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AC316 Final

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Which document or record is used in the write-off of uncollectible accounts classes of transactions? A) general journal B) remittance advice C) sales transaction file D) sales order

When designing tests of controls and substantive tests of transactions for cash receipts, it is important to remember that A) the test of controls are designed to test for monetary misstatements. B) auditors use the same methodology for designing tests of controls and substantive tests of transactions for cash receipts as they use for sales. C) the tests of controls are not dependent on the controls the auditor identifies. D) the tests of controls is not dependent on whether the company being audited is publicly traded.

A ________ indicates a reduction in the amount due from a customer because of returned goods or an allowance. A) bill of lading B) sales invoice C) credit memo D) monthly statement

The most important test of details of balances to determine the existence of recorded accounts receivable is A) tracing details of sales invoices to shipping documents. B) tracing the credits in accounts receivable to bank deposits. C) tracing sales returns entries to credit memos issued and receiving room reports. D) the confirmation of customers' balances.

Which accounts are involved in the sales class of transactions? A) accounts receivable and sales returns and allowances B) cash and allowance for uncollectible accounts C) sales allowances and accounts receivable D) accounts receivable and sales

Which of the following business functions is not considered to be part of the acquisitions class of transactions? A) processing purchase orders B) recognizing liabilities C) receiving goods and services D) processing cash disbursements

Which of the following is an account that is not affected by the sales and collection cycle? A) cash B) accounts receivable C) allowance for doubtful accounts D) accounts payable

Which of the following is an accurate statement relating to separation of duties? A) Management should deny cash access to anyone responsible for entering sales and cash receipts transaction information into the computer. B) All disagreements on the monthly statements should be directed to a designated person who has no responsibility for handling cash or recording sales or accounts receivable. C) The credit granting function should be separate from the sales function. D) All of the above are accurate statements.

Which of the following is not an important aspect of billing? A) All shipments made have been billed. B) No shipment has been billed more than once. C) Each customer is billed for the proper amount. D) Credit is approved to customers for sales on account

Which of the following is not one of the five classes of transactions included in the sales and collection cycle? A) sales returns and allowances B) write-off of uncollectible accounts C) bad debt expense D) interest income

Which of the following types of receivables would not deserve the special attention of the auditor? A) accounts receivables with credit balances B) accounts that have been outstanding for a long time C) receivables from related parties D) each of the above would receive special attention.

To test for recorded sales for which there were no actual shipments, the auditor vouches from the A) bill of lading to the sales journal. B) sales journal to the shipping documents. C) sales journal to the accounts receivable subsidiary ledger. D) bill of lading to the supporting customer order and sales order.

When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger purposefully enters cash received into the wrong customer's account that employee may be suspected of A) kiting. B) lapping. C) floating. D) shorting.

When assessing risk control, the auditor must do all of the following except A) assess control risk for each objective by evaluating the controls and deficiencies for each objective. B) perform the detailed test of balances. C) identify the key internal controls and deficiencies. D) associate the key controls and deficiencies with the objectives

The most significant effect of the results of the tests of controls and substantive tests of transactions in the sales and collection cycle is on A) bad debt expense. B) the analytical tests to be performed. C) the confirmation of accounts receivable. D) the impact of processing cash receipts.

When designing audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion? A) valuation B) cutoff C) completeness D) classification

Which of the following accounts is not included in the acquisitions class of transactions? A) inventory B) prepaid expenses C) sales discounts D) accounts payable

Which of the following accounts is not part of the acquisition and payment cycle? A) prepaid expenses B) accounts payable C) sales returns and allowances D) property, plant, and equipment

Which of the following is a business function related to sales returns and allowances? A) processing customer orders B) writing off uncollectible accounts C) processing and recording credit memos D) granting credit

Which of the following is not a business function within the "Sales" class of transactions? A) processing customer orders B) granting credit C) processing and recording sales returns and allowances D) shipping goods

Changing circumstances may require a change in the useful life of an asset. When this occurs, it involves a change in A) accounting estimate rather than a change in accounting principle. B) accounting principle rather than a change in accounting estimate. C) both accounting principle and accounting estimate. D) neither accounting principle nor accounting estimate.

Confirmation of accounts receivable provide evidence related to the ________ objectives. A) existence B) accuracy C) cutoff D) all if the above

Contingent liability disclosure in the footnotes of the financial statements would normally be made when A) the outcome of the accounting event is deemed probable, but a reasonable estimation as to the amount cannot be made by the client or auditor. B) a reasonable estimation of the loss can be made, but the outcome is not probable. C) the outcome of the accounting event is deemed probable, and a reasonable estimation as to the amount can be made. D) the outcome of the accounting event as well as a reasonable estimation of the loss cannot be made

Cutoff misstatements occur A) either by error or fraud. B) by error only. C) by fraud only. D) randomly without causes related to errors or fraud.

During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditor to suspect that A) long-term debt is understated. B) discount on bonds payable is overstated. C) long-term debt is overstated. D) premium on bonds payable is understated.

For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be recorded on which of the following documents? A) sales order B) sales invoice C) customer order D) remittance advice

From which of the following evidence-gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories? A) observation of physical inventory counts B) written inventory representations from management C) confirmation of inventories in a public warehouse D) auditor's recomputation of inventory extensions

If an auditor wishes to test the completeness transaction-related audit objective in the payroll and personnel cycle, which of the following would be a reasonable test of control? A) Account for a sequence of payroll checks. B) Examine the procedures manual and observe the recording of transactions. C) Examine the payroll records for indication of pay rate approval. D) Reconcile the payroll bank account.

If the client's internal control for recording sales returns and allowances is evaluated as ineffective, A) a larger sample may be needed to verify cutoff. B) sampling is not appropriate. C) all sales returns must be traced to supporting documentation. D) all sales returns must be confirmed with the customer.

In addition to confirming bank balances of your audit client, a bank confirmation would normally contain A) the client's bank loans with due date, interest rate, and collateral requested. B) the client's credit history as regards to paying back loans. C) the client's managements bank account information. D) the client's business prospects.

In auditing debits and credits to retained earnings, other than net income and dividends, the auditors first concern is A) whether the transactions should have been included in retained earnings. B) whether the transactions have been accurately recorded. C) whether the transactions are classified correctly in the footnotes. D) whether the transactions existed as of the balance sheet date.

In auditing payroll, the auditor wants to determine that the individuals included in her sample were employees of the company for the period under review. What is the auditor's best source of evidence? A) examination of human resource records B) examination of the payroll master file C) examination of the payroll transaction file D) examination of the payroll tax records

In connection with the annual audit, which of the following is not a "subsequent events" procedure? A) Prepare any necessary closing journal entries. B) Examine the minutes of stockholders and directors meetings subsequent to the balance sheet date. C) Review journals and ledgers. D) Obtain a letter of representation

In order to strengthen controls over cost accounting information, a company should consider implementing A) perpetual inventory master files. B) a job order cost accounting system. C) an accounting system that keeps separate the records of the accounting department from the records of the production department. D) an economic quantity order system.

Insurance expense for the period is a function of which of the following? A) the beginning prepaid balance, current premium payments and the ending prepaid balance B) the beginning prepaid balance and the current period premium payments C) the current period premium payments D) the current period premium payments and the ending prepaid balance

Inventory is often a significant part of a company's current assets. Because of its importance, A) auditors are required by auditing standards to observe the client taking a physical inventory count. B) price tests must be performed to verify whether the physical counts were correctly summarized. C) companies are required to use perpetual inventory systems. D) auditors are required by auditing standards to take the physical inventory for the client.

It is frequently possible to test the physical inventory prior to the balance sheet date when A) the perpetual inventory records are accurate and related controls operate effectively. B) year-end sales are small. C) the internal control system is no better at year-end than at an earlier point in time. D) the client counts inventory at interim dates.

Listing all bank transfers made a few days before and after the balance sheet date and tracing each to the accounting records for proper recording is a useful approach to test for A) kiting. B) lapping. C) income smoothing. D) channel stuffing.

McKesson & Robbins Company is a well-known audit case involving auditor responsibility. What occurred at the McKesson & Robbins Company to change the way in which auditors audit inventory? A) The company recorded nonexistent inventory. B) The auditor did not perform any audit tests of the inventory. C) The auditor and company colluded to overstate inventory balances. D) The company counted inventory three months prior to year-end.

Once the auditor determines that the company's policy for accruing wages is consistent with prior years, the appropriate audit procedure to test for accuracy and cutoff is A) recalculating the client's accrual. B) performing extensive tests of controls. C) performing extensive tests of details. D) none of the above.

One of the primary objectives in examining the repairs and maintenance accounts is to obtain evidence that A) expenditures of equipment have not been charged to expense. B) the actual amount recorded is the same as the budgeted amount. C) expenditures for equipment have been recorded in the proper period. D) revenue expenditures made on behalf of equipment have been recorded in the proper period

Peprah Company pays its accounts payable 45 days after receipt of the goods or services. In this case, which audit procedure should be used to detect any unrecorded liabilities? A) Examine cash disbursements for several weeks after the balance sheet date. B) Reconcile purchase orders to requisition orders. C) Reconcile purchase orders to receiving reports. D) Reconcile purchase orders to vendor invoices.

Prices in an active market for identical assets is a level ________ fair value estimate. A) 1 B) 2 C) 3 D) 4

Records that include data about employees such as employment date, performance ratings and pay rates are the A) human resource records. B) employee screening forms. C) summary payroll reports. D) employee folders.

Refusal by a client to prepare and sign the representation letter would require the auditor to issue a(n) A) qualified opinion or a disclaimer of opinion. B) adverse opinion or a disclaimer of opinion. C) qualified or an adverse opinion. D) unqualified opinion with an explanatory paragraph.

Responsibility for the issuance of new notes payable would normally be vested in the A) board of directors. B) purchasing department. C) accounting department. D) accounts payable department.

The ________ has the responsibility for approving the number of hours worked for each employee. A) employee's supervisor B) human resources department C) chief financial officer D) budgeting supervisor

The accurate recording of sales transactions concerns all of the following except for A) proper credit authorization. B) shipping the amount of goods ordered. C) accurately billing for the amount of goods shipped. D) accurately recording the amount billed in the accounting records

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 a A) sale in the current period. B) sale in the subsequent period. C) purchase in the current period. D) purchase return in the subsequent period.

The audit procedure that provides the auditor with the most appropriate evidence when performing test of details of balances for accounts receivable is A) confirmations. B) recalculation of the aged receivables and uncollectible accounts. C) tracing credit memos for returned merchandise to receiving room reports. D) tracing from shipping documents to journals to the accounts receivable ledger

The process of transferring money from one bank account to another and improperly recording the transaction is referred to as A) kiting. B) lapping. C) scamming. D) embezzling.

The starting point for the verification of the balance in the general bank account is to obtain A) a bank reconciliation from the client. B) the client's cash account from the general ledger. C) a cutoff bank statement directly from the bank. D) the client's year-end bank statement

The test of details of balances procedure that requires the auditor to trace the book balance on the reconciliation to the general ledger is an attempt to satisfy the audit objective of A) detail tie-in. B) existence. C) completeness. D) accuracy.

The test of details of balances procedure to "examine vendors' invoices of closely related accounts such as repairs to uncover items that should be property, plant, and equipment" satisfies the audit objective of A) completeness. B) detail tie-in. C) cutoff. D) existence.

The total of the individual employee earnings in the payroll master file should equal the total A) balance of gross payroll in general ledger accounts. B) of the checks drawn to employees for payroll. C) gross payroll plus the total contributed by the employer for payroll taxes. D) gross pay for the current week's payroll.

To minimize the opportunity for fraud, unclaimed salary checks should be A) redeposited. B) kept in the payroll department. C) left with the employee's supervisor. D) held for the employee in the personnel department.

To test for cutoff errors which overstate liabilities, the auditor should trace the receiving reports issued ________ to vendors' invoices. A) after year-end B) before year-end C) the last day of the fiscal year D) both before and after year-end

Verifying that an adequate chart of accounts is used is a key internal control for the transaction-related objective of A) classification. B) accuracy. C) existence. D) occurrence.

What typically initiates the acquisitions and payment cycle? A) issuance of a purchase requisition or request for purchase of goods or services B) issuance of payment to vendor C) approval of a new vendor D) purchase requisition

When a dividend is declared by the board of directors, the source for determining who should receive dividend checks is the A) shareholders' capital stock master file. B) stock certificate books. C) common stock account in the general ledger. D) corporate directory.

When an auditor observes that personnel who are responsible for physically counting inventory are not following the inventory instructions, the auditor should A) contact a client's supervisor to correct the problem. B) modify the client's physical inventory instructions. C) not discuss the problem with client's supervisor in order to maintain independence. D) assign audit staff to the inventory count.

When assessing risks affecting cash, A) if a business defers preparing bank reconciliations for long periods, the value of the control is reduced and may affect the auditor's assessment of control risk for cash. B) most companies are likely to have significant client business risks affecting their cash balances. C) there is a low inherent risk for the existence and completeness objectives for cash. D) all of the above are accurate statements.

When assets are being verified, auditors focus much of their attention on making sure that the accounts are not overstated. Alternatively, auditors focus their efforts on understatement when auditing liabilities. What is the primary reason for this difference in focus? A) auditors' legal liability B) GAAP C) GAAS requirements D) all of the above

When auditing financial instruments, analytical procedures can be used to A) test the reasonableness of interest and dividend income. B) test the year-end balance. C) determine if the financial instruments were properly valued. D) determine if the gain or loss on the sales were properly computed.

When auditing inventory cost accounting, the auditor is concerned with all of the following except for A) net realizable value. B) unit cost records. C) physical controls over inventory. D) documents and records for transferring inventory.

When auditors examine vendors' statements or receive confirmations, there must be a reconciliation of the statement or confirmation with the A) accounts payable list. B) vendors' invoices. C) purchase orders. D) receiving reports.

When auditors verify accrued property taxes, two audit objectives are especially significant. These are A) completeness and accuracy. B) completeness and net realizable value. C) detail tie-in and completeness. D) accuracy and classification.

When determining the methodology for designing tests of details of balances for accounts payable, A) the focus by many companies on improving their supply-chain management activities has led to numerous changes in the design of systems used to initiate and record acquisition and payment activities. B) it is relatively inexpensive to audit accounts payable. C) performance materiality for accounts payable is set relatively low. D) inherent risk is often set at low.

When making the sampling decisions for accounts receivable confirmations, A) it is important to sample some items for every material segment of the population. B) if management refuses to allow the auditor to send confirmation requests to certain customers, the auditor must withdraw from the engagement. C) inherent risk does not impact the sample size. D) stratification of the sample is discouraged under current auditing standards

When performing the tests of details of balances for expense accounts, ________ is (are) generally not necessary. A) extensive additional testing B) analytical procedures C) tests of controls D) substantive tests of transactions

A CPA learns that his client has paid a vendor twice for the same shipment, once based upon the original invoice and once based upon the monthly statement. A control procedure that should have prevented this duplicate payment is A) attachment of the receiving report to the disbursement report. B) prenumbering of disbursement vouchers. C) use of a limit or reasonableness test. D) prenumbering of receiving reports.

A commitment is best described as A) an agreement to commit the firm to a set of fixed conditions in the future. B) an agreement to commit the firm to a set of fixed conditions in the future that depends on company profitability. C) an agreement to commit the firm to a set of fixed conditions in the future that depends on current market conditions. D) a potential future obligation to an outside party for an as yet to be determined amount.

A common inventory observation procedure is to select a random sample of tag numbers and identify the tag with that number attached to the actual inventory item. The audit objective being achieved by this procedure is A) inventory as recorded on tags actually exists (existence). B) existing inventory is counted and tagged (completeness). C) inventory is counted accurately (accuracy). D) inventory is classified correctly (classification).

A liability is properly accounted for as an account payable if A) the amount is known and owed as of the balance sheet date. B) the amount can be estimated and is owed at the balance sheet date. C) the amount is known at the balance sheet date and owed by the end of the next fiscal year. D) the amount is estimated and owed within 90 days of the balance sheet date.

A type of positive confirmation in which an individual invoice is confirmed, rather than the customer's entire accounts receivable balance is the ________ confirmation. A) invoice B) specific C) balance D) voucher

A type of positive confirmation known as a blank confirmation A) requests the recipient to fill in the amount of the balance. B) is considered less reliable than the regular positive confirmation. C) generates as high a response rate as the regular positive confirmation form. D) is used when the auditor is confirming several small balances.

