NAME : B.

Checks are signed by one person

DATE : C. Cash receipts are not deposited intact daily
D. Treasurer does not verify the names and
AUDITING addresses of check payees
PQ3
6. Each Saturday afternoon, paychecks are distributed
1. The auditor’s risk assessment procedures by the production department’s shift supervisor.
A. By themselves, do not provide sufficient Unclaimed paychecks are returned to the payroll
appropriate audit evidence on which to base the clerk, from whom the factory workers can claim them
audit opinion at some later time. The payroll clerk routinely
B. Should not consider information obtained from continues the payroll record for workers one week
the auditor’s previous experience with the entity after their departure from the company and untimely
C. Are designed to detect material misstatements diverts the unclaimed paychecks. Which of the
at the assertion level for classes of transactions, following controls would most likely prevent this
account balances, and disclosures misappropriation?
D. Are designed to test the effectiveness of the A. Require the treasurer’s office to prepare checks
entity’s controls. only on the basis of supporting documentation
from both the timekeeper and payroll accounting
2. The risk that the auditor may give an inappropriate B. Periodically rotate the shift supervisor
opinion when the financial statements are materially C. Require the timekeeper to compute weekly pay
misstated is called only
A. Detection risk D. Require the shift supervisor to know all the
B. Audit risk workers
C. Business risk
D. Inherent risk 7. In planning an examination, the auditor would
consider all of the following matters, except
3. There is an inverse relationship that exists between A. Anticipated reliance on internal controls.
the acceptable level of detection risk and the B. Preliminary judgment about materiality levels
A. Risk of failing to discover material misstatements for audit purposes.
B. Assurance provided by substantive tests C. Financial statement items likely to require
C. Preliminary judgments about materiality levels adjustment.
D. Risk of misapplying audit procedures D. The kind of opinion likely to be given.

4. Which of the following statements concerning audit 8. If an auditor establishes a relatively high level for
risk and its components is incorrect? materiality, then the auditor will not
A. Regardless of the assessed levels of inherent and A. accumulate more evidence than if a lower level
control risks, the auditor should always perform had been set.
some substantive procedures for material B. accumulate less evidence than if a lower level
account balances and classes of transactions. had been set.
B. The higher the assessment of inherent and C. perform test of controls.
control risks, the more evidence the auditor D. perform substantive tests of details, substantive
should obtain from the performance of analytical procedures, and substantive tests of
substantive procedures. balances.
C. The assessed level of inherent risk need not be
considered in determining the nature, timing, 9. Having set the level of materiality for the financial
and extent of substantive procedures required to statements as a whole, the auditor now turns his
reduce audit risk to an acceptably low level. attention to determining performance materiality.
D. After obtaining an understanding of the Which of the following statements about
accounting and internal control systems, the performance materiality is NOT true?
auditor should make a preliminary assessment of A. Performance materiality is used to reduce the
control risk, at the assertion level, for each risk that the aggregate of uncorrected and
material account balance or class of transactions. undetected misstatements exceeds materiality
for the financial statements as a whole to an
5. Which of the following is of least concern to an auditor acceptable level.
in assessing the risks of material misstatement B. Performance materiality refers to the amounts
A. Signed checks are distributed by the controller to set by the auditor at higher than the materiality
approved payees level for particular classes of transactions,
 account balances or disclosures where the C. The auditor utilizes the same audit program and
materiality level might otherwise mean that the same procedures each year for a client in
such items are not tested. order to ensure that nothing is missed in the
C. Once the materiality for the financial statements current year audit.
as whole has been set, a lower level of D. Audit planning workpapers are prepared to
performance materiality is determined by the support the foundation of the audit and are
auditor using his or her professional judgement. prepared for the client to assist in their
D. The performance materiality level is affected by understanding of the specific audit procedures
the auditor's understanding of the entity and the that will be performed.
nature and extent of misstatements identified in
prior audits. 15. Which of the following statements is true with
regard to the relationship among audit risk, audit
10. Which of the following is the most valid reason why evidence, and materiality?
auditors need to design and implement responses to A. The lower the inherent risk and control risk, the
assessed risks of material misstatement? lower the aggregate materiality threshold.
