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Aud 7 8 - hakdog

H Lab) (University of the Philippines System)

Studocu is not sponsored or endorsed by any college or university

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Multiple Choice Questions:

The characteristics that distinguish computer processing from manual processing include the following:
(1) Computer processing uniformly subjects like transactions to the instructions.
(2) Computer systems always ensure that complete transaction trails useful for audit purposes are
preserved for indefinite periods.
(3) Computer processing virtually eliminates the occurrence of clerical errors normally associated with
manual processing.
(4) Control procedures as to segregation of functions may no longer be necessary in computer
environment.
a. All of the above statements are true.
b. Only statements (2) and (4) are true.
c. Only statements (1) and (3) are true
d. All of the above statements are false.

2. Which of the following statements is not correct?

a. The overall objective and scope of an audit do not change in a CIS environment.
b. When computers or AIS are introduced, the basic concept of evidence accumulation remains the
same.
c. Most CIS rely extensively on the same type of procedures for control that are used in manual
processing system.
d. The specific methods appropriate for implementing the basic auditing concepts do not change, as
systems become more complex.

3. The use of CIS will least likely affect the

a. The procedures followed by the auditor in obtaining a sufficient understanding of the accounting and
internal control systems.
b. The auditor's specific audit objectives.
C. The consideration of inherent risk and control risk through which the auditor arrives at the risk
assessment.
d. The auditor's design and performance of tests of control and substantive procedures appropriate to
meet the audit objective.

4. Which of the following is unique to CIS

a.Error listing
b. Flowchart
c.Questionnaires
d. Pre-numbered documents

5. Where computer processing is used in significant accounting applications, internal control procedures
may be defined by classifying control procedures in two types: general and
a. Administrative
c. Application
d. Authorization
b. Specific

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6. A control which relates to all parts of the CIS is called a(n)

a. Systems control
b. General control
c. Applications control
d. Universal control

7. Controls which apply to a specific use of the system are called

a. Systems controls
b. General controls.
c. Applications controls
d. User controls

8. Some as control procedures relate to all as activities (general controls) and some relate to specific
tasks (application controls).
General controls include
a. Controls designed to ascertain that all data submitted to as for processing have been properly
authorized.
b. Controls that relate to the correction and resubmission of data that were initially incorrect
C. Controls for documenting and approving programs and changes to programs
d. Controls designed to assure the accuracy of the processing results.

9.An auditor anticipates assessing control risk at a low level in a CIS environment. Under these
circumstances, on which of the following procedures would the auditor initially focus?
á. Programmed control procedures
b. Application control procedures
c. Output control procedures
d. General control procedures

10. Which of the following is not a general control?

a. The plan of organization and operation of CIS activity.
b. Procedures for documenting, reviewing, and approving systems and programs.
c. Processing controls.
d. Hardware controls.

11. Which of the following activities would most likely be performed in the CIS department?
a. Initiation of changes to master records
b. Conversion of information to machine-readable form.
c. Correction of transactional errors.
d. Initiation of changes to existing applications.

12. For control purposes, which of the following should be organizationally segregated from the
computer operations functions?
a. Data conversion
b. Systems development
c. Minor maintenance according to a schedule
d. Processing of data

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13. Where computers are used, the effectiveness of internal control depends, in part, upon whether the
organizational structure includes any incompatible combinations. Such a combination would exist when
there is no separation of the duties between
a. Documentation librarian and manager of programming
B. Programming and computer operator
C. Systems analyst and programmer
d. Processing control clerk and keypunch supervisor

14. Which of the following is a general control that would most likely assist an entity whose system
analyst left the entity in the middle of a major project?
a. Grandfather-father-son record retention.
b. Data encryption
c Systems documentation.
d. Check digit verification.

15. Internal control is ineffective when computer department personnel

a. Participate in computer software acquisition decision.
b. Design documentation for computerized systems.
c. Originate changes in master files.
d. Provide physical security for program files.

16. Access control in an on-line CIS can best be provided in most circumstances by
a. An adequate librarianship function controlling access to files.
b. A label affixed to the outside of a file medium holder that identifies the contents.
c. Batch processing of all input through a centralized, well-guarded facility.
d. User and terminal identification controls, such as passwords.

17. Adequate control over access to data processing is required to

a. Deter improper use or manipulation of data files and programs,
b. Ensure that only console operators have access to program documentation.
c. Minimize the need for backup data files.
d. Ensure that hardware controls are operating effectively and as designed by the computer
manufacturer.

