AUDITING AND ASSURANCE: CONCEPTS AND d.

Credit manager
APPLICATIONS
Reviewer and Answers 4. Proper authorization of write-offs of uncollectible
accounts should be approved in which of the
1. During the consideration of a small business following departments?
client’s internal control, the auditor discovered that
a. Accounts receivable
the accounts receivable clerk approves credit
b. Credit
memos and the access to cash. Which of the
c. Treasurer
following controls would be most effective in
d. Accounts payable
offsetting this weakness?

a. The owner reviews errors in billings to

customers and pastings to the subsidiary ledger.
b. The owner reviews credit memos after they are
recorded. 1. In which of the following will sales return and
c. The controller reconciles the total of the detail allowances not be recorded?
accounts receivable to the amount shown in the
a. Sales returns and allowances transaction file
ledger.
b. Cash receipts journal
d. The controller receives the monthly bank
c. Accounts receivable master file
statement directly and reconciles the checking
d. Sales returns and allowances will be recorded in
accounts.
all of the above
2. Employers bond employees who handle cash
2. To determine that sales are accurately recorded,
receipts because fidelity bonds reduce the
the unit prices on the duplicate sales invoices are
possibility of employing dishonest individuals and
normally compared with:
a. Deter dishonesty by making employees aware
a. The original invoices
that insurance companies may investigate and
b. An approved price list
prosecute dishonest acts.
c. The amounts posted to the customer’s
b. Force employees in positions of trust to take
account in the accounts receivable master
periodic vacations and rotate their assigned
file
duties.
d. The amounts recorded in the sales journal
c. Protect employees who make unintentional
for that transactions
misstatements from possible monetary damages
resulting from their misstatements. 3. Prenumbered documents are intended to help:
d. Facilitate an independent monitoring of the
receiving and depositing of cash receipts. I. Prevent the failure to bill or record sales

3. When a customer fails to include a remittance II. Prevent duplicate billings or recordings of sales
advice with a payment, it is common practice for
the person opening the mail to prepare one. a. Neither
Consequently, mail should be opened by which of b. I & II
the following four company employees? c. I only
d. II only
a. Sales manager
b. Accounts receivable clerk 4. Match the test of controls described below to the
c. Receptionist appropriate assertion it is used to test:
Test a sample of vouchers for the presence of a. apply gross profit rates to inventory disposed of
authorized purchase order and receiving report during the period
b. trace payments received subsequent to the
a. Occurrence balance sheet date
b. Classification c. send accounts receivable confirmation requests
c. Cutof d. compare shipping documents with sales records
d. Completeness
e. Accuracy 9. Match the test of controls described below to the
appropriate assertion it is used to test:
5. An audit procedure that compares the name,
amount, and dates shown on the remittance Compare the dates on the receiving reports with
advices with cash receipts journal entries and with the dates of the relevant vouchers
related duplicate deposit slips would be effective in
detecting: a. Occurrence
b. Classification
a. Lapping c. Cutof
b. Kiting d. Completeness
c. Illicit write-ofs of customers as uncollectible e. Accuracy
accounts
d. Sales without proper credit authorization 10. Match the test of controls described below to
the appropriate assertion it is used to test:
6. Match the test of controls described below to the
appropriate assertion it is used to test: Review monthly bank reconciliations

Review the cash disbursements journal for a. Occurrence

reasonableness of account distribution b. Classification
c. Cutof
a. Occurrence d. Completeness
b. Classification e. Accuracy
c. Cutof
d. Completeness
e. Accuracy

7. Match the test of controls described below to the

appropriate assertion it is used to test:

Trace a sample of receiving reports to their

respective vendor invoices and vouchers

a. Occurrence W7 EXTRA CREDIT POP QUIZ (QUIZZIZ)

b. Classification
c. Cutof 1. Which of the following controls would an entity
d. Completeness most likely use in safeguarding against loss of
e. Accuracy marketable shares

8. Which of the following procedures would a. An independent trust company that has no
ordinarily be best expected to find unrecorded direct contact with the employees who have
sales? record-keeping responsibilities has possession of
the securities.
b. A designated member of the board of directors c. examine documentation of assets purchased
controls the securities in a bank safe-deposit with bond proceeds for liens
box. d. compare interest expense with the bond payable
c. The independent auditor traces all purchases amount for reasonableness
and sales of marketable securities through the
subsidiary ledgers to the general ledgers.
d. The internal auditor verifies the marketable
securities in the entity’s safe each year on the
balance sheet date.

