AP-701 (MCQs Theories On RAP, TOC, ST)

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  October 2021 CPA Licensure Exam  Preweek

AUDITING (Auditing Problems) S. Ireneo  C. Espenilla

AP-701: RAP, TOC AND ST (ALL TRANSACTION CYCLES)


Risk Assessment Procedures (RAP)
1. If the internal control structure is deemed to be effective during the obtaining an understanding
phase, the test of transactions will usually be planned to be performed:
a. At the balance sheet date
b. At an interim date
c. At the beginning of the client’s fiscal period
d. After the tests of balances are completed
2. If the controls necessary to satisfy one of the objectives are inadequate, the likelihood of errors
related to that objective
a. Is increased, regardless of the controls for the other objectives
b. May be increased if the controls for other objectives don’t mitigate it
c. May be decreased if management is aware of the poor controls
d. Is indeterminate
3. Which one of the following statements is true? In deciding on substantive tests of transactions,
a. Some procedures are commonly employed on every audit regardless of the circumstances
b. All procedures are dependent on the adequacy of the controls and the results of the test of
controls
c. Results obtained in the prior year’s audit will not affect the procedures used this year
d. The materiality of the item will not influence the choice of procedures used.
4. Which of the following statements is true?
a. If control risk is assessed at maximum, the nature of related substantive tests should be
changed from more to less effective.
b. If control risk is assessed at maximum, the nature of related substantive tests should be
changed from less to more effective.
c. If control risk is assessed at maximum, the timing of related substantive tests should be
changed from year-end to an interim date.
d. If control risk is assessed at maximum, the extent of related substantive tests should be
changed from a larger to a smaller sample.
5. After the audit planning procedures, your audit team decided to place the preliminary audit risk at a
high level. Which of the following is correct?
a. The risk the planned further audit procedures will not be able to detect misstatement
should be increased.
b. The audit materiality levels should be decreased.
c. The auditors should plan extensive substantive testing through analytical procedures.
d. The auditors should plan set the timing of its extensive compliance testing at year-end.
6. In rendering a preliminary financial ratio analysis on Atom Inc.’s financials, you have observed that
the clients’ accounts receivable turn-over ratio decreased from 10 times last year (based on audited
financial statement) to 6 times this year (based on unaudited figures). Which of the following is
correct regarding the implication of this information in your audit plan?
a. Accounts receivables may be materially misstated thus the auditor should issue a qualified
opinion due to departure from PFRS.
b. Accounts receivables are materially misstated thus the auditor should issue an adverse
opinion due to material and pervasive departure from PFRS.
c. The auditor increases his assessment of inherent risk in the financial statement thus shall
plan to do extensive substantive analytical procedures.
d. The auditor increases his assessment of risk of misstatement in the financial statement thus
shall plan to render test of details at year-end.
7. To obtain an understanding of the client’s internal control over its revenue/receipt transactions, an
audit staff was assigned to do inquiries with the department’s involved (Sales Department, for order
processing; Credit Department, for credit authorization; Warehouse, for determining the availability
of goods; Shipping, for the preparation and actual shipment of goods, and; Billing Department, for
the invoice preparation). Which of the following shall be rendered next?
a. Assessment of control risk at below the maximum level if the staff is satisfied that the
design, operation and effectiveness of internal control can reasonably detect/prevent
potential misstatements in the financial statements.
b. Assessment of the control risk at the maximum level if the design and operations of the
internal controls are inappropriate to detect or prevent potential misstatement in the
financial statements.
c. Confirm his understanding of the internal control through inspection of documents and/or
observation of the performance of policies and procedures.
d. Test the effectiveness of the controls as to consistency of their application.
8. After obtaining and understanding of the Atom Inc.’s internal control policies and procedures over
its purchasing and disbursements transactions, the auditor was satisfied regarding’s the internal
control’s potential reliability. Which of the following shall be rendered next?
a. Test the effectiveness of the internal control in terms of their consistent application by
extending the analytical procedures done during the audit planning.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-701
PREWEEK: RAP, TOC & ST (ALL TRANSACTION CYCLES)
b. Sending confirmation letters to suppliers to confirm their agreements with Atom Inc.’s
reported balances.
c. Examine the consistency of the application of the control by inspecting documents where
control performance are documented.
d. Render purchases cut-off to ascertain whether purchases were recorded in the correct
period.

Test of Controls (TOC) and Substantive Testing (ST):


Receipt/Disbursement Cycle (Audit of Cash Balances)
1. Which of the following controls would most likely reduce the risk of diversion of customer receipts
by a client’s employee?
a. A bank lockbox system
b. Prenumbered remittance advice
c. Monthly bank reconciliations
d. Daily deposit of cash receipts
2. To provide assurance that each voucher is submitted and paid only once, the auditors most likely
would examine a sample of paid vouchers and determine whether each voucher is:
a. Supported by a vendor’s invoice
b. Stamped “PAID” by check signer
c. Prenumbered and accounted for
d. Approved for authorized purchases
3. In testing over cash disbursements, the auditor most likely would determine that the person who
signs checks also:
a. Reviews the monthly bank reconciliation
b. Returns the checks to accounts payable
c. Is denied access to the supporting documents
d. Is responsible for mailing the checks
4. To determine that each voucher is paid only once, when a payment is approved, supporting
documents should be cancelled by the:
a. Authorized members of the audit committee
b. Accounting department
c. Individual who signs the checks last
d. Chief executive officer.
5. To gather evidence regarding the balance per bank in a bank reconciliation, the auditor would
examine any of the following except:
a. Cutoff bank statement
b. Year-end bank statement
c. Bank confirmation
d. General ledger
6. Which of the following errors would not be discovered during the test of the bank reconciliation?
a. Cash received by the client subsequent to the balance sheet date but recorded as cash
receipt in the current year.
b. Deposits recorded in the cash book near the end of the year, deposited in the bank, and
included in the bank reconciliation as a deposit in transit
c. The existence of payments on notes payable that were debited directly to the bank balance
by the bank but were not entered in the client’s records
d. Payment to an employee for more hours than he worked.
7. You have been assigned to the year-end audit of financial institution and are planning the timing of
audit procedures relating to cash. You decided that it would be preferable to:
a. Count the cash in advance of the balance sheet date in order to disclose any kiting
operations at year-end.
b. Coordinate the count of cash with the cutoff of accounts payable.
c. Coordinate the count of cash with the count of marketable securities and other negotiable
assets.
d. Count the cash immediately upon the return of the confirmation letters from the financial
institution.
8. Which of the following procedures would the auditors most likely perform to test controls relating to
management’s assertion about the completeness of cash receipts for cash sales in a grocery store
which inevitably operates on a cash basis?
a. Observe the consistency of employees’ use of cash registers and tapes
b. Inquire about employees’ access to recorded but undeposited cash
c. Trace deposits in the cash receipts journal to the cash balance in the general ledger
d. Compare the cash balance in the general ledger with the bank confirmation request.
9. Reconciliation of the bank account should not be performed by individual who also:
a. Process cash disbursements
b. Has custody of securities
c. Prepares the cash budget
d. Reviews inventory reports

