Audit Final Test
From which of the following evidence gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories? A) Observation of physical inventory counts. B) Written inventory representations from management. C) Confirmation of inventories in a public warehouse. D) Auditor's recomputation of inventory extensions.
A
Internal control over cash receipts is weakened when an employee who receives customer mail receipts also: A) records credits to individual accounts receivable. B) prepares initial cash receipts records. C) maintains a petty cash fund. D) prepares bank deposit slips for all mail receipts.
A
The audit of intangible assets typically involves Vouching the Cost of Assets or Testing Allocation Methods A) Yes Yes B) Yes No C) No Yes D) No No
A
Which of the following is not an acceptable financial reporting framework? A) Generally accepted auditing standards basis. B) Cash basis. C) Tax basis. D) International accounting standards basis.
A
Which of the following should be included as a part of inventory costs of a manufacturing company? Direct Labor Raw Materials Overhead A) Yes Yes Yes B) Yes No No C) No Yes No D) No No No
A
An auditor most likely would analyze inventory turnover rates to obtain evidence about: A) Existence. B) Valuation. C) Presentation. D) Rights.
B
The least crucial element of internal control over cash is: A) Preparation of the monthly bank reconciliation. B) Separation of cash receipts from preparing deposits. C) Canceling the supporting documents for disbursements. D) Separation of cash record keeping from custody of cash.
B
Which of the following is not among the criteria that ordinarily exist for revenue to be recognized? A) Collectibility is reasonably assured. B) Delivery has occurred or is scheduled to occur in the near future. C) Persuasive evidence of an arrangement exists. D) The seller's price to the buyer is fixed or determinable.
B
Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory? A) Compare the physical quantities of slow-moving items with corresponding quantities in the prior year. B) Observe merchandise and raw materials during the client's physical inventory taking. C) Review the management's inventory representations letter for accuracy. D) Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average.
B
An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion is most likely related to presentation and disclosure and: A) Existence. B) Completeness. C) Rights. D) Valuation.
D
Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are not understated? A) Depreciation. B) Accounts Payable. C) Cash. D) Repairs and Maintenance.
D
Which of the following would most likely be detected by an auditor's review of the client's sales cutoff? A) Excessive goods returned for credit. B) Unrecorded sales discounts. C) Lapping of year-end accounts receivable. D) Inflated sales for the year.
D
Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment? A) Accumulated depreciation. B) Cost of goods sold. C) Purchase returns and allowances. D) Purchase discounts.
A
Reconciliation of the bank account should not be performed by an individual who also: A) Processes cash disbursements. B) Has custody of securities. C) Prepares the cash budget. D) Reviews inventory reports.
A
The auditors who wish to draw reader attention to a financial statement note disclosure on significant transactions with related parties should disclose this fact in: A) An emphasis-of-matter paragraph to the auditors' report. B) A footnote to the financial statements. C) The body of the financial statements. D) The "summary of significant accounting policies" section of the financial statements.
A
The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the: A) Bill of lading. B) Job time shipping. C) Production order. D) Production schedule.
A
The organization established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles is the: A) Cost Accounting Standards Board. B) Financial Accounting Standards Board. C) Public Company Accounting Oversight Board. D) Securities and Exchange Commission.
A
To determine that all sales have been recorded, the auditors would select a sample of transactions from the: A) Shipping documents file. B) Sales journal. C) Accounts receivable subsidiary ledger. D) Remittance advices.
A
To strengthen the system of internal control over the purchase of merchandise, a company's receiving department should: A) accept merchandise only if a purchase order or approval granted by the purchasing department is on hand. B) accept and count all merchandise received from the usual company vendors. C) rely on shipping documents for the preparation of receiving reports. D) be responsible for the physical handling of merchandise but not the preparation of receiving reports.
A
A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n): A) Analytical process. B) Loss contingency. C) Probable loss. D) Unasserted claim.
B
Auditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of: A) the next scheduled interim visit. B) the auditors' report. C) the final billing for audit services rendered. D) a postdated footnote.
B
During the inventory count an auditor selects items and determines that the proper description and quantity were recorded by the client. This procedure is most closely related to: A) Rights. B) Completeness. C) Existence. D) Valuation.
B
The primary difference between an audit of the balance sheet and an audit of the income statement lies in the fact that the audit of the income statement deals almost completely with the verification of: A) cutoffs. B) transactions. C) authorizations. D) costs.
B
The primary objective of a CPA's observation of a client's physical inventory count is to: A) Discover whether a client has counted a particular inventory item or group of items. B) Obtain direct knowledge that the inventory exists and has been properly counted. C) Provide an appraisal of the quality of the merchandise on hand on the day of the physical count. D) Allow the auditor to supervise the conduct of the count in order to obtain assurance that inventory quantities are reasonably accurate.