2. The auditor can best verify a client’s bond sinking W3 ASSESSMENT

fund transactions and year-end balance by
1. Which of the following elements underlies the
a. examination and count of the bonds retired application of generally accepted auditing
during the year standards, particularly the standards of fieldwork
b. confirmation with individual holders of retired and reporting?
bonds
c. recomputation of interest expense, interest a. Internal control
payable, and amortization of bond discount or b. Corroborating evidence
premium c. Quality control
d. confirmation with the bond trustee d. Materiality and relative risk (auditing standards
states that materiality and relative risk underlie
3. Which of the following controls would an entity the application of all the standards.)
most likely use to assist in satisfying the
completeness assertion related to long-term 2. Which of the following is an example of
investments? fraudulent financial reporting?

a. senior management verifies that securities in a. Company management changes inventory count
the bank safe deposit box are registered in the tags and overstates ending inventory, while
entity’s name. understating cost of goods sold. (Fraudulent
b. the controller compares the current market financial reporting involves intentional
prices of recorded investments with the broker’s misstatements or omissions of amounts or
advices on file. disclosures in financial statements to deceive
c. the internal auditor compares the securities in financial statement users and changing the
the bank safe deposit box with recorded inventory count tags results in such a
investments misstatement.)
d. the treasurer vouches the acquisition of b. The treasurer diverts customer payments to his
securities by comparing broker’s advices with personal due, concealing his actions by debiting
canceled checks an expense account, thus overstating expenses.
c. An employee steals inventory and the
4. In auditing long-term bonds payable, an auditor “shrinkage” is recorded in cost of goods sold.
most likely would d. An employee steals small tools from the
company and neglects to return them; the cost
a. confirm the existence of individual bond holders
is reported as a miscellaneous operating
at year end
expense.
b. perform analytical procedures on the bond
premium and discount accounts
3. When considering fraud risk factors relating to Answers (b), (c), and (d) are all incorrect because
management’s characteristics, which of the they represent examples of risk factors that should
following is least likely to indicate a risk of possible be considered in an audit and are included in AU-C
misstatement due to fraud? 240.)

a. Failure to correct known reportable conditions 6. Assume that a company has a control deficiency
on a timely basis. regarding the processing of cash receipts.
b. Nonfinancial management’s preoccupation with Reconciliation of cash accounts by a competent
the selection of accounting principles. individual otherwise independent of the cash
c. Significant portion of management’s function might make the likelihood of a significant
compensation represented by bonuses based misstatement due to the control deficiency remote.
upon achieving unduly aggressive operating In this situation, reconciliation may be referred to
results. as what type of control?
d. Use of unusually conservative accounting
practices. (one would expect unusually a. Compensating (it is a compensating control
aggressive, rather than unusually conservative which supplements a basic underlying control, in
accounting practices to indicate a risk of this case basic information processing controls
misstatement due to fraud.) related to cash.)
b. Preventive
4. Under Auditing Standards, which of the following c. Adjustive
would be classified as an error? d. Nonroutine

a. Misappropriation of assets for the benefit of 7. How large must the actual loss identified by the
management. auditor be for a control deficiency to possibly be
b. Misinterpretation by management of facts that considered a material weakness?
existed when the financial statements were
prepared. I. Immaterial; II. Material
c. Preparation of records by employees to cover a
a. I and II
fraudulent scheme.
b. I only
d. Intentional omission of the recording of a
c. II only
transaction to benefit a third party.
d. Neither
5. Which of the following factors or conditions is an
8. Which is correct concerning the external auditors’
auditor least likely to plan an audit to discover?
use of the work of others in an audit of internal
a. Financial pressures afecting employees control performed for a public company?
b. High turnover of senior management.
a. It is not allowed.
c. Inadequate monitoring of significant controls.
b. The work of internal auditors may be used, but
d. Inability to generate positive cash flows from
only when those internal auditors report directly
operations.
to the audit committee.
(The requirement is to identify the factor or c. Ordinarily the work of internal auditors and
condition that an audit is least likely to be planned to others is used primarily in low-risk areas.
discover. Answer (a) is correct because it represents d. There is no limitation and is likely to reduce
a financial stress, and auditors are not required to audi- tor liability since the auditors will then
plan audits to discover information that is indicative share legal responsibility with those who have
of financial stress of employees or adverse performed the service.
relationships between the entity and its employees.
9. Which of the following types of audit evidence is d. Developing the expected current year sales
the least persuasive? based on the sales trend of the prior five years.

