AUDITING THEORYOctober 1987

1. The CPA profession deemed it necessary to establish a Code of Ethics and a mechanism to its enforcement because:a. An ethical code that stresses the CPA's

responsibility to clients and colleagues is a prerequisite to success.

b. A requirement of law provides that CPAs establish a code of ethics.

c. Acceptance of responsibility to the public is a distinguishing mark of a profession.

d. The establishment of flexible ethical standards provides self-protection for CPAs.

2. The third general auditing standard should mean that a CPA who accepts an engagement has a duty to perform:a. As a professional possessed with the degree of skills

customarily held by others in the profession.b. With necessary diligence and without fault or error.c. As a professional who will assume responsibility for

damages caused by his error of judgement.d. None of the above.

3. It is not proper for an auditor to refer to a limitation in the scope of his audita. In the opinion paragraph of his audit report.b. In a note to the financial statements.c. In the explanatory paragraph of the audit report.d. In the first paragraph of the audit report.

4. An auditor evaluates the internal control system of a prospective client in order to :a. Determine proper functional segregation of duties.b. Determine the degree of compliance tests to be

performed.

c. Ascertain whether defalcations might have been perpetrated.

d. Determine the extent of audit procedures to be applied.

5. Which of the following actions is usually a test of compliance?a. Count of negotiable securities.b. Observation of physical inventory count to detect

defective merchandise.c. Analysis of charges to an account.d. Observation of security guards inspecting outgoing

company vehicles.

6. In which of the following ledger accounts will tests of procedures be more properly applicable?a. Delivery equipment.b. Notes payable.c. Marketable securities.d. Purchases.

7. A sales cutoff test of billings complements the verification of:a. Whether sales returns were issued credit memos.b. Whether cash sales were deposited intact the

following banking day.c. Whether accounts receivable were properly stated.d. Whether sales allowances were booked in the

proper accounting period.

8. In financial statements footnotes should not be used to :a. Correct an improper financial statement

presentation.b. Portray substantial variance between book and tax

income.c. Describe a change in accounting principles.d. Show the bases used in valuing principles.

9. Materiality is least important to an external auditor in determining the :a. Effect on independence of his direct financial

interest in the client.b. Extent of his audit of certain accounts.c. Effects of exceptions upon his opinion in the audit

report.d. Specific transactions which should require a detailed

review.

10. Of the following types of documentary evidence, which should you as auditor accept to be most reliable?a. A client's sales invoice supported by an independent

trucker's delivery receipt.b. A client's check bearing the payee's endorsement

and included in the bank statement mailed directly to you.

c. An accounts payable balance confirmation mailed by and returned directly to you.

d. An analysis worksheet prepared by the treasures and reviewed by the controller of your client.

11. It would not be appropriate to address an auditor's report to one of the following:a. The stockholders of a company whose financial

statements you have examined.b. A third person, even if he is client the client who

engaged you to examine a non-client corporation.c. The president of the company whose financial

statements you examined.d. The corporation whose financial statements you

examined.

12. One of GAD's suppliers has a brother working as accounts payable clerk of GAD. Often this supplier will bill GAD twice for the same delivery. His brother removes the receiving report supporting the first invoice and uses it as attachment of the second

invoice. To forestall this activity, the most effective procedure is to:a. Make sure receiving reports are pre-numbered.b. Have checks signed with dual signatures.c. Prevent the accounts payable clerk from receiving

returned signed checks previously mailed.d. Cancel vouchers and supporting papers when check

payments are made.

13. In a balance sheet audit, all capital stock transactions are finally traced to the :a. Cash receipts journal.b. Numbered certificates of stocks.c. Documentary stamps record.d. Board of Director's minutes of meetings.

14. A former auditor is requested by a client to re-issue a prior period report on financial statements. Assuming all the necessary have been performed, the former auditor should:a. Cancel the old date of the report.b. Retain the date of the previous report.c. Use the date of reissuing the report.d. Use both the old and the new date.

15. Besides expressing an opinion on the fairness of financial statement presentation, a government auditor normally includes audit of effectiveness, compliance, efficiency as well as:a. Internal control.b. Economy.c. Risk evaluation.d. Mathematical accuracy.