B
The use of the positive (as opposed to the negative) form of receivables confirmation is indicated when: A) a large number of small balances are involved. B) there is reason to believe that a substantial number of accounts may be in dispute. C) there is reason to believe a significant portion of the requests will be answered. D) control risk for accounts receivable is assessed as low.
B
To achieve effective internal 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 dollar amount. B) authorization and approval of major fixed-asset additions. C) performance of recurring fixed-asset maintenance work solely by maintenance department employees. D) classification as investments of those fixed-asset additions that are not used in the business.
B
To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is: A) Supported by a vendor's invoice. B) Stamped "paid" by the check signer. C) Prenumbered and accounted for. D) Approved for authorized purchases.
B
To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic: A) Increase in insurance coverage. B) Inspection of equipment and reconciliation with accounting records. C) Verification of liens, pledges, and collateralizations. D) Accounting for work orders.
B
The auditors are most likely to seek information from the plant manager with respect to the A) Adequacy of the provision for uncollectible accounts. B) Appropriateness of physical inventory observation procedures. C) Existence of obsolete machinery. D) Deferral of procurement of certain necessary insurance coverage.
C
The auditors have not been able to confirm a large account receivable, but they have satisfied themselves as to the proper amount of the receivable by means of alternative auditing procedures. The auditors' report on the financial statements should include: A) a description of the limitation on the scope of their audit and the alternative auditing procedures used, but an opinion qualification is not required. B) an opinion qualification, but reference to the use of alternative auditing procedures is not required. C) neither a comment on the use of alternative auditing procedures nor an opinion qualification. D) both a scope qualification and an opinion qualification.
C
The auditors who are engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: A) detect lapping. B) detect kiting. C) verify reconciling items on the client's bank reconciliation. D) verify the cash balance reported on the standard financial institution confirmation form.
C
The search for unrecorded liabilities for a public company includes procedures usually performed through the: A) Day the audit report is issued. B) End of the client's year. C) Date of the auditors' report. D) Date the report is filed with the SEC.
C
An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete inventory to address: A) Rights. B) Existence. C) Presentation. D) Valuation.
D
An inventory turnover analysis is useful to the auditor because it may detect: A) inadequacies in inventory disclosures. B) methods of avoiding cyclical holding costs. C) the optimum automatic reorder points. D) the existence of obsolete merchandise.
D
As compared to manual processing, electronic processing of cash transactions generally makes kiting: A) neither easier, nor more difficult to accomplish. B) easier to accomplish. C) impossible to accomplish. D) more difficult to accomplish.
D
The auditor is examining copies of sales invoices only for the initials of the person responsible for checking the extensions. This is an example of a: A) dual purpose test. B) test of balances. C) substantive procedure. D) test of controls.
D
The auditors may conclude that depreciation charges are insufficient by noting: A) Insured values greatly in excess of book values. B) Large amounts of fully depreciated assets. C) Continuous trade-ins of relatively new assets. D) Excessive recurring losses on assets retired.
D
A client's materials purchasing cycle begins with requisitions from user departments and ends with the receipt of materials and the recognition of a liability. An auditor's primary objective in reviewing this cycle is to: A) evaluate the reliability of information generated as a result of the purchasing process. B) investigate the physical handling and recording of unusual acquisitions of materials. C) consider the need to be on hand for the annual physical count if this system is not functioning properly. D) ascertain that materials said to be ordered, received, and paid for are on hand.
A
A client'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: A) sales. B) sales returns. C) purchases. D)purchase discounts.
A
A normal audit procedure is to analyze the current year repairs and maintenance accounts to provide evidence in support of the audit proposition that: A) expenditures for fixed assets have been capitalized. B) non capitalizable expenditures have been properly expensed. C) capital expenditures have been properly authorized. D) expenditures for fixed assets have been recorded in the proper period.
A
An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31, 20X0. By this procedure, the auditor would be most likely to learn which of the following? A) An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period. B) An October check from a customer was posted in error to the account of another customer with a similar name. C) An account balance is past due and should be written off. D) An October invoice was improperly computed.
A
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: A) Send positive confirmation requests. B) Send negative confirmation requests. C) Examine evidence of subsequent cash receipts. D) Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.
A
Hall Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The best person or persons to make periodic reviews of the investment activity would be: A) An investment committee of the board of directors. B) The chief operating officer. C) The corporate controller. D) The treasurer.
A
Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable: A) Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. B) Write-offs must be approved by the accounts receivable department. C) Write-offs must be authorized by the shipping department. D) Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.