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-701
PREWEEK: RAP, TOC & ST (ALL TRANSACTION CYCLES)
10. The auditors suspects that a clients’ cashier is misappropriating cash receipts for personal use by
lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme,
the auditors most likely would compare the:
a. Details of deposit slips with details of credits to customer accounts
b. Daily cash summaries with the sums of the cash receipts journal entries
c. Individual bank deposit slips with the details of the monthly bank statements
d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs
are recorded.
11. The cashier diverted cash received over the counter from a customer to his own use and wrote off
the receivable as bad debt. Select the control that should have prevented the error.
a. Aging schedules of accounts receivable are prepared
b. Journal entries are approved by a responsible official
c. Receipts are given directly to the cashier by the person who opens the mail
d. Remittance advises, letters, or envelopes that accompany receipts are separated and given
directly to the accounting department
12. The audit procedure referred to as proof of cash receipts is useful to test
a. Whether all recorded cash receipts have been deposited in the bank
b. Time lags in making deposits
c. Whether there are cash receipts that have not been recorded int eh journals
d. All of the these.

Items 13 and 14 are based on the following:


The information below was taken from the bank transfer schedule prepared during the audit of Prime
Co.’s financial statements for the year ended December 31, 2020. Assume all checks are dated and
issued on December 30, 2020.
Disbursement Date Receipt Date

Check Bank Accounts Per Per Per Per


No. From To Books Bank Books Bank
101 FEB TC PNB Dec. 30 Jan. 4 Dec. 30 Jan. 3
202 PCIB MBTC Jan. 3 Jan. 2 Dec. 30 Dec. 31
303 PNB CBC Dec. 31 Jan. 3 Jan. 2 Jan. 2
404 MBTC BPI Jan. 2 Jan. 2 Jan. 2 Dec. 31
13. Which of the following checks might indicate kiting?
a. #101 and #303.
b. #202 and #404.
c. #101 and #404.
d. #202 and #303.
14. Which of the following checks illustrate deposits/transfers in transit at December 31, 2021?
a. #101 and #202.
b. #101 and #303.
c. #202 and #404.
d. #303 and #404.
15. An auditor should trace bank transfers for the last part of the audit period and first part of the
subsequent period to detect whether
a. the cash receipts journal was held open for a few days after the year end.
b. the last checks recorded before the year and were actually mailed by the year end.
c. cash balances were overstated because of kiting.
d. any unusual payments to or receipts from related parties occurred.
16. Which of the following cash transfers results in a misstatement of cash at December 31, 2020?
Bank Transfer Schedule
Disbursement Receipt
Recorded
Transfer in books Paid by Recorded in Received
bank books by bank
a. 12/31/20 1/4/21 12/31/20 12/31/20
b. 1/4/21 1/5/21 12/31/20 1/4/21
c. 12/31/20 1/5/21 12/31/20 1/4/21
d. 1/4/21 1/11/21 1/4/21 1/4/21

Items 17 and 18 are based on the following:


Miles Company
Bank Transfer Schedule
December 31, 2020
Check Bank Accounts Date disbursed per Date deposited per
Number From To Amount Books Bank Books Bank
2020 FEBTC PNB P32,000 12/31 1/5* 12/31 1/3^
2021 FEBTC PNB 21,000 12/31 1/4* 12/31 1/3^
3217 PCIB FEBTC 6,700 1/3 1/5 1/3 1/6
0659 PCIB FEBTC 5,500 12/30 1/5 12/30 1/3^
17. The tick mark * most likely indicates that the amount was traced to the
a. December cash disbursements journal.
b. Outstanding check list of the applicable bank reconciliation.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-701
PREWEEK: RAP, TOC & ST (ALL TRANSACTION CYCLES)
c. January cash disbursements journal.
d. Year-end bank confirmations.
18. The tick mark^ most likely indicates that the amount was traced to the
a. Deposits in transit of the applicable bank reconciliation.
b. December cash receipts journal.
c. January cash receipts journal.
d. Year-end bank confirmations.
19. A cash shortage may be concealed by transporting funds one location to another or by converting
negotiable assets to cash. Because of this, which of the following is vital?
a. Simultaneous confirmations.
b. Simultaneous bank reconciliations.
c. Simultaneous verification.
d. Simultaneous surprise cash count.

TOC & ST: Revenue Cycle (Audit of Trade Receivables)


1. The overall objective in the audit of the sales and collection cycle is to evaluate whether:
a. The sales account and the accounts receivable account are free of errors
b. The sales account and the accounts receivable account are free of materials errors
c. The sales account and the accounts receivable account are presented fairly in accordance
with financial reporting standards
d. The accounts balances affected by the cycle are fairly presented in accordance with financial
reporting standards.
2. For the most part, the audit of the sales and collection cycle
a. Cannot be performed until the audit of cash is completed
b. Can be performed independently of the audit of the other cycles
c. Must be performed simultaneously with the audit of the purchases and disbursement cycle
d. Must be performed first so that the audit of the other cycles can rely on the data
3. For the most part, the evidence gathered during the audit of the sales and collection cycle can be
subjectively combined with the other parts of the audit
a. As the evidence accumulation process proceeds
b. Only when all fieldwork processes of the engagement are completed
c. Only after the audit of the sales and collections cycle is concluded
d. After the conclusion of both the cash cycle and the sales and collection cycle.
4. Which of the following is not typically included in the sales and collection cycle?
a. Sales returns and allowances
b. Bad debt expense
c. Allowance for uncollectible accounts
d. Cash credits from the cash disbursement journal
5. The customer’s request for merchandise, the customer order, would be in the form of
a. An oral request
b. A written request on customer’s letterhead
c. A written request on pre-printed form
d. Any of the above three formats
6. A document for recording the description, quantity and related information for goods ordered by a
customer is the
a. Customer order
b. Sales order
c. Shipping document
d. Remittance advice
7. The document used to indicate to the customer the amount of a sale and due date of the payment is
the
a. Sales order
b. Shipping document
c. Bill of lading
d. Sales invoice
8. The document used as the basis for recording sales transactions and updating the accounts
receivable master file is the
a. Sales order
b. Bill of lading
c. Sales journal
d. Sales invoice
9. A document prepared to initiate shipment of goods sold is the
a. Sales order
b. Bill of lading
c. Sales invoice
d. Customer order
10. When posting the Sales Journal, details of the journal are posted to ____________; and journal
totals are posted to ____________.
a. The sales account; the general ledger
b. The accounts receivable master file; the general ledger

