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M-1415
AUDIT EVIDENCE AND DOCUMENTATION
1. All the information used by the auditor in arriving at the conclusion on which the audit
opinion is based. It includes the information contained in the accounting records
underlying the financial statements (underlying accounting data) and other information
(corroborating information).
A. Audit evidence C. Audit opinion
B. Audit risk D. Audit program
Statement 2: Audit evidence is obtained to form an appropriate mix of tests of control and
substantive procedures.
Statement 3: The auditor should obtain sufficient appropriate audit evidence to be able to
draw reasonable conclusions on which to base the audit opinion.
A. Statements 1 and 2 only C. Statement 2 and 3 only
B. Statements 1 and 3 only D. All statements are correct
9. The most reliable form of documentary evidence are those documents that are:
A. Internally generated C. Authorized by a responsible official
B. Pre-numbered D. Easily duplicated
10. Which of the following procedures would provide the most reliable audit evidence?
A. Inquiries of the client’s internal audit staff held in private
B. Inspection of prenumbered client purchase orders filed in the vouchers payable
department
C. Analytical procedures performed by the auditor on the entity’s trial balance
D. Inspection of bank statements obtained directly from the client’s financial institution
12. The auditor’s judgment as to what is sufficient appropriate audit evidence is influenced
by such factors as:
A. The auditor’s assessment of the nature and level of inherent risk at both the financial
statement level and the account balance or class of transaction level.
B. The nature of the internal control structure and the assessment of control risk.
C. The materiality of the item being examined.
D. The experience gained during previous audits.
E. The results of the audit procedures, including fraud or error which may have been
found.
F. The source and reliability of information available.
A. A, B, D, F, G C. A, B, F
B. A, B, D, E, F D. A, B, C, D, E, F
13. Which of the following statements regarding reliability of evidence is incorrect?
A. Audit evidence is more reliable when it is obtained from independent sources outside
the entity.
B. The condition of internal control of the entity does not contribute to the reliability of
audit evidence.
C. Audit evidence that is generated internally is more reliable when the related controls
are effective.
D. Audit evidence obtained directly by the auditor is more reliable than audit evidence
obtained indirectly.
Statement 2: The difficulty and the expense involved are valid basis of omitting an audit
procedure for which there is no alternative.
Statement 3: The auditor relies on audit evidence that is persuasive rather than
conclusive.
Statement 4: The auditor uses professional judgment and exercise professional scepticism
to determine the sufficiency and appropriateness of evidence.
A. Only one statement is correct C. Only three statements are correct
B. Only two statements are correct D. All statements are correct
16. Assertions used by the auditor fall into the following categories, except:
A. Assertions about the faithful representations
B. Assertions about account balances
C. Assertions about classes of transactions and events
D. Assertions about presentation and disclosure
23. Confirming proper title to equipment supports which of the following assertions?
A. Existence or occurrence C. Presentation and disclosure
B. Insurance or coverage D. Rights and obligations
24. Which of the following ultimately determines the auditing procedures necessary in an
audit engagement?
A. Auditor judgment C. Relative risk
B. Materiality D. Reasonable assurance
25. The completeness assertion addresses whether
A. All of the assets on the balance sheet exist.
B. All recorded transactions occurred.
C. The entity has property rights to all assets on the balance sheet.
D. All of the transactions, which occurred during the period, were recorded.
26. The auditor notices that a client’s cash basis financial statements are prepared with
accrual basis financial titles. This situation bears on which financial statement assertion?
A. Valuation or allocation C. Rights and obligations
B. Presentation and disclosure D. Completeness
28. Which of the following statements relating to the competence of evidential matter is
always true?
A. Evidence gathered by auditors must be both valid and relevant to be considered
competent.
B. Properly designed analytical procedures will detect material misstatements.
C. Evidential matter gathered by an auditor from outside a client is reliable.
D. Oral representations made by management are not valid.
29. The process of vouching helps establish that all recorded transactions
A. Have been completed C. Are valid
B. Are complete D. Are presented properly
31. Which of the following best describes the primary purpose of audit procedures?
A. To detect fraud
B. To comply with generally accepted accounting principles
C. To gather corroborative evidence to support the audit opinion
D. To verify the accuracy of account balances
32. Audit procedures performed to obtain an understanding of the entity and its environment,
including its internal control.
