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A. Cash is important to the audit process because of its vulnerability to misappropriation, despite
the fact that the balance at the balance sheet date may be immaterial.
B. Payroll cash account balances kept on an imprest basis are more easily controlled than others
not so kept.
C. Confirmation of cash should only be performed as of the balance statement date because the
auditor expresses an opinion as of that date.
D. Reviewing interbank transfers is important to the auditor because of the possibility that the
client may be engaged in kiting.
3. A practical and effective audit procedure for the detection of lapping is:
A. Preparing an interbank transfer schedule.
B. Comparing recorded cash receipts in detail against items making up the bank deposit as
shown on duplicate deposit slips validated by the bank.
C. Tracing recorded cash receipts to postings in customers' ledger cards.
D. Preparing a proof of cash.
4. Which of the following is not a control that generally is established over cash transactions?
A. Separating cash handling from recordkeeping.
B. Centralizing the receipt of cash.
C. Depositing each day's receipts intact.
D. Obtaining a receipt for every disbursement.
5. Which of the following controls would be most likely to reduce the risk of diversion of
customer receipts by a company's employees?
A. A bank lockbox system.
B. Approval of all disbursements by an individual independent of cash receipts.
C. Monthly bank cutoff statements.
D. Prenumbered remittance advices.
6. Which of the following is not a control that generally is established over cash receipts?
A. To prevent abstraction of cash, a control listing of cash receipts should be prepared by
mailroom personnel.
B. To insure accurate posting, the accounts receivable clerk should post the customers' receipts
from customers' checks.
C. To insure accuracy of the accounts receivable records, the records should be reconciled
monthly to the accounts receivable controlling account.
D. To prevent theft of cash, receipts should be deposited daily.
7. Tracing recorded sales transactions in the sales journal to the shipping documents (bills of
lading) provides evidence about the:
A. Completeness of recording of sales transactions.
B. Occurrence of sales transactions.
C. Billing of all sales transactions.
D. Presentation of payables.
8. By preparing a four-column bank reconciliation ("proof of cash") for the last month of the
year, an auditor will generally be able to detect:
A. An unrecorded check written at the beginning of the month which was cashed during the
period covered by the reconciliation.
B. A cash sale which was not recorded on the books and was stolen by a bookkeeper.
C. An embezzlement of unrecorded cash receipts on receivables before they had been deposited
into the bank.
D. A credit sale which has been recorded twice in the sales journal.
9. In October, three months before year-end, the bookkeeper erroneously recorded the receipt of
a one year bank loan with a debit to cash and a credit to miscellaneous revenue. Select the most
effective method for detecting this type of error.
A. Foot the cash receipts journal for October.
B. Send a bank confirmation as of year-end.
C. Prepare a bank reconciliation as of year-end.
D. Prepare a bank transfer schedule as of year-end.
10. Jones embezzled $10,000 from his company's account in Bank A. At year-end he hid the
shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not
recorded the transaction on the books. This is an example of:
A. Lapping.
B. Kiting.
C. Effective cash management.
D. Related party transactions.
11. What type of error is the CPA most likely to discover when he/she examines all shipping
reports dated in January of 20X1, shipped FOB shipping point, which were recorded in
December of 20X0 as credit sales?
A. Accounts receivable are overstated at December 31, 20X0.
B. Accounts receivable are understated at December 31, 20X0.
C. Operating expenses are overstated for the 12 months ended December 31, 20X0.
D. Sales returns and allowance are overstated at December 31, 20X0.
12. Which of the following is not typically considered to be an alternate procedure for handling
nonreplies to accounts receivable confirmations?
A. Examine sales invoices.
B. Inclusion of the information in the engagement letter.
C. Examine correspondence.
D. Examine any subsequent cash receipts.
13. Which of the following fraudulent activities most likely could be perpetrated due to the lack
of effective internal control over the revenue cycle?
A. Fictitious transactions may be recorded that cause an understatement of revenues and an
overstatement of receivables.
B. Claims received from customers for goods returned (and unpaid for) may be intentionally
recorded in other customers' accounts permitting a misappropriation of cash.
C. Authorization of credit memos by personnel who receive cash may permit the
misappropriation of cash.
D. The failure to prepare shipping documents may lead to an understatement of inventory
balances.
