CORDILLERA CAREER DEVELOPMENT COLLEGE

COLLEGE OF ACCOUNTANCY
Buyagan, Poblacion, La Trinidad, Benguet

SECOND PRE-BOARD ACTIVITY

IN ACCTG. 204B
AUDITING THEORY
INTEGRATION B

for remote teaching and learning use only

COMPILED BY: JORDAN L. LIBANG

Instruction:
 Make a summary of answers and show your solutions on a separate sheet of
paper.
 Send to my messenger account the picture of the summary of answers and
solutions.
 Your preparing yourself for CPA licensure examination so answer it honestly.
Submission:
 To be submitted on or before October 1,2021.

Multiple Choice
1. The auditor’s 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 auditor’s consideration of the auditor company’s 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 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.
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
auditor’s 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 auditor’s 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.
6. Which event that occurred after the end of the fiscal year under audit but prior to
issuance of the auditor’s 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 reporting period.
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. The auditor who wishes to point out that the entity has sufficient transactions with
related parties should disclose this fact in
a. An emphasis of a matter paragraph to the auditor’s report.
b. An emphasis of a matter note to the financial statements.
c. The body of the financial statements.
d. The “summary of significant accounting policies” section of the financial
statements.
9. 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.
10.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.
11.Joan requested permission to communicate with the predecessor auditor and
review certain portions of the predecessor auditor’s working papers. The
prospective client’s refusal to permit this will bear directly on Joan’s decision
concerning the
a. Adequacy of the preplanned audit program.
 b. Ability to establish consistency in application of accounting principles between
years.
c. Apparent scope limitation.
d. Integrity of management.
12.An auditor observes the mailing of monthly statements to a client's customers and
reviews evidence of follow-up on errors reported by the customers. This test of
controls most likely is performed to support management's financial statement
assertions of
Presentation and Existence or
Disclosure occurrence
a. Yes Yes
b. Yes No
c. No Yes
d. No No
13.When a company's stock record books are maintained by an outside registrar or
transfer agent, the auditor should obtain confirmation from the registrar or
transfer agent concerning the
a. Amount of dividends paid to related parties.
b. Expected proceeds from stock subscriptions receivable.
c. Number of shares issued and outstanding.
d. Proper authorization of stock rights and warrants.
14.Which of the following statements ordinarily is not included among the written
client representations made by the chief executive officer and the chief financial
officer?
a. "Sufficient audit evidence has been made available to the auditor to permit the
issuance of an unqualified opinion.”
b. "There are no unasserted claims or assessments that our lawyer has advised us
are probable of assertion and must be disclosed."
c. "We have no plans or intentions that may materially affect the carrying value or
classification of assets and liabilities."
d. "No events have occurred subsequent to the balance sheet date that would
require adjustment to or disclosure in, the financial statements."
15.To which of the following matters would materiality limits not apply when obtaining
written client representations?
a. Violations of the Labor Code.
b. Disclosure of line-of-credit arrangements.
c. Information about related party transactions.
d. Instances of fraud involving management.
16.Prior to commencing field work, an auditor usually discusses the general audit
strategy with the client's management. Which of the following details do
management and the auditor usually agree upon at this time?
a. The specific matters to be included in the communication with the audit
committee.
b. The minimum amount of misstatements that may be considered to be
reportable conditions.
c. The schedules and analyses that the client's staff should prepare.
d. The effects that inadequate controls may have over the safeguarding of assets.
17.An auditor plans to apply substantive tests to the details of asset and liability
accounts as of an interim date rather than as of the balance sheet date. The
auditor should be aware that this practice
 a. Eliminates the use of certain statistical sampling methods that would otherwise
be available.
b. Presumes that the auditor will re-perform the tests as of the balance sheet date.
c. Should be especially considered when there are rapidly changing economic
conditions.
d. Potentially increases the risk that errors that exist at the balance sheet date will
not be detected.
18.In assessing the competence of a client's internal auditor, an independent auditor
most likely would consider the
a. Internal auditor's compliance with professional internal auditing standards.
b. Client's policies that limit the internal auditor's access to management salary
data.
