CRC-ACE REVIEW SCHOOL

The Professional CPA Review School

3RD FLOOR CONCEPCION VILLAROMAN BUILDING,
873 P. CAMPA ST. CORNER ESPAA, SAMPALOC, MANILA
735-9031 / 735-8901

AUDITING THEORY OCT 2007 BATCH

SECOND PREBOARD EXAMS August 18, 2007
GENERAL INSTRUCTIONS: Select the BEST answer for each of the following questions by
writing a vertical line (I) on the letter of your choice on the answer sheet provided. Mark only
one answer. NO ERASURES ARE ALLOWED. Use pencil no. 2 only.
1
. The management is primarily responsible over the establishment and implementation of an adequate internal
control system. If a CPA is engaged to perform an audit of the internal control for the purpose of helping the
management to improve on its stewardship function by evaluating the operational effectiveness of the internal
control structure, the management is more likely the
a. responsible party c. client
b. intended user d. all of the above
2
. Which of the following statements is (are) true?
a. The attest function requires that an assertion be made by one party and attested to by another.
b. PICPA issues CPA certificates.
c. Gerry, CPA, designed the accounting system used by Cuatro Cantos, a small business. He spends a few hours
at the company at the end of each month to see that the accounting records are being properly maintained. At
year-end, he prepares adjusting entries. Under these circumstances, he could issue the standard auditors
report without performing the normal audit procedures.
d. The primary purpose of an audit is the detection or prevention of fraud.
3
. Which of the following is true about assurance engagements?
Statement 1: The objective of an assurance engagement is for a professional accountant to evaluate or measure a
subject matter that is the responsibility of another party against identified suitable criteria, but not to express a
conclusion that provides the intended user with a level of assurance about that subject matter.

Statement 2: Assurance engagements performed by professional accountants are intended to enhance the
credibility of information about a subject matter.
a. statement 1 only c. Both statements are true.
b. statement 2 only d. None of the statements is true.
4
. Absolute assurance in auditing is not attainable as a result of such factors as all of the following except...
a. need for judgment c. lack of expertise
b. use of testing d. inherent limitations of internal control
5
. An audit involves ascertaining the degree of correspondence between assertions and established criteria. In the
case of financial statement audit, which of the following is not a valid criterion?
a. Accounting standards generally accepted in the Philippines.
b. International Accounting Standards
c. Other authoritative financial reporting framework
d. Philippine Standards on Auditing.
6
. Which of the following statements is (are) true?
a. The internal auditing staff usually reports to a committee of the board of directors or to a member of the top
management group.
b. The economic interests of the providers of financial information and the users of this information are the same,
and this common interest calls for an annual independent audit.
c. A senior auditor may plan and conduct an audit, in which case that auditor takes ultimate responsibility for the
engagement.
d. The primary purpose of an audit is the detection or prevention of fraud.
7
. Which of the following would not be considered a special report?
a. An audit of a company's cash basis financial statements.
b. An audit of the financial statements of an individual in which assets are valued at estimated current values.
c. A report on specified elements of financial statements.
d. A report on the client's compliance with the terms of a bond indenture contract.
8
. Which of the following is normally a major reason for establishing an internal audit function?
a. To ensure the accuracy, reliability, and timeliness of financial and operating data used in management's
decision making.
b. To relieve overburdened management of the responsibility for establishing an effective control structure.
c. To safeguard resources entrusted to the organization.
d. To assist members of the organization in the measurement and evaluation of the effectiveness of the
established internal control structure
CRC-ACE/AT: Second Pre-board Exams (October 2007 Batch) Page 2

