1.

a)
b)
c)
d)
2.
a)
b)
c)
d)
3.
a)
b)
c)
d)
4.
a)
b)
c)
d)
5.
a)
b)
c)
d)
6.
a)
b)
c)
d)
7.
a)
b)
c)

The auditors judgment concerning the overall fairness of the presentation of

financial position, results of operations, and statement of cash flows is applied
within the framework of
Quality control.
Generally accepted auditing standards which include the concept of materiality.
The auditors consideration of the auditor companys internal control.
Philippine Financial Reporting Standards.
A major customer of an audit client suffers a fire just prior to completion of yearend fieldwork. The audit client believes that this event could have a significant
direct effect on the financial statements. The auditor should
Advise management to disclose the event in notes to the financial statements.
Disclose the event in the auditors report.
Withhold submission of the auditors report until the extent of the direct effect on
the financial statements is known.
Advise management to adjust the financial statements.
When a contingency is resolved immediately subsequent to the issuance of a
report which was qualified with respect to the contingency, the auditor should
Insist that the client revised financial statements.
Inform the audit committee that the report cannot be relied upon.
Take no action regarding the event.
Inform the appropriate authorities that the report cannot be relied upon.
Under which of the following circumstances may audited financial statements
contain a note disclosing a subsequent event which is labeled unaudited?
When the subsequent event does not require adjustment of the financial
statements.
When the event occurs after completion of fieldwork and before issuance of the
auditors report.
When audit procedures with respect to the subsequent event were not
performed by the auditor.
When the event occurs between the date of the auditors original report and the
date of the reissuance of the report.
Subsequent events affecting the realization of assets ordinarily will require
adjustment of the financial statements under examination because such events
typically represent
The culmination of conditions that existed at the balance sheet date.
The final estimates of losses relating to casualties occurring in the subsequent
events period.
The discovery of new conditions occurring in the subsequent events period.
The preliminary estimate of losses to new events that occurred subsequent to
the balance sheet.
Which event that occurred after the end of the fiscal year under audit but prior to
issuance of the auditors report would not require disclosure in the financial
statements?
Sale of the bond or capital stock issue.
Loss of plant or inventories as result of fire or flood.
A major drop in the quoted market price of the stock of the corporation.
Settlement of litigation when the event giving rise to the claim took place after
the balance sheet date.
When the report of a principal auditor makes reference to the examination made
by another auditor, the other auditor may be named if express permission to do so
is given and
The report of the principal auditor names the other auditor in both the scope and
opinion paragraphs.
The principal auditor accepts responsibility for the work of the other auditor.
The report of the other auditor is presented together with the report of the
principal auditor.

d) The other auditor is not an associate or correspondent firm whose work is done
at the request of the principal auditor.
8.
Which of the following matters is an auditor required to communicate to an entitys
audit committee?
a) The basis for assessing control risk below the maximum.
b) The process used by management in formulating sensitive accounting
estimates.
c) The auditors preliminary judgments about materiality levels.
d) The justification for performing substantive procedures at interim dates.
9.
When an auditor concludes there is substantial doubt about an entitys ability to
continue as a going concern for a reasonable period of time, the auditors
responsibility is to
a) Prepare prospective financial information to verify whether managements plans
can be effectively implemented.
b) Project future conditions and events for a period of time not to exceed 1 year
following the date of the financial statements.
c) Issue a qualified or adverse opinion, depending upon materiality, due to the
possible effects on the financial statements.
d) Consider the adequacy of disclosure about the entitys possible inability to
continue going concern.
10. The auditor who wishes to point out that the entity has sufficient transactions with
related parties should disclose this fact in
a) An explanatory paragraph to the auditors report.
b) An explanatory note to the financial statements.
c) The body of the financial statements.
d) The summary of significant accounting policies section of the financial
statements.
11. When management refuses to disclose illegal activities which were identified by
the independent auditor, the independent auditor may be charged with violating
the CPA Code of Professional Conduct for
a) Withdrawing from the engagement.
b) Issuing a disclaimer of opinion.
c) Failure to uncover the illegal activities during prior audits.
d) Reporting these activities to the audit committee.
12. Because of the pervasive effects of laws and regulations on the financial
statements of governmental units, an auditor should obtain written management
representations acknowledging that management has
a) Identified and disclosed all laws and regulations that have a direct material effect
on its financial statements.
b) Implemented internal control policies and procedures designed to detect all
illegal acts.
c) Expressed both positive and negative assurance to the auditor that the entity
complied with all laws and regulations.
d) Employed internal auditor who can report their findings, opinion, and conclusions
objectively without fear of political repercussion.
13.
Which of the following is generally included or shown in the auditors
working papers?
a) The procedures used by the auditor to verify the personnel financial status of
members of the clients management team.
b) Analyses that are designed to be a part of, or a substitute for, the clients
accounting records.
c) Excerpts from authoritative pronouncements that support the underlying
generally accepted accounting principles used in preparing the financial
statements.
d) The manner in which exceptions and unusual matters disclosed by the auditors
procedure were resolved or treated.

