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College of Business, Economics, Accountancy and Management


Accountancy Department
Auditing Theory
SUBSTANTIVE TESTS APPLICATION
Direction: Read and answer the following questions.

___1. Which of the following is an example of analytical procedure?


a. Comparison of financial information with similar information regarding the industry in which the entity operates.
b. Comparison of recorded amounts of major disbursements with appropriate invoices.
c. Comparison of results of a statistical sample with the expected characteristics of the actual population.
d. Comparison of EDP-generated data with similar data generated by a manual accounting system.
___2. In the course of the audit of financial statements for the purpose of expressing an opinion thereon, the auditor will normally
prepare a schedule of unadjusted differences for which he did not propose adjustments when they were uncovered. The primary
purpose of this schedule is to
a. Point out to the responsible client officials the errors made by various company personnel.
b. Summarize the adjustments that must be made before the company can prepare and submit its income tax returns.
c. Identify the potential effects on the financial statements of errors or disputed items that were considered immaterial when discovered.
d. Summarize the errors made by the company so that corrections can be made after the audited financial statements are released.
___3. Which of the following presumptions does not relate to the competence of audit evidence?
a. The more effective internal control is, the more assurance it provides about the accounting data and financial statements.
b. An auditor’s opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable
cost.
c. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.
d. The independent auditor’s direct personal knowledge, obtained through observation and inspection, is more persuasive than
information obtained indirectly.
___4. Which of the following is usually included or shown in the auditor’s working papers?
a. The procedures used by the auditor to verify the personal financial status of members of the client’s management team.
b. Analyses that are designed to be a part, or a substitute, for the client’s accounting records.
c. Excerpts from authoritative pronouncements that support the underlying generally accepted accounting principles used in preparing
the financial statements.
d. The manner that the exceptions and unusual matters as disclosed by the auditor’s procedures were resolved or treated.
___5. Objective evidence is more reliable than evidence that requires considerable judgment to determine whether it is correct. Which
of the following is not an example of objective evidence?
a. Confirmation of accounts receivable
b. Confirmation of bank balances
c. Confirmation by client’s attorney of the likely outcome of outstanding lawsuits against client
d. Adding a list of accounts payable to determine if it balances with the general ledger
___6. The auditor is concerned that a client usually fails to bill customers for shipments. An audit procedure that would gather relevant
evidence would be to
a. Select a sample of duplicate sales invoices and trace each to related shipping documents.
b. Trace a sample of shipping documents to related duplicate sales invoices.
c. Trace a sample of sales journal entries to the accounts receivable subsidiary ledger
d. Compare the total of the schedule of accounts receivable with the balance of the accounts receivable account in the general ledger.
___7. Which of the following is not a factor affecting the independent auditor’s judgment about the quantity, type, and content of audit
working papers?
a. The need for supervision and review of the work performed by assistants.
b. The nature and condition of the client’s records and internal controls.
c. The expertise of client personnel and their participation in preparing schedules.
d. The type of the financial statements, schedules, or other information on which the auditor is reporting.
___8. 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 himself with the sequence of working papers so that he 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 working paper indexing system that shows the relationship between findings, conclusions, and the related facts.
___9. The permanent file section of the working papers that is kept for each audit client most likely contains
a. Review notes pertaining to questions and comments regarding the audit work performed.
b. A schedule of time spent on the engagement by each individual auditor.
c. Correspondence with the client’s legal counsel concerning pending litigation.
d. Narrative descriptions of the client’s internal control policies and procedures.
___10. Observation, though considered a reliable audit procedure, has limited usefulness. However, it is used in a number of different
audit situations. Which of the following statements is true regarding observation as an audit technique?
a. It is the most effective audit methodology to use in filling out internal control questionnaires.
b. It is the most persuasive technique to learn how transactions are really processed during the period under audit.
c. It is rarely sufficient to satisfy any audit assertion other than existence.
d. It is the most persuasive audit technique for determining if fraud has really occurred.

