ACC346 - Audit Final Exam Review

Mary Hallmonitor, CPA, noted that ABC Co. received goods prior to year-end that were counted and included in physical inventory but had not been recorded. In this case, what adjustments should be made?

Debit COGS, Credit Accounts Payable

If the date of an entity's financial statements is December 31, the date of the auditor's report is February 20, and the audit report release date is February 22, which of the following is considered a subsequent event? a. a significant acquisition that was announced on February 1 and will be finalized on October 1 b. a court settlement on March 3 related to a case that was pending on December 31 c. losses from the devaluation of a foreign currency that became finalized on February 21 d. the entity's announcement of a major restructuring plan on December 30 that will be implemented during the upcoming year

a. a significant acquisition that was announced on February 1 and will be finalized on October 1

When confirming accounts payable, emphasis should be put on what kind of accounts? a. accounts with small or zero balances b. all accounts should be equally emphasized c. accounts with large balances d. accounts listed in the accounts payable subsidiary

a. accounts with small or zero balances

To whom should written representations be addressed? a. auditors b. board of directors c. client d. stockholders

a. auditors

Auditors count investment securities held by the client primarily to test the ASB balance assertion of a. existence b. rights and obligations c. completeness d. valuation

a. existence

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would a. inspect the property ledger and the insurance and tax records, and then tour the client's facilities b. tour the client's facilities, and then inspect the property ledger, and the insurance and tax records c. analyze the repair and maintenance account, and then tour the client's facilities d. tour the client's facilities, and then analyze the repair and maintenance account

a. inspect the property ledger and the insurance and tax records, and then tour the client's facilities

Which of the following fraud detection steps could not be performed by CAATs? a. look for photocopies in invoice files b. look for vendor invoices in numerical order c. look for vendor invoices slightly below the approval threshold d. look for duplicate vendor numbers

a. look for photocopies in invoice files

The preferred method of determining fair value of transactions is a. market-based values b. basing them on reasonable management assumptions c. external auditor estimates d. detailed computations by outside experts

a. market-based values

An auditor selected an invoice for a large inventory purchase and vouched the invoice to the receiving report. Which ASB transaction assertion is the auditor most likely testing? a. occurrence b. completeness c. rights and obligations d. valuation

a. occurrence

The focus of controls in the finance and investment cycle is on a. proper authorizations and competent personnel b. computer controls over transactions c. physical security of assets d. prenumbered documents

a. proper authorizations and competent personnel

Which of the following audit procedures is best for identifying unrecorded accounts payable? a. reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period b. investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supporting by receiving reports c. examining unusual relationships between monthly accounts payable balances and recorded cash payments d. reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date

a. reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period

The audit procedures used in an observation of the client's physical inventory taking are designed primarily to a. test and observe the client's physical count of inventory b. verify independently the physical counts obtained by the client c. assist the client in taking test counts of year-end inventory d. determine whether inventory contains obsolete goods

a. test and observe the client's physical count of inventory

Loan covenants are used for which of the following reasons? a. to protect the lender from the borrower substantially weakening the borrower's financial position b. to protect the borrower from the lender calling the loan early c. to protect the auditors from false information by the borrower d. to protect shareholders from management taking on too much debt

a. to protect the lender from the borrower substantially weakening the borrower's financial position

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be a. vendors with whom the entity has previously done business b. amounts recorded in the accounts payable subsidiary ledger c. payees of checks drawn in the month after the year-end d. invoices filed in the entity's open invoice file

a. vendors with whom the entity has previously done business

Which of the following steps would not normally be included in a program for a physical inventory observation? a. vouch unit prices to vendors' invoices or other cost records b. obtain the client's inventory counting instructions and review them for completeness c. inspect the tags used and unused and record the tag numbers used d. obtain the numbers of the last five receiving reports and last five shipping documents

a. vouch unit prices to vendors' invoices or other cost records

Which of the following would detect the understatement of a purchase discount? a. verify the arithmetic accuracy of the purchases journal b. compare purchase disbursement records and checks with invoice terms c. compare approved purchase orders to receiving reports d. verify the receipt of items ordered and invoiced

b. compare purchase disbursement records and checks with invoice terms

An auditor selected an invoice for a large inventory purchase and vouches the invoice to the receiving report. Which ASB transaction assertion is the auditor most likely testing? a. occurrence b. completeness c. rights and obligations d. valuation

