SUBSTANTIVE AUDIT PROCEDURES AND EVIDENCE

1. An auditor most likely would limit substantive audit tests of sales transactions when control
risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor
has already gathered evidence supporting
A. Opening and closing inventory balances.
B. Cash receipts and accounts receivable
C. Shipping and receiving activities.
D. Cutoffs of sales and purchases.

2. A cash shortage may be concealed by transporting funds from 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.

3. Confirmation is most likely to be a relevant form 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.

4. Tracing recorded sales transactions in the sales journal to the shipping documents (bills of
lading) provides evidence about the: 
A. Completeness of recording of sales transactions.
B. Occurrence of sales transactions.
C. Billing of all sales transactions.
D. Presentation of payables.

5. Which of the following might be detected by an auditor’s review and analysis of the entity’s
sales cutoff test procedures?
A. unrecorded sales discounts
B. inflated sales for the year
C. lapping of accounts receivable
D. excessive goods returned for credit

6. The auditors' count of the client's cash should be coordinated to coincide with the: 
A. Consideration of the internal controls with respect to cash.
B. Close of business on the balance sheet date.
C. Count of investment securities.
D. Count of inventories.

7. What type of error is the CPA most likely to discover when he/she examines all shipping
reports dated in January of 20X1, shipped FOB shipping point, which were recorded in
December of 20X0 as credit sales? 
A. Accounts receivable are overstated at December 31, 20X0.
B. Accounts receivable are understated at December 31, 20X0.
C. Operating expenses are overstated for the 12 months ended December 31, 20X0.
D. Sales returns and allowance are overstated at December 31, 20X0.

8. An audit basically consists of having the auditor form an opinion regarding management's
financial statement assertions. The auditor therefore develops general and specific program steps
to apply to the accounts and transactions. In a particular case, s/he might do this by: 
A. Tracing sales invoices to shipping documents to tests the completeness of reported sales.
B. Tracing shipping documents to sales invoices to test the occurrence of reported sales.
C. Tracing sales invoices to shipping documents to test the occurrence of reported sales.
D. Tracing sales invoices to shipping documents to test the completeness of recorded accounts
receivable.
 

9. In which of the following circumstances would the use of the negative form of accounts
receivable confirmation most likely be justified?
A. A substantial number of accounts may be in dispute and the accounts receivable balance
arises from sales to a few major customers.
B. A substantial number of accounts may be in dispute and the accounts receivable balance arises
from sales to many customers with small balances.
C. A small number of accounts may be in dispute and the accounts receivable balance arises
from sales to a few major customers.
D. A small number of accounts may be in dispute and the accounts receivable balance arises
from sales to many customers with small balances.

10. An auditor has accounted for a sequence of inventory tags and is now going to trace
information on a representative number of tags to the inventory summary sheets. Which assertion
does this procedure relate to most directly? 
A. Completeness.
B. Existence.
C. Legality.
D. Valuation.

11. If the auditor is unable to attend physical inventory counting due to unforeseen
circumstances, he or she
A. shall observe the physical count on an interim date, without performing audit procedures on
intervening transactions, if control risk is low.
B. shall observe the physical count on an interim date if control risk is low, and perform audit
procedures on intervening transactions.
C. Is never allowed to perform inventory count observation on an interim date.
D. shall automatically modify the audit opinion due to scope limitation.
12. An auditor most likely would make inquiries of production and sales personnel concerning
possible obsolete or slow-moving inventory to support management’s financial statement
assertion of
A. Valuation.
B. Rights.
C. Existence.
D. Presentation.

13. Which of the following procedures would an auditor most likely perform in searching for
unrecorded liabilities?
A. Trace a sample of accounts payable entries recorded just before year-end to the unmatched
receiving report file.
B. Compare a sample of purchase orders issued just after year-end with the year-end accounts
payable trial balance.
C. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and
vendor invoices.
D. Scan the cash disbursements entries recorded just before year-end for indications of unusual
transactions.

14. Auditor confirmation of accounts payable balances at the balance sheet date may be
unnecessary because
A. This is a duplication of cutoff tests.
B. Accounts payable balances at the balance sheet date may not be paid before the audit is
completed.
C. Correspondence with the audit client’s attorney will reveal all legal action by vendors for
nonpayment.
D. There is likely to be other reliable external evidence to support the balances.

