University of the Cordilleras

College of Accountancy
Final Exams for Accounting 24D Theory
3rd term 2004-2005

Multiple Choice: Shade the corresponding letter that gives the right answer in the answer
sheet.

1. An audit independence issue might be raised by the auditor’s participation in management

advisory services engagements. Which of the following statements is most consistent with
the profession’s attitude toward this issue?
a. Information obtained as a result of a consulting engagement is confidential to that
engagement and should not influence performance of the attest function
b. The decision as to loss of independence must be made by the client based on the facts of
the particular case
c. The auditor should not make decisions for an audit client
d. The auditor who is asked to review management decisions is also competent to make
these decisions and can do so without loss of independence

2. The Code of Professional Conduct states that a CPA shall not disclose any confidential
information obtained in the course of a professional engagement except with the consent of
his or her client. In which of the situations that follow would disclosure by a CPA be in
violation of the Code?
a. Disclosing confidential information to properly discharge the CPA’s responsibilities in
accordance with the profession’s standards
b. Disclosing confidential information in compliance with a subpoena issued by a court
c. Disclosing confidential information to another accountant interested in purchasing the
CPA’s practice
d. Disclosing confidential information in a review of the CPA’s professional practice by a
peer review team

3. Which of the following fee arrangements is in violation of the Code of Professional Conduct?
a. A fee based on whether the CPA’s report on the client’s financial statements results in the
approval of a bank loan
b. A fee based on the outcome of a bankruptcy proceeding
c. A fee based on the nature of the service rendered and the CPA’s particular expertise
instead of the actual time spent on the engagement
d. A fee based on the fee charged by the prior auditor

4. Which of the following describes most completely how the profession defines independence?
a. Performing an audit from the public’s point of view
b. Avoiding the appearance of a significant interest in an audit client’s interest
c. Resisting a client’s reluctance to reveal evidence
d. Accepting responsibility to act professionally and in accordance with a professional Code
of Conduct

5. In which of the following circumstances would a CPA be bound to refrain from disclosing
confidential information obtained during a professional engagement?
a. The CPA is issued a summons enforceable by a court order that orders the CPA to present
confidential information
b. A major stockholder of a client company seeks accounting information from the CPA
after management declined to disclose the information
c. Confidential client information is made available as part of a quality review of the CPA’s
practice by a review team authorized by the PICPA
d. An inquiry by a disciplinary body of a national CPA society requests confidential client
information
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6. Amor, CPA, performs accounting services for Victory Marine Corp. Victory Marine wishes
to offer shares to the public and asks Amor to audit the financial statements. Amor refers
Victory Marine to Malou, CPA, who is more competent in the area of registration statements
and subsequently thanks Amor for the referral by giving Amor a portion of the audit fees.
Amor accepts the fee. Who, if anyone, has violated professional ethics?
a. Only Amor
b. Only Malou
c. Both Amor and Malou
d. Neither Amor nor Malou

7. The Code of Professional Conduct would be violated if a member accepted a fee for services
and the fee was
a. Fixed by a public authority
b. Based on a price quotation submitted in a competitive bidding
c. Based on the result of judicial proceedings
d. Payable after a specified finding was attained

8. Independence is required of a CPA performing

a. Audits, but not any other professional services
b. All attestations services, but not other professional services
c. All attestations and tax services, but not other professional services
d. All professional services

9. Which of the following statements best describes why the profession of certified public
accountants has deemed it essential to promulgate a code of professional conduct and to
establish a mechanism for enforcing observation of the code?
a. A distinguishing mark of a profession is its acceptance of responsibility to the public.
b. A prerequisite to success is the establishment of an ethical code that primarily defines the
professional’s responsibility to clients and colleagues.
c. A requirement of most state laws for the profession to establish a code of ethics
d. An essential means of self-protection for the profession is the establishment of flexible
ethical standards by the profession.