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-701
PREWEEK: RAP, TOC & ST (ALL TRANSACTION CYCLES)
c. The sales account; the accounts receivable subsidiary ledger
d. The accounts receivable subsidiary account in the general ledger; the sales account in the
general ledger.
11. The report which typically includes information analyzed by key components as sales person,
product and territory is the:
a. Remittance advice
b. Summary sales report
c. Accounts receivable master file
d. Monthly statement
12. The document which supports reductions in accounts receivable is
a. Remittance advice
b. Credit memo
c. Sales invoice
d. Monthly statement
13. The document which accompanies the customer’s payment and is used to permit the immediate
deposit of cash to improve the control over the custody of asset is the:
a. Credit memo
b. Remittance advice
c. Sales invoice
d. Monthly statement
14. The daily entry in the cash receipt journal are supported by the
a. Sales invoice
b. Shipping document
c. Remittance advice
d. Credit memo
15. A file for recording individual sales, cash receipt and sales returns and allowances for each customer
is the:
a. Sales journal
b. Cash receipt journal
c. General ledger
d. Accounts receivable subsidiary ledger
16. A document sent to each customer showing their beginning accounts receivable balance and the
amount and date of each sale, cash payment received, credit memo issued, and the ending
accounts receivable balance is the:
a. Accounts receivable subsidiary ledger
b. Monthly statement
c. Remittance advice
d. Sales invoice
17. Before goods are shipped on account, a properly authorized person must
a. Prepare the sales invoice
b. Approve the journal entry
c. Approve credit
d. Verify the unit price is accurate
18. For the most firms, the function of indicating credit approval is recorded on the
a. Customer order
b. Sales order
c. Remittance advice
d. Sale invoice
19. Most companies recognize sales when
a. A customer order is received
b. The merchandise is shipped
c. The merchandise is received by the customer
d. Cash is received on account
20. Which of the following would an auditor be concerned with when examining the billing function of
client?
a. All shipments made have been billed
b. No shipment has been billed more than once
c. Each shipment has been billed for the proper amount
d. All three are of concern
21. Proper auditing requires that an account receivable must be charged off by client when
a. Client company concludes that an amount is no longer collectible
b. Customer files for bankruptcy
c. A collection agency cannot inspire customer to pay the debt
d. The account is at least six month old.
22. In many audits of sales transactions, no substantive tests of transactions are made for the
completeness objective on the ground that
a. Overstatements of assets and income are greater concern than understatement
b. Understatements of assets and income are greater concern than overstatements
c. It doesn’t matter if income is understated because the savings on income tax offsets the
reduced revenue and net income is correct

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-701
PREWEEK: RAP, TOC & ST (ALL TRANSACTION CYCLES)
d. The reduced sales causes a reduction of the accounts receivable therefore the ratios of the
two financial statements will not be misleading.
23. Which of the following is least likely to be considered an inherent risk relating to receivables and
revenues?
a. Restrictions placed on sales by laws and regulations
b. Decline in sales due to economic declines
c. Decline in sales due to product obsolescence
d. Over-recorded sales due to a lack of control over the sales entry function
24. Which of the following would provide the most assurance concerning the valuation of accounts
receivable?
a. Trace amounts in the accounts receivable subsidiary ledger to details on the shipping
document
b. Compare receivable turnover ratios to industry statistics for reasonableness
c. Inquire about receivables pledged under loan agreements
d. Assess the allowance for uncollectible accounts for reasonableness
25. Which of the following is most likely to be an example of fraudulent financial reporting relating to
sales?
a. Inaccurate billing due to a lack of controls
b. Lapping of accounts receivable
c. Misbilling a client due to a data input error
d. Recording sales when the customer is likely to return the goods
26. Which of the following is an example of misappropriation of assets relating to sales?
a. Accidentally recording cash that represents a liability as revenue
b. Holding the sales journal open to recorded next year’s sales as having occurred in the
current year
c. Intentionally recording cash received from a new debt agreement as revenue
d. Theft of cash register sales
27. There is a presumption that auditors will confirm accounts receivable unless the auditor’s
assessment of the risk of material misstatement is low
a. And accounts receivable are immaterial, or the use of confirmations would be ineffective
b. And accounts receivable are composed of large accounts
c. And the effectiveness of confirmations is absolutely determined
d. Or accounts receivable are from extremely reputable customers.
28. To determine that all valid sales have been recorded, the auditors would select sample of
transactions from the __________; This is necessary to support the __________ assertion over
sales.
a. Shipping documents file; Completeness
b. Sales journal; Existence
c. Accounts receivable subsidiary ledger; Existence
d. Remittance advices; Completeness
29. Which of the following would most likely be detected by an auditor’s review of the client’s sales cut-
off?
a. Excessive goods returned for credit
b. Unrecorded sales discounts
c. Lapping of year-end accounts receivable
d. Inflated sales for the year
30. To test existence assertion of recorded receivables, the auditors would select sample from the:
a. Sales order file
b. Customer purchase orders
c. Accounts receivable subsidiary ledger
d. Shipping documents (bill of lading) file.
31. Which of the following relating to sales is most directly addressed when the auditors compare a
sample of shipping documents to related sales invoices?
a. Existence or occurrence
b. Completeness
c. Rights and obligation
d. Presentation and disclosure
32. Park, CPA is auditing the financial statements of a small rural municipality. The receivable balances
represent residents’ delinquent real estate taxes. Internal control at the municipality is weak. To
determine the existence of the accounts receivable balances at the balance sheet date. Park, CPA
most likely would:
a. Send negative confirmation letter
b. Examine evidence of subsequent cash receipt
c. Inspect the internal records, such as copies of tax invoices that were mailed to the
residents
d. Sent positive confirmation request
33. Fork, CPA is engaged in audit of a cable TV firm which services a rural community. All recieable
balances are small, customers are billed monthly an internal control is effective. To determine the
validity of accounts receivable balances at the balance sheet date, Fork would most likely:
a. Send positive confirmation requests.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-701
PREWEEK: RAP, TOC & ST (ALL TRANSACTION CYCLES)
b. Send negative confirmation requests.
c. Examine evidence of subsequent cash receipts instead of sending confirmation requests.
d. Use statistical sampling instead of sending confirmation request.
34. Identify the control that is most likely to prevent the concealment of a cash shortage resulting from
the improper write-off of a trade accounts receivable:
a. Write-offs must be approved by a responsible official after review of credit department
recommendations and supporting evidence
b. Write-offs must be approved by accounts receivable department
c. Write-offs must be authorized by shipping department
d. Write-offs must be supported by an aging schedule showing that only receivables overdue
by several months have been written-off.
35. An effective procedure to test for unbilled shipments is to trace from the _________. This is to
support the financial statement assertion of __________ over sales and receivables.
a. Sales journal to shipping documents; existence/occurrence.
b. Shipping documents to the sales journal; completeness.
c. Sales journal to the accounts receivable subsidiary ledger; existence/occurrence.
d. Sales journal to the general ledger sales account; completeness.
36. Bok No Manufacturing received a substantial sales return on December 31, 2020, but credit
memorandum for the returns were not prepared and recorded until March 4, 2021. The returned
merchandise was included in the year-end physical inventory taken on December 31, 2021. The
most effective procedure for preventing this type of error and its implication on the net income are:
a. Prepare an aged schedule of accounts receivable monthly; Net income is overstated by the
gross profit on sales.
b. Prenumber and account for all credit memorandums; Net income is overstated by the
amount of gross sales.
c. Reconcile the subsidiary accounts receivable ledger with the general ledger control account
monthly; Net income is overstated by the cost of inventory.
d. Prepare and numerically control receiving reports for all materials received; Net income is
overstated by the amount of gross sales.
37. An auditor should perform alternative audit procedures to substantiate the existence of accounts
receivable when:
a. No reply to a positive confirmation request is received.
b. No reply to a negative confirmation request is received.
c. Collectibility of the receivable is in doubt.
d. Pledging of receivables is probable.
38. It is sometimes necessary for an auditor to use alternative audit procedure specially in instances
where reply on positive confirmation requests is not received even for a second set of confirmation
requests. In such a situation, the best alternative procedure the auditor might resort to would be
a. Examining subsequent receipts of year-end accounts receivable.
b. Reviewing accounts receivable gaining schedule prepared at the balance sheet date and at
a subsequent date.
c. Requesting that management increase the allowance for uncollectible accounts by an
amount equal to some percentage of the balance in those accounts that cannot be
confirmed
d. Performing an overall analytical review of accounts receivable and sales on a year-to-year
basis.
39. Returns of positive confirmation requests for accounts receivable were very poor. As an alternative
procedure, the auditor decided to check subsequent collections. The auditor had satisfied himself
that the client satisfactorily listed the customer name next to each check listed on the deposit slip;
hence, he decided that for each customer for which a confirmation ws not received that he would
add all amounts shown for that customer on each validated deposit slip for the two months following
the balance sheet date. The major fault in the auditor’s procedure is that”:
a. Checking of subsequent collection is not an accepted alternative auditing procedure for
confirmation of accounts receivable
b. By looking only at the deposit slip the auditor would not know if the payments was for the
receivable at the balance sheet date or a subsequent transaction
c. The deposit slip would not be received directly by the auditor as a confirmation would be
d. A customer may not have made a payment during the two-month period.
40. When scheduling the audit work to be performed on an engagement, the auditor should consider
confirming accounts receivable balances at an interim date if
a. Subsequent collections are to be reviewed.
b. Internal control over receivables is good
c. Negative confirmations are to be used
d. There is a simultaneous examination of cash and accounts receivable.
41. The auditor working paper often include a client-prepared aged trial balance of accounts receivable
as of the balance sheet date. This aging is best used by the auditor to ___________, which is
relevant to gather evidence regarding ____________ assertion on receivables.
a. Evaluation internal control over credit sales; Valuation
b. Test of accuracy of recorded charge sales; Existence
c. Estimate credit losses; Valuation

