Republic of the Philippines

DON HONORIO VENTURA STATE UNIVERSITY

Villa de Bacolor, Pampanga
College of Business Studies

PRE-TEST 6

Tracing number: ________

Instructions: Choose the best answer for each question. Write the letter of your
answer on the corresponding answer sheet on the last page. If you believe that
the correct answer is not given among the choices, write letter “E”. Break a leg!
1. In assessing sampling risk, the risk of incorrect rejection and the risk of
assessing control risk too high relate to the
a. Efficiency of the audit.
b. Effectiveness of the audit.
c. Selection of the sample.
d. Audit quality controls.

2. If the achieved allowance for sampling risk of a statistical sample at a given

reliability level is greater than the desired range, this is an indication that
the
a. Standard deviation was larger than expected.
b. Standard deviation was less than expected.
c. Population was larger than expected.
d. Population was smaller than expected.

3. An auditor initially planned to use unrestricted random sampling with

replacement when testing accounts receivable. Later, the auditor decided to use
unrestricted random sampling without replacement. As a result only of this
decision, the sample size should

a. Increase.
b. Remain the same.
c. Decrease.
d. Be recalculated using a binomial distribution.

4. In which of the following cases would the auditor be most likely to conclude
that all of the items in an account under consideration should be examined rather
than tested on a sample basis?

The measure of Error frequency is

tolerable error is expected to be

a. Large Low
b. Small High
c. Large High
d. Small Low

5. An advantage of using statistical sampling is that such techniques

a. Mathematically measure risk.

b. Eliminate the need for judgmental decision.
c. Define the value of reliability necessary to provide audit assurance.
d. Have been established in the courts to be superior to nonstatistical sampling

6. In comparison with probability-proportional-to-size (PPS) sampling, which of

the following is an advantage of classical variables sampling in auditing

a. If no errors are expected, classical variables sampling usually results in a

smaller sample size than PPS sampling.
b. A classical variables sample can be designed more easily and sample selection
can begin before the complete population is available.
c. If there are many individual differences between recorded and audited amounts
in the population, classical variables sampling may result in a smaller sample
size.
d. Classical variables sampling automatically results in a stratified sample
because items are selected in proportion to their peso amounts.

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 Republic of the Philippines
DON HONORIO VENTURA STATE UNIVERSITY
Villa de Bacolor, Pampanga
College of Business Studies

PRE-TEST 6

7. In a variable sampling plan, an auditor must generally consider each of the

following except

a. Variation within the population.

b. Acceptable risk of incorrect acceptance.
c. Tolerable error.
d. Population size

8. Which of the following statements best describe the auditor’s responsibility

concerning the appropriateness of the going concern assumption in preparation of
the financial statements?
A. The auditor’s responsibility is to make a specific assessment of the
entity’s ability to continue as a going concern.
B. The auditor’s responsibility is to predict future events or conditions that
may cause the entity to cease to continue as a going concern.
C. The auditor’s responsibility is to consider the appropriateness of
management’s use of the going concern assumption and consider whether there are
material uncertainties about the entity’s ability to continue as a going concern
that need to be disclosed in the financial statements.
D. The auditor’s responsibility is to give a guarantee in the audit report that
the entity has the ability to continue as a going concern.

9. An auditor is evaluating the results of a variables sampling plan. Which of

the following is not relevant to the auditor's judgment about the sample?

a. Management's explanations for why errors in the sample occurred.

b. Projecting the sample error to the population.
c. Considering the effects of sampling risk.
d. Qualitative information that lends insight into errors found.

10. Several conditions must be met before an auditor applies either difference
or ratio estimation. Which of the following is not one of these conditions?

a. Each population item must have a recorded book value.

b. The auditor must not expect understatement errors.
c. Total population book value must be known and must correspond to the sum of
all individual population items.
d. Expected differences between audited and recorded book values must not be
too rare.

11. Analytical procedures used in the overall stage of the audit generally
include

A. Retesting controls that appeared to be ineffective during the assessment of

control risk.
B. Considering unusual or unexpected account balances that were not previously
identified.
C. Gathering evidence concerning account balances that have not changed from
the prior year.
D. Performing tests of transaction to corroborate management’s financial
statement assertions.

12. Analytical procedures performed in the overall review stage of an audit

suggest that several accounts have unexpected relationships. The results of these
procedures most likely indicate that

A. The communication with the audit committee should be revised.

B. Irregularities exist among the relevant account balances.
C. Additional substantive tests of details are required.
D. Internal control activities are not operating effectively.

13. The auditor should have review information provided by those charged with
governance and management identifying
I. The names of all known related parties.
II. Related party transactions

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DON HONORIO VENTURA STATE UNIVERSITY
Villa de Bacolor, Pampanga
College of Business Studies

PRE-TEST 6
A. I only
B. II only
C. Both I and II
D. Neither I nor II
14. Which of the following events most likely indicates the existence of related
parties?