A
In an audit report on combined financial statements, reference to the fact that a portion of the audit was performed by a component auditor is: A) Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms. B) Not in accordance with generally accepted auditing standards. C) A qualification that lessens the collective responsibility of both CPA firms. D) An example of a dual opinion requiring the signatures of both auditors.
A
In connection with the annual audit, which of the following is not a "subsequent events" procedure? A) Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report. B) Discuss with officers the current status of items in the financial statements that were accounted for on the basis of tentative, preliminary, or inconclusive data. C) Read available minutes of meetings of stockholders, directors, and committees. With regard to meetings for which minutes are not available, inquire about matters dealt with at such meetings. D) Review available interim financial statements.
A
Instead of taking a physical inventory count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and: A) Well-kept records of perpetual inventory are maintained. B) Inventory is slow-moving. C) Computer error reports are generated for missing prenumbered inventory tickets. D) Obsolete inventory items are segregated and excluded.
A
McPherson Corp. does not make an annual physical count of year-end inventories, but instead makes weekly test counts on the basis of a statistical plan. During the year, Sara Mullins, CPA, observes such counts as she deems necessary and is able to satisfy herself as to the reliability of the client's procedures. In reporting on the results of her examination, Mullins: A) Can issue an unqualified opinion without disclosing that she did not observe year-end inventories. B) Should comment in the scope paragraph as to her inability to observe year-end inventories, but can nevertheless issue an unqualified opinion. C) Is required, if the inventories are material, to disclaim an opinion on the financial statements taken as a whole. D) Should, if the inventories are material, qualify her opinion.
A
Purchase cutoff procedures should be designed to test whether purchases recorded near year-end: A) is owned by the company. B) on the year-end balance sheet was carried at lower of cost or market. C) on the year-end balance sheet was paid for by the company. D) is in the possession of the company.
A
The aggregated misstatement in the financial statements is made up of: Known Misstatements --- Projected Misstatements --- Other Misstatements --- A) Yes Yes Yes B) Yes Yes No C) No Yes No D) No Yes Yes
A
The auditor's analytical procedures will be facilitated if the client: A) Uses a standard cost system that produces variance reports. B) Segregates obsolete inventory before the physical inventory count. C) Corrects material weaknesses in internal control before the beginning of the audit. D) Reduces inventory balances to the lower of cost or market.
A
The auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low. A) And accounts receivable are immaterial, or the use of confirmations would be ineffective. B) And accounts receivable are composed of large accounts. C) And the effectiveness of confirmations is absolutely determined. D) Or accounts receivable are from extremely reputable customers.
A
The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare the: A) Details of bank deposit slips with details of credits to customer accounts. B) Daily cash summaries with the sums of the cash receipts journal entries. C) Individual bank deposit slips with the details of the monthly bank statements. D) Dates uncollectible accounts are authorized to be written off with the dates the writeoffs are actually recorded.
A
To determine that sales transactions have been recorded in the proper accounting period, the auditors perform a cutoff review. Which of the following best describes the overall approach used when performing a cutoff review? A) Analyze transactions occurring within a few days before and after year end. B) Confirm year-end transactions with regular customers. C) Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period. D) Examine cash receipts in the subsequent period.
A
When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is: A) Existence. B) Completeness. C) Clarity. D) Presentation.
A
When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments? A) Capitalization. B) Financing. C) Investing. D) Operations.
A
When perpetual inventory records are maintained in quantities and in dollars, and internal 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.
A
Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? A) A bank lockbox system. B) Prenumbered remittance advices. C) Monthly bank reconciliations. D) Daily deposit of cash receipts.
A
Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts? A) Plant assets were retired during the year. B) The prior year's depreciation expense was erroneously understated. C) Overhead allocations were revised at year-end. D) The estimated remaining useful lives of plant assets were revised upward.
A
Which of the following is an effective control over accounts receivable? A) The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records. B) Only persons who handle cash receipts should be responsible for the preparation of documents that reduce accounts receivable balances. C) Balances in the subsidiary accounts receivable ledger should be reconciled to the general ledger control account once a year, preferably at year end. D) Responsibility for approval of the write-off of uncollectible accounts receivable should be assigned to the cashier.
A
Which of the following is an effective control 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 on the receiving report with the purchase order. C) Receiving department personnel are expected to match and reconcile the receiving report with the purchase order. D) Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports.
A
Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report? A) A consistency modification. B) An adverse opinion. C) A qualified opinion. D) Part of the audit has been performed by component auditors.
A
Which of the following policies is an internal control weakness related to the acquisition of factory equipment? A) Acquisitions are to be made through and approved by the department in need of the equipment. B) Depreciation policies are reviewed only once a year. C) Advance executive approvals are required for equipment acquisitions. D) Variances between authorized equipment expenditures and actual costs are to be immediately reported to management.
