AT 1 : Introduction to Auditing

1. From the definition of auditing, it can be extracted that auditing as a process requires
A. Documentation and
B. Evaluation process and a reporting process
C. Investigative process and a reporting process
D. Documentation process and a reporting process

2. Which of the following is not one of the four phases in the audit process?
A. Plan and design an audit approach
B. Test controls and transactions
C. Inform client of any adjustments or corrections to be made to the financial statements
D. Complete the audit and issue the report

3. Audit information is generally considered relevant when it is

A. Derived through valid statistical sampling C. Factual, adequate, and convincing
B. Objective and unbiased D. Consistent with the audit objectives

4. 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. Judgment of the auditor

5. Which of the following presumptions 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 corroborative evidence obtained
D. Effective internal control provides more assurance about the reliability of evidential matter

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

A. To be appropriate, audit evidence must be sufficient
B. Accounting data alone may be considered sufficient appropriate audit evidence to issue an
unmodified opinion on financial statements
C. Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained
D. The auditor's direct personal knowledge, obtained through observation and inspection, is more
persuasive than information obtained indirectly from independent outside sources

7. Which of the following statements relating to audit evidence is the most accurate statement?
A. Audit evidence gathered by an auditor from outside an enterprise is reliable
B. Accounting data developed under satisfactory conditions of internal control are more relevant than
data developed under unsatisfactory internal control conditions
C. Oral representations made by management are not valid evidence
D. The auditor must obtain sufficient appropriate audit evidence

8. Which of the following statements is an incorrect use of the terminology?

A. Evidence obtained from an independent source outside the client organization is more reliable than that
obtained from within.
B. Documents that originate outside the company are considered more reliable than those that originate
within the client’s organization.
C. Documentary evidence is more reliable when it is received by the auditor directly from an independent
third party.
D. External evidence, such as communications from banks, is generally regarded as more reliable than
answers obtained from inquiries of the client.

9. Which of the following factors is most important in determining the competence of audit evidence?
A. The reliability of the evidence in meeting the audit objective
B. The objectivity of the auditor gathering the evidence
C. The quantity of the evidence obtained
D. The independence of the source of evidence

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10. When the auditor is gathering evidence, if the source of the evidence is independent of the client, the auditor
will conclude that the evidence is
A. Not reliable
B. Reliable
C. Not reliable unless the provider is qualified to provide the evidence
D. Reliable if the provider has no reason to be biased

11. The usefulness of the standard bank confirmation request may be limited because the bank employee who
completes the form may
A. Not believe that the bank is obligated to verify confidential information to a third party
B. Be unaware of all the financial relationships that the bank has with the client
C. Sign and return the form without inspecting the accuracy of the client’s bank reconciliation
D. Not have access to the client’s cutoff bank statement

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

A. Appropriateness is the measure of the quantity of audit evidence.
B. The competence of evidence is heavily affected by the amount of evidence gathered.
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 objective and audit procedure.

13. Why are assertions important to the auditor?

A. Because the auditor has to address each of the assertions in the financial statements
B. Because they serve as the auditor’s basis in providing his opinion
C. Because they are considered in determining the types of misstatements in the financial statements
D. Because they are considered in determining whether or not the audit will be accepted

14. Which of the following is not specifically included as assertion about presentation and disclosure for the period
under audit?
A. Classification and understandability C. Accuracy and valuation
B. Occurrence and rights and obligations D. Existence

15. When the notes to the financial statements state that the entity’s biological assets are measured at fair value less
costs to sell
A. The valuation assertion is implicit C. The completeness assertion is explicit
B. The completeness assertion is implicit D. The valuation assertion is explicit

16. Which of the following is an example of an assertion made by management in an entity’s financial statements
A. The financial statements were prepared in an unbiased manner
B. Reported inventory balances reflect all related transactions for the period
C. Reported accounts receivable do not include any uncollectible accounts
D. The scope of the auditor’s investigation was not limited in any way by management

17. If a short-term note payable is included on an accounts payable listing, there is a violation of the
A. Completeness objective C. Timing objective
B. Existence objective D. Classification objective

18. When is an assertion considered relevant?

A. When the evidence is conclusive
B. When it affects the fair presentation of financial statements
C. When it is material to the income statement
D. When it is addressed through inspection and confirmation

19. Which of the following is the most relevant assertion for Cash?
A. Presentation and disclosure C. Valuation
B. Cutoff D. Existence

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20. The existence or occurrence assertion is most relevant to
A. Assets and expenses C. Liabilities and expenses
B. Liabilities and revenues D. Assets and revenues