9
. CPAs may not express an opinion on
a. Operation of an accounting software. c. Prospective financial statements
b. Financial statements. d. Compilation
10
. Public accounting firms are organized as any of the following
a. Sole proprietorships, partnerships and corporations
b. Sole proprietorships and general partnerships only
c. Partnerships and corporations
d. Sole proprietorships and Partnerships
11
. The BOA requires all members of the accountancy profession to obtain . units of continuing professional
education prior to renewal of the PRC license.
a. 40 b. 50 c. 60 d. 65
12
. In the event of an unresolvable difference of opinion between the client company and the CPA firm as to the
valuation of an asset in the financial statements:
a. The final decision rests with the client and the auditors can express their disapproval in the audit report if they
deem it appropriate to do so.
b. The auditors should change the financial statements to show the valuation they consider proper
c. The difference of opinion should be submitted to arbitration by the PICPA
d. The auditors should withdraw from the engagement
13
. All of the following are false except
a. PSAs need only be applied to material matters.
b. A CPA acting as auditor cannot depart from the PSA provisions.
c. Interpretations cover implementation issues relating to PSAs and have inferior authority to the PSAs.
d. The PSAs pronounced by the AASC covers the audit of public sector entities.
14
. The audit work performed by each assistant should be reviewed primarily to determine whether it was
adequately performed and to evaluate whether the
a. Results are consistent with the conclusions to be presented in the auditor's report.
b. Audit has been performed by persons having adequate technical training and proficiency as auditors.
c. Auditor's system of quality control has been maintained at a high level.
d. The costs of internal failure is minimized.
15
. Which of the following activities are carried out by the AASC?
a. Establishment of auditing standards for non-profit organizations
b. Establishment of standards for auditing of government entities
c. Developing continuing education programs
d. Accrediting public practitioners
16
. When the scope of the auditors examinations is restricted by the client, the auditors should issue a(n)
a. Adverse opinion c. Qualified opinion
b. Unqualified opinion d. Disclaimer of an opinion
17
. In the following situation, which among the Ten GAAS is most violated:
The CPA firm had informed the client that the audit would begin on November 17, but found it had no staff
members available at that time. To avoid criticism from the client, the CPA instructed a newly-employed
secretary to go to the clients office, ask to see the general ledger, and to give the impression of being busy
until an auditor could be assigned to the engagement.
a. General standard 3 c. Standards of reporting 4
b. Standard of fieldwork d. Standard of reporting 1
18
. Successor auditor should request the.
a. Predecessor auditor to submit a list of internal control weaknesses that have not been connected.
b. Client to instruct its attorney to send a letter of audit inquiry concerning the status of the prior year's
litigation, claims, and assessments.
c. Client to authorize the predecessor auditor to allow a review of the predecessor auditor's working papers.
d. Client to approve the schedule of the performance of audit procedures.
19
. For a CPA firm considering the acceptance of new clients, which of the following characteristics would be a
deterrent?
a. The prospective client is long-established but has shown little growth in recent years.
b. The prospective client is in the same line of business as two present clients and is in direct competition with
one of them,
c. The prospective client is in a new much-publicized industry offering the possibility of rapid growth but is under-
financed and possibly on the brink of bankruptcy
d. The prospective client is a defendant in an anti-trust suit brought about by the Department of Justice