a. Prenumbered purchase order forms. (Choice "b" is correct. Analytical procedures involve
b. Bank statements obtained from the client. comparison of recorded amounts, or ratios
c. Test counts of inventory performed by the developed from recorded amounts, to expectations
auditor. developed by the auditor. Projecting an error rate
d. Correspondence from the client’s attorney about from a statistical sample does not involve such a
litigation. comparison.

(Answer (a) is correct because evidence secured Choice "a" is incorrect. An analytical procedure
solely from within the entity, here prenumbered involves comparison of an independently developed
purchase order forms, is considered less persuasive expectation to a recorded amount. Comparing an
than evidence obtained from independent sources. estimate of payroll expense (developed by
Answer (b) is incorrect because a bank statement multiplying the number of employees by the average
(even though received from the client) is externally hourly rate and the total hours worked) to the
created and therefore more persuasive than audit recorded expense is an analytical procedure.
evidence secured solely from within the entity.
Answer (c) is incorrect because evidence obtained Choice "d" is incorrect. An analytical procedure
directly by the auditor through observation is involves comparison of an independently developed
considered relatively persuasive. Answer (d) is expectation to a recorded amount. Ratio analysis is
incorrect because correspondence from the client's often performed in order to compare recorded
attorney about litigation is obtained directly from results to industry norms or to past performance,
independent sources and is therefore more and therefore calculation of accounts receivable
persuasive than audit evidence secured from within turnover is likely to be an analytical procedure.
the entity.)
Choice "c" is incorrect. An analytical procedure
10. Which of the following would not be considered involves comparison of an independently developed
an analytical procedure? expectation to a recorded amount. Comparing an
estimate of sales (developed based on a trend
a. Estimating payroll expense by multiplying the analysis) to the recorded amount is an analytical
number of employees by the average hourly procedure.)
wage rate and the total hours worked.
b. Projecting an error rate by comparing the results
of a statistical sample with the actual population
characteristics. (Analytical procedures consist of
evaluations of financial information made by a
study of plausible relationships among both
financial and non-financial data. Answer (b) is W5-6 ASSESSMENT
correct be- cause projecting an error rate from a
1. To minimize the opportunities for fraud,
statistical sample to an actual population is not a
unclaimed cash payroll should be
comparison of a plausible relationship. All other
answers are incorrect because they all include a a. Deposited in a safe-deposit box. (The
study of plausible relationships.) requirement is to determine the best method to
c. Computing accounts receivable turnover by minimize the opportunities for fraud for
dividing credit sales by the average net unclaimed cash in a cash payroll system. For a
receivables. cash payroll the best control is to get the
 unclaimed cash out of the firm’s physical control b. Treasurer.
and into the bank. Maintaining the c. Controller.
accountability for cash which is in a safe- deposit d. Payroll.
box is difficult. Other answers are incorrect
because the cash need not be kept by the firm.) (the personnel department, which has the primary
b. Held by the payroll custodian. objective of planning, controlling and coordinating
c. Deposited in a special bank account. employees, will determine that proposed salary
d. Held by the controller. increases (often recommended by supervisors of
employees) are consistent with the company’s salary
2. The auditor may observe the distribution of guidelines and will approve changes in deductions.
paychecks to ascertain whether
The treasurer and controller will in general initiate
a. Pay rate authorization is properly separated the pay rate change process for only those
from the operating function. employees within their departments and will not
b. Deductions from gross pay are calculated generally approve changes for employees outside
correctly and are properly authorized. their departments.
c. Employees of record actually exist and are
