ACCT 311- Final exam
-A Type I subsequent event usually requires: -A Type II subsequent event usually requires:
-An adjustment to the financial statements. disclosure in the footnotes.
Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?
A bank lockbox system.
Which of the following is NOT a requirement of the Sarbanes-Oxley Act?
A certain number of hours, which is based on the size of the company being audited, must be spent on each audit engagement.
Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Which of the following statements is true regarding the auditor's use of confirmations?
A combination of the two confirmation types can be used, with the positive form used for large balances and the negative form used for small balances.
What is channel stuffing?
A company induces distributors to buy substantially more inventory than they can promptly resell.
Which of the following describes a permanent difference?
A fundamental difference in what constitutes revenue or expense for GAAP and tax purposes.
Which of the following procedures would an auditor ordinarily perform during the review of subsequent events
A reading of the available minutes of meetings of stockholders, directors, or other committees for the subsequent-events period.
Which of the following is not included in the broad category of assurance services?
Accounting or review services.
An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31. By this procedure, the auditor would be most likely to learn about which of the following?
An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.
Which of the following is a question that the auditor would expect to find on the production process section of an internal control questionnaire?
Are all releases by storekeepers of raw materials from storage based on approved requisition documents?
Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?
Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?
Which of the following procedures would an auditor most likely perform to obtain evidence about an entity's subsequent events?
Ask legal counsel about any developments relating to litigation, claims, or assessments against the company.
Reports on service organizations typically:
Assess whether the service organization's controls are suitably designed to achieve internal control objectives.
Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?
Cash flows from operating activities are negative.
Which of the following procedures would ordinarily be expected to best reveal improper cutoff of sales at the balance sheet date?
Compare shipping documents with sales records.
Jones was engaged to examine the financial statements of Virginia Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?
Comparing recorded dividends with a standard financial reporting service's record of dividends.
Which of the following statements ordinarily is included among the written management representations obtained by the auditor?
Compensating balances and other arrangements involving restrictions on cash balances have been disclosed.
If payables turnover has increased significantly since the prior year, this is an indication that which of the following assertions for accounts payable might be violated?
Completeness.
Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?
Confirming with third parties the details of arrangements to maintain financial support.
Which of the following internal control activities most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger?
Daily sales summaries are compared to daily postings to the accounts receivable ledger.
According to FASB ASC 606, which of the following is not part of the five-step approach for revenue recognition?
Determine whether the buyer will take a discount.
Which of the following procedures would be important in the audit of an investment valued at fair value?
Develop an independent estimate of the fair value measurement.
Which of the following control activities may prevent the failure to bill customers for some shipments?
Each shipment should be supported by a prenumbered sales invoice that is accounted for.
Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?
Employees involved in the credit-granting function are separated from the sales function.
In a manufacturing company, which one of the following audit procedures would give the least assurance for the existence of the general ledger balance of investment in stocks and bonds at the audit date?
Examination of canceled checks issued in payment of securities purchased.
Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?
Examine shipping documents for matching sales invoices.
Customers having substantial year-end past due balances fail to reply after second request confirmation forms have been mailed directly to them. Which of the following is the most appropriate audit procedure?
Examine shipping documents.
An entity's control activities include all of the following except:
External auditor's tests of controls.
Auditors sometimes use ratios as audit evidence. For example, an unexplained increase in the ratio of gross profit to sales may suggest which of the following possibilities?
Fictitious sales.
Which of the following most likely would be the result of ineffective internal control policies and procedures in the revenue process?
Final authorization of credit memos by personnel in the Sales Department could permit an employee defalcation scheme.
Which of the following strategies most likely could improve the accuracy of the confirmation of accounts receivable?
Including a monthly statement of the customer's account with the confirmation.
To obtain evidential matter about control risk, an auditor selects tests from a variety of techniques including:
Inquiry
Which of the following statements regarding the PCAOB is incorrect?
It has delegated all of its standard-setting authority to the AICPA.
Which of the following expressions is least likely to be included in a management representation letter?
Management acknowledges responsibility for illegal actions committed by its employees.
Who bears ultimate responsibility for the financial statements?
Management of the organization.
Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?
Notes receivable and interest income.
Which of the following procedures would an auditor least likely perform before the balance sheet date?
Observation of merchandise inventory count.
A procedure that would most likely be used by an auditor in performing tests of control activities that involve segregation of functions but which leave no transaction trail is:
Observation.
