capitalization costs

Question 4
 An essential procedural control to ensure the accuracy of the recorded inventory
quantities is
Correct answer: establishing a cutoff for goods received and shipped

Question 5
 An overstatement of ending inventory in the previous year amounting to P5,000 would
result to a/an:
Correct answer: Overstatement of income in the prior period

Question 6
 Identify properties that are ___________, except:
Correct answer: Useful

Question 7
 Which balance-related audit objective is not relevant to an audit of prepaid expenses?
Correct answer: Realizable value

Question 8
 For an initial audit where the previous years were audited, the vouching of significant
transactions is done to ascertain the following, except:
Correct answer: Completeness

Question 9
 Cost accounting controls are those related to the physical inventory and the
consequent costs from the point at which:
Correct answer: raw materials are requisitioned until the finished product is sent to
storage

Question 10
 Which of the following type of employee typically does not complete time cards?
Correct answer: Salaried employees

Question 11
 Which of the following is an internal control weakness for a company whose inventory
of supplies consists of a large number of individual items?
Correct answer: The storekeeper is responsible for maintenance of perpetual inventory
records.

Question 12
 The approach used to verify manufacturing equipment is different than the one used to
verify:
Correct answer: current assets

Question 13
 The failure to capitalize a permanent asset, or the recording of an asset acquisition at
the improper amount, affects the balance sheet:
Correct answer: until the firm disposes of the asset

Question 14
 When examining payroll transactions, an auditor is primarily concerned with the
possibility of:
Correct answer: overpayments and unauthorized payments

Question 15
 The audit of year-end physical inventories should include steps to verify that the client's
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
Correct answer: sale in the current period
Question 16
 An auditor would be least likely to use confirmations in connection with the examination
of:
Correct answer: property, plant, and equipment

Question 17
 Which of the following is the most important internal control procedure over acquisitions
of property, plant, and equipment?
Correct answer: Using a budget to forecast and control acquisitions and retirements

Question 18
 The following information is from GUMAMELA CORP.'s first year operations:
1. Merchandise purchased: 450,000
2. Ending merchandise inventory: 123,000
3. Collections from customers:150,000
4. All sales are on account and goods sell at 30% above cost.

How much is the sales to be recorded?

Correct answer: 425,100

Question 19
 To achieve effective internal accounting control over fixed asset additions, a company
should establish procedures that require:
Correct answer: authorization and approval of major fixed asset additions

Question 20
 Controls which provide a means of ensuring that the physical counts are properly
summarized, priced at the same amount as the unit records, correctly extended and
totaled, and included in the general ledger at the proper amount are known as:
Correct answer: compilation internal controls

Question 21
 If the client fails to record disposals of property, plant, and equipment, both the original
cost of the asset account and the net book value will be incorrect.
Correct answer: The original cost will be overstated indefinitely, and the net book value
will be overstated until the asset is fully depreciated

Question 22
 The erroneous inclusion of transactions that should properly be recorded as assets into
accounts such as repairs expense, lease expense, or supplies is a common client error.
The auditor should evaluate the likelihood of these types of misclassifications in
conjunction with:
Correct answer: obtaining an understanding of internal control

Question 23
 ORCHIDS COMPANY's accounts receivable at December 31, 2020 has a balance of
P1.2 M. The allowance for bad debts account had a credit balance of P40,000. Net
sales in 2020 were P6,704,000 (net of sales discounts of P56,000). An aging schedule
shows that P150,000 of the outstanding accounts receivable are doubtful.

How much will be debited for bad debt expense?