employed by the client. The payroll functions is a record-keeping function
d. Paychecks agree with the payroll register and which will modify employee pay rates based on
the time cards. approved changes from personnel. Payroll should not
have authority regarding pay rates and deductions.)
(The requirement is to identify a reason why an
auditor may observe the distribution of paychecks. 4. A weakness in internal control over recording
The answer is correct because an employee’s retirements of equipment may cause an auditor to
presence to collect the paycheck provides evidence
a. Inspect certain items of equipment in the plant
that the employee actually exists and is currently
and trace those items to the accounting records.
employed by the client. Answer (a) is incorrect
b. Review the subsidiary ledger to ascertain
because the distributions of payroll checks would not
whether depreciation was taken on each item of
reveal whether pay-rate authorization is properly
equipment during the year.
separated from the operating function.
c. Trace additions to the “other assets” account to
The paycheck distribution does not provide search for equipment that is still on hand but no
information on whether deductions from gross pay longer being used.
have been calculated properly. d. Select certain items of equipment from the
accounting records and locate them in the plant.
Observation of the paycheck distribution process
does not of itself provide assurance that the (The requirement is to identify the best audit
paychecks agree with the related payroll register and procedure when a weakness in internal control over
time cards.) reporting of retirements exists. The answer is correct
because selecting certain items of equipment from
3. Which of the following departments most likely the accounting records and attempting to locate
would approve changes in pay rates and deductions them will reveal situations in which the accounting
from employee salaries? records still have them recorded subsequent to their
retirement.
a. Personnel. (The personnel department provides
the authorization for payroll-related transactions Inspecting items that still exist is not likely to lead to
(e.g., hiring, termination, and changes in pay discovery of unrecorded retirements.
rates and deductions)
Depreciation may continue to be taken on b. Analytical procedures for current year property
equipment that has been retired, but not recorded. It and equipment transactions.
is doubtful that such retirements have been c. Tests of controls and limited tests of current year
reclassified as “other assets.”) property and equipment transactions.
d. Analytical procedures for property and
5. Which of the following questions would an equipment balances at the end of the year.
auditor least likely include on an internal control
questionnaire concerning the initiation and (The requirement is to determine the appropriate
execution of equipment transactions? combination of audit tests when there are numerous
property and equipment transactions during the year
a. Are requests for major repairs approved at a and the auditor plans to assess control risk at a low
higher level than the department initiating the level. The answer is correct because, to justify an
request? assessment of control risk at a low level, tests of
b. Are prenumbered purchase orders used for controls will be required. This will allow auditors to
equipment and periodically accounted for? perform only limited tests of current year property
c. Are requests for purchases of equipment and equipment transactions.
reviewed for consideration of soliciting
competitive bids? Tests of controls will be performed to allow the
d. Are procedures in place to monitor and properly auditor to perform limited, not extensive, tests of
restrict access to equipment? property and equipment balances at the end of the
year.
(The requirement is to identify the question that is
least likely to be included on an internal control Analytical procedures on either year-end balances or
questionnaire concerning the initiation and transactions will not justify a low assessed level of
execution of equipment transactions. The answer is control risk.)
correct because procedures to monitor and properly
restrict access to equipment do not relate directly to 7. Which of the following is a question that the
the initiation and execution of equipment auditor would expect to find on the production
transactions. cycle section of an internal control questionnaire?

