College Of Economics, Management and Development Studies

Final Examination in AUDIT AND ASSURANCE:

SPECIALIZED INDUSTRIES

(AUDI24)
GENERAL INSTRUCTIONS: Read the following questions carefully and choose the letter that best describes the
answer. Click here to access and submit your answer sheet for this exam. Good luck and God bless!
(1 point each unless other point equivalent is indicated)

1. The regulatory body that supervises the industry of banking and other financial institutions.
a. Bangko Sentral ng Pilipinas
b. Insurance Commission
c. Mines and Geosciences Bureau
d. Energy Regulatory Commission

2. The regulatory body that supervises the industry of insurance business.

a. Bangko Sentral ng Pilipinas
b. Insurance Commission
c. Mines and Geosciences Bureau
d. Energy Regulatory Commission

3. The regulatory body that supervises the industry of mining business.

a. Bangko Sentral ng Pilipinas
b. Insurance Commission
c. Mines and Geosciences Bureau
d. Energy Regulatory Commission

4. The regulatory body that supervises the industry of power generating and distribution business.
a. Bangko Sentral ng Pilipinas
b. Insurance Commission
c. Mines and Geosciences Bureau
d. Energy Regulatory Commission

5. The primary goal of the CPA in performing the attest function is to

a. Detect fraud.
b. Examine individual transactions so that the auditor may certify as to their validity.
c. Determine whether the client's assertions are fairly stated.
d. Assure the consistent application of correct accounting procedures.

6. A CPA who has never audited a commercial bank

a. May not accept such an engagement.
b. May accept the engagement only if the accounting firm specializes in the audit of commercial banks.
c. May accept the engagement after attaining a suitable level of understanding of the transactions and
accounting practices unique to commercial banking.
d. May accept the engagement because training as a CPA transcends unique industry characteristics.

7. To test the existence assertion for recorded receivables, an auditor would select a sample from the:
a. Sales orders file.
b. Customer purchase orders.
c. Accounts receivable subsidiary ledger.
d. Shipping documents (bills of lading) file.

8. Which of the following is least likely to be used as an alternate procedure for handling nonreplies to accounts
receivable confirmation requests?
a. Examine bills of lading.
b. Physically examine items sold.
c. Examine correspondence.
d. Examine subsequent cash receipts.

9. Which of the following would be least likely to diminish the validity of evidence obtained through confirmation
of accounts receivable?
a. The confirmation requests are sent on the client's letterhead.

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 b. The confirmation requests are mailed to customers by the internal auditors.
c. The client's mailroom personnel closely monitor and inspect confirmation requests during mailing.
d. The return address on the envelope used to send the confirmation request is that of the client.

10. When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect
with respect to the auditors' confirmation of receivables?
a. The account balances as of year-end will generally be confirmed.
b. The auditors will in general use blank rather than positive confirmation requests.
c. The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as
of year-end.
d. Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors'
invoices, purchase orders and receiving reports.

11. What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January
of 2021, shipped FOB shipping point, which were recorded in December of 2020 as credit sales?
a. Accounts receivable are understated at December 31, 2020.
b. Accounts receivable are overstated at December 31, 2020.
c. Operating expenses are overstated for the 12 months ended December 31, 2020.
d. Sales returns and allowance are overstated at December 31, 2020.

12. Which of the following is not typically considered to be an alternate procedure for handling nonreplies to
accounts receivable confirmation requests?
a. Examine sales invoices.
b. Trace the balances from accounts receivable ledger to the billing statements.
c. Examine correspondence.
d. Examine any subsequent cash receipts.

13. Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal
control over the revenue cycle?
a. Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of
receivables.
b. Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in other
customers' accounts permitting a misappropriation of cash.
c. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.
d. The failure to prepare shipping documents may lead to an understatement of inventory balances.

14. A client might overstate December 31 accounts receivable balances by dating and recording January
transactions in December. Such entries recorded in which journal are most likely to achieve this end?
a. Cash receipts.
b. Payroll.
c. Purchases.
d. Sales.

15. Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts?
a. Confirm receivables.
b. Examine dates of purchase orders.
c. Foot the receivables lead schedule.
d. Examine cash receipts received after year-end.

16. Which of the following is not a distinguishing feature of risk-based auditing?

a. Identifying areas posing the highest risk of financial statement errors.
b. Analysis of internal control.
c. Collecting and evaluating evidence.
d. Concentrating audit resources in those areas presenting the highest risk of financial statement errors.

