FELLOWSHIP BAPTIST COLLEGE

COLLEGE OF BUSINESS AND ACCOUNTANCY

Rizal Street, Kabankalan City, Negros Occidental

SUBJECT: AUDITING PRACTICE INSTRUCTOR: JOHNREY P. BIACA, CPA

INSTRUCTION: Select the correct answer for each of the following questions. For each item, write only
one answer beside the number corresponding to the letter of your choice.

Name: ____________________________________ Course and Section: _________________

PROPERTY, PLANT AND EQUIPMENT: DEPRECIATION AND DEPLETION

1. An auditor has identified numerous debits to accumulated depreciation of equipment. Which of

the following is most likely? 
A. The estimated remaining useful lives of equipment were increased.
B. Plant assets were retired during the year.
C. The prior year's depreciation expense was erroneously understated.
D. Overhead allocations were revised at year-end.

2. In testing for unrecorded retirements of equipment, an auditor might. 

A. Select items of equipment from the accounting records and then attempt to locate them during
the plant tour.
B. Compare depreciation expense with the prior year's depreciation expense.
C. Trace equipment items observed during the plant tour to the equipment subsidiary ledger.
D. Scan the general journal for unusual equipment retirements.

3. A plant manager would be most likely to provide information on which of the following? 
A. Adequacy of the provision for uncollectible accounts.
B. Appropriateness of physical inventory valuation techniques.
C. Existence of obsolete inventory.
D. Deferral of certain purchases of office supplies.

4. Which of the following would be least likely to address control over the initiation and execution of
equipment transactions? 
A. Requests for major repairs are approved by a higher level than the department initiating the
request.
B. Prenumbered purchase orders are used for equipment and periodically accounted for.
C. Requests for purchases of equipment are reviewed for consideration of soliciting competitive
bids.
D. Procedures exist to restrict access to equipment.

5. When there are numerous property and equipment transactions during the year, an auditor who
plans to assess control risk at a low level usually performs: 
A. Tests of controls and extensive tests of property and equipment balances at the end of the
year.
B. Analytical procedures for current year property and equipment transactions.
C. Tests of controls and limited tests of current year property and equipment transactions.
D. Analytical procedures for property and equipment balances at the end of the year.

6. Which of the following best describes the auditors' approach to the audit of the ending balance of
property, plant and equipment for a continuing nonpublic client? 
A. Direct audit of the ending balance.
B. Agreement of the beginning balance to prior year's working papers and audit of significant
changes in the accounts.
C. Audit of changes in the accounts since inception of the company.
D. Audit of selected purchases and retirements for the last few years.

7. 17. Which of the following is not a control that should be established for purchases of
equipment? 
A. Establishing a budget for capital acquisitions.
B. Requiring that the department in need of the equipment order the equipment.
C. Requiring that the receiving department receive the equipment.
D. Establishing an accounting policy regarding the minimum dollar amount of purchase that will
be considered for capitalization.
8. Which of the following is not one of the auditors' objectives in auditing depreciation? 
A. Establishing the reasonableness of the client's replacement policy.
B. Establishing that the methods used are appropriate.
C. Establishing that the methods are consistently applied.
D. Establishing the reasonableness of depreciation computations.

9. Which of the following is the best evidence of continuous ownership of property? 

A. Examination of the deed.
B. Examination of rent receipts from lessees of the property.
C. Examination of the title policy.
D. Examination of canceled check in payment for the property.

10. Which of the following best describes the auditors' typical observation of plant and equipment? 
A. The auditors observe a physical inventory of plant and equipment, annually.
B. The auditors observe all additions to plant and equipment made during the year.
C. The auditors observe all major plant and equipment items in the clients' accounts each year.
D. The auditors observe major additions to plant and equipment made during the year.

11. Which of the following is used to obtain evidence that the client's equipment accounts are not
understated? 
A. Analyzing repairs and maintenance expense accounts.
B. Vouching purchases of plant and equipment.
C. Recomputing depreciation expense.
D. Analyzing the miscellaneous revenue account.

