Module 3-C, A

An auditor most likely would extend substantive tests of payroll when:

overpayments are discovered in performing tests of details.

The information below was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ending December 31, 20X1. Assume that all checks are dated and issued on December 30, 20X1.

202 and 404

At December 31, 20X2, Curry Co. had the following balances in selected asset accounts:

50.7

Which of the following pairs of accounts would an auditor most likely analyze on the same workpaper?

Notes receivable and interest income

Which of the following statements concerning audit evidence is correct?

A client's accounting data cannot by itself be considered sufficient appropriate audit evidence to support the financial statements.

Which of the following comprises an integrated audit of an issuer in accordance with PCAOB audit standards?

A financial statement audit and an audit of internal control over financial reporting

Which of the following procedures would yield the most appropriate evidence?

A recalculation of bad debt expense

Which of the following circumstances could appropriately overcome the presumption that the financial statement auditor will confirm the existence of accounts receivable?

Accounts receivable is immaterial.

Which of the following procedures is considered a test of controls?

An auditor interviews and observes appropriate personnel to determine segregation of duties.

Which of the following presumptions does not relate to the appropriateness of audit evidence?

An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost.

Which of the following statements is incorrect concerning analytical procedures?

Analytical procedures used in planning an audit generally use data aggregated at a low level.

Which of the following procedures most likely would be performed in an engagement to review financial statements of a nonissuer?

Analytical review of payroll tax expense

According to AU-C 330.03, which of the following terms identifies a requirement for audit evidence?

Appropriate

Which of the following procedures would an accountant most likely perform when reviewing the financial statements of a nonissuer?

Ask management about the entity's procedures for recording transactions

Which of the following is not generally considered necessary if an auditor applies principal substantive tests to details of balance sheet accounts at an interim date?

Assessing control risk below the maximum is required in order to have a reasonable basis for extending audit conclusions from an interim date to the balance sheet date.

Analytical procedures are required for which of the following?

Audit planning

The client asked the auditor to audit financial statements covering the current year. The auditor did not observe at the prior year's physical inventory. Which of the following actions would the auditor most likely take?

Audit the prior-year inventory using alternative substantive procedures

Which of the following procedures would a CPA ordinarily perform when reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Compare the financial statements with budgets or forecasts

Which of the following types of audit evidence is the most persuasive?

Bank statements obtained from the client

In determining the appropriate analytical procedures to be performed in a review of financial statements, an accountant may consider which of the following? I. Knowledge obtained during current and previous engagements II. The likelihood of a misstatement in the financial statements

Both I and II

Which of the following is an analytical procedure that an auditor most likely would perform when planning an audit?

Comparing current-year balances to budgeted balances

Which of the following does an auditor usually confirm on one form?

Cash in bank and collateral for loans

The auditor determines that the entity has effective controls and the auditor intends to design substantive procedures based on the effective operation of those controls. As a result, the auditor elects to perform tests of controls to obtain evidence about their operating effectiveness. This often is done for what type of transactions?

Class of transactions that is reasonably uniform, noncomplex, and routinely processed and controlled by the entity's information system

Which of the following types of evidence would an auditor most likely examine to determine whether control activities are operating as designed?

Client records documenting the use of EDP programs

Which of the following types of evidence would an auditor most likely examine to determine whether internal control activities are operating as designed?

Client records documenting the use of EDP programs

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?

Compare cash payments made after the balance sheet date with the accounts payable trial balance

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

Comparing the financial statements to anticipated results

Which of the following would be used on a review engagement?

Comparison of current-year to prior-year account balances

Which assertion is typically higher risk for auditing payables when there is incentive to overstate net income?

Completeness

A portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?

Confirmation

Which of the following types of audit evidence generally is the most appropriate?

Confirmation of account information

Which of the following ratios would an engagement partner most likely consider in the overall review stage of an audit?

Cost of goods sold ÷ Average inventory

Which of the following is least likely to be an assertion that would be addressed by the financial statement audit procedure to verify the gain or loss on security transactions?

Cutoff

Which of the following has the least influence on the reliability of audit evidence?

Quantity of the evidence obtained

Which of the following presumptions is correct about the reliability of audit evidence?

Effective internal control provides more assurance about the reliability of audit evidence.