A weak internal control system allows a department supervisor to "clock in" for a fictitious employee and then approve the employee's time card at the end of the pay period. This fraud would be detected if other controls were in place, such as having an independent party A) distribute paychecks. B) recompute hours worked from time cards. C) foot the payroll journal and trace postings to the general ledger and the payroll master file. D) compare the date of the recorded check in the payroll journal with the date on the canceled checks and time cards.

A written purchase order is a contractual document that is A) an offer to buy goods or services. B) not enforceable if it is not in writing. C) prepared by the receiving department. D) an acceptance of a vendor's catalog offer to sell.

Actual interest expense is significantly higher than the auditor's estimate. This would most likely lead the auditor to conclude that the client has not A) recorded all long-term interest bearing debt in the accounting records. B) recorded all interest expense paid or accrued. C) properly accounted for the discount of bonds payable account. D) properly recorded interest income.

After a purchase requisition is approved, a ________ must be initiated to purchase the goods or services. A) purchase order B) vendor order C) call order D) vendor invoice

Almost all companies need physical controls over their assets to prevent loss. Which of the following is not an example of such a control? A) perpetual inventory master files B) segregated, limited-access storage areas C) custody of assets assigned to specific responsible individuals D) approved prenumbered documents for authorizing movement of inventory

An auditor is performing a credit analysis of customers with balances over 60 days due. She is most likely obtaining evidence for which audit related objective? A) realizable value B) existence C) completeness D) occurrence

An auditor is reconciling the amounts included in the long-term debt footnotes to the information examined and supported in the audit files for long-term debt. Which audit objective is being satisfied? A) accuracy and valuation B) occurrence and rights and obligations C) completeness D) classification and understandability

An auditor is reviewing the minutes of board meetings to determine whether any securities are pledged as collateral. This test of the detail of balances relates to the audit objective of A) rights. B) cutoff. C) realizable value. D) classification.

An auditor is using audit sampling to test transactions in the acquisition and payment cycle. She would normally set the tolerable exception rate at what level? A) Low B) Medium C) High D) Indeterminate

An auditor is vouching a sample of hourly employees from the payroll master file to approved time clock or time sheet data in order to provide evidence that A) employees work the number of hours for which they are paid. B) payments are made at the contractual rate. C) product cost information is accurate. D) segregation of duties is present between the payroll function and the payment function for cash disbursements.

An auditor performs interim work at various times throughout the year. The auditor's subsequent events work should be extended to the date of A) the auditor's report. B) a post-dated footnote. C) the next scheduled interim visit. D) the final billing for audit services rendered.

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

An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to A) extend auditing procedures and assume responsibility for a greater period of time. B) accept responsibility for subsequent events. C) permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor's report. D) assume responsibility for events subsequent to the issuance of the auditor's report.

An auditor's decision concerning whether or not to dual date an audit report is primarily based on the auditor's decision to A) extend appropriate audit procedures. B) assume responsibility for events after the date of the auditor's report. C) assume responsibility for event from fiscal year-end to the date of the audit report. D) roll the dice and hope for a successful outcome.

An imprest payroll account that has a significant balance may indicate the presence of A) employees have not yet cashed their payroll checks. B) fraudulent transfer of funds by the company. C) lack of controls over payroll distribution. D) the company is overpaying its employees.

An inventory acquisition is received late in the afternoon of December 31 after the physical inventory is completed. If the acquisition is included in accounts payable and purchases, but excluded from inventory, the result A) is an understatement of net earnings. B) is an overstatement of net earnings. C) is an overstatement of working capital. D) is an overstatement of owner's equity.

Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally A) reduce the extent of tests of details of balances. B) reduce the extent of tests of controls. C) reduce the tests of transactions. D) reduce all of the other tests

As a test of control, the auditor examines sales invoices for supporting documents. The relevant transaction-related audit objective is A) accuracy. B) occurrence. C) classification. D) timing.

As directed by the Sarbanes-Oxley Act, A) an attorney must report material violations of federal securities law to the public company's chief legal counsel or chief executive officer. B) attorneys cannot breach confidentiality rules even if a client is committing a crime or a fraud. C) if the audit committee fails to remedy any material violations of the federal securities law, the attorney must report the violation to the SEC. D) All of the above are required by Sarbanes-Oxley

Auditing standards require auditors to evaluate whether there is substantial doubt about a client's ability to continue as a going concern. One of the most important audit procedures to perform to assess the going concern question is A) analytical procedures. B) confirmations from creditors. C) statistical sampling procedures. D) tests of internal controls.

Auditors are especially concerned about the ________ and ________ balance-related audit objectives because of the potential for understatements in the account balance. A) completeness; cutoff B) completeness; accuracy C) classification; realizable value D) classification; cutoff

Auditors are likely to prepare a proof of cash when the client has A) material internal control weaknesses in cash. B) material internal control weaknesses in accounts receivable and revenue. C) material internal control weaknesses in accounts payable and inventory. D) material internal control weaknesses in payroll.

You are gathering evidence for the audit objective that existing inventory items are included in the inventory listing schedule. The audit procedure that would provide you with the best evidence to confirm this objective is A) trace from inventory tags to the inventory listing schedule and make sure the inventory on the tags is included. B) trace the inventory totals to the general ledger. C) perform tests of lower-of-cost-or-market. D) account for unused tags shown in the auditor's documentation to make sure no tags have been added.

You are reviewing sales to discover cutoff problems. If the client's policy is to record sales when title to the merchandise passes to the buyer, then the books and records would contain errors if the December 31 entries were for sales recorded A) before the merchandise was shipped. B) at the time the merchandise was shipped. C) several days subsequent to shipment. D) at a time after the point at which title passed.

________ is an automated fraud detection tool offered by most banks. A) Positive pay B) A bank confirmation C) Fraud buster D) Check matching

________ tests are for omitted transactions, while ________ tests are for nonexistent transactions. A) Tracing; vouching B) Vouching; tracing C) Verifying; tracking D) Tracking; verifying

An attorney is aware of a violation of a patent agreement that could result in a significant loss to the client if it were known. This is an example of a(n) A) commitment. B) unasserted claim. C) pending litigation. D) subsequent event.

An audit procedure that compares the name, amount, and dates shown on remittance advices with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting A) kiting. B) lapping. C) unauthorized write-offs of customers as uncollectible accounts. D) sales without proper credit authorization.

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 A) merchandise received. B) vendors' invoices. C) canceled checks. D) receiving reports.

An auditor selects a random sampling of tag numbers and identifies the tag with that number attached to the actual inventory. The purpose of the procedure is to A) obtain proper cutoff information. B) uncover the inclusion of nonexistent items as inventory. C) determine if the client has adequately priced the inventory item. D) verify that the client has not changed the recorded counts after the auditor left the premises.

An imprest petty cash fund would least likely be used to pay for which of the following items? A) minor office supplies B) monthly interest expense C) stamps for small mailings D) small contributions to a local charity

As part of their internal control procedures, management needs to have procedures in place to properly classify financial instruments as trading, available-for-sale, or held-to-maturity, based on A) cost. B) intent. C) maturity. D) probable future gain or loss

Auditor confirmation of accounts payable balances at the balance sheet date may not need to be performed by the auditor because A) this is a duplication of cutoff tests. B) there is likely to be other reliable external evidence available to support the balances. C) accounts payable balances at the balance sheet date may not be paid before the audit is completed. D) correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment.

Auditor tests of the physical controls over raw materials, work in process, and finished goods are generally limited to A) observation and confirmation. B) observation and inquiry. C) inquiry and reconciliation. D) observation and reconciliation.

Auditors need to understand the client's physical inventory count controls before the count of the inventory begins so that A) the auditors can accurately count and tag the inventory for the client. B) the auditors can make constructive suggestions as to the adequacy of the procedures. C) the client will be informed on exactly what items the auditor intends to test count. D) the auditor can communicate any weaknesses directly to the audit committee.

Auditors will generally send a standard inquiry to the client's attorney letter to A) only those attorneys who have devoted substantial time to client matters during the year. B) every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion. C) every attorney whose legal fees for the year exceed a materiality threshold. D) only the attorney who represents the client in proceeding where the client is defendant

Auditors, as part of completing the audit, will request the client to send a standard inquiry to the client's attorney letter to those attorneys the company has been consulting with during the year under audit regarding legal matters of concern to the company. The primary reason the auditor requests this information is to A) determine the range of probable loss for asserted claims. B) obtain a professional opinion about the expected outcome of existing lawsuits and the likely amount of the liability, including court costs. C) obtain an outside opinion of the probability of losses in determining accruals for contingencies. D) obtain an outside opinion of the probability of losses in determining the proper footnote disclosure.

Because cash is the most desirable asset for people to steal, it has a higher A) control risk. B) inherent risk. C) detection risk. D) liquidity risk.

By tracing receiving reports issued at and before year-end to vendors' invoices and making sure they are included in accounts payable, the auditor is testing for A) theft of merchandise by employees. B) unrecorded obligations. C) lapping. D) kiting.

Determining if the financial instruments included in the schedule of investment activity at year-end are stated at appropriate amounts in accordance with accounting standards is the balance-related audit objective of A) materiality. B) realizable value. C) consistency. D) classification.

Financial instruments A) include debt securities and money market funds. B) such as derivatives can be used as a way of hedging. C) must be classified as held-to-maturity securities. D) All of the above are correct.

Handling the receipt of ordered goods is a part of the ________ cycle. A) purchasing B) acquisition and payment C) inventory D) inventory and warehousing

If a potential loss on a contingent liability is remote, the liability usually is A) disclosed in footnotes, but not accrued. B) neither accrued nor disclosed in footnotes. C) accrued and indicated in the body of the financial statements. D) disclosed in the auditor's report but not disclosed on the financial statements.

If an attorney refuses to provide the auditor with information about material existing lawsuits or unasserted claims, A) the attorney may face sanctions from the American Bar Association. B) the auditors must modify their audit report to reflect the lack of available evidence. C) the attorney can no longer represent the client. D) the auditor must withdraw from the engagement

If an auditor were concerned with obtaining evidence about the appropriateness of the value of inventory, which of the following tests would be most appropriate? A) compilation tests B) price tests C) confirmation of inventory held by outside parties D) physical examination of the inventory

In determining the reasonableness of the client's amount for depreciation expense the auditor is primarily concerned that the client has followed a consistent policy and the calculations are correct. Which of the following audit objectives best addresses the above concerns? A) existence B) accuracy C) valuation D) allocation

The audit procedure that requires an auditor to "foot the acquisition schedule" relates to which balance-related audit objective? A) classification B) detail tie-in C) existence D) cut-off

The auditor generally decides whether the inventory count can be taken before year-end primarily on the basis of A) audit efficiency. B) accuracy of the perpetual inventory master files. C) client convenience. D) audit staff availability.

The auditor is performing substantive tests of balances for accounts payable. What documentation would provide the best evidence for the ending balance? A) vendors' invoices B) vendors' statements C) receiving reports D) purchase orders

The auditor is performing tests of transactions for individual accounts payable transactions with vendors. Which document provides more reliable information about individual transactions with vendors? A) receiving report B) vendors' invoices C) vendors' statements D) purchase orders

The auditor needs to be aware that most users of financial statements rely most heavily on the ________ for making decisions. A) balance sheet B) income statement C) statement of cash flows D) statement of stockholders' equity

The auditor needs to gain reasonable assurance that the equipment accounts in the fixed asset master file are not understated. Which of the following accounts would most likely be reviewed in making that determination? A) depreciation expense B) repairs and maintenance expense C) gains/losses on sales and retirements D) cash

The auditor traces inventory tags identified as non-owned during the physical observation to the inventory listing schedule to make sure these have not been included. This test satisfies the balance-related audit objective of A) cutoff. B) rights. C) accuracy. D) existence.

The auditor's internal control objective to determine that "recorded acquisitions are for goods and services received" satisfies the audit objective of A) accuracy. B) occurrence. C) authorization. D) completeness.

The auditor's main objectives in the verification of the sale, trade-in, or abandonment of equipment are to gather sufficient appropriate evidence that all disposals are ________ and at the ________. A) verified; historical cost B) recorded; correct amounts C) accurate; proper gain or loss amount D) classified properly; net realizable value

The tests of details of balances procedure which requires the auditor to examine notes paid after year-end to determine whether they were liabilities at the balance sheet date is an attempt to satisfy the audit objective of A) existence. B) completeness. C) accuracy. D) classification.

Three conditions are required for a contingent liability to exist. Which of the following is not one of those conditions? A) There is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition. B) The outcome must be resolved by a third-party. C) There is uncertainty about the amount of the future payment or impairment. D) The outcome will be resolved by some future event or events.

To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditor should review and test the A) terms of the open purchase orders. B) purchase cutoff procedures. C) contractual commitments made by the purchasing department. D) purchase invoices received on or around year-end.

To determine if notes payable are included in the proper period, the auditor should A) trace the cash received from the issuance to the accounting records. B) examine duplicate copies of notes to determine whether the notes were dated on or before the balance sheet date. C) examine duplicate copies of notes for principal and interest rates. D) trace the individual notes payable to the master file.

Vendors' statements and vendors' invoices are both relatively reliable evidence because they A) come directly to the auditor without being in client's possession. B) originate from a third party. C) validate the effectiveness of the control system. D) are compared to and reconciled with sales invoices.

When positive confirmations are used, auditing standards require alternative procedures for confirmations not returned by the customer. Which of the following would not be considered an alternative procedure? A) Send a second confirmation request. B) Examine subsequent cash receipts to determine if the receivable has been paid. C) Examine shipping documents to verify that the merchandise was shipped. D) Examine sales invoice to verify the actual issuance of a sales invoice and the actual date of the billing.

When sales invoices are automatically calculated and posted by a computer, the auditor may be able to reduce substantive tests of transactions for which, if any, assertion? A) accuracy B) existence C) completeness D) none of the above

Which balance-related audit objective is important for uncovering both errors and fraud? A) completeness B) existence C) accuracy D) detail tie-in

Which of the following accounts is not associated with the acquisition and payment cycle? A) common stock B) property, plant and equipment C) accrued property taxes D) income tax expense

Which of the following audit procedures would be the most correct in determining the audit objective of existence for the equipment account in the fixed asset master file? A) Examine vendor invoices and receiving reports. B) Review transactions near the balance sheet date. C) Recalculate vendor invoices. D) Examine vendor invoices for correct accounting treatment.

Which of the following audit procedures would be the most effective in testing for nonexistent employees? A) Trace transactions recorded in the payroll journal to the human resources department to determine employment status. B) Examine cancelled checks for proper endorsement. C) Recalculate net pay. D) Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement.

Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern? A) review compliance with the terms of debt agreements B) confirmation of accounts receivable from principal customers C) reconciliation of interest expense with debt outstanding D) confirmation of bank balances

Which of the following balance-related audit objectives is not applicable to the audit of notes payable? A) realizable value B) detail tie-in C) cutoff D) classification

Which of the following balance-related audit objectives typically is assessed as having high inherent risk for cash? A) existence B) cutoff C) detail tie-in D) presentation and disclosure

Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account? A) Extraordinary repairs have lengthened the life of an asset. B) Prior years' depreciation charges were erroneously understated. C) A reserve for possible loss on retirement has been recorded. D) An asset has been recorded at its fair value.

Which of the following is a significant audit concern related to the transfer of inventory from one location to another? A) Recorded transfers occurred. B) Transfers were properly transported. C) Transfers were properly planned. D) Transfers represent efficient movement of assets.

Which of the following is an accurate statement regarding inventory and risk? A) Inventory with a high business risk includes products with potential obsolescence. B) Auditors often have a greater concern for misstatements when inventory is stored in one warehouse. C) Inherent risk is generally set at low for manufacturing companies. D) Performance materiality for inventory is determined before assessing client business risk.

Which of the following is not a typical audit procedure performed as part of the out-of period liability tests? A) Examine underlying documentation for cash disbursements made during the last month of the year. B) Examine underlying documentation for bills not paid several weeks after the year-end. C) Trace receiving reports issued before year-end to related vendors' invoices. D) All of the above are correct.

Which of the following should be audited on the interbank transfer schedule? A) Receipts on the interbank transfer schedule should be correctly included in or excluded from year-end bank reconciliations as deposits in transit. B) Disbursements on the interbank transfer schedule must always be shown as outstanding checks. C) The interbank transfers cannot be recorded in both the receiving and disbursing banks. D) All transfers that occurred for the month before and the month after the year-end must be included on the interbank transfer schedule.