b. completeness

Which ASB balance assertion is of the most important to auditors for long-term liabilities? a. existence b. completeness c. rights and obligations d. valuation

b. completeness

Which of the following audit procedures would not likely be performed for audits of investments? a. read board of directors' minutes for authorization of investment strategies b. confirm investments with registrar c. confirm investments with broker or trustee d. compare valuation to published market prices

b. confirm investments with registrar

When auditing PPE, the auditor's approach is generally to a. examine evidence supporting the amounts in the ending balance b. examine evidence supporting additions during the year c. follow a reliance strategy, testing internal controls and analytical procedures d. concentrate on finding unrecorded assets

b. examine evidence supporting additions during the year

Which of the following conditions or set of circumstances would not ordinarily raise questions about the entity's ability to continue as a going concern? a. violation of debt covenants b. failure to meet forecasted earnings per share c. legal proceedings that may have a significant negative impact on the entity d. negative cash flow from operations for each of the last three years

b. failure to meet forecasted earnings per share

Compensating controls in the finance and investment cycle a. feature separation of duties by upper management b. feature involvement of two or more persons handling all important responsibilities c. include involvement by the external auditor d. include all the above

b. feature involvement of two or more persons handling all important responsibilities

An auditor wishes to perform tests of controls on a client's purchasing procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the procedures by a. confirmation and observation b. observation and inquiry c. analytical procedures and confirmation d. inquiry and analytical procedures

b. observation and inquiry

Which of the following is not a substantive audit procedure for estimates of management? a. recalculating the mathematical estimate b. observing whether estimates are prepared by qualified personnel c. developing an independent estimate based on alternative assumptions d. comparing the estimates of management to subsequently discovered facts before the end of fieldwork

b. observing whether estimates are prepared by qualified personnel

Recorded vouchers (accounts payable entries) in the voucher register (i.e. purchases journal) supported by completed voucher documentation is a specific example of which management assertion? a. classification b. occurrence c. completeness d. cutoff

b. occurrence

Periodic or cycle counts of selected inventory items are made at various times during the year rather than during a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventories at interim dates? a. complete recounts by independent teams are performed b. perpetual inventory records are maintained c. unit cost records are integrated with production accounting records d. inventory balances are rarely at low levels

b. perpetual inventory records are maintained

If an audit is performed for the benefit of a specific person or organization, that person or organization is known as a(n) a. party to the contact b. primary beneficiary c. foreseeable third party d. prime benefactor

b. primary beneficiary

Loan covenants a. describe the collateral of the loan b. require the borrower to maintain certain financial characteristics c. describe the lender's responsibilities d. include all the above

b. require the borrower to maintain certain financial characteristics

In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of ASB balance assertion of existence and a. valuation b. rights and obligations c. completeness d. accuracy

b. rights and obligations

On March 15, 2015, Clark Kent, CPA, issued an unmodified opinion on a client's audited financial statements for the year ended December 31, 2014. On May 4, 2015, Kent's internal inspection program disclosed that engagement personnel failed to observe the client's physical inventory. Omission of this procedures impairs Kent's present ability to support the unqualified opinion. If the stockholders are currently relying on the opinion, Kent should first a. advise management to disclose to the stockholders that would provide a satisfactory bases for the opinion b. undertake to apply alternative procedures that would provide a satisfactory basis for the opinion c. reissue the auditors' reports and add an explanatory paragraph describing the departure from generally accepted auditing standards d. compensate for the omitted procedure by performing tests of controls to reduce audit risk to a sufficiently low level.

b. undertake to apply alternative procedures that would provide a satisfactory basis for the opinion