During the performance of an audit, the auditor notes that accounting estimates fair value using a valuation method when there are no observable inputs available. As a result, the auditor should consider which of the following to determine if the entity's method of measurement is appropriate?

Evaluating whether the valuation is appropriate in the circumstance given the nature of the item being evaluated

What type of evidence would provide the highest level of assurance in an audit engagement?

Evidence obtained from independent sources

Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?

Examining vendor statements for amounts not reported as purchases

Although less encompassing than in an audit, an accountant is required to develop expectations in a review of financial statements by identifying and using plausible relationships that are reasonably expected to exist based on his or her understanding of the entity and the industry in which the entity operates. Which of the following might be sources of information for developing expectations?

Financial information for comparable prior periods Budgets and forecasts Published information regarding the industry in which the client operates ***All of the answer choices are correct.

For all audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent: I. in the planning stage. II. as a substantive test. III. in the review stage.

I and III

When an auditor requests information from marketing, sales, or production personnel, which of the following would the auditor request? I. Production strategies II. Compliance with laws and regulations III. Sales trends IV. Application of accounting policies

I and III

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertions of: I. presentation and disclosure. II. existence or occurrence.

II only

Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonissuer?

Identify internal control activities that are likely to prevent or detect material misstatements.

Which of the following actions is an analytical procedure that an auditor most likely would use while auditing a company's notes payable?

Multiplying the average outstanding loan balance by the interest rate and comparing the result to interest expense actually recorded

Which of the following disclaimers of liability included within a response to an auditor's confirmation request would allow the auditor to rely on the confirmation as appropriate audit evidence for an audit of a nonissuer?

Information is furnished as a matter of courtesy without a duty to do so and without responsibility, liability, or warranty, expressed or implied.

Which of the following procedures would an accountant most likely perform during an engagement to review the financial statements of a nonissuer?

Inquire of management about related party transactions

Which of the following procedures regarding inventory would be performed by an accountant during a nonissuer's review engagement?

Inquiring of company personnel about excess or obsolete inventory

Which of the following audit procedures, if used, should be combined with other audit procedures when testing the operating effectiveness of controls?

Inquiry

An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?

Inquiry and inspection of records

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.

Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions?

Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

Inspect the shipping records documenting the merchandise and date sold to the debtors

Which of the following procedures would provide the most reliable audit evidence?

Inspection of bank statements obtained directly from the client's financial institution

In which of the following circumstances is substantive testing of accounts receivable before the balance sheet date most appropriate?

Internal controls during the remaining period are effective.

Which of the following procedures does a CPA usually perform when reviewing the financial statements of a nonissuer?

Make inquiries of management concerning restrictions on the availability of cash balances.

Which of the following procedures regarding notes payable would an accountant most likely perform during a nonissuer's review engagement?

Making inquiries of management regarding maturities, interest rate, and collateral

With which of the following entities can the auditor inquire for information throughout an audit?

Management and internal audit personal Personnel responsible for financial reporting Marketing, sales, and production personnel ***All of the answer choices are correct.

At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. Which of the following actions is the auditor most likely to take?

Obtain additional evidence regarding the valuation of inventory

Which of the following audit procedures would be most appropriate to test the valuation of the collateral of a delinquent loan receivable?

Obtaining a current value appraisal of the collateral

Analytical procedures are most appropriate when testing which of the following types of transactions?

Operating expense transactions

Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation?

Performance of audit tests on a continual basis

Which of the following statements is true related to applying analytical procedures on a financial statement audit?

Plausible relationships among financial and nonfinancial data must be able to be determined to apply analytical procedures as evidence.

Which of the following types of audit evidence is the least persuasive?

Prenumbered purchase order forms

Which of the following types of audit evidence provides the least assurance of reliability?

Prenumbered receiving reports completed by the client's employees

When an auditor requests information from the in-house legal counsel, which of the following would the auditor not request?

Receivables schedule

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?

Reconcile the amounts included in the statement of cash flows to the other financial statements' balances and amounts

When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor's original invoices have been misplaced. What should the auditor do in response to this situation?

Reevaluate the risk of fraud, and design alternate tests for the related transactions

Which of the following procedures would best detect a liability omission by management?