12. Which of the following is not a test primarily used to test property, plant and equipment accounts
for overstatement? 
A. Investigation of reductions in insurance coverage.
B. Review of property tax bills.
C. Examination of retirement work orders prepared during the year.
D. Vouching retirements of plant and equipment.

13. A continuing audit client's property, plant and equipment and accounts receivable accounts have
approximately the same year-end balance. In this circumstance, when compared to property,
plant and equipment one would normally expect the audit of accounts receivable to require: 
A. More audit time.
B. Less audit time.
C. Approximately the same amount of audit time.
D. Similar confirmation procedures.

14. When comparing an initial audit with a subsequent year audit for a particular client, the scope of
audit procedures for which of the following accounts would be expected to decrease the most? 
A. Accounts receivable.
B. Cash.
C. Marketable securities.
D. Property, plant and equipment.

15. When performing an audit of the property, plant and equipment accounts, an auditor should
expect which of the following to be most likely to indicate a departure from generally accepted
accounting principles? 
A. Repairs have been capitalized to repair equipment that had broken down.
B. Interest has been capitalized for self-constructed assets.
C. Assets have been acquired from affiliated corporations with the related transactions recorded
and described in the financial statements.
D. The cost of freight-in on an acquisition has been capitalized.

16. The most likely technique for the current year audit of goodwill which was acquired three years
ago by a continuing audit client: 
A. Confirmation.
B. Observation.
C. Recomputation.
D. Inquiry.
17. For which of the following accounts is it most likely that most of the audit work can be performed
in advance of the balance sheet date? 
A. Accounts receivable.
B. Cash.
C. Current marketable securities.
D. Property, plant and equipment.

18. The auditors may expect a proper debit to goodwill due to: 
A. Purchase of a trademark.
B. Establishment of an extraordinarily profitable product.
C. A business combination.
D. Capitalization of human resources.

19. Which of the following is a customary audit procedure for the verification of the legal ownership of
real property? 
A. Examination of correspondence with the corporate counsel concerning acquisition matters.
B. Examination of ownership documents registered and on file at a public hall of records.
C. Examination of corporate minutes and resolutions concerning the approval to acquire property,
plant and equipment.
D. Examination of deeds and title guaranty policies on hand.

20. In violation of company policy, Lowell Company erroneously capitalized the cost of painting its
warehouse. The auditors examining Lowell's financial statements would most likely detect this
when: 
A. Discussing capitalization policies with Lowell's controller.
B. Examining maintenance expense accounts.
C. Observing, during the physical inventory observation, that the warehouse had been painted.
D. Examining the construction work orders supporting items capitalized during the year.

21. Which of the following best describes the independent auditors' approach to obtaining
satisfaction concerning depreciation expense in the income statement? 
A. Verify the mathematical accuracy of the amounts charged to income as a result of depreciation
expense.
B. Determine the method for computing depreciation expense and ascertain that is in accordance
with generally accepted accounting principles.
C. Reconcile the amount of depreciation expense to those amounts credited to accumulated
depreciation accounts.
D. Establish the basis for depreciable assets and verify the depreciation expense.

22. The auditors are least likely to learn of retirements of equipment through which of the following? 
A. Review of the purchase returns and allowances account.
B. Review of depreciation.
C. Analysis of the debits to the accumulated depreciation account.
D. Review of insurance policy riders.

23. For which of the following ledger accounts would the auditor be most likely to analyze the details
to identify understatements of equipment acquisitions? 
A. Service Revenue.
B. Sales.
C. Repairs and maintenance expense.
D. Sales salaries expense.

24. Which of the following is the most important control procedure over acquisitions of property,
plant, and equipment? 
A. Establishing a written company policy distinguishing between capital and revenue
expenditures.
B. Using a budget to forecast and control acquisitions and retirements.
C. Analyzing monthly variances between authorized expenditures and actual costs.
D. Requiring acquisitions to be made by user departments.

