The failure of the auditor to meet PSAs

an evidence of negligence.

a suggestion of negligence.
tantamount to criminal behavior.
an accepted practice.

Which of the following is not one of the independent auditor's objectives regarding the audit of
inventories?

Verifying that all inventory owned by the client is on hand at the time of the count.

Verifying that inventory counted is owned by the client.

Ascertaining the physical quantities of inventory on hand.
Verifying that the client has used proper inventory pricing.

Which of the following may an auditor least likely consider a symptom of an entity’s significant
going-concern problems?

Significant recurring working capital deficiencies.

Legal proceedings that might jeopardize the entity's ability to operate.

A recurring default in meeting the entity's financial obligation.
A new government regulation imposes a change in accounting principle.

Correct answer
A new government regulation imposes a change in accounting principle.

Which of the following is not a step in the search for unrecorded liabilities?

Examine the open purchase order file.

All of the given choices are steps searching unrecorded liabilities.

Examine disbursements for the period immediately before the end of the period.
Examine the unmatched receiving reports.

Correct answer
Examine disbursements for the period immediately before the end of the period.

To verify the proper value of costs charged to real property records for improvements to the
property, the best source of evidence would be:
a letter signed by the real property manager asserting the propriety of costs incurred.

original invoices supporting entries into the accounting records.

a comparison of billed amounts to contract estimates.
inspection by the auditor of real property improvements.

Correct answer
original invoices supporting entries into the accounting records.

For which of the following transactions would an auditor most likely propose an adjustment to the
financial statements?

Inventory included on the balance sheet at year-end: but the check for payment has not been paid until
January 12.

Purchase of P5,000 of office furniture that was ordered on December 22 with a P1,000 deposit being made
with an entry debiting " deposit on furniture" for P1,000 and a credit to cash for P1,000. The office furniture
was received on January 5.
An order for office supplies that has not been recorded because the goods have neither been received nor
paid for by year-end.
Shop supplies are included on the balance sheet at year-end, but the payable and subsequent cash
disbursements are not recorded until after year-end.

Correct answer
Shop supplies are included on the balance sheet at year-end, but the payable and subsequent cash
disbursements are not recorded until after year-end.

An auditor wants to develop an audit test to evaluate the reasonableness of the quantity of scrap
material resulting from a certain production process compared to industry standards. Which
would be the most competent type of evidence available to satisfy this objective?

Physical.

Indirect testimony.
Analytical.
Documentary.

Correct answer
Analytical.

A forecast is a form of future-oriented financial information. Which of the following best describes
the nature of a forecast?

A forecast is based on management’s judgment of the most likely future economic conditions.

A forecast presents a broad range of possible future economic conditions.

A forecast presents possible future scenarios consistent with the purpose of the information.
A forecast is based on the auditor’s judgment concerning hypothetical future economic conditions.

Correct answer
A forecast presents a broad range of possible future economic conditions.

An auditor concludes that there is a material inconsistency in the other information in an annual
report to shareholders containing audited financial statements. If the auditor concludes that the
financial statements do not require revision, but the client refuses to revise or eliminate the
material inconsistency, the auditor may

Issue an "except for" qualified opinion after discussing the matter with the client's board of directors.

Revise the auditor's report to include a separate explanatory paragraph describing the material
inconsistency.
Consider the matter closed since the other information is not in the audited financial statements.
Disclaim an opinion on the financial statements after explaining the material inconsistency in a separate
explanatory paragraph.

Correct answer
Revise the auditor's report to include a separate explanatory paragraph describing the material
inconsistency.

When single-year financial statements are presented, an auditor ordinarily would express an
unqualified opinion in an unmodified report if the
···/1
Entity declines to present a statement of cash flows with its balance sheet and related statements of
income and retained earnings.

Auditor wishes to emphasize an accounting matter affecting the comparability of the financial statements
with those of the prior year.
Prior year's financial statements were audited by another CPA whose report, which expressed an
unqualified opinion, is not presented.
Auditor is unable to obtain audited financial statements supporting the entity's investment in a foreign
affiliate.

No correct answers

An auditor has accounted for a sequence of inventory tags and is now going to trace information
on a representative number of tags to the physical inventory sheets. The purpose of this
procedure is to obtain assurance that

all inventory represented by an inventory tag is listed on the inventory sheets.

all inventory represented by an inventory tag is bona fide.

the final inventory is valued at cost.
inventory sheets do not Include untagged inventory items.

When goods are received, the receiving clerk should match the goods with the

purchase order and requisition.

vendor’s shipping document and the purchase order.

vendor's invoice and the receiving report.
receiving report and the vendor's shipping documents.

Correct answer
vendor’s shipping document and the purchase order.

Which of the following procedures is most relevant to testing the completeness assertion for
prepaid insurance?

Reconciling premium payments with cash disbursement records

Testing whether insurance coverage exceeds the replacement value of insured tangible property.
Confirming insurance policies With carriers
Agreeing total expense and unexpired premiums with the general ledger

Correct answer
Testing whether insurance coverage exceeds the replacement value of insured tangible property.

Auditors are periodically punished for holding an investment in a client. This violates which ethical
rule?

Independence.

Confidentiality.
Non compliance with GAAP.
Integrity.

In May 20X9, an auditor reissues the auditor’s report on the 20X7 financial statements at a
continuing client’s request. The 20X7 financial statements are not restated and the auditor does
not revise the wording of the report. The auditor should

Dual date the reissued report.

Use the original report date on the reissued report.

Use the current period auditor's report date on the reissued report.
Use the release date of the reissued report.
Correct answer
Use the original report date on the reissued report.

For effective internal control purposes, which of the following individuals should be responsible for
mailing signed checks?

Accounts payable clerk

Treasurer
Payroll clerk
Receptionist

Correct answer
Treasurer

In examining liabilities of a company, what is the auditors' primary concern?

Valuation

Rights
Completeness.
Presentation

Correct answer
Completeness.

Under the Code of Professional Ethics, which of the following may a practicing CPA do in
connection with educational seminars?

Allow himself to be listed as a tax expert on the seminar announcement.

Sponsor a seminar and send invitations to non-clients.

Send announcements about his appearance on a seminar program to non-clients or invite them to attend.
Distribute firm literature at the seminar to non-clients on a relevant topic being discussed at the seminar.

Correct answer
Distribute firm literature at the seminar to non-clients on a relevant topic being discussed at the seminar.

An auditor should examine minutes of the board of directors’ meetings:

on a test basis.

only at the beginning of the audit.

through the date of the financial statements.
through the date of the audit report.

Correct answer
through the date of the audit report.

An explanatory paragraph may be added to the audit report while at the same time issuing an
unqualified opinion in all cases except when:

the audit work has been materially limited by management.

the client has changed an accounting principle with the agreement of the auditor.
the audit opinion is partly based on the work of another auditor
there is an immaterial departure from PFRS to ensure fair presentation with the agreement of the auditor.

In analyzing the plant assets account, why is the examination of repairs and maintenance records
important?

Presentation and disclosure

Existence
Rights
Valuation

Correct answer
Valuation

Which of the following statements is not correct concerning intangible assets?

Auditors review the reasonableness of the clients amortization program.

Valuation is a primary audit concern.

Proper presentation as current assets.
A lack of physical substance.

Correct answer
Proper presentation as current assets.

Which of the following is least likely to be included in the audit program for debenture bonds?

Examine security pledged relating to the loan.

Perform analytical procedures

Confirm.
Review bonds paid during the period.
Which of the following procedures would help an auditor test for overstatements of accounts
payable at the balance sheet date?

Trace entries in the cash disbursements records to items in the accounts payable trial balance.

