University of Nueva Caceres

Naga City
AUDITING THEORY

AUDIT EVIDENCE

REFERENCES:
 PSA 500: Audit Evidence
 PSA 501: Audit Evidence – Specific considerations for Selected Items
 PSA 505: External Confirmations
 PSA 520: Analytical Procedures
 PSA 230: Audit Documentation

ASSERTIONS AND AUDIT OBJECTIVES

Nature of Assertions
1. Financial statements are not statements of facts.
2. They are a collection of claims and assertions, made implicitly or explicitly by the entity’s
management, about the recognition, measurement, presentation, and disclosure of information
in the financial statements.
3. Assertions (or management assertions) are representations by management, explicit or
otherwise, that are embodied in the financial statements.
4. These assertions relate to the fairness of presentation of the financial statements; thus, they
are directly related to applicable financial reporting framework.
5. Examples of assertions:
 All the assets exist. (Existence).
 All sales transactions have been recorded. (Completeness).
 Inventories are properly valued. (Valuation).
 All amounts are properly presented and disclosed in the financial statements. (Accuracy).

Levels of Assertions:
1. Financial statement level
– entity’s management representation that the financial statements as a whole are presented
fairly, in all material respects, in accordance with the applicable financial reporting framework.
2. Account balance or class of transactions level
– entity’s management representation that the underlying account balances and class of
transactions, including related disclosures, are free of material misstatements.

Categories of Assertions used by the Auditor:

1. Assertions about classes of transactions and events for the period under audit
 Completeness – all transactions and events that should have been recorded have been
recorded.
 Occurrence – recorded transactions and events have occurred and pertain to the entity.
 Cutoff (proper period) – transactions and events have been recorded in the correct
accounting period.
 Accuracy – amounts and other data relating to recorded transactions and events have been
recorded appropriately.
 Classification – transactions have been recorded in the proper accounts.

2. Assertions about account balances at the period end

 Completeness – all assets, liabilities and equity interests that should have been recorded
have been recorded.
 Valuation and allocation – assets, liabilities, and equity interests are included in the FS at
appropriate amounts and any resulting valuation or allocation adjustments are
appropriately recorded.
 Existence – assets, liabilities, and equity interests exist.
 Rights and obligations – the entity holds or controls the rights to assets, and liabilities are
the obligations of the entity.

3. Assertions about presentation and disclosure

 Completeness – all disclosures that should have been included in the financial statements
have been included.
 Occurrence and rights and obligations – disclosed events, transactions, and other matters
have occurred and pertain to the entity.
 Classification and understandability – financial information is appropriately presented and
described, and disclosures are clearly expressed.
 Accuracy and valuation – financial and other information are disclosed fairly and at
appropriate amounts.

Auditor’s Use of Relevant Assertions:

1. The auditor uses relevant assertions in developing audit objectives that will be the basis for
designing audit procedures.
2. Relevant assertions are assertions that have a meaningful bearing on whether an account is
fairly stated. For example:
 Existence assertion, not valuation, is typically relevant to the audit of cash account.
 The valuation assertion would be relevant to assessing the inventory balance than assessing
sales balance.

Audit Objectives
1. The auditor develops audit objectives that relate to management assertions about the
financial statement components.
2. To achieve audit objectives, the auditor shall design audit procedures and gather sufficient
appropriate audit evidence whether the assertions are in accordance with the applicable
financial reporting framework.
3. Audit objectives are used to verify management assertions. Thus, there should be proper
matching of auditor’s objectives with management assertions.

Types of Audit Objectives:

1. Whether general or specific:
 General audit objectives – are broad objectives of auditing an account balance or class of
transactions.
 Specific audit objectives – audit objectives stated in terms tailored to the specific audit
engagement.
2. Whether substantive or compliance
 Substantive audit objectives – objectives that relate to the determination of the validity of
assertions on account balances or class of transactions or disclosures found in the financial
statements.
 Compliance audit objectives – objectives that relate to the degree of entity’s compliance
with relevant controls.

Audit Procedures
1. Based on audit objectives, the auditor should plan and perform audit procedures.
2. Audit procedures are the means for obtaining sufficient appropriate audit evidence to satisfy
financial statement assertions and to support audit opinion on the fairness of the financial
statements.
3. They are the detailed instructions for the collection of a particular type of evidence that is to
be obtained during the audit. Since audit procedures are performed to verify management
assertions, they would differ depending on the particular assertion or account audited.

Primary Purpose of Audit Procedures:

1. Audit procedures are performed to gather necessary (not all) corroborative evidence to
achieve audit objectives in order to result to sufficient appropriate audit evidence on the
fairness of the presentation of the entity’s financial statements.

Nature, Timing and Extent of Audit Procedures:

1. Nature of an audit procedure – refers to:
 Its purpose (i.e., test of controls or substantive procedure) and
 Its type (i.e., inspection, observation, inquiry, confirmation, recalculation, reperformance,
or analytical procedures).
2. Timing of an audit procedure – refers to when to perform the audit procedure, or the period
or date to which the audit evidence applies.
 Audit procedures are normally performed:
 Early in the accounting period being examined.
 Throughout the accounting period being examined, but with emphasis of the
transactions near the end.
 Within one to three months after the close of the accounting period.
 Audit procedures performed before period end are known as interim work.
3. Extent of an audit procedure – refers to the quantity to be performed or the extent of testing
or the number of items to be examined.

