INTEGRATED ASSESSMENT AUDITING THEORY and PROBLEMS
Overview of Financial Audit and Substantive Audit of Cash and cash equivalents
Instruction: Encircle the letter of the correct answer.
1.In performing the attest function, the primary goal of the CPA is to
a. Determine whether the client's assertions are fairly stated.
The auditor’s job is to evaluate management’s assertions in the financial statements and
express an opinion if they are presented fairly in accordance with the applicable
framework. The auditor's job is to evaluate management’s assertions in the financial
statements and express an opinion if they are presented fairly in accordance with the
applicable framework.
a. Examine individual transactions so that the auditor may certify as to their validity Too
detailed; auditors don’t certify each transaction, they test samples.
b. Assure the consistent application of correct accounting procedures
Consistency is part of GAAP compliance, but the auditor’s focus is overall fairness, not
just procedure consistency.
c. Detect fraud
Detecting fraud is not the primary goal, only incidental to forming an opinion.
2. Which of the following is the purpose of an auditor's
a. Is an assurance as to the efficiency with which management has conducted the affairs of
the entity, but not effectiveness.
Efficiency is management’s concern, not the auditor’s.
b. Is an assurance as to the future viability of the entity.
Future viability cannot be guaranteed
c. Certifies the correctness of the financial statements.
The auditor does not “certify” correctness, only provides reasonable assurance.
d. Enhances the credibility of the financial statements.
The independent auditor gives assurance, which increases user confidence.
3. This procedure is deemed necessary to achieve the objective of the audit
a. Objective of an audit
Objective is the “goal,” not the procedure.
b. Reasonable assurance
Reasonable assurance is an outcome, not a procedure.
c. Scope of an audit
Scope defines the extent of procedures needed to achieve objectives.
d. Audit program
The audit program is a plan, not the scope itself.
4. I. Assurance is where a CPA issues a written report on subject matter that is the responsibility
of another party.
II. Attestation generally refers to an expert's written communication of a conclusion about the
reliability of someone else's assertions.
III. Assurance always involves a conclusion that enhances reliability of the information.
A. All statements are correct.
B. Only statements I and II are correct.
C. Only statements II and III are correct.
D. None of the statements are correct.
5. The following are part of the three-party relationship, except
A. Fraud Auditors
B. Responsible Party
C. Intended users
D. Practitioner
B, C, D are correct parts of the relationship.
6. The objective of this assurance engagement is to reduce the level of risk to a level that is
acceptable in the circumstances of the engagement, as a basis for a negative form of
expression of the independent auditor's conclusion.
A. Limited Assurance Engagement uses negative wording (“nothing has
come to our attention”).
B. Absolute Assurance Engagement is impossible
C. Reasonable Assurance
high-level, positive form not negative
D. Negative Assurance Engagement
Negative assurance is a type of limited assurance, not a separate engagement.
7. In an assurance engagement, the outcome of the evaluation or measurement of a subject
matter against the criteria is called:
A. Subject Matter
Is what evaluated
B. Subject Matter Information
Example: Financial statements (information about subject matter).
C. Conclusion
is auditor opinion
D. Audit Report
Communicates conclusion
8. Users of financial statements demand independent audit because
A. Users demand assurance that fraud does not exist Fraud detection is not
the main purpose
B. Management relies on the auditor to improve internal controls
Auditor doesn't improve internal control
C. Users expect auditors to correct management errors. Auditor doesn't
correct errors
D. Management may not be objective in reporting.
Independence enhance the reliability
9. Which of the following statements is true concerning evidence in an assurance
engagement? A. Sufficiency is the measure of the quantity of evidence.
B. Obtaining more evidence may compensate for its poor quality. Poor quality cannot be
replaced by more evidence.
C. The reliability of evidence is influenced not by its nature but by its source.
Reliability depends on both source and nature.
D. Appropriateness is the measure of the quality of evidence, that is, its reliability and
persuasiveness
Appropriateness is reliability and relevance (not persuasiveness).
10. The following are different types of assurance engagement,except:
a. Review of financial statements
b. Examination of prospective financial information
c. Compilation of financial information
Gives no assurance
d. Audit of historical financial statements A, B, D are assurance engagement
11. Which of the following is the objective of a review of financial statements?
A. Is to use accounting expertise as opposed to auditing expertise to collect, classify and
summarize financial information. Compilation
B. Is to enable an auditor to state whether, on the basis of procedures which do not provide
all the evidence that would be required in an audit, anything has come to the auditor's
attention that causes the auditor to believe that the financial statements are not
prepared, in all material respects, in accordance with an identified financial reporting
framework.
Review provides limited (negative) assurance.
C. Is to enable the auditor to express an opinion whether the financial statements are
prepared, in all material respects, in accordance with an identified financial reporting
framework.