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-701
PREWEEK: RAP, TOC & ST (ALL TRANSACTION CYCLES)
d. Verify the validity of recorded receivables; Existence
42. Which of the following most likely would give the most assurance concerning the valuation assertion
of accounts receivable?
a. Tracing amounts in the subsidiary ledger to details on shipping documents.
b. Comparing receivable turnover ratios to industry statistics for reasonableness.
c. Inquiring about receivables pledged under loan agreements.
d. Assessing the allowance for uncollectible accounts for reasonableness.
43. Confirmation is most likely to be a relevant from of evidence with regard to assertions about accounts
receivable when the auditor has concerns about the receivables’
a. valuation.
b. classification.
c. existence.
d. completeness.
44. An auditor should perform alternative procedures to substantiate the existence of accounts receivable
when
a. no reply to a positive confirmation request is received.
b. no reply to a negative confirmation request is received.
c. collectability of the receivables is in doubt.
d. pledging of the receivables is probable.

TOC & ST: Expenditure/Purchasing, Payroll and Production Cycles (Audit of Inventories, Trade
Liabilities and Accrued Expenses
1. Which of the following is least likely to be among the auditors’ objective in the audit of inventories
and cost of goods sold?
a. Determine that the valuation of inventories and cost of goods sold is arrived at by
appropriate methods
b. Determine the existence of inventories and the occurrence of transactions affecting cost of
goods sold
c. Establish that the client includes only inventory on hand at year-end in inventory totals
d. Establish completeness of inventories
2. The receiving department is least likely to be responsible for the:
a. Determination of quantities of goods received
b. Detection of damaged or defective merchandise
c. Preparation of a shipping document
d. Transmittal of goods received to the store’s department
3. The document issued by a common carrier acknowledging the receipt of goods and setting forth the
provisions of the transportation agreement is the:
a. Bill of lading
b. Job time shipping
c. Production order
d. Production schedule
4. An auditor usually examines receiving reports to support entries in the
a. voucher register and sales returns journal.
b. sales journal and sales returns journal.
c. voucher register and sales journal.
d. check register and sales journal.
5. When a primary risk related to an audit is possible overstated inventory, the assertion most directly
related is:
a. Existence and Valuation
b. Existence and Completeness
c. Completeness and Valuation
d. Presentation and Valuation
6. Instead of taking a physical inventory count on the balance sheet date, the client may take physical
count prior to the year-end if internal control is adequate and:
a. Well kept records of perpetual inventory are maintained
b. Inventory is slow-moving
c. Computer error reports are generated for missing prenumbered inventory tickets
d. Obsolete inventory items are segregated and excluded.
7. The auditor’s analytical procedures will be facilitated if the client:
a. Uses a standard cost system that produces variance reports
b. Segregates obsolete inventory before the physical inventory count
c. Corrects material weaknesses in internal control before the beginning of the audit
d. Reduces inventory balances to the lower of cost or net realizable value.
8. When perpetual inventory records are maintained in quantities and in pesos, and internal control
over inventory is weak, the auditor would probably:
a. Want the client to schedule the physical inventory count at the end of the year
b. Insist that the client perform physical count several times during the year
c. Increase the extent of tests for unrecorded liabilities at year-end
d. Have to disclaim an opinion on the income statement for the year.