Coordinate cutoff tests performed for receiving and for shipping

Trace items in the accounts payable trial balance to documentation contained in canceled voucher
packages.
Agree items in the file of unmatched receiving reports to the accounts payable balance.

Correct answer
Trace items in the accounts payable trial balance to documentation contained in canceled voucher
packages.

Which of the following procedures is least likely to alert the auditors to unrecorded accounts
payable?

Examine disbursement transactions recorded following year-end.

Confirmation of accrued liabilities.

Reconcile recorded liabilities with monthly statements from creditors.
Analytical procedures involving year-end accounts payable.

Correct answer
Confirmation of accrued liabilities.

Which of the following accounts would most likely be reviewed by the auditor to gain reasonable
assurance that additions to the equipment account are not understated?

Accounts payable.

Repairs and maintenance expense.

Gain on disposal of equipment.
Depreciation expense.

Correct answer
Repairs and maintenance expense.

A client's physical count of inventories was higher than the inventory quantities per the perpetual
records. This situation could be the result of the failure to record:

purchases.
purchase returns.
sales discounts.
sales.

In relation to completed engagements, these are procedures designed to provide evidence of

compliance by engagement teams with the firm’s quality control policies and procedures.

Monitoring

Quality control
Engagement quality control review
Inspection

Correct answer
Inspection

The limitation of an auditor's liability under contract law known as

privity of contract.

statutory liability.
contributory liability.
common law liability.

Which of the following control procedures could prevent or detect payment for goods that have not
been received?

Matching the purchase order, receiving report, and vendor’s invoice.

Verifying vouchers for accuracy and approval.

Comparing goods received with goods requisitioned.
Counting goods when received.

Competence as a certified public accountant includes all of the following except

Having the technical qualifications to perform an engagement.

Possessing the ability to supervise and evaluate the quality of staff work.
Consulting others if additional technical information is needed.
Warranting the infallibility of the work performed.

Correct answer
Warranting the infallibility of the work performed.
If an audit firm discovers threats to independence with respect to an audit engagement, the Code
of Ethics for Professional Accountants indicates that the firm should

Document the issue.

Immediately resign from the engagement.

Evaluate the significance of the threats and apply appropriate safeguards to reduce them to an acceptable
level.
Notify the appropriate regulatory body.

Correct answer
Evaluate the significance of the threats and apply appropriate safeguards to reduce them to an acceptable
level.

If there is a significant difference of opinion between a senior auditor and an audit manager on an
audit engagement, to whose attention should the senior auditor first bring the matter?

The engagement partner on the engagement

The practice advisor in the CPA affiliate office

Another audit manager in the firm
The managing partner or senior partner of the firm

Items for inclusion in management representation letter are normally:

Determined by management.

Based on AASC's standard list.

Covering all the accounts in the financial statements
Determined by auditors based on the circumstances of the engagement.

Correct answer
Determined by auditors based on the circumstances of the engagement.

After an audit report is issued, the auditor discovers through a peer review that an important audit
procedure has been omitted. The auditor should do which of the following?

determine whether the report can still be supported in light of the omitted procedure.

contact his or her professional liability insurance carrier.

immediately request the client recall the report.
notify all parties known to be relying on the report.

Effective internal control over the payroll function should include which of the following?
Total time recorded on time clock cards should be reconciled to job reports by employees responsible for
those specific jobs.

Payroll department employees should be responsible m maintaining the personnel records.

Total time spent on jobs should be compared to the total number of hours indicated on time clock cards.
Payroll department employees should be supervised by the management of the human resources
department.

Correct answer
Total time spent on jobs should be compared to the total number of hours indicated on time clock cards.

When auditing inventories of raw materials, purchased parts, and/or merchandise inventory, the
auditor's most effective means for evaluating the valuation assertion is to

trace quantities from tags or count sheets to final Inventory listings.

scan inventory listings for large extended amounts, and trace related quantities to auditor's copy of the
inventory tag or listing
examine recent invoices from vendors, along with freight bills and compare with client's unit costs, as
adjusted for freight and discount.
compare purchases with prior year and with Industry averages and account for significant fluctuations.

Correct answer
examine recent invoices from vendors, along with freight bills and compare with client's unit costs, as
adjusted for freight and discount.

For a large publicly traded client the auditors' examination of capital stock account will not
ordinarily include:

accounting for the proceeds of a major stock issuance

confirmation of shares Issued with the independent registrar

reconciliation of a stock certificate book with the general ledger.
analysis of capital stock accounts

Correct answer
reconciliation of a stock certificate book with the general ledger.

Which of the following controls would be the most appropriate means to ensure that terminated
employees had been removed from the payroll?

Establishing computerized limit checks on payroll rates.

Mailing checks to employees' residences.

Establishing direct-deposit procedures With employees' banks.
Reconciling payroll and time-keeping records.

Correct answer
Reconciling payroll and time-keeping records.

Which of the following statements is correct about independence?

···/1
Independence is immaterial to the financial statements.

Independence is not an element that is considered in the audit process.

Independence is not a requirement of IFAC's Code of Ethics.
Independence is potentially affected by self-interest, self-review, advocacy, familiarity and intimidation
threats.

No correct answers

To improve control over merchandise purchases, a company’s receiving department should

accept and count all merchandise received from known vendors.

be responsible for handling merchandise but not for preparing receiving reports.
accept merchandise only if an approved purchase order is on hand.
rely on shipping documents to prepare receiving reports.

Correct answer
accept merchandise only if an approved purchase order is on hand.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine
whether they are supported by receiving reports

Reconciling vendors' statements to the file of receiving reports to Identify items receive adjust prior to the
balance sheet date
Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the
related payables apply to the prior period.
Examining unusual relationships bet-ween monthly accounts payable balances and recorded cash
payments

Correct answer
Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the
related payables apply to the prior period.

Before releasing the audit report, the auditor should do which of the following?
estimate the subsequent client fee for services.

perform an analytical review.

give subsequent contingency disclosure.
issue a management letter.

Correct answer
perform an analytical review.

A CPA, wrote an article for publication in PICPA Accountants Journal or News Magazine. The
Code of Professional Ethics would be violated if the CPA allowed the article to state that the CPA
was a

Professor at a school of professional accountancy

Member of PICPA
Practitioner specializing in providing tax services.
Partner in a national CPA firm

Correct answer
Practitioner specializing in providing tax services.

The overall production authorization starts with a

Purchase order

Production plan
Bill of materials
Sales forecast

Correct answer
Production plan

Which of the following audit procedures is the most efficient for detecting unrecorded liabilities at
the balance sheet date?

examining purchase orders issued for several days prior to the close of the year.

comparing cash disbursements in the subsequent period with the accounts payable trial balance at year
end.
obtaining a letter from the client's attorney.
confirming large accounts payable balances at the balance sheet date

Correct answer
comparing cash disbursements in the subsequent period with the accounts payable trial balance at year
end.
The auditor's inquiries of management regarding supplementary information on the effects of price
level changes should be directed to the judgments made concerning

Rights and obligations.

Measurement and presentation.

Accuracy and objectivity.
Relevance and validity.

Correct answer
Measurement and presentation.

The mailing of disbursement checks and remittance advices should be controlled by the employee
who

approves the vouchers for payment.

matches the receiving reports, purchase orders, and vendor invoices.

signs the checks last.
verifies the mathematical accuracy of the vouchers and remittance advices.

Correct answer
signs the checks last.

A CPA has been engaged to compile financial statements for a nonpublic client. Which of the
following statements best describes this engagement?
···/1
The financial statements are representations of both management and the CPA.

