Pamantasan ng Cabuyao

Katapatan Subd., Banay Banay, City of Cabuyao, Laguna

REVIEW MATERIALS II
Encircle the letter of the best answer.

1. In designing written audit programs, an auditor should establish specific audit objectives that related primarily to the
A. Timing of audit procedures. C. Selected audit techniques.
B. Cost-benefit of gathering evidence. D. Financial statement assertions.

2. Which item would not be contained in an audit program?

A. Staff assigned to the audit.
B. List of specific tasks to be performed.
C. Documentation of system being reviewed.
D. Estimated time required to perform each task.

3. When planning an examination, an auditor should

A. Consider whether the extent of substantive tests may be reduced based on the results of the internal control
questionnaire.
B. Make preliminary judgments about materiality levels for audit purposes.
C. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them
D. Prepare a preliminary draft of the management representation letter.

4. The concept of materiality will be least important to the CPA in determining the
A. Scope of his audit of specific accounts.
B. Specific transactions that should be reviewed.
C. Effects of audit exceptions upon his opinion.
D. Effects of his direct financial interest in a client upon his independence.

5. In considering materiality for planning purposes, an auditor believes that misstatements aggregating P100,000 would
have a material effect on an entity’s income statement, but the misstatements would have to aggregate P200,000 to
materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be
expected to detect misstatements that aggregate
A. P100,000 B. P200,000 C. 150,000 D. P300,000

6. The concepts of audit risk and materiality are interrelated and must be considered together by the auditor. Which of
the following is true?
A. Audit risk is the risk that the auditor may unknowingly express a modified opinion when in fact the financial
statements are fairly stated.
B. The phrase in the auditor's standard report "present fairly, in all material respects, in conformity with
generally accepted accounting principles" indicates the auditor's belief that the financial statements taken as a
whole are not materially misstated.
C. If misstatements are not important individually but are important in the aggregate, the concept of materiality
does not apply.
D. Material fraud but not material errors cause financial statements to be materially misstated.

7. Which of the following procedures would an auditor most likely include in the initial planning of a financial statement
audit?
A. Obtaining a written representation letter from the client’s management.
B. Examining documents to detect illegal acts having a material effect on the financial statements.
C. Consider whether the client’s accounting estimates are reasonable in the circumstances.
D. Determining the extent of involvement of the client’s internal auditors.

8. If the independent auditors decide that the work performed by the internal auditor may have a bearing on their own
procedures, they should consider the internal auditor’s
A. Competence and objectivity. C. Independence and review skills.
B. Efficiency and experience. D. Training and supervisory skills.
9. When assessing an internal auditor’s objectivity, an independent auditor should
A. Evaluate the adequacy of the internal auditor’s audit programs.
B. Inquire about the internal auditor’s educational background and professional certification.
C. Consider the organizational level to which the internal auditor reports.
D. Review the internal auditor’s working papers.

10. For which of the following judgments may an independent auditor share responsibility with an entity’s internal auditor
who is assessed to be both competent and objective?
A B C D
Materiality of misstatements Yes No No Yes
Evaluation of accounting estimates No Yes No Yes

11. Which of the following is not a specialist upon whose work an auditor may rely?
A. Lawyer. B. Internal auditor. C. Actuary. D. Appraiser.

12. Which of the following statements is correct concerning an auditor’s use of the work of a specialist?
A. The auditor need not obtain an understanding of the methods and assumptions used by the specialist.
B. The auditor may not use the work of a specialist in matters material to the fair presentation of the financial
statements.
C. The reasonableness of the specialist’s assumptions and their applications are strictly the auditor’s responsibility.
D. The work of a specialist who has a contractual relationship with the client may be acceptable under certain
circumstances.

11. When using the work of another auditor, the principal auditor should ordinarily perform the following procedure
A. Obtain information regarding the professional competence of the other auditor in the context of the specific
assignment undertaken by the other auditor.
B. Advise the other auditor of the applicable independence requirements as regards both the entity and the
component and obtain representation as to his compliance with them.
C. Advise the other auditor of the applicable accounting, auditing and reporting requirements and obtain
representation as to compliance with them.
D. All of the above.

