Auditing Final Exam

The aggregated misstatement in the financial statements is made up of. Known, Projected, Other (1) Yes, Yes, Yes (2) Yes, Yes, No (3) No, Yes, No (4) No, Yes, Yes

(1) Yes, Yes, Yes

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: (1)Notify the board of directors that the auditor's report must no longer be associated with the financial statements. (2)Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. (3)Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. (4)Issue revised pro forma financial statements taking into consideration the newly discovered information.

(2)Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n): (1)Analytical process. (2)Loss contingency. (3)Probable loss. (4)Unasserted claim.

(2)Loss contingency.

Which of the following is most likely to be considered a Type 1 subsequent event? (1)A business combination completed after year-end, but for which negotiations began prior to year-end. (2)A strike subsequent to year-end due to employee complaints about working conditions which originated two years ago. (3)Customer checks deposited prior to year-end, but determined to be uncollectible after year-end. (4)Introduction of a new line of products after year-end for which major research had been completed prior to year-end.

(3)Customer checks deposited prior to year-end, but determined to be uncollectible after year-end.

The search for unrecorded liabilities for a public company includes procedures usually performed through the: (1)Day the audit report is issued. (2)End of the client's year. (3)Date of the auditors' report. (4)Date the report is filed with the SEC.

(3)Date of the auditors' report.

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: (1)December 31, 20X8. (2)January 17, 20X9. (3)February 10, 20X9. (4)February 16, 20X9.

(3)February 10, 20X9.

Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements? (1)A business combination. (2)Early retirement of bonds payable. (3)Settlement of litigation. (4)Plant closure due to a strike.

(3)Settlement of litigation.

Which of the following procedures is most likely to be included in the final review stage of an audit? (1)Obtain an understanding of internal control. (2)Confirmation of receivables. (3)Observation of inventory. (4)Perform analytical procedures.

(4)Perform analytical procedures.

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

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. Accumulated depreciation

The audit of intangible assets typically involves: a. vouching the cost of assets and testing allocation methods b. vouching the cost of assets only c. testing the allocation methods only d. None of the above

A. vouching the cost of assets and testing allocation methods

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. All purchases of factory equipment are required to be made by the department in need of the equipment

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. Inspection of equipment and reconciliation with accounting records

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. Existence of obsolete machinery

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

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. Test deductions from accumulated depreciation for assets purchased during the year

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. Transactions that occurred during the year

To assure accountability for fixed asset retirements, management should implement as 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. Utilization of serially numbered retirement work orders

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. Excessive recurring losses on assets retired

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

D. Repairs

As a result of analytical procedures, the auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should A. express a qualified opinion due to inability of the client company to continue as a going concern B. evaluate management's performance in causing this decline C. require footnote disclosure D. consider the possibility of a misstatement in the financial statements.

D. consider the possibility of a misstatement in the financial statements.

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) Existence

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) 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 statement taken as a whole d) Must, if the inventories are material, qualify her opinion

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

The organization established by Congress to narrow the options in cost accounting that are available under GAAP is the: a) Cost Accounting Standards Board b) Financial Accounting Standards Board c) Public Company Accounting Oversight Board d) Securities and Exchange Commission

a) Cost Accounting Standards Board

Which of the following should be included as a part of inventory costs of a manufacturing company? a) Direct Labor, Raw Materials, Factory Overhead b) Direct Labor only c) Raw Materials only d) None of the above should be included

a) Direct Labor, Raw Materials, Factory Overhead

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) Uses a standard cost system that produces variance reports

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

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) Well kept records of perpetual inventory are maintained

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) 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

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

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

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) Preparation of a shipping document