AUD

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues?

(4) Over-recorded sales due to a lack of control over the sales entry function. Whittington, Ray. Principles of Auditing & control risk not inherent risk

Which of the following is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold?

Establish that the client includes only inventory on hand at year-end in inventory totals.

In order to guard against the misappropriation of company-owned marketable securities, which of the following is the best course of action that can be taken by a company with a large portfolio of marketable securities?

Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

internal control

the policies and procedures implemented by an entity to prevent or detect material accounting errors or frauds and provide for their correction on a timely basis

inherent risk

the prob that a mm either error or fraud will occure before befoe considering the client's ic - nature and evironment

audit risk

the probability that an audit team will express an inappropriate audit opinion when the financial statements are materially misstated

d. Which of the following is an example of misappropriation of assets relating to sales?

theft of cash register sales

if auditors cannot verify beginning inventory

they will not be able to issue an unqualified opinion as statements of income and cash flows; they might be able to give an unqualified opinion on the bs because it does not reflect beginning

kitingq

to manipulations that utilize such temporarily overstated bank balances to conceal a cash shortage or meet short-term cash needs. schedule of bank transfers before and after the bs date

monitor cash trans

data anal

What reference, if any, would the auditors make to the certificate of outside specialists in their audit report?

no reference

neg

no relphy

Inventories

o Goods on hand ready for sale o Goods in process o Goods consumed directly or indirectly in production, such as raw materials, purchased parts, and supplies

i. Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment? Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 598). McGraw-Hill Higher Education. Kindle Edition.

(1) Accumulated depreciation. Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 598). McGraw-Hill Higher Education. Kindle Edition.

The auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low: .

(1) And accounts receivable are immaterial, or the use of confirmations would be ineffective.

The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare the:

(1) Details of bank deposit slips with details of credits to customer accounts.

The auditor's analytical procedures will be facilitated if the client:

(1) Uses a standard cost system that produces variance reports.

Which of the following is an internal control weakness related to factory equipment? Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 597). McGraw-Hill Higher Education. Kindle Edition.

(2) All purchases of factory equipment are required to be made by the department in need Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 597). McGraw-Hill Higher Education. Kindle Edition.

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory?

(2) Observe merchandise and raw materials during the client's physical inventory taking.

j. An effective procedure for identifying unrecorded retirements of equipment is to: Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 598). McGraw-Hill Higher Education. Kindle Edition.

(3) Select items of equipment in the accounting records and then locate them in the plant. Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 598). McGraw-Hill Higher Education. Kindle Edition.

Which of the following is not an overall test of the annual provision for depreciation expense? Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 598). McGraw-Hill Higher Education. Kindle Edition.

(3) Test deductions from accumulated depreciation for assets purchased during the year. Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 598). McGraw-Hill Higher Education. Kindle Edition.

h. For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on: Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 598). McGraw-Hill Higher Education. Kindle Edition.

(3) Transactions that occurred during the year. Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 598). McGraw-Hill Higher Education. Kindle Edition.

rev and collection cycle

1. Customer order 2. physical custody 3. ar recording 4. cash receipts recording

b. The auditors may conclude that depreciation charges are insufficient by noting:

(4) Excessive recurring losses on assets retired. Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 597). McGraw-Hill Higher Education. Kindle Edition.

Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are not understated? Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 598). McGraw-Hill Higher Education. Kindle Edition.

(4) Repairs. Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 598). McGraw-Hill Higher Education. Kindle Edition.

What are the 3 checks for impairment?

-review events or changes in circumstances - If the review indicates possible impairment, apply the recoverability test. If the sum of the future net cash flows from the long-lived assets is less than the cv, an impairment loss has occurred - impairment loss is the amount by which the cv exceeds the fv. The fv is the market price of the asset or the pv of expected future net cash flows

which of the following controls would most likely reduce thr esik of diversion of customer receipts by a client's employees

1. a bank lockbox system

overview (steps of audit)

1. plan audit 2. gain understanding (flowchart) 3. walkthrough 4. ic questionaiire (memory jogger) 5. functional testing of ic 6. sub testing 7. complete audit (rep letter) 8. audit report

to provide assurance that each voucher is submitted and paid only once, the auditors most likley would examine a sample of paid vouchers and determine whether each voucher is

2 stamped paid by the the check signer

You have been assigned to the year-end audit of a fin institution and are planning the timing of audit procedures related to cash. you decide that it would be preferable to

3 coordinate the count of cash with the count of marketable securities and other negotiable assets

to gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except

4 general ledger

In testing controls over cash disbursements, the auditors most likely would determine that a person who signs checks also

4 is responsible for mailing the checks

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales?