Which of the following is the best audit procedure for the discovery of damaged merchandise in an entity's ending inventory?
Observe the condition of merchandise and raw materials during the entity's physical inventory count.
Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control is suitably designed to prevent or detect material misstatements?
Observing the entity's personnel applying the controls.
Which of the following is a plausible explanation for a large increase in the number of days outstanding in inventory?
Obsolete inventory.
Which of the following auditing procedures is ordinarily performed last?
Obtaining a management representation letter.
Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting between intercompany banks?
Prepare a schedule of bank transfers.
Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the entity's employees?
Prepare a schedule/listing of accounts payable.
The cashier of Brooke Company covered a shortage in the cash working fund with cash obtained on December 31 from a local bank by cashing, but not recording, a check drawn on the company's out-of-town bank. How would the auditor discover this manipulation?
Preparing and detail testing a bank transfer schedule.
Which of the following audit procedures is the most appropriate when internal control over cash is weak or when an entity requests an investigation of cash transactions?
Proof of cash.
Which of the following is not an issue related to the valuation of accounts receivable?
Proper cutoff.
The basic concept of internal control that recognizes the cost of internal control should not exceed the benefits expected to be derived is known as:
Reasonable assurance.
For the purpose of determining proper cutoff for inventory, the auditor will select a sample from which of the following for a few days before and after year-end?
Receiving documents.
Of the following, which is the most efficient audit procedure for verification of interest earned on bond investments?
Recomputing interest earned using the interest rate and bond amount.
Which of the following procedures most likely would not be an internal control activity designed to reduce the risk of errors in the billing process?
Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.
An entity erroneously recorded a large purchase twice. Which of the following internal controls would be most likely to detect this error in a timely and efficient manner?
Reconciling vendors' monthly statements with subsidiary payable ledger accounts.
Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fund maintained on an imprest basis?
Reimbursement of the fund from the general cash account occurs twice or more each week.
Walkthroughs usually involve all of the following audit procedures except:
Reperformance.
Data Corporation has just computerized its billing and accounts receivable record keeping. You want to make maximum use of the new computer in your audit of Data Corporation. Which of the following audit techniques could not be performed through a computer program?
Resolving differences reported by customers on confirmation requests.
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?
Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.
The independent auditor selects several transactions in each functional area and traces them through the entire system, paying special attention to evidence about whether or not the control activities are in operation. This is an example of a(n):
Test of controls.
Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?
The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
During a review of a small business entity's internal control system, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness?
The owner reviews credit memos before they are recorded.
Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed?
There is periodic inspection of securities in a safe or safe-deposit box by an individual independent of both the custodial and accounting responsibilities for securities.
Which of the following statements is correct concerning an auditor's required communication with those charged with governance?
This communication should provide timely observations arising from the audit that are significant to the financial reporting process.
Which of the following is not one of the auditor's primary objectives in an examination of marketable securities?
To determine whether securities are authentic.
The management letter is used:
To make recommendations to the entity based on observations made during the audit.
Which of the following is a test of controls for the transaction assertion of completeness for revenue?
Trace shipping documents to sales invoices and the sales journal.
Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?
Usual trade credit from suppliers is denied.
Which of the following is not one of the independent auditor's objectives regarding the examination of inventories?
Verifying that all inventory owned by the entity is on hand at the time of the count.
Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?
Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.
Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence of recorded accounts payable?
Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation?
Vouching the raw materials' costs to vendors' invoices.
Which of the following best describes the concept of risk assessment on which auditors can provide independent assurance?
Whether management has systems in place to evaluate and effectively manage the entity's business risks.
Communications between the auditor and those charged with governance should include all of the following except:
a summary of specific audit procedures used.
Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a control listing. A copy of the listing should be sent to the:
accounts receivable bookkeeper to update the subsidiary accounts receivable records
Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a control listing. A copy of the listing should be sent to the:
accounts receivable bookkeeper to update the subsidiary accounts receivable records.
The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because:
accrued liabilities usually pertain to services of a continuing nature, while accounts payable are the result of completed transactions.
An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's assertion about account balances of:
accuracy, valuation and allocation.
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:
accuracy, valuation and allocation.
In general, revenue is recognized when:
an entity satisfies a performance obligation.
Subsequent events for which the auditor has a responsibility to actively search are defined as events that occur subsequent to the:
balance sheet date but prior to the issuance of the financial statements.