Audit Procedures for Obtaining Audit Evidence:

1. Risk assessment procedures – procedures to obtain an understanding of the entity and its
environment, including its internal control, in order to identify and assess the risks of material
misstatement (RMM). Risk assessment procedures include:
 Inquiry of management and other personnel.
 Analytical procedures (as a planning tool).
 Observation and inspection.
2. Further audit procedures – The auditor shall design and perform audit procedures whose
nature, timing, and extent are based on and are responsive to the assessed RMM at the
assertion level.
 Further audit procedures are actually audit procedures classified according to purpose.
 In designing the further audit procedures to be
performed, the auditor shall:
 Consider the assessed RMM.
 Obtain more persuasive audit evidence the higher the auditor’s assessment of risk by:
 Increasing the quantity of evidence; or
 Obtain evidence that is more relevant or reliable (such as obtaining third party
evidence or by obtaining corroborating evidence from a number of independent
sources).

Further audit procedures include:

1. Tests of controls (compliance tests) – audit procedures designed to evaluate the operating
effectiveness of relevant controls in preventing, or detecting and correcting material
misstatements at the assertion level.
 In designing and performing tests of controls, the auditor shall obtain more persuasive
audit evidence the higher/greater reliance the auditor places on the effectiveness of a
control.
 Test of controls, although not intended to detect material misstatements, may provide
evidence that a misstatement is likely to occur.
2. Substantive procedures – audit procedures designed to detect material misstatements at the
assertion level.

Types of substantive procedures:

1. Tests of details – examining or obtaining audit evidence on the actual details of account
balance, class of transactions, and disclosure.
 The objective of tests of details is to substantiate or identify misstatements in the recorded
amounts.
 Directional testing – refers to the direction of an audit test.
 Tracing – if the auditor starts from original source documents and traces forward to
the accounting records, this tests the assertion of completeness. This helps the auditor
identify understatement errors.
 Vouching – If the auditor starts from the accounting records and vouches backwards to
the original source documents, this tests the assertion of existence or occurrence. This
helps the auditor identify overstatement errors.
 Test of details of transactions – testing of transactions which give rise to the ending
balance of a given account; these involve examining authorization, recording and posting of
transactions.
 Applicability of test of details of transactions: It is used when the account being
substantiated has relatively few or smaller volume of transactions of relatively material
amounts occurring during the year.
 Test of transactions are often performed several months prior to the balance sheet
date.
 Tests of details of transactions primarily involve tracing and vouching.
 Tests of details of balances – direct testing of accounts ending balance.
 Tests of details of balances focus on obtaining evidence directly about an account
balance.
 More types of evidence are obtained using tests of details of balances than by using
any other type of test.
 Test details of balances is usually the most costly to perform.
2. Substantive analytical procedures
– these are analytical procedures performed during testing phase to substantiate predictable
relationships among both financial and non-financial data.
 Analytical procedures are evaluations of financial information made by a study of plausible
relationships among both financial and nonfinancial data. Analytical procedures generally
involve comparisons of recorded amounts to independent expectations developed by the
auditor.
 Analytical procedures will result to circumstantial evidence rather than conclusive evidence.
 Results of substantive analytical procedures would entail additional tests to be performed.
 Analytical procedures are the audit tests that are usually the least costly to perform.

Audit Procedures According to Types:

1. Inspection – consists of examining records or documents (whether internal or external, in
paper form, or other media), or a physical examination of an asset.
2. Observation – consists of viewing/looking at a process or procedure being performed by
others.
3. External confirmation – represents audit evidence obtained by the auditor as a direct written
response to the auditor from a third party (the confirming party) in paper form, or by electronic
or other medium. Examples of external confirmation:
 Confirmation of accounts receivable balances:
 Positive confirmation – customers should reply whether or not they agree with their
respective balances; it is considered more effective than negative confirmation.
 Negative confirmation – customers should reply if there are discrepancies.
 Bank confirmation of account balances (including amount of loan outstanding).
 Suppliers’ confirmation of accounts payable.
 Confirmation from lenders.
 Inventory confirmation when inventory is under custody and control of a third party.
4. Recalculation (computation) – consists of checking the mathematical accuracy (manually or
electronically) of documents or records.
5. Reperformance – involves the auditor’s independent execution of procedures or controls that
were originally performed (by the client’s staff) as part of the entity’s internal control.
6. Analytical procedures – consist of evaluations of financial information made by a study of
plausible relationships among both financial and non-financial data.
7. Inquiry – consists of seeking information of knowledgeable persons, both financial and non-
financial, within the entity or outside the entity.

Audit Techniques
1. The auditor applies audit techniques (methods) to gather corroborative evidence and uses his
professional judgment to determine which audit techniques would best result to the audit
evidence he needs.
2. Examples of audit techniques:
 Confirm – to obtain information directly from an independent third party.
 Inspect – to obtain evidence through physical examination.
 Count – physical examination of assets (such as cash count or petty cash count).
 Compare – technique used after count of assets; also used to compare current period
balances with those of prior periods.
 Inquire – asking questions, whether oral or written, directed to the client or to third parties.
 Trace – to determine whether transactions supported by source documents are properly
recorded and posted.
 Vouch – examine and authenticate of underlying evidential papers.
 Verify – to prove the accuracy of extensions, footings, postings, ownership and existence.

Audit Program
1. An audit program is a detailed listing of the nature, timing and extent of planned audit
procedures (tests of controls and/or substantive tests) that the auditor will perform to gather
sufficient appropriate evidenced.
2. It is a set of instructions to assistants involved in the audit and as a means to control and
record the proper execution of work.

Audit Evidence
1. Audit evidence refers to all the information used by the auditor in arriving at the conclusions
on which the audit opinion is based. Thus, audit evidence supports the opinion and the auditor's
report.
2. Sometimes called as evidential matter, it is the main output/product of performing audit
procedures.
3. The auditor shall conclude whether sufficient appropriate audit evidence has been obtained
based on his professional judgment.