Audit (Reasonable Assurance)
D. Is to carry out those procedures of an audit nature to which the auditor and the entity and
any appropriate third parties have agreed and to report on factual findings. Agreed upon
procedures
12. Which of the following best describes the reason why an independent auditor reports on
financial statements?
a. A misstatement of account balances may exist and is generally corrected as the result
of the independent auditor's work
b. A poorly designed internal control system may be in existence
c. A management fraud may exist, and it is more likely to be detected by independent
auditors a, b, c are possible, but not the main reason.
d. Different interests may exist between the company preparing the statements and the
persons using the statements
Audits bridge the gap of conflicting interests
13. Agreed upon procedures provide which level of assurance?
a. High
b. Moderate
c. Reasonable a, b, c = wrong; no assurance is given
d. None
Auditor only reports factual findings
14. The following are examples of audit documentation, except:
a. Correspondence (including e-mail) concerning significant matters
b. Letters of confirmation and representation
c. The entity's accounting records
Records belong to the client, not the auditor's working papers.
d. Audit programs a, b, d are proper documentation.
15. The The auditor's judgment concerning the overall fairness of the presentation of financial
position, results of operations, and changes in financial position is applied within the
framework of:
a. Generally accepted accounting principles FS fairness is judged using GAAP.
b. Internal control not the basis
c. Generally accepted auditing standards
GAAS relates to how audit is performed
d. Philippine Standards on Auditing (PSA)
PSA relates to auditing standards, not FS presentation
16. In cases when management refuses to give the auditor permission to communicate with the
entity's legal counsel, the auditor should issue what type of opinion?
a. Qualified or Disclaimer Opinion
Scope limitation
b. Qualified or Adverse Opinion
Not adverse that's for misstatements
c. Adverse Opinion
Wrong FS, not scope limitation
d. Unqualified Opinion
Not appropriate
17. Audit sampling involves:
a. Selection of all items over a certain amount.
b. Application of audit procedures to all items over a certain amount and those that are
unusual or have a history of error.
c. Application of audit procedures to less than 100% of items within a class of transactions
or an account balance such that all items have a chance of selection. Testing less than
100% with chance of selection.
d. Application of audit procedures to all items that comprise a class of transactions or an
account balance.
a, b, d describe wrong or incomplete methods
18. Who should take responsibility for the overall quality on each audit engagement? a. Audit
Firm
The firm has general responsibility, but not engagement-specific.
b. Engagement Team
The team executes, but the leader takes responsibility.
c. Engagement Partner
The team executes, but the leader takes responsibility.
d. Quality Control Reviewer Reviewer only reviews.
19. Which of the following is the primary assertion tested when performing a bank confirmation?
a. Valuation
Not tested
b. Existence
c. Completeness not
confirmed
d. Rights and Obligations not
tested
20. When auditing cash, the cut-off assertion is most closely related to:
a. The existence of the cash at year-end
b. The rights to the cash
c. The physical count of cash a, b, c relate to other assertions.
d. The timing of deposits in transit and outstanding checks
21. Which audit evidence is most reliable when testing the existence of cash?
a. Original bank statement obtained directly from the bank
b. Prior period audit working papers
c. Copy of the client-prepared bank reconciliation
d. Management representation letter b, c, d are internally generated or less reliable.
22. When an auditor evaluates a client's cash management controls, which factor most
increases the inherent risk associated with cash?
a. Reconciliation is performed monthly by the accounting clerk
b. Cash balances are minimal and fluctuate insignificantly
c. A single person is responsible for both depositing and recording receipts
Poor segregation of duties
d. Petty cash is reimbursed weekly
23. In auditing petty cash, the auditor typically:
a. Recalculates interest income
b. Verifies large deposits
c. Performs a physical count and tests vouchers
d. Requests a bank confirmation a, b, d are irrelevant to petty cash.
24. Which audit procedure is most effective in detecting unauthorized cash disbursements?
a. Examination of signatures on canceled checks
b. Analytical procedures comparing disbursement trends
c. Confirmation of cash balances
Test balances not disbursement
d. Comparison of disbursement entries to approved check registers
25 Which of the following risks is most relevant when auditing electronically transferred cash? a.
Duplicate postings
b. Currency translation issues
c. Physical theft
d. Improper authorization and access a, b, c apply less than authorization risk.
26. Which audit procedure is least likely to detect check tampering?
a. Inspecting canceled checks for authorized signatures
b. Performing analytical procedures on disbursements Too general, won’t detect specific
tampering.
c. Comparing payee names on canceled checks to the check register
d. Reviewing the sequence of check numbers a, c, d directly test for tampering.