Which of the following should sign checks under conditions of effective internal control? A) treasurer B) purchasing agent C) accounts payable clerk D) person preparing the checks

Which of the following statements is most correct about an auditor's required communication with management and those charged with corporate governance? A) The auditor is required to inform those charged with governance about significant errors discovered and subsequently corrected by management. B) Any significant matter reported to those charged with governance must also be communicated to management. C) Communication is required before the audit report is issued. D) The auditor does not have any requirement to communicate with anyone other than the company's senior management.

You are auditing the inventory account and are concerned about the possibility of an inventory overstatement. What is the best audit procedure to detect damaged inventory? A) Observe the condition of inventory during the client's physical count. B) Compare the condition of inventory from the previous year's count to the current year. C) Compare inventory turnover from the previous year's inventory to the current year's inventory. D) Reconcile the inventory counts to the cost accounting records.

You are auditing the long-term notes payable account for a client. Which of the following audit procedures would you most likely employ? A) Compare interest expense recorded by the client with the notes payable account for reasonableness. B) Confirm bonds payable with individual bond holders. C) Perform analytical procedures on the bond discount or premium account. D) Examine bond documents for the presence of hybrid securities.

When a client uses perpetual inventory records, the tests of details of balances for inventory can be significantly reduced if the auditor believes the records are accurate. The controls over the acquisitions included in the records are normally tested as a part of the A) tests of controls for acquisitions. B) tests of controls and substantive tests of transactions for acquisitions. C) tests of details of balances for acquisitions. D) analytical procedures and tests of controls for acquisitions.

When a company maintains its own records of stock transactions and outstanding stock, internal controls must be adequate to ensure that A) actual owners are recorded in the bylaws. B) the correct amount of dividends is paid to stockholders owning the stock on the dividend record date. C) the correct amount of dividends is paid to stockholders owning the stock on the declaration date. D) actual owners are recorded in the minutes.

When an acquisition is on an FOB origin basis, the inventory and related accounts payable must be recorded in the current period if the goods were A) received prior to the balance sheet date. B) shipped on or before the balance sheet date. C) both shipped and received prior to the balance sheet date. D) paid for in advance

When auditing prepaid insurance, A) for many audits, significant substantive procedures are needed if the control risk is low. B) companies often have a standard monthly journal entry to reclassify prepaid insurance as insurance expense. C) the emphasis in the tests of details of balances is on insurance expense. D) the auditor must prepare the insurance register

When auditors observe the client counting inventory, they should be careful to do all of the following except A) inquire about items that are likely to be obsolete or damaged. B) calculate the unit cost of the inventory items. C) discuss with management the reasons for excluding any material items. D) observe the counting of the most significant items.

When dealing with contingencies, A) all contingencies must be disclosed or footnoted. B) the auditor must exercise considerable professional judgment when evaluating whether the client has applied the appropriate treatment. C) it is easy for the auditor to uncover contingencies without management's cooperation. D) the review for contingent liabilities is only performed at the beginning and the end of the audit.

When designing tests of details of balances, an important point to remember is A) auditors emphasize income statement accounts. B) the audit procedures selected depends heavily on whether planned evidence for a given objective is low, medium, or high. C) if accounts receivable are overstated, then sales will be understated. D) sales cutoff is the most important test of details of accounts receivable.

When determining sample sizes for accounts payable tests, A) sample sizes rarely vary from audit to audit. B) auditors must try to ensure that the population includes all potential payables. C) defining the population is a simple procedure. D) all of the above are correct.

When determining the sample size for the number of items the auditor should count during the physical inventory, A) it is easy to quantify the number of items based on a formula developed by the AICPA. B) one of the key determinants that must be considered is internal control over the physical count. C) one of the key determinants that must be considered is the cost involved. D) generally accepted auditing standards require that at least 80% of the dollar value of the inventory should be included in the sample.

When determining the timing of the accounts receivable confirmations, A) the receivables cannot be confirmed at an interim date. B) if accounts receivable are confirmed before year-end, the auditor typically prepares a rollforward schedule. C) if the receivables are confirmed at an interim date, they must also be confirmed at year-end. D) if internal controls are adequate, the accounts receivable must be confirmed at year-end.

When do most companies record sales returns and allowances? A) during the month in which the sale occurs B) during the accounting period in which the return occurs C) whenever the customer contacts the company regarding the credit D) during the month after the sale occurs

When examining payroll transactions, an auditor is primarily concerned with the possibility of A) incorrect summaries of employee time records. B) overpayments and unauthorized payments. C) under withholding of amounts required to be withheld. D) posting of gross payroll amounts to incorrect salary expense accounts.

When labor is a significant part of inventory, verifying the proper accounting of these costs should be tested in the A) inventory and warehousing cycle. B) payroll and personnel cycle. C) acquisitions and payments cycle. D) cash cycle.

When reviewing the summary of misstatements found in the audit A) an adjusting journal entry must be made by the auditor for all material misstatements. B) auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material. C) the auditor is not required to consider the impact on the current financial statements of misstatements in the prior year that were not corrected. D) auditors only need to consider the misstatements that impact the income statement

When should auditors not perform alternative procedures in testing the accounts receivable balance? A) when customers do not return positive confirmation requests B) when customers do not return negative confirmation requests C) when confirmations are deemed to be ineffective as an audit procedure D) when confirmations are too costly to use

When the auditor compares the cancelled check or direct deposit with the payroll journal for amount, they are concerned with the transaction-related audit objective of A) occurrence. B) accuracy. C) classification. D) timing

When the auditor sends a confirmation to the broker-dealer, they are testing the balancerelated audit objective of A) detail tie-in. B) existence. C) cutoff. D) rights.

When there are no perpetual inventory files and inventory is material, A) an audit cannot be performed, so the auditor must issue a disclaimer. B) a physical inventory should be taken by the client near the end of the accounting period. C) the auditor will have to perform the inventory count and determine valuation. D) the auditor need not observe inventory counts but must do test counts

When there are not numerous transactions involving notes payable during the year, the normal starting point for the audit of notes payable is A) a schedule of notes payable and accrued interest prepared by the audit team. B) a schedule of notes payable and accrued interest obtained from the client. C) a schedule of only those notes with unpaid balances at the end of the year prepared by the client. D) the notes payable account in the general ledger.

When using the probability threshold for contingencies, the likelihood of the occurrence of the event is classified as A) not likely, likely, or highly likely. B) remote, reasonably possible, or probable. C) slight, moderate, great. D) remote, likely, possible.

Which of the following is not a key control in the acquisition and payment cycle? A) authorization of purchases B) authorization of credit C) timely recording and independent review of transactions D) authorization of payments

Which of the following is not an important control over notes payable? A) There is proper authorization over the issuance of new notes payable. B) Notes payable are issued when the business climate is favorable. C) Adequate controls exist over repayment of interest and principal. D) There exist proper documents and records.

Which of the following is not an objective of the auditor's examination of notes payable? A) to determine whether internal controls are adequate B) to determine whether client's financing arrangements are effective and efficient C) to determine whether transactions regarding the principal and interest of notes are properly authorized D) to determine whether the liability for notes and related interest expense and accrued liabilities are properly stated

Which of the following is the most effective control procedure to detect vouchers that were prepared for the payment of goods that were not received? A) Count goods upon receipt in storeroom. B) Match purchase order, receiving report, and vendor's invoice for each voucher in accounts payable department. C) Compare goods received with goods requisitioned in receiving department. D) Verify vouchers for accuracy and approval in internal audit department.

Which of the following most likely would be detected by a review of a client's sales cutoff? A) excessive sales discounts B) unrecorded sales for the year C) unauthorized goods returned for credit D) lapping of year-end accounts receivable

Which of the following statements about the audit of fixed assets is the least correct? A) The primary accounting record for manufacturing equipment and other property, plant and equipment is generally a fixed asset master file. B) Manufacturing equipment and current assets are normally audited in the same fashion regardless of the activity within a particular account. C) The emphasis on auditing fixed assets is on verification of current-period acquisitions. D) Failure to record the acquisition of a fixed asset affects the income statement until the assets are fully depreciated.

Which of the following statements is correct regarding the capital acquisition and payment cycle? A) Bonds are frequently issued by companies in small amounts. B) There are relatively few transactions and each transaction is typically highly material. C) A primary emphasis in auditing debt is on existence. D) Audit procedures for notes payable and interest income are often performed simultaneously

Which of the following statements is false? A) The payroll cycle consists of one class of transactions. B) Balance sheet accounts related to payroll are generally more significant than related transactions. C) Internal controls over payroll are effective for most companies. D) Small companies usually have effective controls over payroll.

Which of the following subsequent events is most likely to result in an adjustment to a company's financial statements? A) merger or acquisition activities B) bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance C) issuance of common stock D) an uninsured loss of inventories due to a fire

Which of the following test of controls is useful to test the completeness objective for cash receipts? A) Compare shipping documents with sales records. B) Observe endorsement of incoming checks. C) Examine evidence that the receivable master file is reconciled to the general ledger. D) Observe if the client reconciles the bank account.

Which of the following would have the least amount of importance regarding controls over the processing of payroll? A) The person authorized to sign paychecks should not be otherwise involved in the preparation of the payroll. B) A check-signing machine should not be used to replace a manual signature. C) Distribution of pay checks should be performed by someone who is not involved in the other payroll functions. D) Unclaimed paychecks should be immediately returned for redeposit.

Which of the following would normally be discovered as part of the audit of the bank reconciliation? A) failure to bill a customer B) failure to include a deposit in transit on the bank reconciliation C) duplicate payment of a vendor's invoice D) payment to an employee for more hours than she worked

Which one of the following procedures would not be appropriate for an auditor in discharging his responsibilities concerning the client's physical inventories? A) confirmation of goods in the hands of public warehouses B) supervising the taking of the annual physical inventory C) carrying out physical inventory procedures at an interim date D) obtaining written representation from the client as to the existence, quality, and dollar amount of the inventory

You are auditing Rodgers and Company. You are aware of a potential loss due to noncompliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to A) accrue a $4 million liability. B) disclose a liability and provide a range of outcomes. C) since there is less than a 50% chance of occurrence, ignore. D) since there is greater that a remote chance of occurrence, accrue the $10 million.

You are performing an audit of Hawk Company. In evaluating the accounts payable balance you are concerned with the completeness assertion. Which of the following audit procedures best satisfies your concern? A) Send confirmations to only vendors with large balances. B) Send confirmations to vendors with large, active, zero balance accounts and a representative sample of all others. C) Send confirmations to vendors chosen from sample stratified by the dollar balance. D) Send confirmations to all vendors.

You are performing the audit of Jenkins and Company. Your tests of controls and tests of transactions for accounts payable demonstrate that the controls are operating effectively. This would normally allow you to A) eliminate the need for substantive testing of balances for accounts payable. B) reduce the need for substantive testing of balances for accounts payable. C) reduce control tests in other transactions cycles. D) increase the need for substantive testing of balances for accounts payable.

________ accumulate costs by individual jobs as material is issued into production and labor costs are incurred. A) Just-in-time production systems B) Job cost systems C) Process cost systems D) Manufacturing systems

________ is not a transaction-related audit objective for the classes of transactions underlying the payroll cycle. A) Classification B) Existence C) Timing D) Completeness

After the balance sheet date, but prior to the issuance of the audit report, the client suffers an uninsured loss of their inventory as a result of a fire. The amount of the loss is material. The auditor should A) adjust the financial statements for the year under audit. B) add a paragraph to the audit report. C) advise the client to disclose the event in the notes to the financial statements. D) advise the client to delay issuing the financial statements until the economic loss can be determined.

All of the following are owners' equity accounts except for A) common stock. B) paid-in-capital in excess of par. C) sales. D) retained earnings.

Although significant client business risks affecting payroll are unlikely for most companies, an area that would have the most business risk would be A) payment of hourly employees. B) payment of salaried employees. C) payments to employees for stock options and bonus plans. D) payments to employees who have direct deposit of their payroll checks.

An auditor has the responsibility to actively search for subsequent events that occur subsequent to the A) balance sheet date. B) date of the auditor's report. C) balance sheet date, but prior to the audit report. D) date of the management representation letter.

An auditor is comparing the write-off of uncollectible accounts as a percentage of total accounts receivable with previous years. A possible misstatement this procedure could uncover is A) overstatement or understatement of sales. B) overstatement or understatement of accounts receivable. C) overstatement or understatement of bad debt expense. D) overstatement or understatement of sales returns and allowances

An auditor is determining whether an issuance of notes payable for cash was correctly recorded. Her best course of action would be to A) confirm with the bond trustee as to the amount of bonds issued. B) confirm with the underwriter as to the appropriate market yield on the bonds. C) trace the cash received from the proceeds to the accounting records. D) verify that the amount was included in a footnote disclosure.

An auditor is gathering evidence on the completeness assertion. To do so, she performs a test to verify that all goods received by the company have been recorded properly. The document population for this test would consist of all A) vendor invoices. B) purchase orders. C) receiving reports. D) cash disbursements for accounts payable.

An auditor must inquire about consigned or customer inventory included on the client's premises to satisfy the balance-related audit objective of A) cutoff. B) classification. C) rights. D) completeness.

An auditor must obtain written client representations that might be signed by all but which of the following? A) treasurer B) chief financial officer C) vice president of operations D) chief executive officer

An auditor traces a sample of electronic time cards before and after the bi-weekly payroll report and then traces to the payroll master file to determine that payroll transactions are reported in the correct period. The auditor is gathering evidence for which audit objective? A) completeness B) existence C) cut-off D) accuracy

Any company with stock listed on a securities exchange is required to engage a(n) A) equity analyst. B) stock transfer agent. C) independent registrar. D) equity placement specialist

Assume that the client's valuation of an inventory item is $10 per unit for 1,000 units, using first-in, first-out (FIFO). If the most recent acquisition of inventory was for 600 units at $10 per unit and the immediately preceding acquisition was for 700 units at $9 per unit, the inventory item is in error and it is A) understated $400. B) understated $300. C) overstated $400. D) overstated $700.

At what point do most companies recognize liabilities in the acquisition and payment cycle when the goods are shipped FOB destination? A) when the purchase order is issued B) when the vendor acknowledges receipt of the order C) when the goods or services are received D) when the vendor invoice is received

Auditing standards require that the auditor evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least A) one quarter beyond the balance sheet date. B) one quarter beyond the date of the auditor's report. C) one year beyond the balance sheet date. D) one year beyond the date of the auditor's report.

Auditing standards require the auditor to ________ other information included in annual reports pertaining directly to the financial statements. A) audit B) express an opinion on C) read D) analyze

Auditors are especially concerned with three aspects of internal control for the sales and collection cycle. Which of the following is not one of their major concerns? A) controls over cutoff B) controls that prevent or detect embezzlements C) controls over sales discounts D) controls related to the allowance for uncollectible accounts

Auditors of accelerated filer public companies A) are responsible for reviewing subsequent events for a period of up to six months after the balance sheet date. B) must always dual-date their audit reports. C) must inquire about and consider any information about subsequent events that materially affects the effectiveness of internal control over financial reporting. D) must perform all of the above procedures.

Because of its central role in auditing of accounts receivable, which of the following would normally be one of the first items tested? A) accounts receivable master file B) customer file C) aged trial balance D) sales register

Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements, it is common in this audit area to use A) block sampling. B) variables sampling. C) attributes sampling. D) probability proportional to size sampling.

Because the failure to record disposals of property, plant, and equipment can significantly affect the financial statements, the search for unrecorded disposals is essential. Which of the following is not a procedure used to verify disposals? A) Make inquiries of management and production personnel about the possibility of the disposal of assets. B) Review whether newly acquired assets replace existing assets. C) Test the valuation of fixed assets recorded in prior periods. D) Review plant modifications and changes in product line, property taxes, or insurance coverage.

Before goods are shipped on account, a properly authorized person must A) prepare the sales invoice. B) approve the journal entry. C) approve the customer's credit. D) verify that the unit price is accurate.

Boxes or other containers holding inventory should also be opened during test counts to determine the ________ of the inventory. A) classification B) detail tie-in C) existence D) realizable value

Confirmation of accounts receivable balances normally provides evidence concerning the A) valuation of the balances. B) rights of the balances. C) existence of the balances. D) completeness of the balances.

Controls which provide a means of ensuring that the physical counts are properly summarized, priced at the same amount as the unit records, correctly extended and totaled, and included in the general ledger at the proper amount are known as A) standard cost controls. B) pricing internal controls. C) compilation internal controls. D) count quantity internal controls.

