NATIONAL FEDERATION OF JUNIOR PHILIPPINE

INSTITUTE OF ACCOUNTANTS REGION IV

R4 Accounting Varsity Auditing – Level 2
Batch 2019-2020

Instructions: Identify the choice that best completes the statement

or answers the question.
You have (1) hour and (30) minutes to answer this 50-item exam. Good
luck!

1. The risk of fraudulent financial reporting increases in the

presence of

a) Substantial increases in sales

b) Improved control systems
c) Incentive systems based on operating income
d) Frequent changes in suppliers
2. Which of the following procedures would an auditor most likely
perform to assist in the evaluation of loss contingencies?

a) Reading the financial statements, including footnotes.

b) Performing appropriate analytical procedures.
c) Checking arithmetic accuracy of the accounting records.
d) Obtaining a letter of audit inquiry from the clients lawyer.
3. Which of the following is not a typical analytical procedure?

a) Comparison of financial information with similar information

regarding the industry in which the entity operates
b) Comparison of recorded amounts of major disbursements with
budgeted amounts
c) Comparison of recorded amounts of major disbursements with
appropriate invoices
d) Study of relationships of financial information with relevant
nonfinancial information
4. In applying analytical procedures, the auditor discovered that
gross profit as a percent of sales declined sharply during the
current year. A possible cause might be

a) Recorded sales included goods that were shipped the following year
b) The client has significant amounts of obsolete inventory carried
at full cost
c) A significant quantity of finished goods located in a distant
warehouse was inadvertently omitted from the ending inventory
d) Depreciation of office equipment was overstated
5. Competence of personnel is necessary to proper recording of
transactions and supports financial statements that are fairly
presented. In reviewing the organization for necessary competence,
which of the following job types would be of least interest to the
auditor?

a) Corporate controller
b) Chief accountant
c) Manager of electronic data processing
d) Vice-president for marketing
6. Which of the following most likely would not be considered an
inherent limitation of internal control?

a) Management override
b) Incompatible functions
c) Mistakes in judgment
d) Collusion among employees
7. When issuing an unmodified auditor’s report, the auditor

a) Should not refer to the expert’s work

b) Should refer to the work of an expert to indicate a division of
responsibility
c) Should include in the auditor’s report the identity of the expert
and the extent of the expert’s involvement
d) May refer to the work of an expert
8. 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 a 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.
c) Provide a workpaper indexing system that shows the relationship
between findings, conclusions, and the related facts.
d) Eliminate any cross-references to other working papers since the
system is unclear.

9. An auditor’s purpose in reviewing credit ratings of customers with

delinquent accounts receivable most likely to obtain evidence
concerning management’s assertion about
a) Rights and Obligations
b) Existence
c) Completeness
d) Valuation and Allocation

10. Which of the following is not a general objective in the design

of an information system?
a) A system should have sufficient capacity to accommodate levels of
normal activity; any additional capacity proves too costly in the
long run.
b) A system should provide information that is timely and relevant
for decision making by management and operating personnel.
c) The output of a system should be highly accurate.
d) A system should be flexible to accommodate changes of a reasonable
magnitude when required.

11. Which of the following is the most appropriate method of

reporting disagreement between the auditor and the auditee concerning
audit findings and recommendations?

a) State the auditees position because management is ultimately

responsible for the activities reported.
b) State neither position. If the disagreement is ultimately
resolved, there will be no reason to report the previous
disagreement. If the disagreement is never resolved, the disagreement
should not be reported, because there is no mechanism to resolve it.
c) State the auditors position because the report is designed to
provide the auditors independent view.
d) State both positions and identify the reasons for the
disagreement.
12. Which of the following is not an example of analytical evidence?