A. Risk assessment procedures C. Substantive procedures
B. Tests of control D. Analytical procedures
33. Audit procedures to test the operating effectiveness in preventing or detecting and
correcting material misstatements at the assertion level.
A. Risk assessment procedures C. Substantive procedures
B. Tests of control D. Analytical procedures
35. Which of the following procedures is not required to be performed by the auditor?
A. Risk assessment procedures C. Substantive procedures
B. Tests of control D. Analytical procedures
36. It includes test of details of classes of transactions, account balances, and disclosures and
analytical procedures.
A. Risk assessment procedures C. Substantive procedures
B. Tests of control D. Analytical procedures
38. Examining records or documents, whether internal or external, in paper form, electronic
form, or other media.
A. Inspection of records or documents C. Observation
B. Inspection of tangible assets D. Inquiry
41. Consists of seeking information from knowledgeable persons, both financial and
nonfinancial, within the entity or outside the entity.
A. Inspection of records or documents C. Observation
B. Inspection of tangible assets D. Inquiry
42. The process of obtaining a representation of information or of an existing condition
directly from third party. It is a specific type of inquiry.
A. Reperformance C. Reconciliation
B. Confirmation D. Recomputation
44. Auditor’s independent execution of procedures or controls that were originally performed
as part of the entity’s internal control.
A. Reperformance C. Reconciliation
B. Confirmation D. Recomputation
45. Evaluation of financial information made by study of plausible relationships among both
financial and non-financial data.
A. Reperformance C. Reconciliation
B. Confirmation D. Analytical procedures
46. Which statement is incorrect regarding the nature of further audit procedures?
A. The nature of further audit procedures refers to their purpose and type.
B. Certain audit procedures may be more appropriate for some assertions than others.
C. The auditor is required to obtain audit evidence about the accuracy and completeness
of information produced by the entity’s information system when that information is
used in performing audit procedures.
D. The higher the auditor’s assessment of inherent and control risks, the less reliable and
relevant is the audit evidence sought by the auditor from substantive procedures.
47. The more the planned reliance of the auditor on the operating effectiveness of internal
controls,
A. The more the extent of the auditor’s tests of controls.
B. The less the extent of the auditor’s tests of controls.
C. The more the reliance of the auditor on information generated by the entity.
D. The less the reliance of the auditor on information generated by the entity.
48. In the context of an audit of financial statements, substantive tests are audit procedures
that
A. May be eliminated under certain conditions.
B. Are designed to discover significant subsequent events.
C. May be either tests of transactions, direct tests of financial balances, or analytical
tests.
D. Will increase proportionately with the auditor’s reliance on internal control.
49. Which of the following methods is considered the best combination in obtaining audit
evidence assuming documentary evidence is available to the auditor?
A. Inspection and reperformance C. Inquiry and inspection
B. Observation and inquiry D. Inquiry and analytical procedures
50. As required by PSA 500, the auditor’s substantive procedures should include the
following:
A. Agreeing the financial statements to the underlying accounting records.
B. Examining material journal entries and other adjustments made during the course of
preparing the financial statements.
C. Both a and b.
D. Neither a nor b.
51. “Physical examination” is the inspection or count by the auditor of assets such as:
A. Cash or inventory only
B. Cash, inventory, cancelled checks, and sales documents
C. Cash, inventory, securities, notes receivable, and tangible assets
D. Cash, inventory, cancelled checks, and tangible fixed assets
52. Physical examination of tangible assets is not a sufficient form of evidence when the
auditor wants to determine the:
A. Existence of the asset C. Condition or quality of the asset
B. Quantity and description of the asset D. Ownership of the asset
53. Which of the following audit procedures is used extensively throughout the audit but
does not, by itself, provide sufficient appropriate evidence?
A. Inspection of records or documents C. Inquiry
B. Observation D. Inspection of tangible assets
54. Evidence obtained directly by the auditor is more reliable than information obtained
indirectly. Which of the following is not an example of the auditor’s direct knowledge?