10. An auditor decides to issue a qualified opinion on an entity’s financial statements because a
major inadequacy in its computerized accounting records prevents the auditor form applying
necessary procedures. The opinion paragraph of the auditor’s report should state that he
qualification pertains to
a. Client-imposed scope limitation
b. A departure form generally accepted auditing standards
c. The possible effects on the financial statements
d. Inadequate disclosure of the necessary information
`
11. Which of the following events occurring after the issuance of an auditor’s report most likely
would cause the auditor to make further inquiries about the previously issued financial
statements?
a. A technological development that could affect the entity’s future ability to continue as a
going concern.
b. The discovery of information regarding a contingency that existed before the financial
statements were issued
c. The entity’s sale of a subsidiary that accounts for 30% of the entity’s consolidated sales.
d. The final resolution of a lawsuit explained in a separate paragraph of the auditor’s report

12. A material departure form GAAP will result in auditor consideration of

a. Whether to issue an adverse opinion rather than a disclaimer of opinion
b. Whether to issue a disclaimer of opinion rather than an “except for opinion”
c. Whether to issue an adverse opinion rather than an “except for opinion”
d. Nothing, because none of these opinions is applicable to this type of exception.
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13. The auditor’s report should be dated as of the date the

a. Report is delivered to the client
b. Field work is completed
c. Fiscal period under audit ends
d. Review of the working papers is completed

14. In the report of the principal auditor, reference to the fact that a portion of the audit was made
by another is
a. Not to be construed as a qualification, but rather as a division of responsibility between
two CPA firms
b. Not in accordance with GAAS
c. A qualification that lessens the collective responsibility of both CPA firms
d. An example of a dual opinion requiring the signatures of both auditors

15. Assume that the opinion paragraph of an auditor’s report begin as follows “With the
explanation given in Note 6, the financial statements referred to above present fairly.” This
is:
a. An unqualified opinion
b. A disclaimer of opinion
c. An “except for” opinion
d. An improper type of reporting

16. The auditor who wishes to indicate that the entity has significant transaction with related
parties should disclose this fact in
a. An explanatory paragraph to the auditor’s report
b. An explanatory note to the financial statements
c. The body of the financial statements
d. The “summary of significant accounting policies” section of the financial statements

17. When restrictions that significantly limit the scope of the audit are imposed by the client, the
auditor should generally issue which of the following opinions
a. Qualified
b. Disclaimer
c. Adverse
d. Unqualified

18. A CPA found that the client has not capitalized a material amount of leases in the financial
statements. When considering the materiality of this departure form GAAP, the CPA’s
reporting options are
a. Unqualified opinion or disclaimer of opinion
b. Unqualified opinion or qualified opinion
c. Emphasis paragraph with unqualified opinion or an adverse opinion
d. Qualified opinion or adverse opinion

19. An auditor has fond that the client is suffering financial difficulty and the going-concern
status is seriously in doubt. Even though the client has placed good disclosures in the
financial statements, the CPA must choose between the following audit report alternatives:
a. Unqualified report with a going-concern explanatory paragraph or disclaimer of opinion
b. Standard unqualified report or a disclaimer of opinion
c. Qualified opinion or adverse opinion
d. Standard unqualified report or adverse opinion

20. Bettina, CPA, is preparing an audit program for the purpose of ascertaining the occurrence of
subsequent events that may require adjustment or disclosure essential to a fair presentation of
the financial statements in conformity with GAAP. Which one of the following procedures
would be least appropriate for this purpose?
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a. Confirm as the completion of field work accounts receivable which have increased
significantly from the year-end date
b. Read the minutes of the board of directors
c. Inquire of management concerning events which may have occurred
d. Obtain a lawyer’s letter as of the completion of fieldwork