18. The management of ABC Co. suspects that someone is tampering with pay rates by entering changes
through the Co.'s remote terminals located in the factory. The method ABC Co. should implement to
protect the system from these unauthorized alterations to the system's files is
a. Batch totals
b. Checkpoint recovery
c. Passwords
d. Record count

19. The possibility of losing a large amount of information stored in computer files most likely would be
reduced by the use of
a. Back-up files
c. Completeness tests
b. Check digits
d. Conversion verification.

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20. Which of the following controls most likely would assure that an entity can reconstruct its financial
records?
a. Hardware controls are built into the computer by the manufacturer, computer
b. Backup diskettes or tapes of files are stored away from originals.
c. Personnel who are independent of data input perform parallel simulations.
d. System flowcharts provide accurate descriptions of input and output operations.

21. Unauthorized alteration of on-line records can be prevented by employing:

a. Key verification
b. Computer sequence checks
c. Computer matching
d. Data base access controls

22. A Co. updates its accounts receivable master file weekly and retains the master files and
corresponding update transactions for the most recent 2-week period. The purpose of this practice is to
a. Verify run-to-run control totals for receivables.
b. Match internal labels to avoid writing on the wrong volume.
c. Permit reconstruction of the master file if needed.
d. Validate groups of update transactions for each

23. Which of the following is not an example of an application control?

a. An equipment failure causes an error message on the monitor.
b. There is a preprocessing authorization of the sales transactions.
c. There are reasonableness tests for the unit-selling price of a sale.
d. After processing, all sales transactions are reviewed by the sales department.

24. Which of the following is not a processing control?

a. Control risk
b. reasonable test
c. Check digits
d. Control total

25. When CIS programs or files can be accessed from terminals, users should be required to enter a(n)
a. Parity check
c. Self-diagnosis test.
b. Personal identification code
d. Echo check

26. Which of the following is an example of a check digit?

a. An agreement of the total number of employees to the total number of checks printed by the
computer.
b. An algebraically determined number produced by the other digits of the employee number.
c. A logic test that ensures all employee numbers are nine digits.
d. A limit check that an employee's hours do not exceed 50 hours per work week

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27. The completeness of computer-generated sales figures can be tested by comparing the number of
items listed on the daily sales with the number of items billed on the actual invoices. This process uses
a. Check digits
c. Validity tests.
b, Control totals
d. Process tracing data.

28. Which of the following is correct?

a Check digits should be used for all data codes.
b. Check digits are always placed at the end of a data code.
c. Check digits do not affect processing efficiency.
d. Check digits are designed to detect transcription errors.

29. A clerk inadvertently entered an account number 12368 rather than account number 12638. In
processing this transaction, the error would be detected with which of the following controls?
a. Batch total
c. Self-checking digit
b. Key verifying
d. An internal consistency check

30. Totals of amounts in computer-record data fields, which are NOT usually added but are used only for
data processing control are called purposes
a. Records totals
b. Hash totals
c. Processing data totals
d. Field totals.

31. If a control total were to be computed on each of the following data items, which would best be
identified as a hash total for a payroll CIS application?
a. Net pay.
b. Hours worked.
C. Department numbers
d. Total debits and total credits.

32. In updating a computerized accounts receivable file, which one of the following would be used as a
batch control to verify the accuracy of the posting of cash receipts remittances?
a. The sum of the cash deposits plus the discounts less the sales returns.
b. The sum of the cash deposits.
c. The sum of the cash deposits less the discounts taken by customers.
d. The sum of the cash deposits plus the discounts taken by customers.

33. Which statement is NOT correct? The goal of batch controls is ensure that during processing
a. transactions are not omitted.
c. transactions are processed more than once.
b. transactions are not added
d. an audit trail is created.

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34. An example of a hash total is

a. total payroll checks - P12,315.
b. total number of employees - 10.
c. sum of the social security numbers - 12,555,437,251.
d. none of the above.

35. The employee entered "40" in the "hours worked per day field.
Which check would detect this unintentional error?
a. numeric/alphabetic check
c. limit check
b. sign check
d. missing data check

36. An unauthorized employee took computer printouts from output bins accessible to all employees. A
control which would have prevented this occurrence is
a. A storage/retention control.
c. An output review control.
b. A spooler file control.
d. A report distribution control.