In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of:
completeness.
Assessing control risk at a lower level involves all of the following except:
concluding that controls are ineffective.
All of the following are significant deficiencies except:
inventory is highly subject to obsolescence.
The auditor must be independent of the auditee unless:
none of the above—the auditor cannot lack independence.
Auditors are most likely to ensure that no production activity is scheduled prior to:
observing physical inventory.
An entity's physical count of inventories was higher than the inventory quantities per the perpetual records. This situation could be the result of the failure to record:
purchases.
An internal auditor is likely to be more concerned with __________ than the external auditor.
the efficiency of operations
An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of:
valuation.
An auditor performs a test to determine whether all merchandise was received for which the entity was billed. The population for this test consists of all:
vendors' invoices.
An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily to:
verify reconciling items on the entity's bank reconciliation.
An examination of the balance in the accounts payable account is ordinarily not designed to:
verify that accounts payable were properly authorized.
When perpetual inventory records are maintained in quantities and in dollars and internal control over inventory is weak, the auditor would probably:
want the entity to schedule the physical inventory count at the end of the year.
Which assertion for ending inventory is most likely violated if the gross profit percentage is much greater than last year?
Existence.
Which of the following best describes the role of corporate governance?
Holding the management team accountable to shareholders and other constituents for the utilization of the entity's resources.
Which of the following situations would require adjustment to or disclosure in the financial statements?
The bankruptcy of a customer who regularly purchased 30 percent of the company's output.
In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following?
The credit manager's opinion.
Which of the following is not an inherent risk factor for the revenue process?
The entity does not follow its stated policies for sales order approvals.
The risk assessment component of internal control refers to
The entity's identification and analysis of risks relevant to achievement of its objectives.
Which of the following is the best argument against the use of negative accounts receivable confirmations?
The inference drawn from receiving no reply may not be correct.
Which of the following is an internal control that would prevent a paid disbursement voucher from being presented for payment a second time?
The official signing the check should compare the check with the voucher and should "cancel" the voucher documents by marking them "paid."
The authority to accept incoming goods in receiving should be based on a(an):
approved purchase order.
Due professional care requires:
auditors to maintain an attitude that includes a questioning mind and a critical assessment of audit evidence.
When comparing prices and terms on a sample of sales invoices with the authorized price list and terms of trade, the auditor is testing the ____________ assertion.
authorization and accuracy
An auditor usually tests the reasonableness of dividend income from investments in stock of public companies by computing the amounts that should have been received by referring to:
comparisons of current-year dividend income with the reported income from prior years.
An auditor selected items for test counts while observing an entity's physical inventory. The auditor then traced the test counts to the entity's inventory listing. This procedure most likely provided evidence concerning management's assertion of:
completeness.
The date of the management representation letter generally coincides with the:
date of the auditor's report.
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:
direct participation by the owner of the business in the recordkeeping activities of the business.
Internal controls are not designed to provide reasonable assurance that:
embezzlement will be eliminated.
When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the:
extent of tests of details.
If fraud is suspected, auditors may complete all of the following procedures except:
footing the bank reconciliation and the outstanding checks listing.
An auditor should obtain evidential matter relevant to all the following factors concerning third-party litigation against an entity except the:
jurisdiction in which the matter will be resolved.
The largest public accounting firms typically are structured as:
limited liability partnerships.
The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the:
marketability of assets that management plans to sell.
The Audit Committee consists of:
members of the Board of Directors.
If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded:
purchases.
An "in-charge" auditor typically holds the rank of:
senior.
A voucher:
serves as the basis for recording a vendor's invoice in the purchases journal.
Tracing shipping documents to prenumbered sales invoices provides evidence that:
shipments to customers were properly billed.
As opposed to a manual control, an automated control:
should function consistently in the absence of program changes.
The concept of reasonable assurance in the context of an entity's internal controls recognizes that:
the costs of some controls may be too high to implement in relation to potential benefits.
An important primary purpose of the auditor's review of the entity's procurement system should be to determine the effectiveness of the activities to protect against:
unauthorized persons issuing purchase orders.
After completing the preliminary phase of the review of internal control, the auditor decides not to rely on the system to restrict substantive procedures. Documentation may be limited to the auditor's:
understanding of the internal control.
Which of the following is generally requested in a legal letter?
A request that the attorney comment on unasserted claims where his or her views differ from management's evaluation.