25. In the examination of property, plant, and equipment, the auditor tries to determine all of the
following except the: 
A. Extent of the control risk.
B. Extent of property abandoned during the year.
C. Adequacy of replacement funds.
D. Reasonableness of the depreciation.
ACCOUNTS PAYABLE AND OTHER LIABILITIES

26. Assume that the auditors are concerned about disbursement transactions that have been
recorded for improper amounts. Which procedure(s) would possibly identify these transactions?

  
A. Option A
B. Option B
C. Option C
D. Option D

27. Which of the following best describes a voucher prepared under good internal control? 
A. A document prepared by Stores that indicates amount to be purchased.
B. A document prepared by Receiving that indicates the quantity received and approves
payment.
C. A document prepared by Accounts Payable authorizing a cash disbursement.
D. A document received by Purchasing, from a supplier, indicating quantity of goods purchased
and amount due.

28. An auditor wishes to perform tests of controls on a client's cash disbursements relating to
accounts payable. If the control procedures leave no audit trail of documentary evidence, the
auditor most likely will test the procedures by: 
A. Confirmation and observation.
B. Observation and inquiry.
C. Analytical procedures and confirmation.
D. Inquiry and analytical procedures.

29. Which of the following tests of controls most likely would help assure an auditor that goods
shipped are properly billed? 
A. Scan the sales journal for sequential and unusual entries.
B. Examine shipping documents for matching sales invoices.
C. Compare the accounts receivable ledger to daily sales summaries.
D. Inspect unused sales invoices for consecutive pre-numbering.

30. 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.

31. An entity's internal control requires for every check request that there be an approved voucher,
supported by a prenumbered purchase order, and a prenumbered receiving report. To determine
whether checks are being issued for unauthorized expenditures, an auditor most likely would
select for testing from the population of: 
A. Purchase orders.
B. Canceled checks.
C. Receiving reports.
D. Approved vouchers.

32. A client recorded a payable for a large purchase twice. Which of the following controls would be
most likely to detect this error in a timely and efficient manner? 
A. Footing the purchases journal.
B. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.
C. Tracing totals from the purchases journal to the ledger accounts.
D. Sending written quarterly confirmations to all vendors.
33.  When an auditor finds a debit to accounts payable, which of the following accounts is most likely
to be credited? 
A. Accounts Receivable.
B. Accrued liabilities.
C. Cash
D. Cost of goods sold.

34. Which of the following is an example of an accrued liability? 

A. Accounts payable.
B. Notes payable.
C. Prepaid Insurance.
D. Product warranty liability.

35. A likely analytical procedure to test the accuracy of purchase discounts would be to compute the
ratio of cash discounts earned to 
A. Accounts payable.
B. Notes payable.
C. Purchases.
D. Sales discounts.

36. Auditors may choose not to confirm accounts payable because: 

A. Confirmation obtains evidence identical to that obtained by cutoff tests.
B. Other reliable external evidence to support the balances is likely to be available.
C. A reading of the corporate minutes reveals that confirmation is unnecessary.
D. The balances due will have changed between the year-end and the date of confirmation.

37. The assertion most directly addressed when performing the search for unrecorded liabilities is: 
A. Completeness.
B. Existence.
C. Presentation.
D. Rights.

38. Which of the following manipulations would understate accounts payable on the financial
statements? 
A. Overstatement of purchases
B. Closing the cash disbursements journal prior to year-end
C. Leaving the cash receipts journal open after year-end
D. Overstating purchase returns.

39. Which statement is correct with respect to accounts payable confirmations? 

A. The negative form is used in most circumstances
B. Accounts with new suppliers are always confirmed
C. They are a required auditing procedure
D. They are more frequently used in situations in which some vendors don't send monthly
statements.

40. The confirmation of accounts payable is most closely associated with: 

A. Assertion risk.
B. Detection risk.
C. Inherent risk.
D. Relative risk.

41. Which of the following audit procedures is aimed most directly at testing the completeness
assertion for accounts payable: 
A. Footing the list of accounts payable.
B. Examining underlying documentation for cash disbursements in the period after year-end.
C. Tracing shipping reports issued on or before year-end to related customer purchase orders
and invoices.
D. Tracing shipping reports after year-end to related customer purchase orders and invoices.