37. It involves application of auditing procedures using the computer as an audit tool. This includes
computer programs and data the auditor uses as part of the audit procedures to process data of audit
significance contained in an entity's information systems.
a. test data approach
b. computer assisted audit techniques
c. generalized audit software
d. auditing around the computer

38. When auditing “around” the computer, the independent auditor focuses solely upon the source
documents and
a. Test data
C. Compliance techniques
b. CIS processing
d. CIS output

39. Which of the following AIS generally can be audited without examining, or directly testing the
computer programs of the system?
A. A system that performs relatively uncomplicated processes and produces detail output
b. A system that affects a number of essential master files and produces no a limited output
C. A system that updates a few essential master files and produces no printed output other than final
balances
d. A system that uses an on-line real-time processing feature.

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40. Which of the following procedures is an example of auditing "around" the computer?
a. The auditor traces adding machine tapes of sales order batch totals to a computer printout of the
sales journal
b. The auditor develops a set of hypothetical sales transactions and,using the client's computer program,
enters the transactions into the system and observes the processing flow.
c. The auditor enters hypothetical transactions into the client's processing system during client
processing of live" data.
d. The auditor observes client personnel as they process the biweekly payroll. The auditor is primarily
concemed with computer rejection of data that fails to meet reasonableness limits.

41. A disadvantage of auditing around the computer is that it

a. Permits no direct assessment of actual processing.
B. Requires highly skilled auditors
c. Demands intensive use of machine resources.
d. Interacts actively with auditee applications.

42. Auditing by testing the input and output of an IT system instead of the computer program itself will
a. Not detect program errors which do not show up in the output sampled.
b. Detect all program errors, regardless of the nature of the output
c. Provide the auditor with the same type of evidence.
d. Not provide the auditor with confidence in the results of the auditing procedures.

43. Which of the following is NOT a common type of white box approach?
a. test data,
c. auditing around the computer
b. integrated test facility
d. parallel simulation

44. Compliance testing of an advanced CIS

a. Can be performed using only actual transactions since testing of simulated transactions is of no
consequence
b.Can be performed using actual transactions or simulated transactions
c. Is impractical since many procedures within the AIS activity leave no visible evidence of having been
performed
d.Is inadvisable because it may distort the evidence in master files

45. Creating simulated transactions that are processed through a system to generate results that are
compared with predetermined results, is an auditing procedure referred to as
a. Program checking
c. Completing outstanding jobs.
b. Use of test data.
d. Parallel simulation.

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46. An auditor estimates that 10,000 checks were issued during the accounting period. If a computer
application control which performs a limit check for each check request is to be subjected to the
auditor's test data approach, the sample should include
a. Approximately 1,000 test items
b. A number of test items determined by the auditor to be sufficient under the circumtances.
c. A number of test items determined by the auditor's reference to the appropriate sampling tables
d. One transaction

47. An integrated test facility (ITF) would be appropriate when the auditor needs to
a Trace a complex logic path through an application system.
b Verify processing accuracy concurrently with processing.
Ć Monitor transactions in an application system continuously.
d. Verify load module integrity for production programs.

48. The auditor's objective to determine whether the client's computer programs can correctly handle
valid and invalid transactions as they arise is accomplished through the
a. Test data approach.
b. Generalized audit software approach.
c. Microcomputer-aided auditing approach.
d. Generally accepted auditing standards.

49. When an auditor tests a computerized accounting system, which of the following is true of the test
data approach?
a. Several transactions of each type must be tested only one
b. Test data must consist of all possible valid and invalid conditions
C. The program tested is different from the program used throughout the year by the client
d. Test data are processed by the client's computer programs under the auditor's control

50. Which of the following statements is not true to the test data approach when testing a computerized
accounting system?
a. The test needs to consist of only those valid and invalid conditions which interest the auditor
b. Only one transaction of each type need be tested
c. The test data must consist of all possible valid and invalid condition's
d. Test data are processed by the client's computed programs under the auditor's control

51. In auditing through a computer, the test data method is used by auditors to test the
a. Accuracy of input data.
b. Validity of the output.
c. Procedures contained within the program
d. Normalcy of distribution of test data.

52. Which of the following computer-assisted auditing techniques allows fictitious and real transactions
to be processed together without client operating personnel being aware of the testing process?
a. Parallel simulation.
b. Generalized audit software programming.
c. Integrated test facility.
d. Test data approach.