Cost accounting controls are those related to the physical inventory and the consequent costs from the point at which A) materials are ordered for purchase until the finished product is sold. B) the customer's order is received until the finished product is shipped. C) raw materials are requisitioned until the finished product is sent to storage. D) raw materials are requisitioned until the finished product is completely manufactured

Cutoff information for inventory acquisitions should be obtained during A) the interim period prior to year-end. B) the interim period immediately following year-end. C) the physical observation of inventory. D) either the interim period prior to or immediately following year-end.

Cutoff procedures for inventory purchased should be designed by companies to assure that A) inventory owned by the company has been received. B) inventory included in the year-end inventory count has been paid. C) inventory received before year-end was recorded before year-end. D) inventory was correctly valued at year-end.

Factors that impact inherent risk of financial instruments do not include A) management's objectives related to investment activity. B) the complexity of the securities. C) the cost of the securities. D) the company's prior experience with certain investments.

For effective internal control purposes, the accounts payable department generally should A) approve the purchase order. B) have the authority to sign the checks. C) establish the agreement of the vendor's invoice with the receiving report and purchase order. D) supervise the preparation of the receiving report.

For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve A) employee overtime wages. B) credit granted to customers. C) write-offs of customer accounts. D) cash disbursements.

For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the improper cutoff of cash A) is detected and correct when cash is separately audited. B) is unlikely to have a material impact on the balance sheet or the income statement. C) affects items on the balance sheet but does not affect net income. D) rarely occurs given the control consciousness of most entities.

For which of the following accounts is cutoff least important? A) sales B) sales returns and allowances C) cash collections D) inventory

Generally accepted accounting principles require that revenue be reported net of sales returns and allowances A) if practical. B) if required by industry practice. C) if the amounts are material. D) any of the above

If a client intends to count inventory at an interim date, the auditor should expect there to be all of the following except A) controls over the preparation and maintenance of perpetual inventory records. B) competent personnel assigned to count the inventory. C) third-party inventory counting specialists. D) an adequately designed plan to count the inventory

If a company employs a capital stock registrar and/or transfer agent, the registrar or agent, or both, should be requested to confirm directly to the auditor the number of shares of each class of stock A) surrendered and canceled during the year. B) authorized at the balance sheet date. C) issued and outstanding at the balance sheet date. D) sold at a price above par during the year.

If the auditor concludes that physical controls over inventory are so inadequate that the inventory will be difficult to count, the auditor should ordinarily A) withdraw from the engagement. B) issue a qualified audit report. C) conduct expanded observation tests of physical inventory. D) hire a specialist to assist the auditor

If the auditor decides not to confirm accounts receivable that are material, the auditor should A) always use alternative procedures to audit the accounts receivable. B) include copies of customer statements in the audit files. C) document the reasons for such a decision in the audit files. D) include copies of customer sales invoices in the audit files.

If the perpetual inventory master files show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded A) sales. B) sales discounts. C) purchases. D) purchase discounts

In an effort to satisfy the completeness objective, the auditor could perform which of the following test of details of balance procedures? A) Trace the book balance on the reconciliation to the general ledger. B) Trace outstanding checks to subsequent period bank statements. C) Perform a four-column proof of cash. D) Review financial statements to make sure that material savings accounts and certificates of deposit are disclosed separately.

In connection with a review of the prepaid insurance account, which of the following audit procedures would you be least likely to use? A) Recompute the portion of the premium that expired during the year. B) Prepare excerpts of insurance policies for audit working papers. C) Confirm premium rates with an independent insurance broker. D) Examine support for premium payments.

In determining that the accounts payable cutoff is correct, it is essential that the cutoff tests be coordinated with the A) confirmation of payables. B) tests of long-term liabilities. C) observation of inventory. D) cash count.

In many audits, no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern. A) accuracy B) existence C) completeness D) none of the above

In searching for unrecorded liabilities the purpose of the audit procedure to "examine underlying documentation for subsequent cash disbursements" is to A) uncover liabilities on the balance sheet which should not have been recorded until a subsequent period. B) find the documentation relating to a cash disbursement. C) uncover payments made in a subsequent accounting period for liabilities that existed at the balance sheet date. D) uncover cash disbursements recorded in a subsequent accounting period which should be recorded in this period.

In the flow of inventory and costs, when work-in-progress is credited, ________ is (are) debited. A) raw materials B) cost of goods sold C) finished goods D) direct labor

With respect to a small company's system of purchasing supplies, an auditor's primary concern should be to obtain satisfaction that supplies ordered and paid for have been A) requested by and approved by the same individual. B) used in the course of business and solely for business purposes during the year under audit. C) received, counted, and checked to quantities and amounts on purchase orders and invoices. D) properly recorded as assets and systematically amortized over the estimated useful life of the supplies.

With which of the following client personnel would it generally not be appropriate to inquire about commitments or contingent liabilities? A) controller B) president C) accounts receivable clerk D) vice president of sales

You are auditing Manufacturing Company and testing the audit related objective of completeness for the equipment accounts. Which of the following audit procedures is most likely to achieve your objective? A) Examine vendor invoices and receiving reports. B) Physically examine assets. C) Examine vendor invoices of closely related accounts such as repairs and maintenance. D) Trace individual acquisitions to the fixed asset master file.

You are auditing the acquisition and payment cycle and note the presence of excessive recurring losses on retired assets. You may conclude that A) insured values are greater than book values. B) there are a large number of fully depreciated assets. C) depreciation charges may by insufficient. D) the company has a policy of selling relatively new assets.

You are the in-charge auditor and are designing audit procedures for accounts payable. Which of the following management assertions would you normally be most concerned about? A) occurrence B) accuracy C) completeness D) existence

________ expense is rarely analyzed unless analytical procedures indicate high potential for material misstatement. A) Repairs and maintenance B) Legal C) Utilities D) Rent and lease

________ is normally characterized as a difficult and complex account to audit. A) Property, plant and equipment B) Cash C) Inventory D) Prepaid insurance

Master files, spreadsheets, and reports that accumulate material, labor, and overhead as the costs are incurred are A) accounting systems. B) storeroom documents. C) cost accounting records. D) finished goods inventory records.

Matching the supplier's invoice, the purchase order, and the receiving report prior to preparing the voucher would normally be the responsibility of the A) warehouse receiving function. B) purchasing function. C) general accounting function. D) treasury function.

Most companies recognize sales revenue when A) sales are invoiced. B) payment is received from the customer. C) goods are shipped. D) the customer's order is received

No individual with access to time cards, payroll records, or checks should also be permitted access to A) the computer. B) job time tickets. C) personnel records. D) the canceled check file.

One of the primary approaches in dealing with uncertainties in loss contingencies uses a(n) ________ threshold. A) monetary B) materiality C) probability D) analytical

One of the shortcomings in evaluating the allowance for uncollectible accounts by reviewing individual noncurrent balances on the aged trial balance is I. it is difficult to compare the results of the current year with those of the previous year. II. current accounts are ignored in establishing the adequacy of the allowance. A) I only B) II only C) both I and II D) neither I nor II

Performance materiality is often set at a(n) ________ level for notes payable. A) high B) moderate C) low D) unknown

Pricing manufactured inventory is difficult. Auditors must evaluate the method of allocating manufacturing overhead for all but which of the following? A) reasonableness B) computational correctness C) compliance with generally accepted auditing standards D) consistency

Procedures that may uncover fraud in the cash receipts area include A) confirmation of accounts payable. B) comparison of purchase orders to invoices. C) tests performed to detect lapping. D) all of the above.

Some companies have customers send payments directly to an address maintained by a bank. This is called a(n) ________ system. A) direct deposit B) funds transfer C) lockbox D) interbank transfer

The accounts payable department usually has responsibility for approving acquisitions for payment by comparing the details on the A) vendor's invoice and the receiving report. B) vendor's invoice and the purchase requisition. C) purchase order, receiving report, and vendor's invoice. D) purchase requisition, purchase order, and receiving report.

The amount of time spent verifying owners' equity is frequently minimal for closely held corporations because A) these companies are so small that it is not necessary to audit the capital section. B) the few owners all have access to the books so the auditor spends more time on accounts like liabilities, which affect outsiders. C) there are few if any transactions during the year for the capital stock accounts, except for earnings and dividends. D) there is no public interest in these companies.

The audit firm issues an audit report for its client. The auditors have no obligation to make further inquiries with respect to the client's audited financial statements unless A) a development occurs that may affect the company's long term viability as a company. B) final resolution was made on disclosed contingency for which no liability needed to be accrued. C) new information comes to the auditor's attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion. D) a lawsuit, in which the risk of loss was considered remote, was resolved in the company's favor.

The audit objective of determining that cash in bank, as stated on the reconciliation, foots correctly and agrees with the general ledger can be tested by which of the following procedures? A) performing tests for kiting B) receiving and testing a cutoff bank statement C) proving the bank reconciliation as to additions and subtractions, including all reconciling items D) examining the minutes of the board of directors for restrictions on the use of cash

To make a final evaluation as to whether sufficient appropriate evidence has been accumulated, the auditor will do all of the following except A) review the audit documentation for the entire audit to determine whether all material classes of transactions have been adequately tested. B) make sure that all parts of the audit program have been accurately completed and documented. C) obtain the management representation letter. D) decide whether the audit program is adequate

When testing for fraudulent hours or fraudulent expense reports A) it is easy for the auditor to discover fraudulent hours because of the abundance of available evidence. B) it is difficult to prevent fraud in these two areas with adequate internal controls. C) management falsification of expense reports can be an indicator of disregard for internal controls and the potential for fraud in other areas. D) examining payroll records for approval is an important substantive tests of transactions to uncover fraudulent hours.

Which department should be authorized to add and delete employees from the payroll or change pay rates and deductions? A) the supervising department B) the accounting department C) the human resources department D) the treasurer's department

Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor's report would not require disclosure in the financial statements? A) sale of a bond or capital stock issue B) loss of plant or inventories as a result of fire or flood C) a significant decline in the market price of the corporation's stock D) a merger or acquisition

Which of the following audit objectives is least important in the audit of capital stock and paid-in-capital in excess of par? A) completeness B) accuracy C) rights and obligations D) presentation and disclosure

Which of the following audit procedures would not likely detect a client's decision to pledge or factor accounts receivable? A) a review of the minutes of the board of directors' meetings B) discussions with the client C) confirmation of receivables D) examination of correspondence files

Which of the following audit tests would provide evidence regarding the balance-related audit objective of existence for an audit of notes payable? A) Examine due dates on duplicate copies of notes. B) Examine balance sheet for proper presentation and disclosure of notes payable. C) Examine corporate minutes for loan approval. D) Foot the notes payable list for notes payable and accrued interest.

Which of the following best describes effective internal control over payroll? A) The preparation of the payroll must be under the control of the personnel department. B) The confidentiality of employee payroll data should be carefully protected to prevent fraud. C) The duties of hiring, payroll computation, and payment to employees should be segregated. D) The payment of cash to employees should be replaced with payment by checks.

Which of the following best describes the systems of internal control for payroll for large companies? A) loosely structured but well controlled B) loosely structured and loosely controlled C) highly structured and well controlled D) highly structured but loosely controlled

Which of the following expenses is not typically evaluated as part of the audit of the acquisition and payment cycle? A) depreciation expense B) insurance expense C) estimated liability for warranties D) property tax expense

Which of the following groups has the responsibility for identifying and deciding the appropriate accounting treatment for recording or disclosing contingent liabilities? A) auditors B) legal counsel C) management D) management and the auditors

Which of the following is a correct statement? A) The proof of cash receipts is a test of the balance in the cash account at a point in time. B) The proof of cash disbursements is effective for discovering a check written for the incorrect amount for which the dollar amount in cash disbursements is also incorrect. C) It is extremely difficult for an auditor to detect thefts of cash, especially omitted transactions and account balances. D) Segregation of duties is not an important control procedure for cash in a small business.

Which of the following is a substantive test of transactions? A) Review personnel policies. B) Account for a sequence of payroll checks. C) Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement. D) Examine printouts of transactions rejected by the computer as having invalid employee IDs.

Which of the following is an accurate statement regarding audit documentation review? A) The audit partner must review the work of the least experienced auditor in more detail than the work of the audit supervisor. B) The audit senior must review all audit documentation. C) For larger audits, it is common to have the financial statements and the entire set of audit files reviewed by someone who has not participated in the audit, but is a member of the audit firm doing the audit. D) Checklists can never be used to verify that all financial statement disclosures have been made.

Which of the following is an accurate statement regarding perpetual inventory master files? A) When perpetual inventory master files are accurate, auditors can test the physical inventory after the balance sheet date. B) It is a difficult procedure for the auditor to test the accuracy of the perpetual inventory master files. C) Auditors test the perpetual records for reductions in finished goods for sale as part of the sales and collection cycle. D) All of the above are accurate statements.

Which of the following is likely to be detected as part of the audit of the bank reconciliation? A) failure to bill a customer B) duplicate payment of a vendor invoice C) cash received by the client after year-end, but included in cash receipts in the current year D) an embezzlement of cash by intercepting cash receipts from customers before they are recorded

Which of the following is most reliable for verifying the correct balance of accounts payable? A) vendors' invoices B) vendors' statements C) confirmations D) bills of lading

Which of the following is not a correct statement regarding business risk and financial instruments? A) Business risks associated with financial instruments will vary depending of the aggressiveness of a company's investing activity. B) Business risk will be higher for companies investing in less liquid securities. C) Financial services firms are exposed to very little risk with their financial instruments. D) Business risk for a company will be higher when investments represent a greater proportion of total assets.

Which of the following is not one of the business functions for the payroll and personnel cycle? A) payment of payroll B) timekeeping and payroll preparation C) reconciliation of payroll account D) human resources and employment

Which of the following is the best way for an auditor to determine that every name on a company's payroll for the Rodgers factory is that of a bona fide employee presently on the job? A) Examine personnel records for accuracy and completeness. B) Examine employees' names listed on payroll tax returns for agreement with payroll accounting records. C) Make a surprise observation of the company's regular distribution of paychecks. D) Visit the working areas and confirm with employees their badge or identification numbers.

Which of the following is the principle "weakness" of using negative confirmations for the tests of details of balances for accounts receivable? A) They can only be used for large balance accounts. B) They cannot not be used when account balances "bunch" around a mean value. C) Conclusions drawn from receiving no reply may not be correct. D) Response rates are generally too low to draw any conclusions

Which of the following items would not normally appear on bank reconciliations? A) balance per bank B) list of deposits in transit C) outstanding deposits D) outstanding checks

Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued? A) loss of a plant as a result of a flood B) sale of long-term debt or capital stock C) settlement of litigation in excess of the recorded liability D) major purchase of a business that is expected to double the sales volume

Which of the following misstatements is most likely to be uncovered during an audit of a client's bank reconciliation? A) duplicate payment of a vendor's invoice B) billing a customer at a lower price than indicated by company policy C) failure to record a collection of a note receivable by the bank on the client's behalf D) payment to an employee for more than the hours actually worked

Which of the following statements is correct regarding the audit of dividends? A) The emphasis is on the ending balance in the dividends account. B) When auditors verify that the dividends are paid to stockholders that exist, they are concerned with the completeness objective. C) If the client uses a transfer agent to disburse dividends, the total can be traced to a cash disbursement entry to the agent and also confirmed. D) All of the above are correct statements.

Which of the following statements is correct regarding the audit of inventory cost accounting? A) Cost accounting systems and controls are the same for all manufacturing companies. B) All companies that have work-in-process must use a perpetual inventory system. C) Auditors test perpetual inventory master files by examining documentation that supports additions and reductions of inventory amounts in the master files. D) Manufacturing companies keep their cost accounting records separate from the production and other accounting records.

A positive confirmation is more reliable evidence than a negative confirmation because A) fewer confirmations can be sent out. B) the auditor has a document which can be used in court. C) the debtor's lack of response indicates agreement with the stated balance. D) follow-up procedures are performed if a response is not received from the debtor.

A procedure to test for a cash receipts cutoff error is A) reconciling the bank statement. B) performing a four-column proof-of-cash. C) observing the counting of cash at the balance sheet date. D) tracing recorded cash receipts to subsequent period bank deposits on the bank statement.

A proof of cash is effective at identifying which of the following misstatements? A) checks written for an improper amount B) checks issued to invalid vendors C) fraudulent checks D) checks recorded in the books for an amount different from that on the check

A proof of cash is not an effective procedure for identifying which of the following types of misstatements? A) All recorded disbursements were paid by the bank. B) All recorded cash receipts were deposited. C) All amounts that were paid by the bank were recorded. D) Some checks were written for incorrect amounts.