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CRC-ACE/AT: Second Pre-board Exams (October 2007 Batch) Page 3
20
. Which of the following statements regarding pre-engagement activities is false?
a. CPAs cannot ethically refuse to provide auditing services to any prospective client which the CPAs are
competent to audit, if the prospective client is willing to pay the CPAs standard audit fees.
b. Successor auditors are required by professional standards to make certain inquiries of the predecessors before
accepting a new audit client.
c. An engagement letter represents a written contract between the auditors and the client.
d. Two of the above statements are false.
21
. Among the possible reasons why an auditor will discontinue servicing an audit client is
a. Too many errors have to be adjusted to make the financial statements conform with GAAPs.
b. The auditor has to use a specialist in verifying inventory valuation.
c. The auditor is also rendering at the same time, a management advisory engagement for the same client, and the
audit was the engagement contracted first.
d. A change in the client management and the auditor is worried about the reputation of the new management.
22
. Which of the following may be considered as a danger signal that the client may resort to deliberate
misstatement of its financial statements?
a. The company is financially distressed.
b. The company is the subsidiary of a multinational corporation.
c. The company has its branches all over the Philippines.
d. The company is engaged in mining.
23
LS Transit Corp. maintains a staff of three full-time internal auditors who report directly to the controller. In
planning to use the internal auditors to provide assistance in performing the audit, the independent auditor most
likely will
a.Increase the extent of the procedures needed to reduce control risk to an acceptable level.
b. Decrease the extent of the tests of controls needed to support the assessed level of detection risk.
c. Place limited reliance on the work performed by the internal auditors.
d. Avoid using the work performed by the internal auditors.
24
. Which of the following situations would most likely require special audit planning by the auditor?
a. Some items of factory and office equipment do not bear identification numbers.
b. Depreciation methods used on the client's tax return differ from those used on the books.
c. Inexpensive assets are expensed even though the expected life exceeds one year.
d. Inventory is comprised of works of artists sold in galleries.
25
. The auditor may refer to and identify a specialist in the auditor's report if the auditor
a. Expresses an unqualified opinion.
b. Believes it will facilitate an understanding of the reason for modification of the report.
c. Wishes to indicate a division of responsibility.
d. Wishes to emphasize the thoroughness of the audit.
26
. Which of the following is not a specialist upon whose work an auditor may rely?
a. Actuary. c. Internal auditor.
b. Appraiser. d. Engineer.
27
. When an outside specialist has assumed full responsibility for taking the client's physical inventory, reliance
on the specialist's report is acceptable if
a. The auditor is satisfied through application of appropriate procedures as to the repu tation and competence of
the specialist.
b. Circumstances made it impracticable or impossible for the auditor either to do the work personally or observe
the work done by the inventory firm.
c. The auditor conducted the same audit tests and procedures as would have been applicable if the client
employees took the physical inventory.
d. The auditor's report contains a reference to the assumption of full responsibility.
28
. If a small client is using a service bureau, the auditor
a. Should refuse to accept the engagement.
b. May accept the outside service bureau's control procedures.
c. Must evaluate the service bureau's control procedures.
d. None of the above
29
. The primary inherent risk associated with accounts receivable is that
a. The receivables are incorrectly classified.
b. The receivables are pledged as collateral
c. The income from receivables is not collectible.
d. The entity has 100% claim over the receivables
30
. A CPA is conducting the first examination of a company's financial statements. The CPA hopes to reduce the
audit work by consulting with the predecessor auditor and reviewing the predecessor's working papers. This
practice is
a. Acceptable if the CPA refers in the audit report to reliance upon the predecessor auditor's work.

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CRC-ACE/AT: Second Pre-board Exams (October 2007 Batch) Page 4
b. Acceptable if the client and the predecessor auditor agree to it.
c. Required if the CPA is to render an unqualified opinion.
d. Unacceptable because the CPA should bring an independent viewpoint to a new engagement.
31
Which of the following is not an internal control structure element?
a. Control environment c. Accounting system
b. Control procedures d. Control risk
32
When control risk is assessed at the maximum level for all financial statement assertions, the auditor need not
document the:
a. Understanding of the entity's internal control structure elements.
b. Conclusion that control risk is at the maximum level.
c. Basis for concluding that control risk is at the maximum level.
d. none of the above.
33
An auditor uses the knowledge provided by the understanding of the internal control structure and final assessed
level of control risk primarily to determine the nature, timing, and extent of the:
a. Attribute tests c. Substantive tests
b. Compliance tests d. Tests of controls
34
. There is an inverse relationship between the effectiveness of an entity's internal control structure and the
a. Reliability of financial statements.
b. Extent of detailed audit tests required.
c. Degree of staff supervision required in the performance of an audit.
d. Fairness of management assertions in the financial statements.
35
. It needs to be structured so that it provides an independent check on management and is primarily responsible
for the governance of the corporation.
a. Securities and Exchange Commission
b. Independent auditor
c. Board of directors
d. Internal Auditor
36
. The auditor is studying internal control policies and procedures within the sales, shipping, and billing subset of
the revenue cycle. Which of the following conditions suggests a need for additional testing of controls?
a. Internal control is found to be weak with regard to shipping and billing.
b. Internal control over sales, billing, and shipping appears strong, but 80% of sales revenue is attributable to
three major customers.
c. Internal control over billing and shipping is thought to be strong.
d. Internal control over the recording of sales is found to be weak and the sales are evenly divided among a large
number of customers.
37
. All policies and procedures adopted by the management of an entity to assist in ensuring the orderly and
efficient conduct of its business.
a. internal control system c. accounting system
b. internal accounting control system d. internal administrative controls
38
. What is the best justification why an external auditor considers control environment in the study of the Internal
Control system?
a. Because the control environment has an effect on the effectiveness of some control procedures that are
relevant to financial statement assertions.
b. Because the actions of the directors and management ensures the effectiveness of the internal control system
c. Because the control environment encompasses the policies on internal verification such as reconciliations,
budgetary analysis, and access to company data and assets
d. Because its study will enable the auditor to identify potential material misstatements considers risk factors and
determine appropriate audit procedures
39
. The Internet is a shared public network that enables communication with other entities and individuals around
the world. Its indispensable assistance to aiding e-commerce however, has also not failed to raise significant audit
issues. In what particular phase in the audit process will this technology pose the least concern?
a. Audit reporting c. Audit preliminary planning
b. Final Control risk assessment d. Performance of substantive tests
40
. An auditor in order to retain the audit risk in an acceptably low level may compensate for a weakness in the
internal control structure by increasing the
a. Level of tests of controls. c. Level of detection risk.
b. Extent of substantive tests. d. Inherent risk
41
. A test of controls to determine the authorization of the sales would be to
a. Review client's procedures for timely reconciliation.
b. Observe the sales order entry process to note orderliness and restrictions.
c. Select a sample of sales invoices and vouch to shipping documents.

