Accounting test 3

FASB ASC Topic 820 provides a hierarchy of levels that distinguish the types of inputs used to value different types of assets and liabilities are their appropriate fair values. A valuation based on directly or indirectly observable market data for similar or comparable assets or liabilities best describes Level ______.

2

Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?

A bank lockbox system.

What is channel stuffing?

A company induces distributors to buy substantially more inventory than they can promptly resell.

Which of the following describes a temporary difference?

A timing difference between the recognition of revenue or expense under GAAP and tax purposes.

Which of the following procedures is NOT used to test the bank reconciliation?

Agree any charges included on the bank statement to the cutoff bank statement.

Which of the following most likely would give the most assurance concerning the valuation assertion for accounts receivable?

Assessing the allowance for uncollectible accounts for reasonableness.

If fraud is suspected, auditors may complete all of the following procedures except: A. testing for kiting. B. footing the bank reconciliation and the outstanding checks listing. C. performing a proof of cash. D. performing extended bank reconciliation procedures, including detailed examination of reconciling items.

B. footing the bank reconciliation and the outstanding checks listing.

Substantive analytical procedures are used to examine plausible relationships among _______ ________ and accrued expenses.

Blank 1: accounts Blank 2: payable

When the auditor has completed the planned substantive procedures, the _______ misstatement for accounts receivable is determined and compared to the __________ misstatement.

Blank 1: aggregate Blank 2: tolerable

The auditor should analyze accounts payable misstatements discovered through the application of substantive procedures because these misstatement may provide additional evidence as to the ________ ________

Blank 1: control Blank 2: risk

The person who approved the purchase and the authorization to buy a good or service is included on the

Blank 1: purchase Blank 2: order

To ensure an independent count of goods, the _______ ________ is normally a copy of the purchase order with quantities omitted.

Blank 1: receiving Blank 2: report

If the evidence does not support fair presentation, the auditor can adjust the accounts to reduce the misstatement to an amount less than the __________ misstatement or ________ the audit report.

Blank 1: tolerable Blank 2: qualify

The entity verifies the accuracy of its records by comparing _______ _______with the accounts payable records.

Blank 1: vendor Blank 2: statements

The least crucial element of internal control over cash is: A. separation of cash record-keeping from custody of cash. B. preparation of the monthly bank reconciliation. C. Batch processing of checks D. separation of cash receipts from cash disbursements.

C. Batch processing of checks

Which of the following procedures is used to test the bank reconciliation?

Compare outstanding checks on the bank reconciliation with the cutoff bank statement.

Which of the following control activities is not usually performed in the accounts payable department?

Controlling the mailing of the check and remittance advice

Customers having substantial year-end past due balances fail to reply after second request confirmation forms have been mailed directly to them. Which of the following is the most appropriate audit procedure?

Examine shipping documents.

A negative confirmation requests that customers respond whether they agree or not with the amount due to the entity stated in the confirmation.

False

Auditors normally test the cutoff assertion by conducting tests of controls only.

False

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

False

True or false: If an auditor suspects cash was stolen without being recorded in the entity's books, (s)he should perform a proof of cash.

False

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

For cash payments occurring after the balance sheet date, examine the date on the associated receiving report or vendor invoice to determine if it relates to the current audit period.

In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?

Occurrence.

"The auditor should presume that there is a fraud risk involving improper revenue recognition...." is stated in which authoritative standard?

PCAOB AS 2110 Identifying and Assessing Risks of Material Misstatement

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting between intercompany banks?

Prepare a schedule of bank transfers.

The cashier of Brooke Company covered a shortage in the cash working fund with cash obtained on December 31 from a local bank by cashing, but not recording, a check drawn on the company's out-of-town bank. How would the auditor discover this manipulation?

Preparing and detail testing a bank transfer schedule.

Which of the following audit procedures is the most appropriate when internal control over cash is weak or when an entity requests an investigation of cash transactions?

Proof of cash.

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fund maintained on an imprest basis?

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

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

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

Which of the following procedures is least likely to be performed before the balance sheet date?

Search for unrecorded liabilities.

Which of the following internal controls would be most likely to deter the lapping of collections from customers?

Segregation of duties between receiving cash and posting the accounts receivable ledger.

During a review of a small business entity's internal control system, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness?

The owner reviews credit memos before they are recorded.

FASB ASC Topic 820 defines Fair Value as:

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

As one of the year-end audit procedures, the auditor instructed the entity's personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the entity's treasurer had signed the request, it was mailed to the bank by the assistant treasurer. What is the major flaw in this audit procedure?

The request was mailed by the assistant treasurer.

Related-party transactions is a common disclosure for revenue-related accounts.

True

Unrecorded liabilities are most likely to be found during the review of which of the following documents?

Unpaid bills.

Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff?

Unrecorded sales for the year.

