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A 3-A/PrE 2 - Auditing and Assurance Concepts and Applications 1

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Question 1
Purchase cut-off procedures should be designed to test whether all inventory

Response: Owned by the company is in the possession of the company at year-end.

Question 2
Transaction cycles are means through which an accounting system processed transactions
of related activities.

Response: True

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Question 3
The audit procedure which requires the auditor to record the last check number used on
the last day of the year and subsequently trace to the outstanding checks and the cash
disbursements records is performed to satisfy the audit objective of:

Response: cutoff

Question 4
A major consideration in the audit of the general cash balance is the possibility of
fraud. The auditor must extend his or her procedures in the audit of year-end cash to
determine the possibility of a material fraud when there are:

Response: inadequate internal controls.

Question 5
Which of the following audit procedures probably provides the most reliable evidence
concerning the entity’s assertion of rights and obligations related to inventories?

Response: Inspect agreements to determine whether any inventory is pledged as collateral

or subject to any liens.

Question 6
The auditor shall agree the terms of the audit engagement with management or those
charged with governance, as appropriate. The agreed terms shall be recorded in a/an

Response: Engagement letter

Question 7
Omission of accrued revenues is an example of non-counterbalancing error.

Response: False

Question 8
Rights and Obligations is when the management asserts that the entity has property
rights to control over
all recorded assets, and that all liabilities represent obligations at the reporting
date.

Response: True

Question 9
Which primary assertion is satisfied by the procedure below?

Performed tests to determine that overhead had been properly applied to ending inventory
and cost of sales

Response: Valuation or Allocation

Question 10
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The direct receipt of a confirmation from every bank with which the client does business
is:

Response: typically done but not required by auditing standards

Question 11
To gather evidence regarding the balance per bank in a bank reconciliation, an auditor
would examine all of the following except the:

Response: general ledger

Question 12
A company must make a reclassification entry when it discovers the error in the error
year.

Response: True

Question 13
Which internal control best describes the control procedure below:

A set of standard journal entries is used to record such monthly journal entries as
depreciation, amortization, accrued payroll, accrued interest, and bad debts

Response: Accuracy control--prevention

Question 14
The risk of material misstatement refers to the combination of inherent and control
risk.

Response: True

Question 15
Inherent risk and control risk are inversely related to each other.

Response: False

Question 16
If the perpetual inventory records show lower quantities of inventory that the physical
count an explanation of the difference might be unrecorded

Response: Purchases

Question 17
If purchases are understated, net income is understated also,

Response: False

Question 18

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Because of the cost/benefit relationship, test of controls may be applied on a test
basis in some circumstances.

Response: True

Question 19
A client maintains perpetual inventory records in both quantities and pesos. If the
assessed level of control risk is high an auditor will probably

Response: Request the client to schedule the physical inventory count at the end of the
year.

Question 20
What's your wish this Christmas?

Response: [none]

Question 21
Which of the following accounts is not under the revenue and collection cycle?

Response: None of the given

Question 22
The risk of material misstatement includes non-sampling risk.

Response: False

Question 23
What is the most common fraud that involves cash?

Response: [none]

Question 24
Error in sales cutoff is non-counterbalancing .

Response: False

Question 25
What do you think will be the most challenging situation when you audit cash? Cite a
concrete example and as an auditor, how will you address it?
Make your answer worthy of the points allotted.

Response: [none]

Question 26
The following data were reported by Chaste Company during the current year:
Rent Receivable - Jan 1: 200,000
Rent Receivable - Dec 31:250,000
Unearned Rent Income - Jan 1: 90,000
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Unearned Rent Income - Dec 31: 30,000
Rent Income - Accrual Basis : 660,000

How much is the rent income under the cash basis of accounting?

Response: [none]

Question 27
Observation of count and reconciliation to records are common audit procedures for
revenue cycle.

Response: False

Question 28
If revenue increases are now consistent with the industry or the economy, there is a
risk of fraud.

Response: True

Question 29
Periodic cycle counts of selected inventory items are made at various times during the
year rather than a single inventory count at year-end. Which of the following is
necessary if the auditor plans to observe inventories at interim dates?

Response: Perpetual inventory records are maintained

Question 30
A client maintains perpetual inventory records in both quantities and pesos. If the
assessed level of control risk is high an auditor will probably

Response: Request the client to schedule the physical inventory count at the end of the
year.

Question 31
Because cash is the most desirable asset for people to steal, it has a higher:

Response: inherent risk

Question 32
Which of the following factors most likely would case an auditor to decline a new audit
engagement?

Response: Concluding that the entity's management probably lacks integrity.

Question 33
In testing reasonableness of cutoff, passbooks are reconciled with book balances.

Response: False

Question 34
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Where internal control over cash is weak, the auditor should consider preparing a proof
of cash reconciliation.

Response: True

Question 35
The following are usually included in an auditor's engagement letter, except:

Response: List of audit procedures to be used in inventory observation.

Question 36
The following data were reported by Haste Company for the current year:
Accounts Payable - Jan 1: 200,000
Accounts Payable - Dec 31: 250,000
Merchandise Inventory - Jan 1: 400,000
Merchandise Inventory - Dec 31: 210,000
Purchase returns and allowances including P2,000 cash received from the suppliers as
refund: 6,000
Purchase discounts: 3,000
Payment to trade creditors: 800,000
Cash Purchases: 10,000

How much is the total cost of sales under the accrual basis of accounting?

Response: [none]

Question 37
Checks accommodated in petty cash should be deposited after the count to establish their
validity.