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CRC-ACE/AT: Second Pre-board Exams (October 2007 Batch) Page 5

42
. Tracing bills of lading to sales invoices provides evidence that
a. Recorded sales were shipped.
b. Invoiced sales were shipped.
c. Shipments to customers were invoiced.
43
. An internal control questionnaire indicates that an approved receiving report is required to accompany every
check request for payment of merchandise. Which of the following procedures provides the greatest assurance that
this control is operating effectively?
a. Select and examine receiving reports and ascertain that the related cancelled checks are dated no earlier
than the receiving reports.
b. Select and examine receiving reports and ascertain that the related cancelled checks are dated no later than
the receiving reports.
c. Select and examine cancelled checks and ascertain that the related receiving reports are dated no earlier
than the checks.
d. Select and examine cancelled checks and ascertain that the related receiving reports are dated no later
than the checks.
44
. When perpetual inventory records are maintained in quantities and in pesos, and internal accounting control over
inventory is weak, the auditor would probably
a. Want the client to schedule the physical inventory count at the end of the year,
b. Insist that the client perform physical counts of inventory items several times during the year.
c. Increase the extent of tests for unrecorded liabilities at the end of the year.
d. Have to disclaim an opinion on the income statement for that year.
45
. Tracing selected items from the payroll register to employee time cards that have been approved by supervisory
personnel provides evidence that
a. Payroll checks were signed by an appropriate officer independent of the payroll preparation process.
b. Internal controls relating to payroll disbursements were operating effectively.
c. Only bona fide employees worked and their pay was properly computed.
d. Employees who are included in the payroll are bona fide employees.
46
. In violation of company policy, Lowell Company erroneously capitalized a cost related to maintaining its
warehouse. The auditor 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.
47
. Which one of the following statements is correct concerning the concept of materiality?
a. Materiality is determined by reference to guidelines established by the FRSC.
b. Materiality depends only on the peso amount of an item relative to other items in the financial statements.
c. Materiality depends on the nature of an item rather than the peso amount.
d. Materiality is a matter of peso magnitude and nature of transaction as discussed in PSA 320.
48
. The auditor faces a risk that the examination will NOT detect material errors in the financial statements. With
regard to minimizing this risk, the auditor primarily relies on
a. Substantive tests. c. Internal control.
b. Compliance tests. d. Statistical analysis.
49
. With respect to the auditor's planning of a year-end examination, which of the following statements is always
true?
a. An engagement should not be accepted after the fiscal year end.
b. An inventory count must be observed at the balance sheet date.
c. The client's audit committee should not be told of the specific audit procedures which will be performed.
d. It is an acceptable practice to carry out substantial parts of the examination at interim dates.
50
. Which of the following procedures is least likely to be performed before the balance sheet date?
a. Observation of inventory.
b. Review of internal control over cash disbursements.
c. Search for unrecorded liabilities.
d. Confirmation of receivables.
51
. From the auditor's point of view, inventory counts are more acceptable prior to the year end when
a. Internal control is weak.
b. Accurate perpetual inventory records are maintained.
c. Inventory is slow-moving.
d. Significant amounts of inventory are held on a consignment basis.
52
. When an auditor selects a sample of items from the vouchers payable register for the last month of the period
under audit and traces these items to underlying documents, the auditor is gathering evidence primarily in support
of the assertion that

