FIRST PREBOARD EXAMINATION OCTOBER 2008

1.

The auditors judgment concerning the overall fairness of the

presentation of financial position, results of operations, and statement
of cash flows is applied within the framework of
a) Quality control.
b) Generally accepted auditing standards which include the concept of
materiality.
c) The auditors consideration of the auditor companys internal control.
d) Philippine Financial Reporting Standards.

2.

A major customer of an audit client suffers a fire just prior to

completion of year-end fieldwork. 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 auditors report.
c) Withhold submission of the auditors report until the extent of the
direct effect on the financial statements is known.
d) Advise management to adjust the financial statements.

3.

When a contingency is resolved immediately subsequent to the

issuance of a report which was qualified with respect to the
contingency, the auditor should
a) Insist that the client revised financial statements.
b) Inform the audit committee that the report cannot be relied upon.
c) Take no action regarding the event.
d) Inform the appropriate authorities that the report cannot be relied
upon.

4.

Under which of the following circumstances may audited financial

statements contain a note disclosing a subsequent event which is
labeled unaudited?
a) When the subsequent event does not require adjustment of the
financial statements.
b) When the event occurs after completion of fieldwork and before
issuance of the auditors report.
c) When audit procedures with respect to the subsequent event were not
performed by the auditor.
d) When the event occurs between the date of the auditors original
report and the date of the reissuance of the report.

5.

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 estimate of losses to new events that occurred
subsequent to the balance sheet.

FIRST PREBOARD EXAMINATION OCTOBER 2008

6.

Which event that occurred after the end of the fiscal year under audit
but prior to issuance of the auditors report would not require
disclosure in the financial statements?
a) Sale of the bond or capital stock issue.
b) Loss of plant or inventories as result of fire or flood.
c) A major drop in the quoted market price of the stock of the
corporation.
d) Settlement of litigation when the event giving rise to the claim took
place after the balance sheet date.

7.

When the report of a principal auditor makes reference to the

examination made by another auditor, the other auditor may be named
if express permission to do so is given and
a) The report of the principal auditor names the other auditor in both the
scope and opinion paragraphs.
b) The principal auditor accepts responsibility for the work of the other
auditor.
c) The report of the other auditor is presented together with the report
of the principal auditor.
d) The other auditor is not an associate or correspondent firm whose
work is done at the request of the principal auditor.

8.

Which of the following matters is an auditor required to communicate

to an entitys audit committee?
a) The basis for assessing control risk below the maximum.
b) The process used by management in formulating sensitive accounting
estimates.
c) The auditors preliminary judgments about materiality levels.
d) The justification for performing substantive procedures at interim
dates.

9.

When an auditor concludes there is substantial doubt about an entitys

ability to continue as a going concern for a reasonable period of time,
the auditors responsibility is to
a) Prepare prospective financial information to verify whether
managements plans can be effectively implemented.
b) Project future conditions and events for a period of time not to exceed
1 year following the date of the financial statements.
c) Issue a qualified or adverse opinion, depending upon materiality, due
to the possible effects on the financial statements.
d) Consider the adequacy of disclosure about the entitys possible
inability to continue going concern.

10.

The auditor who wishes to point out that the entity has sufficient
transactions with related parties should disclose this fact in
a) An explanatory paragraph to the auditors 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.

FIRST PREBOARD EXAMINATION OCTOBER 2008

11.

When management refuses to disclose illegal activities which were

identified by the independent auditor, the independent auditor may be
charged with violating the CPA Code of Professional Conduct for
a) Withdrawing from the engagement.
b) Issuing a disclaimer of opinion.
c) Failure to uncover the illegal activities during prior audits.
d) Reporting these activities to the audit committee.

12.

Because of the pervasive effects of laws and regulations on the

financial statements of governmental units, an auditor should obtain
written management representations acknowledging that management
has
a) Identified and disclosed all laws and regulations that have a direct
material effect on its financial statements.
b) Implemented internal control policies and procedures designed to
detect all illegal acts.
c) Expressed both positive and negative assurance to the auditor that
the entity complied with all laws and regulations.
d) Employed internal auditor who can report their findings, opinion, and
conclusions objectively without fear of political repercussion.