Response: True

Question 38
The process of transferring money from one bank account to another and improperly
recording the transaction is referred to as:

Response: kiting

Question 39
The documentation of an auditor's understanding of internal controls must include
flowcharts.

Response: False

Question 40
The most important balance-related audit objectives in the audit of cash include all but
which of the following?

Response: Occurrence

Question 41
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The audit procedures used in transaction cycles vary based on the assertion being
tested.

Response: [none]

Question 42
The successor auditor has the responsibility to initiate contact with the predecessor
auditor to ask about the client before the engagement is accepted; the predecessor has
no responsibility to initiate this contact, even when aware of matters bearing on the
integrity of management.

Response: [none]

Question 43
The physical count of inventory of a retailer was higher than shown by the perpetual
records. Which of the following could explain the difference?

Response: [none]

Question 44
Which of the following cycles does not affect cash in bank?

Response: [none]

Question 45
Which of the following is not used in identifying control risks or revenue and
collection cycle?

Response: [none]

Question 46
It is not alarming when the revenue is increasing even though there is strong
competition and a major competitor has introduced a new product

Response: [none]

Question 47
Tracing bills of lading to sales invoices provides evidence that billed sales were
shipped.

Response: [none]

Question 48
AR turnover should not significantly be different from the prior year.

Response: [none]

Question 49

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After accounting for a sequential of inventory tags, an auditor traces a sample of tags
to the physical inventory listing to obtain evidence that all items

Response: [none]

Question 50
As the acceptable level of detection risk increases, an auditor may change the timing of
the tests on controls by performing them throughout the year rather than at one time.

Response: [none]

Question 51
An effective control environment guarantees that all controls are followed as
prescribed.

Response: [none]

Question 52
The following documents are used in the revenue and collection cycle, except:

Response: [none]

Question 53
As the risk of material misstatement increases, detection risk should decrease.

Response: [none]

Question 54
Early appointment of the auditor will enable a more thorough examination.

Response: [none]

Question 55
If planned detection risk is reduced, the amount of evidence that auditor accumulates
will decrease.

Response: [none]

Question 56
Which internal control best describes the control procedure below:

All revenue and expense budget variances in excess of predetermined levels are
investigated for cause on a monthly basis

Response: [none]

Question 57
Which primary assertion is satisfied by the procedure below?

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Reconciled client’s bank accounts as of year end

Response: [none]

Question 58
You are about to audit the petty cash fund of the cash custodian. What are the steps or
important points to apply? Explain the purpose of each.

Response: [none]

Question 59
It is difficult to generalize the approach taken by the auditor in making working paper
adjustments to rectify the errors in the financial statements submitted by the client.

Response: [none]

Question 60
In assessing the competence of an internal auditor, an independent CPA most likely would
obtain information about the quality of the internal auditor's work.

Response: [none]

Question 61
Test of controls should be done in every audit engagement as it is a crucial step in the
audit process.

Response: [none]

Question 62
An auditor most likely to inspect loan agreements under which an entity’s inventories
are pledged to support management’s financial statement assertion of

Response: [none]

Question 63
When the ending inventory is overstated in the prior period, it will result to:

Response: [none]

Question 64
Which of the following procedures most likely would be included as part of an auditor's
tests of control procedures?

Response: [none]

Question 65
The maintenance of the system of internal control is an important responsibility of the
internal auditor.

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Response: [none]

Question 66
How should the listed control below be most effectively tested?

Correctness of account distribution appearing on vendor invoices

Response: [none]

Question 67
Which primary assertion is satisfied by the procedure below?

Conducted a search for unrecorded liabilities

Response: [none]

Question 68
It is existence when the management asserts that all assets, liabilities and equity
reported in the financial statements are complete at the reporting date and that
reported income is earned and reported expenses are incurred during the reported period.

Response: [none]

Question 69
Assessing control risk below maximum involves concluding that controls are ineffective.

Response: [none]

Question 70
What is/are the appropriate auditor's response to the following audit environment below?
NOTE: More than one (1) response may be applicable to the given audit environment.

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.

Response: [none]

Question 71
An auditor selected items for test counts while observing a client’s physical inventory.
The auditor then traced the test counts to the client’s inventory listing. This
procedure most likely obtained evidence concerning

Response: [none]

Question 72
When an auditor increases the assessed level of risk of material misstatement because
certain control procedures were determined to be ineffective, the auditor would most
likely increase the level of detection risk.

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Response: [none]

Question 73
The following are the involved processes in revenue and collection cycle, except:

Response: [none]

Question 74
Which primary assertion is satisfied by the procedure below?

Calculated depreciation expense for the year

Response: [none]

Question 75
Inquiries to assigned custodians or thru confirmation requests is used for auditing
finance and investment cycles.

Response: [none]

Question 76
Which primary assertion is satisfied by the procedure below?

Obtained written confirmation from customers regarding year end balances in selected
accounts receivable

Response: [none]

Question 77
Which of the following statements is correct?

Response: [none]

Question 78
Cash is important to auditors primarily because of the potential for:

Response: [none]

Question 79
After obtaining an understanding of the client’s internal control, the auditor should
consider whether

Response: [none]

Question 80
In identifying Inherent Risks� in Revenues, the auditor should consider:

Response: [none]

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Question 81
Transaction is an agreement between two entities to exchange goods or services or any
other event that can be measured in economic terms by an organization.

Response: [none]

Question 82
In the audit of revenue and collection cycle, the auditor should, except:

Response: [none]

Question 83
The auditor is most likely to presume that a high risk of defalcation exists if

Response: [none]

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