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9. Which of the following is the best audit procedure for the discovery of damaged merchandise in a
client’s ending inventory?
a. Compare the physical quantities of slow-moving items with corresponding quantities in the
prior-year
b. Observe merchandise and raw materials during the client’s physical inventory taking
c. Review the management’s inventory representation letter for accuracy
d. Test overall fairness of inventory values by comparing the company’s turnover ratio with
the industry average.
10. Henry Corp. does not make an annual physical count of year-end inventories, but instead makes
weekly test counts on the basis of statistical plan. During the year, Doris Alcaide, CPA, observes
such counts as she deems necessary and is able to satisfy herself to the reliability of the client’s
procedures. In reporting on the results of her examination, Alcaide:
a. Can issue an unqualified opinion without disclosing that she did not observe year-end
inventories
b. Must comment in an emphasis-of-a-matter paragraph the auditor’s responsibility section of
the audit report as to her inability to observe year-end inventories, but can nevertheless
issue an unqualified opinion.
c. Is required, if the inventories are material, to disclaim an opinion on the financial
statements taken as a whole.
d. Must, if the inventories are material, qualify her opinion.
11. The primary objective of a CPA’s observation of a client’s physical inventory count is to:
a. Discover whether a client has counted a particular inventory item or group of items
b. Obtain direct knowledge that the inventory exists and has been properly counted
c. Provide an appraisal of the quality of the merchandise on hand on the day of the physical
count
d. Allow the auditor to supervise the conduct of the count in order to obtain assurance that
inventory quantities are reasonably accurate.
12. An auditor most likely would analyze inventory turnover rates to obtain evidence concerning
management’s assertions about
a. existence or occurrence.
b. rights and obligations.
c. presentation and disclosure.
d. valuation or allocation.
13. Which of the following audit procedures probably would provide the most reliable evidence concerning
the entity’s assertion of rights and obligations related to inventories?
a. Trace test counts noted during the entity’s physical count to the entity’s summarization of
quantities.
b. Inspect agreements to determine whether any inventory is pledged as collateral or subject
to any liens.
c. Select the last few shipping advices used before the physical count and determine whether
the shipments were recorded as sales.
d. Inspect the open purchase order file for significant commitments that should be considered
for disclosure.
14. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical
inventory listing to obtain evidence that all items __________. This is necessary in relation to the
auditor’s objective of validating ____________ assertion over inventories.
a. included in the listing have been counted; completeness
b. represented by inventory tags are included in the listing; completeness
c. included in the listing are represented by inventory tags; existence
d. represented by inventory tags are bona fide; existence
15. Which of the following is correct?
a. The overhead charged to inventory at the balance sheet date can be understated if the
salaries of the administrative personnel are inadvertently or intentionally charged to indirect
manufacturing overhead.
b. When jobs are billed on a cost-plus basis, revenue and total expenses are both affected by
charging labor to incorrect jobs.
c. Payroll is significant portion of inventory for retail and service industry companies.
d. The valuation of inventory is affected if the direct labor cost of individual employees is
improperly charged to the wrong job or process.
16. Which of the following circumstances would not cause an auditor to extend payroll procedures
considerably?
a. Payroll significantly affects inventory valuation for manufacturing concern
b. There is a possibility of material fraudulent payroll transaction
c. There is a weak internal control structure
d. There is a lack of independent third-party evidence, such as confirmations.
17. Which of the following is not a type of error that gives the auditor concern in auditing payroll
transactions?
a. Classification errors in charging labor to inventory and job cost accounts
b. Computational errors in formulas when a computerized system is used
c. Weaknesses in control system which allows underpayment of employees
d. Any error which indicates possible fraud.

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18. Which of the following best describes proper internal control over payroll?
a. The preparation of the payroll must be clear under the control of the personnel department
b. The confidentiality of employee payroll data should be carefully protected to prevent fraud
c. The duties of hiring, payroll computation, and payment to employees should be segregated
d. The payment of cash to employees should be replaced by payment through checks.
19. No individual with access to time cards, payroll records or checks should also be permitted access to
a. Personnel records
b. The computer
c. The canceled check file
d. Job time tickets
20. Controls should prevent those responsible for the preparation of payroll checks from all but which
one of the following activities?
a. Signing paychecks
b. Distributing paychecks
c. Access to time cards
d. Access to the payroll journal
21. Which of the following is an effective internal control used to prove that production department
employees are property validating payroll time cards at a time-recording station?
a. Time cards should be carefully inspected by those persons who distribute pay envelopes to
employees
b. One person should be responsible for maintaining records of employee time for which salary
payment is not to be made
c. Daily reports showing tie charged to jobs should be approved by the supervisor and
compared to the total hours worked on the employee time cards
d. Internal auditors should make observations of distribution of paychecks on a surprise basis.
22. The signing and distribution of the checks must be properly handled to prevent their theft. Which of
the following is not an important control consideration?
a. The person authorized to sign paychecks should not be involved otherwise in the
preparation of the payroll
b. A check signing machine should not be used to replace a manual signature
c. Distribution of paychecks should be performed by someone who is not involved in the other
payroll function
d. Unclaimed paychecks should be immediately returned for redeposit
23. To minimize the opportunity for fraud, unclaimed salary checks should be:
a. Deposited in a special bank account
b. Kept in the payroll department
c. Left with the employee supervisor
d. Held for the employee in the personnel department
24. Effective internal accounting control over unclaimed payroll checks that are kept by the treasury
department would include accounting department procedures that require
a. Effective cancellation and stop payment orders for checks representing unclaimed wages
b. Preparation of a list of unclaimed wages on a periodic basis
c. Accounting for all unclaimed wages in a current liability account
d. Periodic accounting for the actual checks representing unclaimed wages
25. The most important means of verifying account balances int eh payroll and personnel cycle are:
a. Analytical procedures
b. Test of controls
c. Test of details transaction
d. Test of details of balances
26. Which of the following would not be a justification for an auditor spending very little time
performing tests of transactions in the payroll and personnel cycle?
a. The new payroll bookkeeper has a much better educational background that the former one
b. Employees will detect any underpayments
c. Payroll transactions are uniform and uncomplicated
d. Payroll transactions are extensively audited by government agencies.
27. Because of the lack of available evidence, it is usually difficult for an auditor to discover if an
employee records more time on his or her time card than actually worked. One procedure is
a. To reconcile the total hours paid this period with a previous period
b. To reconcile the total hours paid according to the payroll records with an independent
record of the total hours worked, such as those maintained by production control
c. To reconcile the total hours worked this period with a previous period
d. To reconcile the total hours worked according to the summary payroll report with the total
hours worked as recorded on the time card for the period.
28. Control Objective 1: Recorded payroll payments are for work actually performed by non-fictitious
employees.
Control Objective 2: Existing payroll transactions are recorded.
Control Objective 3: Recorded payroll transaction are for the amount of time actually worked and at
the proper pay rate; withholdings are properly calculated.
a. Completeness, Existence, Valuation
b. Existence, Valuation, Completeness

