**AUDITING PROBLEMS - SUBSTANTIVE TEST OF c.

Draw a check for P100,000 on Bank B for deposit in

ACCOUNT BALANCES** Bank A. Record the disbursement but not the receipt.
List the disbursement as an outstanding check, but do
**SUBSTANTIVE TEST OF CASH & CASH EQUIVALENTS** not list the receipt as a deposit in transit. Record the
receipt at the beginning of the following period.
1. An auditor would consider a cashier’s job description d. Draw a check for at least P100,000 on Bank A for
to contain compatible duties if the cashier receives deposit in Bank B. Record the disbursement but not the
remittance from the mailroom and also prepares the receipt and list the disbursement as an outstanding
a. Daily deposit slip. check. Record the receipt at the beginning of the
c. Remittance advices. following year.
b. Prelist of individual checks.
d. Monthly bank reconciliation. 6. While performing an audit of cash, an auditor begins
to suspect check kiting. Which of the following is the
2. Which of the following internal control procedures best evidence that the auditor could obtain concerning
will most likely prevent the concealment of a cash whether kiting is taking place?
shortage resulting from improper write-off of a trade a. Documentary evidence obtained by vouching
account receivable? credits on the latest bank statement to supporting
a. Write-offs must be supported by an aging schedule documents.
showing that only receivables overdue for several b. Documentary evidence obtained by vouching
months have been written off. entries in the cash account to supporting documents.
b. Write-offs must be approved by the cashier who is c. Oral evidence obtained by discussion with
in a position to know if the receivables have, in fact, controller personnel.
been collected. d. Evidence obtained by preparing a schedule of
c. Write-offs must be approved by a responsible interbank transfers.
officer after review of credit department
recommendations and supporting evidence. 7. Two months before year-end, the bookkeeper
d. Write-offs must be authorized by company field erroneously recorded the receipt of a long-term bank
sales employees who are in a position to determine the loan by a debit to cash and a credit to sales. Which of
financial standing of the customers. the following is the most effective procedure for
detecting this type of error?
3. An entity’s internal control structure requires every a. Analyze bank confirmation information.
check request that there be an approved voucher, b. Analyze the notes payable journal.
supported by a prenumbered purchase order and a c. Prepare year-end bank reconciliation.
prenumbered receiving report. To determine whether d. Prepare a year-end bank transfer schedule.
checks are being issued for unauthorized expenditures,
an auditor most likely would select items for testing 8. Postdated checks received by mail in settlement of
from the population of all customer’s accounts should be
a. Cancelled checks. a. Returned to customer.
c. Purchase orders. b. Stamped with restrictive endorsement.
b. Approved vouchers. c. Deposited immediately by the cashier.
* d. Receiving reports. d. Deposited the day after together with cash
receipts.
4. Which of the following auditing procedures would the
auditor not apply to a cutoff bank statement? 9. The cashier of Milady Jewelries covered a shortage in
a. Trace year end outstanding checks and deposits in the cash working fund with cash obtained at December
transit to the cutoff bank statement. 31 from a bank by cashing but not recording a check
b. Reconcile the bank account as of the end of the drawn on the company out of town bank. How would
cutoff period. you as an auditor discover the manipulation?
c. Compare dates, payees and endorsements on a. By confirming all December 31 bank balances.
returned checks with the cash disbursements record. b. By counting the cash working fund at the close of
d. Determine that the year-end deposit in transit was business on December 31.
credited by the bank on the first working day of the c. By investigating items returned with the bank cut-
following accounting period. off statements of the succeeding month.
d. By preparing independent bank reconciliations as
5. A client maintains two bank accounts. One of the of December 31
accounts, Bank A, has an overdraft of P100,000. The
other account, Bank B, has a positive balance of 10. An essential phase of the audit of the cash balance
P50,000. To conceal the overdraft from the auditor, the at the end of the year is the auditor's review of cutoff
client may decide to bank statement. This specific procedure is not useful in
a. Draw a check for at least P100,000 on Bank A for determining if
deposit in Bank B. Record the receipt but not the a. Kiting has occurred.
disbursement and list the receipt as a deposit in transit. b. Lapping has occurred.
Record the disbursement at the beginning of the c. The cash receipts journal was held open.
following year. d. Disbursements per the bank statement can be
b. Draw a check for at least P100,000 on Bank B for reconciled with total checks written.
deposit in Bank A. Record the receipt but not the
disbursement and list the receipt as a deposit in transit.
Record the disbursement at the beginning of the
following year.
 **SUBSTANTIVE TEST OF INVENTORIES** b. Perpetual inventory records.
d. Cost ledgers.
11. Which of the following audit procedures probably
provides the most reliable evidence concerning the 18. An auditor would analyze inventory turnover rates
entity’s assertion of rights and obligations related to to obtain evidence concerning management’s assertion