4. recording the sales when the customer is likely to return the goods because either the sales should not be recorded or an allowance for returns

compensating balance

A minimum average balance that a bank may require a borrower to leave on deposit in a non-interest-bearing account.

g. Which of the following statements is not typical of property, plant, and equipment as compared to most current asset accounts? Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 598). McGraw-Hill Higher Education. Kindle Edition.

A property, plant, and equipment cutoff error near year-end has a more significant effect on net income. Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 598). McGraw-Hill Higher Education. Kindle Edition.

The auditors who physically examine securities should insist that a client representative be present in order to:

Acknowledge the receipt of securities returned.

Hall Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The best person or persons to make periodic reviews of the investment activity would be:

An investment committee of the board of directors.

Which of the following would provide the most assurance concerning the valuation of accounts receivable?

Assess the allowance for uncollectible accounts for reasonableness. net realizable value

c. The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the:

BOL

k. McPherson Corp. does not make an annual physical count of year-end inventories, but instead makes weekly test counts on the basis of a statistical plan. During the year, Sara Mullins, CPA, observes such counts as she deems necessary and is able to satisfy herself as to the reliability of the client's procedures. In reporting on the results of her examination, Mullins:

Can issue an unqualified opinion without disclosing that she did not observe year-end inventories.

The organization established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles is the:

Cost Accounting Standards Board

Under SEC rules, which of the following is not among the criteria that ordinarily exist for revenue to be recognized?

Delivery has occurred or is scheduled to occur in the near future. .

e. The auditors are most likely to seek information from the plant manager with respect to the: Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 598). McGraw-Hill Higher Education. Kindle Edition.

Existence of obsolete machinery. Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 598). McGraw-Hill Higher Education. Kindle Edition.

d. A small, isolated storeroom with five types of dusty raw materials stored therein. Inventory tags are attached to all of the materials, and your test counts agree with the tags.

If high, jot down obsolete for follow up once inventory is complete. If it looked that material, you talk to the client about obsolete. but ignore if small

To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic: Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 598). McGraw-Hill Higher Education. Kindle Edition.

Inspection of equipment and reconciliation with accounting records. Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 598). McGraw-Hill Higher Education. Kindle Edition.

Electric motors in finished goods storeroom not tagged. Upon inquiry, you are informed that the motors are on consignment to Jay Company.

Jay doesn't own them. If a lot, jot down info and move on. If small, ignore. If big, ask stroreman

Which of the following procedures would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?

Observe the consistency of the employees' use of cash registers and tapes.

The primary objective of a CPA's observation of a client's physical inventory count is to:

Obtain direct knowledge that the inventory exists and has been properly counted.

The receiving department is least likely to be responsible for the:

Preparation of a shipping document.

g. Reconciliation of the bank account should not be performed by an individual who also:

Processes cash disbursements.

12-26. You are engaged in the audit of Reed Company, a new client, at the end of its first fiscal year, June 30, 20X1. During your work on inventories, you discover that all of the merchandise remaining in stock on June 30, 20X1, had been acquired July 1, 20X0, from Andrew Reed, the sole shareholder and president of Reed Company, for an original selling price of $10,000 cash and a note payable due July 1, 20X3, with interest at 15 percent, in the amount of $90,000. The merchandise had been used by the president when he operated a similar business as a sole proprietor. How can you verify the pricing of the June 30, 20X1, inventory of Reed Company? Explain.

Related party, tainted transactions, not at arm's length. Disclose how the company was formed, amount paid for the inventory, Net realizable value test makes sure the inventory can be sold for a profit regardless of it was related party or not.

Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely:

Send positive confirmation requests.

To assure accountability for fixed-asset retirements, management should implement an internal control that includes: Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 597). McGraw-Hill Higher Education. Kindle Edition.

Utilization of serially numbered retirement work orders. Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 597). McGraw-Hill Higher Education. Kindle Edition.

The best way to verify the amounts of dividend revenue received during the year is:

Verification by reference to dividend record books.

i. When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably:

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

g. Instead of taking a physical inventory count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and:

Well-kept records of perpetual inventory are maintained.

Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable:

Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence.

if set AR low and both IR and CR are high

a lot of sub testing for acceptable (low) level

vouching system

all disbursements are authorized

Which of the following should be included as a part of inventory costs of a manufacturing company?

all of the above: Direct labor, raw materials, factory overhead

control listing

amount and name and acct num

when you can't get customer confirmations

an alternative procedure is to examine subsequent cash receipts in payment of the rec

The vouching of additions to the property, plant, and equipment accounts during the period under audit is one of the most important substantive tests.

and includes the tracing of entries through the journals to original documents, such as contracts, deeds, construction work orders, invoices, canceled checks, and authorization by appropriate individuals.

The lower of cost or market value is used to measure

ant loss of utility in the inventories

To test the existence assertion for recorded receivables, the auditors would select a sample from the:

ar subsidiary ledger

detection risj

auditor's sub procedures fail to detect mm

RMM

combination of inherent risk and control risk

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices?

completeness

lapping

concealment of a cash shortage by delaying the recording of cash receipts - most easily carried on when an employee who recives collections from custs is also resp for the posting of accts can be uncovered by comparing the deposit slips with rects rec in the accts records

IC over petty cash

custodian reviews support from employees seeking reimbursement for their small expenditures -focus non trans not yr end bal

Auditing Ar and sr -control environment

effective BOD (tone at the top) - enocurage integrity and ethical reporting

How can the auditors determine that the liability to suppliers has been recorded for all goods included in inventory?

examine on a test basis the purchase invoices and receiving reports for several days before and after the inventory date

When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is:

existence

control risk

failure to prevent

ALways confirm AR except when

immaterial ineffective great controls

Which of the following would most likely be detected by an auditor's review of the client's sales cutoff?

inflated sales for the year

Goodwill

is not amortized.

How do you measure goodwill?

is the excess of the purchase price of the fv value of the net identifiable assets, tangible and intangible, acquired

3 major subgroups of PPE

land Buildings, machinery, equipment, and land improvements natural resources

cash equivalents

money market funds, certificates of deposit, savings certificates, and other similar types of deposits..

A cutting machine (one of Jay's principal products) in the receiving department, with a large "REWORK" tag attached. (re-work = shipped to customer defective)

move on, jot down

joint control

neither of the custodians have access to the assets unless in presence of one another

inventories should not be carrried at an amount in excess of

net realizable value

b. What effect, if any, would the inventory certificate of outside specialists have upon the type of report the auditors would render? Discuss.

no effect

Impairment of indefinite life intangibles

no recoverability test fv test - fv<cv = il

Many companies employ outside service companies that specialize in counting, pricing, extending, and footing inventories. These service companies usually furnish a certificate attesting to the value of the physical inventory. Assuming that the service company took the client company's inventory on the balance sheet date: a. How much reliance, if any, can the auditors place on the inventory certificate of outside specialists?

none

c. A crated cutting machine in the shipping department, addressed to a nearby U.S. naval base, with a Department of Defense "Material Inspection and Receiving Report" attached, dated November 30, 20X0, and signed by the Navy Source Inspector.

not fraud, not a bill and hold, they will insect it and tell you if

standard confirmation

only the client's deposit and loan balances completeness

related party transactions

properly authorixed and adqquatelu disclosed relationship, substac\nce, and the effect of each on the fins

a purchase transaction begins with the isuance of

purchase requisition, which provides the basis for the purchase order

main inventory functions

purchasing, receiving, storing, and issuing goods and for controlling production

inverse relationship between

reliance on ics and sub testing

pos confimration

reply

further tests of controls for inventory

sample of purchase transactions tests of the accounting system

To determine that all sales have been recorded, the auditors would select a sample of transactions from the:

shipping docs file

voided checks

should be defaced to eliminate any possibility of further use and filed in regular sequence of paid checks

Alternative procedures to AR

subsequent tax receipts next month after confirmation date to verify and assess allowance for doubtful accounts

Before the taking of inventory,

the auditors will record the serial number of the shipping and receiving documents so that the accuracy of the cutoff can be determined at a later date

sales commitments are indicated by

the client's backlog of unfilled sales orfers

In a first audit of a company that has not previously been audited, or one in which access to a predecessor's audit work is not available,

the ideal approach is a complete historical analysis of the property accounts.

electronic point of sale

universal product code

substantive testing

verify account balances by examining invoices or by doing analyticals

tests of controls

verify that effective controls are in place

The audit of intangible assets typically involves Whittington, Ray. Principles of Auditing & Other Assurance Services (p. 599). McGraw-Hill Higher Education. Kindle Edition.

vouchiNG AND test allocation methods