A. Making a loan without scheduled terms for repayment of the funds.

B. Discussing merger terms with a company that is a major competitor.
C. Selling real estate at a price that differs significantly from its book
value.
D. Borrowing a large sum of money at a variable rate of interest.

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

A. A purchase from another corporation than is controlled by the corporation’s

chief shareholder.
B. A loan from the corporation to a major shareholder.
C. Sale of land to the corporation by the spouse of a director.
D. A sale to another corporation with similar name.

16. Which of the following procedures should be performed by the auditor to

determine the completeness of information provided y those charged with
governance and management identifying the names of all known related parties?

I. Review prior year’s working papers for names of known related parties.
II. Inquire as to the affiliation of those charged with governance and officers
with other entities.
III. Review minutes of the meetings of shareholders and those charged with
governance.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III

17. Which of the following statements concerning related party transactions is

correct?
A. In the absence of evidence to the contrary, related party transactions
should be assumed to be outside the ordinary course of business.
B. The audit procedure direct toward identifying related party transactions
should include considering whether transactions are occurring but are not being
given proper accounting recognition.
C. An auditor should determine whether a particular transaction would have
occurred if the parties have not been related.
D. An auditor should substantiate the related party transactions were
consummated on terms equivalent to those that prevail in arm’s-length
transactions.

18.Probability-proportional-to-size (PPS) sampling is most appropriate when

a. The auditor anticipates understatement errors.
b. The auditor anticipates overstatement errors.
c. The auditor expects no errors.
d. The auditor has assessed control risk at the maximum.

19. An auditor searching for related party transactions should obtained an

understanding of each subsidiary’s relationship to the total entity because

A. This may permit the audit intercompany account balances to be performed as

of concurrent dates.
B. This may reveal whether particular transactions would have taken place if
the parties have not been related.
C. The business structure may be deliberately designed to obscure related party
transactions.
D. Intercompany transactions may have been consummated on terms equivalent to
arm’s-length transactions.

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 Republic of the Philippines
DON HONORIO VENTURA STATE UNIVERSITY
Villa de Bacolor, Pampanga
College of Business Studies

PRE-TEST 6
20. After determining that a related party transaction has, in fact, occurred,
an auditor should
A. Obtain an understanding of the business purpose of the transaction.
B. Substantiate that the transaction was consummated on terms equivalent to an
arm’s-length transaction.
C. Add a separate paragraph to the auditor’s report to explain the transaction.
D. Perform analytical procedures to verify whether similar transactions
occurred, but were not recorded.

21. Which of the following audit procedures is most likely to assist an auditor in
identifying related party transactions?

A. Inspecting communications with law firms for evidence of unreported

contingent liabilities.
B. Reviewing accounting records for nonrecurring transactions recognized near
the balance sheet date.
C. Retesting ineffective controls previously reported to the audit committee.
D. Sending second requests for unanswered positive confirmations of accounts
receivable.

22. For a reporting entity that has participated in related party transactions
that are material, disclosure in the financial statements should include

A. A reference to deficiencies in the entity’s internal control.

B. A statement to the effect that a transaction was consummated on terms
equivalent to those that prevail in arm’s-length transactions.
C. The nature of the relationship and the terms and manner of settlement.
D. Details of the transactions within major classifications.

23.If all other factors specified in a variables sampling plan remain constant,
increasing the acceptable risk of incorrect acceptance would cause the required
sample size to
a. Decrease.
b. Remain the same.
c. Increase.
d. Become indeterminate.

24.An accounts receivable aging schedule was prepared on 300 pages with each page
containing the aging data for 50 accounts. The pages were numbered from 1 to 300
and the accounts listed on each were numbered from 1 to 50. An auditor selected
accounts receivable for confirmation using a table of numbers as illustrated:

Select Column from Table of Numbers

Separate 5 Digits: First 3 Digits, Last 2 Digits

02011 020 11 x
85393 853 93 *
97265 972 65 *
61680 616 80 *
16656 166 56 *
42751 427 51 *
69994 699 94 *
07942 079 42 y
10231 102 31 z
53988 539 88 *

x Mailed confirmation to account 11 listed on page 20

y Mailed confirmation to account 42 listed on page 79
z Mailed confirmation to account 31 listed on page 102
* Rejected

This is an example of which of the following sampling methods?

a. Block sampling.
b. Systematic sampling.
c. Haphazard sampling.
d. Random number sampling.
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Auditing and Assurance Principles – Chapters 8, 9, and 10
 Republic of the Philippines
DON HONORIO VENTURA STATE UNIVERSITY
Villa de Bacolor, Pampanga
College of Business Studies

PRE-TEST 6

25.In which sampling method is the probability of selecting an item proportional

to the size of the value of the item (i.e., a P1,000 item is 10 times more likely
to be selected than a P100 item)?
a. Difference estimation.
b. Mean per unit estimation.
c. Probability proportional to size sampling.
d. Nonstatistical sampling for variables.