A schedule of investment activity will include all of the following except A) the purchases and sales. B) ending balances. C) the gains and losses. D) the opinion of management as to the suitability of the investment to the company.

A useful starting point for becoming familiar with the client's inventory is for the auditor to A) read the AICPA's Industry Audit Guide. B) review accounting theory covering special inventory problems. C) read the client's accounting manual. D) tour the client's facility.

An auditor needs to determine whether all customers of an electric utility company are being billed. The auditor should test from the A) sales register to the accounts receivable ledger. B) sales register to the meter department records. C) accounts receivable ledger to the sales register. D) meter department records to the sales register.

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is to satisfy the audit objective of A) accuracy. B) existence. C) control. D) completeness

An imprest petty cash fund A) is a bank account. B) is used for large, unusual purchases. C) is usually reimbursed at least once a week for good internal control. D) is being replaced by pre-approved purchase cards in many companies.

As a part of the auditor's responsibility for ________, the auditor should review the preparation of at least one of each type of payroll tax form the client is responsible for filing. A) fraud awareness B) doing tests of balances C) doing tests of transactions D) understanding the client's internal controls

Assessed control risk and results of substantive tests of transactions are normally unimportant for designing tests of details of balances for which of the following accounts? A) accounts receivable B) inventory C) accounts payable D) notes payable

At the completion of the audit, management is asked to make a written statement that it is not aware of any undisclosed contingent liabilities. This statement would appear in the A) management letter. B) letter of inquiry. C) letters testamentary. D) management letter of representation.

Audit procedures related to contingent liabilities are initially focused on A) accuracy. B) completeness. C) existence. D) occurrence.

Auditing standards require the auditor to communicate all management frauds and illegal acts to the audit committee A) only if the act is immaterial. B) only if the act is material. C) only if the act is highly material. D) regardless of materiality.

Auditors test the quantity of materials charged to work-in-process by tracing these quantities to A) cost ledgers. B) perpetual inventory records. C) receiving reports. D) material requisitions.

Auditors usually test cost accounting records as part of the A) acquisition tests. B) payroll tests. C) sales tests. D) All of the above are correct.

Communication addressed to the debtor requesting him or her to confirm whether the balance as stated on the communication is correct or incorrect is a A) representation letter. B) negative confirmation. C) bank confirmation. D) positive confirmation.

Comparing the physical counts with the perpetual inventory master files satisfies the balancerelated audit objective of A) classification. B) observation. C) completeness. D) accuracy.

Controls over the acquisition and recording of insurance are a part of which of the following transaction cycles? A) inventory and warehousing cycle B) capitalization cycle C) treasury cycle D) acquisition and payment cycle

Failure to capitalize a fixed asset at the correct amount would impact which financial statements? A) the balance sheet only B) the income statement only C) the cash flow statement only D) both the income statement and the balance sheet

Failure to record the acquisition of goods is a violation of which audit objective? A) accuracy B) occurrence C) authorization D) completeness

If an auditor waits until the subsequent period bank statement is available to verify reconciling items, it is primarily a test for A) errors. B) omissions. C) kiting. D) intentional misstatements

If material, all of the following are required to be separately disclosed in the financial statements except for A) accounts receivable from officers. B) accounts receivable from affiliates. C) sales and assets for different business segments. D) sales for the last ten days of the fiscal year.

If the auditor concludes that there are contingent liabilities, he or she must evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements. Which of the following statements is not true? A) The potential liability is sufficiently well known in some instances to be included in the financial statements as an actual liability. B) Disclosure may be unnecessary if the contingency is highly remote or immaterial. C) A CPA firm often obtains a separate evaluation of the potential liability from its own legal counsel rather than relying on management or management's attorneys. D) The client's attorneys must remain independent when evaluating the likelihood of losing the lawsuit.

Improperly classifying a fixed asset by recording the amount in the repairs and maintenance expense account will have an effect on which of the following financial statements until the asset would normally have been depreciated? A) the balance sheet B) the income statement C) the cash flow statement D) both the income statement and the balance sheet

In most manufacturing companies, the inventory and warehousing cycle begins with the A) receipt of a customer's order. B) completion of production of a customer's order. C) initiation of production of a customer's order. D) acquisition of raw materials for production.

In testing acquisitions the auditor needs to understand the appropriate accounting guidance related to acquisition accounting. Which of the following is not an accounting consideration for the auditor as regards to acquisition cost? A) inclusion of material transportation and installation costs B) recording of trade-in costs C) allocating costs when building and equipment are purchased at one price D) verifying that purchased equipment amounts correspond to the budgeted amount

In the accounts receivable master file, the length of time the account has been due can be useful to the client and the auditor in preparing the A) trial balance. B) working trial balance. C) accounts receivable trial balance. D) aged accounts receivable trial balance

Which of the following is correct regarding supplementary information? A) The auditor must express an opinion on the supplementary information. B) When reporting on supplementary information, the auditor uses a different materiality threshold from that used in forming an opinion on the basic financial statements. C) If the auditor's report on the audited financial statements contains an adverse opinion, the auditor can still issue an unqualified opinion on the supplementary information. D) The auditor can issue a separate report on the supplementary information; it does not need to be part of the report on the financial statements.

Which of the following is not a "cash equivalent"? A) time deposits B) certificates of deposit C) money market funds D) marketable securities

Which of the following is not a correct statement regarding fraudulent hours? A) Fraudulent hours occur when an employee reports more time than was actually worked. B) It is difficult for an auditor to discover fraudulent hours. C) It is ordinarily easier for the client to prevent fraudulent hours by adequate internal controls than for the auditor to detect it. D) To detect fraudulent hours, the auditor should examine the cancelled checks written to the employees.

The failure to capitalize a permanent asset, or the recording of an asset acquisition at the improper amount, affects the balance sheet A) forever. B) for the current period. C) for the depreciable life of the asset. D) until the firm disposes of the asset.

The most important balance-related audit objectives in the audit of cash include all except which of the following? A) existence B) accuracy C) completeness D) occurrence

The most important part of the observation of inventory is to determine whether A) all counts are accurate. B) the inventory-takers are qualified. C) obsolete inventory has been identified. D) the physical count is being taken in accordance with the client's instructions.

The payroll and personnel cycle ends with which of the following events? A) interviewing job candidates B) hiring a new employee C) existing employees submitting requests for payment for work performed D) issuance of paychecks

The primary concern in determining whether retained earnings is correctly disclosed on the balance sheet is A) correct calculation of the net income or loss for the year. B) correct calculation of dividend payments for the year. C) whether prior-period adjustments have been made correctly. D) whether there are any restrictions on the payment of dividends

The record of the outstanding shares at any given time is maintained in the A) corporate directory. B) stock certificate books. C) schedule of stock owners. D) shareholders' capital stock master file.

The reliability of perpetual inventory master files affects the timing and ________ of the auditor's physical examination of inventory. A) cutoff B) accuracy C) nature D) extent

The source of debits in the equipment account is the A) sales schedule. B) cash disbursements journal. C) cash receipts journal. D) acquisitions schedule.

The standard bank confirmation form has been agreed upon by the A) SEC and FASB. B) AICPA and the SEC. C) SEC and the American Bankers' Association. D) AICPA and the American Bankers' Association.

The standard inquiry to the client's attorney should be prepared on A) plain paper (no letterhead) and be unsigned. B) lawyer's stationery and signed by the lawyer. C) auditor's stationery and signed by an audit partner. D) client's letterhead and signed by a company official

The test of details of balance procedure which requires the auditor to account for unused inventory tag numbers to make sure none have been deleted is associated with the audit objective of A) accuracy. B) existence. C) detail tie-in. D) completeness.

Which of the following is not a function within the inventory and warehousing cycle? A) process the goods B) store raw materials C) ship finished goods D) process invoices for shipped goods

Which of the following is not a reason why the auditor requests that the client provide a letter of representation? A) Professional auditing standards require the auditor to obtain a letter of representation. B) It impresses upon management its responsibility for the accuracy of the information in the financial statements. C) It provides written documentation of the oral responses already received to inquiries of management. D) It determines the type of opinion the auditor will issue on the financial statements.

Which of the following is not an accurate statement regarding the acquisition and payment cycle? A) The personnel in the receiving department should be independent of the storeroom personnel. B) Goods received should be physically controlled from the time of their receipt until their use or disposal. C) Accounting records should transfer responsibility for the goods each time they are moved. D) The accounting department should be responsible for receiving goods and preparing the receiving report.

Which of the following is not considered a commitment? A) agreements to purchase raw materials B) pension plans C) agreements to lease facilities at set prices D) Each of the above is a commitment.

Which of the following is not one of the categories of items included in the letter of representation? A) subsequent events B) completeness of information C) recognition, measurement, and disclosure D) materiality

Which of the following is not one of the reasons auditors verify equipment differently from current asset accounts? A) There are usually fewer current period acquisitions of equipment. B) The amount of any given acquisition is often material. C) The equipment is likely to be kept and maintained in the accounting records for several years. D) Current assets are subject to liens and encumbrances while equipment is not

Which of the following statements is correct? A) Auditors must obtain bank confirmations for audits of nonpublic entities. B) Auditors are required to obtain bank confirmations under international auditing standards. C) Auditing standards do not address specific requirements regarding bank confirmations. D) Auditing standards do not require bank confirmations.

The test of details of balance procedure which requires the auditor to perform tests of lower of cost or market, selling price, and obsolescence is an attempt to satisfy the objective of A) existence. B) completeness. C) accuracy. D) realizable value.

The two most important balance-related audit objectives for notes payable are A) completeness and detail tie-in. B) completeness and valuation. C) accuracy and valuation. D) accuracy and completeness.

There are three reasons why an experienced member of the audit firm must thoroughly review audit documentation of the completion of the audit, including A) to evaluate the performance of inexperienced personnel. B) to make sure that the audit meets the CPA firm's standard of performance. C) to counteract the bias that often enters into the auditor's judgment. D) all of the above.

There is inherent risk of payroll fraud because most transactions involve A) expense accounts. B) accrued liabilities. C) estimates. D) cash.

To ensure proper segregation of duties, who should maintain the perpetual inventory master files? A) production personnel B) inventory storeroom personnel C) inventory receiving personnel D) accounting department personnel

What are the two major balance-related audit objectives in testing payroll liabilities? A) accuracy and detail tie-in B) completeness and valuation C) completeness and rights and obligations D) accuracy and cutoff

When auditing accrued property taxes, A) the source for the debits to the liability account is the acquisitions journal. B) realizable value is an important balance-related audit objective. C) the ending balance in the account should be confirmed with the applicable taxing authority. D) the most important consideration for the auditor is that the same portion of each tax payment for the accrual that was used in the preceding year is used in the current year.

When auditing financial instruments, a confirmation is sent to the broker-dealer A) only if the client has poor internal controls. B) to confirm interest and dividends. C) to provide assurance on realizable value. D) to confirm year-end holdings.

When conducting the audit of stockholders' equity, it is normal practice to verify all capital stock transactions A) only when the client is small. B) that are in excess of a material amount. C) if there aren't very many during the year. D) regardless of the controls in existence, because of their materiality and permanence in the records.

When dealing with financial instruments, the most difficult balance-related audit objective to test is A) existence. B) accuracy. C) rights. D) realizable value

When performing the test of details of balances, the balance-related audit objective of classifications is closely related to the objective of A) accuracy. B) detail tie-in. C) existence. D) completeness.

When testing the controls for the completeness transaction-related audit objectives, A) failure to record the acquisition of goods or services will generally understate net income. B) failure to record the acquisition of goods or services has no impact on the balance sheet. C) it is generally easy for the auditor to determine whether unrecorded transactions exist. D) the audit time for accounts payable can be reduced if the client has effective internal controls and the auditor properly tests those controls.

When the auditor believes the year-end bank reconciliation may be intentionally misstated, it is appropriate to perform extended tests of the year-end bank reconciliation. Assuming the client has a October 31 year-end, these extended tests would not include A) comparing all September 30 reconciling items with canceled checks and other documents in the October bank statement. B) comparing all canceled checks and deposit slips in the October bank statement with the October cash disbursements and receipts records. C) carrying out all proper procedures subsequent to the end of the year with the use of the bank cutoff statement. D) determining that all outstanding checks had cleared by the date of the bank cutoff statement.

When the auditor is determining whether the client followed a consistent depreciation policy from period to period, and the client's depreciation calculations are correct, the balance-related audit objective of ________ is being determined for depreciation expense. A) completeness B) existence C) classification D) accuracy

When the client's physical inventory occurs before the last day of the year, it is still necessary to perform an accounts payable cutoff at the time of the count. In addition, the auditor must verify whether all acquisitions taking place between the count and the end of the year were added to A) the physical inventory. B) accounts payable. C) accounts payable and cost of goods sold. D) the physical inventory and accounts payable

When verifying if capital stock is accurately recorded, A) the ending balance in the account does not need to verified. B) the number of shares outstanding at the balance sheet date is verified by examining the corporate minutes. C) the recorded par value can be determined by multiplying the number of shares by the market price of the stock. D) a confirmation from the transfer agent is the simplest way to verify the number of shares outstanding at the balance sheet date.

Which audit procedure would the auditor use to test for the cutoff balance-related audit objective? A) Review minutes of the board of directors meetings. B) Review the accounts receivable trial balance for large items. C) Use audit software to foot and cross-foot the aged trial balance. D) Select the last 20 sales transaction from the current year's sales journal and the first 20 from the subsequent year's and trace each to the related shipping documents.

Which balance-related audit objective is not relevant to an audit of prepaid expenses? A) rights B) accuracy C) detail tie-in D) realizable value

Which of the following errors gives the auditor concern in auditing payroll transactions? A) an error that indicates possible fraud B) computational errors in formulas when a computerized system is used C) classification errors in charging labor to inventory and job cost accounts D) Each of the above gives the auditor significant concern.

Which of the following is a continuously updated computerized record of inventory items purchased, used, sold, and on hand for merchandise, raw materials, and finished goods? A) job cost system B) standard cost records C) cost accounting records D) perpetual inventory master file

Which of the following is a key control for the transaction-related audit objective of accuracy? A) The time records are approved by a supervisor. B) The payroll checks are prenumbered and accounted for. C) The payroll master file contents are internally verified. D) The batch totals are compared with computer summary reports.

Which of the following is a key internal control for the posting and summarization transaction-related audit objective? A) Batch totals are compared with computer summary reports. B) Documents are canceled. C) Dates are internally verified. D) The accounts payable master file contents are internally verified.

Which of the following is an accurate statement regarding cash? A) The amount of cash flowing into and out of the cash account is often larger than that for any other account in the financial statements. B) The susceptibility of cash to embezzlement is greater than that for other types of assets. C) Auditors must verify whether recorded cash in the general ledger correctly reflects all cash transactions that took place during the year. D) All of the above are accurate statements.

Which of the following is an accurate statement regarding nonexistent employees? A) In order to prevent this type of fraud, the foreman should distribute the paychecks and approve the time cards. B) Records for all terminated employees should be destroyed to prevent this type of fraud. C) The person committing this type of fraud is generally the CEO or CFO of the company. D) This type of fraud often results from the continuance of an employee on the payroll after the employee has been terminated.

Which of the following is an accurate statement regarding presentation and disclosure? A) Auditors generally set the risk as low that all required information may not be completely disclosed in the footnotes. B) Audit tests performed in earlier audit phases provides sufficient appropriate evidence about contingent liabilities and subsequent events. C) Auditors do not conduct tests of controls related to disclosures when the initial assessment of control risk is below maximum. D) In phase IV (completing the audit), auditors evaluate whether the overall pre

Which of the following is an accurate statement regarding the audit of pricing and compilation of inventory? A) Inventory compilation tests include all of the tests of the client's unit prices to determine whether they are correct. B) The review for obsolete inventory should be performed by the accounting department. C) The most important internal control for accurate unit costs is external verification by an outside consultant. D) Inventory compilation internal controls are needed to ensure that the physical counts are correctly summarized and priced

Which of the following is an important source of information for determining whether the presentation and disclosure-related objectives for capital stock activities are satisfied? A) the corporate charter B) the minutes of board of directors meetings C) the auditor's analysis of capital stock transactions D) all of the above

A major consideration in the audit of the general cash balance is the possibility of fraud. The auditor must extend his or her procedures in the audit of year-end cash to determine the possibility of a material fraud when there are A) large cash balances at the end of the year. B) large cash receipts and disbursements during the year. C) no imprest accounts used for payroll. D) inadequate internal controls.

