AUDITING THEORY

May 1988
1.

It is carried out by a contracted CPA who after

adequate examination and investigation offers a
professional opinion as to whether the concern's
financial statements present fairly the results of
operation and the financial condition of the enterprise.
a. Internal auditing.
b. Special investigation.
c. Independent auditing.
d. Government auditing.

2.

A comprehensive and constructive examination of the

organization structure of a company, institution or
branch of government of any component thereof, its
plans and objectives, its means of operation and its use
of human and physical facilities to reveal defects or
irregularities and to indicate possible improvements is
called :
a. Financial audit.
b. Management audit.
c. Government audit.
d. Balance sheet audit.

3.

The criteria by which the quality of performance of

auditing engagements are measured. These indicate
levels of performance which must be attained for the
completion of a satisfactory audit and these relate to
the personal qualifications of the auditor and to the
exercise of his judgment in performing the examination
and in rendering his report. These are called the :
a. Generally accepted accounting principles.
b. Generally accepted auditing standards.
c. Cost standards.
d. Standards of field work.

4.

An independent audit :
a. Supports an internal audit.

5.

b. Negates an internal audit.

c. Duplicates an internal audit.
d. Complements an internal audit.
It comprises the plan of organization and all of the
coordinate methods and measures adopted within a
business to safeguard its assets, check the accuracy
and reliability of its accounting data, promote
operational efficiency and encourage adherence to
prescribed managerial policies.
a. Internal audit.
b. Internal control.
c. Cost control.
d. Accounting control.

6.

When an independent auditor is not satisfied with the

extent of his audit, the application or interpretation by
the client of an accounting principle, or with any other
matter about his work and for a reason personally
known to him, provided that, the exceptions of the
auditors are not sufficiently material to nullify an
opinion on the financial statements taken as a whole,
the auditor should render a :
a. Piecemeal opinion.
b. Adverse opinion.
c. Denial opinion.
d. Qualified opinion.

7.

The process of analyzing subsidiary ledger accounts of

accounts receivable to determine those accounts which
are current, past due, uncollectible, etc., is called :
a. Credit check.
b. Analysis.
c. Reconciliation.
d. Aging.

8.

When based on his examination, an independent

auditor thinks that the financial statements are not
fairly presented and he fails to persuade the client to
make the adjustments necessary to correct the defect,

9.

and, when the exception as to fairness to presentation

or conformity with generally accepted accounting
principles are material, the auditor should express :
a. An unqualified opinion.
b. A qualified opinion.
c. A denial of opinion.
d. An adverse opinion.
Errors arousing suspicion of fraud should be given
greater attention than other errors. This is an example
of the application :
a. Consistency.
b. Materiality.
c. Reliability of evidence.
d. Relative risk.

10.

For effective internal control purposes, the employees

assigned to mail signed checks should be :
a. The secretary.
b. The cashier.
c. Accounts payable bookkeeper.
d. Payroll clerk.

11.

The date of the management representation letter

should coincide with the :
a. Date the audit was started.
b. Date of the audit report.
c. Date of the engagement agreement.
d. Balance sheet date.

12.

A Corporation submitted its financial statements to the

auditor on February 1, 1987. The auditor started the
fieldwork on February 8, 1987 and completed such
work in the client's office on March 30, 1987. The audit
report was finished on April 10, 1987. The audit report
should be dated :
a. February 1, 1987.
b. February 8, 1987.
c. March 30,1987.
d. April 10, 1987.

13.

To provide for the greatest degree of independence in

the performance of internal auditing functions, an
internal auditor should report to :
a. Corporate stockholders.
b. Board of directors.
c. Vice President for Finance.
d. Corporate controller.

14.

The plan of organization and procedures that relate to

the safe guarding of assets and the reliability of records
are called :
a. Accounting controls.
b. Administrative controls.
c. Application controls.
d. Cost control.

15.

The plan of organization and procedures that are

concerned mainly with the operational efficiency and
adherence to managerial policies :
a. Accounting controls.
b. Administrative controls.
c. Application controls.
d. Cost controls.

16.

Specific tasks performed by EDP that provide

reasonable assurance that the recording, processing
and reporting of data are properly performed :
a. Accounting controls.
b. Application controls.
c. Cost control.
d. Administrative controls.

17.

Which of the following criteria is unique to the

auditor's attest function?
a. General competence.
b. Familiarity with the particular industry of which his
client is a part.
c. Dues professional care.

d. Independence.
18.

Its consists of the file of evidence obtained during the

engagement, the details of the methods and
procedures the auditor followed and the conclusions he
has reached concerning the object of the audit
engagement :
a. Schedules.
b. Inventory listing.
c. Flowcharts.
d. Working papers.

19.

A sale is usually recognized for accounting purposes:

a. Upon signing of the contract to sell.
b. Upon receipt of cash from the buyer.
c. Upon the delivery of goods or services.
d. As of the date of the sales invoice.

20.