26.Assume you are auditing a retail department store and want to estimate the
peso amount of errors on sales invoices using probability proportional to size
sampling. Which of the following is true?

a. The risks of incorrect acceptance and incorrect rejection are greater than for
a classical variables sampling plan.
b. Tolerable error is ignored.

c. An invoice with a large balance has a greater chance of being selected than
one with a smaller balance.
d. The estimate will be unreliable if the error rate is small.

27.Which of the following forms of evidence represents the most competent

evidence that a receivable actually exists?
a. A positive confirmation. b. A sales invoice.
c. A receiving report. d. A bill of lading.

28. During the process of confirming receivables as of December 31, 2022, a

positive confirmation was returned indicating the "balance owed as of December 31
was paid on January 9,2023." The auditor would most likely

a. Determine whether there were any changes in the account between January 1 and
January 9, 2023.
b. Determine whether a customary trade discount was taken by the customer.
c. Reconfirm the zero balance as of January 10, 2023.
d. Verify that the amount was received.

29. When the objective of the auditor is to evaluate the appropriateness of

adjustments to sales, the best available evidence would normally be

a. Oral evidence obtained by discussing adjustment-related procedures with

controller personnel.
b. Analytical evidence obtained by comparing sales adjustments to gross sales
for a period of time.
c. Physical evidence obtained by inspection of goods returned for credit.
d. Documentary evidence obtained by inspecting documents supporting entries to
adjustment accounts.

30. When counting cash on hand, the auditor must exercise control over all cash
and other negotiable assets to prevent
a. Theft. b. Irregular endorsement.
c. Substitution. d. Deposits in transit.

31. Although most substantive testing is performed during the final audit, some
substantive tests may be done on the interim audit. Which of the following
statements concerning the timing of substantive tests is true?

a. When internal control is weak, extensive substantive testing should be

performed during the interim audit.
b. Substantive testing should be performed during the interim audit only under
conditions of excellent internal control.
c. As a general rule, the auditor performs substantive tests of balances as of
the balance sheet date and tests transactions during the interim audit as well as
the final audit.
d. If internal control is weak, the auditor should confirm accounts receivable
as of a point in time at least one month prior to the client's fiscal year end.

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Auditing and Assurance Principles – Chapters 8, 9, and 10
 Republic of the Philippines
DON HONORIO VENTURA STATE UNIVERSITY
Villa de Bacolor, Pampanga
College of Business Studies

PRE-TEST 6
32. A member of the audit team noted that only one of the company's ten divisions
had a large number of material sales transactions close to the end of the fiscal
year. In terms of risk analysis, this would most likely lead the auditor to
conclude that

a. There is a relatively higher risk of overstatement of revenues for this

division than for other divisions.
b. Risks associated with auditing this division are not affected by this
information.
c. There is a high risk that liabilities of this division are understated.
d. There is a high risk that the other nine divisions have understated
revenues.

33. Which of the following statements best describes the “date of the financial
statements?’

A. That date on which those with the recognized authority assert that they have
prepared the entity’s complete set of financial statements, including the related
notes, and that they have taken responsibility for them.
B. The date that the auditor’s report and audited financial statements are made
available to third parties.
C. The date of the end of the latest period covered by the financial
statements.
D. The date on which the auditor has obtained sufficient appropriate audit
evidence on which to base the opinion on the financial statements.

34. An entity's financial statements were misstated over a period of years due to
large amounts of revenue being recorded in journal entries that involved debits
and credits to an illogical combination of accounts. The auditor could most
likely have been alerted to this fraud by
a. Scanning the general journal for unusual entries.
b. Performing a revenue cut-off test at year-end.
c. Tracing a sample of journal entries to the general ledger.
d. Examining documentary evidence of sales returns and allowances recorded
after year-end.

35. Which of the following would be the most appropriate audit procedure to test
the processing of interbank transfers?
a. Analyze a sample of interbank transfers throughout the period including
period-end reconciliations.
b. Obtain cutoff bank statements for each bank account and reconcile them to
accounting records.
c. Send bank confirmation requests to each bank in which accounts are
maintained and reconcile the completed forms to accounting records.
d. Trace all bank deposits recorded in accounting records

36. Each of the following might, by itself, form a valid basis for an auditor to
decide to omit a test except for the
a. Difficulty and expense involved in testing a particular item.
b. Assessed level of control risk.
c. Relative risk involved.
d. Relationship between the cost of obtaining evidence and its usefulness.