Correct answer: 110,000

Question 24
 Which one of the following procedures would not be appropriate for an auditor in
discharging his responsibilities concerning the client’s physical inventories?
Correct answer: Supervising the taking of the annual physical inventory

Question 25
 The auditor interviews the plant manager. The auditor is most likely to rely upon this
interview as primary support for an audit conclusion on:
Correct answer: the necessity to record a provision for deferred maintenance costs

Question 26
 Which of the following explanations might satisfy an auditor who discovers significant
debits to an accumulated depreciation account?
Correct answer: Extraordinary repairs have lengthened the life of an asset

Question 27
 Which of the following is a customary audit procedure for the verification of the legal
ownership of real property?
Correct answer: Examination of deeds and title guaranty policies on hand

Question 28
 In valuing inventory, the auditor must consider all but which of the following factors?
Correct answer: All inventory must be valued using the same valuation method under
GAAP

Question 29
 Which of the following audit procedures would be least likely to lead the auditor to find
an unrecorded fixed asset disposal?
Correct answer: Review of repairs and maintenance expense
Question 30
 The following information is from GUMAMELA CORP.'s first year operations:
1. Merchandise purchased: 450,000
2. Ending merchandise inventory: 123,000
3. Collections from customers:150,000
4. All sales are on account and goods sell at 30% above cost

What is the accounts receivable balance at the end of the company's first year of
operations?
Correct answer: 275,100

Question 31
 Which of the following combinations of procedures is an auditor most likely to perform
to obtain evidence about PPE additions?
Correct answer: Inspecting documents and physically examining assets.

Question 32
 ____________ both have the effect of simultaneously verifying balance sheet and
income statement accounts.
Correct answer: Tests of controls and substantive tests of transactions

Question 33
 Which of the following most likely would give the most assurance concerning the
valuation and allocation assertions of accounts receivable?
Correct answer: Assessing the allowance for uncollectible accounts for reasonableness.

Question 34
 Income statement accounts resulting from allocations are typically verified as a part of:
Correct answer: analytical procedures

Question 35
 In evaluating the adequacy of the allowance for bad debts, an auditor most likely
reviews the entity's aging of receivables to support management's financial statement
assertion of:
Correct answer: Valuation and allocation

Question 36
 Indicate the treatment of the transaction indicated below in computing for the inventory
balance at December 31, 2020.
An item costing P65,000 was sold on an installment basis on December 10, 2020. The
goods were included in the inventory because the sale was with a repurchase
agreement that requires it to buy back the inventory on January 15, 2021.
Correct answer: Include

Question 37
 The audit procedures used to verify accrued liabilities differ from those employed for
the verification of accounts payable because:
Correct answer: accrued liabilities usually pertain to services of a continuing nature,
whereas accounts payable are the result of completed transactions

Question 38
 Cutoff tests designed to detect credit sales made before the end of the year that have
been recorded in the subsequent year provide assurance about management's
assertion of:
Correct answer: Completeness

Question 39
 In testing for unrecorded retirements of equipment, an auditor is most likely to:
Correct answer: Select items of equipment from the accounting records and then locate
them during the plant tour.

Question 40
 Tracing shipping documents to pre-numbered sales invoices provides evidence that:
Correct answer: Shipments to customers were properly invoiced

Question 41
 As a part of the auditor’s responsibility for ____________, the auditor should review the
preparation of at least one of each type of payroll tax form the client is responsible for
filing.
Correct answer: understanding the client’s internal controls

Question 42
 When an outside specialist has assumed full responsibility for taking the client’s
physical inventory, reliance on the specialist’s report is acceptable if:
Correct answer: the auditor conducted the same audit tests and procedures as would
have been applicable if the client’s employees took the physical inventory

Question 43
 To best ascertain that a company has properly included merchandise that it owns in its
ending inventory, the auditor should review and test the:
Correct answer: purchase cutoff procedures

Question 44
 In connection with a review of the prepaid insurance account, auditors would typically
not perform which of the following procedures?
Correct answer: Confirm premium rates with an independent insurance broker

Question 45
 If an auditor wishes to test the completeness transaction-related audit objective in the
payroll and personnel cycle, which of the following would be a reasonable test of
control?
Correct answer: Account for a sequence of payroll checks

Question 46
 The following are audit objectives in auditing property, plant, and equipment, except:
Correct answer: Determine if it includes products, materials, and supplies owned by the
company.