The board of directors of Queens Supermarkets

declared a 20% cash dividend at its meeting on March
12, 1987 payable on May 15, 1987 to stockholders on
record as of April 15, 1987. The dividend declaration
should be taken up in the company's financial
statement of :
a. March 12, 1987.
b. May 15, 1987.
c. April 15, 1987.
d. December 31, 1987.

21.

In government auditing, its basic objective is to provide

assurance that (1) expenditures are not upon their
face, unreasonable and extravagant, (2) sufficient
funds are available to enable encumbrance of the
appropriation or payment of the voucher, (3) there has
been compliance with budgetary, legal, civil service
and other requirements :
a. Post-audit.
b. Pre-audit.
c. Performance audit.

d. Compliance audit.
22.

A practical and useful device for investigation and

recording the auditor's inquiries into a system of
internal accounting control and internal check and
furnishes a basis foe measuring the performance of the
system under review :
a. Test of transactions.
b. Flowcharts.
c. Internal control questionnaire.
d. Working papers.

23.

A graphic presentation of each part of the company's

system of internal controls, it provides visual assistance
in developing a coordinated plan of organization and
procedures and its use permits simplification of the
descriptive material included in procedures and
practice manuals :
a. Working papers.
b. Diagram.
c. Flowcharts.
d. Questionnaires.

24.

The allocation of authority and work in such a manner

as to afford checks on the routine transactions of dayto-day work by means of the work of one person being
proved independently by another, or the work of a
person being complementary to that of another.
a. Pre-audit.
b. Post-audit.
c. Internal audit.
d. Internal check.

25.

Making the financial statements indicate a more

favorable position by giving effect to transactions in a
period other than that in which these actually occurred
is called :
a. Giving effect statement.
b. Financial projections.

c. Pro-forma balance sheet.

d. Window dressing.
26.

It is an exploratory and critical review by an

independent public accountant of the underlying
controls an accounting records of a business enterprise
that leads to an opinion of the propriety of the financial
statement of that enterprise :
a. Operations audit.
b. Management audit.
c. Government auditing.
d. Financial auditing.

27.

A technique for regularly and systematically appraising

a unit or function and its effectiveness against
corporate and industry standards with the objective of
assuring management that its aims are being carried
out and/or identifying conditions capable of being
improved :
a. Substantive tests.
b. Compliance tests.
c. Financial tests.
d. Operations auditing.

28.

It is done to inflate the cash position or cover the theft

of cash by depositing at the end of the accounting
period a check drawing on one bank account in another
bank account without making the necessary deduction
in the balance of the first bank :
a. Forgery.
b. Lapping.
c. Embezzlement.
d. Kiting.

29.

An examination of the underlying evidence in support

of the transaction in order to prove authority,
ownership, existence and accuracy is called :
a. Test checking.
b. Confirmation.

c. Vouching.
d. Analysis.
30.

Under this method of billing a client, the external

auditors charges on the basis of time spent by
principals, supervisors, seniors and juniors at
predetermined rates agreed upon with the client :
a. Maximum fee basis.
b. Per diem basis.
c. Flat sum basis.
d. Retainership basis.

31.

From the standpoint of good procedural control,

distributing payroll checks to employees is best
handled by the :
a. Personnel dept.
b. Treasurer's dept.
c. President's office
d. Accounting dept.

32.

The computer process where data processing is

performed concurrently with a particular activity and
the results are available soon enough to influence the
course of action being taken or the decision being
made is called :
a. Random access sampling.
b. Integrated data processing.
c. On-line real-time system.
d. Batch processing computer system.

33.

An example of application controls in Electronic Data

Processing is :
a. Controls over access to equipment.
b. Controls over input-output data.
c. Controls over access to data files.
d. Test Decks.

34.

The practice of auditing firms to spread work

throughout the year by carrying out as many auditing

procedures as practicable before the balance sheet

date, in order to minimize the load during the peak
period. This is called :
a. Test of recorded transactions.
b. Confirmation of receivable and payables.
c. Observation and test-check of inventories.
d. Interim work.
35.

The grandfather-father-son approach to providing

protection for computer files is a concept that is most
often found in :
a. On-line, real-time systems.
b. Magnetic tape systems.
c. Fortran computer language.
d. Data based systems.

36.

A well established CPA firm establishes quality control

policies and procedures for deciding whether or not to
accept or continue serving a client. The primary
purpose for establishing such quality control is :
a. To enable the auditor to attest to the reliability of a
client.
b. To minimize the likelihood of associating with clients
whose management lack integrity.
c. To comply with standards established within the
industry.
d. To lessen exposure to litigation for failure to detect
fraud or embezzlement.

37.

A CPA tests sales transaction. One step is tracing a

sample of sales invoices to debits in the accounts
receivable subsidiary ledger. Upon the basis of this
step, he can form an opinion as to whether :
a. All sales have been recorded.
b. All debit entries in the accounts receivable
subsidiary ledger are properly supported by sales
invoices.
c. Each sales invoice represents bonafide sales.

d. Recorded sales invoices are properly posted to

customers accounts.
38.