inventories? about
a. Trace test counts noted during the entity’s physical a. Valuation or allocation.
count to the entity’s summarization of quantities. c. Presentation and disclosure.
b. Inspect agreements to determine whether any b. Rights and obligations.
inventory is pledged as collateral or subject to any liens. d. Completeness
c. Select the last few shipping advices used before the
physical count and determine whether shipments were 19. In auditing inventories, a major objective relates to
recorded as sales. the existence assertion. Of the following audit
d. Inspect the open purchase order file for significant procedures relating to inventories, which does **not**
commitments that should be considered for disclosure. support the existence assertion?
a. The auditor reviews the client's inventory-taking
12. An auditor most likely to inspect loan agreements instructions for such matters as proper arrangement of
under which an entity’s inventories are pledged to goods, separation of consigned goods, and limits on
support management’s financial statement assertion of movements of goods during inventory.
a. Existence or occurrence. b. The auditor observes the client's inventory and
c. Presentation and disclosure. performs test counts as appropriate.
b. Completeness. c. The auditor confirms inventories not on the
d. Valuation or allocation. premises.
d. The auditor performs a lower of cost or market test
13. An auditor selected items for test counts while for major categories of inventory.
observing a client’s physical inventory. The auditor then
traced the test counts to the client’s inventory listing. 20. In a manufacturing company, which one of the
This procedure most likely obtained evidence following audit procedures would give the least
concerning assurance of the valuation of inventory at the audit
a. Existence or occurrence. date?
c. Rights and obligations. a. Obtaining confirmation of inventories pledged
b. Completeness. under loan agreements.
d. Valuation. b. Testing the computation of standard overhead
rates.
14. Periodic cycle counts of selected inventory items are c. Examining paid vendors' invoices.
made at various times during the year rather than a d. Reviewing direct labor rates.
single inventory count at year-end. Which of the
following is necessary if the auditor plans to observe 21. When auditing merchandise inventory at year end,
inventories at interim dates? the auditor performs a purchase cutoff test to obtain
a. Complete recounts by independent teams are evidence that
performed. a. No goods held on consignment for customers are
b. Perpetual inventory records are maintained. included in the inventory balance.
c. Unit cost records are integrated with production b. No goods observed during the physical count are
accounting records. pledged or sold.
d. Inventory balances are rarely at low levels. c. All goods owned at year end are included in the
inventory balance
15. Which of the following control procedures would d. All goods purchased before year end are received
most likely be used to maintain accurate perpetual before the physical inventory count.
inventory records?
a. Independent matching of purchase orders, 22. Which of the following items should **not** be
receiving reports, and vendors' invoices. included in a physical inventory?
b. Independent storeroom count of goods received. a. Materials in transit from vendors.
c. Periodic independent reconciliation of control and b. Goods in a private warehouse.
subsidiary records. c. Goods received for repairs under warranty.
d. Periodic independent comparison of records with d. Consignment to an agent.
goods on hand.
23. You were engaged to conduct an annual
16. The accuracy of perpetual inventory records may be examination for the fiscal year ended October 31, 2016.
established in part by comparing perpetual inventory Because of the expected holiday, you were able to
records with convince your client to take a complete physical
a. Purchase requisitions. inventory, in which you were present on October 15.
c. Receiving reports. Perpetual inventory records are kept and the client
b. Purchase orders. considers a sale to be made in the period in which
d. Vendor payments. goods are shipped. You had a sales cut-off test
worksheet prepared. Which item among those listed
17. The auditor tests the quantity of materials charged below will **not** require an adjusting entry to
to work in process by tracing these quantities to reconcile the client's detailed inventory record with the
a. Receiving reports. physical inventory?
c. Materials requisition forms.
 a. Date Goods Shipped Oct 31, Transaction Recorded c. Inquiring about receivables pledged under loan
as Sale Nov 2, Date Inventory Control Credited Oct 31 agreements.
b. Date Goods Shipped Nov 2, Transaction Recorded d. Assessing the allowance for uncollectible accounts
as Sale Oct 31, Date Inventory Control Credited Oct 31 for reasonableness.
c. Date Goods Shipped Oct 14, Transaction Recorded
as Sale Oct 16, Date Inventory Control Credited Oct 16
d. Date Goods Shipped Oct 10, Transaction Recorded 30. In confirming accounts receivable, an auditor
as Sale Oct 19, Date Inventory Control Credited Oct 12 decided to confirm customers’ account balances rather
than individual invoices. Which of the following most
**SUBSTANTIVE TEST OF RECEIVABLES** likely would be included with the client’s confirmation
letter?
24. In the audit of which of the following general ledger a. An auditor prepared letter explaining that a non-
accounts will tests of controls be particularly response may cause an inference that the account
appropriate? balance

