Study Guide - Exam 2

Channel stuffing is an improper practice used to boost sales by inducing distributors to buy more inventory than they can promptly resell. True or False

True

In the audit of inventory, the entity is responsible for actually making and recording the count of physical inventory; the auditor's responsibility is to evaluate and observe the entity's procedures and draw conclusions about the adequacy of the physical inventory. True or False

True

It is generally more efficient to follow a substantive strategy for auditing investments. True or False

True

Obsolete inventory should be written down to its current market value. True or False

True

Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a control listing. A copy of the listing should be sent to the: A. accounts receivable bookkeeper to update the subsidiary accounts receivable records. B. entity's bank to compare the listing with the deposit slip. C. internal auditor to investigate the listing for unusual transactions. D. treasurer to compare the listing with the monthly bank statement.

A. accounts receivable bookkeeper to update the subsidiary accounts receivable records.

On receiving the cutoff bank statement, the auditor should vouch: A. checks dated before year-end listed as outstanding on the year-end bank reconciliation to the cutoff statement. B. checks dated after year-end to outstanding checks listed on the year-end bank reconciliation and to the cutoff statement. C. deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. D. deposits listed on the cutoff statement to deposits in the cash receipts journal.

A. checks dated before year-end listed as outstanding on the year-end bank reconciliation to the cutoff statement.

In order to efficiently establish the correctness of the accounts payable cutoff, an auditor will be most likely to: A. coordinate cutoff tests with physical inventory observation. B. coordinate mailing of confirmations with cutoff tests. C. compare vendors' invoices with vendors' statements. D. compare cutoff reports with purchase orders.

A. coordinate cutoff tests with physical inventory observation.

Observing an entity's inventory held on consignment by others tests the assertion of: A. existence. B. completeness. C. valuation. D. rights and obligations.

A. existence.

A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA's best direction of test is from the: A. meter department records to the billing (sales) register. B. billing (sales) register to the meter department records. C. accounts receivable ledger to the billing (sales) register. D. billing (sales) register to the accounts receivable ledger.

A. meter department records to the billing (sales) register.

An entity'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. purchase discounts. C. purchases. D. sales returns.

A. sales.

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. send positive confirmation requests.

In general, revenue is recognized when: A. goods are shipped. B. an entity satisfies a performance obligation C. it is recorded in the sales journal. D. it is received in cash.

B. an entity satisfies a performance obligation

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Which of the following statements is true regarding the auditor's use of confirmations? A. The positive confirmation form must always be used to confirm all balances regardless of size. B. A combination of the two confirmation types can be used, with the positive form used for large balances and the negative form used for small balances. C. A combination of the two confirmation types can be used, with the positive form used for trade receivables and the negative form for other receivables. D. The positive confirmation form should be used when controls related to receivables are satisfactory and the negative confirmation form should be used when controls related to receivables are unsatisfactory.

B. A combination of the two confirmation types can be used, with the positive form used for large balances and the negative form used for small balances.

Tracing a sample of remittance advices to entries in the cash receipts journal tests which of the following assertions for cash? A. Occurrence. B. Completeness. C. Authorization. D. Cutoff.

B. Completeness.

Which of the following audit procedures is the most appropriate when internal control over cash is weak or when an entity requests an investigation of cash transactions? A. Bank reconciliation. B. Proof of cash. C. Evaluate ratio of cash to current liabilities. D. Cash confirmation.

B. Proof of cash.

An auditors inventory observation procedures typically include all of the following except: A. Inquiry and inspection of items that may be obsolete or damaged. B. Recalculate the ending inventory balance using the appropriate valuation method such as FIFO, LIFO, Weighted Average, etc. C. Observe and reperform the clients count of the most valuable/significant items. D. Tour the entire facility housing the inventory to gain an understanding of the location of items and the clients counting process.

B. Recalculate the ending inventory balance using the appropriate valuation method such as FIFO, LIFO, Weighted Average, etc.

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fund maintained on an imprest basis? A. Reimbursement vouchers are not prenumbered. B. Reimbursement of the fund from the general cash account occurs C. The custodian occasionally uses the cash fund to cash employee checks. D. The custodian endorses reimbursement checks.

B. Reimbursement of the fund from the general cash account occurs

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fund maintained on an imprest basis? A. The custodian endorses reimbursement checks. B. Reimbursement of the fund from the general cash account occurs twice or more each week. C. Reimbursement vouchers are not prenumbered. D. The custodian occasionally uses the cash fund to cash employee checks.

B. Reimbursement of the fund from the general cash account occurs twice or more each week.

Which one of the following procedures would not be appropriate for an auditor in discharging his or her responsibilities concerning the entity's physical inventories? A. Confirmation of goods in the hands of public warehouses. B. Supervising the annual physical inventory count. C. Carrying out physical inventory procedures at an interim date. D. Obtaining written representation from the entity as to the existence, quality, and dollar amount of the inventory.

B. Supervising the annual physical inventory count.

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that: A. goods observed during the physical count are pledged or sold. B. all goods owned at year-end are included in the inventory balance. C. no goods held on consignment for customers are included in the inventory balance. D. all goods purchased before year-end are received before the physical inventory count.