14.
a)
b)
c)
d)
15.
a)
b)
c)
d)
16.
a)
b)
c)
d)
17.

a)
b)
c)
d)
18.
a)
b)
c)
d)
19.

a)
b)
c)
d)
20.
a)
b)
c)
d)
21.

a)
b)

An auditor compares information on canceled checks with information

contained in the cash disbursement journal. The objective of this test is to
determine that
Recorded cash disbursement transactions are properly authorized.
Proper cash purchase discounts have been recorded.
Cash disbursements are for goods and services actually received.
No discrepancies exist between the data on the checks and the data in the
journal.
Under which of the following circumstances would an auditor be most likely
to intensify an examination of petty cash fund?
Reimbursement vouchers are not prenumbered.
Reimbursement occurs twice each week.
The custodian occasionally uses the cash fund to cash employee checks.
The custodian endorses reimbursement checks.
Which of the following areas would ordinarily be expected to require the
most time when performing an audit of a continuing client?
Accounts receivable.
Common stock.
Retained earnings.
Revenues.
An auditor confirms a representative number of open accounts receivable as
of December 31, 2008, and investigates respondents exceptions and comments.
By this procedure the auditor would be most likely to learn of which of the
following?
One of the cashiers has been covering a personal embezzlement by lapping.
One of the sales clerks has not been preparing charge slips for credit sales to
family and friends.
One of the computer control clerks has been removing all sales invoices
applicable to his account from the data file.
The credit manager has misappropriated remittances from customers whose
accounts have been written off.
Which of the following most likely would give the most assurance concerning
the valuation assertion of accounts receivable?
Tracing amounts in the subsidiary ledger to details on shipping documents.
Comparing receivable turnover rations to industry statistics for reasonableness.
Inquiring about receivables pledged under loan agreements.
Assessing the allowances for uncollected accounts for reasonableness.
Some firms which dispose of only a small part of their total output by
consignment shipments fail to make any distinction between consignment
shipments and regular sales. Which of the following would suggest that goods
have been shipped on consignment?
Numerous shipments of small quantities.
Numerous shipments of large quantities and few returns.
Large debits to accounts receivable and small periodic credits.
Large debits to accounts receivable and large periodic credits.
An inventory turnover analysis is useful to the auditor because it may detect
Inadequacies in inventory pricing.
Methods of avoiding cyclical holding costs.
The optimum automatic reorder points.
The existence of obsolete merchandise.
When title to merchandise in transit has passed to the audit client, the
auditor engaged in the performance of a purchase cutoff on December 31, the
last day of the clients year, will encounter the greatest difficulty in gaining
assurance with respect to the
Quantity.
Quality.
3