42. Which of the following best describes the auditors' approach to the audit of accrued liabilities? 
A. Test computations.
B. Confirmation.
C. Observation.
D. A low planned assessed level of control risk.
 43.  Which of the following statements is correct regarding accounts payable and the auditor's
procedures? 
A. Because it is generally more difficult to discover a transaction that has not been recorded than
to discover one that has been recorded incorrectly, the audit objective of completeness drives
many of the substantive procedures applied to these balances.
B. A judgment whether an unrecorded payable should be recorded before the financial
statements are prepared depends entirely upon the source of the payable.
C. The confirmation of accounts payable selected from the year-end trial balance of such
accounts is most effective in discovering unrecorded liabilities.
D. Unrecorded payables are often discovered through examining vouchers payable entered into
the voucher register prior to the balance sheet date.

44. Which of the following assertions is of principle concern to the auditors in the examination of
accounts payable? 
A. Existence.
B. Completeness.
C. Valuation.
D. Authorization.

45. 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.

Debt and Equity Capital

46. A registrar/transfer agent system relating to capital stock is most likely used by: 
A. A small, nonpublic company.
B. A large, publicly traded company.
C. All companies must use this type of system.
D. No companies use this system anymore.

47. In auditing long-term debt, an auditor would be most likely to: 

A. Perform analytical procedures on the bond prenumbered discount accounts.
B. Examine documentation of assets purchased with bond proceeds for liens.
C. Compare interest expense with the long-term debt amount for reasonableness.
D. Confirm the existence of individual long-term debt holders at year-end.

48. An auditor obtains evidence of stockholders' equity transactions for a publicly traded company by
reviewing the entity's: 
A. Minutes of board of directors meetings.
B. Registrar's record of interbank transfers.
C. Canceled stock certificates.
D. Treasury stock certificate book.

49. Which of the following most likely would approve the issuance of notes payable? 
A. Controller.
B. Payroll.
C. Personnel.
D. Treasurer.

50. Internal control over bonds payable is best when: 

A. The company utilizes the services of a bond trustee.
B. The company segregates approval from issuance of the bonds.
C. Bonds are countersigned by two officers.
D. Bonds are serially numbered.

51. The auditor's program to examine interest-bearing debt most likely will include steps that require: 
A. Comparing the book value of the debt to its year-end market value.
B. Vouching borrowing and repayment transactions.
C. Verifying the proper presentation of the debt through the use of confirmations.
D. Inspecting the accounts payable subsidiary ledger for unrecorded interest-bearing debt.
52. Bond transactions are normally confirmed with: 
A. Individual holders of retired bonds.
B. Recomputation procedures performed using interest expense.
C. The bond trustee.
D. Comparisons of retired bonds with those outstanding.

53. Company A does not employ an independent stock transfer agent, but rather issues its own stock
and maintains its stock records. When outstanding shares are transferred from one holder to
another the certificate of the selling shareholder should be: 
A. Canceled (generally by perforation) and attached to the certificate book.
B. Destroyed to prevent fraudulent reissuance.
C. Retained by the selling shareholder.
D. Sent to the state's registrar of investment securities.

54. Which of the following procedures is least likely in the audit of capital stock? 
A. Examine all outstanding stock certificates for completeness.
B. Account for the proceeds from stock issues.
C. Reconcile shares outstanding with the general ledger.
D. Evaluate compliance with stock option plans.

55. When the auditors obtain an understanding of internal control for the financing cycle
documentation will frequently include a written description as well as a(n): 
A. List of audit objectives.
B. Decision table.
C. Summary of tests of controls.
D. Internal control questionnaire.

56. Which of the following is not a primary objective in the audit of interest-bearing debt? 
A. Establish the completeness of recorded interest-bearing debt.
B. Establish the legality of outstanding debt.
C. Determine that debt is properly valued.
D. Determine that the presentation and disclosure of interest-bearing debt is appropriate.

