Audit Quiz 6
Which of the following statements about litigation, claims, and assessments extracted from a letter from a client's legal counsel is most likely to cause the auditor to request clarification
"I believe that the action can be settled for less than the damages claimed"
Subsequent events affecting the realization of assets ordinarily will require adjustments of the financial statements under audit because such events typically represent
Culmination of conditions that existed at the balance sheet date
The objectives of internal control for a production cycle are to provide assurance that transactions are properly executed and recorded, and that
Custody of work-in-process and of finished goods is properly maintained
Which of the following material events occurring subsequent to the Dec. 31, Yr 1, balance sheet date will not ordinarily result in an adjustment of the financial statements before they are issued on March 2, Yr 2
Acquisition of a subsidiary on Jan. 23, Yr. 2. Negotiations had begun in Dec. of Yr 1
A major customer of an audit client suffers a fire prior to completion of year-end field work. The audit client believes that this event could have a significant direct effect on the financial statements. The auditor should
Advise mgmt to disclose the event in notes to the financial statements
When auditing inventories, an auditor would least likely verify that
All inventory owned by the client is on hand at the time of the count
Which of the following is an internal control weakness related to factory equipment
All purchases of factory equipment are required to be made by the department in need of the equipment
Under the AICPA's auditing standards, which of the following statements about an auditor's communication of significant control deficiencies is true
An auditor's report on significant control deficiencies should include a restriction on the use of the report
A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following items would least likely be included in legal counsel's response to the auditor's letter of inquiry
An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded
An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. Tracing test counts most likely obtained evidence concerning the relevant assertion about
Completeness
In auditing AP, an auditor's procedures most likely will focus primarily on the relevant assertion about
Completeness
Which of the following is not an audit procedure that the auditor performs with respect to litigation, claims, and assessments
Confirm directly with the client's legal counsel that all claims have been recorded in the financial statements
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 control activities is not usually performed with regard to vouchers payable in the accounting department
Controlling the mailing of the check and remittance advice
The primary reason an auditor requests letters of inquiry be sent to a client's legal counsel is to provide the auditor with
Corroboration of the information furnished by mgmt about litigation, claims, and assessments
The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference
Credit memos for several items returned by customers had not been recorded
Subsequent to the date 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. The auditor should
Determine whether the financial statements need revision
Which of the following disagreements between the auditor and mgmt do not have to be communicated by the auditor to those charged with governance
Disagreements of the amount of the LIFO inventory layer based on preliminary information
A written mgmt representation letter is most likely to be an auditor's best source of corroborative information of a client's intention to
Discontinue a line of business
Which of the following matters will an auditor most likely include in a mgmt representation letter
Mgmt's acknowledgement of its responsibility to detect employee fraud
For which of the following matters should an auditor obtain written mgmt representations
Mgmt's compliance with contractual agreements that may affect the financial statements
In a well-designed internal control system, employees in the same department most likely would approve purchase orders, and also
Negotiate terms with vendors
Which of the following are essential elements of the audit trail in an electronic data interchange (EDI) system
Network and sender-recipient acknowledgements
Purchase cutoff procedures should be designed to test whether all inventory
Purchased and whose title has passed before year end was recorded
If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded
Purchases
For several years a client's physical inventory count has been lower than what was shown on the books at the time of the count, an downward adjustments of the inventory account have been required. Contributing to the inventory problem could be material weaknesses in internal control that led to the failure to record some
Purchases returned to vendors
When title to merchandise in transit has passed the audit client, the auditor engaged in the performance of a purchase cutoff will encounter the greatest difficulty in gaining assurance with respect to the
Quality
Which of the following procedures should an auditor ordinarily perform regarding subsequent events
Read the latest subsequent interim financial statements
Which of the following is usually a benefit of using electronic funds transfer for international cash transactions
Reduction of the frequency of data entry errors
Under which of the following circumstances would an auditor be most likely to intensify an audit of a $500 imprest petty cash fund
Reimbursement occurs twice each week
After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items
Represented by inventory tags are including in the listing
A client maintains perpetual inventory records in both quantities and dollars. If the assessment of the risks of material misstatement is high, an auditor will probably
Request the client to schedule the physical inventory count at the end of the year
Which of the following controls will most likely allow for a reduction in the scope of the auditor's tests of depreciation expense
Review and approval of the periodic equipment depreciation entry by a supervisor who does not actively participate in its preparation
An auditor would be most likely to learn of slow-moving inventory through
Review of perpetual inventory records
Which of the following procedures would best detect a liability omission by mgmt
Review purchase contracts and other legal documents
Which of the following audit procedures is best for identifying unrecorded trade accounts payable
Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period
The audit of year-end physical inventories should include steps to verify that the client'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
Sale in the current period
Which of the following procedures is least likely to be performed before the balance sheet date
Search for unrecorded liabilities
An internal control narrative indicates that an approved voucher is required to support 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 cancelled checks and ascertain that the related vouchers are dated no later than the checks
Based on observations made during an audit, the auditor should discuss with management the effectiveness of the company's controls that protect against the purchase of
Supplies individually ordered, without considering possible volume discounts
After an audit report containing an unmodified opinion on a nonissuer's financial statements was dated and the financial statements issued, the client decided to sell the shares of a subsidiary that accounts for 30% of its revenue and 25% of its net income. The auditor should
Take no action because the auditor has no obligation to make any further inquiries
When a contingency is resolved immediately subsequent to the issuance of financial statements with a report that included a paragraph emphasizing the contingency, the auditor should
Take no action regarding the event
Legal counsel's response to an auditor's inquiry about litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client's financial statements. Which parties may reach an understanding on the limits of materiality for this purpose that are stated in the letter of inquiry
The auditor and the client's management
An auditor is most likely to communicate to those charged with governance that
The auditor encountered significant difficulties during the audit
Which of the following statements about an auditor's communication of internal control related matters identified in an audit of a nonissuer is true
The auditor should communicate significant internal control related matters no later than 60 days after the report release date
Which of the following circumstances most likely would require an auditor to apply an omitted procedure after the audit report issuance date
The auditor's report is unsupported as a result of the omitted procedure
If mgmt refuses to provide certain written representations that the auditor believes are essential, which of the following is appropriate
The client's refusal may have an effect on the auditor's ability to rely on other representations of mgmt
Which of the following events occurring after the date of the report will most likely cause the auditor to make further inquiries about the previously issued financial statements
The discovery of information regarding a contingency that existed before the financial statements were issued
Which of the following matters will an auditor most likely communicate to those charged with governance
The effects of significant accounting policies adopted by mgmt in emerging areas for which no authoritative guidance exists
Which of the following internal control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments
The internal auditor compares the securities in the bank safe-deposit box with recorded investments
A purpose of a mgmt representation letter is to reduce
The possibility of a misunderstanding concerning mgmt's responsibility for the financial statements
Which of the following matters should an auditor communicate to those charged with governance
The process used by mgmt in formulating sensitive accounting estimates
When communicating significant deficiencies in internal control noted in a financial statement audit of a nonissuer, the communication should indicate that
The purpose of the audit was to report on the financial statements, not to provide assurance of internal control
An auditor concludes that the omission of a substantive procedure considered necessary at the time of the audit may impair the auditor's current ability to support the previously expressed opinion. The auditor need not apply the omitted procedure if
The results of the other procedures that were applied tend to compensate for the procedure omitted
Effective controls relevant to the efficiency of purchases will result in proper evaluation of the time for ordering merchandise. When making this evaluation, the purchasing company should give primary consideration to
The trade-offs between the cost of owning and storing excess merchandise and the risk of loss by not having merchandise on hand
Which of the following representations should not be included in a written report on internal control related matters identified in an audit under the AICPA's auditing standards
There are no significant deficiencies or material weaknesses in the design or operation of internal control
Operating control of the check-signing machine normally should be the responsibility of the
Treasury Function
When an entity uses a trust company as custodian of its trading securities, the possibility of concealing fraud most likely will be reduced if the
Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records
Which of the following is usually a benefit of transmitting transactions in an electronic data interchange (EDI) envioronment
A compressed business cycle with lower year-end receivables balance
The auditor learned of the following situations after issuing the audit report on Feb. 6. Each is important to users of the financial statements. For which one does the auditor have responsibility for disclosures of the newly discovered facts
A conflict of interest involving credit officers and a principal company supplier that existed during the audit year was discovered on March 3
The refusal of a client's legal counsel to provide a representation on the legality of a particular act committed by the client is ordinarily
A scope of limitation
Which of the following activities is most likely to prevent the improper disposition of equipment
A segregation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders
Which control is most likely to give the greatest assurance that securities held as investments are safeguarded
Access to securities requires the signature and presence of two designated officials
Which of the following internal control activities is not usually performed in the vouchers payable department
Accounting for unused prenumbered purchase orders and receiving reports
Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable
Are direct borrowings on notes payable authorized by the board of directors?
Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions
Are procedures in place to monitor and properly restrict access to equipment?
In an audit engagement, should an auditor communicate the following matters to those charged with governance
Auditor's judgments about the quality of the client's accounting Principles: YES Issues discussed with mgmt prior to the auditor's retention: YES
An auditor is concerned with completing various phases of the audit after the balance sheet date. This subsequent period extends to the date of the
Auditor's report
Subsequent events are defined as events that occur subsequent to the
Balance sheet date but prior to the auditor's report date
Which of the following matters is an auditor required to communicate to those in the entity charged with governance
Both I and II
A secondary result of the auditor's understanding of internal control for a nonissuer is that the understanding may
Bring to the auditor's attention possible control conditions required to be communicated to the client
Which of the following conditions or events is most likely to 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 is a standard control over cash disbursements
Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations
A written representation from a client's mgmt 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
An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support mgmt's financial statement assertion of
Classification and understandability
The primary source of information to be reported about litigation, claims, and assessments is the
Client's management
When considering the use of mgmt's written representation as audit evidence about the completeness assertion, an auditor should understand that such representations
Complement, but do not replace, substantive procedures designed to support the assertion
An auditor finds several misstatements in the financial statements that the client prefers not to correct. The auditor determines that the misstatements are not material in the aggregate. Which of the following actions by the auditor is most appropriate
Document all misstatements accumulated during the audit and the conclusion about whether uncorrected misstatements are material
Which of the following statements is true concerning the security of messages in an electronic data interchange (EDI) system
Encryption performed by physically secure hardware devices is more secure than encryption performed by software
Which of the following tests of details most likely would help an auditor determine whether AP have been misstated
Examining vendor statements for amounts not reported as purchases
An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to
Extend the due dates of existing loans
Zero Corp. suffered a loss having a material effect on its financial statements as a result of a customer's bankruptcy that rendered a trade receivable uncollectible. This bankruptcy occurred suddenly because of a natural disaster 10 days after Zero's balance sheet date but 1 month before the issuance of the financial statements and the auditor's report. Under these circumstances, the
Financial Statements should be adjusted: NO Event requires financial statement disclosure, but no adjustment: YES Auditor's report should be modified for a lack of consistency : NO
To which of the following matters would an auditor not apply material limits when obtaining specific written mgmt respresentations
Fraud involving employees with significant roles in internal control
An auditor should communicate misstatements to those charged with governance
If they are uncorrected
After issuing an auditor's report, an auditor has no obligation to make continuing inquiries about audited financial statements unless
Information that existed at the report date and may affect the report comes to the auditor's attention
Which of the following procedures will an auditor most likely perform to obtain evidence about the occurrence of subsequent events
Inquiring as to whether any unusual adjustments were made after year end
Which of the following procedures will an auditor most likely perform to obtain evidence about the occurrence of subsequent events
Inquiring of the entity's legal counsel concerning litigation, claims, and assessments arising after year end
Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories
Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens
When auditing a public warehouse, which of the following is the most important audit procedure with respect to disclosing unrecorded liabilities
Inspection of receiving and issuing procedures
Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control activity that provides for
Investigation of variances within a formal budgeting system
In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the purchase
Invoices
Key Co. plans to present comparative financial statements for the years ended Dec. 31, Yr 1 and Yr 2, respectively. Smith CPA, audited Key's financial statements for both years and plans to report on the comparative financial statements on May 1, Yr 3. Key's current mgmt team was not present until Jan. 1, Yr 2 What period of time should be covered by Key's mgmt representation letter
Jan. 1, Yr 2, through Dec. 31, Yr 2
Some firms that dispose of only a small part of their total output by consignment shipments fail to make any distinction between consignment shipments and regular sales. Which of the following would suggest to the auditor that the client's goods have been shipped on consignment
Large debits to accounts receivable and small periodic credits
The letter of audit inquiry addressed to the client's external legal counsel will not ordinarily be
Limited to references concerning only pending or threatened litigation in connection with which the legal counsel has been engaged
In a well-designed internal control system, the same employee may be permitted to
Mail signed checks and also cancel supporting documents
Which of the following procedures will best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars
Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the validity of the perpetual inventory record
When outside firms of nonaccountants specializing in the taking of physical inventories are used to count, list, price, and subsequently compute the total dollar amount of inventory on hand at the data 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