c) Price.
d) Terms.
22.
Which of the following audit procedures would provide the least reliable
evidence that the client has legal title to inventories?
a) Confirmation of inventories at location outside the clients facilities.
b) Analytical procedures comparing inventory balances to purchasing and sales
activities.
c) Observation of physical inventory counts.
d) Examination of paid vendors invoices.
23.
In verifying debits to perpetual inventory records of a non-manufacturing
firm, the auditor would be most interested in examining the purchase
a) Journal.
b) Requisitions.
c) Orders.
d) Invoices.
24.
During the first part of the current fiscal year, the client company began
dealing with certain customers on a consignment basis. Which of the following
audit procedures is least likely to bring this new fact to the auditors attention?
a) Tracing of shipping documents to the sales journal.
b) Test of cash receipts transactions.
c) Confirmation of accounts receivable.
d) Observation of physical inventory.
25.
To establish the existence and ownership of a long-term investment in the
common stock of a publicly traded company, an auditor ordinarily performs a
security count or
a) Relies on the clients internal controls if the auditor has reasonable assurance
that the control procedures are being applied as prescribed.
b) Confirms the number of shares owned that are held by an independent
custodian.
c) Determine the market price per share at the balance sheet date from published
quotations.
d) Confirms the number of shares owned with the issuing company.
26.
The audit procedure of analyzing the repairs and maintenance accounts is
primarily designed to provide evidence in support of the audit proposition that all
a) Expenditures for fixed assets have been recorded in the proper period.
b) Capital expenditure have been properly authorized.
c) Noncapitalizable expenditures have been properly expensed.
d) Expenditures for fixed assets have been capitalized.
27.
For which of the following ledger accounts would the auditor be most likely
to analyze the details?
a) Service revenue.
b) Sales.
c) Repairs and maintenance expense.
d) Sales salaries expense.
28.
The auditor is least likely to learn of retirements of equipment through which
of the following?
a) Review of the purchase return and allowance account.
b) Review of depreciation.
c) Analysis of the debits to the accumulated depreciation account.
d) Review of insurance policy riders.
29.
UCANDOIT developed a new secret formula which is of great value because
it resulted in a virtual monopoly. UCANDOIT has capitalized all research and
development costs associated with this formula. QUENNIE, CPA, who is
examining this account, will probably
a) Confer with management regarding transfer of the amount from the balance
sheet to the income statement.

30.

31.

32.

33.

34.

35.

36.

37.

b) Confirm that the secret formula is registered and on file with the county clerks
office.
c) Confer with management regarding a change in the title of the account to
goodwill.
d) Confer with management regarding ownership of the secret formula.
In verifying the amount of goodwill recorded by a client, the most convincing
evidence which an auditor can obtain is by comparing the recorded value of
assets acquired with the
a) Assessed value as evidence by tax bills.
b) Sellers book value as evidence by financial statements.
c) Insured value as evidences by insurance policies.
d) Appraised value as evidence by independent appraisals.
In the examination of property, plant, and equipment, the auditor tries to
determine all of the following except the
a) Adequacy of internal control.
b) Extent of property abandoned during the year.
c) Adequacy of replacement funds.
d) Reasonableness of the depreciation.
An auditor would be least likely to use confirmations in connection with the
examination of
a) Inventories.
b) Long-term debt.
c) Property, plant and equipment.
d) Stockholders equity.
Which of the following procedures relating to the examination of accounts
payable could the auditor delegate entirely to the clients employees?
a) Test footings in the accounts payable ledger.
b) Reconcile unpaid invoices to vendors statements.
c) Prepare a schedule of accounts payable.
d) Mail confirmation for selected account balances.
Once satisfied that the balance sheet and income statement are fairly
presented in accordance with generally accepted accounting principles, an
auditor who is examining the statement of cash flows would be most concerned
with details of transactions in
a) Cash.
b) Trade receivables.
c) Notes payable.
d) Dividends payable.
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 clients attorney will reveal all legal action by
vendor for nonpayment.
d) There is likely to be other reliable external evidence to support the balances.
Which of the following procedures is least likely to be performed before the
balance sheet date?
a) Observation of inventory.
b) Review of internal control over cash disbursements.
c) Search for unrecorded liabilities.
d) Confirmation of receivables.
When an auditor selects a sample of items from the vouchers payable
register for the last month of the period under audit and traces these items to
underlying documents, the auditor is gathering evidence primarily in support of
the assertion that
a) Recorded obligations were paid.
5

38.

