Audit 10-12

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.

A. No reply to a positive confirmation request is received.

In verifying credits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the: A. Shipping documents. B. Receiving reports. C. Purchase orders. D. Vendors' invoices.

A. Shipping documents.

The confirmation of accounts receivable is most closely associated with A. Business risk. B. Detection risk. C. Inherent risk. D. Relative risk.

B. Detection risk.

43. When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if: A. Subsequent collections are to be reviewed. B. Internal control over receivables is good. C. Negative confirmations are to be used. D. There is a simultaneous examination of cash and accounts receivable.

B. Internal control over receivables is good.

The use of a "blind" purchase order is designed to prevent errors by the: A. Purchase department. B. Receiving department. C. Stores department. D. Accounting department.

B. Receiving department.

23. Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice? A. Footing the sales journal. B. Sending accounts receivable confirmations. C. Tracing the total sales in the sales journal to the general ledger. D. Observation of the physical inventory count at year-end.

B. Sending accounts receivable confirmations.

Which of the following generally provides the least evidence regarding the valuation of accounts receivable? A. Reviewing an aging of accounts receivable. B. Examination of cash receipts subsequent to the balance sheet date. C. Confirming current (0-30 day) year-end accounts receivable. D. Reviewing credit files for selected account.

C. Confirming current (0-30 day) year-end accounts receivable.

37. Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client company, if the company: A. Has paid for the merchandise. B. Has physical possession of the merchandise. C. Holds legal title to the merchandise. D. Holds the shipping documents for the merchandise issued in the company's name.

C. Holds legal title to the merchandise.

Which of the following is true about the auditors' observation of the client's physical inventory? A. The auditors should plan the physical inventory. B. The auditors should segregate damaged and obsolete goods. C. The auditors should evaluate the adequacy of the client's counting procedures. D. The auditors should supervise the client's personnel.

C. The auditors should evaluate the adequacy of the client's counting procedures.

Which of the following is consistent with effective internal control over sales transactions? A. The accounting department prepares a shipping report authorizing the shipment of goods. B. The accounting department accounts for all receiving reports. C. The billing department accounts for all shipping documents. D. The accounts payable department annually approves the extension of credit to customers.

C. The billing department accounts for all shipping documents.

Which of the following is not a control that generally is established over cash transactions? A) Separating cash handling from recordkeeping. B) Centralizing the receipt of cash. C) Depositing each day's receipts intact. D) Obtaining a receipt for every disbursement.

D) Obtaining a receipt for every disbursement.

Which of the following is not confirmed on the standard form used for cash balances at financial institutions? A) Cash checking account balances. B) Cash savings account balances. C) Loans payable. D) Securities held for the client by the financial institution.

D) Securities held for the client by the financial institution.

43. Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 199X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? A. Tracing recorded dividend income to cash receipts records and validated deposit slips. B. Utilizing analytical techniques and statistical sampling. C. Comparing recorded dividends with amounts appearing on federal information form 1099s. D. Comparing recorded dividends with a standard financial reporting service's record of dividends.

D. Comparing recorded dividends with a standard financial reporting service's record of dividends.

Properly designed internal control will permit the same employee to: A. Receive and deposit checks, and also approve write-offs of customer accounts. B. Approve vouchers for payment, and also receive and deposit cash. C. Reconcile the bank statements, and also receive and deposit cash. D. Sign checks, and also cancel supporting documents.

D. Sign checks, and also cancel supporting documents.

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

D. The existence of obsolete merchandise.

Which of the following is the best argument against the use of negative accounts receivable confirmations? A. The cost-per-response is excessively high. B. There is no way of knowing if the intended recipients received them. C. Recipients are likely to feel that in reality the confirmation is a subtle request for payment. D. The inference drawn from receiving no reply may not be correct.

D. The inference drawn from receiving no reply may not be correct.

40. To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from: A. The sales journal. B. The billing clerk's file of sales orders. C. Duplicate copies of sales invoices. D. The shipping clerk's file of duplicate copies of bills of lading.

D. The shipping clerk's file of duplicate copies of bills of lading.

In the audit of a client's financial statements, the auditors must be concerned with the possibility that client personnel might be engaged in kiting or lapping. a. Define lapping and describe an audit procedure that might detect lapping. b. Define kiting and describe an audit procedure that might detect kiting.

a. Lapping is the concealment of a cash shortage by delaying the recording of cash receipts. It involves posting receipts to the wrong account. Procedures for detecting lapping include (only one required): · Details of cash receipts may be compared to postings to the accounts receivable subsidiary records, preferably on a surprise basis. · Confirmation of accounts receivable. b. Kiting is manipulation causing an amount of cash to be included simultaneously in the balance of two or more bank accounts. To detect kiting the auditors prepare and verify a schedule of bank transfers.

54. Observation of a client's inventory is a generally accepted auditing procedure that should be performed whenever it is possible. a. What part should the auditors play in planning the physical inventory? b. Describe the procedures performed by the auditors during their observation of a client's physical inventory. c. Why do the auditors document their inventory test counts in their working papers?

a. The auditors should review the client's planning of the physical inventory and make suggestions for improvement. b. During the inventory observation the auditors: 1. Evaluate whether the inventory procedures are followed that assure that all items are counted and nothing is counted twice. 2. Be alert for goods that appear to be damaged or obsolete. 3. Obtain information to test the client's cutoff of purchases and sales. 4. Make test counts and record them in their working papers. 5. Make inquiries regarding goods on consignment. 6. Obtain tag control information and record the information in the working papers. c. The auditors document their test counts in the working papers to later test the accuracy of the final inventory listing.