b. A client
a. Equipment
b. Bonds payable
c. Bank charges
d. Sales
prepared letter
25. An auditor most likely would review an entity’s
periodic accounting for the numerical sequence of
shipping documents and invoices to support
reminding the
management’s financial statement assertion of
a. Existence or occurrence
c. Valuation
customer that
b. Rights and obligations
d. Completeness a non-response
26. Which of the following might be detected by an
auditor’s review of the client’s sales cut-off?
will
a. Excessive goods returned for credit
b. Unrecorded sales discounts cause a second
c. Lapping of year-end accounts receivable
d. Inflated sales for the year
request to be
27. Cut-off tests designed to detect credit sales made
before the end of the year that have been recorded in
the subsequent year provide assurance about
sent.
management’s assertion of
a. Presentation c. An auditor
prepared letter
b. Completeness
c. Rights
d. Existence

28. The auditor finds a situation in which one person requesting the
has the ability to collect receivables, make deposits,
issue credit memos and record receipt of payments. The
auditor suspects the individual may be stealing from
customer to
cash receipts. Which of the following audit procedures
would be most effective in discovering fraud in this
scenario?
supply missing
a. Send positive confirmations to a random selection
of customers. and
incorrect
b. Send negative confirmations to all outstanding
accounts receivable customers.
c. Perform a detailed review of debits to customer
discounts, sales returns, or other debit accounts,
excluding cash posted to the cash receipts journal. information
d. Take a sample of bank deposits and trace the detail
in each bank deposit back to the entry in the cash
receipts journal.
directly to the
29. Which of the following most likely would give the
most assurance concerning the valuation assertion of
auditor.
accounts receivable?
a. Vouching amounts in the subsidiary ledger to d. A client
prepared
details on shipping documents.
b. Comparing receivable turnover ratios with industry
statistics for reasonableness.
statement of
35. Negative confirmations of accounts receivable are
less effective than positive confirmations because:
a. A majority of recipients usually lack the willingness to

account respond objectively

b. Some recipients may report incorrect balances that
require extensive follow-up
showing the c. The auditor cannot infer that all non-respondents
have verified their account information

details of the d. Negative confirmations do not produce evidence that

is statistically quantifiable

customer’s 36. To reduce the risks associated with accepting fax

responses for requests for confirmation of accounts

account
receivable, an auditor most likely would:
a. Examine the shipping documents that provide
evidence for the existence assertion