15. In auditing accounts payable, an auditor’s procedures most likely would focus primarily on
management’s assertion of
A. Existence.
B. Presentation and disclosure.
C. Completeness.
D. Valuation.

16. Which of the following best describes the auditors' approach to the audit of accrued
liabilities? 
A. Test computations.
B. Confirmation.
C. Observation.
D. A low planned assessed level of control risk.

17. In testing for unrecorded retirements of equipment, an auditor might. 

A. Select items of equipment from the accounting records and then attempt to locate them during
the plant tour.
B. Compare depreciation expense with the prior year's depreciation expense.
C. Trace equipment items observed during the plant tour to the equipment subsidiary ledger.
D. Scan the general journal for unusual equipment retirements. 

18. A plant manager would be most likely to provide information on which of the following? 
A. Adequacy of the provision for uncollectible accounts.
B. Appropriateness of physical inventory valuation techniques.
C. Existence of obsolete inventory.
D. Deferral of certain purchases of office supplies.

19. Which of the following best describes the auditors' approach to the audit of the ending
balance of property, plant and equipment for a continuing nonpublic client? 
A. Direct audit of the ending balance.
B. Agreement of the beginning balance to prior year's working papers and audit of significant
changes in the accounts.
C. Audit of changes in the accounts since inception of the company.
D. Audit of selected purchases and retirements for the last few years.

20. Which of the following is used to obtain evidence that the client's equipment accounts are not
understated? 
A. Analyzing repairs and maintenance expense accounts.
B. Vouching purchases of plant and equipment.
C. Recomputing depreciation expense.
D. Analyzing the miscellaneous revenue account.

21. Which of the following is a customary audit procedure for the verification of the legal
ownership of real property? 
A. Examination of correspondence with the corporate counsel concerning acquisition matters.
B. Examination of ownership documents registered and on file at a public hall of records.
C. Examination of corporate minutes and resolutions concerning the approval to acquire
property, plant and equipment.
D. Examination of deeds and title guaranty policies on hand.

22. An auditor analyzes 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 recorded in the proper
period.
B. Expenditures for property and equipment have been recorded in the proper period.
C. Noncapitalizable expenditures for repairs and maintenance have been properly charged to
expense.
D. Expenditures for property and equipment have not been charged to expense.
23. The most likely technique for the current year audit of goodwill which was acquired three
years ago by a continuing audit client: 
A. Confirmation.
B. Observation.
C. Recomputation.
D. Inquiry.

24. In establishing the existence and ownership of a long-term investment in the form of publicly
traded stock, an auditor should inspect the securities or
A. Correspond with the investee company to verify the number of shares owned.
B. Inspect the audited financial statements of the investee company.
C. Confirm the number of shares owned that are held by an independent custodian.
D. Determine that the investment is carried at the lower of cost or market.

25. 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 any 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.

26. An entity leased an asset and appropriately used PPFRS 16. The auditor should determine
A. whether the sum of the minimum lease payments equals the fair value of the property
B. that the cost recorded by the entity is the cost of the property to the lessor
C. that the discount rate used in calculating the present value of the lease payments is the
entity’s weighted average cost of capital
D. whether the interest rate used in computing the present value of the minimum lease
payments is the interest rate implicit in the lease.

27. An entity leased an asset and appropriately used PPFRS 16. What is the first step of the
auditor?
A. Determine whether the sum of the minimum lease payments equals the fair value of the
property
B. Determine the present value of the minimum lease payments
C. Determine whether the entity used the appropriate discount rate
D. Determine whether the contract is a lease or contains a lease

28. Which of the following sets of information does an auditor usually confirm on one form?
A. Accounts payable and purchase commitments.
B. Cash in bank and collateral for loans.
C. Inventory on consignment and contingent liabilities.
D. Accounts receivable and accrued interest receivable.

29. When a CPA observes that the recorded interest expense seems to be excessive in relation to
the balance in the bonds payable account, the CPA might suspect that
A. Discount on bonds payable is understated.
B. Bonds payable are understated.
C. Bonds payable are overstated.
D. Premium on bonds payable is overstated.

30. An auditor most likely would inspect loan agreements under which an entity’s inventories are
pledged to support management’s financial statement assertion of
A. Presentation and disclosure.
B. Valuation or allocation.
C. Existence or occurrence.
D. Completeness.