a) Compared gross profit percentages by major product classes with

the prior year
b) Examined invoices for plant asset additions to determine whether
the client had erroneously recorded ordinary repairs as plant assets
c) Compared inventory turnover by major class with the prior year on
a monthly and quarterly basis
d) Examined monthly performance reports and investigated significant
variations from budgeted amounts
13. The most important factor in planning for a major change in a
computer-based system is:

a) The ability of the systems programmers to write appropriate

software .
b) The organization of the IT department.
c) The participation of top management in the planning process.
d) The selection of the most advanced computer equipment.
14. It would be appropriate for the payroll accounting department to
be responsible for which of the following functions?

a) Maintenance of records of employment, discharges, and pay

increases
b) Temporary retention of unclaimed employee paychecks
c) Approval of employee time records
d) Preparation of periodic governmental reports as to employees'
earnings and withholding taxes

15. The basic concept of internal control which recognizes that the
cost of internal control should not exceed the benefits expected to
be derived is known as
a) Reasonable assurance
b) Limited liability
c) Management by exception
d) Management responsibility

16. Audit risk consists of all but the following components

a) Detection risk
b) Substantive risk
c) Control risk
d) Inherent risk

17. It would be appropriate for the payroll accounting department to

be responsible for which of the following functions?
a) Preparation of periodic governmental reports as to employees'
earnings and withholding taxes
b) Temporary retention of unclaimed employee paychecks
c) Approval of employee time records
d) Maintenance of records of employment, discharges, and pay
increases

18. During the course of an audit engagement, an auditor prepares and

accumulates audit working papers. The primary purpose of the audit
working papers is to
a) Support the auditor's opinion
b) Aid the auditor in adequately planning his work
c) Support the underlying concepts included in the preparation of the
basic financial statements
d) Provide a point of reference for future audit engagements
19. The understanding between the client and the auditor as to the
degree of responsibilities to be assumed by each are normally set
forth in a(an)

a) Engagement letter
b) Representation letter
c) Comfort letter
d) Management letter
20. As part of audit planning, CPAs should design audit programs for
each individual audit and should include audit steps and procedures
to

a) Provide assurances that the objectives of the audit are met

b) Detect and eliminate fraud
c) Ensure that only material items are audited
d) Increase the amount of management information available

21. Detection risk differs from both control risk and inherent risk
in that detection risk.
a) Should be assessed in non-quantitative terms.
b) Can be changed at the auditors discretion.
c) Exists independently of the financial statement audit.
d) Arises from risk factors relating to fraud.

22. Which of the following is an internal control weakness related to

factory equipment?
a) Factory equipment replacements are generally made when estimated
useful lives, as indicated in depreciation schedules, have expired
b) Checks issued in payment of purchases of equipment are not signed
by the controller
c) Proceeds from sales of fully depreciated equipment are credited to
other income
d) A policy exists requiring all purchases of factory equipment to be
made by the department in need of the equipment
23. Of the following procedures, which is the most important that an
auditor should use when performing an analytical review of the income
statement?

a) Obtain from the proper client representatives, inventory

certificates for the beginning and ending inventory amounts that were
used to determine cost of sales
b) Ascertain that the net income amount in the statement of changes
in financial position (statement of cash flows) agrees with the net
income amount in the income statement
c) Compare actual revenues and expenses with the corresponding
figures of the previous year and investigate significant differences
d) Select sales and expense items and trace amounts to related
supporting documents
24. An auditor requests a client to send letters of audit inquiry to
attorneys who have been consulted concerning litigation, claims, and
assessments. The primary reason for this request is to obtain:

a) The opinion of an expert whether any loss contingencies are

possible, probable, or remote.
b) The attorneys assurance that litigation, claims, and assessments
that are probable of assertion are properly accounted for.
c) Corroboration of the information furnished by management
concerning litigation, claims, and assessments.
d) A description of litigation, claims, and assessments that have a
reasonable possibility of unfavorable outcomes.
25. Which of the following statements best distinguishes a forecast
from a projection?