In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?
A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
Which of the following describes a temporary difference?
A timing difference between the recognition of revenue or expense under GAAP and tax purposes.
Tracing costs used to price inventory to vendors' invoices test which of the following assertions?
Accuracy.
After the financials have been issued with an accompanying audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless:
After the financials have been issued with an accompanying audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless:
Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities?
An independent custodian that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities.
Which of the following most likely would give the most assurance concerning the valuation assertion for accounts receivable?
Assessing the allowance for uncollectible accounts for reasonableness.
Which is not an attribute of an external auditor?
Auditee advocacy.
Which of the following best describes the general character of the three principles that are listed in the Performance section of the Principles Underlying an Audit Conducted in Accordance with GAAS?
Auditors' responsibilities in performing an effective audit.
Examining a sample of cancelled checks for an authorized signature tests which of the following assertions for cash?
Authorization.
To determine whether the system of internal control operated effectively to minimize errors of failure to invoice a shipment, the auditor would select a sample of transactions from the population represented by the:
Bill of lading file.
To achieve good internal control, which department should perform the activities of matching shipping documents with sales orders?
Billing.
Which of the following procedures should an auditor generally perform regarding subsequent events?
Compare the latest available interim financial statements issued after year-end with the financial statements being audited.
Tracing a sample of remittance advices to entries in the cash receipts journal tests which of the following assertions for cash?
Completeness.
Harvey, CPA, is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in conformity with generally accepted accounting principles. Which one of the following procedures would be least appropriate for this purpose?
Confirm, as of the completion of fieldwork, accounts receivable that have increased significantly from the year-end date.
Which of the following control activities is not usually performed in the accounts payable department?
Controlling the mailing of the check and remittance advice.
An effective control environment:
Creates a commitment to competence.-
The physical count of inventory of a retailer was higher than shown in its perpetual records. Which of the following could explain the difference?
Credit memos for several items returned by customers had not been prepared.
When auditing contingent liabilities, which of the following procedures would be least effective?
Examining customer confirmation replies.
Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
For cash payments occurring after the balance sheet date, examine the date on the associated receiving report or vendor invoice to determine if it relates to the current audit period.
Which of the following procedures most likely would be included as part of an auditor's tests of controls?
Inspection
Which of the following is not explicitly a part of the IIA's definition of internal auditing?
Internal auditors should help external auditors complete the annual financial statement audit.
For which of the following matters should an auditor obtain written management representations?
Management's addressing control deficiencies communicated to the audit committee during previous engagements.
Auditors will need to perform more substantive tests than normal to obtain sufficient appropriate evidence that a financial instrument is fairly stated if which of the following conditions exist?
Management's key assumptions are subject to volatility.
Which of the following is the most effective control activity to detect vouchers prepared for the payment of goods that were not received?
Matching of purchase order, receiving report, and vendor invoice for each voucher in the accounts payable department.
Which of the following subsequent events will be least likely to result in an adjustment to the financial statements?
Material changes in the quoted market prices of listed investment securities since the balance sheet date.
Which of the following is least likely to be a possible cause of book-to-physical differences in inventory quantities?
Misapplication of LIFO.
Which of the following events occurring after the issuance of an entity's financial statements and the auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
New information is discovered concerning undisclosed lease transactions in the audited period.
Which of the following misstatements is not related to the completeness assertion for revenue?
Next year's revenue is recorded this year.
An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn about which of the following?
One of the cashiers has been covering a personal embezzlement by lapping.
What organization is responsible for setting auditing standards for audits of publicly-traded companies in the U.S.?
PCAOB.
Which principle of the Principles Underlying an Audit Conducted in Accordance with GAAS describes where auditors are required to plan the work and properly supervise any assistants?
Performance.
Which of the following control activities would most likely be used to maintain accurate perpetual inventory records?
Periodic independent comparison of records with goods on hands.
Which of the following best describes the occurrence assertion for inventory?
Recorded inventory transactions actually happened.
Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?
Settlement of litigation, in excess of the previously recorded liability.
Which of the following items should an auditor communicate to those charged with governance in a publicly traded company?
Significant unusual transactions, critical estimates, and management's consultation with other accountants about significant accounting matters.
Which of the following items should an auditor communicate to those charged with governance in a publicly-traded company?
Significant unusual transactions, critical estimates, and management's consultation with other accountants about significant accounting matters.