A. to gain reasonable assurance that all fraud and B. Under conditions of high inherent and control
errors will be detected. risk, the auditor should place more emphasis on
B. to obtain sufficient appropriate audit evidence obtaining external evidence and should reduce
about the assessed risks as a basis for the reliance on internal evidence.
auditor’s opinion. C. Where inherent risk is high and control risk is
C. to afford management with a relief of its low, the auditor may safely ignore inherent risk.
responsibility over the financial statements. D. Aggregate materiality thresholds should not
D. to provide management with resolutions to the change under conditions of changing risk levels.
assessed risks.
16. In which of the following circumstances would the
11. Which of the following statements best identifies the use of the negative form of accounts receivable
two types of fraud? confirmation most likely be justified?
A. Theft of assets and employee fraud. A. A substantial number of accounts may be in
B. Management fraud and employee fraud dispute and the accounts receivable balance
C. Misappropriation of asset and defalcation arises from sales to a few major customers.
D. Fraudulent financial reporting and management B. A substantial number of accounts may be in
fraud. dispute and the accounts receivable balance
arises from sales to many customers with small
12. One characteristic of employee fraud is that the fraud balances.
A. is perpetrated at a level to which internal C. A small number of accounts may be in dispute
controls do not apply and the accounts receivable balance arises from
B. involves misstating financial statements sales to a few major customers.
C. involves the direct conversion of cash or other D. A small number of accounts may be in dispute
assets to the employee’s personal benefit and the accounts receivable balance arises from
D. involves misappropriating assets in a series of sales to many customers with small balances.
complex transactions involving third parties
17. Which of the following statements is correct
13. Forces which may permit fraud to occur do not concerning the use of negative confirmation
include requests?
A. a gambling addiction A. Unreturned negative confirmation requests
B. lack of segregation of duties rarely provide significant explicit evidence.
C. centralized decision making environment B. Negative confirmation requests are effective
D. questionable integrity of employees when detection risk is low.
C. Unreturned negative confirmation requests
14. Which of the following statement is true? indicate that alternative procedures are
A. When preparing the audit plan, the auditor necessary.
should be guided by the results of the risk D. Negative confirmation requests are effective
assessment and procedures performed to gain when understatements of account balances are
and support the understanding of the entity. suspected.
B. The auditor shall, in planning an audit, first
establish the audit plan for the engagement;
and then develop an overall audit strategy.
18. Which of the following most likely would give the D. Sales
most assurance concerning the valuation and
allocation assertion of accounts receivable? 23. Which of the following might be detected by an
A. Vouching amounts in the subsidiary ledger to auditor’s review of the entity’s sales cutoff?
details on shipping documents. A. Inflated sales for the year
B. Comparing receivable turnover ratios with B. Lapping of year-end accounts receivable
industry statistics for reasonableness. C. Unrecorded sales discounts
C. Inquiring about receivables pledged under loan D. Excessive goods returned for credit
agreements.