Before relying on the system of internal control, the

auditor obtains a reasonable degree of assurance that
the internal control procedures are in use and operating
as planned. The auditor obtains this assurance by
performing :
a. Substantive tests.
b. Transaction tests.
c. Compliance tests.
d. Overview process.

39.

It is a statement of opinion based upon convincing

evidence by an independent, competent and
authoritative person concerning the conformance, in
material
respects,
of
accounting
information
communicated by an entity with established criteria :
a. Performance auditing.
b. Operations auditing.
c. Government auditing.
d. Attestation.

40.

In view of practicability constraints, differences in

specific audit objective and in other circumstances, the
comprehensive audit is not intended to be applied in its
entirely to all audit engagements. It was devised to
include one or two combinations of the parts of an
audit to adopt to the particular circumstances exiting
during the engagement. It is called:
a. Semi-comprehensive audit.
b. Compliance audit.
c. Authentication audit.
d. Variable scope audit.

41.

There are landmark legal cases in the U.S. involving the

liability of auditors to people for whom an audit was
explicitly prepared as well as to third parties in case of

fraud. All the cases mentioned hereunder fall under this

except :
a. The Ultramares case - erroneous statement of a
bankrupt company.
b. The McKesson and Robins case - no-existent
receivables and fictitious inventories.
c. Continental Vending Machine Corp. - Inappropriate
collaterals not disclosed in the financial statements.
d. Rhode Island Hospital case - Disclaimer of opinion
by CPA.
42.

During the course of an audit engagement, the CPA

discovers specific circumstances that led him to the
belief that employee fraud may have occurred. In such
a case the CPA should :
a. Tactfully approach the suspected employee and
attempt to resolve the matter with him.
b. Extend his audit procedures to determine whether
fraud has in fact occurred.
c. Ascertain that the client understand that the
ordinary examination is not primarily designed to
disclose fraud, defalcation etc.
d. After advising the client of his findings, suggest that
an investigation has to be made to discover whether
fraud has in fact occurred.

43.

A manufacturing company has consistently followed

the policy of valuing inventory at the total of labor,
materials and variables cost of manufacturing
overhead. Fixed manufacturing expenses are charged
as period costs in the period they were incurred. These
method of valuation was fully disclosed in the
statements. The short form report in this situation
a. Will contain a disclaimer of opinion for nonconformity with generally accepted principles of
accounting.
b. Will contain an unqualified opinion since there was
adequate disclosure.

c. Will contain a unqualified opinion because of lack

conformity with generally accepted principles of
accounting the amount of which is not very
material.
d. Will contain a disclaimer of opinion because there is
insufficient competent evidential matter to form an
opinion.
44.

Subsequent to the date of the financial statements, a

CPA learned of a big loss of the company due to a fire
which will not be compensated by insurance. The client
did not disclose the loss caused by the fire even if the
fire was reported in detail in the newspapers. The CPA
in his short form report should
a. Make no mention of the fire loss since it happened
after the Balance sheet date was widely publicized
in the newspape5rs.
b. The fire loss need not be disclosed since it might
create doubts as to the cause of the fire.
c. The CPA should include the information in his report
to comply with the auditing standard of disclosure.
d. If the client is unwilling to disclosed the fire loss, the
CPA should withdraw from the engagement.

45.

In auditing the statements of a foreign operation that is

integral to the operations of a parent company in the
Philippines, all monetary except those covered by
forward exchange contracts should be
a. Translated at the closed rate of exchange.
b. Translated at the spot rate at the beginning of the
business.
c. Translated at the forward rate agreed upon.
d. Translated at the rate at time of transaction.

46.

It is a procedures which consists of bank reconciliation

at the beginning and the end of the test periods and
reconciliation of the receipts and disbursements per
books with the corresponding bank debits and credits
for the test period :

47.

a. Kiting.
b. Expectation Gap.
c. Cash reconciliation.
d. Proof of Cash.
Where appreciation of fixed assets has been recorded
on the books of a business, the CPA auditing the
company should make sure that depreciation should be
based on :
a. Original cost of the fixed assets.
b. Appraised value of the fixed assets.
c. Book value of the fixed assets.
d. Depreciated value of the fixed assets.

48.

Test data, integrated test data and parallel simulation

each require an auditor to prepare data and computer
programs. CPA's who lack either the technical expertise
or time to prepare programs should request from the
manufacturers or EDP consultants for :
a. The program Code.
b. Flowchart checks.
c. Generalized Audit Software.
d. Application controls.

49.

Information given by a client is shown in writing where

pertinent,
it
provides
evidence,
avoids
misunderstanding and reminds the client of his primary
responsibility for the correctness of the statements.
a. Audit questionnaire.
b. Letter of engagement.
c. Inventory certificate.
d. Representation letter.

50.

When auditing in an EDP environment, the study and

evaluation of accounting controls by the CPA focus on :
a. The adequacy of controls over transactions.
b. The transactions themselves.
c. The source documents.
d. The EDP output.