B. all goods owned at year-end are included in the inventory balance.

Your audit client has 2,000 units in ending inventory recorded at $20,000. The most recent acquisition of inventory consist of the following: Date# of items $ Price per item Dec 21 1,000 $10 Nov 30 800 $9 Nov 13 800 $9.50 Using the FIFO method for inventory valuation, the inventory error at the end of the period (if any) is: A. $0; no overstatement or understatement B. an overstatement error of $900 C. an understatement error of $900 D. an overstatement error of $1,200 E. an understatement error of $1,200

B. an overstatement error of $900

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to assess the assertion of: A. authorization and accuracy. B. completeness. C. cutoff. D. occurrence.

B. completeness.

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except the: A. year-end bank statement. B. general ledger. C. cutoff bank statement. D.bank confirmation.

B. general ledger.

An interbank transfer schedule: A. is another name for the proof of cash. B. helps the auditor test for kiting. C. is used to examine entity bank reconciliations. D. is on a standard bank confirmation.

B. helps the auditor test for kiting.

Smith is engaged in the audit of a cable TV firm that services a rural community. All receivable balances are small, customers are billed monthly, and internal control is effective. To determine the existence of the accounts receivable balances at the balance sheet date, Smith would most likely: A. send positive confirmation requests. B. send negative confirmation requests. C. examine evidence of subsequent cash receipts instead of sending confirmation requests. D. use statistical sampling instead of sending confirmation requests.

B. send negative confirmation requests.

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because: A. some recipients may report incorrect balances that require extensive follow-up. B. the auditor cannot infer that all nonrespondents have verified their account information. C. negative confirmations do not produce evidence that is statistically quantifiable. D. a majority of recipients usually lack the willingness to respond objectively.

B. the auditor cannot infer that all nonrespondents have verified their account information.

Inquiries of warehouse personnel concerning possibly obsolete or slow-moving inventory items provide assurance about management's assertion of: A. presentation. B. valuation. C. completeness. D. existence.

B. valuation.

Which of the following audit procedures would probably provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventory? A. Inquiry of management to determine whether there are significant purchase commitments that should be considered for disclosure. B. Tracing of test counts noted during the entity's physical count to the entity's summarization of quantities. C. During physical observation of inventory verify that "bill-and-hold" inventory is segregated and not included in the ending inventory count. D. Selection of the last few shipping advices used before the physical count and determination of whether the shipments were recorded as sales.

C. During physical observation of inventory verify that "bill-and-hold" inventory is segregated and not included in the ending inventory count.

Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs? A. Employees responsible for authorizing sales and bad debt write-offs are denied access to cash. B. Shipping documents and sales invoices are matched by an employee who does not have authority to write-off bad debts. C. Employees involved in the credit-granting function are separated from the sales function. D. Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.

C. Employees involved in the credit-granting function are separated from the sales function.

Valuations based on management's best judgment that involve management's assumptions about unobservable inputs and how the market would price the asset or liability is the definition of which type of Fair Value Measurement? A. Level 1 measurements B. Level 2 measurements C. Level 3 measurements D. None of the above.

C. Level 3 measurements

Which of the following control activities would most likely be used to maintain accurate perpetual inventory records? A. Independent storeroom count of goods received. B. Periodic independent reconciliation of control and subsidiary records. C. Periodic independent comparison of records with goods on hands. D. Independent matching of purchase orders, receiving reports, and vendors' invoices.

C. Periodic independent comparison of records with goods on hands.

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting between intercompany banks? A. Review the composition of authenticated deposit slips. B. Review subsequent bank statements received directly from the banks. C. Prepare a schedule of bank transfers. D. Prepare year-end bank reconciliations.

C. Prepare a schedule of bank transfers.

For the purpose of determining proper cutoff for inventory, the auditor will select a sample from which of the following for a few days before and after year-end? A. Materials requisitions. B. Production schedules. C. Receiving documents. D. Purchase orders.

C. Receiving documents.

During a review of a small business entity's internal control system, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness? A. The owner reviews errors in billings to customers and postings to the subsidiary ledger. B. A controller receives the monthly bank statement directly and reconciles the checking accounts. C. The owner reviews credit memos before they are recorded. D. The controller reconciles the total of the detailed accounts receivable accounts to the amount shown in the ledger.

C. The owner reviews credit memos before they are recorded.

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about: A. existence. B. completeness. C. accuracy, valuation and allocation. D. rights and obligations.

C. accuracy, valuation and allocation.

An auditor should trace interbank transfers for the last part of the audit period and first part of the subsequent period to detect whether: A. the cash receipts journal was held open for a few days after the year-end. B. the last checks recorded before the year-end were actually mailed by the year-end. C. cash balances were overstated because of kiting. D. any unusual payments to or receipts from related parties occurred.

C. cash balances were overstated because of kiting.

Tests designed to detect credit sales made after the end of the year that have been recorded in the current year provide assurance about management's assertion of: A. occurrence. B. classification. C. cutoff. D. authorization and accuracy.