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___11. An auditor should trace bank transfers for the last part of the audit period and the first part of the subsequent period to detect
whether
a. The cash receipts journal was held open for a few days after the year-end.
b. The cash balances were overstated because of kiting.
c. The last checks recorded before the year-end were actually mailed by the year-end.
d. Any unusual payments to or receipts from related parties occurred.
___12. 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 nonrespondents have verified their account information.
d. Negative confirmations do not produce evidential matter that is statistically quantifiable.
___13. 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 apply to
the prior period.
b. Investigating payable 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 vendor’s statements to the file of receiving reports to identify items received just prior to the balance sheet date.
___14. When auditing merchandise inventory ay year-end, the auditor performs a cutoff test to obtain evidence that
a. All goods purchase before year end are received before the physical inventory count.
b. No goods held on consignment for customers are included in the inventory balance.
c. No goods observed during the physical count are pledged or sold.
d. All goods owned at year end are included in the inventory balance.
___15. An auditor is verifying the existence of newly acquired fixed assets recorded in the accounting records. Which of the following is
the best evidence to help achieve this objective?
a. Documentary support obtained by vouching entries to subsidiary records and invoices.
b. Physical examination of a sample of newly recorded fixed assets.
c. Oral evidence obtained by discussions with operating management.
d. Documentary support obtained by reviewing titles and tax returns.
___16. A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to
employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of
the audit proposition that:
a. Only bonafide employees worked and their pay was properly computed.
b. Jobs on which employees worked were charged with the appropriate labor cost.
c. Controls relating to disbursements are operating properly.
d. Employees worked the number of hours for which their pay was computed.
___17. When a corporation has convertible debentures or stock options, which of the following procedures should the auditor perform?
a. Verify that dividends paid are being held in a secured account.
b. Determine that enough shares are held in reserve to fulfill the obligations.
c. Determine that all stock options and convertible debentures have been recorded in the stockholder ledger.
d. Confirm options and debentures with stock transfer agent.
___18. Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from
which of the following accounts most likely would yield the highest level of evidence?
a. Accounts payable
b. Advertising expense
c. Accounts receivable
d. Interest expense
___19. Which of he following procedures would provide the most reliable audit evidence?
a. Inquiries of the client’s internal audit staff held in private.
b. Inspection of prenumbered client purchase orders filed in the vouchers payable department.
c. Analytical procedures performed by the auditor on the entity’s trial balance.
d. Inspection of bank statements obtained directly from the client’s financial institution.
___20. Which of the following audit procedures is most likely to assist an auditor in identifying related party transactions?
a. Retesting ineffective controls previously reported to the audit committee.
b. Sending second requests for unanswered positive confirmations of accounts receivable.
c. Reviewing information provided by management identifying related parties and being alert for other material related party
transactions.
d. Inspecting communications with law firms for evidence of unreported contingent liabilities.
___21. Which of the following procedures does not require the assistance of an expert?
a. Evaluating the adequacy of disclosure in the notes to the financial statements.
b. Determining the physical condition or quantity of underground mineral.
c. Ascertaining the value of works of art.
d. Interpreting major contracts.

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___22. To assess the objectivity of the internal auditors, an independent external auditor would most likely
a. Consider the professional qualifications and experience of the internal auditors.
b. Consider the organizational level to which the internal auditors report the results of their work.
c. Consider proper planning, supervision and documentation of internal auditor’s work.
d. Consider the nature and extent of the internal auditor’s assignment.
___23. Which of the following statements is incorrect about accounting estimates?
a. When evaluating accounting estimates, the auditor should pay particular attention to assumptions that are objective and are
consistent with industry patterns.
b. Management is responsible for making accounting estimates included in the financial statements.
c. The risk of material misstatements is greater when accounting estimates are involved.
d. The evidence available to support an accounting estimate will often be more difficult to obtain and less conclusive than evidence
available to support other items in the financial statements.
___24. Audit documentation is the record of audit procedures performed, relevant audit evidence, and the auditor’s conclusions. Which
of the following statements concerning audit documentation is incorrect?
a. Audit documentation should include superseded drafts of working papers and financial statements.
b. Audit documentation prepared after the performance of the audit work is likely to be less accurate than documentation prepared at
the time such work is performed.
c. Audit documentation may include abstracts or copies of the entity’s records such as significant and specific contracts and
agreements.
d. Audit documentation is not a substitute for the entity’s accounting records.
___25. Substantive procedures for payroll transactions and balances primarily focus on analytical procedures to identify unexpected
fluctuations in recurring payroll entities. Which of the following is an appropriate analytical procedure for payroll?
a. Reconcile the payroll bank account.
b. Compare the relationship of hours worked and payroll with that of the preceding year.
c. Inspect authorization of time cards.
d. Compare authorized wage rates with payroll records.
___26. In an audit of shareholder’s equity, an auditor is most concerned that
a. Share capital transactions are properly authorized.
b. All changes in the shareholder’s equity accounts are monitored by an independent transfer agent and registrar.
c. Share splits are charged to retained earnings at par or stated value.
d. Dividends declared during the year were approved by the shareholders.
___27. In auditing long-term bonds payable, an auditor most likely will
a. Confirm the existence of individual bondholders at year-end.
b. Perform analytical procedures on the bond premium and discount accounts.
c. Compare interest expense with the bond payable amount for reasonableness.
d. Examine documentation of assets purchased with bond proceeds for liens.
___28. In violation of a company policy, Victoria Company erroneously capitalized the cost of painting its warehouse. The auditor
examining Victoria’s financial statements will most likely detect the 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 Victoria’s controller.
___29. The auditor is making an assessment as to whether the client has adopted the appropriate accounting policy for its investment
in the voting stock of the investee. The auditor should obtain evidence primarily by
a. Inquiries to the client as to whether the client has the ability to exercise significant influence over the financial and operating policy
decisions of the investee.
b. Direct confirmation with the investee about the control influence that can be exercised by the client.
c. An independent, third party’s opinion concerning the potential influence or control that can be exercise by the client over the investee.
d. Comparison of the number of shares held by the investor with the investee’s number of shares outstanding according to the written
confirmation.
___30. Which of the following audit procedures most likely would provide assurance about a manufacturing entity’s inventory valuation?
a. Tracing test counts to the entity’s inventory listing.
b. Reviewing shipping and receiving cutoff procedures for inventories.
c. Obtaining confirmation of inventories pledged under loan agreements.
d. Testing the entity’s computation of standard overhead rates.
___31. Which of the following is a substantive procedure that an auditor would most likely perform to verify the existence and valuation
of recorded accounts payable?
a. Confirming accounts payable balances with known suppliers who have zero balances.
b. Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted.
c. Receiving the client’s mail, unopened, for a reasonable period of time after year-end to search for unrecorded vendor’s invoices.
d. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
___32. What is the purpose of the proof of cash?
a. To validate that the client’s bank did not make an error during the period being examined.
b. To confirm that the client has properly separated the custody function from the recording function with respect to cash.
c. To prove that the client’s year-end balance of cash is fairly stated.
d. To determine whether any unauthorized disbursements or unrecorded deposits were made for the given time period.