21. Subsequent events affecting the realization of assets ordinarily will require adjustment of the
financial statements under examination because such events typically represent
a. The culmination of conditions that existed at the balance sheet date
b. The final estimates of losses relating to casualties occurring in the subsequent events
period
c. The discovery of new conditions occurring in the subsequent events period
d. The preliminary estimates of losses relating to new events that occurred subsequent to the
balance sheet date

22. Which of the following material events occurring subsequent to the balance sheet date would
require an adjustment to the financial statements before they are issued?
a. Sale of long-term debt or capital stock
b. Loss of a plant as a result of a flood
c. Major purchase of a business which is expected to double sales volume
d. Settlement of litigation, in excess of the recorded liability

23. A major customer of an audit client suffers a fire just prior to completion of year-end field
work. The audit client believes that this event could have a significant direct effect on the
financial statements. The auditor should
a. Advise management to disclose the event in notes to the financial statements
b. Disclose the event in the auditor’s report
c. Withhold submission of the auditor’s report until the extent of the direct effect on the
financial statements is known
d. Advise management to adjust the financial statements

24. The primary source of information to be reported about litigation, claims, assessments is the
a. Client’s lawyer
b. Client’s management
c. Court records
d. Auditor

25. The auditor’s primary means of obtaining corroboration of management’s information

concerning litigation is a
a. Letter of audit inquiry to the client’s lawyer
b. Letter of corroboration from the auditor’s lawyer upon review of the legal documentation
c. Confirmation of claims and assessments from the other parties to the litigation
d. Confirmation of claims and assessments from an officer of the court presiding over the
litigation

26. Auditors should request that an audit client send a letter of inquiry to those attorneys who
have been consulted concerning litigation, claims, or assessments. The primary reason for
this request is to provide
a. Information concerning the progress of cases to date
b. Corroborative evidential matter
c. An estimate of the dollar mount of the probable loss
d. An expert opinion as to whether a loss is possible, probable, or remote

27. Which of the following is not an audit procedure, which the independent auditor would
perform with respect to litigation, claims, and assessments?
a. Inquire of and discuss with management the policies and procedures adopted for
identifying, evaluating, and accounting for litigation, claims, and assessments
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b. Obtain from management a description and evaluation of litigation, claims, and

assessments that existed at the balance sheet date
c. Obtain assurance from management that it has disclosed all unasserted claims that the
lawyer has advised are probable of assertion and must be disclosed
d. Confirm directly with the client’s lawyer that all claims have been recorded in the
financial statements

28. When obtaining evidence regarding litigation against a client, the CPA would be least
interested in determining
a. An estimate of when the matter will be resolved
b. The period in which the underlying cause of the litigation occurred
c. The probability of an unfavorable outcome
d. An estimate of the potential loss

29. The audit inquiry letter to the client’s legal counsel should be mailed only by the
a. Client after the auditor has reviewed it for appropriate content
b. Auditor after preparation by the client and review by the auditor
c. Auditor’s attorney after preparation by the client and review by the auditor
d. Client after review by the auditor’s attorney

30. “Unusual fluctuations” occur when

a. Significant differences are not expected but do exist
b. Significant differences are expected but do not exist
c. There is a material accounting error or irregularity
d. Any one of the above three situations may occur

31. Analytical procedures used in planning an audit should focus on identifying:

a. Material weaknesses in the internal control structure
b. The predictability of financial data from individual transactions
c. The various assertions that are embodied in the financial statements
d. Areas that may represent specific risk relevant to the audit

32. To help plan the nature, timing and extent of substantive auditing procedures, preliminary
analytical procedures should focus on:
a. Enhancing the auditors understanding of the client’s business and events that have
occurred since the last audit date
b. Developing plausible relationships that corroborate anticipated results with a measurable
amount of precision
c. Applying ration analysis to externally generated data such as published industry statistics
or price indices
d. Comparing recorded financial information to the results of other tests of transactions and
balances