c. Evidence supporting a further reduction in the assessed level of control risk.
d. Results of ratio analysis that may identify unusual transactions and events.
19.An auditor believes that there is substantial doubt about an entity's ability to
continue as a going concern for a reasonable period of time. In evaluating the
entity's plans for dealing with the adverse effects of future conditions and events,
the auditor most likely would consider, as a mitigating factor, the entity's plans to
a. Repurchase the entity's stock at a price below its book value.
b. Issue stock options to key executives.
c. Lease rather than purchase operating facilities.
d. Accelerate the due date of an existing mortgage.
20.An auditor is required to establish an understanding with a client regarding the
services to be performed for each engagement. This understanding generally
includes
a. The auditor's responsibility for determining the preliminary judgments about
materiality and audit risk factors.
b. Management's responsibility for identifying mitigating factors when the auditor
has doubt about the entity's ability to continue as a going concern.
c. The auditor's responsibility for ensuring that the audit committee is aware of
any significant deficiencies that comes to the auditor's attention.
d. Management's responsibility for providing the auditor with an assessment of
the risk of material misstatement due to fraud.
21.When a client engages in transactions involving derivatives, the auditor should
a. Develop an understanding of the economic substance of each derivative.
b. Confirm with the client's broker whether the derivatives are for trading
purposes.
c. Notify the audit committee about the risks involved in derivative transactions.
d. Add an explanatory paragraph to the auditor's report describing the risks
associated with each derivative.
22.A practitioner's report on agreed-upon procedures that is in the form of procedures
and findings should contain
a. Negative assurance that the procedures did not necessarily disclose all
reportable conditions.
b. An acknowledgment of the practitioner's responsibility for the sufficiency of the
procedures.
c. A statement of restrictions on the use of the report.
d. A disclaimer of opinion on the entity's financial statements.
23.Analytical procedures performed during an audit indicate that accounts receivable
doubled since the end of the prior year. However, the allowance for doubtful
 accounts as a percentage of accounts receivable remained about the same. Which
of the following client explanations would satisfy the auditor?
a. A greater percentage of accounts receivable are listed in the “more than 120
days overdue” category than in the prior year.
b. Internal control activities over the recording of cash receipts have been
improved since the end of the prior year.
c. The client opened a second retail outlet during the current year and its credit
sales approximately equaled the older outlet.
d. The client tightened its credit policy during the current year and sold
considerably less merchandise to customers with poor credit ratings.
24.An auditor usually determines whether dividend income from publicly-held
investments is reasonable by computing the amounts that should have been
received by referring to
a. Stock ledgers maintained by independent registrars.
b. Dividend records on file with the SEC.
c. Records produced by investment services.
d. Minutes of the investee's board of directors.
25.Which of the following factors would most likely be considered an inherent
limitation to an entity's internal control?
a. The complexity of the information processing system.
b. Human judgment in the decision making process.
c. The ineffectiveness of the board of directors.
d. The lack of management incentives to improve the control environment.
26.A successor auditor is required to attempt communication with the predecessor
auditor prior to
a. Performing test of controls.
b. Testing beginning balances for the current year.
c. Making a proposal for the audit engagement.
d. Accepting the engagement.
27.Which of the following factors would least likely affect the extent of the auditor's
consideration of the client's internal controls?
a. The amount of time budgeted to complete the engagement.
b. The size and complexity of the client.
c. The nature of specific relevant controls.
d. The auditor’s prior experience with client operations.
28.The most reliable procedure for an auditor to use to test the existence of a client's
inventory at an outside location would be to
a. Observe physical counts of the inventory items.
b. Trace the total on the inventory listing to the general ledger inventory account.
c. Obtain a confirmation from the client indicating inventory ownership.
d. Analytically compare the current-year inventory balance to the prior-year
balance.
29.An auditor compared the current-year gross margin with the prior-year gross
margin to determine if cost of sales is reasonable. What type of audit procedure
was performed?
a. Test of transactions. c. Analytical procedures.
b. Test of controls. d. Test of details.
30.Sales order form and invoice blanks should be controlled in the
a. Sales order section of the sales department
b. Billing clerk in the accounting department
 c. Credit manager in the credit department
d. Sales manager in the sales department