The CPA must perform the basic accepted auditing procedures necessary to determine that the statements
are in conformity with GAAP.
The CPA may prepare the statements from the books but may not assist in adjusting and closing the
books.
The CPA is performing an accounting service rather than an examination of financial statements.

No correct answers

Before reissuing the prior year's auditor's report on the financial statements of a former client, the
predecessor auditor should obtain a letter of representations from the
CHOICE II

CHOICE IV
CHOICE III
CHOICE I

Correct answer
CHOICE I

Which of the following procedures relating to the audit of accounts payable could the auditor
delegate entirely to the client’s employees?

testing footings in the accounts payable ledger.

reconciling unpaid invoices to vendors' statements.

mailing confirmations for selected account balances.
preparing a schedule of accounts payable.

Correct answer
preparing a schedule of accounts payable.

The purchasing department:

All of the given choices are correct.

Should obtain competitive bids from vendors.

Should inspect Incoming goods and forward them to the receiving department
Should inspect vendor invoices and forward them to the accounting department

Correct answer
Should obtain competitive bids from vendors.

Inspecting marketable securities provides primary evidence about the assertion of

valuation.

all of the above.

existence.
rights and obligations.

Correct answer
existence.

Which of the following audit procedures is not appropriate for addressing the assertion of
valuation?

performing analytical procedures.

confirming with creditors

testing for unrecorded liabilities
verifying accounts payable trial balance

Jun Brian, a CPA, has agreed to a compilation engagement for a client and is preparing the
financial statements based on the client’s information. If Jun Brian feels that the financial
statements will be misleading based on information provided by the client, how should he
proceed?

Jun Brian should not be concerned about whether the financial statements are misleading, since this is
only a compilation engagement.

Jun Brian should correct the financial statements even if the client does not agree to the necessary
changes.
Jun Brian should resign from the engagement.
Jun Brian should issue an adverse opinion.

Correct answer
Jun Brian should resign from the engagement.

Which of the following is an internal control procedure that would prevent a paid disbursement
voucher from being presented for payment a second time?

Disbursement vouchers should be approved by at least tun' responsible management officials.

Vouchers should be prepared by individuals who are responsible for signing disbursement checks
The date on a disbursement voucher should be within a few days of the date the voucher presented for
payment.
The official signing the check should cancel the paid voucher after examining the documentation
supporting the disbursement.

Correct answer
The official signing the check should cancel the paid voucher after examining the documentation
supporting the disbursement.
Controls over making estimates include all of the following except

management communication of the need for proper accounting

comparison of prior estimates with subsequent results.

consideration of whether estimates are consistent with the company's operational plans.
ensuring the effects of the estimate are in line with analysts forecasts.

Correct answer
ensuring the effects of the estimate are in line with analysts forecasts.

Unrecorded liabilities are most likely to be found during the review of which of the following
documents?

Shipping records

Bills of lading
Unmatched sales invoices
Unpaid bills

Correct answer
Unpaid bills

Which of the following may be considered an appropriate means for further testing controls over
vendor payments?

Construct an internal control flowchart covering the payment processing function.

Develop a set of hypothetical transactions designed to test existing controls over vendor payments (e.g.,
introduce into the system, a voucher containing an invoice for raw materials but lacking a purchase order
and/or receiving report.
Search for unrecorded invoices at year-end
Confirm year-end balances with vendor

Correct answer
Develop a set of hypothetical transactions designed to test existing controls over vendor payments (e.g.,
introduce into the system, a voucher containing an invoice for raw materials but lacking a purchase order
and/or receiving report.

Which of the following is true about the audit procedure of confirming accounts payable?

The auditor is not required by current professional pronouncements to justify his or her opinion on financial
statements when payables are not confirmed.
It is not productive to mail second requests.
Confirmation of payables is most appropriate when the auditor expects understatement errors.
Payables are usually confirmed as of an interim date.

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?

Documentary support obtained by vouching entries to subsidiary records and invoices.

Documentary support obtained by reviewing titles and tax returns.

Oral evidence obtained by discussions With operating management
Physical examination of a sample of newly recorded fixed assets.

Correct answer
Physical examination of a sample of newly recorded fixed assets.

Only one of the following four statements which compare confirmation of accounts payable with
suppliers and confirmation of accounts receivable with customers is true. The true statement is
that

it is less likely that the confirmation request sent to the supplier will show the amount owed him or her than
that the request sent to the customer will show the amount due from him or her.

compared to the confirmation of accounts payable, the confirmation of accounts receivable will tend to
emphasize accounts with zero balances at the balance sheet date.
confirmation of accounts payable with suppliers is a more widely accepted auditing procedure than is
confirmation of accounts receivable with customers.
statistical sampling techniques are more widely accepted in the confirmation of accounts payable than in
the confirmation of accounts receivable.

To determine whether accounts payable are complete, an auditor performs a test to verify that all
merchandise received is recorded. The population of documents for this test consists of all:

Vendors' invoices

Purchase orders
Canceled checks
Receiving reports

Correct answer
Receiving reports

A CPA should maintain objectivity and be free of conflicts of interest when performing:
Audits, but not any other professional services.

All professional services.

All assurance and tax services, but not other professional services.
All assurance services, but not other professional services.

Correct answer
All professional services.

A weakness in internal accounting control over the recording of retirements of equipment may
cause the auditor to

review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during
the year.

trace additions to the " other assets" account to search for equipment that is still on hand but no longer
being used
inspect certain items of equipment in the plant and trace those items to the accounting records.
select certain items of equipment from the accounting records and locate them in the plant.

Correct answer
select certain items of equipment from the accounting records and locate them in the plant.

Which of the following is not an element of quality control?

Documentation.

Inspection.
Consultation.
Supervision.

Estimates in the finance and investment cycle include

all of the given choices are correct.

classification of equity investments.

actuarial assumptions for pension
probability of a correlated hedge.

As a consequence of his failure to adhere to generally accepted auditing standards in the course
of his examination of the Lamp Corp., Harrison, CPA, did not detect the embezzlement of a
material amount of funds by the company’s controller. As a matter of common law, to what extent
would Harrison be liable to the Lamp Corp. for losses attributable to the theft?
He would have no liability because privity of contract is lacking.

He would be liable only if it could be proven that he was grossly negligent.

He would have no liability, since the ordinary examination cannot be relied upon to detect thefts of assets
by employees.
He would be liable for losses attributable to his negligence.

Correct answer
He would be liable for losses attributable to his negligence.

Because the same CPA firm does both the annual audit and the public company interim financial
statement review, they are referred to as _______.

auditors

bookkeepers
accountants
CPAs

If market prices are not readily available for fair value measurements, management should use

auditors' best estimates.

their own assumptions as long as there are no contrary data.

the previous year's value
historical cost.

Correct answer
their own assumptions as long as there are no contrary data.

An auditor would most efficiently test for the misclassification of capital acquisitions as expenses
by

Reviewing company capital acquisition policies with purchasing personnel.

Scanning repair and maintenance records and investigating large peso-value entries.
Taking a physical tour of plant facilities before starting an audit.
Tracing capital additions back to source documents.

Correct answer
Scanning repair and maintenance records and investigating large peso-value entries.

Which of the following statements concerning plant assets is not correct?

Few transactions ordinarily occur.

Typically there is little change in accounts from year to year.
Plant assets need to be tightly controlled to prevent defalcation.
Year-end cutoff of plant assets has no effect net income.

Correct answer
Plant assets need to be tightly controlled to prevent defalcation.

Which of the following procedures would most likely be included in a review engagement of a
nonpublic entity?

Inquiring about related-party transactions

Assessing internal control.

Performing cutoff tests on sales and purchases transactions.
Preparing a bank transfer schedule.