14. A client might overstate December 31 accounts receivable balances by dating and recording
January transactions in December. Such entries recorded in which journal are most likely to
achieve this end?
A. Cash receipts.
B. Payroll.
C. Purchases.
D. Sales.
15. Which of the following is a likely procedure to test the adequacy of the allowance for
doubtful accounts?
A. Examine cash receipts received after year-end.
B. Confirm receivables.
C. Examine dates of purchase orders.
D. Foot the receivables lead schedule.
16. A client uses a periodic inventory system. Would one expect a credit to which of the
following accounts at the point of sale?
A. Option A
B. Option B
C. Option C
D. Option D
17. A client uses a perpetual inventory system. Would one expect a credit to which of the
following accounts at the point of sale?
A. Option A
B. Option B
C. Option C
D. Option D
18. Which of the following would an auditor most likely question included in calculation of the
overhead rate for a company that manufactures a product?
A. Factory supervisor salary.
B. Indirect materials.
C. Miscellaneous expense.
D. Sales expense.
20. Which of the following is an auditor least likely to consider a departure from generally
accepted accounting principles?
A. Valuing inventory at cost.
B. Including in inventory items that are consigned out to vendors, but not yet sold.
C. Using standard cost as the measure of inventory cost.
D. Including in inventory items shipped subsequent to year-end, but for which valid orders did
exist at year-end.
21. Which of the following best describes the independent auditors' approach to obtaining
satisfaction concerning depreciation expense in the income statement?
A. Verify the mathematical accuracy of the amounts charged to income as a result of
depreciation expense.
B. Determine the method for computing depreciation expense and ascertain that is in accordance
with generally accepted accounting principles.
C. Reconcile the amount of depreciation expense to those amounts credited to accumulated
depreciation accounts.
D. Establish the basis for depreciable assets and verify the depreciation expense.
22. The auditors are least likely to learn of retirements of equipment through which of the
following?
A. Review of the purchase returns and allowances account.
B. Review of depreciation.
C. Analysis of the debits to the accumulated depreciation account.
D. Review of insurance policy riders.
23. For which of the following ledger accounts would the auditor be most likely to analyze the
details to identify understatements of equipment acquisitions?
A. Service Revenue.
B. Sales.
C. Repairs and maintenance expense.
D. Sales salaries expense.
24. Which of the following is the most important control procedure over acquisitions of property,
plant, and equipment?
A. Establishing a written company policy distinguishing between capital and revenue
expenditures.
B. Using a budget to forecast and control acquisitions and retirements.
C. Analyzing monthly variances between authorized expenditures and actual costs.
D. Requiring acquisitions to be made by user departments.
25. In the examination of property, plant, and equipment, the auditor tries to determine all of the
following except the:
A. Extent of the control risk.
B. Extent of property abandoned during the year.
C. Adequacy of replacement funds.
D. Reasonableness of the depreciation.
26. Property acquisitions that are misclassified as maintenance expense would most likely be
detected by an internal control system that provides for:
A. Investigation of variances within a formal budgeting system.
B. Review and approval of the monthly depreciation entry by the plant supervisor.
C. Segregation of duties of employees in the accounts payable department.
D. Examination by the internal auditors of vendor invoices and canceled checks for property
acquisitions.
27. Assume that the auditors are concerned about disbursement transactions that have been
recorded for improper amounts. Which procedure(s) would possibly identify these transactions?
A. Option A
B. Option B
C. Option C
D. Option D
28. Which of the following best describes a voucher prepared under good internal control?
A. A document prepared by Stores that indicates amount to be purchased.
B. A document prepared by Receiving that indicates the quantity received and approves
payment.
C. A document prepared by Accounts Payable authorizing a cash disbursement.
D. A document received by Purchasing, from a supplier, indicating quantity of goods purchased
and amount due.
29. An auditor wishes to perform tests of controls on a client's cash disbursements relating to
accounts payable. If the control procedures leave no audit trail of documentary evidence, the
auditor most likely will test the procedures by:
A. Confirmation and observation.
B. Observation and inquiry.
C. Analytical procedures and confirmation.
D. Inquiry and analytical procedures.
30. Which of the following tests of controls most likely would help assure an auditor that goods
shipped are properly billed?