balance. b. Verify the sources and contents of the faxes in

telephone calls to the senders
c. Consider faxes to the non-responses and evaluate
31. Auditing standards define a confirmation as "the them as unadjusted differences
process of obtaining and evaluating a direct d. Inspect the faxes for forgeries or alterations and
communication from a third party in response to a consider them to be acceptable if none are noted
request for information about a particular item affecting
financial statement assertions." Two primary evidence 37. An auditor confirms a representative number of
are confirmation of accounts receivable balances open accounts receivable as of December 31 and
provides assertions for which investigates respondents' exceptions and comments. By
a. Completeness and valuation this procedure, the auditor is most likely to learn of
b. Valuation and rights and obligations which of the following:
c. Rights and obligations and existence a. One of the cashiers has been covering a personal
d. Existence and completeness embezzlement by lapping
b. One of the sales clerks has not been preparing charge
32. Auditor may use positive or negative forms of slips for credit sales to family and friends
confirmations requests for accounts receivable. An c. One of the computer processing control has been
auditor most likely will use removing all sales invoices applicable to this account
a. The positive form to confirm all balances regardless from the data file
of the size. d. The credit manager has misappropriated remittances
b. A combination of the two forms, with the positive from customers whose accounts have been written off
form used for large balances and the negative for the
small balances. Sure, I'll include the choices along with the questions
c. A combination of the two forms, with the positive and number them for you:
form used for trade receivables and the negative form
for other receivables. 16. An auditor who has confirmed accounts receivable
d. The positive form when the combined assessed level may discover that the sales journal was held open past
of inherent and control risk for assertions related to year-end if:
receivables is acceptably low, and the negative form a. Positive confirmations sent to debtors are not
when it is unacceptably high. returned
b. Negative confirmations sent to debtors are not
33. The negative request form of accounts receivable returned
confirmation may be used when the c. Most of the returned negative confirmations indicate
Combined Assessed Level Of Number of Small that the debtor owes a larger balance than the amount
Consideration by the being confirmed
Inherent and Control Risk Is Balances is Recipient is d. Most of the returned positive confirmations indicate
a. Low Many Likely that the debtor owes a smaller balance than the
b. Low Few Unlikely amount being confirmed
c. High Few Likely
d. High Many Likely 17. During the process of confirming accounts
receivable as of December 31, 2015, a positive
34. In the confirmation of accounts receivable, the confirmation was returned indicating the "balance owed
auditor would most likely: as of December 31, 2015 was paid on January 9, 2016".
a. Request confirmation of a sample of the inactive The auditor will most likely:
accounts a. Determine whether there were any changes in the
b. Seek to obtain positive confirmations for at least 50% account between January 1 and January 9, 2016
of the total dollar amount of the receivables b. Determine whether a customary trade discount was
c. Require confirmation of all receivables from agencies taken by the customer
of the federal government c. Reconfirm the zero balances as of January 10, 2016
d. Require that confirmation requests be sent within 1 d. Verify that the amount was received
month of the fiscal year-end
18. Confirmation of accounts receivable is a generally
accepted auditing procedure. The presumption that an
auditor will confirm accounts receivable is not
overcome if: Sure, I understand now. Here are the organized
a. Based on prior years' audit experience response rates questions with their corresponding choices numbered
will be inadequate for easy reference:
b. Based on experience with similar engagements,
responses are expected to be unreliable 24. Once a CPA has determined that the accounts
c. The accounts receivable are immaterial receivable have increased because of slow collections in
d. The combined assessed level of inherent and control a tight money environment, the CPA is likely to:
risk is high a. Increase the balance in the allowance for bad debts
account
19. A company has computerized sales and cash b. Review the going concern ramifications
receipts journals. The auditor discovered that the total c. Review the credit and collection policy
of the accounts receivables subsidiary accounts differs d. Expand tests of collectibility
materially from the accounts receivable control
account. This discrepancy could indicate: 25. An auditor reconciles the total of the accounts
a. Credit memoranda being improperly recorded receivables subsidiary ledger to the general ledger
b. Lapping of receivables control account as of October 31. By this procedure, the
c. Receivables not being properly aged auditor is most likely to learn of which of the following:
d. Statements being intercepted prior to mailing a. An October invoice was improperly computed
b. An October check from a customer was posted in
20. Which of the following procedures would an auditor error to the account of another customer with a similar
most likely perform for year-end accounts receivable name
confirmations when the auditor did not receive replies c. An opening balance in a subsidiary ledger account
to second requests? was improperly carried forward from the previous
a. Review the cash receipts journal for the month prior accounting period
to year-end d. An account balance is past due and should be written
b. Intensify the study of internal control concerning the off
revenue cycle
c. Increase the assessed level of detection risk for the **SUBSTANTIVE TEST OF INVESTMENTS**
existence assertion
d. Inspect the shipping records documenting the 1. A client has a large and active investment portfolio
merchandise sold to the debtors that is kept in a bank safe-deposit box. If the auditor is
unable to count the securities at the balance sheet date,
21. Which of the following is the greatest drawback of the auditor most likely will:
using subsequent collections evidenced only by a a. Request the bank to confirm to the auditor the
deposit slip as an alternative procedure when responses contents of the safe deposit box at the balance sheet
to positive accounts receivable confirmations are not date
received? b. Examine supporting evidence for transactions
a. Checking of subsequent collections can never be used occurring during the year
as an alternative auditing procedure c. Count the securities at a subsequent date and confirm
b. By examining a deposit slip only, the auditor does not with the bank whether securities were added or
know whether the payment is for the receivable at the removed since the balance sheet date
balance sheet date or a subsequent transaction d. Request the client to have a bank seal the safe-
c. A deposit slip is not received directly by the auditor deposit box until the auditor can count the securities at
d. A customer may not have made a payment on a a subsequent date
timely basis
2. When an auditor is unable to inspect and count a