Requests for major repairs relate to initiation of a a. Are vendors’ invoices for raw materials approved
transaction which should be controlled. for payment by an employee who is
independent of the cash disbursements
Pre-numbered purchase orders may be used to function?
control all purchases, including purchases of b. Are signed checks for the purchase of raw
equipment. materials mailed directly after signing without
being returned to the person who authorized
The significant amounts of money involved with the invoice processing?
purchases of equipment suggest the need for the c. Are all releases by storekeepers of raw materials
solicitation of competitive bids.) from storage based on approved requisition
documents?
6. When there are numerous property and
d. Are details of individual disbursements for raw
equipment transactions during the year, an auditor
materials balanced with the total to be posted to
who plans to assess control risk at a low level
the appropriate general ledger account?
usually performs
(The requirement is to identify the question that an
a. Tests of controls and extensive tests of property
auditor would expect to find on the production cycle
and equipment balances at the end of the year.
section of an internal control questionnaire. The
answer is correct because approved requisitions will c. Tracing totals from the purchases journal to the
help maintain control over raw materials released to ledger accounts.
be used in the production cycle. d. Sending written quarterly confirmations to all
vendors.
All other answers are incorrect because approval of
vendors’ invoices for payment, mailing of checks (The requirement is to identify the audit procedure
after signing, and comparing individual which would most likely detect a client error in
disbursements to totals all pertain more directly to recording a large purchase. The answer is correct
the disbursement cycle.) because reconciling the vendors’ monthly statements
with the subsidiary ledger for payables should
8. The objective of internal control for a production disclose a diference in the month following the
cycle are to provide assurance that transactions are error.
properly and recorded, and that
Footing the purchases journal, is unlikely to detect
a. Production orders are prenumbered and signed the error since the journal’s totals will have been
by a supervisor. mathematically accumulated properly.
b. Custody of work in process and of finished goods
is properly maintained. Total will be reflected in both the purchases journal
c. Independent internal verification of activity and in the ledger accounts.
reports is established.
d. Transfers to finished goods are documented by a Confirmations will only detect the error quarterly
completed production report and a quality which is neither timely nor efficient.)
control report.
10. With well-designed internal control, employees
(The requirement is to determine an objective of in the same department most likely would approve
internal control for a production cycle in addition to purchase orders, and also
providing assurance that transactions are properly
a. Reconcile the open invoice file.
executed and recorded. The answer is correct
b. Inspect goods upon receipt.
because, in addition to providing assurance as to
c. Authorize requisitions of goods.
proper execution and recording, an objective for the
d. Negotiate terms with vendors.
production cycle (as well as other cycles) is the
safeguarding of assets, here work in process and (The requirement is to identify a function that is
finished goods. compatible with the approval of purchase orders.
The answer is correct because the purchases
All other answers are incorrect because they
department will normally approve purchase orders
represent detailed controls established to help
(generated from user departments or stores) and
achieve the overall objectives. They are all much
negotiate terms of purchase with vendors.
more specific than the overall objectives.)
While the purchases department may reconcile the
9. A client erroneously recorded a large purchase
open invoice file, this is primarily a record-keeping
twice. Which of the following internal control
function that will often be per- formed by the
measures would be most likely to detect this error
accounting department.
in a timely and efficient manner?
Most frequently the receiving department will
a. Footing the purchases journal.
inspect goods upon receipt.
b. Reconciling vendors’ monthly statements with
subsidiary payable ledger accounts. User groups or stores will authorize requisitions of
goods. Keep in mind the principle of segregation of
functions. Record-keeping, authorization, and 6. Which of the following is least likely for a client
custodial functions should all be segregated.) to outsource?

