CORDILLERA CAREER DEVELOPMENT COLLEGE

College of Accountancy
Buyagan, Poblacion , La Trinidad

AUDITING Pre-Board 1

INSTRUCTIONS: Select the correct answer for each of the following questions. Mark only
one answer for each item by shading the box corresponding to the letter of your choice on
the sheet provided. STRICTLY NO ERASURES ARE ALLOWED. Use pencil no. 2 only.

PROBLEM 1:
You were assigned to audit the following financial statements of Debbie Corp. on January
15, 2018, for the year ended December 11, 2017. The general ledger shows each cash
account balance of P1,710,600 as at December 31, 2017.

The bank reconciliation prepared by the client’s cashier included the following items:
Cash per bank Statement, December 31, 2017 1,866,800
Notes collected by the bank on Debbie Corp.’s behalf, recorded in the books
in January, 2018 200,000
Interest on notes collected by the bank, recorded in the books in January,
2018 40,000
Bank service charge for December, recorded in books in January, 2018 15,000
Outstanding checks, including P43,000 certified by the bank 191,970
Customer check deposited in December and returned by the bank with the
December bank statement, marked “NSF”, redeposited in January 4. No
entry made in the books for return and redeposit. 10,500
Check of Dobie Corp., charged by the bank in error on December 28, 2017;
corrected by the bank on January 2, 2018 37,000
Deposit in transit 185,000

From January 2,2018, to January 15, 2018, the date of cash count, total debits to cash
appearing in the books amounted to P350,000. During the same period, bank credits
amounted to P275,000. The following cash and cash items were on hand at the close of
business on January 15, 2018:

Audit notes:
a. Disbursement check amounting to P54,000 was recorded in the books in December
at P45,000.
b. Check deposit on December 2, amounting to P62,000 was recorded in December as
P26,000.
c. Check deposit on January 5, 2018, amounting to P24,000 was recorded in the books
in January as P42,000.

Requirements:
1. What is the correct cash in bank balance as of December 31?
a. 1,952,100 c. 1,939,830
b. 1,860,830 d. 1,934,100

2. What is the cash shortage as of December 31?

a. 12,270 c. 30,915
b. 5,730 d. 55,270

3. What is the net adjustment to cash as of December 31?

a. 186,230 c. 190,235
b. 229,230 d. 179,735

4. What is the total cash shortage from January 2 to January 15?

a. None c. 15,520
b. 5,100 d. 17,370

5. In validating the bank reconciliation statements of the client, the auditor should
trace back the deposits in transits to the:
a. Bank statement of the current month.
b. Accounts Payable voucher.
 c. Cancelled checks returned by the bank.
d. Cut-off bank statement of the subsequent month.

PROBLEM 2:
You are auditing the Accounts Receivable of Lou Inc. as of December 31, 2017. You found
the following information in the general journal:
Accounts receivable P2,455,440
Less: Allowance for doubtful accounts (93, 440)
Accounts receivable net P2,326,000

The accounts receivable subsidiary ledger had the following details:

Customer Invoice date Amount
Golf 11/25/2017 P 187,800
8/12/2017 70,600
Tango 12/12/2017 161,800
11/2/2017 178,400
6/23/2017 125,400
Great Taste 11/17/2017 194,640
9/25/2017 195,600
8/8/2017 332,000
Nancy 12/8/2017 340,000
9/25/2017 109,600
5/20/2017 100,000
Oscar 11/27/2017 146,000
4/26/2017 86,000
Bravo 10/19/2017 195,600
6/20/2017 46,500
Victory 2/24/2017 64,000
Total P 22,533, 940

