No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

iCARE Accountancy Review

AUDIT PRACTICE
PREWEEK MATERIALS

1. 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?
a. Cash.
b. Depreciation Expense.
c. Accounts payable.
d. Travel and entertainment expense.

Use the following information for the next three questions.

Following your preliminary visit to South’s head office you are now aware of the following
information.

The company installed a new till system in all supermarkets four months before the year
end. the new till system is linked to the accounting system at head office and
automatically posts transactions to the accounting system. Previously journals were made
manually based on totals on till rolls.

2. Having reviewed this information you have identified several audit risks which you feel
your team will need to address. The first risk relates to the cost of the new till system
which South has capitalized as a non-current asset. You are concerned that South may
have included within the capitalized costs some items which are revenue in nature,
leading to the overstatement of non-current assets. Which of the following statements
is a valid response to this audit risk?
a. Inspect invoices capitalized within the cost of the new till system to determine
whether they are directly attributable to the cost of the new till system.
b. Obtain a copy of the training manual relating to the new till system and discuss
with directors the extent of training staff has received on the new system.
c. Agree the capitalized costs from the trial balance back to invoices to confirm
their value.
d. Recalculate the depreciation charged on the new till system.

3. A second audit risk relates to how well the new till system is operating. You are
concerned that the system may not be reliable, and that consequently not all sales
have been recorded, resulting in an understatement of revenue. You are also
concerned that staff may not yet be familiar with the system, leading to an increased
risk of errors relating to data entry. Which of the following statements represent valid
responses to this audit risk?
(1) Perform analytical procedures by comparing daily/weekly sales by store with both
the prior year and with expectations, in order to determine whether any unusual
patterns have occurred following the installation of the new system.
 (2) Vouch the sales revenue per the system to the till receipts to confirm the accuracy
of the sales.
(3) Obtain a copy of the training manual relating to the new till system and discuss
with directors the extent of training staff has received on the new system.
(4) Test the internal controls relating to the till system and the transfer of data into
the accounting system.
a. 1, 2, and 4 c. 2 and 4
b. 1, 3, and 4 d. 3 and 4

4. After a number of people living close to one of South’s stores became seriously ill, the
source of the illness was traced back to meet the customers had purchased from
South. Legal proceedings were commenced against South by a number of customers
during the financial year, demanding P50m in compensation. You plan to review the
legal correspondence relating to the claims made by customers to whom South sold
contaminated meat. Which of the following are valid objectives of this audit
procedure?
(1) To determine whether South’s reputation will have been damaged within the local
area.
(2) To confirm whether there are deficiencies in South’s internal controls relating to
food hygiene.
(3) To assess whether a provision for customer compensation is required in South’s
financial statements.
(4) To determine whether disclosure of the nature and financial effect of the legal
claim is required in South’s financial statements.
a. 2 and 3 only c. 3 and 4 only
b. 2, 3 and 4 only d. 1, 2, 3, and 4

5. An auditor is obligated to communicate an uncorrected audit adjustment to an entity's

audit committee (or those charged with governance) only if the adjustment
a. Is individually material.
b. Is not believed to be trivial.
c. Is a recurring matter that was proposed to management the prior year.
d. Results from the correction of a prior period's departure from GAAP.

6. QT, Inc. maintains a staff of three full-time internal auditors who report directly to the
controller. In planning to use the internal auditors to provide assistance in performing
the audit, the independent auditor will most likely
A. Place limited reliance on the work performed by the internal auditors.
B. Decrease the extent of the tests of controls needed to support the assessed level
of detection risk.
C. Increase the extent of the procedures needed to reduce control risk to an
acceptable level.
D. Avoid using the work performed by the internal auditors.

