Audit 2 Test 2

Revenues are deemed to be earned when the company has ______ what it must do to fulfill its obligation.

Accomplished

Amount of expense incurred on debt but not charged yet by bank.

Accrued Interest

Amount estimated to be incurred for utilities for unbilled period.

Accrued Utilities

Amount estimated to be anticipated for warranty claim of sales already recorded.

Accrued Warranty

When searching for unrecorded liabilities, the auditors consider transactions recorded _____ year-end.

After

_____ considering information about the client and its environment, the auditors must assess the risk of material misstatement related to assertions about inventory.

After

Side _________ can substantially alter the terms of a sale.

Agreements

Receivables that have been sold should not remain as a(n) _____ on the company's books.

Asset

Confirmations do not necessarily mitigate the risk of _________.

Bad debt

Determine that all transfers between trading and available-for-sale portfolios have been properly authorized and recorded.

Classification and understandability

_______ needs to be assured in order to recognize revenue.

Collectibility

Levels of authority in the manufacturing process need to be clearly __________.

Communicated

When testing other accrued liabilities, auditors may independently calculate the amount and ______ it to management's estimate.

Compare

Determine that income from investments has been properly recorded as accrued or collected by reference to published sources, by computation, and by tracing to recorded amounts.

Completeness

Select a sample of sales invoices in the subsequent period, and examine the related shipping documents for date of shipment to ascertain whether some of those shipments at the end of the period were inadvertently not recorded.

Completeness of Assets

Accounts payable _______ can be mailed to vendors from whom substantial purchases have been made.

Confirmations

The entity borrowed funds from a financial institution. Although the transaction was properly recorded, the auditor suspects that the loan created a lien on the entity's real estate that is not disclosed in its financial statements.

Confirms the terms of borrowing arrangements with the lender.

Auditors test effectiveness of controls to ensure they can justify their planned levels of ______ risk.

Control

Testing the reconciliation for accounts receivable to the general ledger ensures that the software is programmed _________.

Correctly

Inventories are often a large _____ asset of a company's balance sheet.

Current

Overstatement may occur when sales for the next period are recorded in the _______ period.

Current

An amount paid by a customer for a container to be later returned to the company.

Customer Deposit

Vouch sales and cash receipt transactions occurring near period end.

Cutoff of Transactions

One way to avoid misstatement of revenue is to ensure the client has proper ________.

Cutoff policies

Auditors must confirm that the ____________ of Property, Plant, and Equipment agree with the general ledger.

Detail ledgers

_____ communication with debtors is the most conclusive step in verifying accounts receivable.

Direct

The determination of the value of ending inventory ____ affects net income.

Directly

Tests used to help identify the _____of controls help to evaluate the client's internal control structure.

Effectiveness

A gain recorded on an exchange of non-monetary assets that lacks commercial substance.

Error

An asset that has been replaced is discarded due to lack of value, with no entry to the general ledger.

Error

Erroneous pricing of inventory.

Error

Purchases of equipment are erroneously reported in maintenance and expense account.

Error

Recording sales in the wrong period based on incorrect shipping information.

Error

Revenue earned from franchise is incorrectly calculated.

Error

Which of the following would the auditor NOT be testing for by examining lease agreements?

Estimates

Obtain positive confirmation as of the balance sheet date of the investments held by any independent custodian.

Existence

Confirm a sample of receivables by direct communication with the debtors.

Existence of Assets

Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. However, the financial statement disclosures concerning these matters are adequate.

Explanatory language added to standard report

An entity changes its method of inventory pricing from LIFO to FIFO. The auditor concurs with the change although it has a material effect on the comparability of the entity's financial statements.

Explanatory language added to standard report.

Property tax payments are typically ______ in number.

Few

Provide a list of related parties to all members of the audit team to assist in identification of transactions.

Financial statement presentation and disclosure

Holding sales journal open to record next year's sales in the current year.

Fraud

Intentional misstatement of inventory production costs.

Fraud

Intentional overshipment of goods.

Fraud

Intentional recording of purchases in the subsequent period.

Fraud

Items are stolen and no journal entry is recorded.

Fraud

Purchasing and cash disbursements can provide lots of opportunity for ______ by employees.

Fraud

Purchasing and cash disbursements can provide opportunity for ______ by employees.

Fraud

Recording a fictitious sale without receiving a customer order for goods.

Fraud

Recording a sale for goods that the customer is anticipated to return.

Fraud

Expenditures for repairs and maintenance intentionally recorded as Property, Plant, and Equipment to overstate income.

Fruad

Intentional misstatement of inventory prices.

Fruad

It is important for the auditor to verify that the controls described by the employees during the auditor's survey of controls over property, plant, and equipment have actually been _____.

Implemented

Invoice dated 1/20 for cleaning services for the month of December; not included in AP as of 12/31.