31. In auditing long-term bonds payable, an auditor most likely would

A. Perform analytical procedures on the bond premium and discount accounts.
B. Examine documentation of assets purchased with bond proceeds for liens.
C. Compare interest expense with the bond payable amount for reasonableness.
D. Confirm the existence of individual bond holders at year-end.

32. Which of the following most likely would approve the issuance of notes payable? 
A. Controller.
B. Payroll.
C. Personnel.
D. Treasurer.

33. A bond trust indenture is the contractual agreement between the bondholders and issuing
company. In an audit of bonds payable, an auditor expects the trust indenture to include
A. Effective yield of the bonds issued
B. Issuing company’s debt-to-equity ratio at the time of issuance
C. Forecasted debt-to-equity ratio of the issuing company
D. Interest rate and interest payment dates

34. An auditor usually obtains evidence of stockholders’ equity transactions by reviewing the
entity’s
A. Minutes of board of directors meetings.
B. Transfer agent’s records.
C. Canceled stock certificates.
D. Treasury stock certificate book.

35. In performing tests concerning the granting of stock options, an auditor should
A. Confirm the transaction with the Securities and Exchange Commission.
B. Verify the existence of option holders in the entity’s payroll records or stock ledgers.
C. Determine that sufficient treasury stock is available to cover any new stock issued.
D. Trace the authorization for the transaction to a vote of the board of directors.

36. 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 state 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.

37. In the audit of a small and medium-sized entity, which one of the following areas can be
expected to require the least amount of audit time?
A. Liabilities
B. Equity
C. Assets
D. Revenue

38. 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.

39. Which of the following is an auditor most likely to confirm from the transfer agent and
registrar? 
A. Total shares of stock issued.
B. Restrictions on the payment of dividends.
C. Total market value of outstanding shares of stock.
D. Gains from sale of treasury stock.

40. When auditing related party transactions, the auditor places primary emphasis on
A. determining the accuracy and classification of the related party transactions
B. testing the existence of the related parties
C. proper accounting for, and disclosure of, the related party transactions
D. eliminating the effects of related party transactions

41. Which of the following auditing procedures most likely would assist an auditor in identifying
related-party transactions?
A. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.
B. Vouching accounting records for recurring transactions recorded just after the balance
sheet date.
C. Reviewing confirmations of loans receivable and payable for indications of guarantees.
 D. Performing analytical procedures for indications of possible financial difficulties.

42. After determining that a related-party transaction has, in fact, occurred, an auditor should
A. Add a separate paragraph to the auditor’s standard report to explain the transaction.
B. Perform analytical procedures to verify whether similar transactions occurred, but were
not recorded.
C. Obtain an understanding of the business purpose of the transaction.
D. Substantiate that the transaction was consummated on terms equivalent to an arm’s-
length transaction.

43. Which of the following events most likely indicates the existence of related parties?
A. Making a loan without scheduled terms of repayment of the funds.
B. Discussing merger terms with a company that is a major competitor.
C. Selling real estate at a price that differs significantly from its book value.
D. Borrowing a large sum of money at a variable rate of interest.

44. Which of the following statements is correct concerning related-party transactions?

A. In the absence of evidence to the contrary, related-party transactions should be assumed
to be outside the ordinary course of business.
B. An auditor should determine whether a particular transaction would have occurred if the
parties had not been related.
C. An auditor should substantiate that related-party transactions were consummated on
terms equivalent to those that prevail in arm’s-length transactions.
D. The audit procedures directed toward identifying related-party transactions should
include considering whether transactions are occurring, but are not being given proper
accounting recognition.

INTERNAL CONTROL

45. Inherent limitations in an entity’s internal control system include all of the following, except
a. collusion among employees
b. segregation of incompatible duties
c. the possibility of management override
d. mistakes in judgment

46. When obtaining an understanding of controls that are relevant to the audit, the auditor shall
I – evaluate design of the controls
II – determine whether they have been implemented
III – determine whether they are effective or not in preventing and/or detecting
material misstatements
a. I, II and III
b. I and II only
c. III only
d. II and III only
47. Which of the following does not fall within the entity’s control activities?
a. Authorization of transactions
b. Physical controls
c. Segregation of incompatible duties
d. Management philosophy and operating style

48. This internal control component is the foundation for all other components. It sets the tone of
the organization, provides discipline and structure, and influences the control consciousness of
employees.
a. control activities
b monitoring of controls
c. control environment
d. the entity’s risk assessment process

49. When considering internal control, an auditor should be aware of the concept of reasonable
assurance, which recognizes that
a. Internal control may be ineffective due to mistakes in judgment and personal carelessness.
b. Adequate safeguards over access to assets and records should permit an entity to maintain
proper accountability.
c. Establishing and maintaining internal control is an important responsibility of management.
d. The cost of an entity’s internal control should not exceed the benefits expected to be derived.