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c. Existence, Completeness, Valuation
d. Valuation, Completeness, Existence
29. Which of the following is test of controls in auditing payroll cycle?
a. Review the payroll journal, general ledger, an payroll earnings record for large or unusual
amounts
b. Examine time cards for indication of supervisor approval
c. Compare canceled check with payroll journal for name, amount and date
d. Examine canceled checks for proper endorsement.
30. Which of the following is substantive test of transaction in auditing payroll cycle?
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 the transactions rejected by the computer as having invalid employee
numbers.
31. Tracing selected items from payroll register to employee time cards that have been approved by
supervisory personnel provides evidence that
a. Internal controls relating to payroll disbursements were operating effectively
b. Payroll checks were signed by an appropriate officer independent of the payroll preparation
process
c. Only bona fide employee worked and their pay was properly computed
d. Employees worked the number of hours for which their pay was computed.
32. The primary concern in testing payroll-related liabilities is to make sure that
a. Accruals are properly valued
b. Transactions were recorded in the prior period
c. There are no understated or omitted accruals
d. The accruals are not overstated
33. Client’s liability for payroll taxes withheld but not yet disbursed can be tested by comparing the
balances with
a. The payroll journal
b. The payroll tax form prepared in the subsequent period
c. The cash disbursement in the subsequent period
d. All of these
34. The correct cut-off and valuation of accrued salaries and wages
a. Is to calculate the exact hours of pay that were earned in the current period and paid in the
subsequent period
b. Is to compute an approximate proportion of the wages that were earned in the current
period and use that amount as the accrual
c. Allows the client to choose between a and b above each year
d. Depends on company policy, consistently followed.
35. Which of the following would not be a test used when auditing accrued sales commission?
a. Confirm the amount of commissions directly with the employees
b. Test the calculations based on the agreement between client and employees
c. Compare the method of accruing commissions with the previous years
d. Test the mechanical accuracy in the Commissions Expense account at interim dates.
36. Verification of the legitimacy or propriety of year-end unpaid bonuses to officers and employees can
be accomplished by comparing the recorded accrued to the amount _________. This is necessary to
gather evidence regarding _________ assertion on the year-end accrued bonuses.
a. In the expense account; Completeness
b. Use in the prior period; Existence
c. Authorized in the minutes of board meetings; Existence
d. Paid in the subsequent period; Completeness
37. The most important consideration in evaluating the fairness of the amounts accrued for vacation
pay, sick pay and other benefits is
a. The consistent accrual of these liabilities relative to those of the preceding year
b. The actual expense incurred for the prior period
c. The amount expended to date in the current period
d. The profitability of the client which will enable these liabilities to be met.
38. Ordinarily, the most significant assertion relating to accounts payable, in the perspective of a
financial statements auditor is:
a. Completeness
b. Existence
c. Rights and obligation
d. Valuation
39. Which of the following procedures is least likely to be completed before the balance sheet date?
a. Confirmation of receivables
b. Search for unrecorded liabilities
c. Observation of inventory
d. Review of internal accounting control over cash disbursements.
40. An audit of the balance in the accounts payable account ordinarily is not designed to:

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a. Detect accounts payable that 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.
41. Which of the following is the best audit procedure for determining existence of unrecorded
liabilities?
a. Examine confirmation requests returned by creditors whose accounts appear on a
subsidiary trial balance of accounts payable.
b. Examine unusual relationships between monthly accounts payable balances and recorded
purchases
c. Examine sample of invoices a few days prior to and subsequent to year-end to ascertain
whether they been properly recorded
d. Examine selected cash disbursement sin the period subsequent to year-end.
42. Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
a. Examining unusual relationships between monthly accounts payable balances and recorded
cash payments.
b. Reconciling vendors’ statements to the file of receiving reports to identify items received
just prior to the balance sheet date.
c. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine
whether the related payables apply to the prior period.
d. Investigating payables recorded just prior to and just subsequent to the balance sheet date
to determine whether they are supported by receiving reports.
43. Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary
because:
a. This is a duplication of cutoff test
b. Accounts payable balances at the balance sheet date may not be paid before the audit is
completed
c. Correspondence with the audit client’s attorney will reveal all legal action by vendors for
non-payment
d. There is likely to be other reliable external evidence available to support the balances.
44. When confirming accounts payable, the approach is most likely to be on of
a. Selecting the accounts with the larges balances at year-end, plus a sample of other
accounts
b. Selecting accounts of companies with whom the client has previously done the most
business, plus a sample of other accounts
c. Selecting a random sample of accounts payable at year-end
d. Confirming all accounts.
45. A client erroneously recorded a large purchase twice. Which of the following internal control
measures would be most likely to detect this error in a timely and efficient manner?
a. Footing the purchases journal
b. Reconciling vendors’ monthly statements with subsidiary payable ledger accounts
c. Tracing totals from the purchases journal to the ledger accounts
d. Sending written quarterly confirmation to all vendors.
46. The least likely approach in auditing management’s estimate relating to accrued liability is to:
a. Independently develop an estimate of the amount to compare to management’s estimate
b. Review and test management’s process of developing the estimate
c. Review subsequent events or transactions bearing on the estimate
d. Send confirmation relating to the estimate
47. In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to
the supporting documents. Which assertion would this test of controls most likely test?
a. Completeness
b. Existence
c. Valuation
d. Rights

ST: Investing Cycle (Audit of Investments, PPE, Intangibles and Other Non-current Assets)
1. In order to guard against the misappropriation of company-owned marketable securities, which of
the following is the best course of action that can be taken by a company with a large portfolio of
securities?
a. Require that one trustworthy and bonded employee be responsible for access to the
safekeeping are where securities are kept
b. Requirement that employees who enter and leave the safekeeping are sign and record in a
log the exact reason 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 or stockbroker
that will act as a custodial agent.
2. Squid Company had large amounts of funds to invest on a temporary basis. The board of directors
decided to purchase securities and derivatives and assigned the future purchase and sale decisions

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to a responsible financial executive. The best person or persons to make periodic reviews of the
investment activity would be:
a. An investment committee of the board of directors
b. The chief operating officer
c. The corporate controller
d. The treasurer
3. The auditors who physically examine securities should insist that a client representative be present
in order to:
a. Detect fraudulent securities
b. Lend authority to the auditors’ directives.
c. Acknowledge the receipt of securities returned
d. Examination of cash disbursements records
4. The best way to verify the amounts of dividend revenue received during the year is:
a. Recomputation
b. Verification by reference to dividend record books
c. Confirmation with dividend paying companies
d. Examination of cash disbursement records.
5. When an auditor is unable to inspect and count a client’s investment securities until after the balance
sheet date, the bank where the securities are held in a safe deposit box should be asked to
a. verify differences between the contents of the box and the balances in the client’s
subsidiary ledger.
b. provide a list of securities added and removed from the box between the balance-sheet
date and the security count date.
c. confirm that there has been no access to the box between the balance sheet date and the
security-count date.
d. count the securities in the box so the auditor will have an independent direct verification.
6. Which of the following combinations of procedures would an auditor most likely perform to obtain
evidence about fixed asset additions?
a. Inspecting documents and physically examining assets.
b. Recomputing calculations and obtaining written management representations.
c. Observing operating activities and comparing balances to prior period balances.
d. Confirmation ownership and corroborating transactions through inquiries client personnel.
7. An auditor analyses repairs and maintenance accounts primarily to obtain evidence in support of the
audit assertion that all
a. Noncapitalizable expenditures for repairs and maintenance have been properly charged to
expense.
b. Capitalizable costs for property and equipment have not been charged to expense.
c. Noncapitalizable expenditures for repairs and maintenance have been recorded in the
proper period.
d. Expenditures for property and equipment have been recorded in the proper period.
8. Treetop 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.
9. When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant
equipment is not available for inspection. The policy’s absence most likely indicates the possibility of
a (an)
a. insurance premium due but not recorded.
b. deficiency in the coinsurance provision.
c. lien on the plant equipment.
d. understatement of insurance expense.
10. To assure accountability for fixed asset retirements, management should implement an internal
control that includes:
a. Continuous analysis of miscellaneous revenue to locate any cash proceeds form sale of the
plant assets
b. Periodic inquiry of plant executives by internal auditors as to whether any plant assets have
been retired
c. Utilization of serially numbered retirement work orders
d. Periodic observation of plant assets by the internal auditors.
11. Which of the following is an internal control weakness related to factory equipment
a. Checks issued in payment of purchases of equipment are not signed by the controller
b. All purchases of factory equipment are required to be made by the department in need of
the equipment
c. Factory equipment replacements are generally made when estimated useful lives, as
indicated in depreciation schedules, have expired
d. Proceeds from sales of fully depreciated equipment are credited to other income.
12. To strengthen internal control over custody of heavy mobile equipment, the client would most likely
institute a policy requiring a periodic:
a. Increase in insurance coverage