17. The auditor communicates the results of his or her work through the medium of the
a. Engagement letter.
b. Management letter.
c. Audit report.
d. Financial statements.

18. The four major steps in conducting an audit are:

I. Testing internal controls
II. Audit report

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 III. Planning
IV. Testing transactions and balances

The proper sequence in applying the above steps is:

a. III, I, IV, II
b. III, IV, I, II
c. II, III, IV, I
d. I, IV, III, II

19. Which of the following statements is not true regarding the competence of audit evidence?
a. Relevance is enhanced by an effective information system.
b. To be competent, evidence must be both valid and relevant.
c. Validity is related to the quality of the client’s information system.
d. Relevance must always relate to audit objectives.

20. As used in auditing, which of the following statements best describes "assertions"?
a. Assertions are the representations of management as to the reliability of the information system.
b. Assertions are the auditor's findings to be communicated in the audit report.
c. Assertions are the representations of management as to the fairness of the financial statements.
d. Assertions are found only in the footnotes to the financial statements.

21. Which of the following best describes the purpose of the engagement letter?
a. The engagement letter relieves the auditor of some responsibility for the exercise of due care.
b. By clearly defining the nature of the engagement, the engagement letter helps to avoid and resolve
misunderstandings between CPA and client regarding the precise nature of the work to be performed and
the type of report to be issued.
c. The engagement letter conveys to management the detailed steps to be applied in the audit process.
d. The engagement letter should be signed by both the client and the CPA and should be used only for
independent audits.

22. In assessing audit risk, the CPA needs to do all of the following except
a. Gather audit evidence in support of recorded transactions.
b. Obtain an understanding of the client's system of internal control.
c. Understand the economic substance of significant transactions completed by the client.
d. Understand the entity and the industry in which it operates.

23. Competence as a certified public accountant includes all of the following except
a. Having the technical qualifications to perform an engagement.
b. Possessing the ability to supervise and evaluate the quality of staff work.
c. Warranting the infallibility of the work performed.
d. Consulting others if additional technical information is needed.

24. Which of the following is mandatory if the auditor is to comply with generally accepted auditing standards?
a. Possession by the auditor of adequate technical training.
b. Use of analytical review on audit engagements.
c. Use of statistical sampling whenever feasible on an audit engagement.
d. Confirmation by the auditor of material accounts receivable balances.

25. As a guidance for measuring the quality of the performance of an auditor, the auditor should refer to
a. Statements of the Financial Accounting Standards Board.
b. Generally Accepted Auditing Standards.
c. Interpretations of the Statements on Auditing Standards.
d. Statements on Quality Control Standards.

26. Which of the following statements best describes why the CPA profession has deemed it essential to promulgate
ethical standards and to establish means for ensuring their observance?
a. A requirement for a profession is the establishment of ethical standards that stress primarily a responsibility
to clients and colleagues.
b. A requirement of most state laws calls for the profession to establish a code of ethics.
c. An essential means of self-protection for the profession is the establishment of flexible ethical standards by
the profession.
d. A distinguishing mark of a profession is its acceptance of responsibility to the public.

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 27. An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity,
should
a. Engage financial experts familiar with the nature of the business entity.
b. Obtain a knowledge of matters that relate to the nature of the entity's business.
c. Refer a substantial portion of the audit to another CPA who will act as the principal auditor.
d. First inform management that an unqualified opinion cannot be issued.

28. The exercise of due professional care requires that an auditor

a. Examine all available corroborating evidence.
b. Critically review the judgment exercised at every level of supervision.
c. Reduce control risk below the maximum.
d. Attain the proper balance of professional experience and formal education.

29. In determining estimates of fees, an auditor may take into account each of the following, except the
a. Value of the service to the client.
b. Degree of responsibility assumed by undertaking the engagement.
c. Skills required to perform the service.
d. Attainment of specific findings.

30. A CPA, while performing an audit, strives to achieve independence in appearance in order to
a. Reduce risk and liability.
b. Comply with the generally accepted standards of field work.
c. Become independent in fact.
d. Maintain public confidence in the profession.
31. The permanent file section of the working papers that is kept for each audit client most likely contains
a. Review notes pertaining to questions and comments regarding the audit work performed.
b. A schedule of time spent on the engagement by each individual auditor.
c. Correspondence with the client's legal counsel concerning pending litigation.
d. Narrative descriptions of the client's internal control policies and procedures.