A. Inspection C. Computation
B. Observation D. Inquiry
55. Confirmation is most likely to be the relevant form of evidence with regard to assertions
about accounts receivable when the auditor has concerns about the receivables’
A. Valuation C. Existence
B. Classification D. Completeness
58. A confirmation requests letter should always be sent under the control of:
A. The client C. The recipient
B. The auditor D. Both a and b
60. When the recipient has accomplished the confirmation request, replies should be:
A. Sent directly to the auditor
B. Sent directly to the client, after which the client gives the replies to the auditor
C. Sent directly to the auditor, with another copy of the reply going to the client
D. Not sent back since a confirmation request does not necessitate replies
61. Where no response is received to a positive confirmation request, the auditor should
A. Contact the recipient to elicit a response and perform alternative procedures as
necessary
B. Issue a qualified opinion or an adverse opinion, depending on the materiality involved
C. Issue a qualified opinion or a disclaimer of opinion on grounds of a scope limitation
D. Contact the recipient/respondent in order to force a response from such recipient
62. The primary source for evidence to corroborate the existence of pending litigation is:
A. Vendor confirmations C. management representation letters
B. Disclosures in financial statements D. attorney confirmations
64. Where there are unusual fluctuations and relationships ordinarily begins with inquiries of
management, followed by
A B C D
Corroboration of management’s responses Yes No Yes No
Consideration of the need to apply other audit
procedures based on the results of management Yes Yes No No
inquiries
65. Evidential matter consists of both underlying accounting data and corroborating
information, which support the accounting data. Which of the following is considered
corroborating information?
A. Data files C. Subsidiary ledgers
B. Records of electronic fund transfers D. General ledger
66. As the acceptable level of detection risk decreases, an auditor may change the
A. Timing of substantive tests by performing them at an interim date rather than at year-
end
B. Nature of substantive tests from a less effective to a more effective procedure
C. Timing of tests of controls by performing them at several dates rather than one time
D. Assessed level of inherent risk to a higher amount
69. In testing for lower-of-cost-or-net realizable value, the auditor is gathering evidence to
support which of the following assertions?
A. Pricing C. Valuation
B. Accuracy D. Rights and obligations
5. In testing the existence assertion for an asset, an auditor ordinarily works from the
A. Financial statements to the potentially unrecorded items
B. Potentially unrecorded items to the financial statements
C. Accounting records to the supporting evidence
D. Supporting evidence to the accounting records
6. In determining whether transactions have been recorded, the direction of the audit
testing should be from the
A. General ledger balance C. Original source documents
B. Adjusted trial balance D. General journal entries
7. Which of the following statements concerning evidential matter is true?
A. Appropriate evidence supporting management's assertions should be convincing rather
than merely persuasive.
B. Effective internal control contributes little to the reliability of the evidence created
within the entity
C. The cost of obtaining evidence is not an important consideration to an auditor in
deciding what evidence should be obtained
D. A client's accounting records cannot be considered sufficient evidence to support the
financial statements
9. Audit evidence can come in different forms with different degrees of persuasiveness.
Which of the following is the least persuasive type of evidence?
A. Bank statement obtained from the client
B. Test counts of inventory made by the auditor
C. Prenumbered purchase order forms
D. Correspondence from the client's attorney about litigation
12. Which of the following might be detected by an auditor's review of the client's sale cut-off?
A. Excessive goods returned for credit
B. Unrecorded sales discounts
C. Lapping of year-end accounts receivable
D. Inflated sales for the year
13. Which of the following most likely would give the most assurance concerning the valuation
and allocation assertion of accounts receivable?
A. Vouching amounts of accounts subsidiary ledger to details on shipping documents
B. Comparing receivable turnover ratios with industry statistics for reasonableness
C. Inquiring about receivables pledged under loan agreements
D. Assessing the allowance for uncollectible accounts for reasonableness
14. Confirmation is "the process of obtaining and evaluating a direct communication from a third
party in response to a request about a particular item affecting financial statement assertions."