37. Auditor confirmation of accounts payable balances at the balance sheet date
may be unnecessary because
a. This is a duplication of cutoff tests.
b. Accounts payable balances at the balance sheet date may not be paid before
the audit is completed.
c. Correspondence with the audit client's attorney will reveal all legal action
by vendors for nonpayment.
d. There is likely to be other reliable external evidence to support the
balances.

38. A weakness in internal accounting control over recording retirements of

equipment may cause the auditor to
a. Inspect certain items of equipment in the plant and trace those items to the
accounting records.
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DON HONORIO VENTURA STATE UNIVERSITY
Villa de Bacolor, Pampanga
College of Business Studies

PRE-TEST 6
b. Review the subsidiary ledger to ascertain whether depreciation was taken on
each item of equipment during the year.
c. Trace additions to the "other assets" account to search for equipment that
is still on hand but no longer being used.
d. Select certain items of equipment from the accounting records and locate
them in the plant.

39. The probability of a significant idle capacity loss increases under which of
the following conditions?
a. Sales and production have increased significantly during the period under
audit.
b. Sales have declined somewhat, but production has remained constant in
anticipation of a sales recovery in the following accounting period.
c. Sales and production have declined materially during the period under audit.
d. The client has increased its overhead absorption rate effective at the
beginning of the following accounting period.

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

a. 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.
b. 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.
c. 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.
d. Trace client's unit costs to the auditor's copies of audited price lists.

41. An attorney responding to an auditor as a result of the client's letter of

audit inquiry may appropriately limit the response to
a. Items which have high probability of being resolved to the client's
detriment.
b. Asserted claims and pending or threatened litigation.
c. Legal matters subject to unsettled points of law, uncorroborated
information, or other complex judgments.
d. Matters to which the attorney has given substantive attention in the form of
legal consultation or representation.

42. Patentex developed a new secret formula which is of great value because it
resulted in a virtual monopoly. Patentex has capitalized all research and
development costs associated with this formula. Greene, CPA, who is examining
this account, will probably
a. Confer with management regarding transfer of the amount from the balance
sheet to the income statement.
b. Confirm that the secret formula is registered and on file with the county
clerk's office.
c. Confer with management regarding a change in the title of the account to
"goodwill."
d. Confer with management regarding ownership of the secret formula.

43. 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
a. The final inventory is valued at cost.
b. All inventory represented by an inventory tag is listed on the inventory
sheets.
c. All inventory represented by an inventory tag is bona fide.
d. Inventory sheets do not include untagged inventory items.

44. The audit procedure of analyzing the repairs and maintenance accounts is
primarily designed to provide evidence in support of the audit proposition that
all

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 Republic of the Philippines
DON HONORIO VENTURA STATE UNIVERSITY
Villa de Bacolor, Pampanga
College of Business Studies

PRE-TEST 6
a. Expenditures for fixed assets have been recorded in the proper period.
b. Capital expenditures have been properly authorized.
c. Non-capitalizable expenditures have been properly expensed.
d. Expenditures for fixed assets have been capitalized.

45. The auditor tests the quantity of materials charged to work in process by
tracing these quantities to
a. Cost ledgers. B. Perpetual inventory records.
c. Receiving reports. d. Material requisitions.

46. An auditor's observation of physical inventories at the main plant at year-

end would provide direct evidence to support which of the following objectives?
a. Accuracy of the priced out inventory.
b. Evaluation of lower of cost or market test.
c. Identification of obsolete or damaged merchandise to evaluate allowance for
obsolescence.
d. Determination of goods on consignment at another location.

47. When reviewing working papers, an audit supervisor will be primarily

concerned with determining whether the
a. Audit programs have been carried out without deviation.
b. Working papers adequately support the audit findings, conclusions, and
reports.
c. Working papers reflect adherence to budget constraints.
d. Auditing department's standard formats and tick marks have been used
consistently.

48. Generally accepted auditing standards require the auditor to apply analytical
procedures in both the planning and review stages of the audit. The major reason
for applying analytical procedures as part of audit review is
a. To identify abnormalities that warrant audit attention.
b. To assist the auditor in establishing materiality thresholds.
c. To ascertain that the auditor has gathered adequate evidence to resolve
suspicions arising during the planning stages of the audit.
d. To provide documentary evidence in the event of future litigation.

49. Which of the following procedures would an auditor most likely perform to
obtain evidence about the occurrence of subsequent events?
A. Inquiring as to whether any unusual adjustments were made after the date of
the financial statements.
B. Confirming a sample of material accounts receivable established after the
date of the financial statements.
C. Comparing the financial statements being reported on with those of the prior
period.
D. Investigating personnel changes in the accounting department occurring after
the date of the financial statements.