What critical event must take place before goods can be shipped in order to assure payment can be reasonably expected? A) determination of correct delivery address B) credit approval C) matching of shipping document with sales invoice D) receipt of sales order from the customer

What typically ends the acquisitions and payment cycle? A) issuance of a purchase requisition or request for purchase of goods/services B) issuance of a payment on accounts payable C) approval of a new vendor D) purchase requisition

Confirmation of accounts receivable selected from the trial balance is the most common test of details of balances for the ________ of accounts receivable. A) presentation B) valuation C) accuracy. D) detail tie-in

The most difficult type of cash embezzlement for auditors to detect is when it occurs A) after the merchandise has been shipped. B) before the merchandise has been shipped. C) before the cash is recorded in the cash receipts journal or other cash listing. D) after the cash is recorded in the cash receipts journal or other cash listing.

The overall objective in the audit of the acquisition and payment cycle is A) to ensure the reliability of the affected accounts. B) to ensure the accuracy of the affected accounts. C) to evaluate whether the affected accounts are fairly presented in accordance with accounting standards. D) to evaluate whether fraudulent payments were made.

The understatement of sales and accounts receivable is best uncovered by A) testing internal controls. B) testing the aged accounts receivable trial balance. C) substantive tests of transactions for shipments made but not recorded. D) substantive tests of transactions for bad debts.

Tests of which balance-related audit objective are normally performed first in an audit of the sales and collection? A) accuracy B) completeness C) rights D) detail tie-in

Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction? A) granting of credit B) shipment of goods C) determination of discounts D) selling of goods for cash

All corporations must have A) preferred stock. B) capital stock. C) paid-in capital in excess of par. D) dividends payable

The audit procedures for the subsequent events review can be divided into two categories: (1) procedures normally integrated as a part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is in the second category? A) Correspond with attorneys. B) Test the collectability of accounts receivable by reviewing subsequent period cash receipts. C) Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate. D) Compare the subsequent-period purchase price of inventory with the recorded cost as a test of lower of cost or market valuation

The auditor gets highly reliable evidence about individual transactions by examining A) vendors' invoices. B) vendors' statements. C) confirmations of accounts payable balances. D) detailed inventory counting instructions.

The auditor has completed her assessment of subsequent events. The proper accounting for subsequent events that have a direct effect on the financial statements is to A) adjust the financial statements for the year under audit. B) disclose in the notes to financial statement the amount of the adjustment. C) duly note in the audit workpapers that next year's financial statements need to be adjusted. D) make no adjustment of the financial statements for the year under audit.

The auditor is examining the accounting entries made to the accumulated depreciation account during the year and notices a significant amount of debits to the account. Which of the following provides the most logical explanation? A) large number of asset retirements B) salvage values were revised downward C) useful lives were revised downward D) allocation of fixed overhead were revised

The auditor is testing for the balance-related audit objective of detail tie-in when they A) prove the schedule of investment activity as to additions and subtractions. B) perform a physical inspection of the security. C) verify the quoted market prices. D) test management's assumptions related to valuation.

The auditor is testing for unrecorded retirements/disposals of equipment. Which of the following audit procedures would the auditor most likely use? A) Select items from the fixed asset master file and then physically locate them. B) Examine the repairs and maintenance amount for large debits. C) Compare current year's depreciation expense with the previous year's depreciation expense. D) Trace acquisition documents to the fixed asset master file.

The auditor's independent estimate of interest expense from notes payable uses average interest rates and A) average notes payable outstanding. B) year-end notes payable outstanding. C) only notes payable above the level of materiality. D) only notes payable to major lenders.

The inventory and warehousing cycle can be thought of as having two separate but closely related systems, one involving the actual physical flow of goods, and the other the A) related costs. B) storage of the goods. C) internal control over those goods. D) prevention of waste, obsolescence, and theft.

The most common audit test to verify equipment additions is to A) examine vendors' invoices. B) perform an inventory of the fixed assets. C) confirm the additions with the vendors. D) trace the vendor invoices to the cash disbursements journal.

The most effective and efficient audit approach in the examination of the income statement would be which of the following? A) Examine income statement accounts concurrently with the related balance sheet accounts. B) Compare company's components of net income to other businesses in the same industry. C) Compare company's components of net income to the previous two years. D) Examine changes in all balance sheet accounts

The most important consideration in evaluating the fairness of the amounts accrued for vacation pay, sick pay, and other benefits is the A) consistent accrual of these liabilities relative to those of preceding periods. B) actual expense incurred for the prior period. C) amount expended to date in the current period. D) profitability of the client which will enable these liabilities to be met.

The most important means of verifying account balances in the payroll and personnel cycle are A) tests of controls and substantive tests of transactions. B) analytical procedures and tests of controls. C) analytical procedures and substantive tests of transactions. D) tests of controls and tests of details of balances.

The most reliable evidence from confirmations is obtained when they are sent A) as close to the balance sheet date as possible. B) at various times throughout the year to different segments of the sample, so that the entire sample is representative of account balances scattered throughout the year. C) several months before the year-end, so the auditor will have adequate time to perform alternate procedures if they are required. D) at various times throughout the year to the same group in the sample, so that the sample will not have a time bias.

The net realizable value of accounts receivable is equal to: A) gross accounts receivable less allowance for uncollectible accounts. B) gross accounts receivable less bad debt expense. C) gross accounts receivable less returns and allowances. D) gross accounts receivable less sales discounts.

The overall objective in the audit of accounts payable is to determine whether accounts payable A) are fairly stated and properly disclosed. B) are overstated. C) are understated. D) are accurately stated.

The primary audit objectives to focus on when auditing accounts in the capital acquisition and repayment cycle are A) accuracy and completeness. B) accuracy and existence. C) completeness and valuation. D) accuracy and valuation.

A company recorded an acquisition of merchandise and its related liability, but failed to include the merchandise in ending inventory. The effect on the financial statements was to A) understate liabilities. B) understate net income. C) overstate net income. D) have no impact on the financial statements since the errors cancel each other out.

A major consideration in verifying the ending balance in fixed assets is the possibility of existing legal encumbrances. Tests to identify possible legal encumbrances would satisfy the audit objective of A) existence. B) presentation and disclosure. C) detail tie-in. D) classification.

A record of insurance policies in force and the due date of each policy is contained in the A) voucher register. B) insurance register. C) insurance expense account. D) prepaid insurance account.

In the audit of the transactions and amounts in the capital acquisition and repayment cycle, the auditor must take great care in making sure that the significant legal requirements affecting the financial statements have been properly fulfilled and A) any violations are reported to the SEC. B) are adequately disclosed in the financial statements. C) must issue a disclaimer if they haven't been fulfilled. D) any departures from the agreements are made with management's knowledge and consent.

Level ________ estimates use observable inputs other than quoted prices. A) 1 B) 2 C) 3 D) 4

Management furnishes the independent auditor with information concerning litigation, claims, and assessments. Which of the following is the auditor's primary means of initiating action to corroborate such information? A) Request that client lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they were consulted during the period under examination. B) Request that client management send a standard inquiry to the client's attorney letter to those lawyers with whom management consulted concerning litigation, claims, and assessments. C) Request that client lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate, and account for litigation, claims, and assessments. D) Request that client management engage outside attorneys to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims, and assessments.

Many audits have a ________ risk of misstatement for the payroll cycle. A) high B) low C) moderate D) zero

On the last day of the fiscal year, the cash disbursements clerk drew a company check on bank A and deposited the check in the company account in bank B to cover a previous theft of cash. The disbursement has not been recorded. The auditor will best detect this form of kiting by A) examining the composition of deposits in both bank A and bank B subsequent to year-end. B) examining paid checks returned with the bank statement of the next account period after yearend. C) preparing, from the cash disbursements records, a summary of bank transfers for one week prior to and subsequent to year-end. D) comparing the detail of cash receipts as shown by the client's cash receipts records with the detail on the confirmed duplicate deposit tickets for three days prior to and subsequent to yearend.

Receipt of ordered materials by the receiving department will generate the completion of a form called the A) bill of lading. B) receiving report. C) materials requisition. D) inventory acquisition summary.

Subsequent events affecting the realization of assets ordinarily will require an adjustment of the financial statements under examination because such events typically represent A) the culmination of conditions that existed at the balance sheet date. B) additional new information related to events that were in existence on the balance sheet date. C) final estimates of losses relating to casualties occurring in the subsequent events period. D) preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date.

The audit and accounting concern addressed in a monthly proof of cash is with A) adjusting account balances. B) reconciling the amounts recorded in the books with the amounts included in the bank statement. C) determining the month-end balance. D) identifying cash transfers.

The audit objective to determine that notes payable in the schedule actually exist is verified by the test of details of balances procedure to A) foot the notes payable list. B) confirm notes payable. C) recalculate interest expense. D) examine the balance sheet for proper disclosure of noncurrent portions.

The audit of cost accounting begins with the internal transfer of assets from raw materials to work-in-process to A) manufacturing overhead. B) finished goods inventory. C) the perpetual inventory master files. D) retail sales.

The auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is best expressed by which of the following statements? A) The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of fieldwork. B) The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period. C) The auditor's responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred. D) The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date.

The auditors test the client's monthly bank reconciliation to verify whether the client's recorded bank balance is the same amount as the actual cash in the bank. Which of the following would not explain a difference between the company's cash balance and the bank's balance for the client? A) deposits in transit B) Checks are written by the client in the same month the checks clear the bank. C) other reconciling items D) outstanding checks

The bank reconciliation A) must be done on a daily basis if the client uses electronic banking. B) should be performed by someone independent of the handling or recording of cash receipts. C) should be performed by someone who handles cash disbursements. D) ensures that no cash has been embezzled.

The careful and timely preparation of all payroll tax returns is necessary to avoid penalties and criminal charges. The most important control in the timely preparation of these returns is A) computerized preparation of tax returns. B) a well-defined set of policies that indicate when each form must be filed. C) independent verification of computer output by a competent individual. D) the use of an outside payroll service.

The computer file used for recording payroll transactions for each employee and maintaining total wages paid for the year to date is the A) payroll transaction file. B) payroll master file. C) payroll bank account reconciliation. D) payroll tax returns.

The date of the management representation letter received from the client should A) be the date of latest subsequent event disclosed in the notes to the financial statements. B) be dated no earlier than the date of the audit report. C) have the same date as the date of the balance sheet. D) have the same date as the date of the engagement letter.

The extent of a search for unrecorded liabilities largely depends on A) materiality and inherent risk. B) materiality and control risk. C) materiality only. D) inherent risk only.

The first step in verifying the valuation of purchased inventory is in determining the valuation method used by the client. The next step is A) determining that all inventory that is purchased is expensed through cost of goods sold. B) determining which costs should be included in the valuation of an item of inventory. C) determining that all inventory on hand reconciles to the perpetual inventory records. D) determining that cut-off procedures have been adhered to prior to counting inventory

The general cash account is considered a significant account in almost all audits A) where the ending balance is material. B) even when the ending balance is immaterial. C) except those of not-for-profit organizations. D) where either the beginning or ending balance is material.

The letter of representation obtained from an audit client should be A) dated as of the end of the period under audit. B) dated as of the audit report date. C) dated as of any date decided upon by the client and auditor. D) dated as of the issuance of the financial statement.

The main difference between job order and process costing systems is that A) one accumulates costs by materials issued and the other by labor incurred. B) one accumulates costs by individual jobs and the other by particular processes. C) one emphasizes costs accumulated in completed products and the other emphasizes costs associated with work-in-process. D) one emphasizes costs adding value to the product and the other emphasizes costs incurred because of waste, scrap, and obsolescence.

The majority of financial instruments are valued using A) cost. B) fair value estimates. C) lower of cost or market. D) realizable value.

The most important aspect of evaluating the client's method of obtaining a reliable cutoff is to A) perform extensive detailed testing of cutoff. B) evaluate the client's control procedures around cutoff. C) confirm a sample of transactions near period end with customers. D) confirm transaction with customers.

The positive (as opposed to the negative) form of receivables confirmation may be preferred when A) internal control surrounding accounts receivable is considered to be effective. B) there is reason to believe that a substantial number of accounts may be in dispute. C) a large number of small balances are involved. D) the auditor believes that the recipients of the confirmations will give the requests adequate consideration.

The primary accounting record for manufacturing equipment and other fixed assets is the A) depreciation ledger. B) fixed asset master file. C) asset inventory. D) equipment roster

The reason for testing the client's bank reconciliation is to verify whether the client's recorded bank balance is the same amount as the actual cash in bank, except for deposits in transit, checks outstanding, and other reconciling items. The information needed to complete the tests of the reconciliation is provided by the A) client's records and ledgers for the year under audit. B) cutoff bank statement. C) client's records and ledgers for the subsequent year. D) canceled checks for the year under audit.

The record of the issuance and repurchase of capital stock for the life of the corporation is maintained in the A) shareholders' capital stock master file. B) capital stock certificate record. C) schedule of stock owners. D) corporate directory.

The test of transactions which requires one to "reconcile recorded cash disbursements with the cash disbursements on the bank statement" satisfies the objective of A) occurrence. B) completeness. C) accuracy. D) posting and summarization.

Whenever subsequent events are used to evaluate the amounts included in the statements, care must be taken to distinguish between conditions that existed at the balance sheet date and those that come into being after the balance sheet date. The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation A) took place before the balance sheet date. B) did not take place until after the balance sheet date. C) occurred both before and after the balance sheet date. D) are reimbursable through insurance policies.

Which audit procedure would be used to test for the existence balance-related audit objective? A) Trace ten accounts from the aged trial balance to the accounts receivable master file. B) Confirm accounts receivable. C) Review large sales returns and allowances before and after the balance sheet date. D) Trace ten accounts from the trial balance to the accounts on the master file.

Which is not an important objective for financial instruments? A) existence B) cutoff C) accuracy D) realizable value

Which is not one of the tests that would be used in the audit of equipment, depreciation expense, and accumulated depreciation? A) Verify the ending balance in the asset account. B) Send confirmations to the sales personnel who sold the equipment to the company. C) Perform substantive analytical procedures. D) Verify current year acquisitions.

Which of the following accounts would normally not be a part of the acquisition and payment cycle of prepaid insurance? A) cash B) insurance payable C) insurance expense D) prepaid insurance

Which of the following audit procedures would be least likely to lead the auditor to find an unrecorded fixed asset disposal? A) Examination of insurance policies B) Review of repairs and maintenance expense C) Review of property tax files D) Scanning of invoices for fixed asset additions

Which of the following audit procedures would normally be included in the audit plan when auditing the allowance for doubtful accounts? A) Send positive confirmations. B) Inquire of the client's credit manager. C) Send negative confirmations. D) Examine sales invoices.

Which of the following audit tests both have the effect of simultaneously verifying balance sheet and income statement accounts? A) analytical procedures and substantive tests of transactions B) tests of controls and substantive tests of transactions C) tests of details of balances and substantive tests of transactions D) tests of controls and analytical procedures

Which of the following best describes inherent risk for balance-related audit objectives as they relate to payroll? A) not considered B) low C) moderate D) high

Which of the following cycles does not affect cash in bank? A) capital acquisitions cycle B) inventory and warehousing C) payroll and personnel cycle D) acquisitions and disbursements

Which of the following departments is most likely responsible for pay rate changes and changes in deductible amounts for employees? A) general accounting department B) human resources department C) treasurer D) controller

Which of the following includes all payroll transactions processed by the accounting system for a given period of time? A) payroll journal B) payroll transaction file C) time report D) payroll summary

Which of the following is a major balance-related audit objective in testing payroll liabilities? A) Payroll tax expense is properly recorded. B) Transactions in the payroll and personnel cycle are recorded in the proper period. C) Accrual of salaries is the same as the amounts paid on the payroll tax returns. D) Time records are recorded by supervisors.

Which of the following is a substantive analytical procedure to determine if there is idle equipment or equipment that was disposed of but not written off? A) Compare depreciation expense divided by gross equipment cost with previous years. B) Compare gross manufacturing cost divided by some measure of production with previous years. C) Compare accumulated depreciation divided by gross equipment cost with previous years. D) Compare annual repairs and maintenance accounts with previous years.

Which of the following is an accurate statement regarding the audit of the capital acquisition and repayment schedule? A) When internal controls over notes payable are deficient, auditors are required to confirm the notes payable. B) As auditors perform tests of details of balances for balance-related audit objectives, the evidence obtained helps satisfy the notes payable presentation and disclosure requirements. C) The normal starting point for the audit of notes payable is a list of fixed asset acquisitions. D) The schedule of notes payable and accrued interest must be prepared regardless of the number of transactions involved.