22. The CPA learns that collections of accounts client’s investment securities until after the balance
receivable during the last 10 days of December were sheet date, the bank where the securities are held in a
not recorded. The effect will be to: safe deposit box should be asked to:
a. Leave both working capital and the current ratio a. Verify any differences between the contents of the
unchanged at December 31 box and the balances in the client’s subsidiary ledger
b. Overstate both working capital and the current ratio b. Provide a list of securities added and removed from
at December 31 the box between the balance sheet date and the
c. Overstate working capital with no effect on the security count date
current ratio at December 31 c. Count the securities in the box so that the auditor will
d. Overstate the current ratio with no effect on working have an independent direct verification
capital at December 31 d. Confirm that there has been no access to the box
between the balance-sheet date and the security-count
23. All of the following are examples of substantive tests date
to verify valuation of net accounts receivable except
the: 3. Which of the following is not one of the auditor’s
a. Re-computation of the allowance for bad debts primary objectives in an audit of trading securities?
b. Inspection of accounts for current versus non-current a. To determine whether securities are authentic
status in the statement of financial position b. To determine whether securities are the property of
c. Inspection of the aging schedule and credit records of the client
past due accounts c. To determine whether securities actually exist
d. Comparison of the allowance for bad debts with past d. To determine whether securities are properly
records classified on the balance sheet date
 a. Obtain written representations from management
4. Apol Boba, CPA, observes the count of securities on confirming that the securities are properly classified as
December 31. She records the serial numbers of the trading securities.
securities and reconciles them and the number of b. Inspect the audited financial statements of the
shares with company records. Which fraud should be investee company.
detected by this procedure? c. Confirm the number of shares held by an
a. An investee company declared and paid a stock independent custodian.
dividend on December 15. The stock certificate for the d. Determine that the investment is carried at the lower
additional shares was received directly by the treasurer of cost or market.
who made no record of the receipt and embezzled the
shares 10. An auditor most likely to verify the interest earned
b. The treasurer embezzled and sold securities on April on bond investment by:
4. She speculated successfully with the proceeds and a. Verifying the receipt and deposit of interest checks.
replaced the securities on December 29 b. Confirming the bond interest rate with the issuer of
c. The treasurer borrowed securities on July 15 to use as the bonds.
collateral for a personal loan. He repaid the loan and c. Recomputing the interest earned on the basis of face
returned the securities on December 2 amount, interest rate, and period held.
d. The treasurer embezzled interest receipts from bonds d. Testing controls relevant to cash receipts.
by having the payments mailed directly to him
11. Which of the following provides the best form of
5. Which of the following is the least effective audit evidence pertaining to the annual valuation of an
procedure regarding the existence assertion for the investment in which the independent auditor’s client
securities held by the auditee? owns a 30% voting interest?
a. Examination of paid checks issued in payment of a. Market quotations of the investee company’s stock.
securities purchased b. Current fair value of the investee company’s assets.
b. Vouching all changes during the year to supporting c. Historical cost of the investee company’s assets.
documents d. Audited financial statements of the investee
c. Simultaneous count of liquid assets company.
d. Confirmation from the custodian
12. In verifying the amount of goodwill recorded by a
6. An auditee is holding equity securities as collateral for client, the most convincing evidence an auditor can
a debt. The auditor should: obtain is by comparing the recorded value of assets
a. Determine from data published in the financial press acquired with the:
that the auditee has recorded dividend income from the a. Assessed value as evidenced by tax bills.
collateral. b. Seller’s book value as evidenced by financial
b. Ascertain the value of the securities. statements.
c. Ascertain that the amount recorded for the collateral c. Insured value as evidenced by insurance policies.
in the investment account is equal to its fair value at the d. Appraised value as evidenced by independent
balance sheet date. appraisals.
d. Verify that the client has taken title to the securities.
13. The auditor can best verify a client’s bond sinking-
7. Which of the following is the most effective audit fund transactions and year-end balance by:
procedure for verification of dividends earned on a. Confirmation with individual holders of retired bonds.
investments in equity securities? b. Confirmation with the bond trustee.
a. Tracing deposited dividend checks to the cash c. Recomputation of interest expense, interest payable,
receipts book. and amortization of bond discount or premium.
b. Reconciling amount received with published dividend d. Examination and count of the bonds retired during
records. the year.
c. Comparing the amounts received with preceding year
dividends received. 14. An auditor who physically examines securities
d. Recomputing selected extensions and footings of should insist that a client representative be present in
dividend schedules and comparing totals to the general order to:
ledger. a. Detect fraudulent securities.
b. Lend authority to the auditor’s directives.
8. In confirming with an outside agent, such as a c. Coordinate the return of securities to the proper
financial institution, that the agent is holding locations.
investment securities in the client’s name, an auditor d. Acknowledge the receipt of securities returned.
most likely gathers evidence in support of
management’s financial statement assertions of Apologies for the oversight. Here are the questions with
existence and: all choices numbered for each number:
a. Valuation.
b. Rights and obligations. 15. In testing long-term investments, an auditor
c. Completeness. ordinarily would use analytical procedures to ascertain
d. Presentation and disclosure. the reasonableness of the:
a. Classification between current and noncurrent
9. In establishing the existence and ownership of an portfolios.
investment held by a corporation in the form of publicly b. Valuation of marketable equity securities.
traded stock, an auditor should inspect the securities or: c. Existence of unrealized gains or losses in the portfolio.
d. Completeness of recorded investment income.
 a. Comparison to prior year's acquisitions.
16. In performing tests of the carrying value of trading b. Examination of vendors' invoices and receiving
securities, the auditor would usually: reports for current year's acquisitions.
a. Ask management to estimate the market value of the c. Review of transactions near the balance sheet date
securities. for proper period cutoff.
b. Refer to the quoted market prices of the securities.