13.

Which of the following is generally included or shown in the

auditors working papers?
a) The procedures used by the auditor to verify the personnel financial
status of members of the clients management team.
b) Analyses that are designed to be a part of, or a substitute for, the
clients accounting records.
c) Excerpts from authoritative pronouncements that support the
underlying generally accepted accounting principles used in preparing
the financial statements.
d) The manner in which exceptions and unusual matters disclosed by the
auditors procedure were resolved or treated.

14.
a)
b)
c)
d)
15.
a)
b)
c)
d)

An auditor compares information on canceled checks with

information contained in the cash disbursement journal. The objective
of this test is to determine that
Recorded cash disbursement transactions are properly authorized.
Proper cash purchase discounts have been recorded.
Cash disbursements are for goods and services actually received.
No discrepancies exist between the data on the checks and the data in
the journal.
Under which of the following circumstances would an auditor be
most likely to intensify an examination of petty cash fund?
Reimbursement vouchers are not prenumbered.
Reimbursement occurs twice each week.
The custodian occasionally uses the cash fund to cash employee
checks.
The custodian endorses reimbursement checks.

FIRST PREBOARD EXAMINATION OCTOBER 2008

16.
a)
b)
c)
d)
17.

a)
b)
c)
d)
18.
a)
b)
c)
d)

Which of the following areas would ordinarily be expected to

require the most time when performing an audit of a continuing client?
Accounts receivable.
Common stock.
Retained earnings.
Revenues.
An auditor confirms a representative number of open accounts
receivable as of December 31, 2008, and investigates respondents
exceptions and comments. By this procedure the auditor would be
most likely to learn of which of the following?
One of the cashiers has been covering a personal embezzlement by
lapping.
One of the sales clerks has not been preparing charge slips for credit
sales to family and friends.
One of the computer control clerks has been removing all sales
invoices applicable to his account from the data file.
The credit manager has misappropriated remittances from customers
whose accounts have been written off.
Which of the following most likely would give the most assurance
concerning the valuation assertion of accounts receivable?
Tracing amounts in the subsidiary ledger to details on shipping
documents.
Comparing receivable turnover rations to industry statistics for
reasonableness.
Inquiring about receivables pledged under loan agreements.
Assessing the allowances for uncollected accounts for reasonableness.

19.

Some firms which dispose of only a small part of their total output
by consignment shipments fail to make any distinction between
consignment shipments and regular sales. Which of the following
would suggest that goods have been shipped on consignment?
a) Numerous shipments of small quantities.
b) Numerous shipments of large quantities and few returns.
c) Large debits to accounts receivable and small periodic credits.
d) Large debits to accounts receivable and large periodic credits.

20.
a)
b)
c)
d)
21.

a)
b)
c)
d)

An inventory turnover analysis is useful to the auditor because it

may detect
Inadequacies in inventory pricing.
Methods of avoiding cyclical holding costs.
The optimum automatic reorder points.
The existence of obsolete merchandise.
When title to merchandise in transit has passed to the audit client,
the auditor engaged in the performance of a purchase cutoff on
December 31, the last day of the clients year, will encounter the
greatest difficulty in gaining assurance with respect to the
Quantity.
Quality.
Price.
Terms.
4

FIRST PREBOARD EXAMINATION OCTOBER 2008

22.
a)
b)
c)
d)
23.
a)
b)
c)
d)
24.

a)
b)
c)
d)
25.
a)
b)
c)
d)

Which of the following audit procedures would provide the least

reliable evidence that the client has legal title to inventories?
Confirmation of inventories at location outside the clients facilities.
Analytical procedures comparing inventory balances to purchasing and
sales activities.
Observation of physical inventory counts.
Examination of paid vendors invoices.
In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining
the purchase
Journal.
Requisitions.
Orders.
Invoices.
During the first part of the current fiscal year, the client company
began dealing with certain customers on a consignment basis. Which
of the following audit procedures is least likely to bring this new fact to
the auditors attention?
Tracing of shipping documents to the salDes journal.
Test of cash receipts transactions.
Confirmation of accounts receivable.
Observation of physical inventory.
To establish the existence and ownership of a long-term
investment in the common stock of a publicly traded company, an
auditor ordinarily performs a security count or
Relies on the clients internal controls if the auditor has reasonable
assurance that the control procedures are being applied as prescribed.
Confirms the number of shares owned that are held by an
independent custodian.
Determine the market price per share at the balance sheet date from
published quotations.
Confirms the number of shares owned with the issuing company.