33. An example of an analytical procedure is the comparison of:

a. Financial information with similar information regarding the industry in which the entity
operates
b. Recorded amounts of major disbursements with appropriate invoices
c. Results of statistical sample with the expected characteristic of the actual population
d. EDP-generated data with data generated by a manual accounting system

34. What is the basis for an auditor’s decision either to apply analytical procedures as substantive
tests or to perform tests of transactions and account balances?
a. Relative effectiveness and efficiency of the tests
b. Auditor’s familiarity with industry trends
c. Availability of data segregated at a high level
d. Timing of test performed after the balance sheet data
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35. Which of the following tends to be most predictable for purposes of analytical procedures
applied as substantive tests?
a. Relationships involving balance sheet accounts
b. Transitions subject to management discretion
c. Relationships involving income statement accounts
d. Data subject to audit testing in the prior year

36. Which of the following analytical procedures, should be applied to the income statement?
a. Select sales and expense items and trace amounts to related supporting documents
b. Ascertain that the new income amount in the statement of cash flows agrees with the net
income amount in the income statement
c. Obtain from the client representatives, the beginning and ending inventory amounts that
were used to determining cost of sales
d. Compare the actual revenues and expenses with the corresponding figures of the previous
year and investigate significant differences

37. An auditor uses analytical review during the course of an audit. The most important phase of
this review is the:
a. Computations of key ratios such as inventory turnover and gross profit percentages
b. Investigation of significant variations and unusual relationships
c. Comparisons of client-computed statistics that are analyzed
d. Examinations of the client data that generated the statistics that are analyzed

38. Which of the following is not a typical analytical review procedure?

a. Study of relationships of the financial information with relevant no-financial information
b. Comparison of the financial information with similar information regarding the industry
in which the entity operates
c. Comparisons of recorded amounts of major disbursements with appropriate invoices
d. Comparisons of the financial information with budgeted amounts

39. Which of the following audit techniques would most likely provide an auditor with the most
assurance about the effectiveness of an internal control structure?
a. Inquiry of client personnel
b. Recomputation of account balance amounts
c. Observations of client personnel
d. Confirmations with outside parties.

40. The sequence of the steps in the auditor’s consideration of the internal control structure is as
follows:
a. Obtain an understanding, design substantive tests, perform tests of controls, determine
assessed level of control risk.
b. Design substantive tests, obtain an understanding, perform tests of control, determine
assessed level of control risk
c. Obtain an understanding, perform tests of controls, determine assessed level of control
risk, design substantive tests.
d. Perform tests of controls, obtain an understanding, determine assessed level of internal
control, design substantive tests.

41. When documenting the assessed level of control risk, the auditor should
a. Express the assessed level of control risk in either quantitative or qualitative terms for all
assertions.
b. State the basis for the conclusion when the assessed level of control risk is below the
maximum level fro an assertion.
c. State the basis for the conclusion when the assessed level of control risk is at the
maximum level for an assertion.
d. Describe how the planned substantive test have been affected by the assessed level of
control risk.
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42. In determining the assessed level of control risk, which of the following statement is correct?
a. The knowledge obtained from the understanding of the internal control structure cannot
be used.
b. The knowledge obtained about the internal control structure from prior audits can be
used.
c. The auditor evaluates the design of a policy and whether it has been placed in operations.
d. Observation provides more persuasive evidence about the operating effectiveness of a
policy or procedure than inspecting documentation.