A
Which of the following procedures would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? A) Observe the consistency of the employees' use of cash registers and tapes. B) Inquire about employees' access to recorded but undeposited cash. C) Trace deposits in the cash receipts journal to the cash balance in the general ledger. D) Compare the cash balance in the general ledger with the bank confirmation request.
A
Which of the following situations has the best chance of being detected when a CPA compares 200X revenues and expenses with the prior year and investigates all changes exceeding a fixed percentage? A) The company changed its capitalization policy for small tools in 200X. B) An increase in property tax rates has not been recognized in the company's 200X accrual. C) Because of worsening economic conditions, the 200X provision for uncollectible accounts was inadequate. D) The cashier began lapping accounts receivable in 200X.
A
Which of the following statements is not typical of property, plant, and equipment as compared to most current asset accounts? A) A property, plant, and equipment cutoff error near year-end has a more significant effect on net income. B) Relatively few transactions occur in property, plant, and equipment during the year. C) The assets involved with property, plant, and equipment ordinarily have relatively longer lives. D) Property, plant, and equipment accounts typically have a higher dollar value.
A
A change in accounting principles that the auditors believe is not justified is likely to result in which of the following types of audit opinions? Qualified --- Unmodified with Emphasis-of-Matter --- A) Yes Yes B) Yes No C) No Yes D) No No
B
A note to the financial statements of the First Security Bank indicates that the company self insures itself for the first $100,000 of liability to employees, with liability insurance for the remainder. Based upon this, one would expect the auditors' report to express: A) a qualified opinion. B) a standard unmodified opinion. C) a disclaimer of opinion. D) an adverse opinion.
B
A search for overstated property, plant, and equipment purchases would most likely include: A) Purchase discounts. B) Property, plant, and equipment. C) Accounts receivable. D) Repairs and maintenance expense.
B
An audit report for a public client indicates that the audit was performed in accordance with: A) Generally accepted auditing standards (United States). B) Standards of the Public Company Accounting Oversight Board (United States). C) Generally accepted accounting principles (United States). D) Generally accepted accounting principles (Public Company Accounting Oversight Board).
B
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: A) the final inventory is valued at cost. B) all inventory represented by an inventory tag is listed on the inventory sheets. C) all inventory represented by an inventory tag is bona fide. D) inventory sheets do not include untagged inventory items.
B
An auditors' opinion exception arising from a limitation on the scope of the audit should be explained in: A) the mandatory adjusting entry whenever such a scope limitation occurs. B) the auditors' report. C) a note to the financial statements. D) both a note to the financial statements and the auditors' report.
B
For effective internal control, the billing function should be performed by the: A) sales department. B) accounting department. C) shipping department. D) credit and collection department.
B
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.
B
In testing plant and equipment balances, an auditor may select recorded additions in the analysis of plant and equipment and inspect the actual asset(s) involved. Which management assertion is this procedure most directly related to? A) Valuation. B) Existence. C) Completeness. D) Rights.
B
In the examination of property, plant, and equipment, the auditors try to determine all of the following except the: A) adequacy of internal control. B) adequacy of replacement funds. C) extent of property abandoned during the year. D) reasonableness of the depreciation.
B
Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next: A) Notify the board of directors that the auditor's report must no longer be associated with the financial statements. B) Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. C) Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. D) Issue revised pro forma financial statements taking into consideration the newly discovered information.
B
The auditors' report should be dated as of the date the: A) Report is delivered to the client. B) Auditors have accumulated sufficient evidence. C) Fiscal period under audit ends. D) Peer review of the working papers is completed.
B
The best way to verify the amounts of dividend revenue received during the year is: A) Recomputation. B) by reference to dividend record books. C) Confirmation with dividend-paying companies. D) Examination of cash disbursements records.
B
Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500 imprest petty cash fund? A) The custodian occasionally uses the cash fund to cash employee checks. B) Reimbursement occurs twice each week. C) The custodian endorses reimbursement checks. D) Reimbursement vouchers are not prenumbered.
B
What is the objective of auditor reporting responsibilities with respect to consistency? A) To give assurance that the comparability of financial statements between periods has not been materially affected by any type of change. B) To give assurance that users will be informed of the lack of comparability of financial statements between periods due to changes in accounting principles. C) To give assurance only that the same accounting principles have been applied to all similar transactions within each period presented. D) To give assurance that adequate disclosure will be made so that there will be comparability of financial statements between companies in the same industry.
B
Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? A) Existence or occurrence. B) Completeness. C) Rights and obligations. D) Presentation and disclosure.