Additional Information:
a. You discovered based on your review of Subsequent events that Victory recently
went bankrupt, thus, upon your recommendation the client agreed to the write-off
of the outstanding receivable from the said customer.
b. You also discovered that the invoice dated 8/12/2017 has already been settled by
Golf per OR number 34675. This amount however has been erroneously posted
against Bravo’s subsidiary ledger as a settlement for an invoice dated 12/05/2017
for the same amount.
c. As per Oscar’s reply on customer confirmation request, you discovered that the
invoice dated 4/26/2017 is covered by a credit memo for a return made by the said
customer. You further discovered that while the credit memo has been
appropriately recorded in the general ledger, the company failed to post the same to
the subsidiary ledger.
d. As per Great Taste’s reply on customer confirmation request, you discovered that
the invoice dated 8/8/2017 was erroneously priced at P 332 per unit, the correct
amount should have been P 232 per unit.
e. The estimated bad debt rates below are based on the company's receivable
collection experience:
Age of % of Collectability
accounts
0 – 60 days 98%
61 – 120 days 90%
121 – 180 days 80%
Over 180 days 50%

Required:
6. What is the correct allowance for bad debt expense for the year ended December 31,
2017?
a. 236,188 c. 302,008
b. 258,015 d. 270,723

7. Assuming that there were no other entries to the allowance for doubtful accounts,
what is the correct bad debt expense for the year?
a. 164,575 c. 189,468
 b. 241,283 d. 228,575

8. What is the carrying value of the company’s accounts receivable as of December 31,
2017?
a. 2,033,425 c. 1,995,325
b. 2,025,925 d. 2,015,172

9. What is the entry to adjust the unlocated difference?

a. None
b. DR: Sales P7, 500
CR: Accounts Receivable P7,500
c. DR: Bad debt expense P7,500
CR: Accounts Receivable P7,500
d. DR: Sales P 78,500
CR: Accounts Receivable P 78,500

10. In auditing the client's accounts receivable account, the auditor rendered sales cut-
off by tracing entries several days before and after the balance sheet date from the
client’s sales journal to the supporting documents (sales invoice and delivery
receipt). Tracing the Sales Journal December entries to the supporting documents is
in support to which accounts receivable assertion?
a. Existence
b. Valuation
c. Completeness
d. Presentation and Disclosure

PROBLEM 3:
As part of your audit of receivables of Constance Merchandising, you performed a cut-off
test of sales and purchases. Results of the cut-off tests revealed the following:

Sales Cutoff:
Invoice Selling Cost Terms Shipment Date Received by
Number price customers
01094 14,200 12,500 Shipped to consigned 12/29/2017 01/02/2018
01095 9,000 7,500 FOB shipping point 12/30/2017 01/02/2018
01096 10,000 7,750 FOB destination 12/31/2017 01/03/2018
01097 21,000 18,200 FOB shipping point 12/31/2017 01/03/2018
01098 10,500 8,800 FOB destination 12/31/2017 01/03/2018
01099 4,500 3,200 FOB destination 01/02/2018 01/03/2018
01100 6,500 5,000 FOB shipping point 01/02/2018 01/05/2018

Purchases Cutoff:
Receiving Amount Shipment Date Shipment Terms
report No.
78055 8,100 12/21/2017 FOB Shipping Point
78056 9,100 12/27/2017 On Consignment Basis
78057 10,200 12/28/2017 FOB Destination
78058 8,200 12/29/2017 FOB Shipping Point
78059 9,700 12/29/2017 FOB Destination
78060 10,700 12/30/2017 FOB Shipping Point
78061 11,200 12/31/2017 FOB Destination
78062 12,900 1/11/2018 FOB Shipping Point

A count of all inventories within the premises was made on December 31, 2017. A
documents cut-off on the same date revealed that the last sales invoice recorded as sales on
account in December is Sales Invoice number 01097 while the last receiving report used
(with physical receipt of goods) and recorded as purchases on account is Receiving
Report number 78059. The total cost of the count was recorded as inventories as of
December 31, 2017. The goods shipped to consignees are still unsold at December 31.