39.

40.

41.

42.

43.

44.

45.

b) Incurred obligations were recorded in the correct period.

c) Recorded obligations were valid.
d) Cash disbursements were recorded as incurred obligations.
A clients procurement system ends with the assumption of a liability and the
eventual payment of the liability. Which of the following best describes the
auditors primary concern with respect to liabilities resulting from the procurement
system?
a) Accounts payable are not materially understated.
b) Authority to incur liabilities is restricted to one designed person.
c) Acquisition of materials is not made from one vendor or one group of vendor.
d) Commitments for all purchases are made only after established competitive
bidding procedures are followed.
An examination of the balance in the accounts payable account is ordinarily
not designed to
a) Detect accounts payable which are substantially past due.
b) Verify that accounts payable were properly authorized.
c) Ascertain the reasonableness of recorded liabilities.
d) Determine that all existing liabilities at the balance sheet date have been
recorded.
During an examination of a publicly held company, the auditor should obtain
written confirmation regarding debenture transactions from the
a) Debenture holders.
b) Clients attorney.
c) Internal auditors.
d) Trustee.
Two months before the year-end the bookkeeper erroneously recorded the
receipt of a long-term bank loan by a debit to cash and a credit to sales. Which
of the following is the most effective procedure for detecting this type of error?
a) Analyze the notes payable journal.
b) Analyze bank confirmation information.
c) Prepare a year-end bank reconciliation.
d) Prepare a year-end bank transfer schedule.
DONTQUIT Corporation acquired a building and arranged mortgage
financing during the year. Verification of the related mortgage acquisition costs
would be least likely to include an examination of the related
a) Deed.
b) Cancelled checks.
c) Closing statement.
d) Interest expense.
An auditors program for the examination of long-term debt should include
steps that require the
a) Inspection of the accounts payable subsidiary ledger.
b) Investigation of credits to the bond interest income account.
c) Verification of the existence of the bondholders.
d) Examination of any bond trust indenture.
During the year under audit, a company has completed a private placement
of a substantial amount of bonds. Which of the following is the most important
step in the auditors program for the examination of bonds payable?
a) Confirming the amount issued with the bond trustee.
b) Tracing the cash received from the issue to the accounting records.
c) Examining the bond records maintained by the transfer agent.
d) Recomputing the annual interest cost and the effective yield.
In connection with the audit of a current issue of long-term bonds payable,
the auditor should
a) Determine whether bondholders are persons other then owners, directors, or
officers of the company issuing the bond.

46.

47.

48.

49.

50.

51.

52.