Which one of the following procedures would not be appropriate for an auditor in discharging his or her responsibilities concerning the entity's physical inventories?
Supervising the annual physical inventory count.
Which of the following statements is correct about an auditor's required communication with management and those charged with governance?
The auditor is required to discuss considerations relating to assessment of going concern.
Which of the following procedures most likely would give the greatest assurance that securities held as investments are safeguarded?
When securities are held by the entity, they are stored in a safe or safe-deposit box and periodically inspected.
The auditor should insist that a representative of the entity be present during the physical examination of securities in order to:
acknowledge the receipt of securities returned.
A major customer of an entity suffers a fire after year-end, but just prior to completion of audit fieldwork. The entity believes that this event could have a significant direct effect on the financial statements. The auditor should:
advise management to disclose the event in the notes to the financial statements.
An entity's internal controls are most relevant to the auditor when the policies and procedures:
affect the financial statement assertions.
In the audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure:
affects management's financial statement assertions.
In an audit of inventories, an auditor would least likely verify that:
all inventory owned by the entity is on hand at the time of the count.
An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the physical inventory sheets. The purpose of this procedure is to obtain assurance that:
all inventory represented by an inventory tag is listed on the inventory sheets.
If an auditor dates the auditor's report on financial statements for the year ended December 31, 2013, as of February 10, 2014, except for Note J, as to which the date is March 3, 2014, the auditor is acknowledging responsibility to actively search for and ensure proper handling by management of:
all subsequent events occurring through February 10, 2014 and the specific subsequent event referred to in Note J through March 3, 2014.
Compare the latest available interim financial statements issued after year-end with the financial statements being audited.
an adjustment to the financial statements.
After fieldwork audit procedures are completed for a public company and private company whose financial statements are expected to be widely distributed, a partner of the CPA firm who has not been involved in the audit performs an engagement quality review of the working papers. This review focuses on:
an evaluation of the significant judgments made by the engagement teams and the conclusions reached in formulating the audit report.
An example of a Type I subsequent event is:
an event after the balance sheet date that confirms the auditor's belief (documented prior to the end of the entity's fiscal year) that a large portion of the entity's inventory is obsolete.
A company has additional temporary funds to invest. The Board of Directors decided to purchase marketable securities and assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to make periodic reviews of the investment activity authorized by that executive should be:
an investment committee of the Board of Directors.
The objectives of the Reporting section of Principles Underlying an Audit Conducted in Accordance with GAAS are to provide assurance and include all of the following except for:
an opinion statement of whether the financial statements between periods are not materially affected by changes in accounting principles that are not disclosed.
A high detection risk strategy includes all of the following except:
audit work only completed at year-end.
Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of:
authorization, recording, and custody.
Tracing copies of sales invoices to shipping documents will provide evidence that all:
billed sales were shipped.
An entity's internal control requires that for every check request 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 items for testing from the population of all:
canceled checks.
When a question arises about an entity's continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow. An example of such a factor is the:
capability of extending the due dates of existing debt.
When searching for unrecorded liabilities at year-end, the population identified for sampling would be:
cash disbursements recorded in the period subsequent to year-end.
An auditor most likely would limit substantive tests of sales transactions when control risk is assessed as low for the existence or occurrence assertions concerning sales transactions and the auditor has already gathered evidence supporting:
cash receipts and accounts receivable.
A written representation from an entity's management that, among other matters, acknowledges responsibility for the fair presentation of financial statements should normally be signed by the:
chief executive officer and the chief financial officer.
Confirmation is least likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables':
classification.
All of the following can assist the auditor in testing the existence assertion for investment securities except:
comparing fair value to cost.
An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to assess the assertion of:
completeness.
When an auditor is unable to inspect and count an entity's investment securities until after the balance sheet date, the bank where the securities are held in a safe-deposit box should be notified on or before the balance sheet date that it will be asked to:
confirm that there has been no access to the box between the balance sheet date and the security-count date.
In establishing the existence and ownership of a long-term investment in stock of a publicly traded company, an auditor should inspect the securities or:
confirm the number of shares owned that are held by an independent custodian.
If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments, the auditor should:
consider the refusal to be a scope limitation.
The refusal of an entity's attorney to provide a representation on the legality of a particular act committed by the entity is generally:
considered to be a scope limitation.