The unadjusted ledger balances show the following:

Accounts receivables P 276,500
Accounts payable 212,900
Inventories 425,000
 Sales 1,320,000
Purchases 842,000

Determine the adjusted balances of the following:

A B C D
11. Accounts receivable 252,300 229,620 261,120 289,320
12. Accounts payable 203,800 214,500 223,600 249,500
13. Inventories 456,800 440,650 455,650 446,850

14. What is the effect of errors in cut-off to the net income for the year?
a. 4,850 under c. 4,850 over
b. 4,250 over d. 3,950 over

15. To gain assurance that all inventory items in a client’s inventory listing schedule are
valid, an auditor most likely would trace:
a. Items listed in the inventory listing schedule to inventory tags and the auditor’s
recorded count sheet.
b. Inventory tags noted during the auditor’s observation to items listed in the
inventory listing schedule.
c. Inventory tags noted during the auditor’s observation to items listed in receiving
reports and vendors’ invoices.
d. Items listed in receiving reports and vendors’ invoices to the inventory listing
schedule.

PROBLEM 4:
In line with your audit of Tammy Corp.’s investment accounts as of December 31,2017, you
ascertained the following information:
Investment type CV Per books
Investment in bonds P 8,000,000
Investment in stocks 6,200,000
Investment property 3,500,000

Audit notes:
a. The investment in bonds which shall mature on December 31, 2019 were acquired
in January 1, 2615 when the prevailing market rate of interest was at 12%, Interest
at 10% is collectible from the bonds every December 31. The acquisition was
recorded by the client as a debit to Investment in bonds at face value with the
difference between the face value and the total consideration given up to interest
income. Interest collected from 2015 to 2017were appropriately recorded. No other
entry relating to the investment was made by the client. Further investigation
revealed that the company business model with regard debt security investment has
an objective of collecting contractual cash flows. The prevailing market rate of
interest was 11%, 9% and 9.5% at the end of 2015, 2016, and 2017 respectively.

b. The investment in stocks is for 40,000 shares of Telecom Corp.'s ordinary shares
acquired in April 1, 2016. The shares were originally acquired at P145 per share.
The book value of the net assets of Telecom Corp. on this was at P20M and its total
outstanding shares was at 160,000. Telecom’s depreciable assets with average
remaining life of 10 years were understated on this date.

The fair value of Telecom Corp.’s shares were at P155 per share at the end of 2016.
The company recorded the remeasurement (from the acquisition cost to fair value)
of the investment at the end of 2016 and recognized the same as unrealized holding
gain in the 2017 profit/loss. The only other entry made by the client related to the
investment was the receipt of P2 per share dividend by the end of 2016 and P4 per
share dividend in 2017 as dividend income.

Further investigation revealed the following relevant information:

Telecom Corp. 2016 2017
Net income for the year P3,800,000 P5,200,000
Foreign exchange loss - - 400,000
OCL Unrealized holding 300,000
gain – OCI
Fair value 155 per share 169 per share
 c. The investment property was a building factory converted on June 30, 2017 as a
property for lease since the company decided to discontinue its production segment.
The factory was originally acquired at P6M on January 1, 2012 and was depreciated
using straight-line method over a 10-year useful life. The company elected to use the
fair value method in measuring its investment property. The fair value of the
building on June 30, 2017 was at P3.2M. On December 31, 2017, the fair value of the
building is at P3M.

Required:
16. What is the correct Carrying value of the investment in bonds as of December 31,
2017?
a. 7,615,707 c. 1,729,592
b. 8,145,145 d. 8,277,685

17. What is the retroactive adjustment to the retained earnings, beginning as a result of
your audit of the investment in bonds?
a. 576,764 c. 270,408
b. 485,976 d. 384,293

18. What is the correct Carrying value of the investment in stocks as of December 31,
2016?
a. 6,840,000 c. 6,972,500
b. 7,077,500 d. 7,407,500

19. What is the retroactive adjustment to the retained earnings, beginning as a result of
your audit of the investment in stocks?
a. 262,500 c. 490,000
b. 182,500 d. 172,500