12. The audit risk against which the auditor and those who rely on his/her opinion require reasonable protection is a
combination of three separate risks at the account-balance or class-of-transactions level. The first risk is inherent
risk. The second risk is that material misstatements will not be prevented or detected by internal control. The third
risk is that
A. The auditor will reject a correct account balance as incorrect.
B. Material misstatements that occur will not be detected by the audit.
C. The auditor will apply an inappropriate audit procedure.
D. The auditor will apply an inappropriate measure of audit materiality.

13. Audit risk consists of inherent risk, control risk, and detection risk. Which of the following statements is true?
A. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
B. The risk that material misstatement will not be prevented or detected on a timely basis by internal control can
be reduced to zero by effective controls.
C. Detection risk is a function of the efficiency of an auditing procedure.
D. The existing levels of inherent risk, control risk, and detection risk can be changed at the discretion of the auditor.

14. Control risk should be assessed in terms of

A. Specific controls. C. Financial statement assertions.
B. Types of potential fraud. D. Control environment factors.
15. After obtaining a sufficient understanding of internal control, the auditor assesses
A. The need to apply GAAS.
B. Detection risk to determine the acceptable level of inherent risk.
C. Detection risk and inherent risk to determine the acceptable level of control risk.
D. Control risk to determine the acceptable level of detection risk.

16. An auditor may decide to assess control risk at the maximum level for certain assertions because the auditor believes
A. Control policies and procedures are unlikely to pertain to the assertions.
B. The entity’s control environment, accounting system, and control procedures are interrelated.
C. Sufficient evidential matter to support the assertions is likely to be available.
D. More emphasis on tests of controls than substantive tests is warranted.

17. When control risk is assessed at the maximum level for all financial statement assertions, an auditor should
document the auditor’s
A B C. D
Understanding of the entity’s internal control structure elements Yes Yes No Yes
Conclusion that control risk is at the maximum level No Yes Yes Yes
Basis for concluding that control risk is at the maximum level No No Yes Yes

18. When an auditor increases the assessed level of control risk because certain control activities were determined to
be ineffective, the auditor would most likely increase the
A. Extent of tests of controls. C. Extent of tests of details.
B. Level of detection risk. D. Level of inherent risk.

19. The auditor faces a risk that the examination will not detect material errors which occur in the accounting process.
In regard to minimizing this risk, the auditor primarily relies on
A. Substantive tests. C. Internal control.
B. Compliance tests. D. Statistical analysis.

20. The auditor uses the assessed level of control risk (together with the assessed level of inherent risk) to determine
the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk
decreases, the auditor may do one or more of the following except change the
A. Nature of substantive tests to more effective procedures.
B. Timing of substantive tests, such as performing them at year-end rather than at an interim date.
C. Extent of substantive tests, such as using larger sample sizes.
D. Assurances provided by substantive tests to a lower level.

21. While performing an audit, Sebastian decides to restrict the risk of misstatement to 3%. What must the acceptable
level of detection risk be if inherent risk is 25% and control risk is 40%?
A. 0.3% B. 30% C. 12% D. 33.3%

22. An auditor uses the knowledge provided by the understanding of internal control and the assessed level of control
risk primarily to
A. Determine whether procedures and records concerning the safeguarding of assets are reliable.
B. Ascertain whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized.
C. Modify the initial assessments of inherent risk and preliminary judgments about materiality levels.
D. Determine the nature, timing and extent of substantive tests for financial statement assertions.

23. Which of the following is not a component of internal control?

A. Control risk. C. Information and communication.
B. Monitoring. D. The control environment.

24. Which of the following factors are included in an entity’s control environment?
A B C D
Audit committee Yes Yes No Yes
Integrity and ethical values Yes No Yes Yes
Organizational structure No Yes Yes Yes
25. Basic to a proper control environment are the quality and integrity of personnel who must perform the prescribed
procedures. Which is not a factor in providing for competent personnel?
A. Segregation of duties. C. Training programs.
B. Hiring practices. D. Performance evaluations.

26. Control activities constitute one of the five components of internal control. Control activities do not encompass
A. Performance reviews. C. Physical controls.
B. Information processing. D. An internal audit function.

27. Proper segregation of duties reduces the opportunities to allow persons to be in positions to both
A. Journalize entries and prepare financial statements.
B. Record cash receipts and cash disbursements.
C. Establish internal controls and authorize transactions.
D. Perpetuate and conceal errors and irregularities.