In order to efficiently establish the correctness of the accounts payable cutoff, an auditor will be most likely to:
coordinate cutoff tests with physical inventory observation.
One purpose of sending a standard confirmation request to financial institutions with which the entity has done business during the year is to:
corroborate information regarding deposit and loan balances.
The primary reason an auditor requests letters of inquiry be sent to an entity's attorneys is to provide the auditor with:
corroboration of the information furnished by management concerning litigation, claims, and assessments.
Key segregations of duties in the inventory management process include all of the following except separating:
cost accounting from review of variance reports.
When an auditor tests an entity's cost accounting system, the auditor's tests are primarily designed to determine that:
costs have been properly assigned to work in process, finished goods, and cost of goods sold.
The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because:
customers may not be inclined to report understatement errors in their accounts.
An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the:
cutoff bank statement is reconciled.
Tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of:
cutoff.
Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent:
deficiencies in the design of controls or failures in the operation of internal controls.
An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive procedure most likely was to:
determine that purchases were properly recorded.
The existence assertion for accounts payable includes:
determining whether all accounts payable actually are liabilities.
The cutoff assertion for accounts payable includes:
determining whether all accounts payable are recorded in the proper period.
A primary purpose of the proof of cash is to:
ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account.
An organizational structure is important for all of the following reasons except:
ensuring a proper commitment to controls.
Auditors are more concerned with the occurrence assertion for revenues than the completeness assertion because:
entities are more likely to overstate than understate revenues.
An entity has violated a minor requirement of its bond indenture that could result in the trustee requiring immediate payment of the principal amount due. The entity refuses to seek a waiver from the bond trustee. Request for immediate payment is not considered likely. Under these circumstances, the auditor must:
evaluate whether there is substantial doubt about the entity's ability to continue as a going concern.
After issuance of the financial statements and the accompanying auditor's report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by an auditor's report unless:
evidence of significant, non-arms-length, related party transactions that happened prior to year-end is discovered.
Due professional care requires auditors to:
exercise professional skepticism during the audit.
In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the entity's name, an auditor most likely gathers evidence in support of management's financial statement assertions regarding:
existence, rights and obligations, and completeness.
Observing an entity's inventory held on consignment by others tests the assertion of:
existence.
Once a CPA has determined that accounts receivable has increased because of slow collection in a "tight money" environment, the CPA would be likely to:
expand tests regarding the collectability of receivables.
An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to:
extend auditing procedures.
To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except the:
general ledger.
Purchase cutoff activities should be designed to test that merchandise is included in the inventory of the entity company if the company:
holds legal title to the merchandise.
An auditor will ordinarily examine invoices from lawyers primarily in order to:
identify actual or potential litigation against the entity.
Assessing control risk at a lower level most likely would involve:
identifying specific internal controls relevant to specific assertions.
Auditors are most likely to gather audit evidence solely using substantive procedures:
if the implemented controls are assessed as ineffective.
An auditor will usually trace the details of the test counts made during the observation of the physical inventory count to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are:
included in the final inventory schedule.
Based on a study and evaluation completed at an interim date, the auditor concludes that no significant internal control weaknesses exist. The records and procedures would most likely be tested again at year-end if:
inquiries and observations lead the auditor to believe that conditions within the internal control system have changed.
In testing controls over cash disbursements, an auditor most likely would determine that the person who signs the checks also:
is responsible for mailing the checks.
An auditor is concerned with completing various phases of the examination after the balance sheet date. This "subsequent period" involving formal audit procedures extends to the date of the:
issuance of the financial statements.
After obtaining an understanding of internal controls and assessing control risk of an entity, an auditor decided not to perform tests of controls for purposes of the audit. The auditor most likely decided that:
it would be inefficient to perform tests of controls that would result in a reduction in planned substantive procedures.
To gain assurance that all inventory items in an entity's inventory listing schedule are valid, an auditor most likely would trace:
items listed in the inventory listing schedule to inventory tags and the count sheets.
An auditor issued an audit report that was dual dated for a subsequent event that occurred after the completion of fieldwork but before issuance of the auditor's report. The auditor's responsibility for events occurring subsequent to the completion of fieldwork was:
limited to the specific event referenced.
When outside firms of non-accountants specializing in physical inventory counts are used to count, list, price, and subsequently compute the total dollar amount of inventory on hand at the date of the physical count, the auditor will ordinarily:
make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions.