50. In auditing investments for proper valuation, the auditor should do all but
the following:
a. Confirm securities held in safekeeping off the client's premises.
b. Vouch purchases and sales of securities by tracing to brokers' advices and
canceled checks.
c. Compare cost and market by reference to year end market values for selected
securities.
d. Recalculate gain or loss on disposals.

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

52. An internal auditor discovered an error in a receivable due from a major

stockholder. The receivable's balance accounts for less than one percent of the
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DON HONORIO VENTURA STATE UNIVERSITY
Villa de Bacolor, Pampanga
College of Business Studies

PRE-TEST 6
company's total receivables. Would the auditor be likely to consider the error
material?
a. Yes, if relative risk is low.
b. No, if there will be further transactions with this stockholder.
c. Yes, because a related party is involved.
d. No, because a small peso amount is in error.

53. An auditor is concerned with completing various phases of the audit after the
balance sheet date. The subsequent period extends to the date of the
A. Delivery of the auditor’s report to the client.
B. Auditor’s report
C. Final review of the audit working papers.
D. Public issuance of the financial statements.

54. A letter from the company's attorney in response to inquiries about possible
litigation is best described as:
a. Confirmation evidence.
b. Analytical evidence.
c. Documentary evidence.
d. Physical evidence.

55. Which of the following procedures would an auditor ordinarily perform during
the review of subsequent events?
a. An analysis of related party transactions for the discovery of possible
fraud.
b. A review of the cut-off bank statements for the period after the year-end.
c. An inquiry of the client's legal counsel concerning litigation.
d. An investigation of material weaknesses in internal control previously
communicated to the
client.

56. Which of the following events occurring after the issuance of an auditor’s
report most likely would cause the auditor to make further inquiries about the
previously issued financial statements?

A. A technological development that could affect the entity’s future ability to

continue as a going concern.
B. The entity’s ale of a subsidiary that accounts for 30% of the entity’s
consolidated sales.
C. The discovery of information regarding a contingency that existed before
the financial statements were issued.
D. The final resolution of a lawsuit disclosed in the notes to the financial
statements.

57. The responsibility for the identification and disclosure of related parties
and transactions with such parties rests with the
A. Auditor
B. Entity’s management
C. Financial Reporting Standards Council (FRSC)
D. Securities and Exchange Commission (SEC)

58. The auditor is required to perform procedures designed to obtain sufficient

appropriate audit evidence to identify all events that may require adjustment of,
or disclosure in, the financial statements up to the
A. Date of the auditor’s report
B. Date of approval of the financial statements.
C. Date the financial statements are issued.
D. Date of the financial statements.

59. 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?
A. Cash flows from operating activities are negative.
B. Stock dividends replace annual cash dividends.
C. Significant related party transactions are pervasive.
D. Research and development projects are postponed.

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DON HONORIO VENTURA STATE UNIVERSITY
Villa de Bacolor, Pampanga
College of Business Studies

PRE-TEST 6
60. Which of the following procedures should an auditor ordinarily perform
regarding subsequent events?
A. Review the cutoff bank statements for several months after the year -end.
B. Compare the latest available interim financial statements with the financial
statements being audited.
C. Send second request to the client’s customers who failed to respond to
initial accounts receivable confirmation requests.
D. Communicate material weakness in internal control to the client’s audit
committee.

61. Which of the following statements best expresses the auditor’s responsibility
with respect to facts which become known to the auditor after the date of the
auditor’s report but before the date the financial statements are issued?
A. The auditor should amend the financial statements.
B. If the facts discovered will materially affect the financial statements, the
auditor should issue a new report which contains either a qualified opinion or an
adverse opinion.

C. The auditor should consider whether the financial statements need amendment,
discuss the matter with management, and consider taking actions appropriate in
the circumstances.
D. The auditor should withdraw from the engagement.

62. After issuing a report, an auditor has no obligation to make continuing

inquiries or perform other procedures concerning the audited financial
statements, unless
A. Final determinations or resolutions are made of contingencies that had been
disclosed in the financial statements.
B. Information about an event that occurred after the date of the auditor’s
report comes to the auditor’s attention.
C. The control environment changes after issuance of the report.
D. Information, which existed at the report date and may affect the report,
comes to the auditor’s attention.

63. Only one of the following four statements, which compare confirmation of
accounts payable with suppliers and confirmation of accounts receivable with
debtors, is true. The true statement is that
a. Confirmation of accounts payable with suppliers is a more widely accepted
auditing procedure than is confirmation of accounts receivable with debtors.
b. As 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.
c. Statistical sampling techniques are more widely accepted in the confirmation
accounts payable than in the confirmation of accounts receivable.
d. It is less likely that the confirmation request sent to the supplier will
show the amount owed than that the request sent to the debtor will show the
amount due.