a. Core business services.

b. Forms management.
c. Payroll.
d. Information technology.

7. Which of the following functions is not

MIDTERM EXAMINATION
appropriate for the accounts payable department?
1. The purpose of the purchase requisition is to
a. Prepare payable vouchers.
a. order goods from vendors b. File voucher package by due date.
b. record receipt of goods from vendors c. Compare purchase requisitions, purchase
c. bill for goods delivered orders, receiving reports, and vendors' invoices.
d. authorize the purchasing department to order d. Prepare purchase orders.
goods
8. The desired reliability in a statistical sequential
2. The open purchase order file in the purchasing sampling plan over cash disbursements is set at
department is used to determine 90%. The achieved probability in the first iteration is
85%. Therefore,
a. the best vendor for a specific item
b. the quality of items a vendor ships a. The auditor proceeds to select more items for
c. the orders that have not been received the sample.
d. the quantity of items received b. A conclusion is drawn that the account is fairly
stated.
3. Because of time delays between receiving c. The auditor must start over with a new sample.
inventory and making the journal entry d. A nonstatistical approach is used next.

a. liabilities are usually overstated 9. Which statement is not correct?

b. liabilities are usually understated
c. liabilities are usually correctly stated a. general ledger creates a new cost record upon
d. none of the above receipt of a work order from production
planning and control
4. In a firm with proper segregation of duties, b. cost accounting computes variances and applies
adequate supervision is most critical in overhead to individual cost records
c. cost accounting updates the cost record with
a. general ledger
data gathered from the materials requisition
b. purchasing
d. general ledger posts summary information
c. receiving
about the manufacturing process based on a
d. accounts payable
journal voucher prepared by cost accounting
5. If a company uses a standard cost system,
10. The auditor is testing the labor charges and
inventory records can be updated from the
tracing them to entries in the job costing records
a. purchase order and into work-in-process inventory. This procedure
b. receiving report primarily addresses which of the following
c. purchase requisition assertions?
d. vendor invoice
a. Existence or occurrence. a. Shipments to customers were billed.
b. Valuation or allocation. b. Debits to the subsidiary accounts receivable
c. Presentation and disclosure. ledger are for sales shipped.
d. Rights and obligation. c. Shipments to customers were recorded as
receivables.
11. Internal controls for handling sales returns and d. Billed sales were shipped.
allowances do not include
16. Extensive substantive tests over
a. authorizing the credit memo by management revenue/receipt transactions are used when
b. computing bad debt expense using the
percentage of credit sales a. Control risk is at the maximum and acceptable
c. verifying that the goods have been returned detection risk is low.
d. using the original sales invoice to prepare the b. Control risk is at the maximum and acceptable
sales returns slip detection risk is high.
c. Control risk is below the maximum and
12. The printer ran out of preprinted sales invoice acceptable detection risk is low.
forms and several sales invoices were not printed. d. Control risk is below the maximum and
The best internal control to detect this error is acceptable detection risk is high.

a. visual verification that all sales invoices were 17. To verify that all sales transactions have been
prepared recorded, a test of transactions should be
b. a batch total of sales invoices to be prepared completed on a representative sample drawn from
compared to the actual number of sales invoices
prepared a. The shipping clerk's file of copies of shipping
c. sequentially numbered sales invoices documents.
d. none of the above will detect this error b. The billing clerk's file of sales orders.
c. A file of copies of sales invoices for which the
13. A weekly reconciliation of cash receipts would prenumbered sequence has been accounted.
include comparing d. Entries in the sales journal.

a. bank deposit slips with remittance advices 18. Following are four steps an auditor undertakes
b. the cash prelist with bank deposit slips in assessing control risk:
c. journal vouchers from accounts receivable and
general ledger (a) Determine what control procedures are used by
d. the cash prelist with remittance advices the entity.
(b) Identify the system's control objectives.
14. The auditor found no control exceptions when (c) Design tests of controls.
performing statistical tests of controls over the (d) Consider the potential errors or fraud that could
client's invoicing system. Therefore, the auditor occur.
most likely
In what order would an auditor perform these
a. Confirms 100% of accounts receivable. steps?
b. Performs extended tests of controls.
c. Assesses control risk below the maximum. a. DCAB.
d. Expands substantive tests. b. BCDA.
c. DBAC.
15. Tracing copies of sales invoices to shipping d. BDAC.
documents provides evidence that all
19. Depreciation records include all of the following True
information about fixed assets except

a. the cost of the asset

b. the economic benefit of purchasing the asset
c. the depreciation method being used
d. the location of the asset
W14 ASSESSMENT (Graded)
20. The document that records the total amount of
time spent on a production job is the 1. Which of the following sets of information does
an auditor usually confirm on one form?
a. job ticket
b. time card a. Accounts receivable and accrued interest
c. labor distribution summary receivable.
d. personnel action form b. Inventory on consignment and contingent
liabilities.
c. Accounts payable and purchase commitments.
d. Cash in bank and collateral for loans.

2. Which of the following checks might indicate

kiting?
W13 EXTRA CREDIT POP QUIZ

1. A note payable has an interest rate well below

the market rate at the time at which the loan was
obtained.
a. #101 and #404.
a. more likely an illegal act b. #101 and #303.
b. more likely a related party transaction c. #202 and #303.
d. #202 and #404.
2. Identify the most closely related financial
statement assertion: [1] the recorded property and 3. Which of the following checks illustrate deposits/
equipment acquisitions may include nonexistent transfers in transit at December 31, 2020?
assets.

a. existence or occurrence
b. presentation and disclosure
c. completeness
d. valuation or allocation a. #202 and #303.
e. rights and obligations b. #101 and #404.
c. #101 and #303.
3. With strong internal control, the inventory count d. #202 and #404.
may be at the end of the year or at other times.
4. To measure how effectively an entity employs its
True resources, an auditor calculates inventory turnover
by dividing average inventory into
4. Confirmations of account receivable address
existence more than they address completeness.
a. Cost of goods sold. 9. When using confirmations to provide evidence
b. Net sales. about the completeness assertion for accounts
c. Operating income. payable, the appropriate population most likely
d. Gross sales. would be