20. How much should be recognized in the Statement of comprehensive income upon
the reclassification of the building from PPE to Investment?
a. 300,000 c. 500,000
b. 100,000 d. None

PROBLEM 5:
Amita Corp. presented to you the following Property, plant and equipment schedule as of
December 31, 2016, in line with your audit of the same for 2017:
Cost Accumulated Useful life/ Depreciation
Depreciation Method
Land 4,200,000 – –
Building 9,000,000 3,095,100 20 years/ Double Declining
Machinery and equipment 15,000,000 6,000,000 10 years/ Straight line
Furniture and fixture 6,000,000 3,709,091 10 years/SYD

Audit notes:
a. The assets were acquired at the beginning of 2013 when the company started its
operation
b. In January 2017 Amita Corp. incurred P1,500,000 in the construction of a new wing
of the building.
c. On June 30, 2017 an old machinery which originally costs P2,400,000 was
exchanged for a machinery of Colon Company. Colon Company acquired the said
machinery at P5, 000, 000 on July 1, 2012. The Fair value of Amita Corp.'s machinery
on the exchange date was at P1, 250,000. Amita Corp. paid additional cash at P200,
000 on the exchange which was deemed to have the necessary commercial
substance.
d. On March 1, 2017 some furniture and fixtures were sold for P400,000 These
furniture were originally acquired at P1,800,000. Replacement furniture were
acquired on June 30, 2017 at a total installment price of P2.4M payable in equal
installments starting June 30, 2018. Prevailing market rate of interest on this date
was at 8%. Additional freight and handling costs were paid at P138,322.

Requirements:
Determine the correct depreciation expenses on the following:
 21. What is the depreciation expense for the year on the Building?
a. 590,490 c. 777,990
b. 613,490 d. 900,000

22. What is the depreciation expense for the year on the Machinery and equipment?
a. 1,452,500 c. 1,525,000
b. 1,572,500 d. 1,515,000

23. What is the depreciation expense for the year on the Furniture and Fixture?
a. 685,455 c. 609,091
b. 690,909 d. 824,242

24. What is the gain or loss on the exchange transaction on June 30, 2017?
a. 190,000 c. 130,000
b. 250,000 d. 70,000

25. What is the gain or loss on sale of the furniture and fixture in 2017?
a. 278,723 c. 287,273
b. 245,454 d. 254,545

PROBLEM 6:
The accounting records of Nine Ball Corp. which was organized in 2016 include only
one account for all intangible assets. The following is a summary of the items debited to
the said account in 2016 and 2017:

Date Particulars Amount

Jul. 1, 2016 Franchise (indefinite term) P1,260,000
Oct. 1 Lease advance payments (2-year term, 840,000
starting October 1, 2016)
Dec. 31 Net loss for 2016 including incorporation 480,000
fees, P30,000, and related legal fees of
organizing the business, P150,000.
Jan. 2, 2017 Purchased patent (10-year life) 2,220,000
Mar. 1 Cost of developing 4 recipes 250,000
Apr. 1 Purchased goodwill 8,352,000
Jul. 1 Legal fee for successful defense of the 379,500
patent purchased in Jan 1, 2017

Audit notes:
a. On December 31, 2016, the management estimates that the annual net future cash
flows from the franchise’s continued use was at P180,000. On December 31,2017
this estimate was revised due to decline in product demand to P150,000 annually.
b. On December 31, 2017, the estimated annual net future cash flows from the patent’s
continued use was at P337,822 over its remaining life.
c. The prevailing market rate of interest as of December 31, 2016 and 2017 was
consistent at 12%

Based on the above information and on your audit, answer the following requirements:
26. What is the impairment loss on the Franchise in 2016?
a. None c. 160,000
b. 60,000 d. 240,000

27. What is the correct carrying value of the Franchise as of December 31, 2017?
a. 1,200,000 c. 1,260,000
b. 1,250,000 d. 1,310,000