a) The CPA may review a financial forecast, but may only compile a
projection.
b) A projection is appropriate for general distribution to third
parties, whereas a forecast is more tentative and should be
restricted to those parties with whom the client is negotiating
directly.
c) A forecast reflects conditions expected to exist, whereas a
projection presents financial position, results of operations, and
cash flows given one or more hypothetical assumptions.
d) A forecast contains one or more hypothetical
assumptions, whereas a projection reflects conditions expected to
exist.
26. PSA 500 describes five generalizations concerning the reliability
of evidence. The situations given below indicate the relative degrees
of assurance provided by two types of evidence obtained in different
situations. Which describes an exception to one of the
generalizations?

a) The schedule of insurance coverage obtained from the company’s

insurance agent provides greater assurance than one prepared by the
internal audit staff
b) The auditor’s computation of interest payable on outstanding bonds
provides greater assurance than reliance on the client’s calculation
c) The report of an expert regarding the valuation of a collection of
paintings held as an investment provides greater assurance than the
auditor’s physical observation of the paintings
d) The auditor has obtained greater assurance about the balance of
sales at Plant A where he/she has made limited tests of transactions
because of effective internal control than at Plant B where he/she
has made extensive tests of transaction because of ineffective
internal control
27. Ricky, Inc. began operating on January 1, 2014. At the end of the
first year of operations, Ricky reported P7,500,000 income before
income taxes on its income statement but only P700,000 taxable income
on its tax return. Analysis of the P6,800,000 difference revealed
that P6,200,000 was a permanent difference and P600,000 was a
temporary difference related to a current asset. At the end of 2015,
the accumulated temporary tax liability difference related to future
years us P1,100,000. The enacted tax rate is 30% for 2014 and 2015.
The journal entry to adjust the deferred tax liability at the end of
2015 should include a

a) Debit to Deferred tax liability of P150,000

b) Credit to Deferred tax liability of P330,000
c) Credit to Deferred tax liability of P150,000
d) Debit to Deferred tax asset of P150,000
28. For the fiscal year ending December 31, previous year and the
current year, Justin Co. has net sales of P1,000,000 and P2,000,000;
average gross receivables of P100,000 and P300,000; and allowance for
uncollectible accounts receivable of P30,000 and P50,000,
respectively. If the accounts receivable turnover and the ratio of
allowance for uncollectible accounts receivable to gross accounts
receivable are calculated, which of the following best represents the
conclusions to be drawn
a) Accounts receivable turnovers are 14.3 and 8.0 and the ratios of
uncollectible accounts receivable to gross accounts receivable are
0.42 and 0.20, respectively. Examine allowance for possible
understatement of the allowance.
b) Accounts receivable turnovers are 10.0 and 6.6 and the ratios of
uncollectible accounts receivable to gross accounts receivable are
0.30 and 0.16, respectively. Examine allowance for possible
overstatement of the allowance
c) Accounts receivable turnovers are 14.3 and 8.0 and the ratios of
uncollectible accounts receivable to gross accounts receivable is
0.42 and 0.20, respectively. Examine allowance for possible
overstatement of the allowance
d) Accounts receivable turnovers are 10.0 and 6.6 and the ratios of
uncollectible accounts receivable to gross accounts receivable are
0.30 and 0.16, respectively. Examine allowance for possible
understatement of the allowance.

29. In statistical sampling methods used in substantive testing, an

auditor most likely would stratify a population into meaningful
groups if:
a) The population has highly variable recorded amounts.
b) The auditor's estimated tolerable misstatement is extremely small.
c) Probability proportional to size (PPS) sampling is used.
d) The standard deviation of recorded amounts is relatively small.