C. cutoff.

To gain assurance that all inventory items in an entity's inventory listing schedule are valid, an auditor most likely would trace: A. items listed in receiving reports and vendors' invoices to the inventory listing schedule. B. inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices. C. items listed in the inventory listing schedule to inventory tags and the count sheets. D. inventory tags noted during the auditor's observation to items listed in the inventory listing schedule.

C. items listed in the inventory listing schedule to inventory tags and the count sheets.

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: A. pledging of the receivables is probable. B. no reply to a negative confirmation request is received. C. no reply to a positive confirmation request is received. D. the collectibility of the receivables is in doubt.

C. no reply to a positive confirmation request is received.

The audit firm's valuation specialist would likely be brought in to assist in the audit of fair value measurements at an entity when the following is present: A. the entity is a new audit client. B. the entity has a financial instrument with a Level 2 input. C. significant uncertainty exists in key inputs to the entity's valuation models. D. the entity owns a large and diverse portfolio of publicly traded stock.

C. significant uncertainty exists in key inputs to the entity's valuation models.

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of: A. rights and obligations. B. completeness. C. valuation and allocation. D. existence.

C. valuation and allocation.

Which of the following procedures would be important in the audit of an investment valued at fair value? A. Compare the balance in the investment account to the prior year. B. Read the footnote disclosure related to the investment. C. Inquire of management's regarding the accuracy and reliability of the underlying data. D. Develop an independent estimate of the fair value measurement.

D. Develop an independent estimate of the fair value measurement

Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs? A. Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit. B. Employees responsible for authorizing sales and bad debt write-offs are denied access to cash. C. Shipping documents and sales invoices are matched by an employee who does not have authority to write-off bad debts. D. Employees involved in the credit-granting function are separated from the sales function.

D. Employees involved in the credit-granting function are separated from the sales function.

During inventory observations, auditors typically perform both "sheet to floor" and "floor to sheet" counts of inventory items. The assertions being tested by these procedures are, respectively: A. Valuation; Accuracy B. Existence; Accuracy C. Completeness; Existence D. Existence; Completeness

D. Existence; Completeness

When performing A/R Aging analysis in IDEA, the "mix" of A/R refers to the diversity of customer names/locations. True or False

False

In the IDEA assignment, you were required to summarize all the Accounts Receivable by Customer, then sort the summarized data by size. The purpose/objective of this procedure was to: A. Test management's assertion of Existence by indicating which A/R balances should be selected for sampling. B. Test management's assertion of Completeness by indicating which A/R balances should be selected for sampling. C. To test management's assertion of Valuation to determine if there are any customers with past due accounts over 90 days D. To test management's assertion of presentation and disclosure by determine whether there are any concentrations of credit risk that need to be disclosed.

D. To test management's assertion of presentation and disclosure by determine whether there are any concentrations of credit risk that need to be disclosed.

Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff? A. Unauthorized goods returned for credit. B. Lapping of year-end accounts receivable. C. Excessive sales discounts. D. Unrecorded sales for the year.

D. Unrecorded sales for the year.

A primary purpose of the proof of cash is to: A. investigate variances from expected cash balances. B. reconcile actual cash receipts and disbursements to budgeted receipts and disbursements. C. prevent fraud. D. ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account.

D. ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account.

A primary purpose of the proof of cash is to: A. prevent fraud. B. reconcile actual cash receipts and disbursements to budgeted receipts and disbursements. C. investigate variances from expected cash balances. D. ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account.

D. ensure that all cash receipts recorded in the cash receipts journal were deposited in the bank account.

In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the entity's name, an auditor most likely gathers evidence in support of management's financial statement assertions regarding: A. existence. B. rights and obligations. C. completeness. D. existence, rights and obligations, and completeness.

D. existence, rights and obligations, and completeness.

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: A. represented by inventory tags are bona fide. B. included in the listing have been counted. C. included in the listing are represented by inventory tags. D. represented by inventory tags are included in the listing.

D. represented by inventory tags are included in the listing.

An auditor ordinarily sends a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance. One purpose of this procedure is to: A. detect kiting activities that may otherwise not be discovered. B. request that a cutoff bank statement and related checks be sent to the auditor. C. provide the data necessary to prepare a proof of cash. D. seek information about loans from the banks.

D. seek information about loans from the banks.

The primary evidence regarding year-end bank balances is documented in the: A. bank deposit lead schedule. B. interbank transfer schedule. C. outstanding check listing. D. standard bank confirmations.

D. standard bank confirmations.

An inventory turnover analysis is useful to the auditor because it may detect: A. inadequacies in inventory pricing. B. methods of avoiding cyclical holding costs. C. the optimum automatic reorder points. D. the existence of obsolete merchandise.

D. the existence of obsolete merchandise.

Level 1 inputs are more risky and difficult to audit than Level 3 inputs to a valuation model. True of False

FALSE

A receiving report records the shipment of goods to customers. True or False

False

Failure to record inventory in the proper period can affect all of the following accounts except: sales. receivables. cost of Goods Sold. prepaid Expenses.

prepaid Expenses.