Two assertions for which confirmation of accounts receivable balances provides primary
evidence are
A. Completeness and valuation C. Rights and obligations and existence
B. Valuation and rights and obligations D. Existence and completeness
15. Which of the following procedures would an auditor most likely perform for year-end
accounts receivable confirmations when the auditor did not receive replies to second requests
A. Review the cash receipts journal for the month prior to year-end
B. Intensity the study of internal control concerning the revenue cycle
C. Increase the assessed level of detection risk for the existence assertion
D. Inspect the shipping records documenting the merchandise sold to the debtors
16. Which of the following is an essential control procedure to ensure the accuracy of the
recorded inventory quantities?
A. Calculating unit costs and valuing obsolete or damaged inventory items in accordance with
inventory policy.
B. Testing inventory extensions.
C. Performing a gross profit test
D. Established a cutoff for goods received and shipped.
17. Effective internal controls over inventories are designed and implemented for the following
reasons, except
A. Inventories typically represent a large component of an entity's current tasks.
B. Inventories are the most liquid asset.
C. Inventories directly affect the financial directly affect the financial performance of an entity.
D. Inventories typically represent a large portion of an entity's total assets.
18. Your client, a merchandise concern, has annual sales of P30,000,000 and a 40% gross profit
rate. Test reveals that 2% of the peso amount of purchases does not get into inventory because of
breakage and inventory pilferage by employees. The company estimates that these losses could
be reduced to 0.5% of purchases by designing and implementing certain controls costing
approximately P350,000. Should the controls be designed and implemented?
A. Yes, regardless of cost-benefit considerations, because the situation involves employee theft.
B. Yes, because the ideal system of internal control is the most extensive one.
C. No, because the cost of designing and implementing the added controls exceeds the projected
savings.
D. Yes, because the expected benefits to be derived exceed the cost of the added controls.
19. The primary source of information to be reported about litigation, claims, and assessments is
the
A. Client's lawyer C. Client's management
B. Courts records D. Independent auditor
20. Which of the following is an audit procedure that an auditor most likely would perform
concerning litigation, claims and assessments?
A. Request the clients lawyer to evaluate whether the client's pending litigations, claims and
assessment indicate a going concern problem
B. Examine the legal documents in the client's lawyer's possession concerning litigations, claims
and assessment to which the lawyer has devoted substantive attention
C. Discuss with management its policies and procedures adopted for evaluating and accounting
for litigations, claims and assessments
D. Confirm directly with the client's lawyer that all litigations, claims and assessment have been
recorded or disclosed in the financial statements
21. Which of the following statements is generally correct about the competence of evidential
matter?
A. Competence of evidential matter refers to the amount corroborative evidence obtained. B. The
more effective the internal control, the more assurance it provides about the reliability of the
accounting data and financial statements.
C. Information obtained indirectly from independent sources is more persuasive than the
auditor's direct personal knowledge obtained through observation and inspection.
D. Competence of evidential matter refers to the audit evidence obtained from outside the entity.
22. Although the validity of evidential matter is dependent on the circumstances under which it is
obtained, there are three general presumptions that have some usefulness. The situations given
below indicate the relative reliability a CPA has placed on two types of evidence obtained in
different situations. Which of these is an exception to one of the general presumptions?
A. The CPA places more reliance on the balance in the scrap sales account at Plant A, where the
CPA has made limited tests of transactions because of effective controls, than at Plant B, where
the CPA has made extensive tests of transactions because of ineffective controls.
B. The CPA places more reliance on the CPAs computation of interest payable on outstanding
bonds than on the amount confirmed by the trustee.
C. The CPA places more reliance on the report of an expert on an inventory of precious gems
than on the CPA's physical observation of the gems.
D. The CPA places more reliance on a schedule of insurance coverage obtained from the
company's insurance agent than on one prepared by the internal audit staff.
23. In testing the existence assertion for an asset, an auditor ordinarily works from the
A. Financial statements to the potentially unrecorded items
B. Potentially unrecorded items to the financial statements
C. Accounting records to the supporting evidence
D. Supporting evidence to the accounting records
24. An auditor audits an accounting estimate by any of the following means except
A. Testing the process used by management to develop the estimate.
B. Obtaining a confirmation from an independent source.
C. Developing an independent expectation.
D. Reviewing subsequent events or transactions.
25. When analytical procedures are used as substantive tests, some account relationships are
more predictable than others. For which of the following accounts is the prior-year balance likely
to be the best predictor of the current year-end balance?