30. Which of the following should not be included in an accountant's

standard report based upon the compilation of an entity's financial
statements?
a) A statement that the accountant does not express an opinion but
expresses only limited assurance on the financial statements.
b) A statement that a compilation is limited to presenting in the
form of financial statements information that is the representation
of management.
c) A statement that the compilation was performed in accordance with
standards established by PICPA
d) A statement that the accountant has not audited or reviewed the
financial statements.
31. In a well-designed internal control system, employees in the same
department most likely would approve purchase orders and also

a) Authorize requisitions of goods

b) Inspect and count goods upon receipt
c) Negotiate terms with vendors
d) Reconcile the open invoice file
32. Analytical procedures are

a) Tests of control procedures designed to detect errors in reported

financial information
b) Substantive tests designed to evaluate a system of internal
control
c) Tests of control procedures designed to evaluate the validity of
management's representation letter
d) Substantive tests designed to evaluate the reasonableness of
financial information
33. Which of the following is not one of the elements of assurance
engagement?

a) A three party relationship

b) A suitable opinion
c) A written assurance report
d) Sufficient appropriate evidence
34. Which of the following statements is a standard applicable to
financial statement audits in accordance with Government Auditing
Standards?

a) An auditor should assess whether the entity has reportable

measures of economy and efficiency that are valid and reliable.
b) An auditor should briefly describe in the auditor's report the
method of statistical sampling used in performing tests of controls
and substantive tests.
c) An auditor should determine the extent to which the entity's
programs achieve the desired level of results.
d) An auditor should report on the scope of the auditor's testing of
internal controls.
35. Which of the following is generally included or shown in the
auditor's working papers?

a) Excerpts from authoritative pronouncements that support the

underlying generally accepted accounting principles used in preparing
the financial statements.
b) The procedures used by the auditor to verify the personal
financial status of members of the client's management team.
c) The manner in which exceptions and unusual matters disclosed by
the auditor's procedures were resolved or treated.
d) Analyses that are designed to be a part of, or a substitute for,
the client's accounting records.

36. Significant unexpected fluctuations identified by analytical

procedures will usually necessitate a(an)
a) Review of internal control
b) Explanation in the representation letter
c) Auditor investigation
d) Consistency qualification

37. Which of these is not a common dimension in a feasibility study?

a) Technical
b) all of these are common dimensions
c) Schedule
d) Operational

38. To provide assurance that each voucher is submitted and paid only
once, an auditor most likely would examine a sample of paid vouchers
and determine whether each voucher is:
a) Pre-numbered and accounted for.
b) Stamped paid by the check signer.
c) Supported by a vendors invoice and purchase order.
d) Returned to the vouchers payable department.

39. What threats to independence are created when a contingent fee is

charged by a firm in respect of an assurance engagement?
a) Familiarity and intimidation threats
b) Self-review and intimidation threats
c) Self-interest and advocacy threats
d) Self-interest and self-review threats

40. Which of the following is not a component of audit planning?

a) Observing the client's annual physical inventory taking and making
test counts of selected items
b) Developing audit programs
c) Making arrangements with the client concerning the timing of audit
field work and use of the client's staff in completing certain phases
of the examination
d) Obtaining an understanding of the business

41. Which of the following items would most likely require an

adjustment to the financial statements for the year ended December
31, year 1?
a) Proceeds from a capital stock issuance in year 2 which was being
approved by the board of directors in year 1.
b) Settlement of litigation in year 2 over an event that occurred in
year 2.
c) Loss on an uncollectible trade receivable recorded in year 1 from
a customer that declared bankruptcy in year 2.
d) Uninsured loss of inventories purchased in year 1 as a result of a
flood in year 2.

42. In a probability-proportional-to-size sample with a sampling

interval of P10,000, an auditor discovered that a selected account
receivable with a recorded amount of P5,000 had an audited amount of
P4,000. If this were the only misstatement discovered by the auditor,
the projected misstatement of this sample would be:
a) 5,000
b) 1,000
c) 2,000
d) 10,000

43. Of the following control environment characteristics, identify

the one that contributes most to effective internal control
a) The audit committee consists of the president, two vice-
presidents, and the corporate controller
b) The company routinely transacts business with related parties
c) The company does not have a centralized human resources function
d) The company has an effective internal audit staff that monitors
controls on a continuous basis

44. In examining whether or not an auditee is conforming with the

companys affirmative action policy, the internal auditor has found
that:
1) Five percent of the employees are from minority groups.
2) No one from a minority group has been hired this year.