B
Which of the following audit procedures is most effective in testing credit sales for understatement? A) Confirm accounts receivable. B) Trace sample of initial sales slips through summaries to recorded general ledger sales. C) Age accounts receivable. D) Trace sample of recorded sales from ledger to initial sales slip.
B
Which of the following best describes proper internal control over payroll? A) The payment of cash to employees should be replaced with payment by checks. B) The duties of hiring, payroll computation, and payment to employees should be segregated. C) The confidentiality of employee payroll data should be carefully protected to prevent fraud. D) The preparation of the payroll must be under the control of the personnel department.
B
Which of the following is an internal control weakness related to factory equipment? A) Checks issued in payment of purchases of equipment are not signed by the controller. B) All purchases of factory equipment are required to be made by the department in need of the equipment. C) Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired. D) Proceeds from sales of fully depreciated equipment are credited to other income.
B
Your audit of the Abbox Co. reveals that the firm's poor financial condition creates substantial doubt about its ability to continue as a going concern. Assuming that the financial statements have otherwise been prepared in accordance with generally accepted accounting principles and do include proper presentation of the matter, what disclosure should you make of the company's precarious financial position? A) You need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. B) You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes. C) You should issue an adverse opinion on the financial statements. D) You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty.
B
A client company has changed its accounting practices during the year, materially affecting its financial statements so as to make them seriously misleading and not in conformity with generally accepted accounting principles. The CPAs examining these financial statements should: A) modify the opinion with respect to consistency and, in an emphasis-of-matter paragraph, explain the changes and their effects on the net income of the period. B) disclaim an opinion and give reasons. C) render an adverse opinion and give reasons. D) modify the opinion with respect to consistency, referring to explanatory notes of the financial statements to fulfill disclosure requirements.
C
A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the: A) internal auditors. B) cashier. C) treasurer. D) chief accountant.
C
A material departure from generally accepted accounting principles will result in auditor consideration of: A) Whether to issue an adverse opinion rather than a disclaimer of opinion. B) Whether to issue a disclaimer of opinion rather than a qualified opinion. C) Whether to issue an adverse opinion rather than a qualified opinion. D) Nothing, because none of these opinions is applicable to this type of exception.
C
A surprise observation by an auditor of a client's regular distribution of paychecks is primarily designed to satisfy the auditor that: A) all unclaimed payroll checks are properly returned to the cashier. B) all employees have in their possession proper employee identification. C) names on the company payroll are those of bona fide employees presently on the job. D) the paymaster is not involved in the distribution of payroll checks.
C
An audit report for a public client indicates that the financial statements were prepared in conformity with: A) Generally accepted auditing standards (United States). B) Standards of the Public Company Accounting Oversight Board (United States). C) Generally accepted accounting principles (United States). D) Generally accepted accounting principles (Public Company Accounting Oversight Board).
C
An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated: A) December 31, 20X8. B) January 17, 20X9. C) February 10, 20X9. D) February 16, 20X9.
C
An auditor would be least likely to learn of slow-moving inventory through: A) inquiry of sales personnel. B) inquiry of stores personnel. C) vouching of year-end purchases. D) review of perpetual inventory records.
C
An effective procedure for identifying unrecorded retirements of equipment is to: A) Foot related property records. B) Recalculate depreciation on the related equipment. C) Select items of equipment in the accounting records and then locate them in the plant. D) Select items of equipment and then locate them in the accounting records.
C
An important consideration to the auditor in the audit of equipment is to determine: A) that the equipment is properly maintained. B) that theft of the equipment is impossible. C) whether a large recorded gain on a trade of equipment is appropriate. D) when the client should replace the equipment.
C
Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment? A) Property, plant, and equipment. B) Accumulated depreciation. C) Purchase returns and allowances. D) Insurance expense.
C
Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: A) controller. B) board of directors. C) treasurer. D) executive committee.
C
For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on: A) All transactions resulting in the ending balance. B) Tests of controls over disposals. C) Transactions that occurred during the year. D) Performing analytical procedures on beginning balances of the accounts.
C
If the auditors believe that related party transactions are not adequately described in the notes to the financial statements, they should: A) add an emphasis-of-matter paragraph to their unmodified opinion. B) consider more thoroughly the client's going concern status. C) qualify their opinion or issue an adverse opinion. D) disclaim an opinion.
C
If the auditors indicate in the report that the opinion is based, in part, on the report of component auditors who were responsible for the audit of part of the total financial statement data, the auditors are: A) taking complete responsible for the work of the other auditors. B) abrogating responsibility to those users who rely on the CPA firm's reputation as a basis for relying on the reported financial statements. C) properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors. D) in effect qualifying the opinion.