An auditor usually examines receiving reports that support entries in the:

voucher register and sales returns journal.

voucher register and sales journal.

sales journal and sales returns journal.
check register and sales journal.

The most significant audit step in substantiating additions to the office furniture account balance is

review of transactions near the balance sheet date for proper period cutoff

comparison to prior year's acquisitions.

examination of vendors' invoices and receiving reports for current year's acquisitions.
calculation of ratio of depreciation expense to gross office equipment cost

Correct answer
examination of vendors' invoices and receiving reports for current year's acquisitions.

Which of the following is not correct concerning "specified parties" of an agreed-upon procedures
report under either the auditing or attestation standards?

They must take responsibility for the adequacy of the procedures performed.

They must sign an engagement letter.

They must agree on the procedures to be performed
After completion of the engagement, another party may be added as a specified user.
Correct answer
They must sign an engagement letter.

When verifying dividend amounts paid, an auditor will typically do all except which of the
following?

Examine treatment of unclaimed dividends.

Examine arrearages of preferred stock dividends.

Determine dates and amounts of dividends paid.
Send confirmations to shareholders to verify payments.

Correct answer
Send confirmations to shareholders to verify payments.

Comparing material usage reports to raw material stores issue slips is a control to help insure
which assertion?

Existence and occurrence.

Valuation or allocation.
Rights and obligations.
Completeness.

When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to
obtain evidence that

no goods observed during the physical count are pledged or sold.

no goods held on consignment for customers are included m the inventory balance
all goods owned at year end are included in the inventory balance.
all goods purchased before year end are received before the physical Inventory count.

Correct answer
all goods owned at year end are included in the inventory balance.

The auditors are least likely to learn of retirements of equipment through which of the following?

Analysis of the debits to the accumulated depreciation account.

Review of depreciation.
Review of the purchase returns and allowances account.
Review of insurance policy riders.
Correct answer
Review of the purchase returns and allowances account.

An auditor should not issue a report on

Internal control.

Quarterly financial information.

The achievability of forecasts.
Management performance.

Correct answer
The achievability of forecasts.

Ordinarily, are auditors more concerned with an under- or overstatement of ending inventory, and
why?

Understatement, because this would indicate that liabilities are likely to be understated.

Understatement, because net Income be overstated.

Overstatement, because net income would be overstated also.
Overstatement, because this would Indicate that liabilities are likely to be understated.

Correct answer
Overstatement, because net income would be overstated also.

To avoid potential errors and irregularities, well-designed controls in the accounts payable area
should include a separation of which of the following functions?

Cash disbursements and vendor invoice verification.

Vendor invoice verification and merchandise ordering.

Check signing and cancellation of payment documentation.
Physical handling of merchandise received and preparation of receiving reports.

Which of the following procedures would an auditor most likely perform to obtain evidence about
the occurrence of subsequent events?

Investigating personnel changes in the accounting department occurring after year-end.

Comparing the financial statements being reported on with those of the prior period.
Inquiring as to whether any unusual adjustments were made after year-end.
Confirming a sample of material accounts receivable established after year-end.
Correct answer
Inquiring as to whether any unusual adjustments were made after year-end.

In a manufacturing company, which of the following audit procedures would give the least
assurance of the valuation of inventory at the audit date?

Reviewing direct labor

Obtaining confirmation of inventories pledged under loan agreements.

Examining paid vendors' invoices.
Testing the computation of standard overhead rates.

Correct answer
Obtaining confirmation of inventories pledged under loan agreements.

Defensive auditing includes all of the following except

carefully selecting which clients to accept and retain.

evaluation of a firm's capacity to adequately perform services for a specific client.

knowing when your client is about to fire your firm before hand.
clarifying the nature of the arrangement through the use of a written engagement letter.

Correct answer
knowing when your client is about to fire your firm before hand.

The recruitment of senior management for an assurance client, such as those in a position to
affect the subject of the assurance engagement may least likely create what threat

Familiarity

Advocacy
Self-interest
Intimidation

Correct answer
Advocacy

Review engagements are often used by:

Small, owner-managed companies

large public companies

mid-market public companies
government agencies

The audit report issued by Lozano and Co., CPAs, included the following paragraph that followed
the opinion paragraph:

Without qualifying our opinion we draw attention to Note 11 to the financial statements. The
Company is the defendant in a lawsuit alleging infringement of certain patent rights . . .

This paragraph is considered:

an inappropriate reporting practice

an emphasis of matter regarding uncertainty which is considered an acceptable reporting practice

inappropriate because it contradicted the unqualified opinion issued by the auditor
an additional information to be a part of the notes to financial statements.

Correct answer
an emphasis of matter regarding uncertainty which is considered an acceptable reporting practice

In which of the following situation would a decision of selecting between a qualified or adverse
opinion be inappropriate?

A limitation in the scope of the audit.

A disagreement between the auditor and the client arose because of capitalization of research and
development costs.
The financial statements are significantly misleading.
A required disclosure that is significant is omitted from the financial statements.

Which of the following is an internal control weakness for a company whose inventory of supplies
consists of a large number of individual items?

Perpetual inventory records are maintained only for items of significant value.

Supplies of relatively little value are expensed when purchased.

The storekeeper is responsible for maintenance of perpetual inventory records.
The basis is used for physical counts.

Correct answer
The storekeeper is responsible for maintenance of perpetual inventory records.
An auditor has calculated the interest paid on a company's recorded bonds and found the interest
paid was 10%; in examining the bonds he notes that they are 8% bonds sold without a premium or
a discount. Which of the following is most likely?

Overstated common stock.

Understated debt outstanding.

Overstated accrued interest receivable.
Understated interest expense.

Correct answer
Understated debt outstanding.

When a corporation has convertible debentures or stock options, which of the following
procedures should the auditor perform?

Confirm options and debentures With stock transfer agent

Determine that all stock options and convertible debentures have been recorded in the stockholder ledger.
Determine that enough shares are held in reserve to fulfill the obligations.
Verify that dividends paid are being held m a secured account

Correct answer
Determine that enough shares are held in reserve to fulfill the obligations.

Which of the following statements is correct relating to an auditor's review engagements on an

entity's management discussion and analysis (MD&A)?

A review consists principally of applying analytical procedures and search and verification procedures.

No consideration of internal control is necessary.

The report issued will ordinarily include a summary of findings, but no negative assurance.
The review report of a public entity should be restricted to the use of specified parties.

Correct answer
The review report of a public entity should be restricted to the use of specified parties.

Omitting quantities from copies of purchase orders sent to the receiving department is a control
procedure intended mainly to

ensure that goods received are physically counted by receiving department personnel.

prevent theft of goods by receiving department personnel.

identify and return damaged goods as soon as they are received.
provide a cross-check for verifying the accuracy of perpetual Inventory records.

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of
the audit assertion that all

non-capitalizable expenditures for repairs and maintenance have been recorded m the proper period.

expenditures for property and equipment have been recorded in the proper period.
expenditures for property and equipment have not been charged to expense.
non-capitalizable expenditures for repairs and maintenance have been properly charged to expense.

Correct answer
expenditures for property and equipment have not been charged to expense.

In addition to the company’s financial statements, which of the following would be covered by the
auditor’s standard report?

The company's budget for net income for the year being audited

The company's tax return for the year being audited

The notes to the financial statements
Comparative figures in the financial statements

Correct answer
The notes to the financial statements

Which of the following audit procedures would provide the least reliable evidence that the client
has legal title to inventories?

Examinations of paid vendors' invoices.

Confirmation of inventories at locations outside the client's facilities.

Observation of physical inventory counts.
Analytical review of inventory balances compared to purchasing and sales activities.

Correct answer
Analytical review of inventory balances compared to purchasing and sales activities.