21. Which of the following forms of evidence would be least persuasive in forming the auditor’s opinion?
A. The auditor’s count of marketable securities
B. Correspondence with a stockbroker regarding the quantity of client’s investments held in street name by
the broker
C. Minutes of the board of directors authorizing the purchase of stock as an investment
D. Responses to auditor’s questions by the president and controller regarding the investments account

22. 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

23. Which of the following types of audit evidence is the most persuasive?
A. Prenumbered client purchase order forms C. Bank statements obtained from the client
B. Client work sheets supporting cost allocations D. Client representation letter

24. When making decisions about evidence for a given audit, the auditor’s goal is to obtain a sufficient amount of
timely, reliable evidence that is relevant to the information being verified and to do so
A. No matter what the cost involved in obtaining such evidence
B. Only if the cost is reasonable
C. At the lowest possible total cost
D. At any cost because the costs are billed to the client

25. Which of the following statements is not correct?

A. There are many ways an auditor can accumulate evidence to meet the overall audit objectives
B. Sufficient competent evidence must be accumulated to meet the auditor’s professional responsibility
C. The cost of accumulating the evidence should be minimized
D. Gathering evidence and minimizing costs are equally important considerations that affect the approach
the auditor selects

26. Which of the following is not a valid basis for omitting an audit test?
A. The difficulty and expense involved in testing a particular item
B. The relative risk involved
C. The degree of reliance on the relevant internal controls
D. The relationship between the cost of obtaining evidence and its usefulness

27. Which of the following is an example of objective evidence?

A. A letter written by client’s attorney discussing the likely outcome of outstanding lawsuits
B. The physical count of securities and cash
C. Inquiries of the credit manager about the collectibility of noncurrent accounts receivable
D. Observation of cobwebs on some inventory bins

28. Physical examination is the inspection or count by the auditor of items such as
A. Cash or inventory only
B. Cash, inventory, canceled checks, and sales documents
C. Cash, inventory, canceled checks, and tangible fixed assets
D. Cash, inventory, securities, notes receivable, and tangible fixed assets

29. Testing recorded sales transactions in the shipping documents to the sales journal provides evidence about the
A. Completeness of recording of sales transactions
B. Occurrence of sales transactions
C. Billing of all sales transactions
D. Presentation of payables

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30. Which of the following procedures would ordinarily be expected to best reveal inexistent or fictitious sales at
the balance sheet date?
A. Compare shipping documents with sales records
B. Compare sales records in the journals with shipping documents
C. Trace payments received subsequent to the balance sheet date
D. Send accounts receivable confirmation requests
31. To gain assurance that all inventory items in a client’s inventory listing schedule are valid, an auditor most
likely would trace
A. Inventory tags noted during the observation to items listed in the inventory listing schedule
B. Inventory tags noted during the auditor’s observation to items listed in receiving reports
C. Items listed in the inventory listing schedule to inventory tags
D. Items listed in receiving reports and vendors’ invoices to the inventory listing schedule

32. In auditing existence of equipment, which of the following evidence is most reliable?
A. Evidence from inquiry with plant employee
B. Evidence from inquiry with plant manager
C. Evidence from inspection of the equipment in the plant
D. Evidence from inspection of purchase invoice
33. In testing for unrecorded retirements of equipment, an auditor most likely would
A. Select items of equipment from the accounting records and then locate them during the plant tour
B. Compare depreciation journal entries with similar prior year entries in search of fully depreciated
equipment
C. Inspect items of equipment observed during the plant tour and then trace them to the equipment
subsidiary ledger
D. Scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance
expense
34. Evidence obtained directly by the auditor is more competent than information obtained indirectly. Which of the
following is not an example of the auditor’s direct knowledge?
A. Physical examination C. Computation
B. Observation D. Inquiry
35. The auditor wishes to obtain evidence regarding management’s plans for dealing with the adverse effects of
going concern uncertainty issues the client is facing. In the absence of documented plans or historical records,
the auditor primarily conducts tests through
A. Inspection B. Inquiry C. Reperformance D. Vouching

36. Which among the following is least likely observed?

A. Inventory taking B. Physical asset C. Personnel D. Procedure
37. When procedures performed by employees in the company, on a regular basis, leave no documented trails, the
auditor conducts his tests primarily through
A. Inspection C. Observation
B. Inspection and observation D. Inquiry and inspection
38. The auditor wishes to test whether the client employees observe proper segregation of duties in the performance
of their assigned tasks. The auditor shall perform
A. Inquiry B. Observation C. Inspection D. Reperformance

39. The auditor was in attendance during the client’s physical count of inventories at the end of the year. Before the
count was made, the auditor read count manuals and instruction sheets obtained from the warehouse
supervisor. The auditor then watched as the employees were conducting the count. What procedures did the
auditor perform?
A. Inspection and recalculation C. Recalculation and reperformance
B. Observation and recalculation D. Inspection and observation

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40. Which of the following is not an example of confirmation evidence?