Improperly excluded from AP

Invoice received 12/30 for January temporary workers; included in AP as of 12/31.

Improperly included in AP

Management may have fraudulently overstated revenue by making __________ journal entries.

Inappropriate

If purchasing employees are _______, they may negotiate bad purchases or purchase terms for the company.

Incompetent

After obtaining an understanding of the client and its environment, auditors must identify the ______risks related to the accounts.

Inherent

If purchasing agents accept _______, the entire purchasing cycle is compromised.

Kickbacks

Confirmations are most persuasive than subsequent cash receipts as they help mitigate the risk of _______.

Lapping

To test collectibility of receivables, auditors may consider credit ratings for debtors of _____ receivables.

Large

Income taxes withheld from employees but not yet submitted to the government are considered to be a(n) _______.

Liability

When testing customer deposits, auditors typically review a(n) ______of the individual deposits.

List

A commitment to competence with respect to plant personnel is important to ensure that the ______ process is both effective and efficient.

Manufacturing

When auditors find unrecorded liabilities, before adjusting they must consider_______.

Materiality

The auditor suspects that fictitious employees have been placed on the payroll by the entity's payroll supervisor, who has access to payroll records and to the paychecks.

Observe payroll check distribution on a surprise basis.

Inventories with a high risk of ______ may be warranted as a significant risk.

Obsolescence

The auditor suspects that the controller wrote several checks and recorded the cash disbursements just before the year-end but did not mail the checks until after the first week of subsequent year.

Obtain the cutoff bank statement and compare the cleared checks to the year-end bank reconciliation.

AR confirmations can be sent electronically or via ________.

Paper form

The auditor suspects that a kiting scheme exists because an Accounting Department employee who can issue and record checks seems to be leading an unusually luxurious lifestyle.

Prepare a bank transfer schedule.

An important step of testing controls is comparing quantity and _______ in the invoice, purchase order, and receiving report.

Price

Invoice dated 1/5 for January security protection; not included in AP as of 12/31.

Properly excluded from AP

Invoice dates 12/20 for maintenance services and unpaid as of year-end; listed in AP at 12/31.

Properly included in AP

When testing controls around inventory, auditors are considering the ________ transaction cycle.

Purchasing

In auditing the long-term investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient appropriate audit evidence regarding this investment cannot be obtained.

Qualified Opinion

An entity disclosed in the notes to the financial statements certain lease obligations. The auditor believes that the failure to capitalize these leases is a departure from generally accepted accounting principles.

Qualified opinion

An entity issues financial statements that present financial position and results of operations but omits the related statement of cash flows. Management discloses in the notes to the financial statements that it does not believe the statement of cash flows to be a useful financial statement.

Qualified opinion

To gain overall assurance as to the reasonableness of accounts payable, the auditor may consider ________.

Ratios

Audit procedures for consignment inventory could include a comparison of the physical inventory with the client's ______.

Records

Federal and state governments do not specify the exact _____ to be maintained, but do specify the amounts to be withheld.

Records

Many instances of misstatement are based on the inappropriate recognition of _______.

Revenue

Review confirmations of liabilities to determine if receivables have been sold.

Right to Assets

The amount collected form the customer for a retail sale imposed by the state government.

Sales Tax Payable

The auditor discovered an unusually large receivable from one of the entity's new customers. The auditor suspects that the receivable may be fictitious because the auditor has never heard of the customer and because the auditor's initial attempt to confirm the receivable has been ignored by the customer.

Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness. Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer.

Auditors need to consider _____terms for determining ownership and whether a liability should be recorded.

Shipping

Perform substantive audit procedures.

Step five

Perform tests of controls.

Step four

Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to inventories and cost of goods sold.

Step one

Assess the risks of material misstatement and design further audit procedures.

Step three

Obtain an understanding of internal control over inventories and costs of goods sold.

Step two

A principal auditor decides to take responsibility for the work of another CPA who audited a wholly owned subsidiary of the entity and issued an unqualified opinion.

Unqualified opinion

An entity is a defendant in a lawsuit alleging infringement of certain patent rights. However, the ultimate outcome of the litigation cannot be responsibility estimated by management. The auditor believes there is a reasonable possibility of a significant material loss, but the lawsuit is adequately disclosed in the notes to the financial statements.

Unqualified opinion

The accounting profession allows various methods for the _______ of inventory.

Valuation

Determine that any other-than-temporary decline in the price of an investment has been properly recorded.

Valuation & accuracy & allocation

For investments in nonpublic entities, compare carrying value to information in the most recently available audited financial statements.

Valuation & accuracy & understandability

Compare the amount of credits given to customers in the subsequent period to the amount estimated by management.

Valuation of Assets

The auditor suspects that selected employees of the entity received unauthorized raises from the entity's payroll supervisor, who has access to payroll records.

Vouch data in the payroll register to documented authorized pay rates in the Human Resources Department's files.