D. Assessing the allowance for uncollectible 24. An auditor most likely would review a client’s periodic
accounts for reasonableness. accounting for the numerical sequence of shipping
documents and sales invoices to support
19. Confirmation is the process of obtaining and management’s financial statement assertion of
evaluating a direct communication from a third party A. Existence
in response to a request for information about a B. Rights and obligations
particular item affecting financial statement C. Completeness
assertions. Two assertions for which confirmation of D. Valuation and allocation
accounts receivable balances provides primary
evidence are 25. If the objective of a test of details of transactions is
A. Completeness and valuation to detects over statements of sales, the auditor’s
B. Valuation and rights and obligations direction of testing should be from the
C. Rights and obligations and existence A. Cash receipts journal to the sales journal
D. Existence and completeness B. Accounting records to the source documents
C. Source documents to the accounting records
20. In auditing payroll, an auditor most likely would D. Sales journal to the cash receipts journal
A. Observe entity employees during a payroll
distribution. 26. Cut off tests designed to detect credit sales made
B. Compare payroll costs with entity standards and before the end of the year that have been recorded
budgets. in the subsequent year provide assurance about
C. Trace individual employee deductions to entity management’s assertion of
journal entries. A. Accuracy
D. Verify that checks representing unclaimed B. Classification
wages are mailed. C. Rights and obligations
D. Cutoff
21. The following are the auditor’s principal objectives in
the audit of revenues, except 27. An auditor most likely would limit substantive audit
A. To determine whether all cash owned by the tests of sales transactions when control risk is
entity of the balance sheet date is included on assessed as low for the occurrence assertion
the balance sheet. concerning sales transactions and the auditor has
B. To determine whether earned revenue has been already gathered evidence supporting
recorded and recorded revenue has been A. Beginning and ending inventory balances
earned. B. Cash receipts and accounts receivable
C. To determine whether revenues are reported in C. Cutoffs of sales and purchases
the income statement at the appropriate D. Shipping and receiving activities
amounts.
D. To determine whether revenues are properly 28. Tracing bills of lading to sales invoices provides
classified, described, and disclosed in the evidence that
financial statements, including notes, in A. Invoices sales were shipped
conformity with an applicable financial reporting B. Recorded sales were shipped
framework. C. Shipments to customers were recorded as sales
D. Shipments to customers were invoiced
22. In the audit of which of the following general ledger
accounts will tests of controls be particularly 29. Which of the following most likely would give the
appropriate. most assurance concerning the valuation and
A. Bank charges allocation assertion of accounts receivable?
B. Equipment A. Vouching amounts in the subsidiary ledger to
C. Bonds payable details on shipping documents
 B. Inquiring about receivables pledged under loan C. Lapping of receivables
agreements D. Receivables not being properly aged
C. Assessing the allowance for bad debts for
reasonableness 34. To reduce the risk associated with accepting fax
D. Comparing receivable turnover ratios with responses to requests for confirmations of accounts
industry statistics for reasonableness receivables, an auditor most likely would
A. Inspect the faxes for forgeries or alterations and
30. Which of the following is not a principal objective in consider them to be acceptable if none are noted
auditing accounts receivable? B. Consider the faxes to be nonresponses and
A. To determine whether receivables are carried at evaluate them as unadjusted differences
their net realizable value C. Verify the sources and contents of the faxes in
B. To determine whether receivables are properly telephone calls to the senders
classified, described, and disclosed in the D. Examine the shipping documents that provide
financial statements, including notes, in evidence for the existence assertion
accordance with the applicable financial
reporting framework 35. Purchase cutoff procedures test the completeness
C. To determine whether the entity has real claims assertion. An entity should include goods in its
in all receivables on the balance sheet inventory if it
D. To determine whether the accounts are collected A. Has paid for the goods
by the balance sheet date B. Holds legal title to the goods
C. Has physical possession of the goods
31. The process of obtaining and evaluating audit D. Has sold the goods
evidence through a direct communication from a
third party in response to a request for information 36. In auditing accounts payable, an auditor’s
about a particular item affecting assertions made by procedures most likely will focus primarily on
the management in the financial statement is called managements assertion of
A. Reperformance A. Existence
B. External confirmation B. Valuation and allocation
C. Inquiry C. Completeness
D. Recalculation D. Presentation and disclosure

32. An auditor confirms a representative number of open 37. Which of the following procedures is least likely to be
accounts as of December 31 and investigates performed before the balance sheet date?