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On January 1, 2021, Baby Shark Dutdududut Company accounts receivable has an
outstanding balance of P500,000. Below are the transactions in its accounts receivable
during 2021:
Total Sales (including a P500,000 cash sales) P8,000,000
Account receivable written-off 60,000
Total Sales returns (of which P30,000 were sales on a cash basis) 80,000
Amount received from credit customers 5,100,000
Sales discount and allowances granted 70,000
Amount received representing recovery (not included in P5.1M) 120,000

7. What is the amortized cost of the accounts receivable on December 31, 2021, assuming
that the company’s policy is to provide 5% allowance based on outstanding balance?
a. P2,470,000
b. P2,584,000
c. P2,973,500
d. P3,087,500

8. Proper authorization of write-offs of uncollectible accounts should be approved in

which of the following departments?
a. Accounts receivable.
b. Credit.
c. Disbursing.
d. Treasurer.

9. Which of the following statements would an auditor most likely add to the negative
form of confirmations of accounts receivable to encourage timely consideration by the
recipients?
a. “This is not a request for payment; remittances should not be sent to our auditors
in the enclosed envelope.”
b. “Report any differences on the enclosed statements directly to our auditors; no
reply is necessary if this amount agrees with your records.”
c. “If you do not report any differences within fifteen days, it will be assumed that
this statement is correct.”
d. “The following invoices have been selected for confirmation and represent
amounts that are overdue.”

10. Sound internal control procedures dictate that defective merchandise returned by
customers should be presented initially to the
A. Accounts receivable supervisor.
B. Receiving clerk.
C. Shipping department supervisor.
D. Sales clerk.

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11. Tracing bills of lading to sales invoices provides evidence that
A. Shipments to customers were invoiced.
B. Shipments to customers were recorded as sales.
C. Recorded sales were shipped.
D. Invoiced sales were shipped.

12. Immediately upon receipt of cash, a responsible employee should

A. Record the amount in the cash receipts journal.
B. Prepare a remittance listing.
C. Update the subsidiary accounts receivable records.
D. Prepare a deposit slip in triplicate.

13. An auditor would be most likely to limit substantive audit tests of sales transactions
when control risk is assessed as low for the existence or occurrence assertion
concerning sales transactions and the auditor has already gathered evidence
supporting
A. Opening and closing inventory balances.
B. Cash receipts and accounts receivable.
C. Shipping and receiving activities.
D. Cutoffs of sales and purchases.

14. An auditor would consider a cashier's job description to contain compatible duties if
the cashier receives remittances from the mailroom and also prepares the
A. Prelist of individual checks.
B. Monthly bank reconciliation.
C. Daily deposit slip.
D. Remittance advices.

Use the following information from items 15 to 17

An entity sells a new product. During a move to a new location, the inventory records for
the product were misplaced. The bookkeeper has been able to gather some data for the
purchases and sales records. The July purchases are as follows:

Units Unit cost Total cost

July 5 10,000 65 650,000

10 12,000 70 840,000
15 15,000 60 900,000
25 14,000 55 770,000

On July 31, 17,000 units were on hand. The sales for July amounted to P6,000,000 or
60,000 units at P100 per unit. Roshe Company has always used a perpetual FIFO inventory
costing system. Gross profit on sales for July was P2,400,000.

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15. What was the cost of the inventory on July 31?
a. 3,600,000
b. 1,670,000
c. 770,000
d. 950,000

16. What was the cost of inventory on July 1?

a. 1,390,000
b. 2,400,000
c. 950,000
d. 760,000

17. What is the number of units available on July 1?

a. 34,000
b. 26,000
c. 10,000
d. 9,000

18. Mailing disbursement checks and remittance advices should be controlled by the
employee who
A. Approves the vouchers for payment.
B. Matches the receiving reports, purchase orders, and vendors' invoices.
C. Maintains possession of the mechanical check-signing device.
D. Signs the checks last.

19. An auditor tests an entity's policy of obtaining credit approval before shipping goods
to customers in support of management's financial statement assertion of
A. Valuation or allocation.
B. Completeness.
C. Existence or occurrence.
D. Rights and obligations.