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b. Inspection of equipment and reconciliation with accounting records
c. Verification of liens, pledges and collateralizations
d. Accounting for work orders.
13. The auditors may conclude that depreciation charges are insufficient (understated) by noting:
a. Insured values greatly in excess of book values
b. Large amounts of fully depreciated assets
c. Continuous trade-ins of relatively new assets
d. Excessive recurring losses on assets retirements.
14. Which of the following accounts should be reviewed by the auditors to gain reasonable assurance
that additions to property, plant and equipment are not understated?
a. Depreciation
b. Accounts payable
c. Cash
d. Repairs and maintenance
15. The auditors are most likely to seek information from the plant manager with respect to the
a. Adequacy of the provision for uncollectible accounts
b. Appropriateness of physical inventory observation
c. Existence of obsolete machinery
d. Deferral of procurement of certain necessary insurance coverage.
16. Which of the following statements is not typical of property, plant and equipment as compared to
most current asset accounts?
a. A property, plant and equipment cutoff near year-end has more significant effect on net
income
b. Relatively few transactions occur in property, plant and equipment during the year
c. Auditors normally elect direct substantive testing rather than test of controls in auditing
property, plant and equipment accounts.
d. Property, plant and equipment accounts typically has higher peso value.
17. For the audit of a continuing non-public client, the emphasis for testing for property accounts is on:
a. All transactions resulting in the ending balance
b. Test of controls over disposal
c. Transactions that occurred during the year
d. Performing analytical procedures on beginning balances of the accounts.
18. Audit of which of the following accounts is most likely to reveal evidence relating to recorded
retirements of equipment?
a. Accumulated depreciation
b. Cost of goods sold
c. Purchase returns and allowances
d. Purchase discounts.
19. An effective procedure for identifying unrecorded retirements of equipment is to ________. This is
consistent with the audit objective of gathering evidence to support __________ assertion on PPE.
a. Foot related property; Existence
b. Recalculate depreciation on related equipment; Valuation
c. Select items of equipment in the accounting records and then locate then in the plant;
Existence
d. Select items of equipment while conducting ocular inspections on plants and then locate
them in the accounting records; Completeness
20. If the auditor believes that there is a high likelihood of significant missing permanent assets that are
still recorded on the accounting records, an appropriate procedure is to select a sample from the
assets master file and examine
a. The documents verifying the acquisition
b. The assets
c. All the related journal entries
d. The accumulated depreciation calculations
21. Because failure to record disposal of manufacturing equipment can significantly affect the financial
statements, the search for unrecorded disposals is essential. Which of the following is not a
procedure used to verify disposals?
a. Make inquiries of management and production personnel about the possibility of the
disposal of assets.
b. Review whether newly acquired assets replace existing assets.
c. Test the valuation of fixed assets recorded in prior periods.
d. Review the plant modifications and changes in product line, taxes or insurance coverage.
22. When an asset is sold or disposed of without having been traded in for a replacement asset, the
valuation of the transaction can be verified by examining the related
a. Purchase order and property master file
b. Sales invoice and property master file
c. Sales invoice and merchandise inventory listing
d. Purchase order and merchandise inventory listing
23. Which of the following is not an overall test of the annual provision for depreciation expense?
a. Compare rates used in the current year with those used in the prior years.
b. Test computation of depreciation provisions for a representative number of units

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c. Test deductions from accumulated depreciation for assets purchased during the year
d. Perform analytical procedures
24. Which of the following is the least audit objective when auditing manufacturing equipment and the
related depreciation and accumulated depreciation?
a. To determine whether costs and related depreciation for all significant retirements,
abandonments, and disposals of property have been properly recorded
b. To determine whether the balances in the property accounts, including the amounts carried
forward from the preceding year, are properly stated
c. To determine whether additions represent properties that are installed, constructed or
rented
d. To determine whether the balances in accumulated depreciation accounts are reasonable,
considering expected useful lives of property units and possible net salvage values
25. The emphasis in auditing manufacturing equipment for a continuing audit is on the verification of
a. The balance carried forward in the account form previous period (beginning balance)
b. Current period acquisitions and retirements
c. The balance in the account after the current year’s activities are considered (ending
balance)
d. All of these.
26. Ordinarily, it is unnecessary to test the valuation of fixed assets recorded in prior periods because
a. It will not affect the current valuation
b. They were verified in previous audits
c. The related depreciation calculations for the current period are more important
d. The emphasis of the audit is on the income statement items not he balance sheet items.
27. The failure to capitalize a permanent asset or the recording of an asset acquisition at the improper
amount, affects the balance sheet
a. For the current period only
b. For the depreciable life of the asset
c. Until the firm disposes the asset
d. Forever
28. The failure to capitalize a permanent asset or the recording of an asset acquisition at the improper
amount, affects the income statement
a. For the current period only
b. For the depreciable life of the asset
c. Until the firm disposes the asset
d. Forever
29. The test of details of balances procedure which “physically examine assets” is done to satisfy the
audit objective of:
a. Classification
b. Completeness
c. Cutoff
d. Validity
30. The test of details of balances procedures to “examine vendors’ invoices of closely related accounts
such as repairs and maintenance to uncover items that should be manufacturing equipment” is done
to satisfy the audit objective of:
a. Classification
b. Valuation
c. Cutoff
d. Validity
31. The most common audit test to verify additions to manufacturing equipment is examination of
vendor’s invoices and receiving reports. The appropriate procedure is:
a. Verifying
b. Tracing
c. Dual referencing
d. Vouching
32. It should ordinarily be unnecessary to examine supporting documentation for each addition to
manufacturing equipment, but it is normal to verify:
a. All large transactions
b. All unusual transactions
c. A representative sample of typical additions
d. All of these
33. The erroneous inclusion of transactions that should properly be recorded as assets into accounts
such as repairs expense, lease expense or supplies is a common client error. The auditor should
evaluate the likelihood of these type of error/misclassifications in conjunction with:
a. The test of details of balances
b. The test of details of transactions
c. Test of controls
d. Obtaining an understanding of the internal control structure during the audit planning phase
34. If client fails to record disposals of manufacturing equipment both the original cost of the asset
account the net book value will be incorrect.
a. Both will be overstated indefinitely