64. Which of the following would not likely be included in an accounts payable
confirmation?
a. An itemized statement of amounts owed.
b. An itemized statement of merchandise consigned.
c. An itemized statement of cash paid near the balance sheet date.
d. An itemized list of any notes or other obligations.

65. Companies may be held liable for all of the following except:
a. Noncompliance with environmental laws and regulations.
b. Remedial cleanup of hazardous waste sites.
c. Owners and operators before hazardous waste was disposed.
d. Personal injury or damage caused by hazardous waste.

66. Which of the following audit procedures is not appropriate for addressing the
assertion of valuation?
a. Verify accounts payable trial balance.
b. Confirm with creditors.
c. Test for unrecorded liabilities.
d. Perform analytical procedures.
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DON HONORIO VENTURA STATE UNIVERSITY
Villa de Bacolor, Pampanga
College of Business Studies

PRE-TEST 6

67. A client's purchasing system ends with the assumption of a liability and the
eventual payment of the liability. Which of the following best describes the
auditor's primary concern with respect to liabilities resulting from the
purchasing system?
a. Accounts payable are not materially understated.
b. Authority to incur liabilities is restricted to one designated person.
c. Acquisition of materials is not made from one vendor or one group of
vendors.
d. Commitments for all purchases are made only after established competitive
bidding procedures are followed.

68. A client erroneously recorded a large purchase twice. Which of the following
control procedures would be most likely to detect this error in a timely and
efficient manner?
a. Footing the purchases journal.
b. Reconciling vendors' monthly statements with subsidiary payable ledger
accounts.
c. Tracing totals from the purchases journal to the ledger accounts.
d. Sending written quarterly confirmations to all vendors.

69. A client's 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 this cycle is to
a. Evaluate the reliability of information generated by the cycle.
b. Investigate the physical handling and recording of unusual acquisitions of
materials.
c. Consider the need to be on hand for the annual physical inventory count if
this system is not functioning properly.
d. Ascertain that materials said to be ordered, received, and paid for are on
hand.

70. Which of the following is not an appropriate activity for the treasurer's
department?
a. Prepare checks.
b. Forward checks to vendors.
c. Cancel vouchers.
d. Prepare vouchers.

71. As an in-charge auditor, you are reviewing a write-up of internal control in

cash receipt and disbursement procedures.
Which of the following deficiencies alone should cause you the least concern?
a. Checks are signed by only one person.
b. Signed checks are distributed by the controller to approved payees.
c. The treasurer fails to establish bona fide names and addresses of check
payees.
d. Cash disbursements are made directly out of cash receipts

72. Based on observations made during an audit, an independent auditor should

discuss with management the effectiveness of procedures that control against the
purchase of
a. Supplies purchased from a vendor who offers no trade or cash discounts.
b. Inventory acquired just-in-time.
c. Equipment that is needed but does not qualify for investment tax credit.
d. Supplies ordered without considering potential volume discounts

73. To assure that disbursements are neither improper nor inaccurate, an entity
could require that all checks be
a. Signed by an officer after supporting documentation has been examined.
b. Reviewed by the treasurer before mailing.
c. Numbered sequentially and accounted for by internal auditors.
d. Canceled when they are returned with the bank statement.

74. An auditor plans to examine a sample of 20 checks for countersignatures as

prescribed by the client's internal control procedures. One of the checks in the
sample cannot be found. The auditor should
a. Evaluate the results as if sample size had been 19.
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DON HONORIO VENTURA STATE UNIVERSITY
Villa de Bacolor, Pampanga
College of Business Studies

PRE-TEST 6
b. Treat the missing check as a deviation.
c. Treat the missing check in the same manner as the majority of the other 19
checks, i.e., countersigned or not.
d. Choose another check to replace the missing check in the sample.

75. An internal control questionnaire indicates that an approved receiving report

must accompany every check request for payment of merchandise. Which of the
following procedures provides the greatest assurance that this control is
operating effectively?
a. Select and examine receiving reports and ascertain that the related canceled
checks are dated no earlier than the receiving reports.
b. Select and examine receiving reports and ascertain that the related canceled
checks are dated no later than the receiving reports.
c. Select and examine canceled checks and ascertain that the related receiving
reports are dated no earlier than the checks.
d. Select and examine canceled checks and ascertain that the related receiving
reports are dated no later than the checks.

76. For appropriate segregation of duties, journalizing and posting summary

payroll transactions should be assigned to
a. The treasurer's department.
b. General accounting.
c. Payroll accounting.
d. The timekeeping department.

77. Which of the following procedures is most effective in providing reasonable

assurance that payroll checks are distributed only to bona fide employees?
a. An employee independent of payroll preparation compares endorsements on
canceled payroll checks with employee signatures in personnel records.
b. All changes in pay rates and deductions are reviewed and approved by a
responsible official independent of payroll preparation and distribution.
c. All unclaimed paychecks are returned to an employee independent of payroll
preparation and distribution.
d. All personnel and payroll records and documents are prenumbered and
physically protected from unauthorized access.