20. An auditor would most likely review an entity's periodic accounting for the numerical
sequence of shipping documents and invoices to support management's financial
statement assertion of
A. Existence or occurrence.
B. Rights and obligations.
C. Valuation or allocation.
D. Completeness.

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21. In assessing control risk for purchases, an auditor vouches a sample of entries in the
voucher register to the supporting documents. Which assertion would this test of
controls most likely support?
A. Completeness.
B. Existence or occurrence.
C. Valuation or allocation.
D. Rights and obligations.

22. Before applying principal substantive tests to an entity's accounts receivable at an

interim date, an auditor should:
A. Consider the likelihood of assessing the risk of incorrect rejection too low.
B. Project sampling risk at the maximum for tests covering the remaining period.
C. Ascertain that accounts receivable are immaterial to the financial statements.
D. Assess the difficulty in controlling the incremental audit risk.

23. Under which of the following circumstances would the use of the blank form of
confirmations of accounts receivable most likely be preferable to positive
confirmations?
A. The recipients are likely to sign the confirmations without devoting proper attention
to them.
B. Subsequent cash receipts are unusually difficult to verify.
C. Analytical procedures indicate that few exceptions are expected.
D. The combined assessed level of inherent risk and control risk is low.

24. Which cycle is not directly linked to the production cycle?

A. acquisition and expenditure cycle
B. payroll cycle
C. revenue and collection cycle
D. finance and investment cycle

25. Which of the following is internal control weakness for a company whose
inventory of supplies consists of a large number of individual items?
A. supplies of relatively little value are expensed when purchased
B. the cycle basis is used for physical counts
C. the warehouse manager is responsible for maintenance of
perpetual inventory records
D. perpetual inventory records are maintained only for items of significant
value

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26. Which of the following procedures would best prevent or detect the theft of
valuable items from an inventory that consists of hundreds of different items
selling for P1 to P10 and a few items selling for hundreds of pesos?
A. maintain a perpetual inventory of only the more valuable items with
frequent periodic verification of the accuracy of the perpetual
inventory record.
B. have an independent accounting firm prepare an internal control
report on the effectiveness of the controls over inventory.
C. have separate warehouse space for the more valuable items with
frequent periodic physical counts and comparison to perpetual
inventory records.
D. require a manager's signature for the removal of any inventory item
with a value of more than P50.

27. A retailer's physical count of inventory was higher than that shown by the
perpetual records. Which of the following would explain the difference?
A. inventory items had been counted but the tags placed on the items had
not been take off and added to the inventory accumulation sheets.
B. credit memos for several items returned by customers had not been recorded.
C. no journal entry had been made on the retailer's books for several
items returned to its suppliers.
D. an item purchased FOB shipping point had not arrived at the date of
the inventory count and had not been reflected in the perpetual
records.

28. The accuracy of perpetual inventory records may be established in part by comparing
perpetual inventory records with
a. Purchase requisitions. c. Receiving reports.
b. Purchase orders. d. Vendor payments.

29. Which of the following is not one of the independent auditor’s objectives regarding
the audit of inventories?
a. Verifying that inventory counted is owned by the client.
b. Verifying that the client has used proper inventory pricing.
c. Ascertaining the physical quantities of inventories on hand.
d. Verifying that all inventory owned by the client is on hand at the time of the
count.

30. 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?
a. Complete recounts by independent teams are performed.
b. Perpetual inventory records are maintained.
c. Unit cost records are integrated with production accounting records.
d. Inventory balances are rarely at low levels.
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31. In a manufacturing company, which one of the following audit procedures would give
the least assurance of the valuation of inventory at the audit date?
a. Obtaining confirmation of inventories pledged under loan agreements.
b. Testing the computation of standard overhead rates.
c. Examining paid vendors' invoices.
d. Reviewing direct labor rates.