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53. A primary reason auditors are reluctant to use an ITF is that it requires them to
a. Reserve specific master file records and process them at regular intervals
b. Collect transaction and master file records in a separate file
c. Notify user personnel so they can make manual adjustments to output
d. Identify and reverse the fictitious entries to avoid contamination of the master file

54. Which of the following is a disadvantage of the integrated test facility approach?
a. In establishing fictitious entities, the auditor be compromising audit independence.
b. Removing the fictitious transactions from the system is somewhat difficult and, if not done carefully,
may contaminate the client's files.
c. ITF is simply an automated version of auditing "around" the computer.
d. The auditor may not always have a current copy of the authorized version of the client's program.

55. The audit approach in which the auditor runs his/her own program on a machine language is
controlled basis in order to verify the client's data recorded in a
a. The test data approach.'
b. The generalized audit software approach.
c. The microcomputer-aided auditing approach.
d. Called auditing around the computer.

56. This question is based on the following flowchart:

a. Program code checking
b. Parallel simulation
c. Integrated test facility
d. Controlled reprocessing

57. Which of the following methods of testing application controls utilizes a generalized audit software
package prepared by the auditors?
a. Parallel simulation
b. Integrated testing facility approach
c. Test data approach
d. Exception report tests

58. Parallel simulation is an audit technique employed to verify processing by making use of audit test
programs. These audit test programs “simulate the processing logic of an application program or
progress under review. Which statement indicates the use of parallel simulation audit techniques?
a. Live transactions are processed using live programs
b. Live transactions are processed with test master file
c. Test transactions are processed using test programs
d. Live transactions are processed using test programs

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CHAPTER 8
PERFORMING SUBSTANTIVE TESTS
Multiple Choice Questions
Substantive Tests

1. In the context of an audit of financial statements, substantive tests are audit procedures that
a. May be eliminated under certain conditions.
b. Are designed to discover significant subsequent events.
c. May be either tests of transactions, direct tests of financial balances, or analytical tests.
d. Will increase proportionately with the auditor's assessment of control risk.

2. Which of the following statements concerning analytical procedures is correct?

a. Analytical review may be omitted entirely for some financial statement audits.
b. Analytical procedures used in planning an audit should not use non- financial information.
c. Analytical procedures are usually effective and efficient for tests of controls
d. Analytical procedures alone may provide the appropriate level of assurance for some assertions.

3. Of the following procedures, which does not produce analytical evidence?

a. Compare revenue, cost of sales, and gross profit with the prior year and investigate significant
variations.
b. Examine monthly performance reports and investigate significant revenue and expense variances.
c. Confirm customers' accounts receivable and clear all material exceptions.
d. Compare sales trends and profit margins with industry averages and investigate significant differences.

4. Which of the following comparisons is most useful to an auditor in evaluating the results of an entity's
operations?
a. Prior year accounts payable to current year accounts payable.
b. Prior year payroll expense to budgeted current year payroll expense.
c. Current year revenue to budgeted current year revenue.
d. Current year warranty expense to current year contingent liabilities.

5. Which of the following analytical procedures, should be applied to the income statement?
a. Select sales and expense items and trace amounts to related supporting documents
b. Ascertain that the new income amount in the statement of cash flows agrees with the net income
amount in the income statement
c. Obtain from the client representatives, the beginning and ending inventory amounts that were used to
determine costs of sales.
d. Compare the actual revenues and expenses with the corresponding figures of the previous year and
investigate significant differences

6. Which of the following tends to be most predictable for analytical procedures applied as substantive
tests?
a. Relationships involving balance sheet accounts.
b. Transactions subject to management discretion.
c Relationships involving income statement accounts.
d. Data subject to audit testing in the prior year.