28. What is the correct carrying value of the Patent as of December 31, 2017?
a. 1,998,000 c. 1,900,000
b. 1,800,000 d. 1,880,000

29. What is the total retroactive adjustment to retained earnings beginning in 2017 as a
result of your audit?
 a. 585,000 c. 900,000
b. 480,000 d. 420,000

30. What is the total amount chargeable to expense for the current year 2017 as a result
of your audit?
a. 1,479,500 c. 1,049,500
b. 861,500 d. 1,059,500

PROBLEM 7:
Rose Company has the following selected accounts in its shareholders equity section as of
December 31, 2016:
Preference shares, P100 par, 10 percent cumulative, 100,000 shares
issued and outstanding P10,000,000
Ordinary shares, P20 par, 1,000,000 shares authorized, 700,000
shares issued and outstanding 14,000,000
Share premium 8,000,000
Accumulated profits 30,000,000

There are no dividends in arrears on the preference shares. During 2017, the following
transactions occurred:

a. The board of directors declared a cash dividend totaling to P2,800,000 to be paid to

preference and Ordinary shareholders. Later, a share dividend of 100,000 ordinary
shares were declared “ordinary shares. The market value of ordinary shares is P68
per share on the date the share dividends were declared.
b. Sometime after the above dividends were declared and settled, the board of
directors declared as property dividends one shares of its investment in Bingo Corp.
stocks being held by the company as financial asset at fair market value through
profit or losses fer every two ordinary shares outstanding. Bingo Corp. stocks were
originally purchased by the company at P l2 per share and have a carrying value
based on their fair value as per the last balance sheet date, at P20 per share. Bingo
Corp. shares were selling at P 24 when the property dividends were declared and
were selling at P 25 when the property dividends were settled. The company had a
total of 600,000 shares of Bingo Corp. shares.
c. At the end of 2017, the board declares a four-for-one share split. With the split, the
number of ordinary shares authorized to be issued increased to 4,000,000. At the
date of the share split, the market value of ordinary share is P75 per share.
d. Net earnings during 2017 total P6,000,000.

Required:
31. What the correct debit to the accumulated profits as a result of the stock dividends
declared in item a?
a. 6,800,000 c. 4,000,000
b. 1,000,000 d. 2,000,000

32. What is the total debit to the accumulated profits account as a result of the
declaration and distribution of the Property dividends in item b?
a. 12,500,000 c. 8,000,000
b. 10,000,000 d. 12,000,000

33. What is the adjusted balance of the company’s Accumulated profit account at the
end of year?
a. 18,400, 000 c. 21,600,000
b. 16,400,000 d. 26,400,000

34. What is the balance of the ordinary shares account as of December 31, 2017?
a. 16,000,000 c. 18,000,000
b. 14,000,000 d. 20,800,000

35. The auditor should ordinarily obtain evidence about the stockholders’ equity
transactions by reviewing the entity’s
a. Minutes of board of directors’ meetings.
b. Transfer agent’s records.
c. Canceled stock certificates.
 d. Treasury shares certificate books.

36. Evaluate the following procedures:

I. Test of Details of Balances
II. Inquiry
III. Analytical Procedures

Which of the above are performed on audit engagement?

a. I and II only c. I and III only
b. II and III only d. I, II and III

37. Which of the following pertains to methods used by CPAs to make sure that they
meet their professional responsibilities?
a. Code of ethics c. Quality control
b. Accounting standards d. Auditing standards

38. Classify the following IT controls:

I. Controls on business continuity and recovery
II. Balance/report is not lost, misdirected and/or corrupted
a. Applications, General c. Applications, Applications
b. General, Applications d. General, General

39. The formula to compute the upper deviation rate is:

a. Expected deviation rate plus allowance for sampling risk
b. Expected deviation rate less allowance for sampling risk
c. Sample deviation rate plus allowance for sampling risk
d. Sample deviation rate less allowance for sampling risk