Question 47
 The failure to capitalize a permanent asset, or the recording of an asset acquisition at
the improper amount, affects the income statement:
Correct answer: for the depreciable life of the asset

Question 48
 For which of the following functions is the use of prenumbered documents least
important?
Correct answer: Use of prenumbered time cards in the payroll function

Question 49
 Indicate the treatment of the transaction indicated below in computing for the inventory
balance at December 31, 2020.

On December 27, 2020, merchandise costing P11,648 was received and recorded. The
invoice accompanying the merchandise was marked "on consignment".
Correct answer: Exclude

Question 50
 Purchase cutoff procedures test the cutoff and completeness assertions. A company
should include goods in its inventory if it
Correct answer: holds legal title to the goods
QUIZZES
Question 1
 Gross profit ratio is an example of analytical procedure used in the audit of receivables.
Correct answer: True

Question 2
 The collection on accounts previously written off does not affect the receivable balance.
Correct answer: True

Question 3
A loss on discounting of notes receivable is recorded if the proceeds is higher that the value of
the note being discounted and its interest income earned.
Correct answer: False

Question 4
 If the auditor cannot obtain replies from the customers, no need for any procedures because it
is already a scope limitation.
Correct answer: False

Question 5
 Any officer can be of assistance to the auditor in reviewing individual balances.
Correct answer: False

Question 6
 The aging of receivables is not important in conducting audit of receivables.
Correct answer: False

Question 7
 Non-trade accounts erroneously included in the customer's accounts need not be adjusted.
Correct answer: False

Question 8
 Sales returns and allowances should be considered to come up with the correct receivables
balance.
Correct answer: True

Question 9
 Notes receivable are sometimes used to settle a customer's accounts receivable.
Correct answer: True

Question 10
 Allowance for doubtful accounts is a contra-asset account with a credit balance.
Correct answer: True

Question 1
 The direct labor is not included in computing for the cost of goods manufactured.
Correct answer: False

Question 2
 In a manufacturing company, only the finished goods should be included in the inventory to be
reported.
Correct answer: False

Question 3
 An understatement of Sales in the previous period will result to a dedit to Retained Earnings as
a correcting entry.
Correct answer: False

Question 4
 Inventories represent items held for sale in the ordinary course of business, in the process of
production for such sale, or in the form of materials or supplies to be used in the production
process or in the rendering of services.
Correct answer: True

Question 5
 Confirmations of inventories at locations outside the entity is needed.
Correct answer: True

Question 6
 In correcting prior period errors of inventory, any adjustments in income will be absorbed by the
Retained Earnings account.
Correct answer: True

Question 7
 Only the auditor is required to conduct the physical count of inventory.
Correct answer: False

Question 8
 If the actual count does not match with the system-generated ending inventory, a reconciliation
should be done.
Correct answer: True

Question 9
 Obsolete stocks can be a reconciling item in determining the correct balance for inventory.
Correct answer: True

Question 10
 The system-generated ending inventory should be used to reflect the balance in the financial
statements.
Correct answer: False

PRE 2 QUIZ 9
63. Indicate by letter the internal control that best describes each of the listed control procedures.
a. Accuracy control--prevention
b. Accuracy control--detection
c. Safeguard control--prevention
d. Safeguard control--detection
Safeguard control--prevention 1. All incoming checks are restrictively endorsed
immediately upon receipt
Accuracy control—prevention 2. Accounting manuals are used to determine debit and credit
accounts for nonrecurring transactions
Safeguard control—detection 3. Bank accounts are reconciled monthly by persons not
having access to either financial assets or accounting
records
Accuracy control--prevention 4. Newly-hired accounting personnel undergo rigorous training
before assuming responsibility for transaction
processing
Accuracy control--detection 5. Members of the internal audit staff perform a monthly
review of all non-routine journal entries
Safeguard control—prevention 6. All cash receipts are prelisted and deposited intact daily
Safeguard control--detection 7. A member of the controller’s staff compares the receipted bank
deposit ticket with the cash prelisting
Accuracy control--prevention 8. A set of standard journal entries is used to record such
monthly journal entries as depreciation, amortization,
accrued payroll, accrued interest, and bad debts expense
Accuracy control—detection 9. All revenue and expense budget variances in excess of
predetermined levels are investigated for cause on a
monthly basis
Accuracy control--detection 10. Before signing checks, the treasurer reviews all
documentation

Indicate by letter the appropriate auditor’s response to each of the listed

audit environments. More than one response may be applicable to each
environment.
1. The auditor assesses control risk at a high level and suspects earnings inflation in the form of
premature revenue recognition.

