CHAPTER 7

AUDIT OBJECTIVES, PROCEDURES, EVIDENCE, AND DOCUMENTATION

1. All the informa0on used by the auditor in arriving at the conclusions on which the audit
opinion is based is called
a. audit informa0on
b. audit evidence
c. accoun0ng records
d. corrobora0ng informa0on

2. An en0ty’s accoun0ng records generally include the records of ini0al entries and suppor0ng
records include
a. confirma0ons from third par0es.
b. informa0on obtained by the auditor from such audit procedures as inquiry, observa0on, and
inspec0on.
c. worksheets and spreadsheets suppor0ng cost alloca0ons.
d. other informa0on developed by, or available to, the auditor to permit him/her to reach
conclusions through valid reasoning.

3. Audit evidence comprises

I. Informa0on that supports and corroborates management’s asser0ons
II. Any informa0on that contradicts management’s asser0ons

a. I only
b. II only
c. Neither I nor II
d. Both I and II

4. The auditor is required to use asser0ons for classes of transac0ons, account balances, and
presenta0on and disclosures in sufficient detail to form a basis for the assessment of risks of
material misstatement and the design and performance of further audit procedures. Asser0ons
about classes of transac0ons include occurrence, completeness, accuracy, cutoff, and
a. valua0on and alloca0on
b. rights and obliga0ons
c. existence
d. classifica0on

REVENUE/RECEIPT CYCLE

5. The following are the auditor’s principal objec0ves in the audit of revenues, except
a. To determine whether all cash owned by the en0ty at the balance sheet date is included on
the balance sheet.
b. To determine whether earned revenue has been recorded and recorded revenue has been
earned.
c. To determine whether revenues are reported in the income statement at the appropriate
amounts.
d. To determine whether revenues are properly classified, described, and disclosed in the
financial statements, including notes, in conformity with an applicable financial repor0ng
framework.

6. Auditors are oNen concerned with the possibility of overstatement of sales and receivables.
However, management may also have reasons for understanding these balances. Which of the
following would explain understatements of sales and receivables?
I. To avoid paying taxes,
II. To windowdress the financial statements.
III. To meet budgets and forecasts.

a. I only
b. II only
c. I and III only
d. I, II, and III

7. The process of obtaining and evalua0ng audit evidence through a direct communica0on from
a third party in response to a request for informa0on about a par0cular item affec0ng
asser0ons made by management in the financial statements is called
a. Reperformance
b. External confirma0on
c. Inquiry
d. Recalcula0on

EXPENDITURE/DISBURSEMENT CYCLE

8. Purchase cutoff procedures test the completeness asser0on. An en0ty should include goods
in its inventory if it
a. Has paid for the goods.
b. Holds legal 0tle to the goods.
c. Has physical possession of the goods.
d. Has sold the goods.

9. Which of the following procedures would an auditor least likely perform before the balance
sheet date?
a. confirma0on of accounts payable
b. Iden0fica0on of related par0es
c. Assessment of control risk
d. AXendance at the physical inventory count

PRODUCTION CYCLE
10. Which of the following statements concerning the auditor’s aXendance at the physical
inventory count is incorrect?
a. A financial statement audit should always include aXendance at the physical inventory count.
b. If the auditor is unable to aXend the physical inventory count on the date planned due to
unforeseen circumstances, he/she should take or observe some physical counts on an
alterna0ve date and, when necessary, perform audit procedures on intervening transac0ons.
c. Where aXendance is imprac0cable, due to factors such as the nature and loca0on of the
inventory, the auditor should consider whether alterna0ve procedures provide sufficient
appropriate evidence of existence and condi0on to conclude that reference to a scope limita0on
need not be made.
d. Inventories that are under the custody and control of third par0es (for example, inventories
located in public warehouses) may be verified by obtaining direct confirma0on from the
custodians, provided that, depending on the materiality of the amount involved, addi0onal
procedures should be applied as deemed necessary.

11. 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 presenta0on of inventories is appropriate.
d. All inventory owned by the client is on hand at the 0me of the count.

12. An auditor is most likely to inspect loan agreements under which an en0ty’s inventories are
pledged to support management’s financial statement asser0on of
a. Presenta0on and disclosure
b. Existence
c. Completeness
d. Valua0on and alloca0on

INVESTING CYCLE

13. Which of the following is not one of the auditor’s primary objec0ves in an audit of trading
securi0es?
a. To determine whether securi0es are authen0c.
b. To determine whether securi0es actually exist.
c. To determine whether securi0es are the property of the client.
d. To determine whether securi0es are properly classified on the balance sheet.

14. A company makes a prac0ce of inves0ng excess short-term cash in trading securi0es that are
traded regularly on the Philippine Stock Exchange (PSE). A reliable test of the valua0on of those
securi0es is
a. Calcula0on of premium or discount amor0za0on.
b. Confirma0on of securi0es held by the broker.
c. Considera0on of current market quota0ons.
d. Recalcula0on of investment value using a valua0on model.
15. Which of the following is the most effec0ve audit procedure for verifica0on of dividends
earned on investments in equity securi0es?
a. Reconciling amounts received with published dividend records.
b. Recompu0ng selected extensions and foo0ngs of dividend schedules and comparing totals to
the general ledger.
c. Comparing dividends received in the current year with that of the preceding year.
d. Tracing deposited dividend checks to the cash receipts book.

FINANCING CYCLE

16. During an audit of a publicly held company, the auditor should obtain wriXen confirma0on
regarding debenture transac0ons from the
a. Trustee
b. Client’s aXorney
c. Debenture holders
d. Internal auditors

17. An auditor’s purpose in reviewing the renewal of a note payable shortly aNer the balance
sheet date most likely is to obtain evidence concerning management’s asser0on about
a. Existence
b. Presenta0on and disclosure
c. Completeness
d. Valua0on and alloca0on

HUMAN RESOURCES

18. In audi0ng payroll, an auditor most likely would

a. Observe en0ty employees during a payroll distribu0on.
b. Compare payroll costs with en0ty standards and budgets.
c. Trace individual employee deduc0ons to en0ty journal entries.
d. Verify that checks represen0ng unclaimed wages are mailed.

DOCUMENTATION

19. As used in PSA 320 (Audit Documenta0on), it refers to the record of audit procedures
performed, relevant audit evidence obtained, and conclusions the auditor reached.
a. Audit documenta0on
b. Audit file
c. Audit planning memorandum
d. Management leXer

20. Audit documenta0on may be recorded on paper or on electronic or other media. The
following are examples of audit documenta0on, except
a. Audit programs
b. LeXers of confirma0on and representa0on
c. Correspondence (including e-mail) concerning significant maXers
d. The en0ty’s accoun0ng records