Misstatements detected during the audit that were initially deemed to be immaterial (unless clearly
trivial) must be summarized to determine their:

quantitative effect.

aggregate effects.
control.
nature of misstatement.

Correct answer
aggregate effects.

Unaudited financial statements for the prior year presented in comparative form with audited
financial statements for the current year should be clearly marked to indicate their status and
I. The report on the prior period should be reissued to accompany the current period report.
II. The report on the current period should include as a separate paragraph a description of the
responsibility assumed for the prior period's financial statements.

Either I or II.

Il only.
Both I and Il.
I only.

Assume an auditor’s interim consideration of internal control in the expenditure/disbursement cycle

reveals that control risk can be assessed below the maximum and detection risk above the
minimum for some assertions. Based on the foregoing, which of the following is true about the
substantive tests applied to accounts payable?

The auditor is more apt to increase the extent of substantive tests.

The auditor is more apt to confirm payable balances.

The auditor is more apt to ignore the risk of incorrect acceptance when sampling accounts payable.
The auditor is less apt to perform substantive tests at the balance sheet date.

Correct answer
The auditor is less apt to perform substantive tests at the balance sheet date.

What happens to the sufficiency of audit evidence collected if in the final review new information
causes the engagement partner to decide that a lower materiality threshold is required and as a
result the partner reduces planning materiality for the audit?

less evidence may be required.

Both A and C.
the client may be asked to make correcting entries.
more evidence may be required.

Correct answer
Both A and C.
Goodwill impairment refers to

a need for increased professional skepticism.

the amount of amortization.

loss of trust from customer.
a permanent decline in value of recorded goodwill.

Correct answer
a permanent decline in value of recorded goodwill.

To test the accuracy of the current year's depreciation charges, an auditor should rely most heavily
on

tracing of totals from the depreciation schedule to properly approved journal entries and ledger postings.

comparison of depreciation schedule detail with schedules supporting the Income tax return _
vouching of the current year's fixed asset acquisitions.
recomputation of depreciation for a sample of plant assets.

Correct answer
recomputation of depreciation for a sample of plant assets.

An audit procedure applicable to testing the year-end cutoff of liabilities is

Tracing recorded liabilities to supporting documents.

Examining vendor invoices received subsequent to year-end for shipment date and terms of shipment.
Reviewing the general journal for unusual entries recorded immediately after year-end.
Preparing an aging schedule for accounts payable.

Correct answer
Examining vendor invoices received subsequent to year-end for shipment date and terms of shipment.

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to
separate the

administrative controls from the internal accounting controls.

authorization of transactions from the custody of related assets.

operational responsibility from the record keeping responsibility.
human resources function from the controllership function.

Correct answer
authorization of transactions from the custody of related assets.

An audit found that P10,000,000 of long term debt on the financial statements will become due in
6 months. The financial statement assertion that must be addressed in determining that the proper
amount of debt is included as current is:

completeness.

existence.
rights.
presentation.

Correct answer
presentation.

Fees calculated on a predetermined basis relating to the outcome or result of a transaction or the
result of the work performed

Per diem fees

Flat sum fees

Contingent fee
Retainer fees

Correct answer
Contingent fee

Confirmation of accounts payable balances is

required by generally accepted auditing standards.

usually performed at interim dates rather than at year end.

particularly useful when the auditor suspects liabilities may be materially understated.
not effective in testing for unrecorded liabilities.

Correct answer
particularly useful when the auditor suspects liabilities may be materially understated.

Which of the following auditing procedures most likely would assist an auditor in identifying
related-party transactions?

Vouching accounting records for recurring transactions recorded just after the balance sheet date.

Performing analytical procedures for indications of possible financial difficulties.

Reviewing confirmations of loans receivable and payable for indications of guarantees.
Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.

Correct answer
Reviewing confirmations of loans receivable and payable for indications of guarantees.

With regard to how KAM was addressed in the audit, the description may include the following,
except

Aspects of the auditor's response or approach and brief overview of procedures performed

None of the above

Indication of the outcome of the auditor's procedures
Key observations with respect to the matter

Correct answer
None of the above

Which of the following procedures ordinarily should be applied when an independent accountant
conducts a review of interim financial information of a publicly held entity?

Verify changes in key account balances.

Perform cut-off tests for cash receipts and disbursements.

Inspect the open purchase order file.
Read the minutes of the board of directors’ meetings.

Correct answer
Read the minutes of the board of directors’ meetings.

Purchase cutoff procedures should be designed to test that merchandise is included in the
inventory of the client when the client:

holds legal title to the merchandise.

has paid for the merchandise.

holds the shipping documents for the merchandise issued in the company's name.
has physical possession of the merchandise

In auditing plant assets and accumulated depreciation for proper valuation, the auditor should do
all of the following, except:

physically inspect major plant assets additions.

vouch major additions by reference to underlying documentation
recalculate depreciation expense on a test basis.
vouch repairs and maintenance expense on a test basis.

The predecessor auditor, who is satisfied after properly communicating with the successor auditor,
has reissued a report because the audit client desires comparative financial statements. The
predecessor auditor's report should make

Reference to the report of the successor auditor only in the scope paragraph.

Reference to the work of the successor auditor in the scope and opinion paragraphs.
Reference to both the work and the report of the successor auditor only in the opinion paragraph.
No reference to the report or the work of the successor auditor.

Correct answer
No reference to the report or the work of the successor auditor.

The audit procedures applied to accrued liabilities differ from those applied to accounts payable
because

accrued liabilities at year-end will become accounts payable during the following year.

accrued liability balances are less material than accounts payable balances.
evidence supporting accrued liabilities is nonexistent, whereas evidence supporting accounts payable is
readily available.
accrued liabilities usually pertain to services of a continuing nature, whereas accounts payable are the
result of completed transactions.

Correct answer
accrued liabilities usually pertain to services of a continuing nature, whereas accounts payable are the
result of completed transactions.

Which of the following statement(s) is (are) true?

All of the given choices are true

Fraud requires the intent to deceive

Constructive fraud is also termed recklessness.
Gross negligence may constitute constructive fraud

An auditor has accounted for a sequence of inventory tags and is now tracing information on a
representative number of tags to the inventory summary sheets. Which assertion does this
procedure relate to most directly?
Presentation.

Completeness.
Existence.
Valuation.

Correct answer
Completeness.

To adequately provide for the segregation of duties, the purchase requisitions for regular inventory
stock should be initiated by which of the following departments?

Warehouse

Shipping
Sales department
Purchasing department

The CPA in public practice violates the Code of Professional Ethics for CPAs if he accepts a fee
which was

Fixed by a public authority.

Based on a price quotation submitted in competitive bidding.

Determined based on the results of judicial proceedings.
Payable after a specified finding was obtained.

Correct answer
Payable after a specified finding was obtained.

Which of the following is true about the audit procedure of confirming accounts payable?

It is not productive to mail second requests.

Payables are usually confirmed as of an interim date.

The auditor is not required by current professional pronouncements to justify his or her opinion on financial
statements when payables are not confirmed.
Confirmation of payables is most appropriate when the auditor expects understatement errors.

Correct answer
The auditor is not required by current professional pronouncements to justify his or her opinion on financial
statements when payables are not confirmed.

Which of the following control questions relates to the existence and occurrence objective in
purchasing and accounts payable?
Does the accounting department check invoices for mathematical accuracy?

Are receiving reports prepared for each item received?

Are the purchase order forms prenumbered and the numerical sequence checked for missing documents?
Does the chart of accounts and accounting manual give instructions for classifying debit entries?

Correct answer
Are receiving reports prepared for each item received?