b) Calculate the effective interest rate to see if it is substantially the same as the
rates for similar issues.
c) Decide whether the bond issue was made without violating state or local law.
d) Ascertain that the client has obtain the opinion of counsel on the legally of the
issue.
The letter of audit inquiry addressed to the clients legal counsel will not
ordinarily be
a) Sent lawyer who was engaged by the audit client during the year and soon
thereafter resigned the engagement.
b) A source of corroboration of the information originally obtained from
management concerning litigation, claims, and assessments.
c) Limited to reference concerning only pending or threatened litigation with
respect to which the lawyer has been engaged.
d) Needed during the audit of client whose securities are not registered with the
SEC.
After discovering that a related-party transaction exists, the auditor should
be aware that the
a) Substance of the transaction could be significantly different from its form.
b) Adequacy of disclosure of the transaction is secondary to its legal form.
c) Transaction is assumed to be outside the ordinary course of business.
d) Financial statements should recognize the legal form of the transaction rather
than its substance.
When auditing related-party transactions, an auditor places primary
emphasis on
a) Confirming the existence of the related parties.
b) Verifying the valuation of the related-party transactions.
c) Evaluating the disclosure of the related-party transactions.
d) Ascertaining the rights and obligations of the related parties.
Which of the following audit procedures would most likely assist an auditor
in identifying conditions and events that may indicate there could be substantial
doubt about an entitys ability to continue as a going concern?
a) Review compliance with terms of debt agreements.
b) Confirmation of account receivable from principal customers.
c) Reconciliation of interest expense with debt outstanding.
d) Confirmation of bank balances.
A client acquired 25% of its outstanding capital stock after year-end and
prior to completion of the auditors fieldwork. The auditor should
a) Advise management to adjust the balance sheet to reflect the acquisition.
b) Issue pro forma financial statements giving effect to the acquisition as if it had
occurred at year-end.
c) Advise management to disclose the acquisition in the notes to the financial
statements.
d) Disclose the acquisition in the opinion paragraph of the auditors report.
Which of the following procedures would an auditor most likely perform to
obtain evidence about an entitys subsequent events?
a) Reconcile bank activity for the month after the balance sheet date with cash
activity reflected in the accounting records.
b) Examine on a test basis the purchase invoices and receiving reports for
several days after the inventory date.
c) Review the treasurers monthly reports on temporary investment owned,
purchased, and sold.
d) Obtain a letter from the entitys attorney describing any pending litigation of
unasserted claims, or loss contingencies.
After issuance of the auditors report, the auditor has no obligation to make
any further inquiries with respect to audited financial statements covered by that
report unless

53.

54.

55.

56.

57.

58.

a) A final resolution of a contingency that had resulted in a qualification of the

auditors report is made.
b) A development occurs that may affect the clients ability to continue as a going
concern.
c) An investigation of the auditors practice by a peer review committee ensues.
d) New information is discovered concerning undisclosed related-party
transactions of the previously audited period.
An auditor concludes that a substantive auditing procedure considered
necessary during the prior periods audit was omitted. Which of the following
factors would most likely cause the auditor promptly to apply the omitted
procedure?
a) There are on alternative procedures available to provide the same evidence as
the omitted procedure.
b) The omission of the procedures impairs the auditors present ability to support
the previously expressed opinion.
c) The source documents needed to perform the omitted procedure are still
available.
d) The auditors opinion on the prior periods financial statements was unqualified.
Which of the following auditing procedures is ordinarily performed last?
a) Reading of the minutes of the directors meetings.
b) Confirming accounts payable.
c) Obtaining a management representation letter.
d) Testing of the purchasing function.
Independent internal verification of inventory occurs when employees who
a) Issue raw materials obtain material requisition for each issue and prepare daily
totals of material issued.
b) Compare records of goods on hand with physical quantities do not maintain the
records or have custody of the inventory.
c) Obtain receipts for the transfer of completed work to finished goods prepares a
completed report.
d) Are independent of issuing production orders updated records from completed
job cost sheets and production cost reports on a timely basis.
Well functioning internal control for the inventory/production functions would
provide that finished goods are to be accepted for stock only after presentation of
a completed production order and a(n)
a) Shipping order.
b) Material requisition.
c) Bill of lading.
d) Inspection report.
Which of the following procedures would best detect the theft of valuable items
from an inventory that consists of hundreds of different items selling for P1 to
P10 and a few items selling for hundreds of pesos?
a) Maintain a perpetual inventory of only the more valuable items with frequent
periodic verification of the validity of the perpetual inventory record.
b) Have an independent CPA firm prepare a report on the effectiveness of internal
control over inventory.
c) Have separate warehouse space for the more valuable items with sequentially
numbered tags.
d) Require an authorized officers signature on all requisitions for the more
valuable items.
Effective internal control over the purchasing of raw materials should usually
include all of the following procedures except
a) Systematic reporting of product changes which will affect raw materials.
b) Determining the need of the raw materials prior to preparing the purchase order.
c) Obtaining third-party written quality and quantity reports prior to payment for the
raw materials.
d) Obtaining financial approval prior to making a commitment.
8

59.

60.

61.

62.