ANSWER:
Lower the individual item materiality threshold
Lower the aggregate materiality threshold
Increase reliance on external evidence

2. Although the auditor has found internal control to be highly effective, analytical procedures
suggest that repairs and maintenance expenses may have been debited to plant asset accounts,
thereby materially overstating net income.

ANSWER:
Lower the individual item materiality threshold
Consider internal evidence as possessing enhanced reliability

3. The auditor perceives internal control over sales and cash receipts as excellent; but internal
control over purchases, inventory, and cash payments is considered weak.

ANSWER:
Lower the aggregate materiality threshold
Rely on external evidence for the expenditure cycle, while accepting internal evidence as
reliable for the revenue cycle

4. Debits to the account, “Construction in Progress” have increased dramatically during the year
under audit; during the same period, however, “Repairs and Maintenance Expense”, as
well as “Research and Development” have experienced significant declines. Internal control is
considered good in all areas.

ANSWER:
Lower the individual item materiality threshold
5. Although salespersons are granted 5% commissions on all sales, the current year’s rate, based
on unaudited sales and commissions data, is 3%. Internal control over sales and cash receipts is
strong.

ANSWER:
Lower the individual item materiality threshold

6. Based on past experience and analytical procedures applied to unaudited data, the auditor
suspects that the controller has understated net income to reduce the company’s tax liability.
Internal control for the company is weak in all areas.

ANSWER:
Raise the individual item materiality threshold
Lower the aggregate materiality threshold
Increase reliance on external evidence

7. Tests of internal control revealed it to be much more effective than the auditor had perceived
during the preliminary planning stages.

ANSWER:
Raise the aggregate materiality threshold
Consider internal evidence as possessing enhanced reliability

1. The main factor that distinguishes errors from fraud is .

ANSWER: INTENT
2. In the audit risk equation, risk is the controllable variable.
ANSWER: DETECTION

3. The auditor’s primary goal in considering the client acceptance decision is to avoid associating
with clients whose managements lack
ANSWER: INTEGRITY

Indicate by letter how each of the listed controls can be

most effectively tested.
a. Observation
b. Reprocessing
c. Document examination and testing

Reprocessing 1. Computer controls applicable to payroll processing

Document examination and testing 2. Correctness of account distribution appearing on vendor
invoices
Document examination and testing 3. Whether invoices exist for shipments to customers
Document examination and testing 4. Evidence, appearing on the face of receiving reports,
that the goods were transferred from receiving to
stores
Observation 5. Whether computer errors are reprocessed by the “control
group rather than the computer operator
Document examination and testing 6. All documents must be attached in order to vouchers to
be approved for payment
1. If, after obtaining an initial understanding of a client's internal control, the auditor wishes to further
reduce the assessed level of control risk relating to plant asset transactions, the auditor should next
a. Make extensive substantive tests of plant asset balances.
b. Establish the physical existence of current year additions.
c. Complete the plant asset section of the internal accounting control questionnaire.
d. Further test those internal control procedures relating to processing and recording plant asset
transactions.
ANSWER: D

2. Which of the following procedures most likely would be

included as part of an auditor's tests of control
procedures?
a. Inspection.
b. Reconciliation.
c. Confirmation.
d. Analytical procedures.
ANSWER: A

 The auditor is most likely to presume that a high risk of a fraud exists
if inadequate segregation of duties places an employee in a position to perpetrate and conceal
theft.

 sAfter obtaining an understanding of the client’s internal controls, the auditor should
consider whether
Further testing of internal control procedures is likely to permit further reduction of assessed
control risk.

 Which of the following, if material, would be considered fraud?