Company A hired Chug & Hurt, CPA's to audit the financial statements of Company B and deliver the report to M & Fee Bank. Who is the client? a. M & Fee Bank b. Chug & Hurt c. Company A d. Company B

c. Company A

An auditor reviews job cost sheets to test which transaction assertion? a. occurrence b. completeness c. accuracy d. classification

c. accuracy

The primary objective of analytical procedures used near the end of an audit is to a. obtain evidence from details tested to corroborate management assertions b. obtain evidence on the validity of the assessment of control risk c. assist auditors in evaluating the overall financial statement presentation d. identify areas that represent specific risks relevant to the audit

c. assist auditors in evaluating the overall financial statement presentation

Auditors have a responsibility to evaluate whether financial statements properly reflect all known events through the a. date of the financial statements b. date of the auditors' report c. audit report release date d. subsequent year's date of the financial statements

c. audit report release date

An audit plan for the examination of retained earnings account should include a step that requires the verification of the a. market value used to charge retained earnings to account for a 2 for 1 stock split b. approval of the adjustment to the beginning balance as a result of a write-down of accounts receivables c. authorization for both cash and stock dividends d. dividends received from investments

c. authorization for both cash and stock dividends

Which of the following personnel department procedures reduces the risk of payroll fraud and represents and appropriate responsibility for the department? a. distributing paychecks b. authorizing overtime hours c. authorizing the addition or deletion of employees from the payroll d. collecting and retaining unclaimed paychecks

c. authorizing the addition or deletion of employees from the payroll

In auditing long-term bonds payable, an auditor most likely would a. perform analytical procedures on the bond premium and discount accounts b. examine documentation of assets purchased with bond proceeds for liens c. compare interest expense with the bond payable amount for reasonableness d. confirm the existence of individual bondholders at year-end

c. compare interest expense with the bond payable amount of reasonableness

An auditor selected an inventory item on the warehouse floor, test counted it, and traced the count to the final inventory compilation. The auditor most likely was testing the PCAOB assertion of a. existence b. valuation c. completeness d. rights and obligations

c. completeness

Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of a. valuation or allocation b. existence or occurrence c. completeness d. rights and obligations

c. completeness

Selecting a sample of paid notes and tracing interest to the general ledger account is a test of the PCAOB assertion for a. accounting b. valuation or allocation c. completeness d. existence

c. completeness

Selecting a sample of paid notes and tracing interest to the general ledger account is a test of the PCAOB assertion for a. accounting b. valuation or allocation c. completeness d. existence or occurrence

c. completeness

"Are interest payments and accruals monitored for due dates and financial statement dates?" is an internal control questionnaire item that is related to the ASB transaction assertion of a. occurrence b. completeness c. cutoff d. accuracy

c. cutoff

Which of the following best describes the auditors' responsibility with respect to management's estimates? a. verifying the mathematical accuracy of management estimates b. assessing the likelihood that actual results will be consistent with management's estimates c. evaluation the reasonableness of management's estimates d. identifying how the entity's failure to achieve management's estimates will influence users' decisions

c. evaluation the reasonableness of management's estimates

Which of the following approaches is most suitable for auditing the finance and investment cycle? a. perform extensive tests of controls and limit substantive procedures to analytical procedures b. ignore internal controls and perform extensive substantive procedures c. gain an understanding of internal controls and perform extensive substantive procedures d. ignore internal controls and limit substantive procedures to analytical procedures

c. gain an understanding of internal controls and perform extensive substantive procedures

To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace a. inventory tags noted during the auditor's observation to items in the inventory listing schedule b. inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices c. items in the inventory listing schedule to inventory tags and the auditor's recorded count sheets d. items in receiving reports and vendors' invoices to the inventory listing schedule

c. items in the inventory listing schedule to inventory tags and the auditor's recorded count sheets

Maple Company has an increase in purchase from specific vendors and an increase in raw materials inventory for the items purchased from these vendors. Sales for the company have not increased and are not forecast to increase. From this information an auditor might suspect a. an increase in obsolete raw material inventory b. theft of raw material inventory c. kickbacks from vendors d. poor security over raw material inventory

c. kickbacks from vendors

Related party transactions a. must be valued as if they were arm's length b. must be assumed to be valued differently than if they were arm's length c. must be disclosed in the financial statements d. must be disclosed in the financial statements and the auditor's report

c. must be disclosed in the financial statements

An auditor most likely would extend substantive tests of payroll when a. payroll is extensively audited by the state government b. payroll expense is substantially higher than in the prior year c. overpayments are discovered in performing tests of controls d. employees complain to management about too much overtime

c. overpayments are discovered in performing tests of controls

A client maintains perpetual inventory records in quantities and in dollars. If the assessed control risk is high, an auditor would probably a. apply gross profit tests to ascertain the reasonableness of the physical counts b. increase the extent of tests of controls relevant to the inventory cycle c. request the client to schedule the physical inventory count at the end of the year d. insist that the client perform physical counts of inventory items several times during the year