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7. Auditors try to identify predictable relationships when using analytical procedures. Relationships
involving transactions from which of the following accounts most likely would yield the highest level of
evidence?
c. Accounts receivable
a. Accounts payable
d. Interest expense
b. Advertising expense

8. Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained
decrease in the ratio of gross profit to sales may suggest which of the following possibilities?
a. Unrecorded purchases
b. Unrecorded sales
c. Merchandise purchases being charged to selling and general expense
d. Fictitious sales

9. Which result of an analytical procedure suggests the existence of obsolete merchandise?

a. Decrease in the inventory turnover rate
b. Decrease in the ratio of gross profit to sales
c. Decrease in the ratio of inventory to accounts payable
d. Decrease in the ratio of inventory to accounts receivable

10. If accounts receivable turned over 7.1 times in 2011 as compared to only 5.6 times in 2012, it is
possible that there were
a. Unrecorded credit sales in 2012
b. Unrecorded cash receipts in 2011
c. More thorough credit investigations made by the company late in2011
d Fictitious sales in 2012

11. An auditor compares this year's revenues and expenses with those of the prior year and investigates
all changes exceeding 10%. By this procedure the auditor is most likely to learn that
a. An increase in property tax rates has not been recognized in the client's accrual
b. This year's provision for uncollectible account is inadequate because of worsening economic
conditions
c. Fourth quarter payroll taxes were not paid
d. The client changed its capitalization policy for small tools during the year.

12. The practice of auditing firms to spread work throughout the year by carrying out as many auditing
procedures as practicable before the balance sheet date, in order to minimize the load during the peak
period. This is called
a. Test of recorded transactions
b. Confirmation of receivable and payables
c. Observation and test-check of inventories
d. Interim work

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13. Which of the following statements is not true?

a. Tests of transactions are often performed several months prior to the balance sheet date.
b. It is common to use analytical procedures at any time during the audit
c. When controls are not considered effective, or when control deviations are discovered, substantive
tests will be eliminated,
d. Tests of details of balances are normally done last. a audit working papers

Evidence
14. The information obtained by the auditor in arriving at the conclusions or which the audit opinion is
based is called:
a. audit working papers
b. audit assertions
c. audit evidence
d. audit standards

15. The major reason an independent auditor gathers evidence is to

a. Form an opinion on the financial statements,
b. Detect fraud.
c. Evaluate management.
d. Evaluate internal control.

16. Which of the following is the best example of corroborating evidence?

a. general journal
e. purchase orders
b. worksheet cost allocations
d. cash receipts journal

17. Which of the following is correct about the appropriateness of evidence?

a. Audit evidence from external sources is more relevant than evidence generated internally
b. Audit evidence is more persuasive when items of evidence from different sources or of different
nature are not consistent.
c. Audit evidence generated internally is more reliable when the related accounting and internal control
systems are effective
d. Sufficiency refers to the amount of evidence needed

18. Which of the following statements about audit evidence is correct?

a. Appropriateness is the measure of the quantity of audit evidence.
b. Sufficiency is the measure of the quality of audit evidence and it relevance to a particular assertion
and its reliability.
C. Audit evidence is more persuasive when items of evidence from different sources or of different
nature are consistent.
d. There should be a one-to-one relationship between audit objective and audit procedure.

19. Evidential matter is generally considered sufficient when

a. It is appropriate
b. There is enough of it to afford a reasonable basis for an opinion on financial statements.
c. It has the qualities of being relevant, objective and free from unknown bias.
d. It has been obtained by random selection.

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20. Theoretically, which of the following would not have an effect on the amount of audit evidence
gathered by the auditor?
a. 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.

21. The sufficiency and appropriateness of evidential matter ultimately is based

a. Availability of corroborating data.
b. Philippine Standards on Auditing
c. Pertinence of the evidence.
d. Judgment of the auditor.

22. Which of the following assertions is correct about the reliability of evidential matter?
a. Information obtained indirectly from outside sources is the most reliable evidential matter.
b. To be reliable, evidential matter should be convincing rather than persuasive.
c. Reliability of evidential matter refers to the amount of corroborative evidence obtained.
d. An effective internal control structure provides more assurance about the reliability of evidential
matter.

23. which of the following statements is generally correct about the appropriateness of evidential
matter?
a. The auditor's direct personal knowledge, obtained through observation and inspection, is more
persuasive than information obtained indirectly from independent outside sources.
b. To be appropriate, evidential matter must be either valid or relevant, but need not be both.
c. Accounting data alone may be considered sufficient appropriate evidential matter to issue an
unmodified opinion of financial statements
d. Appropriateness of evidential matter refers to the amount of corroborative evidence to be obtained.

24. In determining validity of accounts receivable, which of the following would the auditor consider to
be the most reliable?
a. Documentary evidence that supports the accounts receivable balance.
b. Credits to accounts receivable from the cash receipts book after the close of business at year-end.
C. Direct telephone communication between auditor and debtor.
d. Confirmation replies received directly from customers.