The Performance section of Principles Underlying an Audit Conducted in Accordance with GAAS states that for auditors to obtain reasonable assurance, they need to do all of the following except for:
make sure all audit team members have adequate training.
Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when:
management is dominated by one individual.
"There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." The foregoing passage most likely is from a(an):
management representation letter.
Forensic audits include all of the following except:
manufacturers' assertions about product quality.
In evaluating internal control, the auditor is basically concerned that the system provides reasonable assurance that:
material misstatements have been prevented, or detected and corrected.
The auditor tests the quantity of materials charged to work in process by tracing these quantities to:
material requisitions.
The Reporting section of Principles Underlying an Audit Conducted in Accordance with GAAS requires the auditor's report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of this requirement is to prevent:
misinterpretations regarding the degree of responsibility the auditor is assuming.
An auditor compares information on canceled checks with information contained in the cash disbursements journal. The objective of this test is to determine that:
no discrepancies exist between the data on the checks and the data in the journal.
On February 25, a CPA issued an auditor's report expressing an unqualified opinion on financial statements for the year ended January 31. On March 2, the CPA learned that, on February 11, the entity incurred a material loss on an uncollectible trade receivable as a result of the ongoing deterioration of the financial condition of the entity's principal customer, which finally led to the customer's bankruptcy. Management then refused to adjust the financial statements for this subsequent event. The CPA determined that the information is reliable and that there are creditors currently relying on the financial statements. The CPA's next course of action most likely would be to:
notify each member of the entity's board of directors about management's refusal to adjust the financial statements.
For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by:
observation and inquiry.
As part of gaining an initial understanding of internal control, an auditor is required to do all of the following except:
obtain knowledge about the operating effectiveness of the internal control.
To satisfy the valuation assertion when auditing an investment, an auditor most likely would:
obtain market quotations from financial newspapers, periodicals, or electronic outlets.
When a sample of sales transactions recorded in the sales journal is traced back to the customer orders and shipping documents, the auditor is testing the ____________ assertion.
occurrence
Assertions about classes of transactions and events for the period under audit include:
occurrence, completeness, and cutoff.
An imprest cash account is:
one that contains a stipulated amount of money and is used for limited purposes.
Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be invoiced that are not shipped. The inadequate control activities could cause an:
overstatement of revenues and receivables and an understatement of inventory.
Failure to record inventory in the proper period can affect all of the following accounts except:
prepaid Expenses.
Immediately upon receipt of cash, a responsible employee should:
prepare a control listing.
Which is not a key segregation of duties for the revenue process? Different parties should:
prepare shipping orders and prepare bills of lading.
If completeness is a concern for accounts payable, auditors will send accounts payable confirmations to:
primarily vendors with small or zero accounts payable balances.
Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of:
professional skepticism.
The Performance section of the "Principles Underlying an Audit" is concerned with:
proper planning and supervision, appropriate materiality levels, and sufficient appropriate audit evidence.
All of the following are important controls over credit memos except:
proper segregation of duties to ensure that sales discounts taken were earned.
An advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaires is that systems flowcharts:
provide a visual depiction of the entity's activities.
For several years, an entity's physical inventory count has been lower than what was shown on the books at the time of the count so that downward adjustments to the inventory account were required. Contributing to the inventory problem could be weaknesses in internal controls that led to the failure to record some:
purchases returned to vendors.
With respect to a small company's system of purchasing supplies, an auditor's primary concern should be to obtain satisfaction that supplies ordered and paid for have been:
received, counted, and checked to quantities and amounts on purchase orders and invoices.
For effective internal control over accuracy of transactions, the accounts payable department should compare the information on each vendor's invoice with the:
receiving report and the purchase order.
The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with:
receiving reports.
A product cost is:
recognized in the period during which related revenue is recognized.
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:
recorded obligations were valid.
A debit memo:
reduces the amount of accounts payable due to a vendor.
An entity has a large and active investment portfolio that is kept in a bank safe-deposit box. If the auditor is unable to examine and count the securities at the balance sheet date but will examine and count the securities shortly thereafter, the auditor most likely will:
request that the entity have the bank seal the safe-deposit box until the auditor can count the securities at a subsequent date.
In the confirmation of accounts receivable, the auditor would most likely:
require that confirmation requests be sent as soon as possible after fiscal year-end.
The auditor's communication of material weaknesses in internal control for a nonpublic company is:
required even though the financial statement audit for private companies does not require an audit of the entity's system of internal control.