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CRC-ACE/AT: Second Pre-board Exams (October 2007 Batch) Page 6
a. Recorded obligations were paid.
b. Incurred obligations were recorded in the correct period.
c. Recorded obligations were valid.
d. Cash disbursements were recorded as incurred obligations.
53
.An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared.
This test is to satisfy the audit objective of
a. Completeness. b. Control. c. Existence. d. Accuracy
54
.Software that controls all aspects of the computer's internal operation is
a. Database management system software.
b. Operating system software
c. Access control software.
d. Local Area Network
55
. An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a
reasonable period of time. If the entity's disclosures concerning this matter are adequate, the audit report may
include a (an)
Disclaimer "Except for"
Of opinion qualified opinion
a. No No
b. No Yes
c. Yes No
d. Yes Yes
56
. Which of the following would generally be a limitation on the scope of the auditor's examination?
a. The unavailability of sufficient competent evidential matter.
b. The engagement of the auditor to report on only one basic financial statement.
c. The examination of a subsidiary's financial statements by an auditor other than the one who examines and
reports on the consolidated financial statements.
d. The engagement of the auditor after year end.
57
. The following pertains to features of a review engagement except for ...
a. involves application of audit skills and techniques and the gathering of evidence
b. test of records and of responses to inquiries by obtaining corroborating evidence
c. comprises inquiry and analytical procedures
d. limited assurance
58
. Which of the following statements is (are) true?
a. An independent audit of small business by a CPA firm usually results in an unconditional guarantee of the
accuracy of the financial statements.
b. If the independent auditors satisfy themselves that a clients accounting records are up-to date and reliable, and
that internal control is strong, they will not need to gather evidence from banks or other outside sources.
c. CPA firms sometimes compile or review financial statements for small companies not having trained
accountants in their employ. Under these circumstances, the CPA firm does not issue an audit report.
d. Because of the prospective nature of financial forecasts, auditors never are involved with attesting to
reasonableness of this type of data.
59
. Inquiry of the entity's personnel and analytical procedures are the primary bases for the issuance of a(an)
a. Compilation report on financial statements for a nonpublic company in its first year of operations.
b. Auditor's report on financial statements supplemented with price level information.
c. Review report on comparative financial statements for a nonpublic company in its second year of operations.
d. Management advisory report prepared at the request of the client's audit committee.
60
. An accountant who is not independent of a client is precluded from issuing a
a. Compilation report on prospective financial statements.
b. Compilation report on historical financial statements.
c. Report on consulting services.
d. Audit report
61
. In connection with the study and evaluation of internal control during an examination of financial statements, the
independent auditor
a. Gives equal weight to internal accounting and administrative control.
b. Emphasizes internal administrative control.
c. Emphasizes the separation of duties of client personnel.
d. Emphasizes internal accounting control.
62
. In connection with an audit of financial statements by an independent CPA, the client suggests that members of
the internal audit staff be utilized to minimize external audit costs. It would be inappropriate for the CPA to delegate
which of the following tasks to the internal audit staff?
a. Selection of accounts receivable for confirmation, based upon decision rules established by the independent CPA
and with appropriate supervision by the CPA.