A. Scan the sales journal for sequential and unusual entries.
B. Examine shipping documents for matching sales invoices.
C. Compare the accounts receivable ledger to daily sales summaries.
D. Inspect unused sales invoices for consecutive pre-numbering.
31. Which of the following audit procedures is best for identifying unrecorded trade accounts
payable?
A. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine
whether the related payable applies to the prior period.
B. Investigating payables recorded just prior to and just subsequent to the balance sheet date to
determine whether they are supported by receiving reports.
C. Examining unusual relationships between monthly accounts payable balances and recorded
cash payments.
D. Reconciling vendors' statements to the file of receiving reports to identify items received just
prior to the balance sheet date.
32. An entity's internal control requires for every check request that there be an approved
voucher, supported by a prenumbered purchase order, and a prenumbered receiving report. To
determine whether checks are being issued for unauthorized expenditures, an auditor most likely
would select for testing from the population of:
A. Purchase orders.
B. Canceled checks.
C. Receiving reports.
D. Approved vouchers.
33. A client recorded a payable for a large purchase twice. Which of the following controls
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.
34. When an auditor finds a debit to accounts payable, which of the following accounts is most
likely to be credited?
A. Accounts Receivable.
B. Accrued liabilities.
C. Cash
D. Cost of goods sold.
36. A likely analytical procedure to test the accuracy of purchase discounts would be to compute
the ratio of cash discounts earned to
A. Accounts payable.
B. Notes payable.
C. Purchases.
D. Sales discounts.
37. A registrar/transfer agent system relating to capital stock is most likely used by:
A. A small, nonpublic company.
B. A large, publicly traded company.
C. All companies must use this type of system.
D. No companies use this system anymore.
39. An auditor obtains evidence of stockholders' equity transactions for a publicly traded
company by reviewing the entity's:
A. Minutes of board of directors meetings.
B. Registrar's record of interbank transfers.
C. Canceled stock certificates.
D. Treasury stock certificate book.
40. Which of the following most likely would approve the issuance of notes payable?
A. Controller.
B. Payroll.
C. Personnel.
D. Treasurer.
42. The auditor's program to examine interest-bearing debt most likely will include steps that
require:
A. Comparing the book value of the debt to its year-end market value.
B. Vouching borrowing and repayment transactions.
C. Verifying the proper presentation of the debt through the use of confirmations.
D. Inspecting the accounts payable subsidiary ledger for unrecorded interest-bearing debt.
45. Which of the following procedures is least likely in the audit of capital stock?
A. Examine all outstanding stock certificates for completeness.
B. Account for the proceeds from stock issues.
C. Reconcile shares outstanding with the general ledger.
D. Evaluate compliance with stock option plans.
46. When the auditors obtain an understanding of internal control for the financing cycle
documentation will frequently include a written description as well as a(n):
A. List of audit objectives.
B. Decision table.
C. Summary of tests of controls.
D. Internal control questionnaire.
47. Which of the following is not a primary objective in the audit of interest-bearing debt?
A. Establish the completeness of recorded interest-bearing debt.
B. Establish the legality of outstanding debt.
C. Determine that debt is properly valued.
D. Determine that the presentation and disclosure of interest-bearing debt is appropriate.
48. In which of the following accounts would one expect a related party transaction to be easiest
to detect?
A. Accounts receivable.
B. Accounts payable.
C. Notes payable.
D. Cash
50. The audit approach for acquired treasury stock will normally include:
A. Confirmation with shareholders.
B. Inspection of certificates.
C. Inspection of cash receipts entries.
D. Recomputation of all gains and losses.
You have been assigned to audit the financial statements of AYALA MERCHANTS CORPORATION
for the year 2015. The company is a dealer of appliances and has several branches in Metro
Manila. Its main office is located in Makati City. You were given by the company controller the
unadjusted balances of the items to be included in the company’s statement of financial position
and statement of income as of and for the year ended December 31, 2015. Audit findings are as
follows:
I. AUDIT OF CASH
A cash count was conducted by your staff on January 7, 2016. The petty cash fund of P60,000
maintained by the company on an imprest basis relected a balance of P22,750. Unreplenished
expenses totaled P37,250 of which P9,510 pertains to January 2016.