5. An auditor most likely would analyze inventory a. Vendors with whom the entity has previously
turnover rates to obtain evidence concerning done business.
management’s assertions about b. Amounts recorded in the accounts payable
subsidiary ledger.
a. Valuation. c. Invoices filed in the entity’s open invoice file.
b. Existence. d. Payees of checks drawn in the month after the
c. Rights. year-end.
d. Presentation.
10. Which of the following is a substantive test that
6. An auditor concluded that no excessive costs for an auditor most likely would perform to verify the
idle plant were charged to inventory. This existence and valuation of recorded accounts
conclusion most likely related to the auditor’s payable?
objective to obtain evidence about the financial
statement assertions regarding inventory, including a. Receiving the client’s mail, unopened, for a
presentation and disclosure and reasonable period of time after the year-end to
search for unrecorded vendors’ invoices.
a. Existence. b. Investigating the open purchase order file to
b. Valuation. ascertain that prenumbered purchase orders are
c. Completeness. used and accounted for.
d. Rights. c. Confirming accounts payable balances with
known suppliers who have zero balances.
7. Analysis of which account is least likely to reveal
d. Vouching selected entries in the accounts
evidence relating to recorded retirement of
payable subsidiary ledger to purchase orders
equipment?
and receiving reports.
a. Property, plant, and equipment.
b. Accumulated depreciation.
c. Insurance expense.
d. Purchase returns and allowances.

8. Which of the following explanations most likely

would satisfy an auditor who questions W14 2ND ASSESSMENT (Graded)
management about significant debits to the
accumulated depreciation accounts? 1. The general cash account is considered significant
in almost all audits
a. Overhead allocations were revised at year-end.
b. The estimated remaining useful lives of plant a. when the ending balance is material
assets were revised upward. b. when either the beginning balance or ending
c. The prior year’s depreciation expense was balance is material
erroneously understated. c. when the beginning balance is immaterial
d. Plant assets were retired during the year. d. when the ending balance is immaterial

2. Which of the following audit procedures would

be best for identifying unrecorded liabilities?
a. Trace the recorded liabilities to the receiving a. Accuracy
report b. Presentation and disclosure
b. Review cash disbursement entries after the c. Occurrence
reporting date to determine whether the d. Completeness
payables
c. Examine unusual relationships between ending 7. Which of the following procedures are tests of
accounts payable and recorded purchases control an auditor should perform in testing the
d. Reconcile vendors’ statements to the file of inventory cycle of their client while attending the
receiving reports processed just prior to the inventory count?
reporting date.
I. Observe whether the client’s staff are following
3. To obtain assurance that all inventory items I a the inventory count instructions
client’s inventory listing are valid, an auditor would
II. Review inventory present in the warehouse for
most likely trace
evidence of damage or obsolescence
a. Inventory tags during the auditor’s observation
III. Obtain a sample of the last receiving report and
to items listed in receiving reports and vendor’s
the shipping documents and follow through to
invoices
ensure inclusion in the correct accounting period
b. Items in the inventory listing to inventory tags
and the auditor’s recorded count sheets IV. Inspect and review management’s inventory
c. Inventory tags noted during the auditor’s count instructions
observation to items in the inventory listing
d. Items listed in receiving reports and vendor’s a. I and II
invoices to the inventory listing. b. I and IV
c. II and III
4. Which of the following audit procedures would d. III and IV
most likely detect lapping?
8. Which of the following is the least likely test
a. Comparing postings of cash receipts with the relating to the audit of long-lived operating assets?
details of cash deposits
b. Conducting a cash count a. Recalculation of depreciation and amortization
c. Preparing month-end bank reconciliations expense
d. Confirmation of cash balance with financial b. Performing analytical procedures
institutions c. Verification of current year additions
d. Observation of current year disposals
5. The auditor’s inventory observation test counts
are traced to the client’s inventory listing to test for 9. A major consideration in verifying the ending
which of the following financial statement balances of long-lived assets is the possibility of
assertions? existing legal encumbrances. Tests to identify
possible legal encumbrances would satisfy the audit
a. Allocation and valuation objective of
b. Understandability and classification
c. Completeness a. Cut-of
d. Rights and obligations b. Presentation and disclosure
c. Completeness
6. On which assertion does the auditor focus in the d. Existence and validity
audit of liabilities
10. Which of the following misstatements is most 4. When material uncertainties/going concern
likely to be uncovered during an audit of a client’s issues are identified, which of the following is the
bank reconciliation? best response by the auditor if such were
adequately disclosed?
a. Failure to record collection of a customer’s note
by the bank on the client’s behalf a. Express an unmodified opinion, include other
b. Billing a customer at a price diferent from that matter
indicated by the company policy b. Express an unmodified opinion, include an
c. Duplicate payment of a vendor’s invoice emphasis of a matter
d. Payment of an overtime pay of an employee in c. Modify the opinion
excess of what is legally required. d. Include a section of material uncertainties
related to going concern