32. After counting for a sequence of inventory tags, an auditor traces a sample of tags to
the physical inventory listings to obtain evidence that all items
a. Included in the listing have been counted.
b. Represented by inventory tags are included in the listing.
c. Included in the listing are represented by inventory tags.
d. Represented by inventory tags are bona fide.

33. Which of the following is not one of the auditor’s primary objectives in an audit of
trading securities?
a. To determine whether securities are authentic.
b. To determine whether securities are the property of the client.
c. To determine whether securities actually exist.
d. To determine whether securities are properly classified on the balance sheet
date.

34. The auditee has acquired another company by purchase. Which of the following
would be the best audit procedure to test the appropriateness of the allocation of cost
to tangible assets?
a. Evaluate procedures used to estimate and record fair market values for
purchased assets.
b. Determine whether assets have been recorded at their book value at the date of
purchase.
c. Evaluate the reasonableness of recorded values by discussion with operating
personnel.
d. Evaluate the reasonableness of recorded values by use of replacement cost data.

35. The most effective means for the auditor to determine whether a recorded intangible
asset possesses the characteristics of an asset is
a. Vouch the purchase by reference to underlying documentation.
b. Inquire as to the status of patent application.
c. Evaluate the future revenue-producing capacity of the intangible asset.
d. Analyze the research and development expenditures to determine that only
those expenditures possessing future economic benefit have been capitalized.

36. In auditing Intangible assets, an auditor most likely would review or recompute
amortization and determine whether the amortization period is reasonable in
support of management’s financial assertion of
a. Valuation C. Completeness
b. Existence D. Rights and obligations
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37. Assuming QT, Inc. has capitalized all research and development costs associated with
patent. The auditor who is examining this account will probably
a. Confer with management regarding transfer of the amount from the balance
sheet to the income statement
b. Confirm that the patent is registered and on file with the intellectual property
office.
c. Confer with management regarding a change in the title of the account to
“Goodwill”
d. Confer with management regarding ownership of the patent.

38. Which of the following comparisons would be the most appropriate audit test for
the amount of recorded goodwill?
a. The purchase price and the assigned book value of net tangible and
identifiable assets purchased.
b. The purchase price and the assigned fair value of net identifiable assets
purchased.
c. The purchase price and the assigned fair value of net tangible and identifiable
assets purchased.
d. Earnings in excess of 5% of net assets for the past five years.

39. Which is the best audit procedure to obtain evidence to support the legal ownership
of real property?
a. Examination of corporate minutes and board resolutions with regard to
approvals to acquire real property.
b. Examination of closing documents, deeds and ownership documents registered
and on file at the register of deeds.
c. Discussion with corporate legal counsel concerning the acquisition of a specific
piece of property.
d. Confirmation with the title company that handled the escrow account and
disbursement of proceeds for the closing of the property.

40. An auditor is verifying the existence of newly acquired fixed assets recorded in the
accounting records. Which of the following is the best evidence to help achieve this
objective?
a. Oral evidence obtained by discussions with operating management.
b. Documentary support obtained by vouching entries to subsidiary records and
invoices.
c. Documentary support obtained by reviewing titles and tax returns.
d. Physical examination of a sample of newly recorded fixed assets.

41. If an auditor tours a production facility, which of the misstatements or questionable

practices is most likely to be detected by the audit procedure specified?
a. Depreciation expense on fully depreciated machinery has been recognized.
b. Overhead has been overapplied.
c. Necessary facility maintenance has not been performed.
d. Insurance coverage on the facility has lapsed.
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42. An auditor performs a test to determine whether all merchandise for which the client
was billed was received. The population for this test consists of all
a. Merchandise received c. Canceled checks
b. Vendors’ invoices d. Receiving reports

43. The primary audit test to determine if accounts payable are valued properly is:
a. Confirmation of accounts payable
b. Vouching accounts payable to supporting documentation
c. An analytical procedure
d. Verification that accounts payable was reported as a current liability in the
balance sheet