50. Proper segregation of functional responsibilities calls for separation of the functions of
a. Authorization, execution, and payment.
b. Authorization, recording, and custody.
c. Custody, execution, and reporting.
d Authorization, payment, and recording.

51. Proper segregation of duties reduces the opportunities to allow any employee to be in a

position to both 
a. Journalize cash receipts and disbursements and prepare the financial statements.
b. Monitor internal controls and evaluate whether the controls are operating as intended.
c. Adopt new accounting pronouncements and authorize the recording of transactions.
d. Record and conceal fraudulent transactions in the normal course of assigned tasks.
 
52. An entity’s ongoing monitoring activities often include
a. Periodic audits by the audit committee.
b. Reviewing the purchasing function.
c. The audit of the annual financial statements.
d. Control risk assessment in conjunction with quarterly reviews.

53. The overall attitude and awareness of an entity’s board of directors concerning the
importance of internal control usually is reflected in its
a. Computer-based controls.
b. System of segregation of duties.
c. Control environment.
d. Safeguards over access to assets.

54. Management philosophy and operating style most likely would have a significant influence
on an entity’s control environment when
a. The internal auditor reports directly to management.
b. Management is dominated by one individual.
c. Accurate management job descriptions delineate specific duties.
d. The audit committee actively oversees the financial reporting process

55. Which of the following does not fall within the entity’s control environment?
a. Commitment to competence
b. Participation of those charged with governance
c. Communication and enforcement of integrity and ethical values
d. Information processing

56. When obtaining an understanding of an entity’s internal control, an auditor should

concentrate on the substance of controls rather than their form because
a. The controls may be operating effectively but may not be documented.
b. Management may establish appropriate controls but not enforce compliance with them.
c. The controls may be so inappropriate that no reliance is contemplated by the auditor.
d. Management may implement controls whose costs exceed their benefits.

57. After obtaining an understanding of internal control and assessing the risk of material
misstatement, an auditor decided to perform tests of controls. The auditor most likely decided
that
a. It would be efficient to perform tests of controls that would result in a reduction in planned
substantive tests.
b. Additional evidence to support a further reduction in the risk of material misstatement is not
available.
c. An increase in the assessed level of the risk of material misstatement is justified for certain
financial statement assertions.
d. There were many internal control weaknesses that could allow misstatements to enter the
accounting system.

58. Which of the following would be least likely to be regarded as a test of a control? 

a. Tests of the additions to property by physical inspection.
b. Comparisons of the signatures on cancelled checks to the authorized check signer list.
c. Tests of signatures on purchase orders.
d. Recalculation of payroll deductions.
59. Which statement is correct concerning the relevance of various types of controls to a
financial statement audit? 
a. An auditor may ordinarily ignore the consideration of controls when a substantive audit
approach is used.
b. Controls over the reliability of financial reporting are ordinarily most directly relevant to an
audit, but other controls may also be relevant.
c. Controls over safeguarding assets and liabilities are of primary importance, while controls
over the reliability of financial reporting may also be relevant.
d. All controls are ordinarily relevant to an audit.

60. Which of the following procedures concerning accounts receivable would an auditor most
likely perform to obtain evidence in support of an assessed level of control risk below the
maximum?
a. Observing an entity’s employee prepare the schedule of past due accounts receivable.
b. Sending confirmation requests to an entity’s principal customers to verify the existence of
accounts receivable.
c. Inspecting an entity’s analysis of accounts receivable for unusual balances.
d. Comparing an entity’s uncollectible accounts expense to actual uncollectible accounts
receivable.

61. A procedure that involves tracing a transaction from its origination through the company’s
information systems until it is reflected in the company’s financial report is referred to as a(n)
a. Analytical analysis.
b. Substantive procedure.
c. Test of a control.
d. Walk-through.