An auditor should obtain written representation from mgmt about litigation, claims, and assessments. These representations may be limited to matters that are considered either individually or collectively material provided an understanding on the limits of materiality for this purpose has been reached by
Mgmt and the auditor
On Feb. 25, financial statements were released with an auditor's report expressing an unmodified opinion on the statements for the year ended Jan. 31. On March 2, the CPA learned that on Feb. 11, the entity incurred a material loss on an uncollectible trade receivable as a result of the deteriorating financial condition of the entity's principal customer that led to the customer's bankruptcy. Mgmt then refused to adjust the financial statements for this subsequent even. The CPA determined that the information is reliable and that creditors are currently relying on the financial statements. The CPA's next course of action most likely is to
Notify mgmt and those charged with governance that the auditor will seek to prevent future reliance on the auditor's report
When an audit is made in accordance with auditing standards, the auditor should always
Obtain a certain written representation form mgmt
Effective controls relevant to purchasing of raw materials should usually include all of the following except
Obtaining third-party written quality and quantity reports prior to payment for the raw materials
In assessing risk of material misstatement for purchasers, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support
Occurance
Propex Corporation uses a voucher register and does not record invoices in a subsidiary ledger. Propex will probably benefit most from the additional cost of maintaining an AP subsidiary ledger if
Partial payments to vendors are continuously made in the ordinary course of business
Which of the following internal control activities most likely justifies reducing the assessment of the risks of material misstatement for plant and equipment acquisitions
Periodic physical inspection of plant and equipment by the internal audit staff
Periodic or cycle counts of selected inventory items are made at various times during the year rather than a single inventory count at year end. Which of the following is necessary if the auditor plans to observe inventories at interim dates
Perpetual inventory records are maintained
Apex Manufacturing Corporations mass produces eight different products. The controller who is interested in strengthening internal control over the accounting for materials used in production is most likely to implement a
Perpetual inventory system
An auditor has substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time because of negative cash flows and working capital deficiencies. Under these circumstances, the auditor would be most concerned abou the
Possible effects on the entity's financial statements
After performing risk assessment procedures, Cooper,CPA, believes substantial doubt exists about the ability of Zero Corp. to continue as a going concern for a reasonable period of time. In evaluating Zero's plans for dealing with the adverse effects of future conditions and events, Cooper most likely will consider, as mitigating factor, Zero's plans to
Postpone expenditures for research and development projects
Which of the following procedures relating to the examination of AP could the auditor delegate entirely to the client's employees
Prepare a schedule of accounts payable
Which of the following statements is correct concerning internal control in an electronic data interchange system
Preventative controls generally are more important than detective controls in an EDI system
On March 15, Yr 2, Kent, CPA, expressed an unmodified opinion on a client's audited financial statements for the year end December 31, Yr 1. On May 4, Yr 2, Kent's internal inspection program disclosed that engagement personal failed to observe the client's physical inventory. Omission of this procedure impairs Kent's present ability to support the unmodified opinion. If the shareholder are currently relying on the opinion, Kent should first
Undertake to apply alternative procedures that would provide a satisfactory basis for the unmodified opinion
A CPA has received legal counsel's letter in which no significant disagreements with the client's assessments of contingent liabilities were noted. The resignation of the client's legal counsel shortly after receipt of the letter should alert the auditor that
Undisclosed unasserted claims may have arisen
Unrecorded liabilities are most likely to be found during the review of which of the following documents
Unpaid bills
Wilson, CPA, obtained sufficient appropriate audit evidence on which to base the opinion on Abco's Dec. 31, Yr 1, financial statements on March 6, Yr 2, the date of the auditor's report. A subsequently discovered fact requiring revision of the Yr 1 financial statements occurred on April 10, Yr 2, and came to Wilson's attention on April 24, Yr 2. If the fact became known prior to the report release date, and the revision is made, Wilson's report ordinarily should be dated
Using dual dating
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 relevant assertions regarding inventory, including presentation and disclosure and
Valuation and allocation
When using confirmations to provide evidence about the completeness assertion for AP, the appropriate population most likely is
Vendors with whom the entity has previously done business
An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all
Vendors' Invoices
In the accounting system of Apogee Company, the quantities counted by the receiving department and entered at a terminal are transmitted to the computer, which immediately transmits the amounts back to the terminal for display on the terminal screen. This display enables the operator to
Verify that the amount was entered accurately
Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence and valuation assertions about recorded AP
Vouching selected entries in the AP subsidiary ledger to purchase orders and receiving reports
Under which of the following circumstances may audited financial statements contain a note that is labeled "unaudited" disclosing an event occurring after the balance sheet date
When the even occurs after the date of the auditor's original report