Nature of Audit Evidence:

1. Accounting records (Underlying data)
– accounting records/data prepared by the client’s personnel and from which financial
statements are prepared.
 Records of initial accounting entries.
 Supporting records, such as checks and records of electronic fund transfers, invoices and
contracts.
 General and subsidiary ledgers.
 Journal entries and other adjustments to the financial statements that are not reflected in
formal journal entries.
 Records such as worksheets and spreadsheets supporting cost allocations, computations,
reconciliation and disclosures.
2. Corroborating evidence – corroborating information that are used by the auditor to verify the
fairness of the accounting records.
 Documents (such as checks, bank statements, contracts and minutes of meetings).
 Information/evidence from other sources such as:
 Previous audits
 Confirmations from third parties
 Client written representation
 Information obtained by the auditor from audit procedures such as inquiry, observation,
inspection and computation.
 Other information developed by, or available to, the auditor that permits the auditor to
reach conclusions through valid reasoning.

Types of Audit Evidence:

1. Physical evidence – obtained by physical examination of assets.
2. Mathematical recomputation – auditor’s recomputation of the accuracy of client’s
computations such as depreciation, amortization, doubtful accounts, etc.
3. Documentation – examination of the supporting documents of recorded transactions and
balances appearing in the financial statements.
4. Representation by third parties (or confirmation) – a document originating from
independent outside party and sent directly to the auditor.
5. Representation by client personnel – statements from client personnel in response to queries
posed by the auditor.
6. Results of analytical procedures.
7. Internal control – existence of effective internal control may be regarded as a strong evidence
of the validity of the accounts and amounts found in the financial statements.
8. Subsequent events – they provide additional evidence regarding conditions that already
existing on the balance sheet that and affect accounting estimates.

Sufficient Appropriate Audit Evidence

1. Sufficiency – the measure of the quantity or amount of audit evidence that the auditor shall
accumulate.
 Sufficiency is determined based on the auditor’s professional judgment.
 Audit evidence is sufficient if there is enough of it to afford a reasonable basis for an audit
opinion on the financial statements.
2. Appropriateness – measures the quality of audit evidence, that is, its relevance and its
reliability in providing support for the conclusions on which the auditor's opinion is based.
 Relevance – deals with the logical connection with, or bearing upon, the purpose of audit
procedures and the assertion under consideration.
 Reliability – objectivity of evidence
 Reliability of evidence is influenced by:
 Its source (external or internal)
 Its nature (visual, documentary, or oral)
 The circumstances under which it is obtained
 Where relevant, the controls over its preparation and maintenance
 Hierarchy of reliability of evidence: (from most reliable to least reliable)
 Direct evidence or personal observation and knowledge (such as physical
observation).
  Externally generated evidence sent directly to the auditor (such as confirmations
from banks and customers and bank statements and cutoff bank statements
received from banks).
 Externally generated evidence kept by the client (such as vendor’s invoices, bank
statements received from the client).
 Internally generated evidence circulated externally (such as sales invoices from
sale to customers and paid checks and cost allocations).
 Internally generated evidence not circulated externally (such as purchase
requisitions, customer’s order and cost allocations).
 Oral evidence.

Persuasive Evidence:
1. Audit evidence is persuasive if it is sufficient both in quantity and quality to support audit
opinion. Thus, sufficiency and appropriateness of audit evidence are the determinants of
persuasiveness of audit evidence. The auditor may need to rely on audit evidence that is
persuasive rather than conclusive. However, to obtain reasonable assurance, the auditor must
not be satisfied with audit evidence that is less than persuasive.

Information produced by a management expert as audit evidence

1. A management expert is an individual or organization possessing expertise in a field other
than accounting or auditing, whose work in that field is used by the entity to assist the entity in
preparing the financial statements.
2. When information to be used as audit evidence has been prepared using the work of a
management’s expert, the auditor shall, to the extent necessary, having regard to the
significance of that expert’s work for the auditor’s purpose.
3. Evaluate the competence, capabilities and objectivity of that expert.
 Competence – relates to the nature and level of expertise of the management’s expert.
 Capability – relates to the ability of the management’s expert to exercise that competence
in the circumstances.
 Objectivity – relates to the possible effects that bias, conflict of interest or the influence of
others may have on the professional or business judgment of the management expert.
4. Obtain an understanding of the work or field of expertise of that management’s expert.
Aspects of the management’s expert’s field relevant to the auditor’s understanding may include:
 Whether that expert’s field has areas of specialty within it that are relevant to the audit.
 Whether any professional or other standards, and regulatory or legal requirements apply.
5. Evaluate the appropriateness of that expert’s work as audit evidence for relevant assertion.
The auditor shall consider:
 The relevance and reasonableness of that expert’s findings or conclusions, their consistency
with other audit evidence, and whether they have been appropriately reflected in the
financial statements.
 If the expert’s work involves use of significant assumptions and methods, the relevance and
reasonableness of those assumptions and methods.
 If that expert’s work involves significant use of source data the relevance, completeness,
and accuracy of that source data.

- - END - -
 AUDIT EVIDENCE

AUDIT EVIDENCE PART I: Financial Statement Assertions

1. The information obtained by the auditor in arriving at the conclusions on which the audit
opinion is based is called
a. Audit working papers c. Audit evidence
b. Audit assertions d. Audit standards

2. The major reason an independent auditor gathers evidence is to

a. Form an opinion on the financial statements c. Evaluate management
b. Detect fraud d. Evaluate internal control

3. The sufficiency and appropriateness of evidential matter ultimately is based on the

a. Availability of corroborating data c. Pertinence of the evidence
b. Philippine Standards on Auditing d. Judgments of the auditor

4. Audit evidence comprises:

I. Information that supports and corroborates management’s assertions
II. Any information that contradicts management’s assertions

a. I only c. Neither I nor II

b. II only d. Both I and II

5. Which of the following is correct about the appropriateness of evidence?

a. Audit evidence from external sources is more relevant than evidence generated internally
b. Audit evidence is more persuasive when items of evidence from different sources or different
nature are not consistent
c. Audit evidence generated internally is more reliable when the related accounting and internal
control systems are effective
d. Sufficiency refers to the amount of evidence needed