C
In order to avoid the misappropriation of company-owned financial investments, which of the following is the best course of action that can be taken by the management of a company with a large portfolio of financial investments? A) Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. B) Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. C) Require that the safekeeping function for securities be assigned to a securities broker who will act as a custodial agent. D) Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis.
C
Overall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly: A) revenue and expense account balances to the monthly reported net income. B) income statement ratios to published industry averages. C) revenue and expense account totals to the corresponding figures of the preceding years. D) income statement ratios to balance sheet ratios.
C
The auditors who physically examine securities should insist that a client representative be present in order to: A) Detect fraudulent securities. B) Lend authority to the auditors' directives. C) Acknowledge the receipt of securities returned. D) Coordinate the return of securities to the proper locations.
C
The date of the management representation letter should coincide with the: A) date of the latest subsequent event referred to in the notes to the financial statements. B) balance sheet date. C) date of the auditor's report. D) date of the engagement agreement.
C
The financial management of a company should take steps to see that company's investment securities are protected. Which of the following is not a step that is designed to protect investment securities? A) Securities should be registered in the name of the owner. B) Access to securities should be vested in more than one person. C) Custody of securities should be assigned to persons who have the accounting responsibility for securities. D) Securities should be properly controlled physically in order to prevent unauthorized usage.
C
The primary responsibility for the adequacy of disclosure in the financial statements of a publicly-held company rests with the: A) partner assigned to the audit engagement. B) Securities and Exchange Commission. C) management of the company. D) auditor in charge of the field work.
C
The receiving department is least likely to be responsible for the: A) Determination of quantities of goods received. B) Detection of damaged or defective merchandise. C) Preparation of a shipping document. D) Transmittal of goods received to the store's department.
C
To assure accountability for fixed asset retirements, management should implement an internal control that includes: A) Continuous analysis of miscellaneous revenue to locate any cash proceeds from the sale of plant assets. B) Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired. C) Utilization of serially numbered retirement work orders. D) Periodic observation of plant assets by the internal auditors.
C
To test the existence assertion for recorded receivables, the auditors would select a sample from the: A) Sales orders file. B) Customer purchase orders. C) Accounts receivable subsidiary ledger. D) Shipping documents (bills of lading) file.
C
Upon the advice of its auditors, Smith Company changed the method of computing depreciation from the straight-line method to an accelerated method with a material effect upon the financial statements. The auditors' report: A) must be qualified for the accounting change. B) should be a standard unmodified report. C) should include an additional emphasis-of-matter paragraph highlighting the accounting change. D) should contain modification of the opinion paragraph.
C
What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? Qualified Adverse A) Yes Yes B) Yes No C) No Yes D) No No
C
When an adverse opinion is expressed, the opinion paragraph should include a direct reference to: A) a note to the financial statements which discusses the basis for the opinion. B) the paragraph that describes management's responsibilities. C) a separate paragraph that discusses the basis for the opinion expressed. D) the consistency or lack of consistency in the application of generally accepted accounting principles.
C
When the matter is properly disclosed in the financial statements, the likely result of substantial doubt about the ability of the client to continue as a going concern is the issuance of which of the following audit opinions? Qualified --- Unmodified with Emphasis-of-Matter --- A) Yes Yes B) Yes No C) No Yes D) No No
C
Which of the following audit procedures would be least likely to lead the auditors to find unrecorded fixed asset disposals? A) Review of property tax files. B) Scanning of invoices for fixed-asset additions. C) Review of repairs and maintenance expense. D) Examination of insurance policies.
C
Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements? A) A business combination. B) Early retirement of bonds payable. C) Settlement of litigation. D) Plant closure due to a strike.
C
Which of the following is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold? A) Determine that the valuation of inventories and cost of goods sold is arrived at by appropriate methods. B) Determine the existence of inventories and the occurrence of transactions affecting cost of goods sold. C) Establish that the client includes only inventory on hand at year-end in inventory totals. D) Establish the completeness of inventories.
C
Which of the following is least likely to result in inclusion of an emphasis-of-matter paragraph in an audit report? A) The company is a component of a larger business enterprise. B) An unusually important significant event. C) A decision not to confirm accounts receivable. D) A risk or uncertainty.
C
Which of the following is most likely to be considered a Type 1 subsequent event? A) A business combination completed after year-end, but for which negotiations began prior to year-end. B) A strike subsequent to year-end due to employee complaints about working conditions which originated two years ago. C) Customer checks deposited prior to year-end, but determined to be uncollectible after year-end. D) Introduction of a new line of products after year-end for which major research had been completed prior to year-end.