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

During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify the ASB assertion and disclosure assertion of a. occurrence b. completeness c. rights and obligations d. understandability

c. rights and obligations

Which of the following accounts does not appear in the acquisition and expenditure cycle? a. cash b. purchases returns c. sales returns d. prepaid insurance

c. sales returns

Management letters are not a means of a. reporting recommendations to the client b. assisting the client in improving its operations c. satisfying professional requirements to communicate matters related to the client's internal control d. developing rapport with the client

c. satisfying professional requirements to communicate matters related to the client's internal control

Derivative instruments include a. stocks b. preferred stocks c. stock options d. all of the above

c. stock options

A liability for a long-term purchase contact should generally be recognized when a. the contract is signed b. the goods are shipped c. the goods are received d. the goods are sold to match the cost

c. the goods are received

A liability for a long-term purchase contract should generally be recognized when a. the contract is signed b. the goods are shipped c. the goods are received d. the goods are sold to match the cost

c. the goods are received

Why should auditors be particularly concerned with "miscellaneous," "other," and "clearing" accounts classified as revenues or expenses? a. these accounts are likely to relate to going-concern matters b. these accounts are often more difficult to audit using normal substantive procedures c. these accounts may represent attempts of earnings management d. these accounts are likely to require the assistance of a specialist

c. these accounts may represent attempts of earnings management

Long and Shot CPAs, were auditing Island Corporation for the year ended December 31, 2014. On January 11, 2015, a major customer of Island Corporation declared bankruptcy as the result of an uninsured loss due to a major fire in their warehouse on January 8, 2015. As a result, a material accounts receivable from the customer was determined to be uncollectible. Long and Shot, CPAs, would expect the client to a. record the loss on uncollectible accounts as a routine transaction in the year 2015 b. treat the loss as a subsequent event and provide a footnote about the loss in the 2014 financial statements c. treat the loss as a subsequent event and adjust the 2014 financial statements to record the loss on uncollectible accounts d. file a lawsuit against the customer in hopes of collecting some of the money owed to the client

c. treat the loss as a subsequent event and adjust the 2014 financial statements to record the loss on uncollectible accounts

Cash disbursements are authorized by a. purchase orders b. invoices c. receiving reports d. a complete voucher package

d. a complete voucher package

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about a. existence b. rights and obligations c. completeness d. accuracy and valuation

d. accuracy and valuation

If it would be appropriate to confirm capital stock, the auditor would obtain the confirmation from a. management b. the board of directors c. stockholders d. an independent registrar

d. an independent registrar

In connection with the audit of an issue of long-term bonds payable, the audit team should a. determine whether bondholders are persons other than owners, directors, or officers of the company issuing the bond b. calculate the effective interest rate to see if it is substantially the same as the rates for similar issues c. decide whether the bond issue was made without violating state or local law d. ascertain that the client has obtained the opinion of counsel on the legality of the issue

d. ascertain that the client has obtained the opinion of counsel on the legality of the issue

Which of the following would not be included in the supporting documents for a voucher? a. purchase order b. vendor invoice c. receiving report d. blank check

d. blank check

An audit team's purpose in reviewing the documentation concerning the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management's assertions about a. existence b. valuation c. completeness d. classification

d. classification

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables? a. reconcile receiving reports with related cash payments made just prior to year-end b. contrast the ratio of accounts payable to purchases with the prior year's ratio c. vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders d. compare cash payments occurring after the balance sheet date with the accounts payable trial balance

d. compare cash payments occurring after the balance sheet date with the accounts payable trial balance

When testing a company's cost accounting system, the auditor uses procedures that are primarily designed to determine that a. quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand b. physical inventories agree substantially with book inventories c. the system is in accordance with generally accepted accounting principles and is functioning as planned d. costs have been properly assigned to finished goods, work-in-process, and cost of goods sold

d. costs have been properly assigned to finished goods, work-in-process, and cost of goods sold