78. In auditing postretirement healthcare benefits, auditors face what's called

the attribution period, which is the period from the date the employee:
a. Was hired to the date the employee terminated employment.
b. Was hired to the date the employee is eligible to receive benefits.
c. Was terminated to the date the employee is eligible to receive benefits.
d. Was terminated to the date the employee receives benefits.

79. To minimize the opportunities for fraud, unclaimed cash payroll should be
a. Deposited in a safe deposit box.
b. Held by the payroll custodian.
c. Deposited in a special bank account.
d. Held by the controller.

80. Which of the following best describes the primary purpose of audit
procedures?
a. To detect errors or irregularities.
b. To comply with generally accepted accounting principles.
c. To gather corroborative evidence.
d. To verify the accuracy of account balances.

81. Which of the following statements relating to the competence of evidential

matter is always true?
a. Evidential matter gathered by an auditor from outside an enterprise is
reliable.
b. Accounting data developed under satisfactory conditions of internal control
are more relevant than data developed under unsatisfactory conditions.
c. Oral representations made by management are not valid.
d. Evidence gathered by auditors must be both valid and relevant to be
considered competent.

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DON HONORIO VENTURA STATE UNIVERSITY
Villa de Bacolor, Pampanga
College of Business Studies

PRE-TEST 6
82. Which of the following factors will least affect the independent auditor's
judgment as to the quantity, type, and content of the working papers desirable
for a particular engagement?
a. Nature of the auditor's report.
b. Nature of the financial statements, schedules, or other information upon
which the auditor is reporting.
c. Need for supervision and review.
d. Number of personnel assigned to the audit.

83. Audit evidence takes different forms and varies in persuasiveness. Which of
the following is the least persuasive type of evidence?
a. Vendor's invoice.
b. Bank statement obtained from the client.
c. Computations made by the auditor.
d. Canceled checks.

84. The purpose of tests of controls is to provide reasonable assurance that

a. The extent of substantive testing is minimized.
b. Evidence will be obtained to determine an assessed level of control risk.
c. Errors and irregularities are prevented or detected in a timely manner.
d. The auditor has an understanding of the control environment.

85. In which of the following instances would an auditor be least likely to

require the assistance of a specialist?
a. Assessing the value of inventories of works of art.
b. Determining the quantities of materials stored in piles.
c. Determining the value of unlisted securities.
Determining the assessed value of fixed assets.

86. During an audit engagement, data are compiled and included in the audit
working papers. The working papers are
a. A client owned record of conclusions reached by the auditors who performed
the engagement.
b. Evidence supporting financial statements.
c. Support for the auditor's compliance with generally accepted auditing
standards.
d. A record to be used as a basis for the following year's engagement.

87. Once an auditor has determined that accounts receivable have increased due to
slow collections in a "tight money" environment, the auditor would be likely to
a. Increase the balance in the allowance for bad debts account.
b. Review the going-concern ramifications.
c. Review the credit and collection policy.
d. Expand tests of collectibility.

88. As one of the year-end audit procedures, the auditor instructed the client's
personnel to prepare a standard bank confirmation request for a bank account that
had been closed during the year. After the client's treasurer had signed the
request, it was mailed by the assistant treasurer. What is the major flaw in
this audit procedure?
a. The confirmation request was signed by the treasurer.
b. Sending the request was meaningless because the account was closed before
the year-end.
c. The request was mailed by the assistant treasurer.
d. The CPA did not sign the confirmation request before it was mailed.

89. Which of the following is one of the better auditing techniques that might be
used by an auditor to detect kiting?
a. Review composition of authenticated deposit slips.
b. Review subsequent bank statements and canceled checks received directly from
the banks.
c. Prepare a schedule of bank transfers from the client's books.
d. Prepare year-end bank reconciliations.

90. Audit working papers often include a client prepared, aged trial balance of
accounts receivable as of the balance sheet date. An aging is best used by the
auditor to
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DON HONORIO VENTURA STATE UNIVERSITY
Villa de Bacolor, Pampanga
College of Business Studies

PRE-TEST 6
a. Evaluate controls over credit sales.
b. Test the accuracy of recorded charge sales.
c. Estimate credit losses.
d. Verify the validity of the recorded receivables.

91. The application of statistical sampling techniques is least related to which

of the following generally accepted auditing standards?
a. The work is to be adequately planned, and assistants, if any, are to be
properly supervised.
b. In all matters relating to the assignment, independence in mental attitude
is to be maintained by the auditor or auditors.
c. A sufficient understanding of internal control is to be obtained to plan the
audit and to determine the nature, timing, and extent of tests to be performed.
d. Sufficient competent evidential matter is to be obtained through inspection,
observation, inquiries, and confirmations to afford a reasonable basis for an
opinion about the financial statements under audit.