A. Accounts payable C. Revenues
B. Cash D. Inventory
26. Which of the following best describes the most important stage of an auditor's statistical
analysis of significant ratios and trends?
A. Computation of significant ratios and trends.
B. Reconciliation of statistical data to the client's accounting ratios.
C. Interpretation of significant variations and unusual relationships.
D. Comparison of statistical data to prior-year statistics and to similar data published by
government and private sources.
27. In the audit of accounts receivable an auditor sends confirmations to all customers with
balances of P50,000 or more and to a sample of 25% of the customers with balances of less than
P50,000. Overstatement errors of P12,000 were found in the accounts of P50,000 or more, and
understatement errors of P3,000 were found in the sample. Likely misstatements for accounts
receivable is
A. P0 B. P15,000 C. P9,000 D. P24,000
28. An auditor would least likely initiate a discussion with a client's audit committee concerning
A. The methods used to account for significant unusual transactions.
B. The maximum peso amount of misstatements that could exist without causing the financial
statements to be materially misstated.
C. Indications of fraud and illegal acts committed by a corporate officer that were discovered by
the auditor.
D. Disagreements with management as to accounting principles that were resolved during the
current year's audit.
ACCOUNTING ESTIMATES
3. Which of the following would an auditor ordinarily perform first in evaluating management's
accounting estimates for reasonableness?
A. Develop independent expectations of management's estimates.
B. Consider the appropriateness of the key factors or assumptions used in preparing the
estimates.
C. Test the calculations used by management in developing the estimates.
D. Obtain an understanding of how management developed its estimates
4. Which of the following would an auditor generally perform to obtain assurance that
accounting estimates are properly accounted for and disclosed?
A. Inquiry of management
B. Make an independent estimate for comparison with client's estimate
C. Review subsequent events
D. Obtain knowledge about the applicable financial reporting standards related to the accounting
estimate
5. Which of the following procedures would an auditor least likely perform when evaluating the
reasonableness of management's estimates?
A. Make independent estimates for comparison with management estimates
B. Read minutes of board of director’s meetings
C. Review and test the process used by management
D. Review subsequent events and confirm the estimate made
8. When auditing the fair value of an asset or liability, valuation issues ordinarily arise at the
point of
AUDIT DOCUMENTATION
13. Statement 1: The auditor should prepare working papers which are sufficiently
complete and detailed to provide an overall understanding of the audit.
Statement 2: The auditor should record in the working papers information on planning
the audit work, the nature, timing and extent of the audit procedures performed, the
results thereof, and the conclusions drawn from the audit evidence obtained.
A. Only statement one is correct
B. Only statement two is correct
C. Both statements are correct
D. Both statements are incorrect
14. The form and content of working papers are affected by matters such as the following except:
A. Nature of the engagement
B. Type of opinion to be rendered by the auditor
C. Nature and complexity of the business
D. Needs in the particular circumstances for the direction, supervision and review of work
performed by assistants.
15. Audit working papers are used to record the results of the auditor's evidence gathering work.
When preparing working papers, the auditor should remember that
A. Working papers should be designed to meet the circumstances and the auditor's need for each
engagement
B. Working papers should be kept on the client's premises so as to provide ready access to them
by the client.
C. Working papers should be at the primary support for the financial statements being examined.
D. Working papers should be considered as a substitute for the client's accounting records.
18. During an audit engagement, pertinent data are compiled and included in the audit working
papers. The working papers primarily are considered to be
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 representations as to compliance with generally accepted auditing
standards.
D. A record to be used as a basis for the following year’s engagement.
20. An auditor’s working papers will generally be least likely to include documentation showing
how the
A. Client’s schedules were prepared
B. Engagement had been planned
C. Client’s system of internal control had been reviewed and evaluated
D. Unusual matters were resolved
21. Which of the following is not a factor affecting the independent auditor’s judgement
about the quantity, type and content of audit working papers?
A. The needs for supervision and review of the work performed by assistants.
B. The nature and condition of the client’s records and internal control.
A. Copies of those client records examined by the auditor during the course of the
engagement.