43. To determine the sample size for a test of controls, an auditor should consider the tolerable
occurrence rate, the allowable risk of assessing control risk too low and the
a. Expected occurrence rate
b. Risk of incorrect acceptance
c. Risk of incorrect rejection
d. Upper precision limit

44. Reportable conditions are matters that come to an auditor’s attention, which should be
communicated to an entity’s audit committee because they represent
a. Flagrant violations of the entity’s documented conflict-of-interest policies
b. Intentional attempts by client personnel to limit the scope of the auditor’s field work
c. Material irregularities or illegal acts perpetrated by high-level structure
d. Significant deficiencies in the design or operation of the internal control structure

45. After considering a client’s internal control system, an auditor has concluded that it is well
designed and is functioning as intended. Under these circumstances the auditor would most
likely
a. Determine the control policies and procedures that should prevent or detect errors and
irregularities
b. Determine whether transactions are recorded to permit preparation of financial statements
in conformity with GAAP
c. Not increase the extent of predetermined substantive tests
d. Perform tests of controls to the extent outlined in the audit program

46. Ideally, tests of controls should be applied to transactions and controls

a. At each quarterly interim period
b. At the balance sheet date
c. At the beginning of the fiscal period
d. For the entire period under audit

47. A procedure that should most likely be used by an auditor in performing tests of control
procedures that involve segregation of functions and that leave no transaction trail is
a. Inspection
b. Observation
c. Reconciliation
d. Reperformance

48. Each key control that the auditor intends to rely on must be supported by sufficient
a. Analytical review procedures
b. Tests of controls
c. Tests of transactions
d. Reperformance procedures

49. When controls leave no documentary evidence or trail

a. It is impossible for the auditor to verify them so he/she will have to rely on substantive
tests
b. It is impossible to audit that area of client’s system
c. The auditor generally observes them being applied
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d. The only thing available as verification of their effectiveness is inquiry of management

50. When CIS programs or files can be accessed from terminals, users should be required to
enter a (an)
a. Parity check
b. Personal identification code
c. Self-diagnostic test
d. Echo check

51. When the auditor tests a computerized accounting system, which of the following is true of
the test data approach?
a. Several transactions of each type must be tested
b. Test data consist of all possible valid and invalid conditions
c. test data are processed by the client’s computer program under the auditor’s control.
d. Several transactions of each type must be tested

52. Which of the following CAAT allows fictitious and real transactions to be processed together
without client operating personnel being aware of the testing procedure?
a. Parallel simulation
b. Integrated test facility approach
c. Test data approach
d. Exception report basis

53. An auditor who is testing CBIS controls in a payroll system would most likely use test data
that contain conditions such as
a. Deductions not authorized by employees
b. Overtime not approved by supervisors
c. Payroll checks with unauthorized signatures
d. Time tickets with invalid job numbers

54. Which of the following controls most likely would assure that an entity can reconstruct its
financial records?
a. Backup diskettes or tapes of files are stored away from originals
b. Hardware controls are built into the computer by the computer manufacturer
c. Personnel who are independent of data input perform parallel simulations
d. System flowcharts provide accurate descriptions of input and output operations

55. An auditor anticipates assessing control risk at a low level in a computerized environment.
Under these circumstances, on which of the following procedures would the auditor initially
focus?
a. Application control procedures
b. General control procedures
c. Output control procedures
d. Programmed control procedures

56. A CIS input control is designed to ensure that

a. CBIS processing has been performed as intended for the particular application
b. Data received for processing are properly authorized and converted to machine-readable
form
c. Machine processing is accurate
d. Only authorized personnel have access to the computer area

57. Internal control is ineffective when computer department personnel

a. Design documentation for computerized systems
b. Originate changes to master files
c. Participate in computer software acquisition decisions
d. Provide physical security for program files
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58. Which is not a major reason for maintaining audit trail for a computer system?
a. Analytical procedures
b. Deterrent to fraud
c. Monitoring purposes
d. Query answering

59. Which of the following types of computer documentation would an auditor most likely
utilize in obtaining an understanding of the internal control systems?
a. Program listings
b. Record counts
c. Record layouts
d. Systems flowcharts

60. An auditor’s flowchart of a client's accounting system is a diagrammatic representation that

depicts the auditor'
a. Program for tests of controls
b. Understanding of the system
c. Understanding of the types of fraud that are probable, given the present system
d. Documentation of the Study and evaluation of the system
61. For the internal control procedures to be effective, employees maintaining the accounts
receivable subsidiary ledger should nor also approve
a. Employee overtime wages
b. Credit granted to customers
c. Write-offs of customer accounts
d. Cash disbursements