6. Evidential mater is generally considered sufficient when

a. It is appropriate
b. There is enough of it to afford a reasonable basis for an opinion on financial statements
c. It has the qualities of being relevant, objective and free from unknown bias
d. It has been obtained by random selection

7. Which of the following statements about audit evidence is correct?

a. Appropriateness is the measure of the quantity of audit evidence
b. Sufficiency is the measure of the quality of audit evidence and its relevance to a particular
assertion and its reliability
c. Audit evidence is more persuasive when items of evidence from different sources or of
different nature are consistent
d. There should be a one-to-one relationship between audit objectives and audit procedure

8. Which of the following assertions is correct about the reliability of evidential matter?
a. Information obtained indirectly from outside sources is the most reliable evidential matter
b. To be reliable, evidential matter should be convincing rather than persuasive
c. Reliability of evidential matter refers to the amount of corroborating evidence obtained
d. An effective internal control structure provides more assurance about the reliability of
evidential matter

9. In determining the validity of accounts receivable, which of the following would the auditor
consider to be the most reliable?
a. Documentary evidence that supports the accounts receivable balance
b. Credits to accounts receivable from the cash receipts book after the close of business at year
end
c. Direct telephone communication between the auditor and customer
d. Confirmation replies received directly from customers

10. Which of the following types of evidence is the least persuasive?

a. Pre-numbered purchase order forms
b. Bank statements obtained from the client
c. Test counts of inventory performed by the auditor
d. Correspondence from the client’s attorney about litigation

11. Which of the following forms of documentary evidence would be considered the most
reliable by an auditor?
a. Internally generated c. Easily duplicated
b. Prenumbered d. Authorized by a responsible official

12. In the context of an audit of financial statements, substantive tests are audit procedures that
a. May be eliminated under certain conditions
b. Are designed to discover significant subsequent events
c. May be either tests of transactions, direct test of financial balances or analytical tests
d. Will increase proportionately with the auditor’s assessment of control risk

13. The objective of tests of details of transactions performed as substantive tests is to

a. Comply with generally accepted auditing standards
b. Attain assurance about the reliability of the accounting system
c. Detect material misstatements in the financial statements
d. Evaluate whether management’s policies and procedures operate effectively

14. Which of the following is the best example of corroborating evidence?

a. General journal c. Purchase orders
b. Worksheet cost allocations d. Cash receipts journal

15. Which of the following is an example of “other information” that could be used by an
auditor as evidential matter supporting the financial statements?
a. Worksheets supporting cost allocations c. Special journals
b. Confirmation of accounts receivable d. Cash receipts journal

16. Management assertions are

a. Stated in the footnotes to the financial statements
b. Implied or expressed representations about the accounts in the financial statements
c. Explicitly expressed representations about the financial statements
d. Provided to the auditor in the Assertions Letter, but are not disclosed in the financial
statements

17. Which of the following statements is true?

a. The auditor’s objectives follow and are closely related to management assertions
b. Management’s assertions follow and are closely related to the auditor’s objectives
c. The auditor’s primary responsibility to find and disclose fraudulent management assertions
d. Assertions about presentation and disclosure deal with whether the accounts have been
included in the financial statements at appropriate amounts

18. Which of the following statements is true?

a. The evidence which the auditor accumulates remains the same from audit to audit, but the
general audit objectives vary, depending on the circumstances
b. The general audit objectives remain the same from audit to audit, but the evidence varies,
depending on the circumstances
c. The circumstances may vary from audit to audit, but the evidence accumulated remains the
same
d. The general audit objectives may vary from audit to audit, but the circumstances remain the
same

19. An auditor most likely would review a client’s periodic accounting for the numerical
sequence of shipping documents and sales invoices to support management’s financial
statement assertion of
a. Existence c. Completeness
b. Rights and obligations d. Valuation and allocation

20. Cut-off tests designed to detect credit sales made after the end of the year that have been
recorded in the current year provide assurance about management’s assertion of
a. Accuracy c. Rights and obligations
b. Classification d. Existence
21. In confirming with an outside agent, such as a financial institution, that the agent is holding
investment securities in the client's name, an auditor most likely gathers evidence in support of
management's financial statement assertions of existence and
a. Valuation and allocation c. Completeness
b. Rights and obligations d. Classification and understandability

22. Two assertions for which confirmation of accounts receivable balances provides primary
evidence are
a. Completeness and valuation and allocation
b. Valuation and allocation and rights and obligations
c. Rights and obligations and existence
d. Existence and completeness

23. An auditor concluded that no excessive costs for an idle plant were charged to inventory.
This conclusion most likely related to the auditor’s objective to obtain evidence about the
financial statement assertions regarding inventory, including presentation and disclosure and
a. Valuation and allocation c. Rights and obligations
b. Completeness d. Existence

24. Which of the following most likely would give the most assurance concerning the valuation
and allocation assertion of accounts receivable?
a. Vouching amounts in the subsidiary ledger to details on shipping documents
b. Inquiring about receivables pledged under loan agreements
c. Assessing the allowance for bad debts for reasonableness
d. Comparing receivable turnover ratios with industry statistics for reasonableness

25. An auditor is most likely to inspect loan agreements under which an entity’s inventories are
pledged to support management’s financial statement assertion of
a. Presentation and disclosure c. Completeness
b. Existence d. Valuation and allocation

26. An auditor’s purpose in reviewing the renewal of a note payable shortly after the balance
sheet date most likely is to obtain evidence concerning management’s assertion about
a. Existence c. Completeness
b. Presentation and disclosure d. Valuation and allocation