C
Which of the following is not an overall test of the annual provision for depreciation expense? A) Compare rates used in the current year with those used in prior years. B) Test computation of depreciation provisions for a representative number of units. C) Test deductions from accumulated depreciation for assets purchased during the year. D) Perform analytical procedures.
C
Which of the following is not correct relating to an audit report for a public company? A) It must include the city and state in which it was issued. B) It includes an additional paragraph indicating that the auditors have also issued a report on the client's internal control over financial reporting. C) It includes the term "PCAOB Compliant" in the title. D) It refers to standards of the Public Company Accounting Oversight Board.
C
Which of the following is the best evidence of real estate ownership at the balance sheet date? A) Closing statement. B) Title insurance policy. C) Paid real estate tax bills. D) Original deed held in the client's safe.
C
Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job? A) Examine human resources records for accuracy and completeness. B) Examine employees' names listed on payroll tax returns for agreement with payroll accounting records. C) Make a surprise observation of the company's regular distribution of paychecks on a test basis. D) Visit the working areas and verify that employees exist by examining their badge or identification numbers.
C
Which of the following statements regarding the audit of negotiable notes receivable is correct? A) Notes receivable discounted without recourse are confirmed via the standard form for confirmation of deposits and loans at financial institutions used in the audit of cash. B) Physical inspection of a note by the auditors provides conclusive evidence. C) Confirmation in writing from the holder of the note is considered an acceptable alternative to inspection. D) Notes receivable discounted with recourse need not be confirmed.
C
You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to: A) Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. B) Coordinate the count of cash with the cutoff of accounts payable. C) Coordinate the count of cash with the count of marketable securities and other negotiable assets. D) Count the cash immediately upon the return of the confirmation letters from the financial institution.
C
A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements? A) A major subsidiary was sold on February 7. B) The client decided to change depreciation methods in the coming year. C) The factory building was damaged by a fire on January 19. D) A substantial portion of the company's inventory was written off as obsolete on January 31.
D
An auditor selects items from the client's inventory listing and identifies the items in the warehouse. This procedure is most likely related to: A) Completeness. B) Valuation. C) Rights. D) Existence.
D
An example of an internal control weakness is to assign to a supervisor the responsibility for: A) authorizing payroll checks for terminated employees. B) reviewing and approving time reports for subordinate employees. C) initiating requests for salary adjustments for subordinate employees. D) distributing payroll checks to subordinate employees.
D
As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should: A) Express an opinion that is qualified due to the inability of the client company to continue as a going concern. B) Evaluate management's performance in causing this decline. C) Require note disclosure. D) Consider the possibility of a misstatement in the financial statements.
D
Assume that the opinion paragraph of an auditors' report begins as follows: "With the explanation given in Note 6, . . . the financial statements referred to above present fairly. . ." This is: A) An unmodified opinion. B) A disclaimer of opinion. C) An "except for" opinion. D) An improper type of reporting.
D
For which of the following ledger accounts would the auditor be most likely to analyze the details? A) Sales salaries expense. B) Postage expense. C) Supplies expense. D) Miscellaneous expense.
D
In order to guard against the misappropriation of company-owned marketable securities, which of the following is the best course of action that can be taken by a company with a large portfolio of marketable securities? A) Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. B) Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. C) Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. D) Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.
D
In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: A) Reviews the monthly bank reconciliation. B) Returns the checks to accounts payable. C) Is denied access to the supporting documents. D) Is responsible for mailing the checks.
D
Jones, CPA, accepts a new client late in Year 5 and therefore had no opportunity to observe the physical inventory taken at December 31, Year 4. Jones found it impossible to obtain evidence by other auditing procedures as to the beginning inventories for Year 5. Jones observed the physical inventory at December 31, Year 5 and completed the audit satisfactorily. The report to be issued should: A) be a disclaimer of opinion. B) be unmodified. C) be qualified as to all of the statements. D) be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows.
D
On June 15, 20X0, Ward, CPA, accepted an engagement to perform an audit of the Grant Co. for the year ended December 31, 20X0. Grant Co. has not previously been audited by a CPA and Ward has been unable to satisfy himself with respect to opening inventories. How should Ward report on his audit? A) He would have to disclaim an opinion or qualify his opinion on the December 31, 20X0 balance sheet, but could issue an unmodified opinion on the income statement and the statement of cash flows. B) He must disclaim an opinion on the financial statements taken as a whole. C) He could give an unmodified opinion on the financial statements taken as a whole so long as the change in the inventories from the beginning of the year to the end of the year was not material. D) He would have to disclaim an opinion or qualify his opinion on the income statement and the statement of cash flows, but could issue an unmodified opinion on the December 31, 20X0 balance sheet.