Roll-forward work normally occurs between the ... and the ... a. beginning of the year under audit, audit report release date b. date of the financial statements, audit report release date c. beginning of the year under audit, date of the financial statements d. date of interim work, date of the auditors' report

d. date of interim work, date of the auditors' report

Mary Monitor, CPA, noted that ABC Co. received goods prior to year-end that were included in physical inventory but had not been recorded. In this case, which of the following adjustments should be made? a. debit purchase / credit COGS . none c. debit inventory / credit accounts payable d. debit COGS / credit accounts payable

d. debit COGS / credit accounts payable

An auditor's tests of controls over the issuance of raw materials to production would most likely include a. reconciling raw materials and work-in-process perpetual inventory records to general ledger balances b. inquiring of the custodian about the procedures followed when detective materials are received from vendors c. observing that raw materials are stored in secure areas and that storeroom security is supervised by a responsible individual d. examining material requisitions and reperforming client controls designed to process and record issuances

d. examining material requisitions and reperforming client controls designed to process and record issuances

The typical assertions related to investments and related accounts would not include the PCAOB assertion that a. capitalized intangible costs relate to intangibles acquired in exchange transactions b. amortization is properly calculated c. research and development costs are properly classified d. goodwill is valued at market value

d. goodwill is valued at market value

Auditors may conclude that depreciation charges are too small by noting a. insured values much larger than book values b. large numbers of fully depreciated assets c. frequent trade-ins of relatively new assets d. large and frequent losses on assets retired

d. large and frequent losses on assets retired

Your client plans to count inventory at several locations on the same day. No location is material in amount, but the total of inventory is quite material. How is an auditor likely to plan to observe? a. observe all counts at all locations by using the required number of auditors b. insist the inventory be counted at all locations by using the required number of auditors c. work with the client to determine which locations to observe d. observe a sample of locations on a surprise basis

d. observe a sample of locations on a surprise basis

Which of the following procedures is not used in auditors' examination of litigation, claims, and assessments? a. obtaining a description and evaluation of litigation, claims, and assessments from management b. examining documentary evidence regarding litigation, claims, and assessments c. reading minutes if meetings of stockholders, directors, and appropriate committees d. performing analytical procedures

d. performing analytical procedures

Your client counts inventory three months before the end of the fiscal year. Internal controls over inventory are excellent. Which procedure is not necessary for the inventory roll-forward? a. check that shipping documents for the last three months agree with perpetual records b. tracing receiving reports for the last three months to perpetual records c. compare gross margin percentages for the last three months d. request the client to recount inventory at the end of the year

d. request the client to recount inventory at the end of the year

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record a. purchase discounts b. purchase returns c. sales d. sales returns

d. sales returns

Which of the following is the most effective method of identifying potential earnings management attempts? a. analytical procedures b. detailed substantive procedures c. inquiry of client management and key financial personnel d. scanning accounts for unusual items

d. scanning accounts for unusual items

Which of the following methods for determining inventory cost is not allowed by GAAP? a. average cost b. FIFO c. LIGO d. standard cost

d. standard cost

Which of the following events or activities may occur following the audit report release date? a. interim testing b. roll-forward work c. subsequent events d. subsequently discovered facts

d. subsequently discovered facts

A form of communication used by auditors to corroborate information received orally from the client during the audit examination is a(n) a. acceptance letter b. confirmation letter c. engagement letter d. written representation

d. written representation

True or false? If control risk is assessed very low, cost accumulations will require additional substantive procedures to lower the risk of failing to detect material misstatements in inventory.

false

True or false? Standard costing of inventory is a generally accepted accounting principle.

false

An account payable is ... and an accrual is ...

period certain, an estimate

True or false? A comparison of the prior year's sales forecast with actual sales may provide an indication of slow-moving inventory.

true

True or false? Based on the production orders, management develops a plan for the amount and timing of production.

true

True or false? Cost accounting is responsible for reconciling inventory usage with production.

true

True or false? Forecasts of the following year can be used in connection with valuing the inventory at lower-of-cost or market, which influences the amount of cost of goods sold that is shown in the financial statements.

true

True or false? If control risk is assessed high, cost accumulations will require additional substantive procedures to lower the risk of failing to detect material misstatements in inventory.

true

True or false? If inventory located is off the client's premise the auditor might confirm the amount with the custodian to satisfy evidence requirements.

true

True or false? Most businesses try to estimate sales levels and seasonal timing and then try to plan production schedules to meet customer demand.

true

True or false? Production planning interacts with inventory planning to produce production orders.

true

True or false? When inventory quantities are determined solely by means of a physical count it is necessary for the auditor to be present at the time of the count.

true