28. Which of the following are compatible functions in a well-designed internal control structure.
A. Preparing receiving reports, and also approving purchase orders.
B. Approving vouchers for payment, and also have access to unused purchased orders.
C. Mailing signed checks, and also preparing bank reconciliations.
D. Mailing signed checks, and also canceling supporting documents.

29. Internal control should follow certain basic principles to achieve its objectives. One of these principles is the
segregation of functions. Which one of the following examples does not violate the principle of segregation of
functions?
A. The treasurer has the authority to sign checks but gives the signature block to the assistant treasurer to run the
check-signing machine.
B. The warehouse clerk, who has the custodial responsibility over inventory in the warehouse, may authorize
disposal of damaged goods.
C. The sales manager has the responsibility to approve credit and the authority to write off accounts.
D. The department time clerk is given the undistributed payroll checks to mail to absent employees.

30. If internal control is well designed, two tasks that should be performed by different persons are
A. Approval of bad debt write-offs, and reconciliation of the accounts payable subsidiary ledger and controlling
account.
B. Distribution of payroll checks and approval of sales returns for credit.
C. Posting of amounts from both the cash receipts journal and cash payments journal to the general ledger.
D. Recording of cash receipts and preparation of bank reconciliations.

31. A small entity may use less formal means to ensure that internal control objectives are achieved. For example,
extensive accounting procedures, sophisticated accounting records, or formal controls are least likely to be needed
if
A. Management is closely involved in operations.
B. The entity is involved in complex transactions.
C. The entity is subject to legal or regulatory requirements also found in larger entities.
D. Financial reporting objectives have been established.

32. Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an
entity’s internal control?
A. Incompatible duties. C. Mistakes in judgment.
B. Management override. D. Collusion among employees.
33. The internal auditor recognizes that certain limitations are inherent in any internal control system. Which one of the
following scenarios is the result of an inherent limitation of internal control?
A. The comptroller both makes and records cash deposits.
B. A security guard allows one of the warehouse employees to remove company assets from the premises without
authorization.
C. The firm sells to customers on account, without credit approval.
 D. An employee, who is unable to read, is assigned custody of the firm's computer tape library and run manuals
that are used during the third shift.

34. When considering the internal control structure, an auditor should be aware of the concept of reasonable assurance,
which recognizes that
A. Procedures requiring segregation of duties may be circumvented by employee collusion and management
override.
B. Establishing and maintaining the internal control structure is an important responsibility of management.
C. The cost of an entity’s internal control structure should not exceed the benefits expected to be derived.
D. Adequate safeguards over access to assets and records should permit an entity to maintain proper
accountability.

35. It is important for the CPA to consider the competence of the audit client’s employees because their competence
bears directly and importantly upon the
A. Cost/benefit relationship of the system of internal control.
B. Achievement of the objectives of the system of internal control.
C. Comparison of recorded accountability with assets.
D. Timing of the tests to be performed.

36. When an organization has strong internal control, management can expect various benefits. The benefit least likely
to occur is
A. Reduced cost of an external audit.
B. Elimination of employee fraud.
C. Improvement in the reliability and integrity of information for decision-making purposes.
D. Some assurance of compliance with governmental regulations.

37. Of the following statements about an internal control system, which one is not valid?
A. No one person should be responsible for the custodial responsibility and the recording responsibility for an asset.
B. Transactions must be properly authorized before such transactions are processed.
C. Because of the cost/benefit relationship, a client may apply control procedures on a test basis.
D. Control procedures reasonably insure that collusion among employees cannot occur.

38. The requirement that purchases be made from suppliers on an approved vendor list is an example of a
A. Preventive control. C. Corrective control.
B. Detective control. D. Monitoring control.

39. Internal controls may be preventive, detective, or corrective. Which of the following is preventive?
A. Requiring two persons to open mail.
B. Reconciling the accounts receivable subsidiary file with the control account.
C. Using batch totals.
D. Preparing bank reconciliations.