27. During an audit of a company’s stockholders’ equity accounts, the auditor determines
whether there are restrictions on retained earnings resulting from loans, agreements, or
law.This audit procedure most likely is intended to verify management’s assertion of
a. Existence c. Completeness
b. Presentation and disclosure d. Valuation and allocation

28. In testing the existence assertion for an asset, an auditor ordinarily works from the
a. Potentially unrecorded items to the financial statements
b. Financial statements to the potentially unrecorded items
c. Supporting evidence to the accounting records
d. Accounting records to the supporting evidence

29. In determining whether transactions have been recorded, the direction of the audit testing
should be from the:
a. General journal entries c. General ledger balances
b. Original source documents d. Adjusted trial balance

30. If the objective of a test of details of transactions is to detect overstatement of sales, the
auditor’s direction of testing should be from the
a. Cash receipts journal to the sales journal
b. Accounting records to the source documents
c. Source documents to the accounting records
d. Sales journal to the cash receipts journal

31. Tracing bills of lading to sales invoices provides evidence that

a. Invoiced sales were shipped
b. Recorded sales were shipped
c. Shipments to customers were recorded as sales
d. Shipments to customers were invoiced

32. To determine that all sales have been recorded, the auditors would select a sample of
transactions from the
a. Shipping documents file
b. Sales journal
c. Accounts receivable subsidiary ledger
d. Remittance advices

33. The document used to indicate to the customer the amount of a sale and due date of the
payment is the
a. Sales order c. Bill of lading
b. Shipping document d. Sales invoice

34. A document prepared to initiate shipment of the goods sold is the

a. Sales order c. Sales invoice
b. Bill of lading d. Shipping form

AUDIT EVIDENCE Part II: Substantive Testing

CASH

1. Which of the following is not considered an objective of the audit of cash?

a. Cash is stated at its realizable value
b. Compensating cash balances are reported as other current assets
c. Cash is properly classified, described and disclosed in the financial statements, including notes,
in conformity with GAAP
d. The client has ownership rights in the reported cash

2. The most likely reason for the auditor to be concerned about the valuation of cash is that
a. The proof of cash cannot be reconciled
b. The client uses a checking account
c. Both currency and negotiable securities are on hand
d. The client has foreign currency accounts

3. When counting cash on hand, the auditor must exercise control over all cash and other
negotiable assets to prevent
a. Theft c. Substitution
b. Deposits in transit d. Irregular endorsement

4. The best evidence regarding year-end bank balances is documented in the

a. Bank reconciliations c. Cash in bank lead schedule
b. Interbank transfer schedule d. Cutoff bank statement

5. Which procedure is an auditor most likely to use to detect a check outstanding at year-end
that was not recorded as outstanding on the year-end bank reconciliation?
a. Prepare a bank transfer schedule using the client's cash receipts and cash disbursements
journal
b. Receive a cutoff statement directly from the client's bank
c. Prepare a four-column bank reconciliation using the year-end bank statement
d. Confirm the year-end balance using the standard form to confirm account balance
information with financial institutions

6. X embezzled P10,000 from his company's account in Bank A. At year-end he hid the shortage
by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the
transaction on the books. This is an example of
a. Lapping c. Effective cash management
b. Kiting d. Related party transactions

7. An auditor will most likely detect kiting by

a. Completing an analysis of interbank transfers and obtaining cutoff bank statements directly
from all banks
b. Reconciling all bank accounts as of year end
c. Reconciling Bank A as of year end and Bank B at the end of the first week following year end
d. Reconciling Bank B as of year end and Bank A at the end of the first week following year end
8. The purpose of a proof of cash is to
a. Validate that the client’s bank did not make an error during the period being examined
b. Confirm that the client has properly separated the custody function from the recording
function with respect to cash
c. Prove that the client’s year-end balance of cash is fairly stated
d. Determine whether any unauthorized disbursements or unrecorded deposits were made for a
given time period

INVESTMENTS

9. Which of the following is not one of the auditor’s primary objectives in an audit of trading
securities?
a. To determine whether securities are authentic
b. To determine whether securities actually exist
c. To determine whether securities are the property of the client
d. To determine whether securities are properly classified on the balance sheet

10. A company makes a practice of investing excess short-term cash in trading securities that are
traded regularly on the Philippine Stock Exchange (PSE). A reliable test of the valuation of those
securities is
a. Calculation of premium or discount amortization
b. Confirmation of securities held by the broker
c. Consideration of current market quotations
d. Recalculation of investment value using a valuation model

11. A logical substantive test for accrued interest receivable would be to

a. Compare the interest income with published interest investment records
b. Verify the interest income by a calculation based on the face amount of notes and the
nominal interest rate
c. Verify the cost, carrying value, and market value of notes receivable
d. Recalculate interest earned and compare it to the amounts received

12. In establishing the existence and ownership of an investment held by a corporation in the
form of publicly traded stock, an auditor should inspect the securities or
a. Determine that the investment is carried at the lower of cost or market
b. Confirm the number of shares owned that are held by an independent custodian
c. Inspect the audited financial statements of the investee company
d. Obtain written representations from management confirming that the securities are properly
classified as trading securities

13. Which of the following provides the best form of evidence pertaining to the annual valuation
of an investment in which the client owns a 30% voting interest?
a. Historical cost of the investee company’s assets
b. Audited financial statements of the investee company
c. Current fair value of the investee company’s assets
d. Market quotations of the investee company’s stock

RECEIVABLE

14. Which of the following is not a principal objective in auditing accounts receivable?
a. To determine whether receivables are carried at their net realizable value
b. To determine whether receivables are properly classified, described and disclosed in the
financial statements, including notes, in conformity with GAAP
c. To determine whether the entity has real claims in all receivables on the balance sheet
d. To determine whether the accounts are collected by the balance sheet date