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b. The original cost will be overstated indefinitely and the net book value will be overstated
until the asset is fully depreciated
c. The original cost will be overstated indefinitely and the net book value will be understated
indefinitely
d. The original cost will be overstated indefinitely and the net book value will be understated
until the asset is fully depreciated
35. The audit of intangible assets typically involves:
a. Vouching the cost of asset and testing allocation methods.
b. Vouching the cost of assets only.
c. Testing the allocation methods only.
d. Neither is involved in audit of intangibles.
36. A major consideration in verifying the ending balance in permanent assets is the possibility of
existing legal encumbrances. Tests to identify possible legal encumbrances would satisfy the audit
objective for
a. validity.
b. classification.
c. disclosure.
d. mechanical accuracy.
37. Depreciation expense is one of the few expense accounts that is not verified as apart of
a. tests of controls.
b. tests of transactions.
c. test of details of balances.
d. analytical procedures.
38. The most important objective for depreciation expense is proper
a. valuation.
b. classification.
c. cutoff.
d. disclosure.
39. Occasionally, changing circumstances may necessitate a revaluation of the useful life of an asset.
When this occurs, it involves a change in
a. accounting estimate rather than a change in accounting principle.
b. accounting principle rather than a change in accounting estimate.
c. both accounting principle and accounting estimate.
d. neither accounting principle nor accounting estimate.
40. In verifying accumulated depreciation, the credits to accumulated depreciation are verified as part
of the audit of depreciation expense, whereas the debits are normally tested as a part of the audit
of
a. asset acquisitions.
b. capital acquisitions.
c. disposal of assets.
d. accumulated depreciation.
41. One typical difference between the asset Prepaid Expenses and other assets, such as Accounts
Receivable and inventory, is the immateriality of the former in many audits. Because of this
immateriality, frequently the only audit procedure necessary to perform is
a. tests of control.
b. tests of transactions.
c. tests of details of balances.
d. analytical procedures.

ST: Financing Cycles (Audit of Non-trade Liabilities and Stockholders’ Equity)


1. Which of the following is least likely to be an audit objective for debt?
a. Determine the existence of recorded debt.
b. Establish the completeness of recorded debt.
c. Determine that the client has rights to receive proceeds relating to the redemption of debt.
d. Determine that the valuation of debt is in accordance with financial reporting standards.
2. The auditors would be most likely to find unrecorded long-term liabilities by analyzing:
a. Interest payments.
b. Discounts on long-term liabilities.
c. Premiums on long-term liabilities.
d. Recorded long-term liability accounts.
3. A likely reason that consideration of client compliance with debt provisions is important to an audit is
that violation of such debt provisions may affect the total recorded.
a. Number of debt restrictions.
b. Current liabilities.
c. Long-term assets.
d. Share capital.
4. An auditor’s program to examine long-term debt most likely would include steps that require
a. comparing the carrying amount of the debt to its year-end market value.
b. correlating interest expense recorded for the period with outstanding debt.
c. verifying the existence of the holders of the debt by direct confirmation.
d. inspecting the accounts payable subsidiary ledger for unrecorded long-term debt.
5. The auditors can best verify a client’s bond sinking fund transactions and year-end balance by:

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-701
PREWEEK: RAP, TOC & ST (ALL TRANSACTION CYCLES)
a. Recomputation of interest expense, interest payable, and amortization of bond discount or
premium.
b. Confirmation with individual holders of retired bonds.
c. Confirmation with the bond trustee.
d. Examination and count of the bonds retired during the year.
6. The auditor’s program for the examination of long-term debt should include steps that require the:
a. Verification of the existence of the bondholders.
b. Examination of copies of debt agreements.
c. Inspection of the accounts payable subsidiary ledger.
d. Investigation of credits to the bond interest income account.
7. In the continuing audit of a manufacturing company of medium size, which of the following areas
would you expect to require the least amount of audit time?
a. Owner’s equity.
b. Revenue.
c. Assets.
d. Liabilities.
8. Which of the following is most likely to be an audit objective in the audit of owner’s equity?
a. Establish that recorded owner’s equity incudes all long-term debt and equity balances.
b. Determine that ordinary share is valued at current market value.
c. Determine that the presentation and disclosure of owner’s equity is appropriate.
d. Determine that the existence of recorded owner’s equity is in conformity with equity
accounting rule valuations.
9. A transfer agent and a registrar are most likely to provide the auditor with evidence on:
a. Restrictions on the payment of accounts payable.
b. Shares issued and outstanding.
c. Preferred stock liquidation value.
d. Transfers occurring between management and related parties.
10. The audit procedure of confirmation is least appropriate with respect to:
a. The trustee of an issue of bonds payable.
b. Holders of ordinary shares.
c. Holders of notes receivable.
d. Holders of notes payable.
11. An auditor is most likely to trace treasury stock purchase transactions to the:
a. Numbered stock certificates on hand.
b. Articles of incorporation.
c. Year’s interest expense.
d. Minutes of the audit committee
12. All corporate share capital transactions should ultimately be traced to the:
a. Minutes of the board of directors.
b. Cash receipts journal.
c. Cash disbursements journal.
d. Numbered stock certificates.
13. During an audit of an entity’s stockholders’ equity accounts, the auditor determines whether there
are restrictions on retained earnings resulting from loans, agreements, or law. This audit procedure
most likely is intended to verify management’s assertion of
a. existence or occurrence.
b. completeness.
c. valuation or allocation.
d. presentation and disclosure.
14. When a client company does not maintain its own stock records, the auditor should obtain written
confirmation from the transfer agent and registrar concerning.
a. restrictions on the payment of dividends.
b. the number of shares issued and outstanding.
c. guarantees of preferred stock liquidation value.
d. the number of shares subject to agreements to repurchase.
15. An auditor should trace corporate stock issuances and treasury stock transactions to the
a. numbered stock certificates.
b. articles of incorporation.
c. transfer agent’s records.
d. minutes of the board of directors.
16. An audit program for the examination of the retained earnings account should include a step that
requires verification of the
a. market value used to charge retained earnings to account for a two-for-one stock split.
b. approval of the adjustment to the beginning balance as a result of a write down of an
account receivable.
c. authorization for both cash and stock dividends.
d. gain or loss resulting from disposition of treasury shares.

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