44. Which of the following procedures is least likely to be performed before the balance
sheet date?
a. Observation of inventory count
b. Testing of internal control over cash
c. Search for unrecorded liabilities
d. Confirmation of receivables

45. An audit assistant found a purchase order for a regular supplier in the amount of
P5,500. The purchase order was dated after receipt of goods. The purchasing agent
had forgotten to issue the purchase order. Also, a disbursement of P450 for materials
did not have a receiving report. The assistant wanted to select additional purchase
orders for investigation but was unconcerned about lack of receiving report. The
audit manager should?
a. Agree with the assistant because the amount of the purchase order exception
was considerably larger than the receiving report exception.
b. Agree with the assistant because the cash disbursement clerk had been
assured by the receiving clerk that the failure to fill out a report didn’t happen
very often.
c. Disagree with the assistant because two problems have an equal risk of loss
associated with them.
d. Disagree with the assistant because the lack of a receiving report has a
greater risk of loss associated with it.

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 The cash equivalent account of Aurora Company is composed of the following items:
Time deposit, 3 months maturity due on January 31, 2022 P 200,000
Certificate of shares* 420,000
Money market placement, 2 months 250,000
Customer's check dated December 31, 2021 280,000
Treasury bills dated November 30, 2021, due February 28, 450,000
2022
Treasury bills dated December 31, 2021, due June 30, 2022 490,000
Total 2,090,000
*the share certificate is a redeemable preference share purchased on November 1, 2020
with maturity of January 31, 2022.
46. How much is the amount of cash equivalent?
a. P900,000
b. P1,180,000
c. P1,320,000
d. P1,670,000

47. An audit program for the audit of the retained earnings account should include a
step that requires verification of
a. Market value used to charge retained earnings to account for a 2-for-1 stock
split.
b. Approval of the adjustment to the beginning balance as a result of a write-
down of an account receivable.
c. Authorization for both cash and stock dividends.
d. Gain or loss resulting from disposition of treasury shares.

48. In an examination of shareholders’ equity, an auditor is most concerned that

a. Capital stock transactions are properly authorized.
b. Stock splits are capitalized at par or stated value on the dividend declaration
date.
c. Dividends during the year under audit were approved by the shareholders.
d. Changes in the accounts are verified by a bank serving as a registrar and stock
transfer agent.
49. To minimize opportunity for fraud, unclaimed salary checks should be:
a. Deposited in a special bank account
b. Kept in the payroll department
c. Left with the employee’s supervisor
d. Held for the employee in the personnel department

50. Which of the following type of employee typically does not complete timecards?
a. Hourly employees
b. Salaried employees
c. All employees must complete timecards
d. Timecards are typically completed by salaried employees but may also be
completed by hourly employees.

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51. When examining payroll transactions, an auditor is primarily concerned with the
possibility of:
a. Incorrect summaries of employee time records
b. Overpayments and unauthorized payments
c. Underwithholding of amounts required to be withheld
d. Posting of gross payroll amounts to incorrect salary expense accounts.

52. For which of the following functions is the use of prenumbered documents lease
important?
a. Use of prenumbered time cards in the payroll function
b. Use of prenumbered sales invoices in the sales function
c. Use of prenumbered receiving reports in the acquisitions function.
d. Use of prenumbered deposit slips in the cash receipts function.

53. The total of the individual employee earnings in the payroll master file equals the total:
a. Balance of gross payroll in general ledger accounts
b. Of the checks drawn to employees for payroll
c. Gross payroll plus the total contributed by the employer for payroll taxes
d. Gross pay for the current week’s payroll.