27. Which of the following procedures is not a substantive procedure related to cash?
a. Review of bank reconciliations
b. Analytical procedures comparing cash balances to prior periods
c. Inquiry of bank personnel
Test of control, not substantive
d. Observation of cash counts a, b, d are substantive
28. I. A proof of cash is only necessary when the client has a high volume of cash transactions.
(not only on high volume)
II. Bank confirmations are less reliable than internally prepared bank reconciliations (more
reliable)
III. Outstanding checks reduce the balance per bank to reconcile with the general ledger.
a. All statements are true
b. Only statement III is true
c. Only statements I and III are true
d. Only statement II and III are true
29. A client receives a large insurance reimbursement check on Dec. 31 but doesn't deposit it
until Jan. 4. They record it as a Dec. 31 cash receipt. What is the auditor's best response?
a. Investigate the deposit and adjust the date if necessary
To ensure proper cut off
b. Confirm the bank recorded it in December The bank won't record in Dec.
c. Reclassify as a receivable not receivable
d. Only two statements are correct
Misleading
30. During the audit of a startup tech firm, the auditor observes a sudden spike in year-end cash
due to last-minute investor funds. There's no corresponding liability or equity entry. What
should the auditor do?
a. Reclassify as revenue
NOT revenue
b. Accept the balance if confirmed by the bank
Confirmation doesn’t solve classification issue.
c. Review board minutes and agreements to evaluate classification
d. Only two statements are correct Wrong
31. A client has significant foreign bank accounts. What is a heightened risk area for the
auditor?
a. Lack of completeness in cash balances
b. Testing cash equivalency
c. Overstatement of currency conversion a, b, c less risky compared to non-disclosure.
d. Non-disclosure of offshore accounts
32. Which assertion is least relevant when auditing a company's restricted cash account? a.
Existence
b. Occurrence
Occurrence relates to transactions, not balances
c. Valuation
d. Rights and Obligation a, c, d are relevant.
33. While performing a review of the client's cash disbursements, you find checks made payable
to employees with vague memos and no attached invoices. What should you suspect?
a. Possible fraudulent disbursements or embezzlement
b. Duplicate payments
c. Payroll error
d. Bank error b, c, d are less likely explanations.
34. A client delays reconciling its bank statements until several months after year-end. This
should be considered:
a. Acceptable if there are no significant reconciling items
b. A weakness in internal controls
c. Normal for cash-rich entities
d. Only two statements are correct
35. Which of the following would be most indicative of possible cash lapping?
a. Discrepancies in vendor invoice dates
b. Frequent voided checks
c. Customer complaints about misapplied payments
d. Unusually high cash on a, b, d less indicative.
36. The auditor performs a proof of cash to:
a. Verify the classification of marketable securities
Not classification
b. b. Trace outstanding checks to the general ledger only partial purpose
c. Confirm that all recorded receipts and disbursements match the bank
d. All of the above Too broad
Problem Solving: Please refer to the problem below for questions 37-40.
The audit engagement team audited CPA Atlas Corp's financial statements for the year ended
December 31, 2023. The following information were obtained:
a. The corporation's cash in bank account with Pass Bank showed a balance of P535,250.00
as of December 31, 2023 and the following transactions were revealed during the audit:
● Check #7652 amounting to P13,650.00 was cleared in the bank for P16,530.00
on Bank is right 9/25/23.
● Disbursement on 12/28/23 amounting to P10,950.00 issued by the fund
custodian was not recorded in the books.
● Check received from a customer amounting to P33,800.00 was returned by the
bank on December 19,2023 due to insufficiency of funds. The customer replaced
the check on December 20, 2023. No entry was made for the return of this
check.
● Postdated checks covering 20 months rental fee aggregating to P45,700 was
issued on February 1, 2023. These were included in the deposit-in-transit per
bank reconciliation summary.
● Bank statements showed interest earned for the last quarter of 2023 amounting
to P1,920 was not recorded. Withholding tax is P243.
● Check #7562 amounting to P10,350.00 was disbursed on 10/2/23 for donation to
St. Francis Church and recorded on 2/10/24.
● Purchase of tires amounting to P150,000 was issued with Check #9625 on
11/6/23, this was later on adjusted to payable in the books due to the missing
purchase request form. The unit was delivered on 11/4/23 and was properly
documented by the warehousing department.
● Deposits-in-transit and outstanding checks as of December 31, 2023 amounted
to P152,725 and P234,138, respectively.
b. In the conduct of cash count on petty cash fund, the audit team noted the following: Bills
and Coins: P500; vouchers and receipts from various expenses dated 12/28/23 and
1/5/24 amounted to P11,250 and P8,250, respectively, and a replenishment report made
on 1/3/24 amounting to P13,250. The corporation follows the imprest cash fund method
in accounting these transactions.
c. Trial balance for the year ended December 31, 2023 relative to cash and cash
equivalents include the following accounts: Cash in bank - Pass Bank P629,100.; Petty
Cash Fund: P22,000.
d. The Corporation has a written policy that disbursements taken from the petty cash fund
should not exceed to P10,000.
e. External confirmations also showed the following balances: Pass Bank P535,250.00;
Almost Bank P213,200 (11-month Time Deposit: P125,000; Retirement Fund:
P88,200.00) and CIO Cooperative P1,250,000; Inventory: P35,600; Current Liabilities:
P94,750.
37. How much is the adjusted cash in bank balance as of December 31, 2023?
38. How much is the total deposit-in-transit and outstanding checks?
39. How much is the total outstanding checks?
40. How much is the total adjusted cash and cash equivalents accounted for?