40. A good system of internal control provides reasonable assurance that errors and irregularities will be detected or
prevented. Identify the detective control for the procurement function.
A. Goods received are counted and compared to quantities on purchase order and receiving reports.
B. The procurement function is organizationally separate from receiving, disbursing, and accounting.
C. Review and approval of each procurement action is required prior to the final issuance of a purchase order.
D. Prenumbered standard purchase order forms include all relevant terms required to be used in all applicable
instances.
41. Audit committees have been identified as a major factor in promoting both the internal and external auditor's
independence. Which of the following is the most important limitation on the effectiveness of audit committees?
A. Audit committees may be composed of independent directors. However, those directors may have close
personal and professional friendships with management.
B. Audit committee members are compensated by the organization and thus favor a shareholder's view.
C. Audit committees devote most of their efforts to external audit concerns and do not pay much attention to internal
auditing and the overall control environment.
D. Audit committee members do not normally have degrees in the accounting or auditing fields.
42. CPAs may send a formal “management letter” to clients in order that such a letter may provide
A. A summary of the CPA’s observations arising out of his study of the client’s internal control system.
B. A written record of discussion between the auditor and the client concerning the former’s observations and
suggestions for improvements in financial management.
C. A permanent record of the review of the internal control work accomplished by the auditor during the course of
his engagement.
D. Evidence as to the adequacy or inadequacy of the operating internal control system.

43. A conceptually logical approach to the auditor's evaluation of internal accounting control consists of the following
four steps:

I. Determine whether the necessary procedures are prescribed and are being followed satisfactorily.
II. Consider the types of errors and irregularities that could occur.
III. Determine the internal accounting control procedures that should prevent or detect errors and
irregularities.
IV. Evaluate any weakness to determine its effect on the nature, timing, or extent of auditing
procedures to be applied and suggestions to be made to the client.

What should be the order in which these four steps are performed?
A. III, IV, I, II B. II, III, I, IV C. III, I, II, IV D. II, I, III, IV

44. Tests of controls are least likely to be omitted with regard to

A. Accounts believed to be subject to ineffective controls.
B. Accounts representing few transactions.
C. Accounts representing many transactions.
D. Subsequent events.

45. To obtain evidential matter about control risk, an auditor selects tests from a variety of techniques including
A. Inquiry. B. Calculations. C. Analytical procedures. D. Confirmations.

46. A procedure that would most likely be used by an auditor in performing tests of control procedures that involve
segregation of functions and that leave no transaction trail is
A. Inspection. B. Reperformance. C. Observation. D. Reconciliation.

47. Which of the following controls would an entity most likely use to assist in satisfying the completeness assertion
related to long-term investments?
A. Senior management verifies that securities in the bank safe deposit box are registered in the entity’s name.
B. The internal auditor compares the securities in the bank safe deposit box with recorded investments.
C. The treasurer vouches the acquisition of securities by comparing brokers’ advices with canceled checks.
D. The controller compares the current market prices of recorded investments with the brokers’ advices on file.

48. During the audit the independent auditor identified the existence of a weakness in the client’s internal control and
orally communicated this finding to the client’s senior management and audit committee. The auditor should
A. Consider the matter a scope limitation and therefore disclaim an opinion.
B. Document the matter in the working papers and consider the effects of the conditions on the audit.
C. Suspend all audit activities pending directions from the client’s audit committee.
D. Withdraw from the engagement.

49. During the planning phase of an audit, an auditor is identifying matters for communication to the entity’s audit
committee. The auditor most likely would ask management whether
A. There was significant turnover in the accounting department.
B. It consulted with another CPA firm about installing a new computer system.
C. There were changes in the application of significant accounting policies.
D. It agreed with the auditor’s selection of fraud detection procedures.
50. Which of the following statements is correct concerning an auditor’s required communication with an entity’s audit
committee?
A. This communication is required to occur before the auditor’s report on the financial statements is issued.
B. This communication should include discussion of any significant disagreements with management concerning
the financial assertions.
C. Any significant matter communicated to the audit committee also should be communicated to management.
D. Significant audit adjustments proposed by the auditor and recorded by management need not be communicated
to the audit committee.

51. How do the scope, procedures, and purpose of an examination of management’s written assertion on internal control
compare to those for obtaining an understanding of internal control and assessing control risk as part of an audit?
A B C D
Scope Similar Different Different Different
Procedures Different Similar Different Similar
Purpose Similar Similar Different Different

52. Which of the following statements is incorrect concerning a client who outsources a portion of its IT function?
A. Auditors need not be concerned with outsourced IT functions because those functions are reviewed by other
auditors.
B. The extent to which an auditor obtains an understanding of the service center’s internal controls should be based
upon the same criteria used to determine the understanding obtained for a client’s internal controls.
C. It is common for a single independent auditor to obtain an understanding and test internal controls of a service
center for use by all its customers and their auditors.
D. None of the above is correct.