An auditor generally tests physical security controls over inventory by:
review and observation.
A flowchart is most frequently used by an auditor in connection with the:
review of the entity's internal controls.
In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would:
review the entity's description of inventory policies and procedures.
The purpose of analytical procedures at the completion of the audit includes all of the following except:
revising the audit plan.
When reviewing bank confirmations for any liens on receivables, the auditor is testing the ______________ assertion.
rights and obligations
Examining brokers' advices for a sample of securities purchased during the year is a test for the assertion of:
rights and obligations.
The audit of year-end physical inventories should include steps to verify that the entity's purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a:
sale in the current period.
The auditor is most likely to verify accrued commissions payable in conjunction with the:
sales cutoff review.
While observing an entity's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the entity's perpetual records. This situation could be the result of the entity's failure to record:
sales returns.
An entity's physical count of inventories was lower than the inventory quantities shown in its perpetual records. This situation could be the result of the failure to record:
sales.
In obtaining an understanding of an entity's internal control in a financial statement audit of a nonpublic company, an auditor is not obligated to:
search for significant deficiencies in the operation of the internal control.
An auditor ordinarily should send a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance, because this procedure:
seeks information about indebtedness to the bank.
Smith is engaged in the audit of a cable TV firm that services a rural community. All receivable balances are small, customers are billed monthly, and internal control is effective. To determine the existence of the accounts receivable balances at the balance sheet date, Smith would most likely:
send negative confirmation requests.
Cooper, CPA is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely:
send positive confirmation requests.
To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is:
stamped "paid" by the check signer.
When there is a large number of negotiable securities in multiple locations, careful planning of the physical inspection and count of the securities by the auditor is necessary to guard against:
substitution of securities already counted at one location for other securities that should be on hand at a different location but are not.
When documenting an entity's internal control, the independent auditor sometimes uses a systems flowchart, which can best be described as a:
symbolic representation that represents the flow of documents and the processing steps among departments in the entity.
After an audit report containing an unqualified opinion on a nonpublic entity's financial statements is issued, the auditor learns that the entity has decided to sell the shares of a subsidiary that accounts for 30 percent of its revenue and 25 percent of its net income. The auditor should:
take no action because the auditor has no obligation to make any further inquiries.
After the auditor has prepared a flowchart of the internal controls surrounding sales and evaluated the design of the system, the auditor would perform tests of controls on all control activities:
that the auditor plans to rely on.
In auditing accounts receivable, the negative form of confirmation request most likely would be used when:
the combined assessed level of inherent and control risk relative to accounts receivable is low.
Management philosophy and operating style most likely would have a significant influence on an entity's control environment when:
the entity does not have sound personnel policies for hiring, training, and evaluating competent individuals.
An inventory turnover analysis is useful to the auditor because it may detect:
the existence of obsolete merchandise.
A disclosure of a contingent liability in the footnotes is made rather than adjusting the financial statement accounts when:
the outcome of the event is judged to be reasonably possible or the loss cannot be reasonably estimated.
The Performance section of Principles Underlying an Audit Conducted in Accordance with GAAS states that the auditor is unable to obtain absolute assurance that the financials are free of material misstatements because of inherent limitations which arise from all of the following except:
the presentation of the financial statements based on GAAS.
While substantive procedures may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because:
the records may be accurate even though they are maintained by persons having incompatible functions.
An IT specialist is least likely to be necessary when:
the system has not changed from the prior year.
External auditors are referred to as "external" because:
they are not employees of the entity being audited.
As the acceptable level of detection risk increases, an auditor may change the:
timing of substantive procedures from year-end to an interim date.
Tests of controls for the occurrence assertion for purchases include all of the following except:
tracing a sample of vouchers to purchases journal.
When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the:
trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.
Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be shipped that are not invoiced. The inadequate control activities could cause an:
understatement of revenues and receivables and an overstatement of inventory.
To reduce the risks associated with accepting electronic responses to requests for confirmation of accounts receivable, an auditor most likely would:
validate the sender of electronic information.
An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the financial statement assertions regarding inventory, including presentation and disclosure, and:
valuation and allocation.
A CPA is most likely to refer to one or more of the items listed in the Responsibilities section of the Principles Underlying an Audit Conducted in Accordance with GAAS in determining:
whether the CPA should undertake an audit engagement.