62. Which of the following procedures would an auditor most likely perform to test controls
relating to management’s assertion about the completeness of cash receipts for cash sales at a
retail outlet?
a. Observe the consistency of the 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.
63. Tracing shipping documents to prenumbered sales invoices provides evidence that
a. No duplicate shipments or billings occurred.
b. Shipments to customers were properly invoiced.
c. All goods ordered by customers were shipped.
d. All prenumbered sales invoices were accounted for.

64. Which of the following controls most likely would reduce the risk of diversion of customer
receipts by an entity’s employees?
a. A bank lockbox system.
b. Prenumbered remittance advices.
c. Monthly bank reconciliations.
d. Daily deposit of cash receipts.

65. Which of the following controls most likely would assure that all billed sales are correctly
posted to the accounts receivable ledger?
a. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
b. Each sales invoice is supported by a prenumbered shipping document.
c. The accounts receivable ledger is reconciled daily to the control account in the general ledger.
d. Each shipment on credit is supported by a prenumbered sales invoice.

66. Which of the following controls most likely would be effective in offsetting the tendency of
sales personnel to maximize sales volume at the expense of high bad debt write-offs?
a. Employees responsible for authorizing sales and bad debt write-offs are denied access to cash.
b. Shipping documents and sales invoices are matched by an employee who does not have
authority to write off bad debts.
c. Employees involved in the credit-granting function are separated from the sales function.
d. Subsidiary accounts receivable records are reconciled to the control account by an employee
independent of the authorization of credit.

67. Proper authorization of write-offs of uncollectible accounts should be approved in which of

the following departments?
a. Accounts receivable.
b. Credit.
c. Accounts payable.
d. Treasurer.

68. During the consideration of a small business client’s internal control, the auditor discovered
that the accounts receivable clerk approves credit memos and has access to cash. Which of the
following controls would be most effective in offsetting this weakness?
a. The owner reviews errors in billings to customers and postings to the subsidiary ledger.
b. The controller receives the monthly bank statement directly and reconciles the checking
accounts.
c. The owner reviews credit memos after they are recorded.
d. The controller reconciles the total of the detail accounts receivable accounts to the amount
shown in the ledger.

69. To provide assurance that each voucher is submitted and paid only once, an auditor 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 the check signer.
c. Prenumbered and accounted for.
d. Approved for authorized purchases.

70. Which of the following controls most likely addresses the completeness assertion for
inventory?
a. Work in process account is periodically reconciled with subsidiary records.
b. Employees responsible for custody of finished goods do not perform the receiving function.
c. Receiving reports are prenumbered and periodically reconciled.
d. There is a separation of duties between payroll department and inventory accounting
personnel.

71. Kappa Company uses its sales invoices for posting perpetual inventory records. Inadequate
controls over the invoicing function allow goods to be shipped that are not invoiced. The
inadequate controls could cause an
a. Understatement of revenues, receivables, and inventory.
b. Overstatement of revenues and receivables, and an understatement of inventory.
c. Understatement of revenues and receivables, and an overstatement of inventory.
d. Overstatement of revenues, receivables, and inventory.

72. In determining the effectiveness of an entity’s controls relating to the existence or occurrence
assertion for payroll transactions, an auditor most likely would inquire about and
a. Observe the segregation of duties concerning personnel responsibilities and payroll
disbursement.
b. Inspect evidence of accounting for prenumbered payroll checks.
c. Recompute the payroll deductions for employee fringe benefits.
d. Verify the preparation of the monthly payroll account bank reconciliation.

73. Which of the following controls would an entity most likely use to assist in satisfying the
completeness assertion related to long-term investments?
a. Senior management verifies that securities in the bank safe-deposit box are registered in the
entity’s name.
b. The internal auditor compares the securities in the bank safe-deposit box with recorded
investments.
c. The treasurer vouches the acquisition of securities by comparing brokers’ advices with
canceled checks.
d. The controller compares the current market prices of recorded investments with the brokers’
advices on file.

74. Internal control is strengthened when the quantity of merchandise ordered is omitted from the
copy of the purchase order sent to the
a. Department that initiated the requisition.
b. Receiving department.
c. Purchasing agent.
d. Accounts payable department.

75. 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 confirmations to all vendors.
76. Sound internal control dictates that defective merchandise returned by customers should be
presented initially to the
a. Salesclerk.
b. Purchasing clerk.
c. Receiving clerk.
d. Inventory control clerk.