d. Calculation
c. Value the securities at cost regardless of their market
prices. d.
d. Count the securities.

17. Which of the following statements is the least of ratio of

accepted reason/purpose for acquiring long-term
investments:
a. To create specific funds.
depreciation
b. To yield a relatively permanent other income.
c. To generate cash for operating purposes.
d. To establish business relationships.
expense to
18. In testing long-term investments, an auditor would gross office
equipment
use analytical procedures to ascertain the
reasonableness of:
a. The classification between current and noncurrent
portfolios.
b. The valuation of marketable equity securities. cost.
c. The existence of unrealized gains or losses in the
portfolio.
d. The completeness of recorded investment income.
d. Calculation
d.

of ratio of
19. Which of the following questions would an auditor
least likely include on an internal control questionnaire
concerning the initiation and execution of equipment
transactions:
a. Are procedures in place to monitor and properly depreciation
restrict access to equipment?
b. Are requests for major repairs approved at a higher
level than the department initiating the request?
expense to
c. Are prenumbered purchase orders used for
equipment and periodically accounted for?
d. Are requests for purchases of equipment reviewed
gross office
for consideration of soliciting competitive bids?
equipment
cost.
20. Property acquisitions that are misclassified as
maintenance expense would most likely be detected by
internal control procedures that provide for:
23. An auditor is verifying the existence of newly
a. Review and approval of the monthly depreciation
acquired fixed assets recorded in the accounting
entry by the plant supervisor.
records. Which of the following is the best evidence to
b. Investigation of variances within a formal budgeting
help achieve this objective?
system.
a. Oral evidence obtained by discussions with operating
c. Examination by the internal auditor of vendor
management.
invoices and canceled checks for property acquisitions.
b. Documentary support obtained by vouching entries
d. Segregation of duties of employees in the accounts
to subsidiary records and invoices.
payable department.
c. Documentary support obtained by reviewing titles
and tax returns.
21. A weakness in internal accounting control over
d. Physical examination of a sample of newly recorded
recording retirements of equipment may cause the
fixed assets.
auditor to:
a. Trace additions to the "other assets" account to
24. In auditing plant assets and accumulated
search for equipment that is still on hand but no longer
depreciation for proper valuation, the auditor should do
being used.
all except the following:
b. Inspect certain items of equipment in the plant and
a. Physically inspect major plant assets additions.
trace those items to the accounting records.
b. Recalculate depreciation expense on a test basis.
c. Select certain items of equipment from the
c. Vouch repairs and maintenance expense on a test
accounting records and locate them in the plant.
basis.
d. Review the subsidiary ledger to ascertain whether
d. Vouch major additions by reference to underlying
depreciation was taken on each item of equipment
documentation.
during the year.
25. To verify the proper value of costs charged to real
22. The most significant audit step in substantiating
property records for improvements to the property, the
additions to the office furniture account balance is:
best source of evidence would be:
a. A letter signed by the real property manager asserting b. Analytical procedures to verify current year additions
the propriety of costs incurred. to property and equipment
b. Original invoices supporting entries into the c. A thorough examination of the balances at the
accounting records. beginning of the year
c. A comparison of billed amounts to contract d. Extensive tests of current year property and
estimates. equipment transactions
d. Inspection by the auditor of real property
improvements. 4. Which of the following combinations of procedures is
an auditor most likely to perform to obtain evidence
26. To test the accuracy of the current year's about fixed asset addition?
depreciation charges, an auditor should rely most a. Inspecting documents and physically examining
heavily on: assets
a. Comparison of depreciation schedule detail with b. Recomputing calculations and obtaining written
schedules supporting the income tax return. management representations
b. Re-computation of depreciation for a sample of plant c. Observing operating activities and comparing
assets. balances to prior period balances
c. Tracing of totals from the depreciation schedule to d. Confirming ownership and corroborating transactions
properly approved journal entries and ledger postings. through inquiries of client personnel
d. Vouching of the current year's fixed asset
acquisitions. 5. If an auditor tours a production facility, which of the
misstatements or questionable practices is most likely
27. The audit procedure of analyzing the repairs and to be detected by the audit procedures specified?
maintenance accounts is primarily designed to provide a. Depreciation expense on fully depreciated machinery
evidence in support of the audit proposition that all: has been recognized
a. Capital expenditures have been properly authorized. b. Overhead has been overapplied
b. Expenditures for fixed assets have been recorded in c. Necessary facility maintenance has not been
the proper period. performed
c. Expenditures for fixed assets have been capitalized. d. Insurance coverage on the facility has lapsed
d. Non-capitalizable expenditures have been properly
expensed. 6. In testing for unrecorded retirements of equipment,
an auditor is most likely to:
28. Assets may suffer an impairment in value for a a. Select items of equipment from the accounting
variety of reasons, but not likely as a result of: records and then locate them during the plant tour
a. A corporate restructuring. b. Compare depreciation journal entries with similar
b. Slumping demand for uncompetitive products. prior-year entries in search of fully depreciated
c. Significant increases in market share. equipment
d. Obsolescence. c. Inspect items of equipment observed during the plant
tour and then trace them to the equipment subsidiary
**SUBSTANTIVE TEST OF PPE AND INTANGIBLES** ledger
d. Scan the general journal for unusual equipment
1. Property, plant and equipment is typically judged to additions and excessive debits to repairs and
be one of the accounts least susceptible to fraud maintenance expense
because:
a. The amounts recorded on the balance sheet for most 7. Determining that proper amounts of depreciation are
companies are immaterial. expensed provides assurance about management’s
b. The inherent risk is usually low. assertions of valuation and:
c. The depreciated values are always smaller than cost. a. Presentation and disclosure
d. Internal control is inherently effective regarding this b. Completeness
account. c. Rights and obligations
d. Existence or occurrence
2. Which is the best audit procedure to obtain evidence
to support the legal ownership of real property? 8. The auditor may conclude that depreciation charges
a. Examination of corporate minutes and board are insufficient by noting:
resolutions with regard to approvals to acquire real a. Insured values greatly in excess of book values
property. b. Large numbers of fully depreciated assets
b. Examination of closing documents, deeds and c. Continuous trade-in of relatively new assets
ownership documents registered and on file at the d. Excessive recurring losses on assets retired
register of deeds.
c. Discussion with corporate legal counsel concerning 9. An auditor analyzes repairs and maintenance
the acquisition of a specific piece of property. accounts primarily to obtain evidence in support of the
d. Confirmation with the title company that handled the audit assertion that all:
escrow account and disbursement of proceeds for the a. Noncapitalizable expenditures for repairs and
closing of the property. maintenance have been recorded in the proper period
b. Expenditures for property and equipment have been
3. When few property and equipment transactions recorded in the proper period
occur during the year, the continuing auditor usually c. Noncapitalizable expenditures for repairs and
obtains an understanding of internal control and maintenance have been properly charged to expense
performs: d. Expenditures for property and equipment have not
a. Tests of controls been charged expense
 d. Rights and obligations.
10. In violation of company policy, Coatsen Company
erroneously capitalized the cost of painting its SUBSTANTIVE TEST OF LIABILITIES
warehouse. An auditor would most likely detect this
when: 1. In auditing accounts payable, an auditor’s procedures
a. Discussing capitalization policies with Coatsen's most likely will focus primarily on management’s
controller assertion of:
b. Examining maintenance expense accounts a. Existence or occurrence.
c. Observing that the warehouse had been painted b. Presentation and disclosure.
d. Examining construction work orders that support c. Completeness.
items capitalized during the year d. Valuation or allocation.