54. Which of the following audit objectives is addressed when the audit staff reviews the
minutes of board of directors’ meeting regarding investment acquisitions?
a. Validity
b. Accuracy
c. Presentation and disclosure
d. Valuation
55. When reviewing journal entries recorded by the company near year-end, which of the
following would be considered by the audit team an entry that requires additional
investigation?
a. A debit to accounts payable for payments made to suppliers.
b. A credit to retained earnings for change in machinery’s depreciation charge.
c. A credit to accounts receivable for goods returned by a credit customer.
d. A debit to interest payable for reversal of accrued interest.
56. The test of details of balance procedure which requires the auditor to account for
unused inventory tag numbers to make sure none have been deleted is associated
with the audit objective of:
a. accuracy.
b. existence.
c. detail tie-in.
d. completeness.

57. Which department within a manufacturing company is often responsible for the
review of production and scrap reports?
a. Purchasing.
b. Accounts Payable.
c. Accounting.
d. Production.

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58. Confirmation is most likely to be a relevant form of evidence with regard to
assertions about accounts receivable when the auditor has concerns about the
receivables'
a. Valuation.
b. Classification.
c. Existence.
d. Completeness.

59. Which of the following is not a major reason for maintaining an audit trail for a
computer system?
a. Deterrent to fraud
b. Monitoring purposes
c. Analytical procedures
d. Query answering

60. An auditor suspects that certain client employees are ordering merchandise for
themselves over the Internet without recording the purchase or receipt of the
merchandise. When vendors’ invoices arrive, one of the employees approves the
invoices for payment. After the invoices are paid, the employee destroys the
invoices and the related vouchers. In gathering evidence regarding the fraud, the
auditor most likely would select items for testing from the file of all
A. Cash disbursements.
B. Approved vouchers.
C. Receiving reports.
D. Vendors’ invoices.

The following items have not been reflected in the financial statements of NALLA, Inc.
for the year-ended 31 December 2022. You were assigned by the engagement leader to
determine whether the following information will require an adjustment and/or
disclosure in the financial statements or not:
61. The Company owns a warehouse located in Marikina City where a large fault line
is present. The amount of inventory stored in the warehouse is about P2,500,000.
The Company is currently not insured against any acts of God. Many experts say
that an earthquake may happen anytime.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.
62. NALLA, Inc. offers its customers rewards. For every appliance purchased, the
Company gives 100 coupons. It is necessary to surrender 1,000 coupons for the
customer to avail of a free trip to Bali, Indonesia, all-expense-paid by NALLA, Inc
Based on experience, the Company estimates its rewards expense to be 5% of
sales. For the year 2022, RAIN, Inc.’s sales were P500,000,000.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

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 63. On 30 October 2022, the regulatory body found a safety hazard related to one of
the Company’s appliances. It is considered probable that the Company will be
liable for an amount in the range of P100,000 to P500,000.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

64. On 29 November 2022, NALLA, Inc. initiated a lawsuit seeking P1,250,000 in

damages from a patent infringement. The company lawyer’s estimate that it is
probable that NALLA, Inc. will win the case.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

65. On 15 December 2022, a former employee filed a lawsuit amounting to P150,000

in damages for the besmirched reputation it suffered. The Company’s legal
counsel believes that the suit is without merit. No court date has been set.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

66. On 12 December 2022, Bobong, the Company’s president guaranteed a bank loan
of P500,000 for his secretary’s use.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

67. On 10 January 2023, a warehouse containing a substantial portion of the

Company’s inventory was destroyed by fire. The Company expects to recover the
entire loss, except for a certain inventory amounting to P125,000.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

68. On 3 January 2023, XYZ, Inc., a customer was declared bankrupt by the Regional
Trial Court. The amount of receivables from XYZ, Inc. is P1,000,000.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

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 69. On 15 February 2023, NALLA, Inc. issued P10,000,000 bonds at a premium of
P250,000. The audited financial statements of NALLA, Inc. was approved for issue
on 30 January 2023.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

70. On 14 February 2023, the Bureau of Internal Revenue assessed NALLA, Inc. an
additional P1,200,000 for deficiency Corporate Income Tax and Expanded
Withholding Tax for the taxable calendar year 2015. The Company’s legal counsel
protested such assessment on 28 February 2023.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

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