The most appropriate conclusion the internal auditor should draw is

a) The companys policy is unauditable and hence unenforceable.
b) The auditee is complying with the affirmative action policy.
c) Insufficient evidence exists of compliance with the affirmative
action policy.
d) The auditee is violating the companys policy.

45. When providing limited assurance that the financial statements of

a non-issuer require no material modifications to be in accordance
with GAAP, the accountant should:
a) Assess the risk of material misstatement in the financial
statements due to fraud.
b) Perform tests of controls to evaluate the effectiveness of the
controls.
c) Communicate with the audit committee regarding material weaknesses
in internal control.
d) Understand the accounting principles of the industry in which the
entity operates.

46. In auditing a not-for-profit entity that receives governmental

financial assistance, the auditor has a responsibility to:
a) Issue a separate report that describes the expected benefits and
related costs of the auditor's suggested changes to the entity's
internal control.
b) Assess whether management has identified laws and regulations that
have a direct and material effect on the entity's financial
statements.
c) Render an opinion concerning the entity's continued eligibility
for the governmental financial assistance.
d) Notify the governmental agency providing the financial assistance
that the audit is not designed to provide any assurance of detecting
errors and fraud.

47. Sales commissions as a percentage of sales declined significantly

during the year under audit. Of the following possible causes, the
most likely is
a) Sales commission rates were increased at the beginning of the year
b) Sales increased during the year
c) Fictitious sales were recorded at year-end to inflate earnings.
Commissions were not recorded on these sales
d) The sales force was reduced at the end of the year

48. An assumption underlying analytical procedures is that

a) Statistical tests of financial information may lead to the
discovery of material errors in the financial statements
b) These procedures cannot replace tests of balances and transactions
c) The study of financial ratios is an acceptable alternative to the
investigation of unusual fluctuations
d) Relationships among data may reasonably be expected to exist and
continue in the absence of known conditions to the contrary

49. To be more responsive to its customers, a bank wants a system

that will permit account representatives to consolidate information
about all the accounts belonging to individual customers. Bank
management is willing to experiment with different approaches because
the requirements are evolving rapidly. The best development approach
for this system is
a) Pilot operation
b) Prototyping
c) Structured analysis and design technique
d) System development life cycle model
50. Which of the following computer-assisted auditing techniques
allows fictitious and real transactions to be processed together
without client operating personnel being aware of the testing
process?

a) Data entry monitor

b) Integrated test facility
c) Input controls matrix
d) Parallel simulation

---- Thank you for taking the exam. We will be informing you about
the results. ----

Answer Key:

1. c AVERAGE 21. b AVERAGE 41. c AVERAGE

2. d AVERAGE 22. d AVERAGE 42. c EASY
3. c AVERAGE 23. c AVERAGE 43. d AVERAGE
4. c AVERAGE 24. c DIFFICULT 44. c AVERAGE
5. d EASY 25. c AVERAGE 45. d AVERAGE
6. b EASY 26. c DIFFICULT 46. b EASY
7. a DIFFICULT 27. c EASY 47. c AVERAGE
8. c AVERAGE 28. d DIFFICULT 48. d AVERAGE
9. d EASY 29. a EASY 49. b AVERAGE
10. a EASY 30. a AVERAGE 50. b EASY
11. d AVERAGE 31. c EASY
12. b AVERAGE 32. d AVERAGE
13. c EASY 33. b DIFFICULT
14. d AVERAGE 34. d EASY
15. a AVERAGE 35. c AVERAGE
16. b AVERAGE 36. c AVERAGE
17. a AVERAGE 37. b EASY
18. a AVERAGE 38. b AVERAGE
19. a AVERAGE 39. c EASY
20. a AVERAGE 40. a AVERAGE