25. Which of the following types of audit evidence is the least persuasive?
a. Pre-numbered 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.

Working papers
26. It refers to the material (working papers) prepared by and for, or obtained and retained by the
auditor in connection with the performance of the audit.
a Documentation
d. Corroborative evidence
c. Accounting data

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b. Audit report

27. Which of the following statements is incorrect about the working papers prepared by the auditor?
a. The auditor should record in the working papers, information on planning the audit work, the nature,
timing and extent of the audit procedures performed, the results thereof, and the conclusions reached
from the audit evidence obtained.
b. The extent of working paper documentation is a matter of professional judgment.
c. Working Papers should be in the form of data stored on paper.
d. Working papers should be designed and organized to meet the circumstances and the auditor's need
for each individual audit.

28. Which of the following statements is correct about the working papers?
a. Working papers should not include documentation prepared by the client.
b. Every matter the auditor considers in an audit must be documented in the working papers.
C. In determining the extent of working paper documentation, it may be useful to consider what would
be necessary to provide another auditor who has no previous experience with the audit an
understanding of the detailed aspects of the audit.
d. The auditor should prepare working papers' which are sufficiently complete and detailed to provide an
overall understanding of the audit.

29. Which of the following is not one of the primary purposes of working papers?
a. to assist in planning and performance of the audit
b. to assist in the supervision and review of work
c. to record the audit evidence resulting from audit work performed to support the auditor's opinion
d. to substitute the client's accounting records.

30. An auditor's working papers serve mainly to

a. Provide the principal support for the auditor's report.
b. Satisfy the auditor's responsibilities concerning the Code of Professional Conduct.
c. Monitor the effectiveness of the CPA firm's quality control procedures.
d. Document the level of independence maintained by the auditor.

31. Which of the following statements concerning working papers is incorrect?

a. An auditor may support an opinion by other means in addition to working papers.
b. The form of working papers should be designed to meet the circumstances of a particular
engagement.
c. An auditor's working papers may not serve as a reference source for the client
d. Working papers should show that the internal accounting control system has been studied and
evaluated to the degree necessary.

32. Which of the following factors most likely affects the auditor's judgment about the quantity, type,
and content of working papers?
a. The nature and condition of the client's accounting and internal control systems
b. The content of the client's representation letter.
c. The timing of substantive tests completed prior to the balance sheet date.
d. The usefulness of the working papers as a reference for the client.

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33. Which of the following is not a factor that affects the independent auditor's judgment as to the
quantity, type, and content of working papers?
a. The timing and the number of personnel to be assigned to the engagement.
b. The nature of the engagement
C. The need for supervision of the engagement.
d. Forms of the report.

34. An auditor's working papers will generally be least likely to include documentation showing how the
a. Client's schedules were prepared.
b. Engagement had been planned.
c. Client's system of internal control had been reviewed and evaluated,
d. Unusual matters were resolved.

35. Audit files that are updated with new information of continuing importance is called
a current files
C. permanent files
b. working paper file
d. correspondence file

36. Which of the following statements about working papers is correct?

a. Working papers are not permitted to be used as a reference source by the client.
b. The auditor should document the understanding of the client's internal control obtained to plan the
audit
c. Working papers may be regarded as a substitute for the client's accounting records.
d. When reporting on comparative financial statements, the independent auditor may discard working
papers after two years.

37. PSA 230 provides general guidelines about the ownership, custody and confidentiality of working
papers. Accordingly,
a. Working papers are the personal property of the auditor and the client has no rights to the working
papers prepared by the auditor.
b. The working papers should be retained by the auditor for a sufficient period of time but not to exceed
five years.
c. Working papers should not be made available to the client.
d. Working papers may be considered a substitute for the client's accounting records.

38. Working papers would not include

a. Information concerning the legal and organizational structure of the entity
b. Letters of representation received from the entity.
C. Copies of the financial statements and the auditor's report.
d. Documentation showing how the client's schedules are prepared.

39. The permanent (continuing) file of an auditor's working papers most likely would include copies of
the
b. Lead schedules.
c. Debt agreements.
d. Attorney's letters.
a. Bank statements.