11. Additions to equipment are sometimes understated. 2. An auditor performs a test to determine whether all
Which of the following accounts would be reviewed by merchandise for which the client was billed was
the auditor to gain reasonable assurance that additions received. The population for this test consists of all:
are not understated? a. Merchandise received.
a. Accounts payable b. Vendors’ invoices.
b. Gain on disposal of equipment c. Canceled checks.
c. Depreciation expense d. Receiving reports.
d. Repair and maintenance expense
3. The primary audit test to determine if accounts
12. When an auditor interviews the plant manager, he payable are valued properly is:
will most likely seek from the plant manager a. Confirmation of accounts payable.
information regarding: b. Vouching accounts payable to supporting
a. Appropriateness of physical inventory observation documentation.
procedures. c. An analytical procedure.
b. Existence of obsolete machinery. d. Verification that accounts payable was reported as a
c. Deferral of procurement of certain necessary current liability in the balance sheet.
insurance coverage.
d. Adequacy of the provision for uncollectible accounts. 4. Which of the following procedures is least likely to be
performed before the balance sheet date?
13. The auditor is least likely to learn of retirements of a. Observation of inventory.
equipment through which of the following? b. Testing of internal control over cash.
a. Review of the purchase return and allowance c. Search for unrecorded liabilities.
account. d. Confirmation of receivables.
b. Review of depreciation.
c. Analysis of the debits to the accumulated 5. An audit assistant found a purchase order for a
depreciation account. regular supplier in the amount of P5,500. The purchase
d. Review of insurance policy riders. order was dated after receipt of goods. The purchasing
agent had forgotten to issue the purchase order. Also, a
14. Which of the following is not likely a motive for disbursement of P450 for materials did not have a
management to manipulate the timing and amount of receiving report. The assistant wanted to select
impaired asset writedowns? additional purchase orders for investigation but was
a. Steady increases in earnings per share over the past 5 unconcerned about the lack of a receiving report. The
years. audit director should:
b. Income smoothing. a. Agree with the assistant because the amount of the
c. A "big bath." purchase order exception was considerably larger than
d. An abnormally unprofitable year. the receiving report exception.
b. Agree with the assistant because the cash
15. There is goodwill involved in the acquisition of a disbursement clerk had been assured by the receiving
business if the purchase price paid is in excess of the clerk that the failure to fill out a report didn’t happen
proprietorship of the business acquired. Goodwill might very often.
be viewed as the enjoyment of a profit by a company in c. Disagree with the assistant because two problems
excess of the normal or usual return for the industry as have an equal risk of loss associated with them.
a whole but such goodwill is not recorded if it has not d. Disagree with the assistant because the lack of a
been purchased or paid for. receiving report has a greater risk of loss associated
a. False; True. with it.
b. False; False.
c. True; False. 6. When using confirmation to provide evidence about
d. True; True. completeness assertion for accounts payable, the
appropriate population most likely is:
16. In auditing intangible assets, an auditor most likely a. Vendors with whom the entity has previously done
would review or recompute amortization and business.
determine whether the amortization period is b. Amounts recorded in the accounts payable subsidiary
reasonable in support of management’s financial ledger.
statement assertion of: c. Payees of checks drawn in the month after the year-
a. Valuation. end.
b. Existence or occurrence. d. Invoices filed in the entity’s open invoice file.
c. Completeness.
7. Which of the following is a substantive test that an d. Reconciling vendors’ statements to the file of
auditor is most likely to perform to verify the existence receiving reports to identify items received just prior to
and valuation of recorded accounts payable? the balance sheet date.
a. Investigating the open purchase order file to
ascertain that pre-numbered purchase orders are used 13. In verifying debits to perpetual inventory records of
and accounted for. a nonmanufacturing firm, the auditor is most interested
b. Receiving the client’s mail, unopened, for a in examining the purchase:
reasonable period of time after year-end to search for a. Journal
unrecorded vendor’s invoices. b. Requisitions
c. Vouching selected entries in the accounts payable c. Orders
subsidiary ledger to purchase orders and receiving d. Invoices
reports.
d. Confirming accounts payable balances with known 14. Which of the following procedures relating to the
suppliers who have zero balances. examination of accounts payable could the auditor
delegate entirely to the client’s employees?
8. Only one of the following four statements, which a. Test footings in the accounts payable ledger
compare confirmation of accounts payable with b. Reconcile unpaid invoices to vendors' statements
suppliers and confirmation of accounts receivable with c. Prepare a schedule of accounts payable
debtors, is false. The false statement is that: d. Mail confirmations for selected account balances
a. Confirmation of accounts receivable with debtors is a
more widely accepted auditing procedure than is 15. An auditor’s purpose in reviewing the renewal of a
confirmation of accounts payable with suppliers. note payable shortly after the balance sheet date most
b. Statistical sampling techniques are more widely likely is to obtain evidence concerning management’s
accepted in the confirmation of accounts payable than assertions about:
in the confirmation of accounts receivable. a. Existence or occurrence
c. As compared with the confirmation of accounts b. Presentation and disclosure
receivable, the confirmation of accounts payable will c. Completeness
tend to emphasize accounts with zero balances at the d. Valuation or allocation.
balance sheet date.
d. It is less likely that the confirmation request sent to 16. An auditor’s program to audit long-term debt should
the supplier will show the amount owed than that include steps that require:
request sent to the debtor will show the amount due. a. Examining bond trust indentures
b. Inspecting the accounts payable subsidiary ledger
9. When title to merchandise in transit has passed to c. Investigating credits to the bond interest income
the audit client, the auditor engaged in the performance account
of a purchase cut-off will encounter the greatest d. Verifying the existence of the bondholders
difficulty in gaining assurance with respect to the:
a. Quantity 17. In an audit of bonds payable, an auditor expects the
b. Quality trust indenture to include the:
c. Price a. Auditee’s debt-to-equity ratio at the time of issuance
d. Terms b. Effective yield of the bonds issued
c. Subscription list
10. Which of the following audit procedures is least d. Description of the collateral
likely to detect an unrecorded liability?
a. Analysis and recomputation of interest expense. 18. In auditing long-term bonds payable, an auditor
b. Analysis and recomputation of depreciation expense. most likely will:
c. Mailing of standard bank confirmation forms. a. Perform analytical procedures on the bond premium
d. Reading of the minutes of meetings of the board of and discount accounts
directors. b. Examine documentation of assets purchased with
bond proceeds or liens
11. Unrecorded liabilities are most likely to be found c. Compare interest with the bond payable amount for
during the review of which of the following documents? reasonableness
a. Unpaid bills d. Confirm the existence of individual bondholders at
b. Shipping records year-end
c. Bills of lading
d. Unmatched sales invoices 19. The audit procedures used to verify accrued
liabilities differ from those employed for the verification
12. Which of the following audit procedures is best for of accounts payable because:
identifying unrecorded trade accounts payable? a. Accrued liabilities usually pertain to services of a
a. Reviewing cash disbursements recorded subsequent continuing nature while accounts payable are the result
to the balance sheet date to determine whether the of completed transactions
related payables apply to the prior period. b. Accrued liability balances are less material than
b. Investigating payables recorded just prior to and just accounts payable balances
subsequent to the balance sheet date to determine c. Evidence supporting accrued liabilities in
whether they are supported by receiving reports. nonexistence while evidence supporting accounts
c. Examining unusual relationships between monthly payable is readily available
accounts payable balances and recorded cash d. Accrued liabilities at year-end will become accounts
payments. payable during the following year
20. The auditor is most likely to verify accrued agreements, or law. This audit procedure most likely is
commissions payable in conjunction with the: intended to verify management’s assertion of:
a. Sales cutoff test a. Existence.
b. Verification of contingent liabilities b. Completeness.
c. Review of post-balance sheet date disbursements c. Valuation.
d. Examination of trade accounts payable d. Presentation and disclosure.