D
Patentex developed a new secret formula that is of great value because it resulted in a virtual monopoly. Patentex has capitalized all of its research and development costs associated with this formula. Greene, CPA, who is examining this account will probably: A) confer with management relating to controls maintained over formula confidentiality. B) confer with management regarding a change in the title of the account to "goodwill". C) confirm that the secret formula is registered and on file with the county clerk's office. D) confer with management regarding transfer of the amount from the balance sheet to the income statement.
D
Smith Manufacturing Company's accounts receivable clerk has a friend who is also Smith's customer. The accounts receivable clerk, on occasion, has issued fictitious credit memorandums to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to: A) prenumber and account for all credit memorandums. B) mail monthly statements. C) have the sales department independent of the accounts receivable department. D) require receiving reports to support all credit memorandums before they are approved.
D
Tennessee Company violated company policy by erroneously capitalizing the cost of painting its warehouse. The auditors examining Tennessee's financial statements would most likely learn of this error by: A) discussing Tennessee's capitalization policies with its controller. B) examining in detail a sample of construction requests. C) observing, during the physical inventory observation that the warehouse has been painted. D) reviewing the titles and descriptions for all construction work orders issued during the year.
D
The auditors may conclude that depreciation charges are insufficient by noting: A) insured values greatly in excess of book values. B) continuous trade-ins of relatively new assets. C) large amounts of fully depreciated assets. D) excessive recurring losses on assets retired.
D
The confirmation of the client's trade accounts receivable as a means of obtaining audit evidence is ordinarily considered to be a: A) test of a control. B) required observation technique. C) basic principle of attestation. D) substantive procedure.
D
To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: A) Cutoff bank statement. B) Year-end bank statement. C) Bank confirmation. D) General ledger.
D
Treetop Corporation acquired a building and arranged mortgage financing during the year. Verification of the related mortgage acquisition costs would be least likely to include an examination of the related: A) Interest expense. B) Canceled checks. C) Closing statement. D) Deed.
D
When an auditor tests a client's cost accounting system, the auditors' tests are primarily designed to determine that: A) quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand. B) physical inventories are in substantial agreement with book inventories. C) the system is in accordance with generally accepted accounting principles and is functioning as planned. D) costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.
D
When examining a client's statement of cash flows, for audit evidence, an auditor will rely primarily upon: A) determination of the amount of working capital at year-end. B) the guidance provided by the FASB Statement on the statement of cash flows. C) analysis of significant ratios of prior years as compared to the current year. D) cross-referencing to balances and transactions audited in connection with the examination of the other financial statements.
D
Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? A) Evaluation of ratio of cash to current liabilities. B) Cash confirmation. C) Bank reconciliation. D) Proof of cash.
D
Which of the following is a frequent control over cash disbursements? A) Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation. B) Checks should be signed by the controller and at least one other employee of the company. C) Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement. D) Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.
D
Which of the following is an example of misappropriation of assets relating to sales? A) Accidentally recording cash that represents a liability as revenue. B) Holding the sales journal open to record next year's sales as having occurred in the current year. C) Intentionally recording cash received from a new debt agreement as revenue. D) Theft of cash register sales.
D
Which of the following is least likely to be considered a substantive procedure relating to payroll? A)Investigate fluctuations in salaries, wages, and commissions. B) Test computations of compensation under profit sharing for bonus plans. C) Test commission earnings. D) Test whether employee time reports are approved by supervisors.
D
Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? A) Restrictions placed on sales by laws and regulations. B) Decline in sales due to economic declines. C) Decline in sales due to product obsolescence. D) Over-recorded sales due to a lack of control over the sales entry function.
D
Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? A) Inaccurate billing due to a lack of controls. B) Lapping of accounts receivable. C) Misbilling a client due to a data input error. D) Recording sales when the customer is likely to return the goods.
D
Which of the following is not one of the auditors' primary objectives in an examination of investments in securities? A) To determine whether securities are properly classified on the balance sheet. B) To determine whether securities actually exist. C) To determine whether securities are the property of the client. D) To determine whether all securities are in proper, secure, files at year-end.
D
Which of the following procedures is most likely to be included near completion of an audit? A) Obtain an understanding of internal control. B) Confirmation of receivables. C) Observation of inventory. D) Perform analytical procedures.
D
Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable? A) Request that customers' payment checks be made payable to the company and addressed to the treasurer. B) Segregate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. C) Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts. D) Have customers send payments directly to the company's depository bank.
D
Which of the following would provide the most assurance concerning the valuation of accounts receivable? A) Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. B) Compare receivable turnover ratios to industry statistics for reasonableness. C) Inquire about receivables pledged under loan agreements. D) Assess the allowance for uncollectible accounts for reasonableness.
D