62. Which of the following controls is most likely to help ensure that all credit sales transactions
of an entity are recorded?
a. The billing department supervisor sends a copy of each approved sales order to the credit
department for comparison with the customer's authorized credit limit and current
account balance
b. The accounting department supervisor independently reconciles the accounts receivable
subsidiary ledger to the accounts receivable control account each month
c. The accounting department supervisor controls the mailing of monthly statements to
customers and investigates any differences reported by customers.
d. The billing department supervisor matches prenumbered shipping documents with entries
in the sales journal.

63. Cash receipts from sales on account have been misappropriated, Which of the following acts
would conceal this defalcation and be least likely to be detected by an auditor?
a. Understanding the sales Journal
b. Overstating the accounts receivable control account
c. Overstating the accounts receivable subsidiary ledger
d. Understating the cash receipts journal

64. An auditor would consider a cashier's job description to contain incompatible duties if the
cashier receives remittances from the mailroom and also prepares
a. The prelisting of individual checks
b. The monthly bank reconciliation
c. The daily deposit slip
d. Remittance advices.
65. Which of the following internal control would be most likely to deter the lapping of
collections from customers?
a. Independent internal verification of dates of entry in the cash receipts journal with dates
of daily cash summaries
b. Authorization of write-offs or uncollectible accounts by a supervisor independent of the
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credit approval function

c. Segregation of duties between receiving cash and posting the accounts receivable ledger
d. Supervisory comparison of the daily cash summary with the sum of the cash receipts
journal entries

66. To strengthen internal control over the custody of heavy mobile equipment, the client would
most likely institute a- policy requiring a periodic
a. Increase in insurance coverage
b. Inspection of equipment and reconciliation with accounting record
c. Verification of liens, pledges, and collateralization
d. Accounting for work orders

67. Which of the following is not a component of an entity's internal control system?
a. Control environment
b. Control Risk
c. Risk assessment
d. Control activities

68. An internal control structure can never be regarded as completely effective. Even if systems
personnel could design an ideas system. Its effectiveness depends on the
a. Adequacy of the computer system
b. Proper implementation by management
c. Ability of the internal audit staff to maintain it
d. Competency and dependability of the people using it

69. An act of two or more employees to misstate records is called

a. Malfeasance
b. Collusion
c. Defalcation
d. felony

70. Even with the most effectively designed internal control structure, the auditor must obtain
audit evidence, beyond testing of controls, for every
a. financial statement account
b. material financial statement account
c. financial statement account that -will be relied upon by third parties
d. transaction

71. In developing the overall audit plan for a new client, factor not to be considered is:
a. The terms of the engagement and any statutory responsibilities
b. The client’s business, including the structure of the organization and accounting system
used
c. The amount of estimated audit fee
d. The audit risks on procedures to be performed to achieve audit objectives

72. Prior to beginning the field work on a new audit engagement in which a CPA does not
possess expertise in the industry in which the client operates, the CPA should
a. Reduce audit risk by lowering the preliminary levels of materiality.
b. Design special substantive tests to compensate for the lack of industry expertise.
c. Engage financial experts familiar with the nature of the industry
d. Obtain a knowledge of matters that relate to the nature of the entity’s business

73. An auditor planning an audit engagement for a new client in a business that is unfamiliar to
the auditor. Which of the following is the least useful source of information for the auditor
during the preliminary planning stage, when the auditor is trying to obtain a general
understanding of audit problems that might be encountered.
a. Textbooks and periodicals related to the industry.
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b. Audit and accounting guides.

c. Financial statements of the entities in the industry
d. Results of performing substantive tests

74. To obtain an understanding of a continuing client’s business in planning an audit, an audit

most likely would:
a. Perform tests of details of transactions and balances.
b. Review prior year working papers and the permanent file for the client.
c. Read specialized industry journals.
d. Reevaluate the client’s internal control environment.