15. In many audits of sales transactions, no substantive tests of transactions are made for the
completeness objective on the ground that
a. Overstatements of assets and income are a greater concern than understatements
b. Understatements of assets and income are a greater concern than overstatements
c. It doesn’t matter if income is understated because the savings on income tax offsets the
reduced revenue and net income is correct
d. The reduced sales causes a reduction of accounts receivable, therefore the ratios of the two
financial statements will not be misleading

16. All of the following are examples of substantive procedures to verify the valuation of net
accounts receivable, except the
a. Comparison of the allowance for bad debts with past records
b. Recomputation of the allowance for bad debts
c. Inspection of the aging schedule and credit records of past due accounts
d. Inspection of accounts for current versus noncurrent status in the statement of financial
position

17. Which of the substantive field work procedures presented below provides the best evidence
about the completeness of recorded revenues?
a. Reconciling the sales journal to the general ledger control account
b. Vouching charges made to the accounts receivable subsidiary ledger to supporting shipping
record
c. Vouching shipping records to the customer order files
d. Reconciling shipping records to recorded sales

18. Which of the following is the most effective procedure for determining the collectability of
an accounts receivable?
a. Confirmation of the account
b. Review of the subsequent cash collections
c. Review of authorization of credit sales to the customer and the previous history of collections
d. Examination of the related sales invoice(s)

19. The process of obtaining and evaluating audit evidence through a direct communication
from a third party in response to a request for information about a particular item affecting
assertions made by management in the financial statements is called
a. Reperformance c. Inquiry
b. External confirmation d. Recalculation

20. The confirmation of customers’ accounts receivable rarely provides reliable evidence about
the valuation assertion because
a. Customers may not be inclined to report understatement errors in their accounts
b. Auditors typically select many accounts with low recorded balances to be confirmed
c. It is not practicable to ask the customer to confirm detailed information relating to its ability
to pay the account
d. Recipients usually respond only if they disagree with the information on the request

21. Auditors may use positive and/or negative forms of confirmation requests. An auditor most
likely will use
a. The negative form for small balances
b. The positive form, when the combined assessed level of inherent and control risk for related
assertions is acceptably low, and the negative form when it is unacceptably high
c. The positive form to confirm all balances regardless of size
d. A combination of the two forms, with the positive form used for trade balances and the
negative form for other balances

22. Negative confirmation of accounts receivable is less effective than positive confirmation of
accounts receivable because
a. A majority of recipients usually lack the willingness to respond objectively
b. Some recipients may report incorrect balances that require extensive follow-up
c. The auditor cannot infer that all non-respondents have verified their account information
d. Negative confirmations do not produce evidential matter that is statistically quantifiable

23. For customers not responding to a first request for positive confirmation requests, the
auditor should next
a. Contact the customer by telephone and attempt to confirm the balance orally
b. Analyze subsequent remittances from the customer to see if the year-end balance has been
paid
c. Send a second request for confirmation
d. Examine underlying documentation supporting the year-end balance
24. An auditor should perform alternative procedures to substantiate the existence of accounts
receivable when
a. No reply to a positive confirmation request is received
b. No reply to a negative confirmation request is received
c. Collectibility of the receivables is in doubt
d. Pledging of the accounts receivables is probable

25. In confirming accounts receivable, an auditor decided to confirm customers’ account

balances rather than individual invoices. Which of the following most likely would be included
with the client’s confirmation letter?
a. An auditor-prepared letter explaining that a non-response may cause an inference that the
account balance is correct
b. An auditor-prepared letter requesting the customer to supply missing and incorrect
information directly to the auditor
c. A client-prepared letter reminding the customer that a nonresponse will cause a second
request to be sent
d. A client-prepared statement of account showing the details of the customer’s account
balance

26. Which of the following statements would an auditor most likely add to the negative
confirmation form of confirmations of accounts receivable to encourage timely consideration by
the recipient?
a. “This is not a request for payment; remittances should not be sent to our auditors in the
enclosed enveloped”
b. “If you do not report any differences within 15 days, it will be assumed that this statement is
correct”
c. “The following invoices have been selected for confirmation and represent amounts that are
overdue”
d. “Report any differences on the enclosed statement directly to our auditors; no reply is
necessary if the amount agrees with your records”

27. An auditor confirms a representative number of open accounts as of December 31 and

investigates respondents’ exceptions and comments. By this procedure, the auditor is most
likely to learn which of the following?
a. One of the cashiers has been covering a personal embezzlement by lapping
b. The credit manager has misappropriated remittances from customers whose accounts have
been written off
c. One of the sales clerks has not been preparing charge slips for credit sales to family and
friends
d. One of the customer processing control clerks has been removing all sales invoices applicable
to his account from the data file

INVENTORY

28. Purchase cutoff procedures test the completeness assertion. An entity should include goods
in its inventory if it
a. Has paid for the goods c. Has physical possession of the goods
b. Holds legal title to the goods d. Has sold the goods

29. Purchase cutoff procedures should be designed to test whether all inventory
a. Owned by the company was recorded
b. On the year-end balance sheet was carried at lower of cost or market
c. On the year-end balance sheet was paid for by the company
d. Owned by the company is in the possession of the company

30. In an audit of inventories, an auditor is least likely to verify that

a. The client has used proper inventory pricing
b. Damaged goods and obsolete items have been properly accounted for
c. The financial statement presentation of inventories is appropriate
d. All inventory owned by the client is on hand at the time of the count

31. In auditing inventories, a major objective relates to the existence assertion. Of the following
audit procedures relating to inventories, which does not support the existence assertion?
a. The auditor observes the client's inventory and performs test counts as appropriate
b. The auditor confirms inventories not on the premises
c. The auditor performs a lower of cost or market test for major categories of inventory
d. The auditor reviews the client's inventory-taking instructions for such matters as proper
arrangement of goods, separation of consigned goods, and limits on movements of goods during
inventory

32. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the
physical inventory listing to obtain evidence that all items
a. Included in the listing have been counted
b. Represented by inventory tags are included in the listing
c. Included in the listing are represented by inventory tags
d. Represented by inventory tags are bona fide

33. A client maintains perpetual inventory records in both quantities and pesos. If the assessed
level of control risk is high, an auditor will probably
a. Increase the extent of tests of controls relevant to the inventory cycle
b. Request the client to schedule the physical inventory count at the end of the year
c. Apply gross profit tests to ascertain the reasonableness of the physical counts
d. Insist that the client perform physical counts of inventory items several times during the year

34. An auditor’s attendance at the physical inventory at the client’s main plant at year-end
provides direct evidence to support which of the following objective?
a. Accuracy of the priced-out inventory
b. Determination of goods in the hands of consignees
c. Evaluation of lower of cost or net realizable value test
d. Identification of obsolete or damaged merchandise to evaluate allowance (reserve) for
obsolescence

35. An auditor is most likely to learn of slow-moving inventory through

a. Inquiry of sales personnel
b. Inquiry of warehouse personnel
c. Review of perpetual inventory records
d. Physical observation of inventory

36. Which of the following audit procedures probably provides the most reliable evidence
concerning the entity’s assertion of rights and obligations related to inventories?
a. Inspect the open purchase order file for significant commitments that should be considered
for disclosure
b. Trace test counts noted during the entity’s physical count to the entity’s summarization of
quantities
c. Inspect agreements to determine whether any inventory is pledged as collateral or subject to
any liens
d. Select the last few shipping advices used before the physical count and determine whether
the shipments were recorded as sales

PROPERTY, PLANT AND EQUIPMENT

37. A weakness in internal accounting 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 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

38. Which of the following combinations of procedures is an auditor most likely to perform to
obtain evidence about fixed asset conditions?
a. Confirming ownership and corroborating transactions through inquiries of client personnel
b. Inspecting documents and physically examining assets
c. Recomputing calculations and obtaining written management representations
d. Observing operating activities and comparing balances to prior period balances
39. If an auditor tours a production facility, which of the following misstatements or
questionable practices is most likely to be detected by the audit procedure specified?
a. Depreciation expense on fully depreciated machinery has been recognized
b. Insurance coverage on the facility has lapsed
c. Necessary facility maintenance has not been performed
d. Overhead has been overapplied

40. The auditor may conclude that depreciation charges are insufficient by noting
a. Large amounts of fully depreciated assets
b. Continuous trade-ins of relatively new assets
c. Excessive recurring losses on assets retired
d. Insured values greatly in excess of book values

41. In violation of a company policy, a company erroneously capitalized the cost of painting its
warehouse. The auditor examining its financial statements will most likely detect this
misstatement when
a. Observing, during the physical inventory observation, that the warehouse had been painted
b. Examining the construction work orders supporting items capitalized during the year
c. Examining maintenance expense accounts
d. Discussing capitalization policies with the company’s controller

42. Which of the following is the primary audit test to determine if accounts payable are valued
properly?
a. Vouching accounts payable to supporting documentation
b. An analytical procedure
c. Verification that accounts payable are reported as a current liability in the balance sheet
d. Examination of cash disbursements subsequent to year-end

43. One audit procedure for an audit of facilities and equipment is to test the accuracy of
recorded depreciation. Which of the following is the best source of evidence that the equipment
in question is in service?
a. A review of inventory documentation for the equipment
b. A comparison of depreciation schedules with the maintenance and repair logs for the same
equipment
c. A comparison of depreciation schedules with a listing of insurance appraisals for the same
equipment
d. A review of depreciation policies and procedures

44. Which of the following accounts would most likely be reviewed by the auditor to gain
reasonable assurance that additions to the equipment account are not understated?
a. Repairs and maintenance expense c. Gain on disposal of equipment
b. Depreciation expense d. Accounts payable

LIABILITIES

45. 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 non
payment
d. There is likely to be other reliable external evidence to support the balances

46. Which of the following procedures is least likely to be performed before the balance sheet
date?
a. Search for unrecorded liabilities
b. Confirmation of accounts receivable
c. Attendance at the physical inventory account
d. Testing internal control over cash

47. The auditors' search for unrecorded liabilities is completed

a. During an interim period
c. Subsequent to the balance sheet date
b. At the balance sheet date
d. At any time during the examination

48. Which of the following audit procedures is best for identifying unrecorded trade accounts
payable?
a. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine
whether the related payable applies to the prior period
b. Investigating payables recorded just prior to and just subsequent to the balance sheet date to
determine whether they are supported by receiving reports
c. Examining unusual relationships between monthly accounts payable balances and recorded
cash payments
d. Reconciling vendors' statements to the file of receiving reports to identify items received just
prior to the balance sheet date

49. A CPA, in performing an independent audit, would most likely use recalculation as a
substantive test for which of the following expense-related accounts?
a. Purchases of supplies c. Advertising expense
b. Interest expense d. Repairs and maintenance expense

50. Which of the following best describes the specific accounts payable that are selected for
confirmation?
a. Accounts with large balances
b. Accounts with zero balances
c. Accounts with a large amount of activity regardless of their balance
d. Accounts for which vendor statements are available

51. When using confirmations to provide evidence about the completeness assertion for
accounts payable, the appropriate population most likely is
a. Amounts recorded in the accounts payable subsidiary ledger
b. Vendors with whom the entity has previously done business
c. Invoices filed in the entity’s open invoice file
d. Payees of checks drawn in the month subsequent to the balance sheet date

52. Unrecorded liabilities are most likely to be found during the review of which of the following
documents?
a. Bills of lading c. Unmatched sales invoices
b. Unpaid bills d. Shipping records