- Misappropriation of an asset or group of assets

 Competence of personnel is necessary to proper recording of transactions and supports

financial statements that are fairly presented. In reviewing the organisation for necessary
competence, which of the following job types would be of least interest to the auditor?
- Vice-President for marketing

 Having evaluated inherent risk and control risk, the auditor determines detection risk
- At a level that equates the joint probability of inherent risk, control risk, and detection risk with
overall audit risk
  An auditor compares 2019 revenues and expenses with those of the prior year and
investigates all changes exceeding 10%. By this procedure the auditor would be most
likely to learn that
- The client changed its capitalization policy for small tools in 2019

 For effective internal control purposes, which of the following individuals should be
responsible for mailing signed checks?
- Treasurer

 An auditor would consider internal control procedures relating to a client’s payroll

procedures to be ineffective if the payroll department supervisor is responsible for
- Having custody over unclaimed paychecks

 Of the following control environment characteristics, identify the one that contributes
most to effective internal control
- The company has an effective internal audit staff that monitors controls on a continuous basis

 The most effective control to prevent unbilled and unrecorded shipments of finished
goods is to
- Require all outgoing shipments to be accompanied...

 The basic concept of internal control which recognizes that the cost of internal control
should not exceed the benefits expected to be derived is known as
- Reasonable assurance

 Mix and Associates, CPAs

- The audit was performed in accordance with GAAS

 Which of the following is not a purpose served by the application if analytical

procedures?
- To determine the economic substance of related party transactions 
  A basic objective of CPA firm is to provide professional services that conform with
professional standards...
- A system of quality control

 Experience has shown that certain conditions in an organization are symptoms of

possible management fraud...
- Managers subject to formal performance reviews on a regular basis

 Which of the following is the most effective control procedure to detect vouchers that
were prepared for the payment of goods that were not received?
- Match purchase order, receiving report, and vendor's invoice...

 How can audit program best be described at the beginning of the audit process?
- Tentative 

 The factor that distinguishes constructive fraud from actual fraud is

- Intent

 In connection with the element of professional development, a CPA firm's system of

quality control should ordinarily provide that all personnel
- Have the knowledge required to enable them to fulfill responsibilities assigned

 The human resources department receives an edit listing of payroll changes processed
at every payroll cycle...
- Undetected errors in payroll for new employees

 It would be appropriate for the payroll department to be responsible for which of the
following functions?
- Preparation of the periodic governmental reports as to employee's earnings and withholding
taxes

 During the review of a small business client's internal control system...

- The owner reviews credit memos after they are recorded

 Which of the following concepts is most useful in assessing the scope of an auditor's
program relating to various accounts?
- Materiality

 When a CPA is approached to perform an audit for the first time...

- Whether the engagement should be accepted

 The auditor's analytical procedures will be facilitated if the client

- Uses a standard cost system that produces variance reports

 An auditor judged an item to be immaterial when planning an audit...

- Adverse effects related to the item are likely to occur

 Accounting firms should establish quality control procedures for occur for professional
development in order to provide reasonable assurance that
- Personnel will have the knowledge required to fulfill responsibilities assigned

 Which of the following is not a factor that affects the auditor's judgement, during audit
planning, as to the quantity, type, and content of working paper?
- The type of report to be issued by the auditor

 Which of the following is an indicator of possible fraudulent financial reporting for the
purpose of inflating earnings?
- A trend analysis discloses: (1) sales increases of 50 percent and (2) cost of goods sold
increases 25 percent

 The element of the audit planning process most likely to be agreed upon with the client
before implementation of the audit strategy is the determination of the
- Timing of inventory observation procedures to be performed 
  Apex Manufacturing Corporation 
- A perpetual inventory system

 Property acquisitions that are misclassified as maintenance expense...

- Investigation of variances within a formal budgeting system

 Which of the following activities represents both an appropriate human resources

function and a deterrent to payroll fraud?
- Authorization of additions to and deletions from the payroll

 The existence of a related party transaction may be indicated when another entity
- Absorbs expenses of the corporation 

 Alpha Company...
- Understatement of revenues and receivables, and an overstatement of inventory

 Which of the following underlies the application of generally accepted auditing

standards, particularly the standards of field of work reporting?
- The elements of materiality and relative risk

 The probability of an auditor's procedures leading to the conclusion that a material error
does not exist in an account balance when in fact, such error does exist is referred to as
- Detection risk

 Which of the following, if material, would be considered fraud?