FASB ASC Topic 820 provides a hierarchy of levels that distinguish the types of inputs used to value different types of assets and liabilities are their appropriate fair values. Which of the following best describes Level 3?

Valuations are based on management's best judgment and involve management's assumptions.

FASB ASC Topic 820 provides a hierarchy of levels that distinguish the types of inputs used to value different types of assets and liabilities are their appropriate fair values. Which of the following best describes Level 1?

Valuations are based on quoted prices in active markets for identical assets or liabilities.

If the objective of a test of details is to detect the overstatement of sales, the auditor should trace transactions from the:

accounting records to the shipping documents.

To test the auditor's concern with accounts receivables completeness, the aged trial balance should be reconciled to the ______.

accounts receivables general ledger account

If an auditor does not receive responses to positive confirmations ______.

additional requests can be sent

Third-party providers of electronic confirmation services ______.

address the risk of fraud

If the aggregate misstatement is greater than the tolerable misstatement, the auditor choices are to ______.

adjust the accounts to reduce the misstatement qualify the audit report

Substantive tests of transactions ______.

are often conducted at the same time as tests of controls may be difficult to distinguish from a test of controls

Paper-based bank confirmations are sent and received by the

auditor

Accounts payable confirmations are used to test

both the existence and completeness audit assertions.

The auditor obtains a cutoff bank statement ______,

by having the entity request the bank send the statement to the auditor

Examples of disclosure issues for cash include ______

cash balances restricted by foreign exchange contracts letters of credit an accounting policy for defining cash and cash equivalents

An auditor should trace interbank transfers for the last part of the audit period and first part of the subsequent period to detect whether:

cash balances were overstated because of kiting.

Disbursements made by check or EFT are recorded in the

cash disbursements journal

When searching for unrecorded liabilities at year-end, the population identified for sampling would be

cash disbursements recorded in the period subsequent to year-end.

On receiving the cutoff bank statement, the auditor should vouch:

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

Segregating short-term and long-term payables is one of the major issues with respect to presentation and disclosure assertions about ______.

classification

Obtaining a listing of accounts payable, footing the listing, and agreeing it to the general ledger control account is done to determine the __________ of accounts payable

completeness

The auditor's concern with the ___________ assertion over accounts receivable is whether all accounts receivable have been included in the subsidiary ledger and the general ledger account.

completeness

When tracing a sample of shipping documents from throughout the year to the details of the sales invoices and to the sales journal and customers' accounts receivable subsidiary ledger, the auditor is testing the _____________ assertion.

completeness

An auditor testing long-term investments would ordinarily use substantive analytical procedures to ascertain the reasonableness of the:

completeness of recorded investment income.

Audit evidence that is a direct written response from a third party to the auditor, in paper form or by electronic or other medium is called

confirmation

A vendor invoice

contains the quantity shipped and price is the bill from the supplier

The cash disbursements journal usually has columns for

credits to cash debits to accounts payable

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because:

customers may not be inclined to report understatement errors in their accounts.

The __ assertion attempts to determine whether all purchase transactions and related accounts payable are recorded in the proper period.

cutoff

The attempt of the ________ assertion is to determine whether all revenue transactions and related accounts receivable are recorded in the proper period.

cutoff

The auditor obtains a(n) ________ bank statement to test reconciling items included in the bank reconciliation.

cutoff

Tests designed to detect credit sales made after the end of the year that have been recorded in the current year provide assurance about management's assertion of:

cutoff.

The existence assertion for accounts payable includes:

determining whether all accounts payable actually are liabilities.

The cutoff assertion for accounts payable includes:

determining whether all accounts payable are recorded in the proper period.

Auditors are more concerned with the occurrence assertion for revenues than the completeness assertion because:

entities are more likely to overstate than understate revenues.

The auditor must maintain control over the accounts receivable confirmations to minimize the possibility of ______.

entity interception of the confirmation alteration of the confirmation by the entity

When the auditor does not receive a response to the positive confirmations, possible procedures include ______.

examining specific subsequent cash receipts examining shipping documentation sending second and third requests

A test of details of balances for cash calls for confirming the bank account balance with the financial institution. This is most likely done to provide evidence regarding ______.

existence

One of the more important assertions regarding accounts receivables is _________ because the auditor wants assurance that this account balance is not overstated through the inclusion of fictitious customer accounts or amounts.

existence

The auditor's major concern with the ______ assertion is whether the recorded liabilities are valid obligations of the entity.

existence

The major audit procedures for testing the ________ assertion for accounts receivables are confirmation of customers' accounts balances and examination of subsequent cash receipts.

existence

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date is the FASB ASC Topic 820 definition of

fair value

When the results of testing controls do not support the planned level of control risk, detection risk will ______.

have to be set lower

The major issues related to the presentation and disclosure assertion about accounts payable are ______.