92. The tolerable rate of deviation for tests of controls necessary to justify a
control risk assessment depends primarily on which of the following?
a. The cause of errors.
b. The extent of reliance to be placed on the procedures.
c. The amount of any substantive errors.
d. The limit used in audits of similar clients.

93. An underlying feature of random sampling is that each

a. Stratum of the accounting population be given equal representation in the
sample.
b. Item in the accounting population be randomly ordered.
c. Item in the accounting population should have an opportunity to be selected.
d. Item must be systematically selected using replacement.

94. If the achieved allowance for sampling risk of a statistical sample at a

given reliability level is greater than the desired range, this is an indication
that the
a. Standard deviation was larger than expected.
b. Standard deviation was less than expected.
c. Population was larger than expected.
d. Population was smaller than expected.

95. In a variables sampling plan, an auditor must generally consider each of the
following except
a. Variation within the population.
b. Acceptable risk of incorrect acceptance.
c. Tolerable error.
d. Population size.

96. An advantage of using statistical sampling is that such techniques

a. Mathematically measure risk.
b. Eliminate the need for judgmental decision.
c. Define the value of reliability necessary to provide audit assurance.
d. Have been established in the courts to be superior to nonstatistical
sampling.

97. The variability of a population, as measured by the standard deviation, is

the
a. Extent to which the individual values of the items in the population are
spread about the mean.
b. Degree of asymmetry of a distribution.
c. Tendency of the means of large samples (at least 30 items) to be normally
distributed.
d. Measure of the closeness of a sample estimate to a
corresponding population characteristic.

98. Which of the following statements concerning alpha and beta risk is true?
a. As alpha risk increases, beta risk decreases.
b. As inherent risk and/or control risk increase, beta risk should also
increase.
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DON HONORIO VENTURA STATE UNIVERSITY
Villa de Bacolor, Pampanga
College of Business Studies

PRE-TEST 6
c. As inherent risk and/or control risk increase, beta risk should decrease.
d. As a "rule of thumb," the auditor generally sets beta risk equal to or less
than 10%, inasmuch as it is the basis for the audit opinion.

99. After an audit report containing an unmodified opinion on a client’s

financial statements was issued, the client decided to sell the shares of a
subsidiary that accounts for 30% of its revenue and 25% of its net income. The
auditor should
A. Describe the effects of this subsequently discovered information in a
communication with persons known to be relying on the financial statements.
B. Take no action because the auditor has no obligation to make any further
inquiries.
C. Determine whether the information is reliable and, if determined to be
reliable, request that revised financial statements be issued.
D. Notify the entity that the auditor’s report may no longer be associated with
the financial statements.

100. Which of the following is an element of sampling risk?

a. Choosing an audit procedure that is inconsistent with the audit objective.
b. Choosing a sample size that is too small to achieve the sampling objective.
c. Failing to detect an error on a document that has been inspected by the
auditor.
d. Failing to perform audit procedures that are required by the sampling plan.
-------------------------------END OF EXAMINATION--------------------------------
“You’re on your own kid, always have been.” – Taylor Swift
Prepared by:

Camille Garcia, CPA, MBA

Faculty

ANSWER SHEET
Tracing Number: _________
1.____ 18. ____ 35. ____ 52.____ 69.____ 86.____
2. ____ 19. ____ 36. ____ 53. ____ 70. ____ 87. ____
3. ____ 20. ____ 37. ____ 54. ____ 71. ____ 88. ____
4. ____ 21. ____ 38. ____ 55. ____ 72. ____ 89. ____
5. ____ 22. ____ 39. ____ 56. ____ 73. ____ 90. ____
6. ____ 23. ____ 40. ____ 57. ____ 74. ____ 91. ____
7. ____ 24. ____ 41. ____ 58. ____ 75. ____ 92. ____
8. ____ 25. ____ 42. ____ 59. ____ 76. ____ 93. ____
9. ____ 26. ____ 43. ____ 60. ____ 77. ____ 94. ____
10. ___ 27. ____ 44. ____ 61. ____ 78. ____ 95. ____
11. ___ 28. ____ 45. ____ 62. ____ 79. ____ 96. ____
12. ___ 29. ____ 46. ____ 63. ____ 80. ____ 97. ____
13. ___ 30. ____ 47. ____ 64. ____ 81. ____ 98. ____
14. ___ 31. ____ 48. ____ 65. ____ 82. ____ 99. ____
15. ___ 32. ____ 49. ____ 66. ____ 83. ____ 100. ____
16. ___ 33. ____ 50. ____ 67. ____ 84. ____
17. ___ 34. ____ 51. ____ 68. ____ 85. ____

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