42. Evaluate the following statements:

I. A foreign accountant may practice in the Philippines, subject to existing treaties,
laws and regulations
II. Accountants who want to be public practitioners (under his/her name),
compilers (in commerce and industry) and teachers (e.g., in Universities) need to be
accredited.
a. True, False c. True, True
b. False, True d. False, False

43. Classify the following engagements:

I. Audit
II. Review
III. Compilation

a. Assurance, Assurance, Non-Assurance

b. Assurance, Non-Assurance, Assurance
c. Assurance, Non-Assurance, Non-Assurance
d. Non-Assurance, Non-Assurance, Non-Assurance

44. Evaluate the following statements:

I. In lieu of practicing under the MRA, a foreign CPA may instead take the
licensure exam for accountants
II. Continuing Professional Development units are only required for accountants
in public practice

a. True, False c. False, False

b. True, True d. False, True

45. Evaluate the following statements:

I. The auditor’s assertion of concern is existence hence he/she confirmed the
accounts receivable.
II. The accountant records, approves and documents receivable write offs.
III. The auditor assesses that the risk of material misstatement for accounts
receivable is high, hence, he/she tested them on an interim period and rolled
forward the account.
Which of the above directly pertains to detection risk?
 a. I only c. III only
b. I and II only d. I, II, and III

46. Evaluate the following statements:

I. CDE Company operates as 4 mining company in the Philippines; mining
companies are highly regulated.
II. Checks, regardless of amount, are solely signed by the President.

Which components of the risk of material misstatements are indicated above?

a. Inherent Risk, Inherent Risk
b. Control Risk, Control Risk
c. Inherent Risk, Control Risk
d. Control Risk, Inherent Risk

47. Evaluate the following planning items/issues:

I. Identification of significant risk and auditor’s responses (general)
II. Relating audit procedures to audit objectives, risk of material misstatement
and assertions

Which of the above is/are included in an audit program?

a. I only c. I and II
b. II only d. Neither I nor II

48. Determine the appropriate audit opinion(s) for a summary financial statement:
I. Summary financial statements are consistent with the audited financial
statements
II. Summary financial statements are fairly presented
III. Summary financial statements present a true and fair view

a. I c. III
b. II d. I, II, or III

49. Evaluate the following risk factory:

I. Client operates in a non-regulated industry
II. Client's cash is recorded and handled by different persons.
III. Client’s internal auditors’ procedures are effective
IV. Client’s board of directors disregards the applicable strict code of ethical
conduct

Which of the above would lead the auditor to assess the risk of material
misstatement to be “HIGH”?
a. I only c. III only
b. II only d. IV only

50. Evaluate the following statements:

I. Setting a low-level peso materiality means more evidence to be gathered
II. There is a direct relationship between materiality and audit risk

a. True, True c. True, False

b. False, False d. False, True

51. Evaluate the following statements:

I. Risk of material misstatement cannot be influenced by the auditor’s effort
II. Detection risk can only be assessed, but not controlled by the auditor

a. True, True c. False, True

b. False, False d. True, False

52. Ultimately, who sets the level of audit risk?

I. External Auditor
II. Management
III. Internal Auditor

a. I only c. I and II
 b. II only d. I, II, and III

53.When an auditor determines that the level of acceptable

detection risk is high, then
a. More testing is to be performed
b. Less testing is to be performed
c. Risk of material misstatement is high
d. Sample size is larger

54. Evaluate the following components of the fraud triangle:

I. Incentive
II. Opportunity
III. Rationalization

To what component of the risk of material misstatement are they related?

a. Inherent Risk, Inherent Risk, Inherent Risk
b. Control Risk, Control Risk, Control Risk
c. Inherent Risk, Control Risk, Inherent risk
d. Control Risk, Control Risk, Inherent Risk

55. Evaluate the following statements:

I. Obtain more (corroborating) evidence
II. Consult with auditor’s own counsel
III. Discuss the fraud with the suspected fraudster

Which are appropriate responses to identified/suspected fraud?