A. Requesting the client's outside legal counsel to evaluate the possible outcome of pending litigation
B. Questioning the client's employees about existing internal control policies and procedures
C. Requesting the client's customers to verify year-end accounts receivable balances
D. Requesting payees to respond in writing to the terms contained in notes payable appearing in the client's
ledger

41. Confirmation would be most effective in addressing the existence assertion for the
A. Addition of a milling machine to a machine shop
B. Payment of payroll during regular course of business
C. Inventory held on consignment
D. Granting of a patent for a special process developed by the organization

42. In determining 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
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 debtor
D. Confirmation replies received directly from customers

43. Which of the following audit objectives is not served by confirming customers’ accounts receivable?
A. Sales and accounts receivable cutoff
B. Valuation of accounts receivable as of the balance sheet date
C. Existence of customers represented in the accounts receivable trail balance
D. Completeness of customers represented in the accounts receivable trial balance

44. In testing for overstatement of receivables, the auditor primarily plans to start from the
A. Recorded receivables C. Collections subsequent to year-end
B. Supporting documents (e.g. sales invoice) D. Responses by management to inquiries

45. An auditor wants to develop an audit test to evaluate the reasonableness of the quantity of scrap material
resulting from a certain production process compared to industry standards. Which would be the most
competent type of evidence available to satisfy this objective?
A. Documentary B. Physical C. Hearsay D. Analytical

46. Which of the following will analytical procedures most likely discover?
A. Weak segregation of duties
B. Components of the line item Property, Plant and Equipment
C. Unusual fluctuations in distribution costs
D. Existence of inventories held by a third-party warehouse

47. When results of analytical procedures reveal unusual or unreasonable relationships, the auditor shall
A. Conclude that the financial statements are not presented fairly
B. Document the finding and not revise the initial risks assessment
C. Investigate further by performing detailed tests
D. Disclaim an opinion on the financial statements

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PRACTICE QUESTIONS
1. Auditing consists of investigative and reporting processes. Thus, the audit process is
A. A special application of the scientific method of inquiry
B. Regulated by the PICPA
C. The only service a CPA is allowed to perform by law
D. Performed only by CPAs

2. Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based is called
A. Audit evidence C. Accounting records
B. Corroborating information D. Supplementary information

3. Which of the following constitutes audit evidence?

I. Accounting records underlying the financial statements
II. Other information
A. I only B. II only C. Both I and II D. Neither I nor II

4. Appropriateness is the measure of quality of audit evidence; that is, its

A. Relevance and reliability C. Reliability and comparability
B. Relevance and comparability D. Comparability and completeness

5. It deals with the logical connection with, or bearing upon the purpose of the audit procedure and, where appropriate, the
assertion under consideration. It may be greatly affected by the direction of the testing.
A. Reliability of evidence C. Completeness of evidence
B. Relevance of evidence D. Existence of evidence

6. Assertions that have a meaningful bearing on whether an account balance, transaction class or disclosure is fairly stated are
referred to as
A. Appropriate assertions C. Relevant assertions
B. Sufficient assertions D. Reliable assertions

7. It is greatly affected by its source and nature and, and is dependent on the individual circumstances under which it is obtained.
A. Reliability of evidence C. Completeness of evidence
B. Relevance of evidence D. Existence of evidence

8. Which of the following generalizations about the reliability of audit evidence is incorrect?
A. The reliability of audit evidence is increased when it is obtained from independent sources outside the entity.
B. The reliability of audit evidence that is generated internally is increased when the related controls imposed by the
entity are effective.
C. Audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable than evidence
obtained orally.
D. Audit evidence provided by photocopies or facsimiles is more reliable than that provided by original documents.

9. In auditing an asset valued at fair value, which of the following potentially provides the auditor with the strongest evidence?
A. A price for a similar asset obtained from an active market
B. An appraisal obtained discounting future cash flows
C. Management's judgment of the cost to purchase an equivalent asset
D. The historical cost of the asset

10. Audit evidence must be both sufficient and appropriate. Which of the following statements is incorrect about sufficiency of
audit evidence?
A. The quantity of audit evidence is affected by the auditor’s risk assessment (i.e. the higher the assessed risk, the more
audit evidence is likely to be required).
B. Since sufficiency and appropriateness are interrelated, the quantity of audit evidence is affected by the quality of
such audit evidence (i.e. the higher the quality, the less audit evidence may be required).
C. Audit evidence is sufficient if there is enough of it to afford a reasonable basis for opinion.
D. Obtaining more evidence may likely compensate for its poor quality.