(63)

(64)

(65)

An auditor will ordinarily ascertain whether payroll checks are properly

endorsed during the examination of
a) Time cards.
b) The voucher system.
c) Cash in bank.
d) Accrued payroll.
In the audit of which of the following types of profit-oriented enterprises would
the auditor be most likely to place special emphasis on testing the controls over
proper classification of payroll transactions?
a) A manufacturing organization.
b) Retailing organization.
c) Wholesaling organization.
d) A service organization.
A large retail enterprise has established a policy which requires that the
paymaster deliver all unclaimed payroll checks to the internal auditing
department at the end of each payroll distribution day. This policy was most
likely adopted in order to
a) A assure that employees who were absent on a payroll distribution day are not
paid for that day.
b) Prevent the paymaster from cashing checks which are unclaimed fro several
weeks.
c) Prevent a bona fide employees check from being claimed by another
employee.
d) Detect any fictitious employee who may have been placed on the payroll.
One of the auditors objectives in observing the actual distribution of payroll
checks is to determine that every name on the payroll is that of a bona fide
employee. The payroll observation is an auditing procedure that is generally
performed for which of the following reasons?
a) The professional standards that are generally accepted require the auditor to
perform the payroll observation.
b) The various phases of payroll work are not sufficiently segregated to afford
effective internal control.
c) The independent auditor uses personal judgment and decides to observe the
payroll distribution on a particular audit.
d) The standards that are generally accepted by the profession are interpreted to
mean that payroll observation is expected on an audit unless circumstances
dictate otherwise.
An auditor may decide to increase the risk of incorrect rejection when
a) Increase reliability form the sample is desired.
b) Many differences (audit value minus recorded value) are expected.
c) Initial sample results do not support the planned level of control risk.
d) The cost and effort of selecting additional sample items is low.
The purpose of segregating the duties of hiring personnel and distributing payroll
checks is to separate the
a) Operational responsibility from the recordkeeping responsibility.
b) Responsibility of recording a transaction at its origin from the ultimate posting in
the general ledger.
c) Authorization of transactions from the custody or related assets.
d) Human resources function from the controllership function.
A CPA reviews a clients payroll procedures. The CPA would consider internal
control to be less than effective if a payroll department supervisor was assigned
the responsibility for
a) Reviewing and approving time reports for subordinate employees.
b) Distributing payroll checks to employees.
c) Hiring subordinate employees.
d) Initiating requests for salary adjustments for subordinate employees.

(66) In the audit of which of the following types of profit-oriented enterprises would the
auditor be most likely to place special emphasis on testing the controls over proper
classification of payroll transactions?
a)
A manufacturing organization.
b)
Retailing organization.
c)
Wholesaling organization.
d)
A service organization.
(67) One of the auditors objectives in observing the actual distribution of payroll checks
is to determine that every name on the payroll is that of a bona fide employee. The
payroll observation is an auditing procedure that is generally performed for which
of the following reasons?
a)
The professional standards that are generally accepted require the auditor
to perform the payroll observation.
b)
The various phases of payroll work are not sufficiently segregated to afford
effective internal control.
c)
The independent auditor uses personal judgment and decides to observe
the payroll distribution on a particular audit.
d)
The standards that are generally accepted by the profession are
interpreted to mean that payroll observation is expected on an audit unless
circumstances dictate otherwise.
(68) Which of the following questions would an auditor most likely include on an internal
control questionnaire for notes payable?
a) Are assets that collateralize notes payable critically needed for the entitys
continued existence?
b) Are two or more authorized signatures required on checks that repay notes
payable?
c) Are the proceeds from notes payable used for the purchase of noncurrent
assets?
d) Are direct borrowings on notes payable authorized by the board of directors?
(69) The primary responsibility of a bank acting as registrar of capital stock is to
a) Ascertain that dividends declared do not exceed the statutory amount allowable
in the state of incorporation.
b) Account for stock certificates by comparing the total shares outstanding to the
total in the shareholders subsidiary ledger.
c) Act as an independent third party between the board of directors and outside
investors concerning merger, acquisitions, and the sale of treasury stock.
d) Verify that stock is issued in accordance with the authorization of the board of
directors and the articles of incorporation.
(70) A company holds bearer bonds as a short-term investment. Responsibility for
custody of these bonds and submission of coupons for periodic interest collections
probably should be delegated to the
a) Chief accountant.
b) Internal auditor.
c) Cashier.
d) Treasurer.
(71) In order to avoid the misappropriation of company-owned marketable securities,
which of the following is the best course of action that can be taken by the
management of a company with a large portfolio of marketable securities?
a) Require that one trustworthy and bonded employee be responsible for access
to the safekeeping area, where securities are kept.
b) Require that employees who enter and leave the safekeeping area sign and
record in a log the exact reasons for their access.
c) Require that employees involved in the safekeeping function maintain a
subsidiary control ledger for securities on a current basis.
d) Require that the safekeeping function for securities be assigned to a bank that
will act as a custodial agent.