a. I only c. I and II
b. II only d. I, II, and III

56. Evaluate the following statements:

I. Auditor assesses that revenue recognition’s risk of material misstatement is
high
II. Auditor determine that impairment testing of goodwill is inherently complex
and judgmental
III. Auditor determines that a disclaimer of an opinion is appropriate

In which of the above may a Key Audit Matter be presented in the auditor’s report?
a. I only c. I and II
b. II only d. I, II, and III

57. Under PSA 701, auditors are required to (for listed entities):
I. Determine those matters which are to be regarded as KAM
II. Communicate KAM in the auditor’s report
III. Determine a categorical opinion on the KAM

a. I only c. I and II
b. II only d. I, II, and III

58. If an auditor fails to observe the inventory count of the client at the end of the
reporting period which of the following are considered in determining the
appropriate opinion:
I. Materiality of the issue
II. Performance of alternative procedures
III. Effect of the issue to other components of the financial statement

a. I only c. III only

b. II only d. I, II, and III

59. Evaluate the following situations:

I. A material scope limitation
II. A material misstatement
III. A pervasive misstatement
IV. An immaterial scope limitation
In which of the above would an auditor issue a qualified opinion?
a. I only c. III only
b. I and II only d. III and IV

60. Which of the following are components of a system of Quality control?

I. Leadership responsibilities
II. Engagement performance
III. Client’s internal controls

a. I only c. III only

b. I and II only d. III and IV

61. Establishing a plausible relationship between financial and non-financial

information is required to be performed during
I. Risk Assessment Procedures
II. Test of Controls
III. Substantive Test of Details
IV. Substantive Analytical Procedures

a. I only c. I, II, and III only

b. II only d. I, II, III and IV

62. In accepting or continuing an engagement, which of the following is normally

considered by the auditor?
I. Integrity of a shareholder (.001% voting rights)
II. Competence of the professional
III. Independence

a. II only c. I and II only

b. II and III only d. I, II, and III

63. After tests of control, the auditor determined that the tolerable deviation rate is
4%. Sample deviation rate is 4% while expected deviation rate is 3%. Which of
the following is a correct response?
a. Proceed with original plan (rely on controls) because expected deviation rate
is lower than to1erable deviation rate
b. Revise the original plan (not rely on controls) because expected deviation rate
plus sample deviation rate is higher than tolerable deviation rate
c. Proceed with original plan (rely on controls) since sample deviation rate is
equal to tolerable deviation rate
d. Revise the original plan (not rely on controls) since sample deviation rate is
already equal to tolerable rate without the allowance for sampling risk yet.

64. Which normally involves a set a procedure to initially ascertain the

implementation of controls through a completed transaction?
a. Study the design of internal controls
b. Walkthrough of processes and controls
c. Test of controls
d. Substantive testing

65. Evaluate the following statements related to a prospective financial information:

I. Assurance report is written in the positive form
II. Assurance report makes it clear that management is responsible for the
assumptions on which the financial information is based

a. True, False c. True, True

b. False, True d. False, False

66. Confirmation primarily addresses which assertion(s)?

I. Completeness
II. Existence

a. I only c. I and II
 b. II only d. Neither I nor II

67. When an auditor traces reconciles recorded receipts back to official receipts,
the auditor most likely concerned with:
a. Risk of overstatement
b. Risk of understatement
c. Risk of material misstatement
d. Risk of misleading information

68. Segregation of incompatible duties is normally tested by:

I. Inquiry
II. Analytical Procedures
III. Observation

a. I only c. I and II only

b. II only d. I and III only

69. When an auditor physically reconciles a high value inventory in the warehouse
to the accounting records then he/she is concerned with:
a. Risk of overstatement
b. Risk of understatement
c. Risk of material misstatement
d. Risk of misleading information

70. Which of the following should sign the management representation letter?
I. Senior Executive Officer
II. Senior Finance Officer
III. Assistant Vice President for Finance

a. I only c. II and III only

b. II only d. I and II only