75. An auditor obtain knowledge about a new client’s business and industry to
a. Make constructive suggestions concerning improvements in client’s internal control
structure
b. Develop an attitude of professional skeptism concerning management’s financial
statements assertions.
c. Evaluate whether the aggregation of known misstatements causes financial statements
taken as a whole to be materially misstated.
d. Understand the events and transactions that may have an effect the client’s financial
statements

76. During the initial planning for an audit, a CPA obtains a level knowledge of the client’s
business to help him evaluate:
a. The reasonableness of estimates, such as valuation of inventories and allowances for
doubtful accounts.
b. Whether to accept the engagement or not
c. The probability of the business
d. The nature of the audit report he will issue

77. Which of the following is most likely the first step an auditor will perform after accepting an
initial audit engagement.
a. Prepare a rough draft of the financial statements and of the audit report
b. Assess control risks for the assertions embodied in the financial statements
c. Tour the client’s facilities and review the general records
d. Consult with and review the work of the predecessor audit prior to discussing the
engagement with the client management.

78. Which of the following would not necessarily be a related – party transaction?
a. Sales to another corporation with a similar name
b. Purchases from another corporation that is controlled by the corporation’s chief
stockholder
c. Loan from the corporation to a major stockholder
d. Sale of land to the corporation by the spouse of a director

79. Which of the following events most likely indicates the existence of related parties?
a. Borrowing a large sum money at a variable rate of interest
b. Selling real state at a price that differs significantly from its book value.
c. Making a loan without scheduled terms for repayment of the funds
d. Discussing merger terms with a company that is a major competitor

80. Which of the following is not one of the four determinants of the persuasive of evidence?
a. Physical examination
b. Competence
c. Relevance
d. Sufficiency

81. Which one of the following statements about the competence of evidence is not true?
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a. Competence can be improved by selecting a larger sample size.

b. Competence deals only with the audit procedures selected.
c. Competence can be improved by selecting audit procedures that contain a higher quality
of the characteristics sought.
d. Competence cannot be improved by selecting different population items to include in the
sample size.

82. Which of the following is not one of the characteristics of competent evidence?
a. Size of the sample
b. Degree of objectivity
c. Effectiveness of internal control structure
d. Independence of provider

83. Which one of the following forms of evidence would be least reliable?
a. Client’s copy of a purchase requisition.
b. Monthly bank statement.
c. A letter from client’s attorney stating that there are no known lawsuits pending against the
client.
d. Positive confirmation of customer’s balances.

84. Which one of the following forms of evidence would be most reliable?
a. An insurance policy in client’s file.
b. The file copy of a purchase requisition.
c. The file copy of a receiving report.
d. The file copy of a sales invoice.

85. When the auditor is gathering evidence, he/she will conclude that if the source of information
is independent, the evidence will
a. Not be reliable unless the provider is qualified to do so.
b. Be reliable if the provider has no reason to be biased.
c. Be reliable.
d. Not be reliable.

86. When an auditor calculates the gross profit as a percent of sales and compares it with
previous periods, this type of evidence is called
a. Computation
b. Inquiry
c. Observation
d. Physical examination

87. Evidence obtained directly by the auditor is more competent that information obtained
indirectly. Which of the following is not an example of the auditor’s direct knowledge?
a. Inquiry
b. Computation
c. Observation
d. Physical examination

88. Which of the following is an example of objective evidence?

a. The physical count of securities and cash.
b. Observation of cobwebs on some inventory bins.
c. Inquiries of the credit manager about the collectivity of noncurrent accounts receivables.
d. A letter written by the client’s attorney discussing the likely outcome of outstanding
lawsuits.