32. Of the following procedures, which is not considered part of “obtaining an understanding of the client’s
environment?”
a. Examining trade publications to gain a better understanding of the client's industry.
b. Confirming customer accounts receivable for existence and valuation.
c. Touring the client's manufacturing and warehousing facilities to gain a clearer understanding of operations.
d. Studying the internal controls over cash receipts and disbursements.

33. If working papers are to have the characteristics that will ensure that they achieve their primary purposes, which
of the following is the most important?
a. Working papers must be of standard format and standard content.
b. Working papers must be properly indexed and cross-referenced to the draft audit report.
c. Working papers must provide sufficient, competent, and useful information to support the audit report.
d. Working papers must be arranged in logical order following the audit program sequence.

34. Which of the following is not an example of analytical evidence?

a. Compared inventory turnover by major class with the prior year on a monthly and quarterly basis.
b. Compared gross profit percentages by major product classes with the prior year.
c. Examined invoices for plant asset additions to determine whether the client had erroneously recorded
ordinary repairs as plant assets.
d. Examined monthly performance reports and investigated significant variations from budgeted amounts.

35. Choose the best illustration of objective audit evidence from the following
a. The paid invoice file containing invoices matched with receiving reports and purchase orders.
b. Management's assertion that payment procedures require matching of invoice with receiving report and
purchase order.
c. Clerical staff assurances that management policy regarding payment of invoices --matching of invoice with
receiving report and purchase order-- is always followed.
d. The treasurer's statement of not remembering any exceptions in which an invoice was submitted for
payment that was not accompanied by a matching receiving report and purchase order.

36. An initial (first-time) audit requires more audit time to complete than a recurring audit. One of the reasons for
this is that
a. New auditors are usually assigned to an initial audit.
b. Predecessor auditors need to be consulted.

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 c. The client's business, industry, and internal control are unfamiliar to the auditor and need to be carefully
studied.
d. A larger proportion of customer accounts receivable need to be confirmed on an initial audit.

37. Having evaluated inherent risk and control risk, the auditor determines detection risk
a. As the complement of overall audit risk.
b. By performing substantive audit tests.
c. As a product of further study of the business and industry and application of analytical procedures.
d. At a level that equates the joint probability of inherent risk, control risk, and detection risk with overall audit
risk.

38. Which of the following underlies the application of generally accepted auditing standards, particularly the
standards of field work and reporting?
a. The elements of materiality and relative risk.
b. The element of internal control.
c. The element of corroborating evidence.
d. The element of reasonable assurance.

39. 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
a. Prevention risk.
b. Inherent risk.
c. Control risk.
d. Detection risk.

40. Which of the following concepts is most useful in assessing the scope of an auditor's program relating to various
accounts?
a. Attribute sampling.
b. Materiality.
c. The reliability of information.
d. Management fraud.

Use the following information to answer the next ten questions.

The following information was obtained in connection with your review of GULAT Company’s cash account as of
December 31, 2018.

Outstanding checks, Nov. 30, 2018 ₱ 16,250

Outstanding checks, Dec. 31, 2018 12,500
Deposit in transit, Nov. 30, 2018 12,500
Cash balance per general ledger Dec. 31, 2018 37,500
Actual company collections from its customers during December 152,500
Company checks paid by the bank in December 130,000
Bank service charges recorded on company books in December 2,500
Bank service charges in December 3,250
Deposits credited by the bank during December 145,000
November bank service charges recorded on company books in December 1,500

The cash receipts book of December is underfooted by ₱2,500. During December, the bank erroneously charged the
company’s account for a ₱3,750 check of another depositor. The bank error was corrected in January 2019.
41. How much is the deposit in transit on December 31, 2018?
42. The total unrecorded bank service charges as of December 31, 2018 is:
43. What is the total book receipts in December?
44. What is the total amount of company checks issued in December?
45. What is the total book disbursements in December?
46. What is the book balance on November 30, 2018?
47. What is the bank balance on November 30, 2018?
48. What is the total bank receipts in December?
49. What is the total bank disbursements in December?
50. What is the bank balance on December 31, 2018?

“In the business world, everyone is paid in two coins: cash and experience.
Take the experience first; the cash will come later. ”
-Harold S. Geneen

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