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CRC-ACE/AT: Second Pre-board Exams (October 2007 Batch) Page 7
b. Investigation of negative accounts receivable responses, for later review by the independent
c. Preparation of an accounts receivable aging schedule.
d. Determination of the adequacy of the allowance for uncollectible accounts.
63
. In comparison to the external auditor, an internal auditor is more likely to be concerned with
a. Internal administrative control. c. Operational auditing.
b. Cost accounting procedures. d. Internal accounting control.
64
. An auditor is planning the study and evaluation of internal control for purchasing and disbursement procedures.
In planning this study and evaluation the auditor will be least influenced by
a. The availability of a company manual describing purchasing and disbursement procedures.
b. The scope and results of audit work by the company's internal auditor.
c. The existence within the purchasing and disbursement area of internal control strengths that offset weaknesses.
d. The strength of weakness of internal control in other areas, e.g., sales and accounts receivable.
65
. Which of the following statements relating to compliance tests is most accurate?
a. Auditing procedures cannot concurrently provide both evidence of compliance with accounting control
procedures and evidence required for substantive tests.
b. Compliance tests include physical observations of the proper segregation of duties which ordinarily may be
limited to the normal audit period.
c. Compliance tests should be based upon proper application of an appropriate statistical sampling plan. d.
Compliance tests ordinarily should be performed as of the balance sheet date or during the period subsequent to
that date.
66
. An example of an internal control weakness is to assign to a department supervisor the responsibility for
a. Reviewing and approving time reports for subordinate employees.
b. Initiating requests for salary adjustments for subordinate employees.
c. Authorizing payroll checks for terminated employees.
d. Distributing payroll checks to subordinate employees.
67
. Operating control over the check signature plate normally should be the responsibility of the
a. Secretary. c. Vice president of finance.
b. Chief accountant. d. Treasurer.
68
. Which of the following best describes the principal advantage of the use of flowcharts in reviewing internal
control?
a. Standard flowcharts are available and can be effectively used for describing most company internal operations.
b. Flowcharts aid in the understanding of the sequence and relationships of activities and documents.
c. Working papers are not complete unless they include flowcharts as well as memoranda on internal control.
d. Flowcharting is the most efficient means available for summarizing internal control.
69
. In connection with the study of internal control, an auditor encounters the following flowcharting symbols:

The auditor would conclude that:

a. A document has been generated by a manual operation.
b. A master file has been created by a computer operation.
c. A document has been generated by a computer operation.
d. A master file has been created by a manual operation.
70
. Effective internal control in a small company that has an insufficient number of employees to permit proper
division of responsibilities can best be enhanced by
a. Employment of temporary personnel to aid in the separation of duties.
b. Direct participation by the owner of the business in the record-keeping activities of the business.
c. Engaging a CPA to perform monthly write-up work.
d. Delegation of full, clear-cut responsibility to each employee for the functions assigned to each.
71
. Effective internal control over the purchasing of raw materials should usually include all of the following
procedures except
a. Obtaining third-party written quality and quantity reports prior to payment for the raw materials.
b. Determining the need for the raw materials prior to preparing the purchase order.
c. Systematic reporting of product changes which will affect raw materials.
d. Obtaining financial approval prior to snaking a commitment.
72
. Which of the following best describes proper internal control over payroll?
a. The preparation of the payroll must be under the control of the personnel department.
b. The confidentiality of employee payroll data should be carefully protected to prevent fraud.
c. The duties of hiring, payroll computation, and payment to employees should he segregated.