53. Assertions are representations of management that are embodied in financial statement components. They can be
either explicit or implicit. Which of these assertions is not about valuation or allocation?
A. Property is recorded at historical cost.
B. Trade accounts receivable in the balance sheet are stated at net realizable value.
C. Notes payable in the balance sheet include all such obligations of the entity.
D. Property cost is systematically allocated to appropriate accounting period.

54. Which of the following relates to rights and obligations assertion?

A. All assets, liabilities and equity interests that should have been recorded have been recorded.
B. Transactions and events that have been recorded have occurred and pertain to the entity.
C. Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts
D. The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

55. Most of the independent auditor’s work in formulating an opinion on financial statements consists of
A. Studying and evaluating internal control.
B. Obtaining and examining evidential matter.
C. Examining cash transactions.
D. Comparing recorded accountability with assets.

56. The principal reason for an independent auditor to gather and evaluate audit evidence is to
A. Form an opinion on the financial statements.
B. Detect fraud.
C. Evaluate management.
D. Evaluate internal control.

57. Which of the following statements concerning evidential matter is correct?

A. Competent evidence supporting management’s assertions should be convincing rather than merely persuasive.
B. An effective internal control structure contributes little to the reliability of the evidence created within the entity.
C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should
be obtained.
D. A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.
58. Which of the following statements relating to the competence of evidential matter is always true?
A. Evidential matter gather by an auditor from outside an enterprise is reliable.
B. Accounting data developed under satisfactory conditions of internal control are more relevant than data
developed under unsatisfactory internal control conditions.
C. Oral representations made by management are not valid evidence.
D. Evidence gathered by auditors must be both valid and relevant to be considered competent.

59. Audit information is usually considered relevant when it is

A. Derived through valid statistical sampling.
B. Objective and unbiased.
C. Factual, adequate, and convincing.
D. Consistent with the audit objectives.

60. Several types of documentary evidence were received by the auditor, but of these only one is considered most
reliable:
A. Working papers prepared by the chief accountant and reviewed personally by the VP for finance.
B. A check issued by the treasurer with the payee’s endorsement, included with the statement mailed by the bank
directly to the auditor.
C. A delivery receipt issued by the shipping department, signed by the customer, with an accompanying copy of
the sale invoice.
D. Confirmation of the balance of an accounts payable mailed by and returned directly to the auditor.

61. Which of the following types of audit evidence is the least persuasive?
A. Prenumbered purchase order forms.
B. Bank statements obtained from the client.
C. Test counts of inventory performed by the auditor.
D. Correspondence from the client’s attorney about litigation.

62. Theoretically, which of the following would not have an effect on the amount of audit evidence gathered by the
auditor?
A. The type of opinion to be issued.
B. The auditor’s evaluation of internal control.
C. The types of audit evidence available to the auditor.
D. Whether or not the client reports to the Securities and Exchange Commission.

63. Describe substantive audit tests in the context of an audit of financial statements.
A. Substantive tests are audit procedures that may be either tests of transactions, direct tests of financial balances,
or analytical tests.
B. Substantive tests are audit procedures that may be eliminated under certain conditions.
C. Substantive tests are audit procedures that are designed to discover significant subsequent events.
D. Substantive tests are audit procedures that will increase proportionately with the auditor’s reliance on internal
control.

64. In performing an audit, which one of the following procedures would be considered a “substantive” test”?
A. Comparing last year’s interest expense with this year’s interest expense.
B. Comparing signatures on checks with the signatures of authorized check signers.
C. Reviewing initials on received documents.
D. Reviewing procedures followed in receiving, depositing, and disbursing cash.

65. A basic premise underlying the application of analytical procedures is that

A. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations.
B. Statistical tests of financial information may lead to the discovery of material misstatements in the financial
statements.
C. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known
conditions to the contrary.
D. These procedures cannot replace tests of balances and transactions.
66. The auditor will most likely perform extensive tests for possible understatement of
A. Revenues. B. Liabilities. C. Assets D. Capital.

67. Which of the following statements is true about related party transactions?
A. In the absence of evidence to the contrary, related party transactions should be assumed to be outside the
ordinary course of business.
B. An auditor should determine whether a particular transaction would have occurred if the parties had not been
related.
C. An auditor should substantiate that related party transactions were consummated on terms equivalent to those
that prevail in arm’s length transactions.
D. The audit procedures directed toward identifying related party transactions should include considering whether
transactions are occurring but are not being given proper accounting recognition.