respondents’ exceptions and comments. By this A. Search for unrecorded liabilities
procedure, the auditor is most likely to learn of which B. Confirmation of accounts receivable
of the following? C. Attendance at the physical inventory count
A. One of the cashiers has been covering a D. Testing internal control over cash
personal embezzlement by lapping
B. The credit manager has misappropriated 38. An auditor performs a test to determine whether all
remittances from customers whose accounts merchandise for which the client was billed was
have been written off received. The population for this test consists of all
C. One of the sales clerks has not been preparing A. Receiving reports
charge slips for credit sales to family and friends B. Vendor’s invoices
D. One of the computer processing control clerks C. Canceled checks
has been removing all sales invoices applicable D. Merchandise received
to his account from the data file
39. When using confirmations to provide evidence about
33. A company has computerized sales and cash receipts the completeness assertion for accounts payable, the
journals. The computer programs for these journals appropriate population most likely is
have been properly debugged. The auditor’s A. Amounts recorded in the accounts payable
examination of the accounting records revealed that subsidiary ledger
the total of the accounts receivable subsidiary B. Vendors with whom the entity has previously
accounts differs materially from the accounts done business
receivable control account. This discrepancy could C. Invoices filed the entity’s open invoice file
indicate D. Payees of checks drawn in the months
A. Credit memoranda being improperly recorded subsequent to the balance sheet date
B. Statements being intercepted prior to mailing
40. Unrecorded liabilities are most likely to be found that payroll payments were made to bona fide
during the review of which of the following employees?
documents A. Reconcile time cards in use to employees on the
A. Bills of lading job
B. Unpaid bills B. Test the payroll account bank reconciliation by
C. Unmatched sales invoices tracing outstanding checks to the payroll
D. Shipping records register
C. Examine canceled checks for proper
41. Which of the following audit procedures is least likely endorsement and compare with personnel
to detect an unrecorded liability? records
A. Reading the minutes of meeting of the board of D. Test for segregation of the authorization for
directs payment from the hire/fire authorization
B. Analysis and recomputation of interest expense
C. Analysis and recomputation of depreciation 47. One payroll audit objective is to determine whether
expense the employees received pay in amounts recorded in
D. Mailing of bank confirmation forms the payroll journal. To achieve this objective, the
auditor should
42. When title to merchandise in transit has passed to A. Determine whether a proper segregation of
the audit client, the auditor engaged in the duties exists between recording payroll and
performance of purchase cutoff will encounter the reconciling the payroll bank account
greatest difficulty in gaining assurance with respect B. Requesting that a company official distribute all
to the paychecks
A. Quality C. Reconcile the payroll bank account
B. Quantity D. Compare canceled payroll checks with the
C. Price payroll journal
D. Terms
48. Substantive procedures for payroll transactions and
43. Which of the following procedures relating to the balances primarily focus on analytical procedures to
examination of accounts payable could the author identify unexpected fluctuations in recurring payroll
delegate entirely to the client’s employees? entries. Which of the following is an appropriate
A. Mail confirmations for selected account balances analytical procedure for payroll?
B. Prepare a schedule of accounts payable A. Reconcile the payroll bank account
C. Test footings in the accounts payable ledger B. Compare the relationship of hours worked and
D. Reconcile unpaid invoices to vendor’s payroll with that of the preceding year
statements C. Inspect authorization on time cards
D. Compare authorized wage rates with payroll
44. Which of the following procedures would an auditor records
least likely perform before the balance sheet date?
A. Confirmation of accounts payable 49. To check the accuracy of hours worked, an auditor
B. Identification of related parties would ordinarily compare clock card with
C. Assessment of control risk A. Shop job time tickets
D. Attendance at the physical inventory count B. Personnel records
C. Tome recorded on the payroll register
45. An auditor is most likely to perform substantive test D. Labor variance reports
of details on payroll transactions and balance when
A. Analytical procedures indicate unusual 50. An auditor found that employee time cards in one
fluctuations in recurring payroll entries department are not properly approved by the
B. Cutoff tests indicate a substantial amount of supervisor. Which of following could occur?
accrued payroll expense A. Payroll checks might not be distributed to the
C. The assessed level of control risk relative to appropriate payees
payroll transactions is low B. The wrong hourly rate could be used to calculate
D. Accrued payroll expense consists primarily of gross pay
unpaid commissions C. Employees might be paid for hours they did not
work
46. Which of the following audit procedures would D. Duplicate paychecks might be issued
provide the least relevant evidence in determining
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