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___33. Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the
auditor did not receive replies to second requests?
a. Inspect the shipping records documenting the merchandise sold to the debtors.
b. Review the cash receipts journal for the month prior to year-end.
c. Intensify the study of internal control concerning the revenue cycle.
d. Increase the assessed level of detection risk for the existence assertion.
___34. Which of the following statements concerning the use of analytical procedures is false?
a. Substantive analytical procedures are applicable when there is only a small volume of transactions.
b. The application of substantive analytical procedures is based on the expectation that relationships among data exist and continue in
the absence of known conditions to the contrary.
c. The presence of relationships among data provides evidence as to the completeness, accuracy, and occurrence of transactions
captured in the information produced by the entity’s information system.
d. Reliance on the results of substantive analytical procedures will depend on the auditor’s assessment of the risk that the analytical
procedures may identify relationships as expected when, in fact, a material misstatement exist.
___35. Which of the following statements concerning audit evidence is correct?
a. An audit usually involves the authentication of documentation.
b. A given set of procedures may provide audit evidence that is relevant to certain assertions, but not to others.
c. Audit evidence obtained from an independent external source is always reliable.
d. An entity’s accounting records can be sufficient audit evidence to support the financial statements.
___36. Using personal computers in auditing may affect the methods used to review the work of staff assistants because
a. Working paper documentation may not contain readily observable details of transactions.
b. The quality control standards may differ.
c. Documenting the supervisory review may require assistance of consulting services personnel.
d. Supervisory personnel may not have an understanding of the capabilities and limitations of personal computers.
___37. PSA 501 states that when inventory is material to the financial statements, the auditor should obtain sufficient appropriate audit
evidence regarding its existence and condition by attendance at physical inventory counting unless impracticable. Which of the
following statements concerning this audit procedure is incorrect?
a. Regardless of the inventory system operated by the client, an annual physical count must be made of each item in the inventory, and
test counts must be made by the auditor.
b. Inventories located in public warehouses may be verified by direct confirmation in writing from the custodians, provided that,
depending on the materiality of these inventories, additional procedures are applied as deemed necessary.
c. When the well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts, the
auditor’s observation procedures usually can be performed either during or after the end of the period under audit.
d. The independent auditor, when asked to audit financial statements covering the current period and one or more periods for which
he/she had not observed or made some physical counts, may be able to become satisfied as to such prior inventories through
appropriate alternative procedures.
___38. In a payables application, checks are authorized and paid based on matching purchase orders, receiving reports, and vendor
invoices. Partial payments are common. An appropriate audit procedure for verifying that a purchase order has not been paid twice is to
sort the
a. Check register file by purchase order, compute total amounts paid by purchase order, compare total amounts paid with purchase
order amounts, and investigate and discrepancies between the total amounts paid and purchase order amounts.
b. Receiving report file by vendor invoice amounts and investigate any discrepancies between the total amounts received and vendor
invoice amounts.
c. Vendor invoice file by purchase order, compute total amounts invoiced by purchase order, compare total amounts invoiced with
purchased order amounts, and investigate any discrepancies between the total amounts invoiced and purchase order amounts.
d. Receiving report file by purchase order, compute total amounts received by purchase order, compare total amounts received with
purchase order amounts, and investigate any discrepancies between the total amounts received and purchase order amounts.
___39. An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year
under audit, regardless of the year-end balance. A purpose of this procedure is to
a. Detect kiting activities that may otherwise not be discovered.
b. Provide the data necessary to prepare a proof of cash.
c. Request that a cutoff bank statement and related checks be sent to the auditor.
d. Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the
confirmation.
___40. Which of the following combination of procedures is an auditor most likely to perform to obtain evidence about fixed asset
additions?
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.

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SOLUTION
1. A
2. C
3. B
4. D
5. C
6. B
7. C
8. D
9. D
10. C
11. B
12. C
13. A
14. D
15. B
16. D
17. B
18. D
19. D
20. C
21. A
22. B
23. A
24. A
25. B
26. A
27. C
28. B
29. A
30. D
31. D
32. D
33. A
34. A
35. B
36. A
37. A
38. A
39. D
40. B

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