26.

The audit procedure of analyzing the repairs and maintenance

accounts is primarily designed to provide evidence in support of the
audit proposition that all
a) Expenditures for fixed assets have been recorded in the proper
period.
b) Capital expenditure have been properly authorized.
c) Noncapitalizable expenditures have been properly expensed.
d) Expenditures for fixed assets have been capitalized.

27.

For which of the following ledger accounts would the auditor be

most likely to analyze the details?
a) Service revenue.
b) Sales.
c) Repairs and maintenance expense.
d) Sales salaries expense.

FIRST PREBOARD EXAMINATION OCTOBER 2008

28.

The auditor is least likely to learn of retirements of equipment

through which of the following?
a) Review of the purchase return and allowance account.
b) Review of depreciation.
c) Analysis of the debits to the accumulated depreciation account.
d) Review of insurance policy riders.

29.

UCANDOIT developed a new secret formula which is of great value

because it resulted in a virtual monopoly. UCANDOIT has capitalized
all research and development costs associated with this formula.
QUENNIE, CPA, who is examining this account, will probably
a) Confer with management regarding transfer of the amount from the
balance sheet to the income statement.
b) Confirm that the secret formula is registered and on file with the
county clerks office.
c) Confer with management regarding a change in the title of the
account to goodwill.
d) Confer with management regarding ownership of the secret formula.

30.

In verifying the amount of goodwill recorded by a client, the most

convincing evidence which an auditor can obtain is by comparing the
recorded value of assets acquired with the
a) Assessed value as evidence by tax bills.
b) Sellers book value as evidence by financial statements.
c) Insured value as evidences by insurance policies.
d) Appraised value as evidence by independent appraisals.

31.

In the examination of property, plant, and equipment, the auditor

tries to determine all of the following except the
a) Adequacy of internal control.
b) Extent of property abandoned during the year.
c) Adequacy of replacement funds.
d) Reasonableness of the depreciation.

32.

An auditor would be least likely to use confirmations in connection

with the examination of
a) Inventories.
b) Long-term debt.
c) Property, plant and equipment.
d) Stockholders equity.

33.

Which of the following procedures relating to the examination of

accounts payable could the auditor delegate entirely to the clients
employees?
a) Test footings in the accounts payable ledger.
b) Reconcile unpaid invoices to vendors statements.
c) Prepare a schedule of accounts payable.
d) Mail confirmation for selected account balances.

FIRST PREBOARD EXAMINATION OCTOBER 2008

34.

Once satisfied that the balance sheet and income statement are
fairly presented in accordance with generally accepted accounting
principles, an auditor who is examining the statement of cash flows
would be most concerned with details of transactions in
a) Cash.
b) Trade receivables.
c) Notes payable.
d) Dividends payable.

35.

Auditor confirmation of accounts payable balances at the balance

sheet date may be unnecessary because
a) This is a duplication of cutoff tests.
b) Accounts payable balances at the balance sheet date may not be
paid before the audit is completed.
c) Correspondence with the audit clients attorney will reveal all legal
action by vendor for nonpayment.
d) There is likely to be other reliable external evidence to support the
balances.

36.

Which of the following procedures is least likely to be performed

before the balance sheet date?
a) Observation of inventory.
b) Review of internal control over cash disbursements.
c) Search for unrecorded liabilities.
d) Confirmation of receivables.

37.

When an auditor selects a sample of items from the vouchers

payable register for the last month of the period under audit and
traces these items to underlying documents, the auditor is gathering
evidence primarily in support of the assertion that
a) Recorded obligations were paid.
b) Incurred obligations were recorded in the correct period.
c) Recorded obligations were valid.
d) Cash disbursements were recorded as incurred obligations.

38.