Review purchase contracts and other legal documents

To support financial statement assertions, an auditor develops specific audit objectives. The auditor then designs substantive tests to satisfy or accomplish each objective. Which of the following audit procedures would primarily respond to the audit objective for accounts receivable that accounts receivable are properly described and presented in the financial statements?

Review the accounts receivable trial balance for amounts due from officers and employees.

An audit team has concluded that inventory is highly susceptible to misappropriation and that a potential misstatement would be material to the financial statements. How should the audit team address the audit procedures to the increased risk?

Review the client's control procedures over the safeguarding of inventory, and perform a physical inventory count on the last day of the current year.

Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?

Reviewing accounting records for nonrecurring transactions recognized near the balance sheet date

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

Which of the following procedures is performed first for unreturned positive confirmations of accounts receivable?

Sending second requests for confirmation of accounts receivable

Which of the following documents are examples of audit evidence generated by the client?

Shipping documents and receiving reports

Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?

Square footage of selling space

Which of the following would be the most appropriate initial response to a situation when substantive procedures alone will not provide sufficient appropriate audit evidence on a financial statement audit?

Test the operating effectiveness of controls

When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate?

Test the operating effectiveness of such controls in the current audit

In an integrated audit of a nonissuer, which of the following is the responsibility of an auditor with regard to testing controls at a company with multiple business units?

Testing controls over specific risks at business units that are material to the company's consolidated financial statements

Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks?

Testing the operating effectiveness of the relevant controls would not be efficient.

Which of the following events occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit?

The chief financial officer waived approvals on all checks to one vendor to expedite payment.

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?

The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.

An auditor's analytical procedures performed during the overall review stage indicated that the client's accounts receivable had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor?

The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?

The current year's payroll expense with the prior year's payroll expense

When planning an engagement to audit the effectiveness of the entity's internal control in an integrated audit of a nonissuer, a practitioner would least likely consider which of the following factors?

The evaluation of the operating effectiveness of the controls

Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations?

The recipients are likely to sign the confirmations without devoting proper attention to them.

When performing analytical procedures in the planning stage, the auditor most likely would develop expectations by reviewing which of the following sources of information?

Unaudited information from internal quarterly reports

Which of the following would most likely be an appropriate test of the existence assertion?

Vouch from the general ledger to the underlying source document

Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?

When the combined assessed level of inherent and control risk over the sale is high

Analytical procedures performed in the overall review stage of an audit generally would include:

considering the adequacy of the evidence gathered in response to unexpected balances identified in planning

When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection. The policy's absence most likely indicates the possibility of:

a lien on the plant equipment.

If the audit objective of a test of details is to detect overstatements of sales, the auditor should vouch transactions from the:

accounting records to the source documents.

In testing the existence assertion for an asset, an auditor ordinarily works from the:

accounting records to the supporting evidence.

After assessing control risk below the maximum level, an auditor desires to seek a further reduction in the assessed level of control risk. At this time, the auditor would consider whether:

additional audit evidence sufficient to support a further reduction is likely to be available.

After obtaining an understanding of the internal control and assessing control risk at maximum, an auditor did not want to perform additional tests of controls. The auditor most likely concluded that the:

additional evidence to support a reduction in control risk was not cost beneficial to obtain.

If an auditor of an issuer examines purchase orders obtained from the issuer to verify proper authorization of transactions, then the auditor is conducting:

an inspection.

Before applying principal substantive tests to an entity's accounts receivable at an interim date, an auditor should:

assess the difficulty in controlling the incremental audit risk.

An auditor's principal objective in analyzing repairs and maintenance expense accounts is to:

discover expenditures that were expensed but should have been capitalized.

Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should:

consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations:

client-prepared statements of account that show the details of the account balances.

In auditing payroll, an auditor most likely would:

compare payroll costs with entity standards or budgets.

In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the:

completeness of recorded investment income.

An auditor may decide to perform only substantive procedures for specific assertions because the auditor believes:

control policies and procedures are unlikely to pertain to the assertions.

An auditor's program to examine long-term debt most likely would include steps that require:

correlating interest expense recorded for the period with outstanding debt.

To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into:

cost of goods sold.

An auditor most likely would introduce test data into a computerized payroll system to test internal controls related to the:

discovery of invalid employee ID numbers.