Which of the following is not a common audit procedure used to search for contingent liabilities? A) examine letters of credit B) examine payroll reports C) review internal revenue agent reports D) analyze legal expense

A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events might result in adjustment of the December 31 financial statements? A) sale of a major subsidiary B) adoption of accelerated depreciation methods C) write-off of a substantial portion of inventory as obsolete D) collection of 90% of the accounts receivable existing at December 31

A common inventory observation procedure is to be alert for items that are damaged, rust- or dust-covered, or located in inappropriate places. The balance-related audit objective being achieved by this procedure is A) classification. B) cutoff. C) realizable value. D) rights

A document review of which of the following is most likely to yield evidence of any unrecorded liabilities? A) debit memos B) vendor memos C) unpaid accounts payable D) sales invoices out of sequence

A key internal control over the acquisition cycle is to ensure that the company requires recording transactions as soon as possible after the goods and services have been received. This satisfies the transaction-related audit objective of A) accuracy. B) completeness. C) timing. D) occurrence.

A major difficulty in the verification of inventory cost records for the purpose of inventory valuation is in determining the reasonableness of the A) direct labor costs. B) raw material costs. C) manufacturing overhead costs. D) period costs

A major source of cutoff information for sales and purchases of inventory is A) confirmations from outside parties. B) the test of details of balances. C) physical observation. D) the performance of analytical procedures.

A management representation letter is A) prepared on the CPA's letterhead. B) addressed to the client. C) signed by high-level corporate officials. D) dated as of the balance sheet date.

A partial-period bank statement and the related copies of or digital access to cancelled checks, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the CPA firm's office, is called A) a four-column proof of cash. B) a year-end bank statement. C) a cutoff bank statement. D) a short-period bank statement.

A proof of cash represents A) a test of controls and substantive test of transactions. B) a substantive test of transactions. C) a substantive test of transactions and test of details of balances. D) a test of details of balances.

A set of records for each piece of equipment that includes descriptive information, date of acquisition, original cost, current year depreciation, and accumulated depreciation is the A) acquisitions schedule. B) depreciation schedule. C) fixed asset master file. D) file of purchase requisitions.

A substantive tests of transactions for acquisitions that would be used to provide evidence regarding the occurrence assertion would be to A) compare the classification with the chart of accounts by referring to vendors' invoices. B) recompute the clerical accuracy on the vendors' invoice. C) review the acquisitions journal for large or unusual amounts. D) trace from a file of receiving reports to the acquisition journal.

A surprise payroll payoff in which employees must pick-up and sign for their pay check is one means of A) identifying employees who do not have proper work credentials. B) establishing a tightly controlled, fraud-free work environment. C) testing for nonexistent employees. D) identifying employees who have not submitted proper W-2 forms.

There must be a periodic physical count by the client of the inventory items on hand A) only if the client uses the LIFO method. B) only if the client uses a lower-of-cost-or-market method. C) regardless of the client's inventory valuation method. D) only if the client uses either the LIFO or FIFO method

The audit procedures for the subsequent events review can be divided into two categories: (1) procedures integrated as a part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is in the first category? A) Inquire of client regarding contingent liabilities. B) Obtain a letter of representation written by client. C) Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate. D) Review journals and ledgers of year 2 to determine the existence of any transactions related to year 1

The audit tests to verify that the client is using an inventory method which is generally accepted and to verify that physical counts were correctly summarized are performed during the audit of the A) acquisition and payments cycle. B) payroll and personnel cycle. C) inventory and warehousing cycle. D) sales and collection cycle.

The auditor is responsible for communicating significant internal control deficiencies to the audit committee, or those charged with governance. This communication A) may be oral or written. B) must be oral. C) must be written. D) must be oral via direct communication.

The auditor is reviewing the receivables listed on the aged trial balance for notes and related party receivables. Which balance-related audit objective is he trying to satisfy? A) detail tie-in B) existence C) classification D) all of the above

The auditor normally does not need to test the accuracy or classification of fixed assets recorded in prior periods if they are the continuing auditor because A) they are rarely material to the audit. B) they rarely contain misstatements. C) they are verified in previous audits. D) they don't affect the balance sheet.

The auditor's primary concern relative to presentation and disclosure-related objectives is A) accuracy. B) existence. C) completeness. D) occurrence.

The auditor's starting point for verifying disposals of property, plant, and equipment is the A) equipment account in the general ledger. B) file of shipping documents. C) client's schedule of recorded disposals. D) equipment subsidiary ledger.

The auditor's tour of the client's inventory facilities should be led by A) a member of the audit committee. B) the CFO. C) a plant supervisor. D) the company president.

The capital acquisition and repayment cycle does not include A) payment of interest. B) payment of dividends. C) payment of vendor invoices. D) acquisition of capital through interest-bearing debt.

The direct receipt of a confirmation from every bank with which the client does business is A) required by auditing standards for every audit. B) not necessary unless material fraud is suspected. C) recommended but not required by auditing standards. D) necessary for every audit except when there are an unusually large number of active accounts.

The documents typically used to reconcile the balance on the accounts payable list with the confirmation or vendor's statements include all of the following except for A) receiving reports. B) vendor's invoices. C) sales invoices. D) cancelled checks.

The internal control that requires that "checks are prenumbered and accounted for" satisfies the objective of A) accuracy. B) existence. C) completeness. D) posting and summarization

The main focus taken by the auditor in verifying liability balances is on the discovery of I. understated liabilities. II. omitted liabilities. A) I only B) II only C) both I and II D) neither I nor II

The most effective audit evidence gathered for accounts receivable is the A) detail tie-in of the records. B) analysis of the allowance for doubtful accounts. C) confirmation of accounts receivable. D) examination of sales invoices.

The primary concern in testing payroll-related liabilities is to make sure that A) accruals are properly valued. B) transactions are recorded in the proper period. C) there are no understated or omitted accruals. D) the accruals are not overstated

The test of details of balances procedure that requires the auditor to foot the outstanding check and electronic payment list and deposits in transit is an attempt to satisfy which audit objective? A) cutoff B) presentation and disclosure C) detail tie-in D) completeness

The tests of details of balances procedure which requires the auditor to trace the totals of the notes payable list to the general ledger satisfies the audit objective of A) accuracy. B) existence. C) detail tie-in. D) completeness.

The use of unobservable inputs such as a pricing model or discounted cash flow is an example of a level ________ estimate. A) 1 B) 2 C) 3 D) 1 and 3

Under which of the following circumstances would it be advisable for the auditor to confirm accounts payable with creditors? A) The internal accounting control over accounts payable is effective, and there is sufficient evidence on hand to minimize the risk of a material misstatement. B) The confirmation response is expected to be favorable, and accounts payable balances are of immaterial amounts. C) The creditor statements are not available and internal control over payables is deficient. D) The majority of accounts payable balances are with associated companies.

Verification of the legitimacy of year-end unpaid bonuses to officers and employees can be accomplished by comparing the recorded accrual to the amount A) in the expense account. B) used in the prior period. C) authorized in the minutes of the board. D) paid in the subsequent period.

When a physical count of inventory is performed at an interim date, the auditor observes it at that time and tests the perpetual records for transactions A) throughout the year. B) which are a representative sample of the period under audit. C) from the date of the count to year-end. D) from the date of the count to the end of the audit field work.

When an audit client uses a service organization to manage their investment activity, A) the auditor can always rely on the internal controls of the service organization. B) the auditor must state in their audit opinion that the client uses a service organization. C) the auditor can rely on the internal controls of the service organization if the service organization's auditor issues a report on their internal control. D) the auditor must rely on the service organization to determine the fair level 1, 2, and 3 estimates.

When an auditor recomputes the unexpired portion of prepaid insurance, they are satisfying which audit objective? A) completeness B) existence C) accuracy and detail tie-in D) rights

When an auditor tests to determine if all existing accounts receivable are included in the aged trial balance, A) they cannot rely on the self-balancing nature of the accounts receivable master file. B) if all sales to a customer are omitted from the sales journal, it is easy to uncover the understatement of accounts receivable by tests of details of balances. C) auditors rarely send accounts receivable confirmations to customers with zero balances. D) unrecorded sales to a new customer are easy to identify for confirmation because that customer is included in the accounts receivable master file.

When auditing accrued property taxes, A) the auditors will generally only verify the larger payments since there are usually many property tax payments. B) property taxes should only be charged to one expense account. C) the auditor begins by obtaining a schedule of property tax payments from the client. D) the auditor must generally spend a considerable amount of time in this area.

When auditing depreciation expense, the two major concerns related to the accuracy audit objective are A) consistent application of depreciation method and useful lives. B) consistent application of depreciation method and classification of assets. C) correctness of calculations and consistent application of depreciation policies. D) cost of the fixed asset and useful lives.

When auditing financial instruments, A) the auditor usually performs more extensive substantive testing to reduce reliance on controls. B) analytical procedures are critical in assessing the year-end balances for financial instruments. C) the auditor relies on statements and broker's advices from investment managers to test purchases and sales as long as controls were deemed effective. D) tests of transactions are generally not performed.

When auditing interest-bearing debt, the auditor should ________ verify the related interest expense and interest payable. A) not B) attempt to C) simultaneously D) never

When auditing manufacturing overhead costs assigned to inventory, auditors should keep in mind that A) GAAP has strict procedures that must be followed when assigning overhead to work-inprocess inventory. B) overhead costs must be allocated to raw materials, work-in-process, and finished goods inventory. C) management typically allocates overhead using total direct labor dollars as the basis for the allocation. D) determining the reasonableness of the allocation method is relatively simple for work-inprocess inventory.

When auditing the payroll and personnel cycle, the auditor should keep in mind that A) since payroll transactions are typically uniform, all companies have the same internal controls over payroll. B) the substantive tests of transactions for the payroll cycle are the same for all audit clients. C) controls the auditor intends to rely on to reduce assessed control risk must be tested with tests of controls. D) the tests of controls and the substantive tests of transactions for payroll cannot be combined.

When communicating with the audit committee and management, A) only material fraud and illegal acts are required by auditing standards to be communicated. B) all internal control deficiencies are required by auditing standards to be communicated. C) the communications should be made in a timely manner to allow those charged with governance to take appropriate actions. D) all communications with the audit committee and management must be in writing.

When labor is a material factor in inventory valuation, the auditor should place special emphasis on testing the internal controls concerning A) fictitious employees. B) authorization of wage rates. C) proper classification of payroll transactions. D) completeness of recorded transactions.

When reviewing the controls and procedures in the acquisition and payment cycle, A) companies cannot record the liability for the acquisition until the invoice is received from the vendor. B) the purchasing department has the responsibility for verifying for appropriateness of the acquisition. C) personnel who record the acquisitions should not have access to cash or other assets. D) the accounts payable department should account for all receiving reports to assure that the occurrence objective is satisfied.

When should auditors generally assess a client's ability to continue as a going concern? A) upon completion of the audit B) during the planning stages of the audit C) throughout the entire audit process D) during testing and completion phases of the audit

Which of the following statements is correct? A) A letter of representation is documentation of management's acceptance of responsibility for the financial statements and is deemed to be reliable evidence. B) A letter of representation is not deemed to be reliable evidence because of the potential incompetence of management. C) A letter of representation is not deemed to be reliable evidence because it is a written statement from a nonindependent source. D) A letter of representation is documentation of the CPA's acceptance of responsibility for the audit of the financial statement and is deemed to be reliable.

Which of the following statements is correct? A) Bank personnel are responsible for providing reasonable assurance that a response to a bank confirmation is accurate. B) Bank personnel are responsible for providing complete assurance that a bank confirmation is complete. C) Bank personnel are not responsible for searching their records for bank balances or loans beyond those included on the bank confirmation. D) Bank personnel are not responsible for providing information related to interest on the bank confirmation.

Which of the following statements regarding the capital acquisition and repayment cycle is most correct? A) A relatively few transactions affect the cycle, and most are smaller amounts. B) A large numbers of transactions affect the cycle, and most are smaller amounts. C) A relatively few transactions affect the cycle, and most are highly material. D) A large number of transaction affect the cycle, and most are highly material.

Which of the following tests of controls is least useful in assessing the transaction-related audit objective related to occurrence? A) Examine documents in voucher package for occurrence. B) Examine supporting documents for indication of approval. C) Account for sequence of vouchers. D) Attempt to input transactions with valid and invalid vendors

Which of the following types of audit tests is usually emphasized due to a lack of independent third-party evidence related to payroll transactions? A) analytical procedures B) tests of details of balances C) tests of controls D) Each of the above is emphasized.

Which of the following verifications would generally not be performed by the auditor in the month subsequent to the balance sheet date? A) Foot the lists of all canceled checks, debit memos, deposits, and credit memos. B) Verify the bank statement balances when the footed totals are used. C) Verify the book statement balances tie to the cash receipts and disbursements journals for the year under audit. D) Review the items included in the footings to make sure that they were cancelled by the bank.

Which of the following would generally not be a component of the audit of the acquisition and payment cycle? A) adequacy of controls over acquisitions of long-lived assets B) tracing disposals of long-lived assets to the fixed asset master file C) determining the adequacy of the funds available for capital expenditures D) reperformance of recorded depreciation expense

Which of the following would the auditor expect to find in the client's management representation letter? A) management's recommendations for internal control effectiveness improvements B) management's plans for improving product quality C) management's compliance with contractual arrangements that impact the financial statements D) management's goals for improving earnings per share

Which one of the following substantive analytical procedures would be most useful in alerting the auditor to the possibility inventory and cost of goods sold being overstated or understated? A) Compare extended inventory value with that of previous years. B) Compare unit costs of inventory with previous years. C) Compare inventory turnover ratio with previous years. D) Compare current year manufacturing costs with previous years.

Which one of the following substantive analytical procedures would be most useful in alerting the auditor to the possibility of obsolete inventory? A) Compare gross margin percentage with that of previous years. B) Compare unit costs of inventory with previous years. C) Compare inventory turnover ratio with previous years. D) Compare current year manufacturing costs with previous years.

Which substantive analytical procedure would help determine if there are unrecorded or nonexistent accounts? A) Review the list of accounts payable for unusual items. B) Compare acquisition-related expense account balances with prior years. C) Calculate ratios, such as accounts payable divided by current liabilities. D) Calculate ratios, such as sales divided by gross profit.

While there is no professional requirement to do so on audit engagements, CPAs frequently issue a formal "management" letter to clients. The primary purpose of this letter is to provide A) evidence indicating whether the auditor is reasonably certain that internal accounting control is operating as prescribed. B) a permanent record of the internal accounting control work performed by the auditor during the course of the engagement. C) the client with the CPA's recommendations for improving any part of the client's business. D) a summary of the auditor's observations that resulted from the auditor's special study of internal control.

In the audit of notes payable, it is common to include tests of principal and interest payments as a part of the audit of the acquisitions and payment cycle because the payments are in the cash disbursements journal that is being sampled. It is also normal to test these transactions as part of the capital acquisitions and repayment cycle because A) it is not unusual for the auditor to duplicate a process, thereby gathering a larger quantity of evidence. B) replicating the evidence will provide the auditor with a higher level of assurance. C) the tests done in the acquisitions and payments cycle will look only at the cash credit side so the tests done in the capital acquisitions and repayment cycle will look at the debit side of the transaction. D) due to the infrequency of these transactions, in many cases no transactions involving notes payable are included in the sample tests of acquisitions and payments.

In valuing inventory, the auditor must consider all but which of the following factors? A) The valuation method must be in accordance with GAAP. B) The valuation method must be applied on a consistent basis. C) The inventory must be valued at the lower of cost or market. D) LIFO must be used for work-in-process inventory.

Internal controls that are likely to prevent the client from including as a business expense those transactions that primarily benefit management or other employees rather that the entity being audited satisfy the control objective that A) acquisitions are correctly valued. B) existing acquisitions are recorded. C) acquisitions are correctly classified. D) recorded acquisitions are for goods and services received.

Inventory is a complex area to audit for all except which of the following reasons? A) Inventory is often in different locations. B) There are several acceptable valuation methods and some entities use different methods for different types of inventory. C) Inventory is often the largest account on the balance sheet. D) Inventory valuation includes few estimates.

It would be appropriate for the payroll department to be responsible for which of the following functions? A) approval of employee time records B) maintain records of employment, firings, and raises C) temporary retention of unclaimed employee paychecks D) preparation of governmental reports as to employees' earnings and withholding taxes

Methods used to determine if there are legal encumbrances related to fixed assets include all but which of the following? A) Read the terms of loan and credit agreements. B) Send loan confirmation requests to banks and other lending institutions. C) Have discussions with the client or send letters to legal counsel. D) All of the above may be used to identify legal encumbrances.