A clients procurement system ends with the assumption of a

liability and the eventual payment of the liability. Which of the
following best describes the auditors primary concern with respect to
liabilities resulting from the procurement system?
a) Accounts payable are not materially understated.
b) Authority to incur liabilities is restricted to one designed person.
c) Acquisition of materials is not made from one vendor or one group of
vendor.
d) Commitments for all purchases are made only after established
competitive bidding procedures are followed.

39.

An examination of the balance in the accounts payable account is

ordinarily not designed to
a) Detect accounts payable which are substantially past due.
b) Verify that accounts payable were properly authorized.
c) Ascertain the reasonableness of recorded liabilities.
d) Determine that all existing liabilities at the balance sheet date have
been recorded.

FIRST PREBOARD EXAMINATION OCTOBER 2008

40.

During an examination of a publicly held company, the auditor

should obtain written confirmation regarding debenture transactions
from the
a) Debenture holders.
b) Clients attorney.
c) Internal auditors.
d) Trustee.

41.

Two months before the year-end the bookkeeper erroneously

recorded the receipt of a long-term bank loan by a debit to cash and a
credit to sales. Which of the following is the most effective procedure
for detecting this type of error?
a) Analyze the notes payable journal.
b) Analyze bank confirmation information.
c) Prepare a year-end bank reconciliation.
d) Prepare a year-end bank transfer schedule.

42.

DONTQUIT Corporation acquired a building and arranged mortgage

financing during the year.
Verification of the related mortgage
acquisition costs would be least likely to include an examination of the
related
a) Deed.
b) Cancelled checks.
c) Closing statement.
d) Interest expense.

43.

An auditors program for the examination of long-term debt should

include steps that require the
a) Inspection of the accounts payable subsidiary ledger.
b) Investigation of credits to the bond interest income account.
c) Verification of the existence of the bondholders.
d) Examination of any bond trust indenture.

44.

During the year under audit, a company has completed a private

placement of a substantial amount of bonds. Which of the following is
the most important step in the auditors program for the examination
of bonds payable?
a) Confirming the amount issued with the bond trustee.
b) Tracing the cash received from the issue to the accounting records.
c) Examining the bond records maintained by the transfer agent.
d) Recomputing the annual interest cost and the effective yield.

45.

In connection with the audit of a current issue of long-term bonds

payable, the auditor should
a) Determine whether bondholders are persons other then owners,
directors, or officers of the company issuing the bond.
b) Calculate the effective interest rate to see if it is substantially the
same as the rates for similar issues.
c) Decide whether the bond issue was made without violating state or
local law.
d) Ascertain that the client has obtain the opinion of counsel on the
legally of the issue.

FIRST PREBOARD EXAMINATION OCTOBER 2008

46.

The letter of audit inquiry addressed to the clients legal counsel

will not ordinarily be
a) Sent lawyer who was engaged by the audit client during the year and
soon thereafter resigned the engagement.
b) A source of corroboration of the information originally obtained from
management concerning litigation, claims, and assessments.
c) Limited to reference concerning only pending or threatened litigation
with respect to which the lawyer has been engaged.
d) Needed during the audit of client whose securities are not registered
with the SEC.

47.

After discovering that a related-party transaction exists, the

auditor should be aware that the
a) Substance of the transaction could be significantly different from its
form.
b) Adequacy of disclosure of the transaction is secondary to its legal
form.
c) Transaction is assumed to be outside the ordinary course of
business.
d) Financial statements should recognize the legal form of the
transaction rather than its substance.

48.

When auditing related-party transactions, an auditor places

primary emphasis on
a) Confirming the existence of the related parties.
b) Verifying the valuation of the related-party transactions.
c) Evaluating the disclosure of the related-party transactions.
d) Ascertaining the rights and obligations of the related parties.

49.

Which of the following audit procedures would most likely as

sist an auditor in identifying conditions and events that may indicate
there could be substantial doubt about an entitys ability to continue as
a going concern?
a) Review compliance with terms of debt agreements.
b) Confirmation of account receivable from principal customers.
c) Reconciliation of interest expense with debt outstanding.
d) Confirmation of bank balances.

50.