W15 EXTRA CREDIT POP QUIZ

1. The phrase “The financial statements present

fairly in all material respects the financial position, W12 ASSESSMENT
results of operations, and cash flows in conformity
with GAAP” indicates: 1. The methods or procedures used to record and
report financial data are called the accounting
a. A qualified opinion system.
b. A disclaimer of opinion
c. An unqualified opinion True
d. An adverse opinion
2. Which steps in the Financial Accounting Process
2. Which of the following PSAs refer to Forming an are in the correct sequence?
Opinion and Reporting on Financial Statements?
a. record the transaction, post to the ledger,
a. PSA 700 prepare the adjusted trial balance, enter
b. PSA 705 adjusting entries, prepare financial statements
c. PSA 800 b. record the transaction, post to the ledger,
d. PSA 805 prepare the adjusted trial balance, prepare
financial statements, record closing entries
3. Which of the following matters would an auditor c. record the transaction, post to the ledger, record
most likely include in a management representation adjusting entries, prepare the unadjusted trial
letter? balance, prepare financial statements
d. record the transaction, prepare the unadjusted
a. The completeness and availability of minutes of trial balance, record adjusting journal entries,
stockholders’ and directors’ meetings. record closing entries, prepare financial
b. Plans to acquire or merge with other entities in statements
the subsequent year.
c. Communications with the audit committee 3. Which statement is not correct?
concerning weaknesses in internal control
d. Management’s acknowledgement of its a. the unadjusted trial balance reports control
responsibility for the detection of employee account balances but omits subsidiary ledger
fraud. detail
b. the post-closing trial balance reports the ending c. No efect
balance of each account in the general ledger
c. one purpose of preparing the unadjusted trial 8. Determine the effects of each of the foregoing
balance is to ensure that debits equal credits error on the total assets at December 31, 2016:
d. financial statements are prepared based on the Error 2 >>> Interest cost on specific borrowing
unadjusted trial balance incurred to finance the construction of a building in
2016 was charged to interest expense.
4. Financial statements are prepared from the
a. Overstated
a. trial balance b. Understated
b. general journal c. No efect
c. general ledger
d. adjusted trial balance 9. Indicate how the following item will be treated in
a proof or cash for the month of June: Item 1 >>>
5. Risk exposures in the General Ledger and Deposits in transit, May 31
Financial Reporting Systems include all of the
following except a. Add to May 31 bank balance, and deduct from
June bank receipts
a. loss of the audit trail b. Add to June 30 bank balance, and deduct to
b. loss of physical assets June bank receipts
c. unauthorized access to the general ledger c. Add to May 31 bank balance, and add to June
d. general ledger account out of balance with the bank receipts
subsidiary account d. Deduct from June 30 book balance, and deduct
from June bank receipts
6. Which situation indicates an internal control risk
in the General Ledger/Financial Reporting Systems 10. Indicate how the following item will be treated
(GL/FRS)? in a proof or cash for the month of June: Item 2 >>>
Deposits in transit, June 30
a. the employee who maintains the cash receipts
journal records transactions in the accounts a. Add to May 31 bank balance, and deduct to June
receivable subsidiary ledger bank receipts
b. the cash receipts journal voucher is approved by b. Add to May 31 bank balance, and add to June
the Treasurer bank receipts
c. the cash receipts journal vouchers are c. Add to June 30 bank balance, and add to June
prenumbered and stored in a locked safe bank receipts
d. the employee who maintains the cash journal d. Add to June 30 bank balance, and deduct from
computes depreciation expense June bank receipts

7. Determine the effects of each of the foregoing

error on the total assets at December 31, 2016:
Error 1 >>> In 2015, some office personnel were
trained to use the new management information
system at a cost of P30,000, which was capitalized
and subsequently amortized over a period of 5
years.

a. Understated
b. Overstated