Normally it may be unnecessary to examine supporting documentation for each addition to property, plant, and equipment, but it would be customary to verify A) all large transactions. B) all unusual transactions. C) a representative sample of typical additions. D) all of the above.

One of the auditor's primary concerns in verifying the transfer of inventory from one location to another is that A) recorded transfers exist. B) all actual transfers are recorded. C) the quantity, date, and description of all recorded transfers are accurate. D) all of the above

The audit objective that requires that existing notes payable be included in the notes payable schedule is satisfied by performing which of the following audit procedures? A) Confirm notes payable. B) Trace the total of the notes payable schedule to the general ledger. C) Review the notes payable schedule to determine whether any are related parties. D) Review the bank reconciliation for new notes credited directly to the bank account by the bank.

The audit objective that requires the auditor to determine that notes payable on the notes payable schedule are properly classified can be tested by performing the procedure to A) confirm notes payable. B) examine corporate minutes for loan approval. C) examine notes, minutes, and bank confirmations for restrictions. D) review the notes to determine whether any are with related parties.

The audit procedure which requires the auditor to record the last check number used on the last day of the year and subsequently trace to the outstanding checks and the cash disbursements records is performed to satisfy the audit objective of A) detail tie-in. B) existence. C) completeness. D) cutoff.

The auditor ________ rely on the internal controls of the payroll service organization if the service organization's auditor issues a report on the service organization's internal control. A) must B) cannot C) can rarely D) can often

The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the statements being audited. The procedures required to verify these transactions are commonly referred to as the review for A) contingent liabilities. B) subsequent year's transactions. C) late unusual occurrences. D) subsequent events.

The auditor is concerned with four aspects of cost accounting, including A) documents and records for transferring inventory. B) perpetual inventory master files. C) unit cost records. D) all of the above.

The auditor's responsibility for "reviewing the subsequent events" of a public company that is about to issue new securities is normally limited to the period of time A) beginning with the balance sheet date and ending with the date of the auditor's report. B) beginning with the start of the fiscal year under audit and ending with the balance sheet date. C) beginning with the start of the fiscal year under audit and ending with the date of the auditor's report. D) beginning with the balance sheet date and ending with the date the registration statement becomes effective.

The authorization of an issuance of capital stock normally includes all but which of the following? A) type of stock to be issued B) number of shares to be issued C) date shares are to be issued D) amount of dividend to be paid on shares issued

The estimated unpaid obligations for services or benefits that have been received before the balance sheet date are A) accounts payable. B) accounts receivable. C) unearned liabilities. D) accrued liabilities.

Which of the following statements is correct? A) The overhead charged to inventory at the balance sheet date can be understated if the salaries of administrative personnel are inadvertently or intentionally charged to indirect manufacturing overhead. B) When jobs are billed on a cost-plus basis, revenue and total expenses are both affected by charging labor to incorrect jobs. C) Payroll is a significant portion of inventory for retail and service industry companies. D) The valuation of inventory is affected if the direct labor cost of individual employees is improperly charged to the wrong job or process.

Which of the following statements regarding the letter of representation is not correct? A) It is prepared on the client's letterhead. B) It is addressed to the CPA firm. C) It is signed by high-level corporate officials, usually the president and chief financial officer. D) It is optional, not required, that the auditor obtain such a letter from management.

Which of the following tests are typically not necessary when auditing a client's schedule of recorded disposals? A) footing the schedule B) tracing the totals on the schedule to the recorded disposals in the general ledger C) tracing cost and accumulated depreciation of the disposals to the property master file D) All of the above are necessary.

Which of the following types of audit procedures is ordinarily emphasized the least when auditing payroll? A) tests of controls B) tests of transactions C) substantive analytical procedures D) tests of details of balances

Which of the following types of owners' equity transactions would require authorization by the board of directors? A) issuance of capital stock B) repurchase of capital stock C) declaration of dividends D) all of the above

Which of the following would be a subsequent discovery of facts which would not require a response by the auditor? A) discovery of the inclusion of material nonexistent sales B) discovery of the failure to write off material obsolete inventory C) discovery of the omission of a material footnote D) discovery of management's intent to increase selling prices in the future

Which of the following would generally not need to be approved by the board of directors? A) issuing capital stock B) repurchasing capital stock C) declaration of a dividend D) payment of a dividend

Which one of the following duties should not be assigned the purchases department? A) finding the lowest cost vendor B) reviewing vendors' catalog descriptions and prices for standardized items C) designing the purchase order form D) authorizing the acquisition of goods

Which type of audit procedure would normally be sufficient for purposes of auditing prepaid expenses and deferred charges? A) tests of controls B) tests of transactions C) tests of details of balances D) substantive analytical procedures

You are the in-charge auditor for a company who has been an audit client for several years. Which of the following is not a category of tests commonly associated with the audit of manufacturing equipment? A) verification of depreciation expense B) analytical procedures C) verification of current-period disposals D) verification of the beginning balance in the equipment account

You have been assigned to the accounts payable transaction cycle as part of your auditing responsibilities. You have decided to vouch a sample of entries in the accounts payable master file to supporting documents. Which assertion is this test of controls most likely to support? A) accuracy B) classification C) completeness D) occurrence

________ is a balance-related audit objective that is not applicable to liabilities. A) Existence B) Accuracy C) Detail tie-in D) Realizable value

Absent disputed amounts and minor timing differences, the vendor's statements should reconcile to the A) acquisition journal. B) accounts payable master file. C) cash disbursements amount for purchases. D) vouchers payable amount for vendors.

The document used to indicate to the customer the amount of a sale and payment due date is the A) sales invoice. B) bill of lading. C) purchase order. D) sales order.

A ________ is a document for communicating the description, quantity, and related information for goods ordered by a customer. A) sales order B) customer order C) vendor invoice D) sales invoice

A ________ is a list prepared when cash is received by someone who has no responsibility for recording sales, accounts receivable, or cash, and who has no access to the accounting records. A) prelisting of cash receipts. B) sales invoice. C) packing ticket. D) vendor invoice.

A document indicating a reduction in the amount owed to a vendor because of returned goods is A) a debit memo. B) a credit memo. C) a receiving report. D) a contractual adjustment form.

A document used by organizations to establish a formal means of recording and controlling acquisitions which usually contains a package of documents about the acquisition is the A) voucher. B) purchase order. C) receiving report. D) purchase requisition.

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this fraud and be least likely to be detected by an auditor? A) understating the sales journal by not recording cash sales B) overstating the accounts receivable control account by intentionally misstating prices charged for goods sold C) overstating the accounts receivable subsidiary ledger by not recording payments made by customers D) understating the cash receipts journal by purposely recording incorrect amounts

For sales, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives? A) existence B) completeness C) rights D) detail tie-in

The auditor's objectives for the sales and cash collections activities when the client is primarily an e-commerce business as compared to a "brick and mortar" business are A) unchanged. B) expanded. C) mitigated. D) decreased.

The computer-generated file which records acquisitions, disbursements and allowances for each vendor is the A) accounts payable master file. B) cash disbursements file. C) acquisitions transaction file. D) purchase approval file.

Which one of the following statements is true? In deciding on substantive tests of transactions A) some procedures are commonly employed on every audit regardless of the circumstances. B) all procedures are dependent on the adequacy of the controls and the results of the tests of controls. C) results obtained in the prior year's audit will not affect the procedures used this year. D) the materiality of the item will not influence the choice of procedures used.

Which one the following procedures performed for the billing function provides evidence for the completeness assertion? A) making sure that all shipments have been billed B) making sure that no shipment has been billed more than twice C) making sure that each shipment is billed at the correct amount D) making sure that each shipment is billed to the proper customer

A listing of the balances in the accounts receivable master file at the balance sheet date, including individual customer balances outstanding and a breakdown of each balance by the time passed between the date of the sale and the balance sheet date, is the A) customer list. B) aged trial balance. C) accounts receivable ledger. D) schedule of accounts receivable

An effective procedure to test for unfilled shipments is to trace from the A) sales journal to the shipping documents. B) shipping documents to the sales journal. C) sales journal to the accounts receivable ledger. D) sales journal to the general ledger sales account.

Analytical procedures A) are only done during the planning of the audit and when performing detailed tests. B) performed during the detailed testing phase are done before tests of details of balances. C) performed during the detailed testing phase are done before the balance sheet date. D) are performed only on accounts receivable, not on the entire sales and collection cycle.

At what point in the acquisition and payment cycle do most companies first recognize the acquisition and related liability on their records? A) when the purchase requisition is received by the accounting department B) when the purchase order is prepared C) when the company receives the invoice from the vendor D) when the company receives the goods or services from the vendor

The appropriate and sufficient evidence to be obtained from tests of details must be decided on an A) efficiency basis. B) effectiveness basis. C) objective-by-objective basis. D) none of the above

When dealing with the processing and recording of cash receipts, A) the most important concern is the theft of cash. B) theft can only occur before the receipts are entered into the records. C) cash receipts should be deposited at least monthly. D) the monthly statement is used to prepare the cash receipts journal.

Which of the following is an accurate statement regarding the risk assessment process of phase I of the audit process for the sales and collection cycle? A) Auditors must perform substantive tests related to assertions deemed to have significant risks. B) The auditor must relate control risk for transaction-related audit objectives to balance-related audit objectives in deciding planned inherent risk. C) The realizable value balance-related audit objectives are affected by assessed control risk for classes of transactions. D) All of the above are accurate statements.

Which of the following is not a key control for sales and cash receipts? A) active board of directors B) adequate separation of duties C) internal verification procedures D) adequate documents and records

Which of the following is not one of the classes of transactions in the acquisition and payment cycle? A) acquisition of common stock B) acquisition of goods and services C) cash disbursements D) purchase returns and allowances and purchase discounts

Which of the following tests of controls is useful to test the transaction-related audit objective of posting and summarization? A) Observe whether monthly statements are sent. B) Observe unrecorded cash at a point in time. C) Observe whether the accountant reconciles the bank account. D) Observe endorsement of incoming checks.

A document generally received from the vendor which indicates a reduction in the amount owed due to the company granting an allowance is a A) vendor invoice. B) debit memo. C) credit adjustment form. D) credit memo.

A document sent to each customer showing his or her beginning accounts receivable balance and the amount and date of each sale, cash payment received, any debit or credit memo issued, and the ending balance is the A) accounts receivable subsidiary ledger. B) monthly statement. C) remittance advice. D) sales invoice.

For cash receipts, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives? A) existence B) completeness C) rights D) detail tie-in

In many audits of sales transactions substantive tests of transactions can be reduced in determining the completeness objective because A) understatements of assets and income are a greater concern than overstatements. B) overstatements of assets and income are a greater concern than understatements. C) it doesn't matter if income is understated because the savings on income tax offsets the reduced revenue and net income is correct. D) the unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two financial statements will not be misleading.

Most tests of accounts receivable are based on what schedule, file, or listing? A) sales master file B) aged accounts receivable trial balance C) accounts receivable master file D) accounts receivable general ledger account

One type of shipping document is the ________, which is a written contract between the carrier and the seller of the receipt and shipment of goods. A) sales order B) bill of lading C) sales invoice D) customer order

Prenumbered documents will only be useful for control purposes if A) a different numerical sequence is used for each company. B) the sequence is accounted for periodically. C) employees are allowed to use documents out of numerical sequence. D) the same numerical sequence is used each accounting period.

Smaller privately held companies may not maintain an accounts payable master file by vendor. These companies pay on the basis of A) vendors' monthly statements. B) individual vendors' invoices. C) the accounts payable account in the general ledger. D) dunning letters.

Smith Manufacturing Company's accounts receivable clerk has a friend who is also a customer of Smith Manufacturing. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to A) prenumber and account for all credit memorandums. B) require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved. C) have independent sales and accounts receivable departments. D) mail monthly statements to customers.

The audit procedure referred to as proof of cash receipts is particularly useful to test A) time lags in making deposits. B) whether all recorded cash receipts have been deposited in the bank. C) whether there are cash receipts that have not been recorded in the journals. D) the client's reconciliation between cash receipts and bank deposits.

The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the A) existence objective. B) completeness objective. C) ownership objective. D) valuation objective.

The auditor's primary concern in performing audit procedures of the write-off of uncollectible accounts relates to the risk that the client writes off customer accounts that have already been collected.The primary control for preventing this fraud is A) examining authorized credit memos. B) examining the uncollectible account authorization form. C) examining debit memos. D) examining the vouchers payable register.

The document that accompanies the customer's payment is the A) credit memo. B) remittance advice. C) vendor invoice. D) monthly statement

The two primary classes of transactions in the sales and collection cycle are A) sales and sales discounts. B) sales and cash receipts. C) sales and sales returns. D) sales and accounts receivable.

To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with A) the original invoices. B) an approved master price list. C) the amounts recorded in the sales journal for that transaction. D) the amounts posted to the customer's account in the accounts receivable master file.

Which of the following is a correct statement regarding analytical procedures? A) If an auditor identifies a possible misstatement in sales using analytical procedures, accounts payable will be the likely offsetting misstatement. B) Auditors should also compare the results of their analytical procedures to budgets and industry trends. C) If sales are overstated, the income statement will be incorrect, but the balance sheet will be correct. D) If an analytical procedure uncovers an unusual fluctuation, the auditor must assume fraud is involved.

Which of the following is a correct statement regarding the shipment of goods? A) The shipping document must be in paper form. B) The shipping document is used to update the perpetual inventory records. C) Only one copy of the shipping document is needed. D) All of the above are correct statements.

Which of the following is likely to be determined first when performing tests of details for accounts receivable? A) Recorded accounts receivable exist. B) Accounts receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger. C) The client has a right to the accounts receivable. D) Existing accounts receivable are included.

A ________ is a document that indicates a request for merchandise by a customer. A) sales invoice B) vendor invoice C) customer order D) sales order

Audit procedures designed to uncover credit sales made after the client's fiscal year-end that relate to the current year being audited provide evidence for which of the following audit objectives? A) realizable value B) accuracy C) cutoff D) existence

In the processing and recording of cash disbursements, A) after a check includes the signature of an authorized person, it is a liability. B) when a check cashed by the vendor has cleared the bank, it is called an outstanding check. C) in many cases, the company submits payment to the vendor electronically through an electronic funds transfer (EFT) between the company's bank and the vendor's bank. D) the accounts payable master file is a computer-generated file that includes all cash disbursement transaction processed by the accounting system for a period.

Which of the following would offer the best protection for a company that wishes to prevent a reoccurrence of a previously detected "lapping" problem with trade accounts receivable? A) Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. B) Separate duties so that no employee has access to both checks from customers and currency from daily cash receipts. C) Have a mandatory vacation policy for employees who both handle cash and enter cash receipts into the system. D) Request that customer's payment checks be made payable to the company and addressed to the treasurer.

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mail room? A) The cashier prepares the daily deposit. B) The cashier makes the daily deposit at a local bank. C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards. D) The cashier endorses the checks.

Which type of misstatement is always a fraud? A) sales included in the journals for which no shipment was made B) sales to related parties, such as officers and subsidiaries C) shipments made to nonexistent customers and recorded as sales D) sales recorded more than once.

Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts? A) company personnel B) temporary employees in the town where the lockbox is located C) bank employees D) company controller

Except for two key differences, the transaction-related audit objectives are essentially the same for the processing of credit memos as they are for sales. Which of the following are the two key differences? A) risk and emphasis on the completeness objective B) materiality and emphasis on the accuracy objective C) risk and emphasis on the classification objective D) materiality and emphasis on the occurrence objective

The total of the individual account balances in the accounts receivable master file should equal the A) total sales for the period. B) balance of the sales account in the general ledger. C) total sales less the total cash received for the period. D) balance of the accounts receivable account in the general ledger

What event initiates a transaction in the sales and collection cycle? A) receipt of cash B) delivery of product to a customer C) identification of a new customer D) customer request for goods or services

When assessing planned control risk for sales, A) the key internal controls and deficiencies for sales will be the same for every company. B) the audit objectives for sales will differ from company to company. C) a flowchart is required to help assess control risk for sales. D) assessing control risk for sales is a highly subjective decision.

Which one of the following best describes the auditors responsibilities regarding appropriate authorizations in the sales/collections cycle? A) Credit must be authorized before the sale. B) Goods must be shipped after the authorization C) Prices must be authorized. D) All of the above should be of concern to the auditor

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