11. Which of the following procedures entails the least cost?

A. Test of details of balances C. Analytical procedures
B. Test of details of transaction D. Test of controls

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12. Which of the following statements is wrong?

A. The absence of information (e.g. management’s refusal to provide a requested representation) also constitutes evidence.
B. It is generally more difficult to obtain evidence about information covering a period (e.g. income statement accounts)
than information at a point in time (e.g. balance sheet accounts).
C. While the auditor balances the costs and benefits of obtaining evidence, the matter of difficulty or expense itself is, in
itself a valid basis for omitting a procedure for which there is no alternative.
D. A vendor's invoice is an example of documentary evidence created by a third party and held by the client.
(read NOTES on Evidence)

13. Which of the following properly describes “reperformance”?

A. It consists of seeking information of knowledgeable persons, both financial and non-financial, within the entity or
outside the entity
B. It consists of looking at a process or procedure being performed by others
C. It involves examining records or documents
D. It involves the auditor’s independent execution of procedures or controls that were originally performed as part of
the entity’s internal control

14. Which of the following is not a specific audit procedure enumerated in application and explanatory material in PSA 500?
A. Inspection C. External Confirmation
B. Recalculation D. Vouching

15. Which of the following is not a specific audit procedure enumerated in application and explanatory material in PSA 500?
A. Reperformance C. Inquiry
B. Analytical procedures D. Risk assessment procedure

16. These are representations by management, explicit or otherwise, that are embodied in the financial statements.
A. Assumptions B. Assertions C. Statements D. Assurances

17. Classification is an assertion that represents that

A. All transactions are recorded in their proper account titles
B. All transactions are recorded in their proper period
C. All transactions are recorded in their correct amounts
D. All transactions occurred during the period

18. Assertions about classes of transactions during the period do not include
A. Occurrence B. Existence C. Classification D. Accuracy

19. For liabilities and expenses, the most relevant assertion is

A. Occurrence B. Completeness C. Classification D. Accuracy

20. Which of the following is not specifically included as assertion about balances for the period under audit?
A. Valuation and allocation C. Existence
B. Completeness D. Cutoff

21. Assets, liabilities and equity interests are included in the financial statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately recorded. This refers to which assertion?
A. Accuracy and valuation C. Valuation and cutoff
B. Accuracy and allocation D. Valuation and allocation

22. Which of the following statements is incorrect regarding the process of obtaining evidence?
A. The benefit of obtaining evidence must exceed its cost.
B. When equal alternatives are available, the auditor gathers the evidence at the lowest cost possible.
C. The cost to gather the evidence is not a reason to omit a procedure for which there is no alternative.
D. Cost is the most important consideration in gathering evidence.

23. Which of the following is a disadvantage of observation as audit procedure?

A. It is costly C. It is not allowed by the client
B. It is not effective D. It is limited to a point in time

24. This procedure involves procedures to check the mathematical accuracy of documents or records.
A. Reperformance B. Recalculation C. Repetition D. Recollection

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25. The auditor was in attendance during the client’s physical count of inventories at the end of the year. After the count, the
auditor asked for a client’s copy of the count sheets and located some stocks listed in the sheets to the warehouse floor. Also,
the auditor traced some stocks from the warehouse floor to the count sheets to check whether they were included. What
procedures did the auditor perform?
A. Reperformance and analytical procedures C. Inspection and confirmation
B. Confirmation and recalculation D. Inspection and reperformance

26. Inspecting marketable securities provides primary evidence about the assertion of
A. Rights and obligations B. Valuation C. Existence D. Completeness

27. Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the
auditor has concerns about the receivables’
A. Valuation B. Classification C. Existence D. Completeness

28. The auditor will most likely perform extensive tests for possible understatement of
A. Revenues B. Assets C. Liabilities D. Capital

29. An auditor selected items for test counts while observing a client’s physical inventory. The auditor then traced the test
counts to the client’s inventory listing. This procedure most likely obtained evidence concerning management’s assertion of
A. Rights and obligations B. Existence or occurrence C. Valuation D. Completeness

30. An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-
moving inventory to support management’s financial statement assertion of
A. Valuation or allocation C. Existence or occurrence
B. Rights and obligations D. Presentation and disclosure

End.

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