A client acquired 25% of its outstanding capital stock after yearend and prior to completion of the auditors fieldwork. The auditor
should
a) Advise management to adjust the balance sheet to reflect the
acquisition.
b) Issue pro forma financial statements giving effect to the acquisition
as if it had occurred at year-end.
c) Advise management to disclose the acquisition in the notes to the
financial statements.
d) Disclose the acquisition in the opinion paragraph of the auditors
report.

FIRST PREBOARD EXAMINATION OCTOBER 2008

51.

Which of the following procedures would an auditor most likely

perform to obtain evidence about an entitys subsequent events?
a) Reconcile bank activity for the month after the balance sheet date
with cash activity reflected in the accounting records.
b) Examine on a test basis the purchase invoices and receiving reports
for several days after the inventory date.
c) Review the treasurers monthly reports on temporary investment
owned, purchased, and sold.
d) Obtain a letter from the entitys attorney describing any pending
litigation of unasserted claims, or loss contingencies.

52.

After issuance of the auditors report, the auditor has no obligation

to make any further inquiries with respect to audited financial
statements covered by that report unless
a) A final resolution of a contingency that had resulted in a qualification
of the auditors report is made.
b) A development occurs that may affect the clients ability to continue
as a going concern.
c) An investigation of the auditors practice by a peer review committee
ensues.
d) New information is discovered concerning undisclosed related-party
transactions of the previously audited period.

53.

An auditor concludes that a substantive auditing procedure

considered necessary during the prior periods audit was omitted.
Which of the following factors would most likely cause the auditor
promptly to apply the omitted procedure?
a) There are on alternative procedures available to provide the same
evidence as the omitted procedure.
b) The omission of the procedures impairs the auditors present ability
to support the previously expressed opinion.
c) The source documents needed to perform the omitted procedure are
still available.
d) The auditors opinion on the prior periods financial statements was
unqualified.

54.

Which of the following auditing procedures is ordinarily performed

last?
a) Reading of the minutes of the directors meetings.
b) Confirming accounts payable.
c) Obtaining a management representation letter.
d) Testing of the purchasing function.

55.

Independent internal verification of inventory occurs when

employees who
a) Issue raw materials obtain material requisition for each issue and
prepare daily totals of material issued.
b) Compare records of goods on hand with physical quantities do not
maintain the records or have custody of the inventory.
c) Obtain receipts for the transfer of completed work to finished goods
prepares a completed report.
d) Are independent of issuing production orders updated records from
completed job cost sheets and production cost reports on a timely
basis.
10

FIRST PREBOARD EXAMINATION OCTOBER 2008

56.

Well functioning internal control for the inventory/production

functions would provide that finished goods are to be accepted for
stock only after presentation of a completed production order and a(n)
a) Shipping order.
b) Material requisition.
c) Bill of lading.
d) Inspection report.

57.

Which of the following procedures would best detect the theft of

valuable items from an inventory that consists of hundreds of different
items selling for P1 to P10 and a few items selling for hundreds of
pesos?
a) Maintain a perpetual inventory of only the more valuable items with
frequent periodic verification of the validity of the perpetual inventory
record.
b) Have an independent CPA firm prepare a report on the effectiveness
of internal control over inventory.
c) Have separate warehouse space for the more valuable items with
sequentially numbered tags.
d) Require an authorized officers signature on all requisitions for the
more valuable items.

58.

Effective internal control over the purchasing of raw materials should

usually include all of the following procedures except
a) Systematic reporting of product changes which will affect raw
materials.
b) Determining the need of the raw materials prior to preparing the
purchase order.
c) Obtaining third-party written quality and quantity reports prior to
payment for the raw materials.
d) Obtaining financial approval prior to making a commitment.

59.

An auditor will ordinarily ascertain whether payroll checks are

properly endorsed during the examination of
a) Time cards.
b) The voucher system.
c) Cash in bank.
d) Accrued payroll.

60.

In the audit of which of the following types of profit-oriented

enterprises would the auditor be most likely to place special emphasis
on testing the controls over proper classification of payroll
transactions?
a) A manufacturing organization.
b) Retailing organization.
c) Wholesaling organization.
d) A service organization.

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FIRST PREBOARD EXAMINATION OCTOBER 2008

61.

