Auditing Ch 11-13

Using the allowance method, the uncollectible accounts for the year is estimated to be $35,000. If the balance for the Allowance for Doubtful Accounts is a $9,000 debit before adjustment, what is the amount of bad debt expense for the period? a) $26,000 b) $9,000 c) $35,000 d) $44,000

$44,000

Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment? a) Insurance expense. b) Property, plant, and equipment. c) Purchase returns and allowances. d) Accumulated depreciation.

Purchase returns and allowances.

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.

Repairs

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.

Accumulated depreciation.

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.

Assess the allowance for uncollectible accounts for reasonableness.

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.

Inflated sales for the year.

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.

Observe merchandise and raw materials during the client's physical inventory taking.

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.

Obtain direct knowledge that the inventory exists and has been properly counted.

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.

Transactions that occurred during the year.

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.

Uses a standard cost system that produces variance reports.

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.

Utilization of serially numbered retirement work orders.

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.

Want the client to schedule the physical inventory count at the end of the year.

Which of the following should be included as a part of inventory costs of a manufacturing company? Direct Labor Raw Materials Factory Overhead a) Yes Yes Yes b) Yes No No c) No Yes No d) No No No

Yes Yes Yes

Our client uses the allowance method to estimate uncollectible accounts receivable. The company produced the following aging of the accounts receivable at year end. % Balance Uncollectible Total $375,000 0-30 $222,000 1% 31-60 $90,000 4% 61-90 $38,000 5% 91-120 $10,000 6% > 120 $15,000 10% Calculate the total estimated bad debts based on the above information. a) $97,500 b) $9,820 c) $19,800 d) $15,000

$9,820

Smithson Corporation's unadjusted trial balance includes the following balances (assume normal balances): - Accounts Receivable $2,238,000 - Allowance for Doubtful Accounts $42,600 (credit balance) Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debts expense will the company record? a) $91,680 b) $134,280 c) $136,836 d) $89,124

$91,680

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 property, plant, and equipment cutoff error near year-end has a more significant effect on net income.

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.

Bill of lading

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) Must 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) Must, if the inventories are material, qualify her opinion.

Can issue an unqualified opinion without disclosing that she did not observe year-end inventories

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.

Completeness

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.

Delivery has occurred or is scheduled to occur in the near future.

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.

Establish that the client includes only inventory on hand at year-end in inventory totals.

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.

Excessive recurring losses on assets retired.

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) Completeness. b) Existence. c) Rights. d) Valuation.

Existence

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.

Existence

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts? a) Overhead allocations were revised at year-end. b) Plant assets were retired during the year. c) The estimated remaining useful lives of plant assets were revised upward. d) The prior year's depreciation expense was erroneously understated.

Plant assets were retired during the year.

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.

Preparation of a shipping document

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.

Select items of equipment in the accounting records and then locate them in the plant.

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.

Shipping documents file

An aging of a company's accounts receivable indicates that $4,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,600 debit balance, the adjustment to record bad debts for the period will require a: a) debit to Bad Debt Expense for $5,600 b) debit to Bad Debts Expense for $4,000 c) debit to Bad Debts Expense for $2,400 d) credit to Allowance for Doubtful Accounts for $5,000

debit to Bad Debt Expense for $5,600

An aging of a company's accounts receivable indicates that $4,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 credit balance, the adjustment to record bad debts for the period will require a: a) credit to Allowance for Doubtful Accounts for $4,000 b) debit to Bad Debts Expense for $4,000 c) debit to Allowance for Doubtful Accounts for $2,800 d) debit to Bad Debts Expense for $2,800

debit to Bad Debts Expense for $2,800