31.Which of the following is a substantive test of transactions

a. Review personnel policies
b. Account for a sequence of payroll checks
c. Reconcile the disbursements in the payroll journal with the disbursements on
the payroll bank statement
d. Examine printouts of transactions rejected by the computer as having invalid
employee numbers
32.The information typically needed to prepare a production order would not include a
a. Sales forecast c. Inventory plan
b. Production plan d. Bill of materials
33.The substantive test which requires the auditor to “trace from a file of receiving
reports to the acquisitions journal” satisfies the objective of
a. Validity c. Completeness
b. Authorization d. Valuation
34.An auditor usually examines receiving reports to support entries in the
a. Voucher register and sales return journal
b. Sales journal and sales return journal
c. Voucher register and sales journal
d. Check register and sales journal
35.The inventory and warehousing cycle can be thought of as comprising two separate
but closely related systems, one involving the actual physical flow of goods, and the
other the
a. internal control over those goods c. storing of the goods
b. related costs d. prevention of wastes
36.In planning an audit engagement, which of the following is a factor that affects the
independent auditor’s judgment as to the quantity, type, and content of working
papers?
a. The estimated occurrence rate of attributes
b. The preliminary evaluation based upon initial substantive testing
c. The content of the client’s representation letter
d. The anticipated nature of the auditor’s report
37.A listing of all the things which the auditor will use to gather sufficient, competent
evidence is the
a. audit procedure c. audit program
b. audit plan d. audit risk model
38.The primary emphasis in most tests of details of balances is on the
a. balance sheet accounts c. cash flow statement accounts
b. income statement accounts d. stockholders equity accounts
39.Tracing recorded sales transactions in the sales journal to the shipping documents
(bills of lading) provides evidence about the
a. Completeness of recording of sales transactions
b. Occurrence of sales transactions
c. Billing of all sales transactions
d. Presentation of payables
40.Which of the following is the best audit procedure for the detection of lapping?
 a. Comparison of postings of cash receipts to accounts with the details of cash
deposits
b. Confirmation of the cash balance
c. Reconciliation of the cash account balances
d. Preparing a proof of cash
41.The confirmation of accounts receivable is most closely associated with
a. business risk c. inherent risk
b. detection risk d. relative risk
42.The most likely technique for the current year audit of goodwill which was not
acquired three years ago by a continuing audit client.
a. Confirmation c. Recomputation
b. Observation d. Inquiry
43.If the auditor is determined to lack independence, a disclaimer of opinion must be
issued
a. in all cases c. only if it is material
b. only if it is highly material d. if the client requests it
44.The use of negative assurances in audit reports of historical financial statements is
a. a violation of the standards of reporting
b. encouraged by the Philippine Institute of CPAs
c. a help in clarifying the degree of responsibility by being assumed by the auditor
d. properly located in the opinion paragraph of the unqualified report
45.Unqualified financial statements for the prior year presented in comparative form
with audited financial statements for the current year should be clearly marked to
indicate their status and
I. The report on the prior period should be reissued to accompany the current
period report
II. The report on the current period should include as a separate paragraph
description of the responsibility assumed for the prior period’s financial
statements
a. I only c. Both I and II
b. II only d. Either I or II
46.A modification of the CPA’s report on a review of the interim financial statements of
a publicly-held company would be necessitated by which of the following?
a. An uncertainty c. Reference to another accountant
b. Lack of consistency d. Inadequate disclosure
47.Comfort letters ordinarily are signed by the client’s
a. independent auditor c. audit committee
b. underwriter of securities d. senior management
48.The element of the audit planning process most likely to be agreed upon with the
client before implementation of the audit strategy is the determination of the
a. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
b. Procedures to be undertaken to discover litigation, claims and assessments.
c. Pending legal matters to be included in the inquiry of the client’s attorney.
d. Timing of inventory observation procedures to be performed.
49.The auditor observed that the long term debt increased from the prior year, but
interest expense increased a larger-than-proportionate amount than long-term
debt. Which of the following is the most likely explanation for this situation?
a. Interest expense decreased, as compared to the prior year.
b. Short-term borrowing was refinanced on a long term basis at the same interest
rate.
 c. Short-term borrowing was refinanced on a long term basis at lower interest
rate.
d. Short-term borrowing was refinanced on a long term basis at higher interest
rate.

50.In considering internal control within the revenue/receipt cycle, what is the
purpose of a transaction walk through?
a. To assure that employees are performing assigned functions accurately.
b. To confirm the auditor’s understanding of the internal control structure.
c. To select documents for detailed tests of controls.
d. To verify the results of the auditor’s sampling plan.
51.The purpose of tests of controls over shipping is to determine whether
a. Billed goods have been shipped.
b. Shipments are billed.
c. Shipping department personnel are competent.
d. Credit is approved before goods are shipped.
52.The cash receipts function should be separated from the related record keeping in
an organization to
a. Physically safeguard the cash receipts.
b. Establish accountability when the cash is first received.
c. Minimize undetected misappropriations of cash receipts.
d. Prevent paying cash disbursements from cash receipts.
53.The authority to accept incoming goods in receiving should be based on a (an)
a. Vendor’s invoice.
b. Bill of lading.
c. Materials requisition.
d. Approved purchase order.
54.To determine whether accounts payable are complete, an auditor performs a test to
verify that all merchandise received is recorded. The population of documents for
this test consists of all
a. Payment vouchers.
b. Purchase requisitions.
c. Receiving reports.
d. Vendor’s invoices.
55.How can an auditor test to determine whether Receiving Department procedures
are applied properly?
a. Test a sample of receiving documents.
b. Observe receiving procedures on a surprise basis.
c. Review procedures manuals.
d. Interview receiving personnel.
56.For appropriate segregation of duties, journalizing and posting summary payroll
transactions should be assigned to
a. The treasurer’s department
b. Payroll accounting
c. General accounting
d. The timekeeping department
57.During an audit of the production cycle, you noted a control procedure requiring
the accounting clerk to look up the material invoice and match the material unit
 costs to the unit cost of material shown on the job cost sheet for all government
contract work. This procedure is designed to meet the control objective of
a. Validity.
b. Authorization.
c. Valuation.
d. Classification.

58.When perpetual inventory records are maintained in quantities and in pesos, and
internal control procedures over inventory are deficient, the auditor would probably
a. Have to disclaim an opinion on the income statement that year.
b. Want the client to schedule the physical inventory count at the end of the year.
c. Insist that the client perform physical counts of inventory items several times
during the year.
d. Increase the extent of tests for unrecorded liabilities at the end of the year.
59.To be competent, evidence must be both
a. Timely and substantial.
b. Reliable and documented.
c. Valid and relevant.
d. Useful and objective.
60.Which of the following procedures would provide the most reliable audit evidence?
a. Inquiries of client’s internal audit staff held in private.
b. Inspection of pre-numbered client purchase orders filed in the vouchers payable
department.
c. Analytical procedures performed by the auditor on the entity’s trial balance.
d. Inspection of bank statements obtained directly from the client’s financial
institution.
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