A large retail enterprise has established a policy which requires that

the paymaster deliver all unclaimed payroll checks to the internal
auditing department at the end of each payroll distribution day. This
policy was most likely adopted in order to
a) A assure that employees who were absent on a payroll distribution
day are not paid for that day.
b) Prevent the paymaster from cashing checks which are unclaimed fro
several weeks.
c) Prevent a bona fide employees check from being claimed by another
employee.
d) Detect any fictitious employee who may have been placed on the
payroll.

62.

One of the auditors objectives in observing the actual distribution of

payroll checks is to determine that every name on the payroll is that of
a bona fide employee.
The payroll observation is an auditing
procedure that is generally performed for which of the following
reasons?
a) The professional standards that are generally accepted require the
auditor to perform the payroll observation.
b) The various phases of payroll work are not sufficiently segregated to
afford effective internal control.
c) The independent auditor uses personal judgment and decides to
observe the payroll distribution on a particular audit.
d) The standards that are generally accepted by the profession are
interpreted to mean that payroll observation is expected on an audit
unless circumstances dictate otherwise.

(63)An auditor may decide to increase the risk of incorrect rejection when
a) Increase reliability form the sample is desired.
b) Many differences (audit value minus recorded value) are expected.
c)Initial sample results do not support the planned level of control risk.
d) The cost and effort of selecting additional sample items is low.
(64)The purpose of segregating the duties of hiring personnel and
distributing payroll checks is to separate the
a) Operational responsibility from the recordkeeping responsibility.
b) Responsibility of recording a transaction at its origin from the ultimate
posting in the general ledger.
c) Authorization of transactions from the custody or related assets.
d) Human resources function from the controllership function.
(65)A CPA reviews a clients payroll procedures. The CPA would consider
internal control to be less than effective if a payroll department
supervisor was assigned the responsibility for
a) Reviewing and approving time reports for subordinate employees.
b) Distributing payroll checks to employees.
c) Hiring subordinate employees.

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FIRST PREBOARD EXAMINATION OCTOBER 2008

(66)Initiating requests for salary adjustments for subordinate employees.
In the audit of which of the following types of profit-oriented enterprises
would the auditor be most likely to place special emphasis on testing the
controls over proper classification of payroll transactions?
a)
A manufacturing organization.
b)
Retailing organization.
c)
Wholesaling organization.
d)
A service organization.
(67)One of the auditors objectives in observing the actual distribution of
payroll checks is to determine that every name on the payroll is that of
a bona fide employee. The payroll observation is an auditing procedure
that is generally performed for which of the following reasons?
a)
The professional standards that are generally accepted require
the auditor to perform the payroll observation.
b)
The various phases of payroll work are not sufficiently
segregated to afford effective internal control.
c)
The independent auditor uses personal judgment and decides to
observe the payroll distribution on a particular audit.
d)
The standards that are generally accepted by the profession are
interpreted to mean that payroll observation is expected on an audit
unless circumstances dictate otherwise.
(68)Which of the following questions would an auditor most likely include on
an internal control questionnaire for notes payable?
a) Are assets that collateralize notes payable critically needed for the
entitys continued existence?
b) Are two or more authorized signatures required on checks that repay
notes payable?
c) Are the proceeds from notes payable used for the purchase of
noncurrent assets?
d) Are direct borrowings on notes payable authorized by the board of
directors?
(69)The primary responsibility of a bank acting as registrar of capital stock is
to
a) Ascertain that dividends declared do not exceed the statutory amount
allowable in the state of incorporation.
b) Account for stock certificates by comparing the total shares
outstanding to the total in the shareholders subsidiary ledger.
c) Act as an independent third party between the board of directors and
outside investors concerning merger, acquisitions, and the sale of
treasury stock.
d) Verify that stock is issued in accordance with the authorization of the
board of directors and the articles of incorporation.
(70)A company holds bearer bonds as a short-term investment.
Responsibility for custody of these bonds and submission of coupons for
periodic interest collections probably should be delegated to the
a) Chief accountant.
b) Internal auditor.
c) Cashier.
d) Treasurer.