16. A long-form report normally includes the basic financial statements but would exclude :a. Details of items in the basic statements.b. Explanatory comments.c. Exceptions to the standard reports.

d. Statistical information.

17. A CPA firm offers management advisory services to clients. Its primary purpose is to :a. Furnish professional advice and assistance which

will enable the client to improve operations.b. Keep the CPA firm competitive with other firms.c. Establish the firm as a consultant, thus ensuring its

future expansion and growth.d. Permit the firm's staff members to acquire expertise

in other areas of practice.

18. A customer erroneously ordered Item No. 86321 rather than Item No. 83621. When this order is processed, the vendor's EDP department would identify the error with what type of control?a. Key verifying.b. Self-checking digit.c. Batch total.d. Item inspection.

19. Normally the auditors are hired before the end of a fiscal year. Which procedures would be least likely to be done before the balance sheet date?a. Physical inventory count.b. Search for unrecorded liabilities.c. Accounts of receivable confirmation.d. Review of internal control.

20. You were engaged to conduct an annual examination for the fiscal year ended December 31, 1987. Because of the expected holiday, you were able to convince your client to take a complete a physical inventory, in which you were present, on October 15. Perpetual inventory records are kept and the client considers a sale to be made in the period in which goods are shipped. You had a sales cut-off test worksheet prepared. Which item among those listed below will not require an adjusting entry to reconcile the client's detailed inventory record with physical inventory?

Date Transaction Date InventoryGoods Shipped Recorded as Sale Control is

Crediteda. October 31 November 2 October 31b. November 2 October 31 October 31c. October 14 October 16 October 16d. October 10 October 19 October 12

21. A CPA has given the proper tax recommendations to a client.If later this advice is affected by changes in the tax law, the CPA is called upon toa. Advise the client of the change if he is obliged to do

so under their engagement.b. Notify the Commissioner of Internal Revenue.c. Take no further action if the client has already

implemented his advice and does not ask again.d. Notify the client upon learning of any change.

22. As envisioned in the CPA's Code of Ethics, the following situation most completely describes how independence is to be defineda. Accepting the duty to perform as a professional in

accordance with the code.b. Avoiding the appearance of having material interest

in the affairs of the client.c. Having the capacity to act with integrity and

objectivity.d. Performing an audit with the interest of the public

uppermost in his mind. 23. The sampling method that is most useful when testing

for compliance is :a. Stratified random sampling.b. Judgment sampling.c. Attribute sampling.d. Unrestricted random sampling.

24. A control total is desired to be computed for a payroll EDP application. Which of the following data items would best constitute a hash total?a. Number of employees.b. Number of hours worked.c. Amount of gross pay.d. Department number.

25. A CPA is expected to maintain the confidentiality of information obtained during his audit, excepta. Under the rule that independence may not be

impaired.b. Where the client expressly agrees.c. When the security of the state so demands.d. In defense of himself when sued by the client.

26. Letters of representation are normally secured by an auditor from clients except as regards a. Prepaid insurance.b. Merchandise inventories.c. Accounts payable.d. Receivables.

27. Errors emanating from suspicion of fraud are accorded

more emphasis than other types of errors. This emphasis is an example of applying the criterion ofa. Materiality.b. Relative risk.c. Audit judgment.d. Dual-purpose testing.

28. An auditor would most likely object to the asset recognition of the following item listed among the assets of Norgood Corporation.a. Research and development costs billable to

customers.b. Goodwill arising from land appraisal.c. Franchise payments for a concession.d. Excess of cost over book value of patents.

29. To raise the standards of the profession, PD No. 692 requires that the CPA profession be integrated under rules to be established bya. The Philippine Institute of CPAs.b. The Board of Accountancy.c. The Professional Regulation Commission.d. The Government Association of CPAs.

30. Evidential matter is normally considered sufficient when :a. There is enough of it to provide a reasonable basis

for expressing an opinion on financial statements.b. It has been determined to be relevant, objective and

free from bias.c. It has been obtained through random selection.d. It is proved to be competent.