B. Evaluation of the efficiency and competence of the audit staff assistants by the
partner responsible for the audit.
23. Which of the following is generally included or shown in the auditor’s working papers?
A. The procedures used by the auditor to verify the personal financial status of
members of the client’s management’s team
B. Analysis that are designed to be a part of, or a substitute for, the client’s
accounting records.
D. The manner in which exceptions and unusual matters disclosed by the auditor’s
procedures were resolved or treated.
C. Show that the accounting records agree or reconcile with the financial statements.
D. Be considered the primary support for the financial statements being audited.
25. Using laptop computers in auditing may affect the methods used to review the work of
staff assistants because.
C. Used on the rare occasions when it is both readily available and less costly than
other procedures.
27. An audit working paper that shows the detailed evidence and procedures regarding the
balance in the accumulated depreciation account in the year under audit will be found in
the
28. In the case of recurring audits, some working papers files may be classified as audit files
which are updated with new information of continuing importance. This type of audit file
is known as:
29. The audit working paper that reflects the major components of an amount reported in the
financial statements is the
30. A schedule listing account balances for the current and previous years, and columns for
adjusting and reclassifying entries proposed by the auditors to arrive at the final amount
that will appear in the financial statements, is referred to as a
31. What do you call the type of working paper where matters of importance are noted down
for further verification?
32. The current file of the auditor’s working papers generally should include.
33. The permanent file portion of the auditor’s working papers generally should include
34. The permanent (continuing) file of an auditor’s working paper most likely would include
copies of the
35. The current file of an auditor’s working paper most likely would include copy of the
A. Bank reconciliation C. Articles of incorporation
36. The permanent file section of the working papers that is kept for each audit client most
likely contains
A. Review notes pertaining to questions and comments regarding the audit work
performed.
37. In general, which of the following statements is correct with respect to ownership,
possession, or access to working papers prepared by a CPA firm in connection with an
audit?
A. The working papers may be obtained by third parties where they appear to be
relevant to issues raised in litigation.
B. The working papers are subject to the privileged communication rule which, in a
majority of jurisdictions, prevents third-party access to the working papers.
C. The working papers are the property of the client after the client pays the fees.
D. The working papers must be retained by the CPA firm for a period of ten years.
38. For what minimum period should audit working papers be retained by the independent
CPA?
A. For the period during which the entity remains a client of the independent CPA.
B. For the period during which an auditor-client relationship exists but not more
than six (6) years
C. For the statutory period within which legal action may be brought against the
independent CPA.
39. Which of the following documentation is required for an audit in accordance with PSA?
A. An internal control questionnaire C. A planning memorandum or
checklist
40. The auditor should complete the assembly of the financial audit file on a timely basis
after the date of the auditor’s report. As PSQC 1 indicates, ___ days after the date of the
auditor’s report is ordinarily an appropriate time limit within which to complete the
assembly of the financial audit file.
A. 30 B. 60 C. 90 D. 120
41. After the assembly of the final audit file has been completed, the auditor not delete or
discard audit documentation before the end of its retention period. As PSQC 1 indicates,
the retention period for audit engagement ordinarily is no shorter than ___ years from the
date of the auditor’s report.
A. 5 B. 3 C. 7 D. 10
42. In documenting the nature, timing and extent of audit procedures performed, the auditor
should record
I. Who performed the audit work and the date such work papers was completed
II. Who reviewed the audit work and the date and extent of such review
C. An auditor’s working papers may not serve as reference source for the client
D. Working papers should show that the internal accounting control system has been
studied and evaluated to the degree necessary.
A. Reduce the size of the file C. Better organize the working papers
B. Allow division of labor within the audit team D. Facilitate the efficient use of
audit staff
45. During the working paper review, an audit supervisor finds that the auditor’s reported
findings are not adequately cross-referenced to supporting documentation. The supervisor
will most likely instruct the auditor to
A. Prepare working paper to indicate that the full scope of the audit was carried out.
B. Familiarize him/herself with the sequence of working papers so that he/she will be
able to answer questions about the conclusions stated in the report.
D. Provide a working paper indexing system that shows the relationship between
findings, conclusions and the related facts.