A client company has not paid its 2018 audit fees. According to the Code of Professional Conduct,
for the auditor to be considered independent with respect to the 2019 audit, the 2018 audit fees
must be paid before the

2020 field work is started

2018 report is issued

2019 report is issued
2019 field work is started

Correct answer
2019 report is issued

When audited financial statements are presented in a client's document containing other
information, the auditor should

Perform the appropriate substantive auditing procedures to corroborate the other information.

Add an explanatory paragraph to the auditor's report without changing the opinion on the financial
statements.
Read the other information to determine that it is consistent with the audited financial statements.
Perform inquiry and analytical procedures to ascertain whether the other information is reasonable.

Correct answer
Read the other information to determine that it is consistent with the audited financial statements.

Sale of capital stock and large debt financing transactions are usually authorized by

the board of directors

management
the transfer agent
the shareholders
Which statement is incorrect regarding auditing fair value measurements and disclosures?

The auditor's consideration of such assumptions is based on information available to the auditor at the
time of the audit.

Many measurements based on estimates, including fair value measurements, are inherently imprecise.
The auditor is responsible for predicting future conditions, transactions or events which, had they been
known at the time of the audit, may have had a significant effect on management's actions or assumptions
underlying the fair value.
The auditor should obtain sufficient appropriate audit evidence that fair value measurements and
disclosures are in accordance with GAAP.

Correct answer
The auditor is responsible for predicting future conditions, transactions or events which, had they been
known at the time of the audit, may have had a significant effect on management's actions or assumptions
underlying the fair value.

An example of a breach of contract would likely include:

a bank's claim that an auditor had a duty to uncover material errors in financial statements that had been
relied on in making a loan.

a CPA firm’s failure to complete an audit on the agreed-upon date because the firm had a backlog of other
work which was more lucrative.
an auditor's claim that the client staff is unqualified.
an auditor's refusal to return the client's general ledger book until the client paid last year's audit fees.

Correct answer
a CPA firm’s failure to complete an audit on the agreed-upon date because the firm had a backlog of other
work which was more lucrative.

Which of the following is the legitimate reason why a responsible party would have difficulty
estimating environmental cleanup costs?

Possible preexisting contamination.

Possible insurance recoveries.

Possible as yet unknown contamination.
Possible future legislation.

In conjunction with the observation of a client's physical inventory, the auditors should:

supervise the client's personnel.

segregate damaged and obsolete goods.

plan the physical inventory.
evaluate the adequacy of the client's counting procedures.

Correct answer
evaluate the adequacy of the client's counting procedures.

Which of the following least likely serves as a substitute for performing other audit procedures?

Obtaining a representation letter signed by top management.

Sending letters to debtors or creditors of the company to confirm amount the company owes or is owed,
respectively.
Tracing an amount on the financial statements back through the accounting system to the underlying
supporting documentation.
The physical observation of the counting of company inventory.

To succeed in an action against the auditor, the client must be able to show that:

there was a written contract.

the auditor was grossly negligent.

there is a close causal connection between the auditor’s behavior and the damages suffered by the client.
the auditor was fraudulent.

Correct answer
there is a close causal connection between the auditor’s behavior and the damages suffered by the client.

Which of the following would require a denial (disclaimer) of the audit opinion?

The auditor was not appointed as the auditor until after year end, after the inventory count, and was unable
to satisfy herself concerning inventory values by other means.

There is a misstatement that is in the range of P200,000 to P300,000 (materiality is P100,000), but that
cannot be calculated exactly because It involves an estimate.
There is a material misstatement that in the auditor's opinion will overstate the value of an investment by
P1,000,000.
The auditor concludes that there is a going-concern issue for the auditee company.

In examining the miscellaneous revenue account, an auditor discovers income from plant assets.
What should be a primary audit concern?

That such assets are not available for physical examination.

That such assets have been replaced by comparable equipment.

That such assets have been removed from the ledger of property owned.
That the assets sold were fully depreciated prior to the decision to sell them.
Correct answer
That such assets have been removed from the ledger of property owned.

The auditor tests the quantity of materials charged to work in process by tracing these quantities to

receiving reports.

cost ledgers.
perpetual inventory records.
material requisitions.

Correct answer
material requisitions.

The accounts payable department generally should

assure that the quantity ordered is omitted from the receiving department's copy of the purchase order.

approve the price and quantity of each purchase requisition.

agree the vendor’s invoice with the receiving report and purchase order.
cancel supporting documentation after a cash payment is mailed.

Correct answer
agree the vendor’s invoice with the receiving report and purchase order.

Which of the following is a necessary control procedure for cash disbursements?

Checks should be signed by the controller and at least one other employee of the company.

Checks should be sequentially numbered, and the numerical sequence should be accounted for by the
person preparing the bank reconciliation.
Checks should be sent directly to the payee by the employee who prepares documents that authorizes
check preparation
Checks and supporting documents should be marked "paid" immediately after the check is returned with
the bank statement

Correct answer
Checks should be sequentially numbered, and the numerical sequence should be accounted for by the
person preparing the bank reconciliation.

The objective of a review engagement

Is to carry out those procedures of an audit nature to which the auditor and the entity and any appropriate
third parties have agreed and to report on factual findings.
Is to use accounting expertise as opposed to auditing expertise to collect, classify and summarize financial
information.
Is to enable the auditor to state whether, on the basis of procedures which do not provide all the evidence
that would be required in an audit, anything has come to the auditor’s attention that causes the auditor to
believe that the financial statements are not prepared in all material respects, in accordance with an
identified financial reporting framework.
Is to enable the auditor to express an opinion whether the financial statements are prepared in all material
respects, in accordance with an identified financial reporting framework.

Correct answer
Is to enable the auditor to state whether, on the basis of procedures which do not provide all the evidence
that would be required in an audit, anything has come to the auditor’s attention that causes the auditor to
believe that the financial statements are not prepared in all material respects, in accordance with an
identified financial reporting framework.

Accepting an engagement to examine an entity's financial projection most likely would be

appropriate if the projection were to be distributed to

All employees who work for the entity

All stockholders of record as of the report date.

A bank with which the entity is negotiating for a loan.
Potential stockholders who request a prospectus or a registration statement

Correct answer
A bank with which the entity is negotiating for a loan.

In performing an audit on the existence of inventory contained in a warehouse, an auditor is

primarily concerned with

identifying the ownership of the Inventory.

locating slow moving items contained m inventory.

observing and testing the number of units on hand.
determining if the value of the inventory is reasonable.

Correct answer
observing and testing the number of units on hand.

The firm may obtain information to determine integrity of the client from the following, except:

Inquiry of other firm personnel or third parties such as bankers, legal counsel and industry peers.

All of the given choices.

Background searches of relevant databases.
Communications with existing or previous providers of professional accountancy services to the client in
accordance with relevant ethical requirements, and discussions with other third parties.
Correct answer
All of the given choices.

When perpetual inventory records are maintained in quantities and in pesos, and internal
accounting control over inventory is weak, the auditor would probably

want the client to schedule the physical inventory count at the end of the year.

insist that the client perform physical counts of inventory items several times during the year.
have to disclaim an opinion on the income statement for that year.
increase the extent of tests for unrecorded liabilities at the end of the year.

Matching the suppliers’ invoice, the purchase order, and the receiving report normally should be
the responsibility of the

purchasing department.

treasury function.
accounts payable department.
receiving department.

Correct answer
accounts payable department.

To assure that disbursements are neither improper nor inaccurate, an entity should require that all
checks be

numbered sequentially and accounted for by internal auditors.

canceled when they are returned with the bank statement.

signed by an officer after supporting documentation has been examined.
reviewed by the treasurer before mailing.