An auditor usually tests the reasonableness of dividend income from investments in publicly held companies by computing the amounts that should have been received by referring to:

dividend record books produced by investment advisory services.

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that:

employees work the number of hours for which they are paid.

Analytical procedures used in planning an audit should focus on:

enhancing the auditor's understanding of the client's business.

Analytical procedures used in the planning phase of an audit should focus on:

enhancing the auditor's understanding of the transactions and events that have occurred since the last audit.

Audit procedures that center on observation and inspection include all of the following except:

evaluating whether the financial statements as a whole are presented fairly, in all material respects, in conformity with generally accepted accounting principles.

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:

fictitious credit sales have been recorded during the year.

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to:

identify potential liabilities for unpaid payroll taxes.

After testing a client's internal control activities, an auditor discovers a number of material weaknesses in the operation of a client's internal controls. Under these circumstances the auditor most likely would:

increase the assessment of control risk and increase the extent of substantive tests.

When the operating effectiveness of a control is not evidenced by written documentation, an auditor should obtain evidence about the control's effectiveness by:

inquiry and other procedures such as observation.

To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including:

inquiry.

In evaluating controls over cash disbursements, an auditor most likely would determine that the control risk is lower when the person who signs checks also:

is responsible for mailing the checks.

An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's:

minutes of board of directors' meetings.

When a company's stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the:

number of shares issued and outstanding.

In determining the effectiveness of an entity's policies and procedures relating to the existence assertion for payroll transactions, an auditor most likely would inquire about and:

observe the segregation of duties concerning personnel responsibilities and payroll disbursement.

Evidence concerning the proper segregation of duties for receiving and depositing cash receipts ordinarily is obtained by:

observing the employees who are performing the control activities.

One of the responsibilities of the auditor in an audit conducted in accordance with generally accepted auditing standards is to:

obtain evidence to support his opinion.

During the compilation of a client's financial statements, an accountant comes to believe that the financial statements are materially misstated. The accountant should:

obtain the additional or revised information needed to correct the financial statements.

In determining whether transactions have been recorded, the direction of the audit testing should be from the:

original source documents.

Confirmation of accounts receivable that have been categorized initially by an auditor as "exceptions" most likely could be due to:

payments mailed to the client that have not been recorded.

An auditor's decision whether to apply analytical procedures as substantive tests usually is determined by the:

precision and reliability of the data used to develop expectations.

In auditing a client's retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate management's financial statement assertion of:

presentation and disclosure.

An auditor usually determines whether dividend income from publicly held investments is reasonable by computing the amounts that should have been received by referring to:

records produced by investment services.

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including:

reperformance and observation.

To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would:

request that the senders mail the original forms to the auditor.

The procedure, "The accountant should perform analytical procedures designed to identify relationships that appear unusual," is:

required for a review only.

When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and:

reviewing payroll accruals for reasonableness.

A weakness in internal control over recording retirements of equipment may cause an auditor to:

select certain items of equipment from the accounting records and locate them in the plant.

In testing for unrecorded retirements of equipment, an auditor most likely would:

select items of equipment from the accounting records and then locate them during the plant tour.

During an audit of a nonissuer's financial statements, an auditor should perform tests of controls to obtain sufficient appropriate audit evidence about the operating effectiveness of relevant controls if:

substantive procedures alone cannot provide sufficient appropriate audit evidence.

Regardless of the assessed risk of material misstatement, an auditor would perform:

substantive tests to restrict detection risk for significant transaction classes.

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs:

tests of controls and limited tests of current year property and equipment transactions.

In auditing accounts receivable, the negative form of confirmation request most likely would be used when:

the combined assessed level of inherent and control risk relative to accounts receivable is low.

Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess:

the difficulty in controlling the incremental audit risk.

An important element in the effective application of analytical procedures is the development by the auditor of relevant expectations regarding the client's financial statements. As expectations on the part of the auditor become more precise:

the range of expected differences become narrower, and, accordingly, the likelihood increases that significant differences from the expectations are due to misstatements.

The objective of performing analytical procedures in planning an audit is to identify the existence of:

unusual transactions and events.

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would:

verify the sources and contents of the faxes in telephone calls to the senders.