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40. Although, the quantity and content of the audit working papers vary with each particular
engagement, an auditor's permanent files most likely include
a. Schedules that support the current year's adjusting entries.
b. Prior year's accounts receivable confirmations that were classified as exceptions.
c. Documentation indicating that the audit work was adequately planned and supervised.
d. Analyses of capital stock and other owners' equity accounts.

41. The permanent file of an auditor's working papers generally would not include
a. Bond indenture agreements.
b. Working trial balance.
c. Lease agreements.
d. Flowchart of the internal control structure.

42. The current file of the auditor's working papers generally should include
a. A flowchart of the internal accounting controls.
b. A copy of the financial statements.
c. Organization charts.
d. Copies of bond and note indentures.

43. The current file of an auditor's working papers most likely would include a copy of the
a. Bank reconciliation.
b. Articles of incorporation.
C. Pension plan contract.
d. Flowchart of the internal control procedures.

44. For what minimum period should audit working papers be retained by the independent CPA?
a. For the period during which the entity remains a client of the independent CPA.
b. For the period during which an auditor-client relationship exists but not more than six years.
c. For the statutory period within which legal action may be brought against the independent CPA.
d. For as long as the CPA is in public practice.

49. Which of the following is not one of the primary reasons why auditors should be aware of related
parties and transactions between such parties?
a. PFRS requires disclosure of the related party transactions if they are
b. The existence of related parties or related party transactions may affect the financial statements and
the reliability of audit evidence.
c. a related party transaction may be motivated by other than ordinary business considerations.
d. PFRS requires that related party transactions be accounted for in the same manner as an arm’s-length
transaction.

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50. The primary concern of the auditor regarding related party transactions is
a. They are reported to proper regulatory authorities because they are illegal.
b. Their form be emphasized rather than their economic substance.
C. Their existence and significance be adequately disclosed.
d. Their effects are eliminated from the financial statements.

51. Which of the following would not necessarily be a related-party transaction?

a. Sales to another corporation with a similar name
b. Purchases from another corporation that is controlled by the corporation's chief stockholder
C. Loan from the corporation to a major stockholder
d. Sale of land to the corporation by the spouse of a director

52. Which of the following is most likely to indicate the existence of related parties?
a. Writing down obsolete inventory just before year-end
b. Failing to correct previously identified internal control deficiencies.
c. depending on a single product for the success of the entity
d. Borrowing money at an interest rate significantly below the market rate.

53. The existence of a related party transactions may be indicated when another entity
a. Sells real estate to the corporation at a price that is significantly different from its book value
b. Absorbs expenses of the corporation
C. Borrows from the corporations at a rate of interest equal to the current market rate
d. Lends to the corporation at a rate of interest equal to the current market rate

54. Which of the following auditing procedures is most likely to assist an auditor in identifying related
party transactions?
a. Retesting ineffective controls previously reported to the audit committee
b. Sending second requests for unanswered positive confirmations of accounts receivable
C. Reviewing information provided by management identifying related parties and being alert for other
material related party transactions.
d. Inspecting communications with law firms for evidence of unreported contingent liabilities

55. A person or firm possessing special skill, knowledge and experience in a particular field other than
accounting and auditing is called a/an
a. Professional
c. Expert
b. Consultant
d. Assistant

56. Which of the following is not an expert upon whose work an auditor may rely?
a. Actuary
c. Appraiser
b. Internal auditor
d. Engineer

57. During an audit, the auditor may need the assistance of an expert obtaining sufficient appropriate
evidence. A common example is
a. Evaluating the potential financial statement effect of an employee fraud

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b. Determination of the amounts using actuarial computations.

c. Evaluating the integrity of management.
d. Determining the sufficiency and appropriateness of evidential matter obtained.

58. Each of the following procedures requires the assistance of an expert except.
a. Determining the physical condition or quantity of underground mineral
b. Determining the value of works of art.
Ć. Interpreting major contracts.
d. Determining the adequacy of disclosure in the notes to the financial statements.