57. In which of the following accounts would one expect a related party transaction to be easiest to
detect? 
A. Accounts receivable.
B. Accounts payable.
C. Notes payable.
D. Cash.

58. For audit purposes, a corporation's articles of incorporation are normally: 

A. Copied and placed on the owners' equity lead schedule.
B. Copied and placed in the permanent file.
C. Confirmed with the transfer agent.
D. Ignored since they are not normally considered to be related to the internal control structure.

59. The audit approach for acquired treasury stock will normally include: 
A. Confirmation with shareholders.
B. Inspection of certificates.
C. Inspection of cash receipts entries.
D. Recomputation of all gains and losses.

60. Changes in capital stock accounts should normally be approved by: 

A. The board of directors.
B. The audit committee.
C. The stockholders.
D. The president.

61. For a large publicly traded client the auditors' examination of capital stock accounts will not
normally include: 
A. Analysis of capital stock accounts.
B. Confirmation of shares issued with the independent registrar.
C. Accounting for the proceeds of major stock issues.
D. Reconciliation of a stock certificate book with the general ledger.
62.  For a corporation that does not utilize the services of an independent registrar and stock transfer
agent, which of the following represents a weakness in internal control over stock issuance? 
A. Stock certificates are prenumbered.
B. Stock certificates are signed immediately upon receipt from the printer.
C. Stock certificates are in the exclusive custody of a responsible officer.
D. Stock certificates require the signature of two officers.

63. A primary responsibility of a registrar of capital stock is to: 

A. Determine that dividends paid do not exceed the amount allowable by law.
B. Act as an independent third party between the board of directors and outside investors
concerning merger, acquisition, and other major decisions.
C. Avoid any over issuance of stock.
D. Maintain detailed stockholder records and carrying out transfers of stock ownership.

64. Which of the following is an auditor most likely to confirm from the transfer agent and registrar? 
A. Total shares of stock issued.
B. Restrictions on the payment of dividends.
C. Total market value of outstanding shares of stock.
D. Gains from sale of treasury stock.

65. The auditors' program for the examination of long-term debt should include steps that require
the: 
A. Verification of the existence of the bondholders.
B. Examination of any bond trust indenture.
C. Inspection of the accounts payable subsidiary ledger.
D. Investigation of credits to the bond interest income accounts.

66. During an audit of a publicly-held company, the auditors should obtain written confirmation
regarding debenture transactions from the: 
A. Debenture holders.
B. Client's attorney.
C. Internal auditors.
D. Trustee.

67. Auditors often request that the audit client send a letter of inquiry to those attorneys who have
been consulted with respect to litigation, claims, or assessments. The primary reason for this
request is to provide the auditor with: 
A. An estimate of the dollar amount of the probable loss.
B. An expert opinion as to whether a loss is possible, probable or remote.
C. Information concerning the progress of cases to date.
D. Corroborative audit evidence.

68. The primary reason for preparing a reconciliation between interest-bearing obligations
outstanding during the year and interest expense presented in the financial statements is to: 
A. Evaluate internal control over securities.
B. Determine the validity of prepaid interest expense.
C. Ascertain the reasonableness of imputed interest.
D. Detect unrecorded liabilities.

69. An audit program for the examination of the retained earnings account should include a step that
requires verification of the: 
A. Market value used to charge retained earnings to account for a two-for-one stock split.
B. Approval of the adjustment to the beginning balance as a result of a write-down of an account
receivable.
C. Authorization for both cash and stock dividends.
D. Gain or loss resulting from disposition of treasury shares.

70. During its fiscal year, a company issued, at a discount, a substantial amount of first-mortgage
bonds. When performing audit work in connection with the bond issue, the independent auditor
should: 
A. Confirm the existence of the bondholders.
B. Review the minutes for authorization.
C. Trace the net cash received from the issuance to the bond revenue account.
D. Inspect the records maintained by the bond trustee.