77. An auditor vouched data for a sample of employees in a payroll register to approved clock
card data to provide assurance that
a. Payments to employees are computed at authorized rates.
b. Employees work the number of hours for which they are paid.
c. Segregation of duties exist between the preparation and distribution of the payroll.
d. Controls relating to unclaimed payroll checks are operating effectively.

78. Which of the following is a control that most likely could help prevent employee payroll
fraud?
a. The personnel department promptly sends employee termination notices to the payroll
supervisor.
b. Employees who distribute payroll checks forward unclaimed payroll checks to the absent
employees’ supervisors.
c. Salary rates resulting from new hires are approved by the payroll supervisor.
d. Total hours used for determination of gross pay are calculated by the payroll supervisor.

79. To minimize the opportunities for fraud, unclaimed cash payroll should be
a. Deposited in a safe-deposit box.
b. Held by the payroll custodian.
c. Deposited in a special bank account.
d. Held by the controller.

80. Which of the following departments most likely would approve changes in pay rates and
deductions from employee salaries?
a. Personnel.
b. Treasurer.
c. Controller.
d. Payroll.

81. A weakness in internal control over recording retirements of equipment may cause an auditor
to
a. Inspect certain items of equipment in the plant and trace those items to the accounting records.
b. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of
equipment during the year.
c. Trace additions to the “other assets” account to search for equipment that is still on hand but
no longer being used.
d. Select certain items of equipment from the accounting records and locate them in the plant.
82. When there are numerous property and equipment transactions during the year, an auditor
who plans to assess control risk at a low level usually performs
a. Tests of controls and extensive tests of property and equipment balances at the end of the year.
b. Analytical procedures for current year property and equipment transactions.
c. Tests of controls and limited tests of current year property and equipment transactions.
d. Analytical procedures for property and equipment balances at the end of the year.

83. In general, material fraud perpetrated by which of the following are most difficult to detect?
a. Cashier.
b. Keypunch operator.
c. Internal auditor.
d. Controller.

AUDIT SAMPLING

1. The risk that the auditor’s conclusion based on a sample may be different from the conclusion
if the entire population were subjected to the same audit procedure is
A. Sampling risk
B. Audit risk
C. Non-sampling risk
D. Detection risk

2. Sampling risk is an inherent part of sampling that results from

A. Inappropriate audit procedures
B. Failure to properly plan the audit
C. Testing less than the entire population
D. Weaknesses in the internal control system

3. Which of the following does not constitute non-sampling risk?

A. Use of inappropriate audit procedures
B. Misinterpretation of audit evidence
C. Failure to recognize a misstatement or deviation
D. Failure of a sample to represent the population

4. One way to reduce sampling risk is to

A. Carefully design the audit procedures to be used
B. Provide for proper planning and supervision of audit staff
C. Use an appropriate method of selecting sample items from the population
D. Use variables sampling rather than attributes sampling

5. The decision whether to use statistical or non-statistical sampling depends upon the
A. Philippine Standards on Auditing C. Size of the population
B. Auditor’s judgment D. Generally Accepted Auditing Standards

6. Audit sampling for substantive tests is appropriate when

A. Analytical procedures are used
B. The population contains small but large value items
C. The auditor wants to eliminate sampling risk
D. Tests of details are performed

7. Audit sampling for tests of control is generally appropriate when

A. The control leaves evidence of performance
B. The control is not effective
C. 100 % of the transactions is tested
D. The control leaves no evidence of performance

8. There are many kinds of statistical estimates that an auditor may find useful, but basically
every statistical estimate in auditing is of either a quantity or of an error rate. The statistical terms
that roughly correspond to "quantities" and "occurrence rate", respectively, are: 
A. Attributes and variable.
B. Variables and attributes.
C. Constants and attributes.
D. Constants and variables.

9. An advantage of using statistical sampling is that such techniques

A. Eliminate the need for professional judgment
B. Defined the value of reliability necessary to provide audit assurance
C. Mathematically measure sampling risk
D. Eliminate sampling risk

10. Statistical sampling does not allow

A. More efficient samples
B. Measurement of sample reliability
C. Replacement of auditor’s professional judgment
D. Measurement of sampling risk

11. Statistical sampling cannot

A. Determine reliability of samples
B. Select a sample to draw inference about a population
C. Assure a sample will be representative of a population
D. Measure the risk that a sample is not representative of a population

12. A rate of deviation from prescribed internal control procedures set by the auditor in respect
of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation
set by the auditor is not exceeded by the actual rate of deviation in the population is
A. Tolerable misstatement C. Anomaly
B. Tolerable rate of deviation D. Expected misstatement