**SUBSTANTIVE TEST OF SHAREHOLDERS’ EQUITY** 8. If the auditee has a material amount of treasury stock
on hand at year-end, the auditor should:
1. In an examination of shareholder’s equity, an auditor a. Count the certificates at the same time other
is most concerned that: securities are counted.
a. Capital stock transactions are properly authorized b. Count the certificates only if the company had
b. Stock splits are capitalized at par or stated value on treasury stock transactions during the year.
the dividend declaration date c. Not count the certificates if treasury stock is a
c. Dividends during the year under audit were approved deduction from shareholders’ equity.
by the shareholders d. Count the certificates only if the company classifies
d. Changes in the accounts are verified by a bank treasury stock with other assets.
serving as a registrar and stock transfer agent
9. In performing tests concerning the granting of stock
2. In an audit of a medium-sized manufacturing options, an auditor should:
concern, which one of the following areas can be a. Confirm the transaction with the Securities and
expected to require the least amount of audit time? Exchange Commission.
a. Owner’s equity b. Verify the existence of option holders in the entity’s
b. Assets payroll records or stock ledgers.
c. Revenue c. Determine that sufficient treasury stock is available to
cover any new stock issued.
3. When a corporate client maintains its own stock d. Trace the authorization for the transaction to a vote
records, the auditor primarily will rely upon: of the board of directors.
a. Confirmation with the company secretary of shares
outstanding at year-end. 10. The auditor would not expect the client to debit
b. Review of the corporate minutes for data as to shares retained earnings for which of the following
outstanding. transactions?
c. Confirmation of the number of shares outstanding at a. A 4-for-1 stock split.
year-end with the appropriate state official. b. "Loss" resulting from disposition of treasury shares.
d. Inspection of the stock book at year-end and c. A 1-for-10 stock dividend.
accounting for all certificate numbers. d. Correction of error affecting prior year's earnings.

4. When a client company does not maintain its own

stock records, the auditor should obtain written
confirmation from the transfer agent and registrar
concerning:
a. Restrictions on the payment of dividends.
b. The number of shares issued and outstanding.
c. Guarantees of preferred stock liquidation value.
d. The number of shares subject to agreement to
repurchase.

5. The auditor is concerned with establishing that

dividends are paid to client corporation shareholders
owning stock as of the:
a. Issue date.
b. Declaration date.
c. Record date.
d. Payment date.

6. An audit program for the retained earnings account

should include a step that requires verification of the:
a. Fair value used to charge retained earnings to
account 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.

7. During an audit of an entity’s shareholders’ equity

accounts, the auditor determines whether there are
restrictions on retained earnings resulting from loans,