89. Which of the following terms does not belong to the group
a. Financial Audit
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b. Internal Audit
c. External audit
d. Independent audit

90. An external audit

a. Supports an internal audit
b. Duplicates an internal audit
c. Overlaps an internal audit
d. Complements an internal audit

91. The primary objective of the ordinary examination of financial statements by a CPA is the
expression of an opinion on the
a. Competence of management in accounting matters which is implied by whether the
opinion is qualified or not.
b. Conformity of the statements is qualified or not.
c. Conformity of the financial statements with generally accepted auditing standards applied
on a basis consistent with that of the preceding year.
d. Fairness with which the financial statements present financial position and results of
operations.

92. Although the CPA does not guarantee his findings, his opinion is nevertheless valuable to
various third parties. The value of the CPA’s opinion lies in the fact that
a. He has the qualifications required by law to be a CPA
b. He is under the supervision of the Board of Accountancy
c. He has gathered sufficient, competent evidential matter to support his opinion.
d. He has followed generally accepted auditing standards.

93. The independent auditor lends credibility to client’s financial statements by

a. Stating in the auditor’s management letter that the examination was made in accordance
with generally accepted auditing standards.
b. Maintaining a clear-cut distinction between management’s representations and the
auditor’s representation.
c. Attaching an auditor’s opinion to the client’s financial statements
d. Testifying under oath about client’s financial statements.

94. Which of the following best describes the reason why an independent auditor reports on
financial statements?
a. A management fraud may exist and it is more likely to be detected by independent
auditors.
b. Different interests may exist between the company preparing the statements and the
persons using the statements.
c. A misstatement of account balances may exist and is generally corrected as a result of the
independent auditor’s work.
d. A poorly designed internal control system may be in existence.

95. An external audit

a. Supports an internal audit
b. Duplicates an internal audit
c. Overlaps an internal audit
d. Complements an internal audit

96. The primary objective of the ordinary examination of financial statements by a CPA is the
expression of an opinion on the
a. Competence of management in accounting matters which is implied by whether the
opinion is qualified or not
b. Conformity of the statements with the books of accounts
Final exams Acctg 24d 3rd term 2004-2005 page 14

c. Conformity of the financial statements with generally accepted auditing standards applied
on a basis consistent with that of the preceding year.
d. Fairness with which the financial statements present financial position and results of
operations.

97. Although the CPA does not guarantee his findings, his opinion is nevertheless valuable to
various parties. The value of the CPAs opinion lies in the fact that
a. He has the qualifications required by law to be a CPA
b. He is under the supervision of the Board of Accountancy
c. He has gathered sufficient, competent, evidential matter to support his opinion.
d. He has followed generally accepted auditing standards.

98. Operational audits generally have been conducted by internal auditors and governmental
audit agencies but may be performed by certified public accountants. A primary purpose of
an operational audit is to provide
a. A means of assurance that internal accounting controls are functioning as planned
b. A measure of management performance in meeting organizational goals
c. The results of internal examination of financial and accounting matters to a company’s
top level management
d. Aid to the independent auditor, who is conducting the examination of the financial
statements.

99. The independent auditor lends credibility to a clients financial statements by

a. Stating in the auditors management letter that the examination was made in accordance
with generally accepted auditing standards
b. Maintaining a clear-cut distinction between management’s representations and the
auditor’s representations.
c. Attaching an auditor’s opinion to the client’s financial statements
d. Testing under oath about clients financial statements

100. Which of the following best describes why publicly-traded corporations follow the
practice of having the outside auditor appointed by the board of directors elected by the
stockholders?
a. To comply with the regulations of the Accounting Standards Council
b. To emphasize auditors independence from the management of the corporation
c. To encourage a policy of rotation of the independent auditors.
d. To provide the corporate owners with opportunity to voice their opinion concerning the
quality of the auditing firm selected by the directors.

PREPARED BY:

CANDIDO M. PEREZ, CPA, MMBM