You were furnished a copy of the company’s bank reconciliation statement with Chartered
Bank as follows:
Balance per bank P277,994
Add: Deposit in transit 248,836
Bank debit memos 712,750
Returned check 63,000
Less: Outstanding checks (174,580)
Book error (72,000)
Balance per books P1,056,000
1. Postdated checks totaling P107,400 were included as part of the deposit in transit. These
represent collections from various customers whose accounts have been outstanding for
less than three months. These checks were actually deposited on January 8, 2016.
2. Included in the deposit in transit is a check from a customer for P63,000 which was
returned by the bank on December 27, 2015 for insufficiency of funds. This account has
been outstanding for over six months. The check was replaced by the customer on January
15, 2016.
3. The bank debited the account of Ayala Merchants for P710,000 as payment of notes
payable including interest of P10,000 due on December 26, 2015. This was not recorded
as of year-end.
4. A check was cleared by the bank as P30,900 but was recorded by the bookkeeper as
P102,900. This was in payment of accounts payable.
The note receivable amounting to P1,300,000 represents a loan granted to a subsidiary. This
is covered by a promissory note with interest at 15% per annum dated November 1, 2015.
No interest has been accrued on the note as of December 31, 2015.
V. AUDIT OF PREPAYMENTS
The company leases the main office and store in Makati City at a monthly rental of P140,000.
On November 5, 2015, a check for P420,000 was issued in payment of three-month rental as
per renewal contract which was effective on November 1, 2015. Rental deposit remained at
three months and is included under other assets.
The company’s delivery equipment is insured with Fortune Insurance Corporation for a total
coverage of P2.4 million. Total payment made on November 16, 2015 for the renewal
amounted to P490,000 which covers the period from November 1, 2015 to November 1, 2016.
No adjustment has been made as of December 31, 2015.
To take advantage of volume discount ranging from 10% to 20%, the company buys office
and store supplies on a bulk basis. The staff-in-charge bought supplies worth P220,000 on
June 10, 2015 and included the same in their office supplies inventory. As at year-end, unused
office supplies amount to P102,500.
The company purchased additional equipment worth P268,000 on June 30, 2015. At the date
of purchase, it incurred the following additional costs which were charged to repairs and
maintenance account:
Freight-in P30,400
Installation cost 13,000
Total P43,400
The above equipment has an estimated useful life of ten years and estimated salvage value
of P20,000. Depreciation for the above equipment has been provided based on original cost.
The company discarded some store equipment on October 1, 2015, realizing no salvage value.
The cost of these equipment amounted to P165,520 with an accumulated depreciation of
P138,620 as of December 31, 2015. Depreciation booked from October 1, 2015 to year-end
was P10,480. No entry was made on the disposal of the property.
Ayala Merchants obtained a one-year loan from Chartered Bank amounting to P2.6 million at
an interest rate of 16% per annum on October 1, 2015. Accrued interest on this loan was not
taken up at year-end.
A review of the minutes of meeting showed that a 10% cash dividend was declared to
shareholders of record as of December 15, 2015, payable on January 31, 2016.
Debit Credit
Petty cash fund P 60,000
Cash in bank 1,056,000
Trading securities 483,640
Accounts receivable – trade 3,618,660
Allowance for doubtful accounts P 110,360
Notes receivable 1,300,000
Inventories 7,274,900
Prepaid advertising 640,000
Prepaid insurance 490,000
Prepaid rent 420,000
Office supplies inventory 361,000
Furniture and fixtures 1,298,400
Delivery equipment 2,770,000
Accumulated depreciation 1,177,500
Other assets 548,000
Accounts payable – trade 2,356,320
Notes payable 3,300,000
Accrued expenses 169,040
Bonds payable 5,000,000
Discount on bonds payable 500,000
Ordinary share capital 5,400,000
Retained earnings 792,160
Sales 13,078,000
Cost of goods sold 8,034,000
Operating expenses 3,357,000
Other income 1,453,500
Other charges 625,280
P32,836,880 P32,836,880
Based on the above information, determine the adjusted balances of the following: (Ignore tax
implications.)
51. Petty cash fund
A. P37,250 B. P60,000 C. P22,750 D. P32,260
57. Inventories
A. P6,934,200 B. P7,274,900 C. P7,290,200 D. P6,780,400
68. Sales
A. P13,068,440 B. P13,078,000 C. P13,224,940 D. P12,339,500