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FIRST PREBOARD EXAMINATION OCTOBER 2008

(71)In order to avoid the misappropriation of company-owned marketable
securities, which of the following is the best course of action that can be
taken by the management of a company with a large portfolio of
marketable securities?
a) Require that one trustworthy and bonded employee be responsible for
access to the safekeeping area, where securities are kept.
b) Require that employees who enter and leave the safekeeping area
sign and record in a log the exact reasons for their access.
c) Require that employees involved in the safekeeping function maintain
a subsidiary control ledger for securities on a current basis.
d) Require that the safekeeping function for securities be assigned to a
bank that will act as a custodial agent.
(72)A company has additional temporary funds to invest. The board of
directors decided to purchase marketable securities and assigned the
future purchase and sale decisions to a responsible financial executive.
The best person(s) to make periodic reviews of the investment activity
should be
a) The investment committee of the board of directors.
b) The treasurer.
c) The corporate controller.
d) The chief operating officer.
(73)When there are numerous property and equipment transactions during
the year, an auditor planning to assess control risk at the minimum level
usually plans to obtain an understanding of the internal control and to
perform
a) Tests of control and extensive tests of property and equipment at the
end of the year.
b) Extensive tests of current year property and equipment transactions.
c) Tests of controls and limited tests of current year property and
equipment transactions.
(74)Analytical procedures for property and equipment balances at the end of
the year.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 records.
c) Verification of liens, pledges, and collateralizations.
d) Accounting for work orders.
(75)A weakness in internal control over recording retirements of equipment
may cause the auditor to
a) Inspect certain items of equipment in the plant and trace those items
to the accounting records.
b) Review the subsidiary ledger to ascertain whether depreciation was
taken on each item of equipment during the year.
c) Trace additions to the other assets account to search for equipment
that still on hand but no longer being used.
d) Select certain items of equipment from the accounting records and
locate them in the plant.

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FIRST PREBOARD EXAMINATION OCTOBER 2008

(76)Which of the following procedures is most likely to prevent the improper
disposition of equipment?
a) A separation of duties between those authorized to dispose of
equipment and those authorized to approve removal work orders.
b) The use of serial numbers to identify equipment that could be sold.
c) Periodic comparison of removal work orders to authorizing
documentation.
d) A periodic analysis of the scrap sales and the repairs and
maintenance accounts.
(77)Which of the following is the most important internal control activity
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 users departments.
(78)Equipment acquisitions that are misclassified as maintenance expense
most likely would be detected by a control that provides for
a) Segregation of duties of employees in the accounts payable
department.
b) Independent verification of invoices for disbursements reported as
equipment acquisitions.
c) Investigation of variances within a formal budgeting system.
d) Authorization by the board of directors of significant equipment
acquisitions.
(79)It would not be appropriate for the auditor to initiate discussion with the
audit committee concerning
a) The extent to which the work of internal auditors will influence the
scope of the examination.
b) Details of the procedures which the auditor intends to apply.
c) The extent to which change in the companys organization will
influence the scope of the examination.
d) Details of potential problems which the auditor believes might cause
a qualified opinion.
(80)When communicating internal control related matters noted in an audit,
an auditors report issued on reportable conditions should indicate that
a) Errors or irregularities may occur and not be detected because there
are inherent limitations in any internal control.
b) The issuance of an unqualified opinion on the financial statements
may be dependent on corrective follow-up action.
c) The deficiencies noted were not detected within a timely period by
employees I in the normal course of performing their assigned
functions.
d)
The purpose of the audit was to report on the financial statements
and not to provide assurance on internal control.

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FIRST PREBOARD EXAMINATION OCTOBER 2008

1-5 D A C D A
6-10 C C B D A
10-15 B A D D B
15-20 A A D C D
21-25 B B D D B
26-30 D C A A D
31-35 C C C C D
36-40 C C A B D
41-45 B A D B D
46-50 C A C A C
51-55 D D B C B
56-60 D A C C A
61-65 D B D C B
66-70 A B D D D
70-75 D A C B D
75-80 A B C B D

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FIRST PREBOARD EXAMINATION OCTOBER 2008

1st Test: SCORE = _______

2nd Test SCORE = _______

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