13. Sampling risk that leads the auditor to conclude that controls are more effective than they
actually are is
A. Risk of assessing control risk too low C. Risk of incorrect rejection
B. Risk of assessing control risk too high D. Risk of incorrect acceptance
14. Sampling risk that leads the auditor to conclude that a material misstatement exists when in
fact it does not is
A. Risk of assessing control risk too low C. Risk of incorrect rejection
B. Risk of assessing control risk too high D. Risk of incorrect acceptance

15. Of the four erroneous conclusions from a sampling risk, the auditor is primarily concerned
with
A. Risk of assessing control risk too low C. Risk of incorrect rejection
B. Risk of assessing control risk too high D. Risk of incorrect acceptance

16. Which of the following types of risk is of critical importance to auditors in performing tests
of controls? 
A. The risk of assessing control risk too low.
B. The risk of assessing control risk too high.
C. The risk of incorrect acceptance.
D. The risk of incorrect rejection.

17. Which of the following combinations results in a decrease in sample size for attributes?

Acceptable sampling Tolerable Expected population

risk deviation rate deviation rate
A. Increase Decrease Increase
B. Decrease Increase Decrease
C. Increase Increase Decrease
D. Increase Increase Increase

18. The process of dividing a population into subpopulations, each of which is a group of
sampling units which have similar characteristics (often monetary value) is
A. Division C. Grouping
B. Stratification D. Characterization

19. How would increases in tolerable misstatement and assessed level of control risk affect the
sample size in a substantive test of details?

Increase in tolerable misstatement Increase in assessed level of control risk

A. Increase sample size Increase sample size
B. Increase sample size Decrease sample size
C. Decrease sample size Increase sample size
D. Decrease sample size Decrease sample size
20. An auditor wishes to estimate inventory shrinkage by weighing a sample of inventory items.
From experience, the auditor knows that a few specific items are subject to unusually large
amounts of shrinkage. In using statistical sampling, the auditor's best course of action is to: 
A. Eliminate any of the items known to be subject to unusually large amounts of shrinkage.
B. Increase the sample size to lessen the effect of the items subject to unusually large amounts of
shrinkage.
C. Stratify the inventory population so that items subject to unusually large amounts of shrinkage
are reviewed separately.
D. Continue to draw new samples until a sample is drawn which includes none of the items
known to be subject to large amounts of shrinkage.

21. An advantage of using statistical over non-statistical sampling methods in tests of controls is
that the statistical methods
A. Can more easily convert the sample into a dual-purpose test useful for substantive testing
B. Eliminate the need to use judgment in determining appropriate sample sizes
C. Afford greater assurance than a non-statistical sample of equal size
D. Provide an objective basis for quantitatively evaluating sample risk

Items 22 and 23 are based on the following information:

The diagram below depicts the auditor’s estimated deviation rate compared with the tolerable
rate, and also depicts the true population deviation rate compared with the tolerable rate.

22. In which of the situations would the auditor have properly concluded that control risk is at or
below the planned assessed level?
A. I.
B. II.
C. III.
D. IV.
23. As a result of tests of controls, the auditor assesses control risk too high and thereby
increases substantive testing. This is illustrated by situation
A. I.
B. II.
C. III.
D. IV.

24. The expected population deviation rate of client billing errors is 3%. The auditor has
established a tolerable rate of 5%. In the review of client invoices the auditor should use
A. Stratified sampling.
B. Variable sampling.
C. Discovery sampling.
D. Attribute sampling.

25. Which of the following is not a likely item on which to apply stratification techniques?
A. Aging of accounts receivable
B. Dollar value of accounts receivable
C. Customer names of account receivables
D. Number of sales per customer in a period

26. For which of the following audit tests would an auditor most likely use attribute sampling?
A. Making an independent estimate of the amount of a LIFO inventory.
B. Examining invoices in support of the valuation of fixed asset additions.
C. Selecting accounts receivable for confirmation of account balances.
D. Inspecting employee time cards for proper approval by supervisors.

27. Which of the following statistical selection techniques is least desirable for use by an
auditor?
A. Systematic selection.
B. Stratified selection.
C. Block selection.
D. Sequential selection.