59. The risk that an expert's objectivity will be impaired increases when the is related in some other
manner to the entity (for example, by being financially dependent upon or having an investment in the
entity) and when the expert is
a, Engaged by the entity
c. Engaged by the auditor
b. Employed by the entity
d. Employed by the auditor

60. When determining the need to use the work of an expert, the auditor would consider the following,
except
a. The materiality of the financial statement item being considered
b. The risk of misstatement based on the nature and complexity of the matter being considered
c. The quantity and quality of other audit evidence available
d. The professional certification or licensing by, or membership in, an appropriate professional body

Internal auditing
61. The scope and objectives of internal auditing vary widely and depend on the size and structure of the
entity and the requirements of its management. Ordinarily, internal auditing activities include one or
more of the following, except
a. Examination of financial and operating information including review of the means to identify,
measure, classify and report such information and specific inquiry into individual items including detailed
testing of transactions and recommending improvements thereto.
b. Review of the economy, efficiency and effectiveness of operations including non-financial controls of
an entity
C. Establishment of adequate accounting and internal control systems
d. Review of compliance with laws, regulations and other external requirements and with management
policies and directives and other internal requirements

62. Which of the following in relation to the relationship between internal auditing and the external
auditor is false?
a. The role of internal auditing is determined by management and its objectives differ from those of the
external auditor who is appointed to report independently on the financial statements
b. The external auditor has the sole responsibility for the audit opinion expressed and that responsibility
is not reduced by any use made of internal auditing
c Internal auditors should exercise the same degree of independence as required of the external auditor
d. All judgments relating to the audit of the financial statements are those of the external auditor

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63. Which of the following statements in relation to the preliminary assessment of internal auditing is
false?
a. The external auditor should obtain a sufficient understanding of internal audit activities to assist in
planning the audit and developing an effective audit approach
b. During the course of planning the audit, the external auditor should perform a preliminary assessment
of the internal audit function when it appears that internal auditing is relevant to the external audit of
the financial statements in specific audit areas
c. Effective internal auditing will often allow a modification in the nature, timing, reduction in the extent
and even eliminate in its entirety some procedures performed by the external auditor
d. In some cases, after having considered the activities of internal auditing, the external auditor may
decide that internal auditing will have no effect on external audit procedures

64. When obtaining an understanding and performing a preliminary assessment of the internal audit
function, the important criteria includes organization status, scope of function, technical competence
and due professional care. Which of the following statements relates to the criteria of due professional
care?
a. The internal auditor will need to be free to communicate fully with the external auditor
b. Whether management acts on internal audit recommendations and how this is evidenced
c. Policies for hiring and training the internal auditing staff and their experience and professional
qualifications
d. Existence of adequate audit manual, work programs and working papers

65. To operate effectively, an internal auditor must be independent of

a. The line functions of the organization
b. The entity
c. The employer-employee relationship which exists for other employees in the organization
d. The audit committee of the board of directors

66. When obtaining an understanding and performing a preliminary assessment of the internal audit
function, the auditor should consider the internal auditors'
Organizational status/ scope of functions, technical competence and due
a. y , y ,y
b. y, n, y,
c. y, n, n
d. n, y, n

67. An independent auditor might consider the procedures performed by the internal auditors because
a. They are employees whose work must be reviewed during substantive testing
b. Their work affects the cost benefit trade-off.
C. They are employees whose work may affect the nature, timing, and extent of audit procedures.
d. Their degree of independence may be inferred from the nature of their work.

68. To assess the objectivity of the internal auditors, an independent auditor would most likely
a. Consider the professional qualifications and experience of the internal auditors.
b. Consider the organizational level to which the internal auditors report the results of their work.
c. Consider proper planning, supervision and documentation of internal auditor's work
d. Consider the nature and extent of the internal auditors' assignment.

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Accounting estimates
69. Which of the following statements is incorrect about accounting estimates?
a. Management is responsible for making accounting estimates included in the financial statements.
b. The risk of material misstatement is greater when accounting estimates are involved.
C. The evidence available to support an accounting estimate will often be more difficult to obtain and
less conclusive than evidence available to support other items in the financial statements.
d. When evaluating accounting estimates, the auditor should pay particular attention to assumptions
that are objective and are consistent with industry patterns.

70. Which of the following would an auditor generally perform to obtain assurance that accounting
estimates are properly accounted for and disclosed?
a. Inquiry of management
b. Make an independent estimate for comparison with client's estimate
c. Review subsequent events
d. Obtain knowledge about the applicable financial reporting standards related to the accounting
estimate.

71. Which of the following procedures would an auditor least likely perform when evaluating the
reasonableness of management's estimates?
a. Make an independent estimates for comparison with management estimates
b. Read the minutes of board of directors' meeting
c. Review and test the process used by management.
d. Review subsequent events which confirm the estimates made.

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