Correct answer
signed by an officer after supporting documentation has been examined.

An accountant’s review report on interim financial information of a public entity is most likely to
include a

Statement that the interim financial information was examined in accordance with standards of the Public
Company Accounting Oversight Board.

Description of the procedures for a review.

Statement that the interim financial information is the responsibility of the entity's shareholders.
Statement that a review of interim financial information is less in scope than a compilation conducted in
accordance with standards.

Correct answer
Description of the procedures for a review.

Instead of taking a physical inventory count on the balance sheet date, the client may take
physical counts prior to the year end if internal controls are adequate and

obsolete inventory items are segregated and excluded

CBIS error reports are generated for missing pre-numbered inventory tickets
inventory is slow moving.
computerized records of perpetual inventory are maintained.

Correct answer
computerized records of perpetual inventory are maintained.

The source of authorization for preparation of materials requisitions is

Production plan.

Purchase order.
Sales forecast.
Bill of materials.

Correct answer
Bill of materials.

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?

Arrearages in preferred stock dividends are paid.

Restrictions on the disposal of principal assets are present.

Significant related party transactions are pervasive.
Usual trade credit from suppliers is denied.

Correct answer
Usual trade credit from suppliers is denied.

An auditor’s primary concern when performing tests of controls over purchasing is to determine
whether:
purchase orders agree to purchase requisitions.

purchases are properly authorized.

purchases are properly recorded.
purchasing personnel are performing their assigned functions properly.

Correct answer
purchases are properly authorized.

Which of the following best explains why accounts payable confirmation procedures are not
always used?

Inclusion of representations on accounts payable in the client representation letter eliminates the need in
most situations.

Confirmations are better at identifying overstatements than understatements, and overstatements are not
typically the major concern with accounts payable.
Accounts payable generally are immaterial and may be audited through using analytical procedures.
Creditors will press for payment when they receive the confirmation.

Correct answer
Confirmations are better at identifying overstatements than understatements, and overstatements are not
typically the major concern with accounts payable.

Rock School, Inc. has a matter of material litigation that is threatened, but that has not gone to
trial. The auditor's consideration of such a matter will most likely include all of the following except

confirmation with the harmed party regarding the amount that will be claimed.

discussions of the matter with the client and their insurance adjuster.
assessment of whether accrual or disclosure by the client.
sending a letter to the client's attorneys for more information.

When the auditors discover an overstatement of accounts payable, they would most likely expect
to find an overstatement of:

retained earnings

revenues
inventory.
accrued liabilities

Correct answer
inventory.
Which of the following is not an appropriate activity for the treasurer’s department?

Prepares vouchers.

Client's inventory instructions should include all the following except

instructions for recording accurate descriptions.

names of client personnel responsible for the count.

plans for controlling movement of goods.
instructions for auditors' test counts.

Correct answer
instructions for auditors' test counts.

When performing an audit of the property, plant, and equipment accounts, an auditor should
expect which of the following to be most likely to indicate a departure from generally accepted
accounting principles?

The cost of freight-m on an acquisition has been capitalized.

A gain was recognized when a new asset was acquired at a price lower than its listed retail price.
Interest has been capitalized for self-constructed equipment
Assets have been acquired from affiliated corporations with the related transactions recorded and
described in the financial statements.

Correct answer
A gain was recognized when a new asset was acquired at a price lower than its listed retail price.

Which of the following services performed by a CPA is an example of an assurance engagement

that requires the CPA to be independent in fact and appearance?

Compilation of financial statements

Management consulting services

Review of financial statements
Giving tax advice

Correct answer
Review of financial statements
All prospective clients wishing their financial statements to be audited by an independent auditor
should be accepted by the auditor as the service of the auditor is for public interest.

A previous client may always be an acceptable client to the auditor.

True, true

False, false
False, true
True, false

Correct answer
False, false

In testing cutoff for purchases and payables at December 31, an auditor is confronted with the
following four scenarios. Which of the four most likely represents a cutoff error, requiring that the
auditor propose an adjusting journal entry?

Shipping terms are FOB shipping point Goods were shipped on January 2. The purchase was recorded on
January 4.

Shipping terms are FOB destination. Goods were shipped on December 31. The purchase was recorded on
December 31.
Shipping terms are FOB destination Goods were shipped on December 31. The purchase was recorded on
January 2.
Shipping terms are FOB shipping point Goods were shipped on December 31. The purchase was recorded
on December 31.

Correct answer
Shipping terms are FOB destination. Goods were shipped on December 31. The purchase was recorded on
December 31.

Which of the following is a primary function of the purchasing department?

Ensuring the acquisition of goods of a specified quality.

Reducing expenditures for goods acquired

Verifying the propriety of goods of a specified quality.
Authorizing the acquisition of goods.

Which of the following functions is not appropriate for the accounts payable department?

Preparing purchase orders.

Preparing voucher and daily summary.
Filing voucher package by due date.
Comparing purchase requisitions, purchase orders, receiving reports, and vendors' invoices.

The auditor may conclude that depreciation charges are insufficient by noting

large amounts of fully depreciated assets.

insured values greatly m excess of book values.

continuous trade-ins of relatively new assets.
excessive recurring losses on assets retired.

Correct answer
excessive recurring losses on assets retired.

What audit opinion would be appropriate when the auditor has formed an opinion that the financial
statements are not fairly presented in all material respects due to a departure from GAAP?

Denial

Unqualified
Qualified
Adverse

Correct answer
Adverse

An additional partner review of the audit and its findings is typically performed by an experienced
member of the firm. Which of the following individuals is qualified to perform this concurring
partner review?

An employee of the enforcement division of the SEC.

A partner of another firm or office who knows the client well and who was a vital member of the audit team.
The engagement partner who has worked on the client for three years.
An experienced partner of the firm who did not actively participate on the audit.

Correct answer
An experienced partner of the firm who did not actively participate on the audit.

The accuracy of perpetual inventory records may be established in part by comparing perpetual
inventory records with

vendor payments.
purchase requisitions
purchase orders
receiving reports.

Correct answer
receiving reports.

A small CPA firm provides audit services to a large local company. Almost eighty percent of the
CPA firm's revenues come from this client. Which statement is most likely to be true?

The situation is satisfactory if the auditor exercises due skeptical negative assurance care in the audit.

Appearance of independence may be lacking.

The small CPA firm does not have the proficiency to perform a larger audit.
The auditor should provide an "emphasis of a matter paragraph" to his/her audit report adequately
disclosing this information and then it may issue an unqualified opinion.

Correct answer
Appearance of independence may be lacking.

A primary purpose for establishing a code of conduct within a professional organization is to:

Ensure that all members of the profession perform at approximately the same level of competence.

Reduce the likelihood that members of the profession will be sued for substandard work.
Demonstrate acceptance of responsibility to the interests of those served by the profession.
Require members of the profession to exhibit loyalty in all matters pertaining to the affairs of their
organization.

Correct answer
Demonstrate acceptance of responsibility to the interests of those served by the profession.

When there are few property and equipment transactions during the year, the continuing auditor
usually makes a

complete review of the related internal controls and assesses control risk relative to them.

complete review of the related internal controls and performs analytical review tests to verify current year
additions to property and equipment.
preliminary review of the related internal controls and performs extensive tests of current year property and
equipment transactions.
preliminary review of the related internal controls and performs a thorough examination of the balances at
the beginning of the year.

Correct answer
preliminary review of the related internal controls and performs extensive tests of current year property and
equipment transactions.