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CRC-ACE/AT: Second Pre-board Exams (October 2007 Batch) Page 8
d. The payment of cash to employees should be replaced with payment by checks.
73
. To achieve effective internal accounting control over fixed-asset additions, a company should establish
procedures that require
a. Capitalization of the cost of fixed-asset additions in excess of a specific peso amount.
b. Performance of recurring fixed-asset maintenance work solely by maintenance department employees.
c. Classification as investments, those fixed-asset additions that are not used in the business.
d. Authorization and approval of major fixed-asset additions.
74
. When an independent auditor decides that the work performed by internal auditors may have a bearing on the
nature, timing, and extent of the independent auditor's procedures, the independent auditor should evaluate the
competence and objectivity of the internal auditors. Relative to objectivity, the independent auditor should
a. Consider the organizational level to which internal auditors report the results of their work.
b. Review the training program its effect for the internal audit staff.
c. Examine the quality of the internal audit reports.
d. Consider the qualifications of the internal audit staff.
75
. Which of the following is an effective internal accounting control measure that encourages receiving department
personnel to count and inspect all merchandise received?
a. Quantities ordered are excluded from the receiving department copy of the purchase order.
b. Vouchers are prepared by accounts payable department personnel only after they match item counts ors the
receiving report with the purchase order.
c. Receiving department personnel are expected to match and reconcile the receiving report with the purchase or-
der.
d. Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports.
76
. A good system of internal accounting control over purchases will give proper evaluation to the time for ordering
merchandise. When making this evaluation the purchasing company should give primary consideration to
a. The price differences that exist between various vendors who can supply the merchandise at the required time.
b. The borrowing cost of money (interest) which the company must incur as a consequence of acquiring the mer-
chandise.
c. The trade-off between the cost of owning and storing excess, merchandise and the risk of loss by not having
merchandise on hand.
d. The flow of funds within the company which indicates when money is available to pay for merchandise
77
. The ultimate risk against which the auditor requires reasonable protection is a combination of two separate risks.
The first of these is that material errors will occur in the accounting process by which the financial statements are
developed, and the second is that
a. A company's system of internal control is not adequate to detect errors and fraud.
b. Those errors that occur will not be detected in the auditor's examination.
c. Management may possess an attitude that lacks integrity.
d. Evidential matter is not competent enough for the auditor to form an opinion based on reasonable assurance.
78
. Which of the following best describes the inherent limitations that should be recognized by an auditor when
considering the potential effectiveness of a system of internal accounting control?
a. Procedures whose effectiveness depends on segregation of duties can be circumvented by collusion.
b. The competence and integrity of client personnel provides an environment conducive to accounting control and
provides assurance that effective control will be achieved.
c. Procedures designed to assure the execution and recording of transactions in accordance with proper
authorizations are effective against fraud perpetrated by management.
d. The benefits expected to be derived from effective internal accounting control usually do not exceed the costs of
such control.
79
. Sanbor Corporation has an inventory of parts consisting of thousands of different items of small value
individually, but significant total. Sanbor could establish effective internal accounting control over the parts by
requiring
a. Approval of requisitions for inventory parts by a company officer.
b. Maintenance of inventory records for all parts included in the inventory.
c. Physical counts of the parts on a cycle basis rather than at year end.
d. Separation of the store-keeping function from the production and inventory record-keeping functions.
80
. To avoid potential errors and fraud a well-designed system of internal accounting control in the accounts payable
area should include a separation of which of the following functions?
a. Cash disbursements and invoice verification.
b. Invoice verification and merchandise ordering.
c. Physical handling of merchandise received and preparation of receiving reports.
d. Check signing and cancellation of payment documentation.

/end

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1
D
2
A
3
B
4
C
5
D
6
A
7
B Other Services Pany
8
D
9
D
10
D based on RA 9298 annex
11
C
12
A
13
A
14
A
15
A
16
D
17
A
18
C
19
C
20
A
21
D
22
A
23
C
24
D
25
B
26
C
27
C
28
C
29
C
30
B
31
D
32
C
33
C
34
B
35
C
36
C
37
A.
38
A.
39
A
40
B
41
B
42
C
43
D
44
A
45
D
46
D
47
D
48
A
49
D
50
C
51
B
52
A
53
A
54
B
55
C
56
A
57
B
58
C
59
C
60
D
61
(d)
62
(d)
63
(a)
64
(d)
65
(b)
66
(d)
67
(d)
68
(b)
69
(a)
70
(b)
71
(a)
72
(c)
73
(d)
74
(a)
75
(a)
76
(c)
77
(b)
78
(a)
79
(d)
80
(a)