68. During the course of an audit engagement an auditor prepares and accumulates audit working papers. The primary
purpose of the audit working papers is to
A. Aid the auditor planning his work.
B. Provide a point of reference for future audit engagements.
C. Support the underlying concepts included in the preparation of the basic financial statements.
D. Support the auditor's opinion.

69. Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?
A. Notes receivable and interest income.
B. Accrued interest receivable and accrued interest payable.
C. Notes payable and notes receivable.
D. Interest income and interest expense.

70. Which of the following factors most likely would affect an auditor’s judgment about the quantity, type, and content of
the auditor’s working papers?
A. The assessed level of control risk.
B. The likelihood of a review by a concurring (second) partner.
C. The number of personnel assigned to the audit.
D. The content of the management representation letter.

71. The permanent (continuing) file of an auditor’s working papers most likely would include copies of the
A. Lead schedules. C. Bank statements.
B. Attorney’s letters. D. Debt agreements.

72. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high (risk of under-
reliance) on internal accounting control relate to the
A. Efficiency of the audit. C. Selection of the sample.
B. Effectiveness of the audit. D. Audit quality controls.

73. Statistical sampling provides a technique for

A. Exactly defining materiality.
B. Greatly reducing the amount of substantive testing.
C. Eliminating judgment in testing.
D. Measuring the sufficiency of evidential matter.

74. At times a sample may indicate that the auditor's planned degree of reliance on a given control is reasonable when,
in fact, the true compliance rate does not justify such reliance. This situation illustrates the risk of
A. Over-reliance. C. Incorrect precision.
B. Under-reliance. D. Incorrect rejection.

75. When assessing the tolerable rate, the auditor should consider that, while deviations from control procedures
increase the risk of material errors, such deviations do not necessarily result in errors. This explains why
A. A recorded disbursement that does not show evidence of required approval may nevertheless be a transaction
that is properly authorized and recorded.
 B. Deviations would result in errors in the accounting records only if the deviations and the errors occurred on
different transactions.
C. Deviations from pertinent control procedures at a given rate ordinarily would be expected to result in errors at a
higher rate.
D. A recorded disbursement that is properly authorized may nevertheless be a transaction that contains a material
error.

76. In audit sampling contexts, precision is

A. A characteristic of the population at hand and is not under the direct control of the auditor.
B. A measure of the accuracy with which one has generated sample estimates. Desired precision must be
established before the sample is obtained and evaluated.
C. Evaluated independently of reliability in a given sample.
D. Important for evaluating variables samples, but not attributes samples.

77. Conditions leading to smaller sample size in compliance testing:

- Reliance on internal control
1.1 lower reliance
1.2 higher reliance
- Acceptance rate of deviation from planned reliance on internal control
2.1 lower acceptable rate
2.2 higher acceptable rate
- Allowance risk of over reliance
3.1 lower risk
3.2 higher risk
- Likely rate or population deviation
4.1 lower expected rate
4.2 higher expected rate
A. Combination of 1.1, 2.1, 3.1, 4.1 C. Combination of 1.2, 2.1, 3.1, 4.2
B. Combination of 1.1, 2.2, 3.2, 4.1 D. Combination of 1.2, 2.2, 3.2, 4.2

78. Statistical sampling techniques may be used to sample “attributes” as well as “variables”. An example of a “variable”
that can be tested using statistical sampling technique would be:
A. The number of errors in the client-prepared aging schedule of accounts receivable.
B. The balance in the accounts receivable account.
C. Compliance with the requirement that each voucher be initialed by the treasurer before a check is prepared for
payment of the voucher.
D. The number of entries improperly posted to a job order cost card.

79. Which of the following statements is correct concerning the auditor’s use of statistical sampling?
A. An auditor needs to estimate the peso amount of the standard deviation of the population to use classical
variables sampling.
B. An assumption of PPS sampling is that the underlying accounting population is normally distributed.
C. A classical variables sample needs to be designed with special considerations to include negative balances in
the sample.
D. The selection of zero balances usually does not require special sample design considerations when using PPS
sampling.