10

(72) A company has additional temporary funds to invest. The board of directors
decided to purchase marketable securities and assigned the future purchase and
sale decisions to a responsible financial executive. The best person(s) to make
periodic reviews of the investment activity should be
a) The investment committee of the board of directors.
b) The treasurer.
c) The corporate controller.
d) The chief operating officer.
(73) When there are numerous property and equipment transactions during the year, an
auditor planning to assess control risk at the minimum level usually plans to obtain
an understanding of the internal control and to perform
a) Tests of control and extensive tests of property and equipment at the end of the
year.
b) Extensive tests of 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.
(74) To strengthen internal control over the custody of heavy mobile equipment, the
client would most likely institute a policy requiring a periodic
a) Increase in insurance coverage.
b) Inspection of equipment and reconciliation with accounting records.
c) Verification of liens, pledges, and collateralizations.
d) Accounting for work orders.
(75) A weakness in internal control over recording retirements of equipment may cause
the 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 still
on hand but no longer being used.
d) Select certain items of equipment from the accounting records and locate them
in the plant.
(76) Which of the following procedures is most likely to prevent the improper disposition
of equipment?
a) A separation of duties between those authorized to dispose of equipment and
those authorized to approve removal work orders.
b) The use of serial numbers to identify equipment that could be sold.
c) Periodic comparison of removal work orders to authorizing documentation.
d) A periodic analysis of the scrap sales and the repairs and maintenance
accounts.
(77) Which of the following is the most important internal control activity over
acquisitions of property, plant, and equipment?
a) Establishing a written company policy distinguishing between capital and
revenue expenditures.
b) Using a budget to forecast and control acquisitions and retirements.
c) Analyzing monthly variances between authorized expenditures and actual
costs.
d) Requiring acquisitions to be made by users departments.
(78) Equipment acquisitions that are misclassified as maintenance expense most likely
would be detected by a control that provides for
a) Segregation of duties of employees in the accounts payable department.
b) Independent verification of invoices for disbursements reported as equipment
acquisitions.
c) Investigation of variances within a formal budgeting system.
d) Authorization by the board of directors of significant equipment acquisitions.
11

(79) It would not be appropriate for the auditor to initiate discussion with the audit
committee concerning
a) The extent to which the work of internal auditors will influence the scope of the
examination.
b) Details of the procedures which the auditor intends to apply.
c) The extent to which change in the companys organization will influence the
scope of the examination.
d) Details of potential problems which the auditor believes might cause a qualified
opinion.
(80) When communicating internal control related matters noted in an audit, an
auditors report issued on reportable conditions should indicate that
a) Errors or irregularities may occur and not be detected because there are
inherent limitations in any internal control.
b) The issuance of an unqualified opinion on the financial statements may be
dependent on corrective follow-up action.
c) The deficiencies noted were not detected within a timely period by employees I
in the normal course of performing their assigned functions.
d)
The purpose of the audit was to report on the financial statements and not to
provide assurance on internal control.
CPA REVIEW SCHOOL OF THE PHILIPPINES

12