28. In statistical sampling methods used in substantive testing, an auditor most likely would
stratify a population into meaningful groups if
A. The population has highly variable recorded amounts
B. Value-weighted sampling is used
C. The auditor’s estimated tolerable misstatement is extremely small
D. The standard deviation of recorded amounts is relatively small

29. What is the primary objective of using stratification as a sampling method in auditing?
A. To increase the confidence level at which a decision will be reached from the results of the
sample selected.
B. To determine the occurrence rate for a given characteristic in the population being studied.
C. To decrease the effect of variance in the total population.
D. To determine the precision range of the sample selected.
30. As a result of tests of controls, an auditor assessed control risk too low and decreased
substantive testing. This assessment occurred because the true deviation rate in the population
was
A. Less than the risk of assessing control risk too low, based on the auditor’s sample.
B. Less than the deviation rate in the auditor’s sample.
C. More than the risk of assessing control risk too low, based on the auditor’s sample.
D. More than the deviation rate in the auditor’s sample.

31. An auditor is testing internal control procedures that are evidenced on an entity’s vouchers by
matching random numbers with voucher numbers. If a random number matches the number of a
voided voucher, that voucher ordinarily should be replaced by another voucher in the random
sample if the voucher
A. Constitutes a deviation.
B. Has been properly voided.
C. Cannot be located.
D. Represents an immaterial dollar amount.

32. An auditor plans to examine a sample of twenty purchase orders for proper approvals as
prescribed by the client’s control procedures. One of the purchase orders in the chosen sample of
twenty cannot be found, and the auditor is unable to use alternative procedures to test whether
that purchase order was properly approved. The auditor should
A. Choose another purchase order to replace the missing purchase order in the sample.
B. Consider this test of control invalid and proceed with substantive tests since internal control
cannot be relied upon.
C. Treat the missing purchase order as a deviation for the purpose of evaluating the sample.
D. Select a completely new set of twenty purchase orders.

33. In which sampling method is the probability of selection of an item proportional to the size or
value of the item (P 100,000 item is 10 times more likely to be selected than a P 1,000 item)?
A. Discovery sampling
B. Ratio estimation
C. Value weighted sampling
D. Stratified sampling

34. If the auditor is concerned that a population may contain exceptions, the determination of a
sample size sufficient to include at least one such exception is a characteristic of
A. Discovery sampling.
B. Variables sampling.
C. Random sampling.
D. Dollar-unit sampling.

35. What is an auditor’s evaluation of a statistical sample for attributes when a test of fifty
documents results in three deviations if tolerable rate is 7%, the expected population deviation
rate is 5%, and the allowance for sampling risk is 2%?
A. Modify the planned assessed level of control risk because the tolerable rate plus the allowance
for sampling risk exceeds the expected population deviation rate.
B. Accept the sample results as support for the planned assessed level of control risk because the
sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
C. Accept the sample results as support for the planned assessed level of control risk because the
tolerable rate less the allowance for sampling risk equals the expected population deviation rate.
D. Modify the planned assessed level of control risk because the sample deviation rate plus the
allowance for sampling risk exceeds the tolerable rate.

36. In the past, the auditors have found that the book value of a receivable account has been
related to the amount the account is misstated (i.e., large accounts have large misstatements and
small accounts have small misstatements). Which of the following techniques is most likely to be
efficient? 
A. Mean-per-unit estimation.
B. Ratio estimation.
C. Difference estimation.
D. Sequential sampling estimation.

37. Using statistical sampling to assist in verifying the year-end accounts payable balance, an
auditor has accumulated the following data:

Using the ratio estimation technique, the auditor’s estimate of year-end accounts payable balance
would be
A. $6,150,000
B. $6,000,000
C. $5,125,000
D. $5,050,000

38. Use of the ratio estimation sampling technique to estimated dollar amounts is inappropriate
when
A. The total book value is known and corresponds to the sum of all the individual book values.
B. A book value for each sample item is unknown.
C. There are some observed differences between audited values and book values.
D. The audited values are nearly proportional to the book values.
39. If the projected misstatement in a nonstatistical sampling is $8,000, while the tolerable
misstatement is $8,100, what would an auditor likely conclude? 
A. Since the projected misstatement is less than the tolerable misstatement, the account is not
misstated.
B. Since the projected misstatement is less than the tolerable misstatement, the account is
misstated.
C. The risk is high that the account is materially misstated.
D. The analysis has been improperly performed since the projected misstatement is unequal to
the tolerable misstatement.