- Misappropriation of an asset or group of assets

 Competence of personnel is necessary to proper recording of transactions and supports

financial statements that are fairly presented. In reviewing the organisation for necessary
competence, which of the following job types would be of least interest to the auditor?
- Vice-President for marketing
  Having evaluated inherent risk and control risk, the auditor determines detection risk
- At a level that equates the joint probability of inherent risk, control risk, and detection risk
with overall audit risk

 An auditor compares 2019 revenues and expenses with those of the prior year and
investigates all changes exceeding 10%. By this procedure the auditor would be most
likely to learn that
- The client changed its capitalization policy for small tools in 2019

 For effective internal control purposes, which of the following individuals should be
responsible for mailing signed checks?
- Treasurer

 An auditor would consider internal control procedures relating to a client’s payroll

procedures to be ineffective if the payroll department supervisor is responsible for
- Having custody over unclaimed paychecks

 Of the following control environment characteristics, identify the one that contributes
most to effective internal control
- The company has an effective internal audit staff that monitors controls on a continuous
basis

 The most effective control to prevent unbilled and unrecorded shipments of finished
goods is to
- Require all outgoing shipments to be accompanied...

 The basic concept of internal control which recognizes that the cost of internal control
should not exceed the benefits expected to be derived is known as
- Reasonable assurance

 Mix and Associates, CPAs

- The audit was performed in accordance with GAAS
  Which of the following is not a purpose served by the application if analytical
procedures?
- To determine the economic substance of related party transactions

 A basic objective of CPA firm is to provide professional services that conform with
professional standards...
- A system of quality control

 Experience has shown that certain conditions in an organization are symptoms of

possible management fraud...
- Managers subject to formal performance reviews on a regular basis

 Which of the following is the most effective control procedure to detect vouchers that
were prepared for the payment of goods that were not received?
- Match purchase order, receiving report, and vendor's invoice...

 How can audit program best be described at the beginning of the audit process?
- Tentative

 The factor that distinguishes constructive fraud from actual fraud is

- Intent

 In connection with the element of professional development, a CPA firm's system of

quality control should ordinarily provide that all personnel
- Have the knowledge required to enable them to fulfill responsibilities assigned

 The human resources department receives an edit listing of payroll changes processed
at every payroll cycle...
- Undetected errors in payroll for new employees
  It would be appropriate for the payroll department to be responsible for which of the
following functions?
- Preparation of the periodic governmental reports as to employee's earnings and
withholding taxes

 During the review of a small business client's internal control system...

- The owner reviews credit memos after they are recorded

 Which of the following concepts is most useful in assessing the scope of an auditor's
program relating to various accounts?
- Materiality

 When a CPA is approached to perform an audit for the first time...

- Whether the engagement should be accepted

 The auditor's analytical procedures will be facilitated if the client

- Uses a standard cost system that produces variance reports

 An auditor judged an item to be immaterial when planning an audit...

- Adverse effects related to the item are likely to occur

 Accounting firms should establish quality control procedures for occur for professional
development in order to provide reasonable assurance that
- Personnel will have the knowledge required to fulfill responsibilities assigned

 Which of the following is not a factor that affects the auditor's judgement, during audit
planning, as to the quantity, type, and content of working paper?
- The type of report to be issued by the auditor

 Which of the following is an indicator of possible fraudulent financial reporting for the
purpose of inflating earnings?
- A trend analysis discloses: (1) sales increases of 50 percent and (2) cost of goods sold
increases 25 percent

 The element of the audit planning process most likely to be agreed upon with the client
before implementation of the audit strategy is the determination of the
- Timing of inventory observation procedures to be performed

 Apex Manufacturing Corporation

- A perpetual inventory system

 Property acquisitions that are misclassified as maintenance expense...

- Inventory