identifying and reclassifying any material debits contained in accounts payable segregating short-term and long-term payables ensuring that different types of payables are properly classified

A purchase order

indicates the authorization to purchase the goods or services includes the description, quality and quantity of the goods being purchased

According to ASC Topic 820, fair value ______.

is the price that would be received to sell an asset or transfer a liability in an orderly transaction must be measured in accordance with GAAP

An employee prepares a check on one account before year end but does not record it as a disbursement. The same check is deposited and recorded as a cash receipt in a second account before year end. The employee is engaged in

kiting

If a company uses electronic wire transfers

kiting is still possible due to a one-day delay in recording

If the auditor has tested entity controls for ensuring that liabilities are recorded, he or she may be able to focus on accounts payable confirmations of ______ dollar accounts.

large

If the aggregate misstatement is ______ the tolerable misstatement, the auditor may accept the account as fairly presented.

less than

When considering important financial statement disclosures for cash, primary documents an auditor might review include ______.

line-of-credit arrangements minutes of board of director's meetings loan agreements

For control of the confirmation process, the auditor should ______.

mail the confirmations outside the entity's facilities send return envelope addressed to the public accounting firm mail the confirmations in envelopes with the public accounting firm as the return address

According to ASC Topic 820, fair value ______.

must be measured in accordance with GAAP is the price that would be received to sell an asset or transfer a liability in an orderly transaction

An auditor compares information on canceled checks with information contained in the cash disbursements journal. The objective of this test is to determine that:

no discrepancies exist between the data on the checks and the data in the journal.

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be invoiced that are not shipped. The inadequate control activities could cause an:

overstatement of revenues and receivables and an understatement of inventory.

There are two types of confirmations: __________ and ____________

positive negative

If completeness is a concern for accounts payable, auditors will send accounts payable confirmations to

primarily vendors with small or zero accounts payable balances.

Budd, the purchasing agent for Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a C.O.D. basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over

purchase orders.

An authorized person in a department requests goods with a ______.

purchase requisition

To request goods or services, an authorized individual completes a(n)

purchase requisition

Purchase cutoff procedures should be designed to test whether all inventory

purchased and received before the end of the year was recorded.

In the purchasing process, substantive tests of transactions focus mainly on the ______.

purchases and cash disbursement transactions

Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the

receiving department.

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all

receiving reports.

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all:

receiving reports.

An auditor would most likely verify the interest earned on bond investments by:

recomputing the interest earned on the basis of face amount, interest rate, and period held.

When an auditor selects a sample of items from the vouchers payable register for the last month of the period under audit and traces these items to underlying documents, the auditor is gathering evidence primarily in support of the assertion that

recorded obligations were valid.

When an auditor selects a sample of items from the vouchers payable register for the last month of the period under audit and traces these items to underlying documents, the auditor is gathering evidence primarily in support of the assertion that:

recorded obligations were valid.

A receiving report

records the receipt of goods contains the date and description of goods

An auditor ordinarily sends a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance. One purpose of this procedure is to:

seek information about loans from the banks.

An auditor ordinarily should send a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance, because this procedure:

seeks information about indebtedness to the bank.

Substantive procedures to examine the cutoff assertion for accounts payable include

selecting a sample of receiving reports around year-end and comparing dates on related vouchers to dates in the purchases journal.

A voucher

serves as the basis for recording a vendor's invoice in the purchases journal.

The primary evidence regarding year-end bank balances is documented in the:

standard bank confirmations.

Obtaining a cutoff bank statement is a

test of details of balances for cash

Auditing standards allow the auditor to omit confirming accounts receivable when ______.

the accounts receivable balance is immaterial assessed level of risk for the assertion is low, and the planned substantive procedures address that risk external confirmations would be ineffective

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because:

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

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

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

If there is not a proper cutoff of revenue transactions, both the revenue and accounts receivable accounts will be misstated for

the current and following years

On the bank reconciliation, a tick mark next to a deposit in transit indicates ______.

the deposit was traced by the auditor to the cutoff bank statement

The vendor's statement may differ from the entity's records because of:

timing differences in supplier recording cash receipts timing differences in shipping goods errors

Analyzing misstatements may lead the auditor to conclude that the original assessment of control risk was ______.

too low

The auditor often confirms balances with regular vendors that have small or zero balances because of concerns about ______.

unrecorded liabilities

A voucher is ______.

used to control payment for purchases attached to the purchase requisition, PO, receiving report, and invoice

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of:

valuation and allocation.

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be

vendors with whom the entity has previously done business.

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily to:

verify reconciling items on the entity's bank reconciliation.

Companies control payment with a ______.

voucher

To control payment for acquired goods and services, entities frequently use a(n)

voucher

For a positive confirmation, a response is required ______.

whether the amount is correct or incorrect

For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve:

write-offs of customer accounts.