53. The auditor can best verify a client’s bond sinking fund transactions and year-end balance by
a. Confirmation with the bond trustee
b. Confirmation with individual holders of retired bonds
c. Examination and count of the bonds retired during the year
d. Recomputation of interest expense, interest payable, and amortization of bond discount or
premium

54. An auditor's program to examine long-term debt most likely would include steps that require
a. Comparing the carrying amount of the debt to its year-end market value
b. Correlating interest expense recorded for the period with outstanding debt
c. Verifying the existence of the holders of the debt by direct confirmation
d. Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt

STOCKHOLDER’S EQUITY

55. In the audit of a medium-sized manufacturing concern, which one of the following areas can
be expected to require the least amount of audit time?
a. Revenue c. Liabilities
b. Assets d. Stockholder’s Equity

56. If the client corporation has a material amount of treasury stock on hand at year-end, the
auditor should
a. Count the certificates only if the company reports treasury stock as an asset
b. Not count the certificates if treasury stock is reported as a deduction from stockholders’
equity
c. Count the certificates only if the company had material treasury stock transaction during the
year
d. Count the certificates at the same time other securities are counted

57. In an audit of stockholders’ equity, an auditor is most concerned that

a. Capital stock transactions are properly authorized
b. All changes in the stockholders’ equity accounts are monitored by an independent transfer
agent and register
c. Stock splits are charged to retained earnings at par or stated value
d. Dividends declared during the year were approved by the stockholders

58. When a client company does not maintain its own stock records, the auditor should obtain
written confirmation from the transfer agent and register concerning
a. The number of shares issued and outstanding
b. Restrictions on the payment of dividends
c. The number of shares subject to agreements to repurchase
d. Guarantees of preferred stock liquidation value

59. The auditor is concerned with establishing that dividends are paid to client corporation
stockholders owning stock as of the
a. Payment date c. Declaration date
b. Record date d. Issue date

60. An audit program for the retained earnings account should include a step that requires
verification of the
a. Gain or loss resulting from disposition of treasury shares
b. Approval of the adjustment to the beginning balance as a result of a write-down of an
accounts receivable
c. Authorization for both cash and stock dividends
d. Fair value used to charge retained earnings to account for a two-for-one stock split

DOCUMENTATION: WORKING PAPERS

61. Audit working papers are indexed by means of reference numbers. Which of the following Is
the primary purpose of indexing?
a. Determine that working papers adequately support findings, conclusions and reports
b. Support the audit opinion
c. Permit cross-referencing and simplify supervisory review
d. Eliminate the need for follow-up reviews

62. During the course of an audit engagement, an auditor prepares and accumulates audit
working papers. The primary purpose of the audit working papers is to
a. Aid the auditor in adequately planning his work
b. Provide a point of reference for future audit engagements
c. Support the underlying concepts included in the preparation of the basic financial statements
d. Support the auditor's opinion

63. Audit working papers are used to record the results of the auditor's evidence-gathering
procedures. When preparing working papers, the auditor should remember that working papers
should be
a. Kept on the client's premises so that the client can have access to them for reference
purposes
b. The primary support for the financial statements being examined
c. Considered as a part of the client's accounting records that are retained by the auditor
d. Designed to meet the circumstances and the auditor's needs on each engagement

64. The main advantage of properly indexed working papers is to

a. Reduce the size of the file
b. Better organize the working papers
c. Allow division of labor within the audit team
d. Facilitate the efficient use of audit staff
65. During the working paper review, an audit supervisor finds that the auditor's reported
findings are not adequately cross-referenced to supporting documentation. The supervisor will
most likely instruct the auditor to
a. Prepare a working paper to indicate that the full scope of the audit was carried out
b. Familiarize him/herself with the sequence of working papers so that he(she) will be able to
answer questions about the conclusions stated in the report
c. Eliminate any cross-references to other working papers since the system is unclear
d. Provide a workpaper indexing system that shows the relationship between findings,
conclusions, and the related facts

IDENTIFICATION

For each of the listed procedures, indicate, by letter, the assertion(s) being tested.
a. Existence or occurrence
b. Completeness
c. Rights and obligations
d. Valuation or allocation
e. Presentation and disclosure

____
a,d 1. Confirmed customer accounts receivable
____2.
d Vouched property additions to underlying documentation consisting of vendors’
invoices and work orders
____
e 3. Inquired of corporate treasurer as to reasons for buying and holding securities
____
b 4. Selected a sample of bills of lading representing shipments to customers and traced to
sales invoices to determine that all shipments have been billed to customers
____
b,c 5. Examined vendors’ invoices recorded after year-end to determine whether any of these
invoices represent liabilities of the client as of year-end
____ 6. Obtained confirmation of marketable securities from client’s brokers
a,c,d
____
d 7. Evaluated the reasonableness of the client’s depreciation policy
____
e 8. Obtained letter from client’s outside legal counsel regarding pending litigation
____
a 9. Inspected recorded addition to client materials handling facilities
____
b 10. Investigated decrease in revenue from scrap sales as revealed by the application of
analytical procedures
____d 11. Calculated depreciation expense for the year
____
a 12. Test counted client’s year-end inventory of materials and finished goods
____
c 13. Examined vehicle title applicable to new truck purchased during the current year
____
e 14. Considered need for a footnote describing a lawsuit pending against the client
____
b 15. Conducted a search for unrecorded liabilities
____e 16. Advised client of the need to reclassify the current portion of a long-term mortgage
note
____
d 17. Performed tests to determine that overhead had been properly applied to ending
inventory and cost of sales
d 18. Reconciled client’s bank accounts as of year end
____
____d 19. Examined appraisal reports applicable to land donated by the city
____20.
d Obtained written confirmation from customers regarding year end balances in selected
accounts receivable