Expenditure/disbursement cycle begins with requisitions from user departments and ends with the
receipt of materials and the recognition of a liability. An auditor’s primary objective in reviewing
the cycle is to:

consider the need to Increase substantive tests of purchases and accounts payable.

investigate the handling and recording of unusual acquisitions.

obtain an understanding of the client’s prescribed policies and procedures sufficient to plan the audit.
assure that materials ordered, received, and paid for are actually on hand.

Correct answer
obtain an understanding of the client’s prescribed policies and procedures sufficient to plan the audit.

Inventory should be recorded when

The company has title to it.

When It is received.
When the related revenue is recognized.
When it is shipped from the vendor.

A CPA, while performing an audit, strives to achieve independence in appearance in order to

Reduce risk and liability

Comply with PSAs

Maintain public confidence in the profession
Become independent in fact

Correct answer
Maintain public confidence in the profession

How can an auditor determine whether the Receiving Department procedures are applied
properly?

Test a sample of receiving documents.

Review procedures manuals.

Interview Receiving personnel.
Observe receiving procedures on a surprise basis.

Correct answer
Observe receiving procedures on a surprise basis.

Tracing a test count to the inventory compilations provides evidence for which assertion?

Completeness.

Presentation and disclosure.

Valuation or allocation.
Existence and occurrence.

Which of the following would be the best procedure to determine whether purchases were properly
authorized?

Vouch payments for selected purchases to supporting receiving reports.

Determine whether a sample of entries in the purchase journal is supported by properly executed purchase
orders.
Discuss authorization procedures with personnel in the controller's and purchasing functions.
Review and evaluate a flowchart of purchasing procedures

Correct answer
Determine whether a sample of entries in the purchase journal is supported by properly executed purchase
orders.

How is the auditor’s report on the financial statements that require final approval by stockholders
before such financial statements are issued publicly dated?

The date of the auditor’s report coincides the date of approval of the financial statements by the board of
directors.

The auditor's report should be dated after the approval of the financial statements by the stockholders.
The auditor's report should be dated coinciding the date of approval of the financial statements by the
stockholders.
The audit report should be dual dated, the first date coinciding the approval by the board of directors and
the second date to coincide with the approval by the stockholders.

When an auditor selects a sample of items from the vouchers payable register for the last month
of the period being audited and traces the items to underlying documents, the auditor is gathering
evidence primarily in support of the assertion that

recorded obligations were paid.

incurred obligations were recorded in the correct period

recorded obligations were valid.
cash disbursements were recorded as Incurred obligations.

Correct answer
recorded obligations were valid.

An audit program for the examination of the retained earnings account should include a step that
requires the verification of the:

market value used to charge retained earnings to account for a two-for-one stock split.

approval of the adjustment of the beginning balance as a result of a write-down of an account receivable.
authorization for both cash and stock dividends.
gain or loss resulting from disposition of treasury shares.

Correct answer
authorization for both cash and stock dividends.

Which of the following audit procedures is not designed primarily to test for the correctness of
purchases and sales cutoff?

Examine sales and purchases invoices for a few days before and after year end. Compare with dates of
receipt and shipment and with freight terms to determine that the transactions were recorded In the proper
accounting period.

Record last document numbers (sales invoice, voucher, check, receiving report) for the year and relate to
goods in shipping and receiving areas at year end.
Observe shipping and receiving areas during physical inventory observation and relate goods to the last
receipt and shipment for the year. Determine that these are the final entries in the purchases and sales
records for the year.
Trace client's unit costs to the auditor's copies of audited price lists.

Correct answer
Trace client's unit costs to the auditor's copies of audited price lists.

An internal control questionnaire indicates that an approved receiving report accompanies every
check request. To test this control, an auditor should select and examine:

receiving reports, to determine that the related canceled checks are dated no later than the receiving
reports.

receiving reports, to determine that the related canceled checks are dated no earlier than the receiving
reports.
canceled checks, to determine that the related receiving reports are dated no earlier than the checks.
canceled checks, to determine that the related receiving reports are dated no later than the checks.

Correct answer
canceled checks, to determine that the related receiving reports are dated no later than the checks.

Which of the following best describes the auditors' approach to the audit of accrued liabilities?

Plan a low assessed level of control risk.

Test computations.
Observation.
Confirmation.

Correct answer
Test computations.

The human resources department receives an edit listing of payroll changes processed at every
payroll cycle. If they do not verify the changes processed, this could result in:

inaccurate social security deduction

undetected errors in payroll rates for new employees.

employees not being asked if they want to contribute to the company pension plan.
labor hours charged to the wrong account in the cost reporting system

Correct answer
undetected errors in payroll rates for new employees.

If the scope of the examination has been satisfactory for all items except for one of material
amount, the auditor should issue a (an)

Adverse opinion.

Disclaimer of opinion.
Qualified opinion.
Unqualified opinion.

Correct answer
Qualified opinion.

An inventory turnover analysis most likely helps the auditors to detect:

obsolete merchandise.

methods of avoiding cyclical holding cost.

optimum automatic reorder points.
inadequacies In inventory pricing.
An auditor would consider internal control procedures relating to a client's payroll procedures to be
ineffective if the payroll department supervisor is responsible for

updating employee earnings records

having custody over unclaimed paychecks.

applying pay rates to time tickets.
hiring subordinate payroll department employees.

Correct answer
having custody over unclaimed paychecks.

Accrued liabilities generally differ from accounts payable in that accrued liabilities:

Can be found by a review of unpaid invoices.

Are usually confirmed at year-end.

Are never Included in cost of goods sold.
Accumulate over time.

Correct answer
Accumulate over time.

In cases when the threat to independence is significant and no safeguards are available to reduce
it to an acceptable level, which of the following actions should be taken?

Neither a nor b

Either a or b
Eliminating the activities of interests creating the threat.
Refusing to accept or continue the assurance engagement.

Correct answer
Either a or b

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to
separate the

administrative controls from the internal accounting controls.

human resources function from the controllership function.

operational responsibility from the record keeping responsibility.
authorization of transactions from the custody of related assets.
Correct answer
authorization of transactions from the custody of related assets.

Which of the following is not a required communication with the audit committee?

difficulties encountered.

accounting estimates.
accounting policies.
economic trends.

Correct answer
economic trends.

During an audit of a non-public entity, which of the following is primarily an overall audit approach
to audit plant assets and equipment by a continuing auditor?

Direct tests of year-end ending balances.

Tests of controls.
Analysis and inquiry.
Tests of transactions during the year.

Correct answer
Tests of transactions during the year.

The accounts payable department receives a purchase order form to accomplish all of the
following except

ensuring that the purchase had been properly authorized.

ensuring that the goods had been received by the party requesting the goods.
comparing invoice price to purchase order price.
comparing quantity ordered to quantity purchased.

Correct answer
ensuring that the goods had been received by the party requesting the goods.

The skills and qualities of the engagement team is likely to provide a positive contribution to audit
quality where

partners and staff understand their clients' business and adhere to the principles underlying auditing and
ethical standards.
partners and staff exhibit professional skepticism in their work and are robust in dealing with issues
identified during the audit.
all of the given choices.
sufficient training is given to audit personnel in audit, accounting and industry specialist issues.

Correct answer
all of the given choices.

Which of the following departments should have the responsibility for authorizing payroll rate
changes?

Timekeeping.

Treasurer
Human Resources.
Payroll.

Correct answer
Human Resources.

There are various professional requirements for CPA firms to help assure audit quality. These
requirements potentially minimize the exposure of public accounting firms and partners to lawsuits.
These requirements include

auditor independence requirements.

quality-control programs.
all of the given choices.
review programs.

Correct answer
all of the given choices.

Which of the following provides a “notice to reader”?

A review engagement

An external audit
A compilation engagement
Any assurance engagement

Correct answer
A compilation engagement