80. An auditor selects a preliminary sample of 100 items out of a population of 1,000 items. The sample statistics
generate an arithmetic mean of P60, a standard deviation of P6 and a standard error of the mean of P.60. If the
sample was adequate for the auditor's purposes and the auditor's desired precision was plus or minus P1,000, the
minimum acceptable peso value of the population would be
A. P61,000 B. P59,000 C. P60,000 D. P58,800

81. The statistical sampling drawn from a population of invoices indicates a mean value of P150 and sampling precision
of + P30 at a 95% confidence level. What is the correct interpretation of this sample data?
A. In repeated sampling, the point estimates of the true population mean will be P150 about 95% of the time.
B. In repeated sampling, the true population mean will fall in the precision range of P120 to P180 about 95% of the
time.
 C. There is a 95% probability that the true population mean falls in the range of P135 and P165.
D. There is a 95% probability that the true population mean is P150.

82. The primary objective of analytical procedures used in the final review stage of an audit is to
A. Obtain evidence from details tested to corroborate particular assertions.
B. Identify areas that represent specific risks relevant to the audit.
C. Assist the auditor in assessing the validity of the conclusions reached.
D. Satisfy doubts when questions arise about a client's ability to continue in existence.

83. An auditor is concerned with completing various phases of the examination after the balance sheet date. This
"subsequent period" extends to the date of the
A. Auditor's report.
B. Final review of the audit working papers.
C. Public issuance of the financial statements
D. Delivery of the auditor's report to the client.

84. Which of the following procedures would most likely be performed in connection with a review of subsequent events?
A. Test of shipping cut-offs.
B. Review of cut-of bank statements.
C. Vouching of subsequent payments of accounts payable
D. Reading of minutes of meetings of stockholders and board of directors up to the date of the audit report.

85. Which of the following material events occurring subsequent to the balance sheet date would require an adjustment
to the financial statements before they are issued?
A. Sale of long-term debt or capital stock.
B. Loss of a plant as a result of a flood.
C. Major purchase of a business which is expected to double sales volume.
D. Settlement of litigation, in excess of the recorded liability.

86. The auditor's primary means of obtaining corroboration of management's information concerning litigation is a
A. Letter of audit inquiry to the client's lawyer.
B. Letter of corroboration from the auditor's lawyer upon review of the legal documentation.
C. Confirmation of claims and assessments from the other parties to the litigation.
D. Confirmation of claims and assessments from an officer of the court presiding over the litigation.

87. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an
entity’s ability to continue as a going concern?
A. Cash flows from operating activities are negative.
B. Research and development projects are postponed.
C. Significant related party transactions are pervasive.
D. Stock dividends replace annual cash dividends.

88. Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going concern for
a reasonable period of time. In evaluating Zero’s plans for dealing with the adverse effects of future conditions and
events, Cooper most likely would consider, as a mitigating factor, Zero’s plans to
A. Discuss with lenders the terms of all debt and loan agreements.
B. Strengthen internal controls over cash disbursements.
C. Purchase production facilities currently being leased from a related party.
D. Postpone expenditures for research and development projects.

89. When an auditor concludes there is a substantial doubt a continuing audit client’s ability to continue as a going
concern for a reasonable period of time, the auditor’s responsibility is to
A. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial
statements.
B. Consider the adequacy of disclosure about the client’s possible inability to continue as a going concern.
C. Report to the client’s audit committee that management’s accounting estimates may need to be adjusted.
D. Reissue the prior year’s auditor’s report and add an explanatory paragraph that specifically refers to “substantial
doubt” and “going concern”.
90. It is an accepted practice for external auditors to request letter of representation from their clients. A principal purpose
of a letter of representation form the client is to
A. Discharge the auditor from legal liability of his examination.
B. Confirm in writing management’s approval of limitations on the scope of audit.
C. Serve as an introduction to company’s personnel and authorization to examine the records.
D. Remind management for its primary responsibility for financial statements.

91. Items for inclusion in management representation letter are normally:

A. Determined by management.
B. Covering all the accounts in the financial statements
C. Determined by auditors based on the circumstances of the engagement.
D. Based on ASPC’s standard list.

92. Which of the following events occurring after the issuance of an auditor’s report most likely would cause the auditor
to make further inquiries about the previously issued financial statements?
A. An uninsured natural disaster occurs that may affect the entity’s ability to continue as a going concern.
B. A contingency is resolved that had been disclosed in the audited financial statements.
C. New information is discovered concerning undisclosed lease transactions of the audited period.
D. A subsidiary is sold that accounts for 25% of the entity’s consolidated net income.

wep/assurance/revmat2