Audit 2 Exam 2

Amortization relates to _____ assets like depreciation relates to property and equipment

intangible

Analytical procedures, in conjunction with other substantive procedures, are often used for verification of income statement accounts. True False

True

Auditors generally consider the evidence regarding accounts payable in the client's possession as more reliable than that for accounts receivable. True False

True

Subsequent events that provide additional evidence as to conditions that existed at the balance sheet date may result in adjusting journal entries. True False

True

During the audit, a customer with a large A/R balance at year-end declares bankruptcy

Type 1

Many subsequent events may involve the settling of ______

litigation

Additional evidence about conditions that existed at the balance sheet date

type 1

A lawsuit that was in progress as of year-end was settled shortly thereafter

Type 1

Conditions that have come into existence after the balance sheet date

Type 2

Type 1 subsequent events require the financial statements to be _____ if needed

adjusted

Auditors consider the _____ expense when determining the correct allowance for doubtful accounts

bad debt

It is difficult to audit ______ without the consideration of the property account.

depreciation

A registrar/transfer agent system relating to capital stock is most likely used by: all companies must use this type of system. no companies use this system anymore. a large, publicly traded company. a small, nonpublic company.

a large, publicly traded company.

Accrued liabilities generally differ from accounts payable in that accrued liabilities: are never included in cost of goods sold. are usually confirmed at year-end. accumulate over time. depend upon the existence of a transaction for original recording of the account.

accumulate over time.

Interest Bad Debt Depreciation Amortization Gain on Sale

A/R N/P PP&E Securities or other Investments Intangible Assets

Understatement of which of the following is most likely to overstate net income? Property, plant and equipment. Cash. Accounts payable. Accounts receivable.

Accounts payable.

An audit program for the examination of the retained earnings account should include a step that requires the verification of the: Approval of the adjustment of the beginning balance as a result of a write-down of an account receivable. Gain or loss resulting from disposition of treasury shares. Authorization for both cash and stock dividends. Market value used to charge retained earnings to account for a two-for-one stock split.

Authorization for both cash and stock dividends.

Which of the following procedures is least likely carried out in the audit of capital stock for a public company? Reconcile shares outstanding with the general ledger. Evaluate compliance with stock option plans. Account for the proceeds from stock issues. Examine all outstanding stock certificates for completeness.

Examine all outstanding stock certificates for completeness.

The CPA's opinion on the _____ of the financial statements may be changed by subsequent events.

Fairness

The auditors should determine that the issuance of bonds were approved by the company's stockholders. True False

False

Invoice dated 1/20 for cleaning services for the month of December; not included in A/P as of 12/31

Improperly excluded from A/P

Invoice received 12/30 for January temporary workers; included in A/P as of 12/31

Improperly included in A/P

Which of the following is an example of an accrued liability? Product warranty liability. Accounts payable. Prepaid insurance. Notes payable.

Product warranty liability.

An auditor who is auditing for treasury stock acquired will normally expect to see an entry in which journal? Sales. Cash disbursements. Cash receipts Purchases.

Cash disbursements.

When an auditor finds a debit to accounts payable, which of the following accounts is most likely to be credited? Cash. Accrued liabilities. Cost of goods sold. Accounts Receivable.

Cash.

Which of the following auditing procedures is ordinarily performed last and that Professor Phillips does not think holds much weight? Reading of the minutes of the directors' meetings. Obtaining a management representation letter. Confirming accounts payable. Testing of the purchasing function.

Obtaining a management representation letter.

Invoice dated 1/5 for January security protection; not included in A/P as of 12/31

Properly excluded from A/P

The auditor will most likely perform extensive tests for possible understatement of: revenues. liabilities. assets. capital.

liabilities.

Subsequent events need to be disclosed in the financial statements; otherwise, the financial statements would be

misleading

The review of audit working papers by the audit partner is normally completed: immediately as each working paper is completed. prior to year-end. after issuance of the audit report, but prior to required subsequent event review procedures. near the completion of the audit.

near the completion of the audit.

The audit of inventories may help in the auditor determination of _____.

COGS

The employees of our client, a manufacturing concern, are paid once a month, on the 4th day of the month following the balance sheet date. What audit issue(s) pertaining to labor costs exists at year end? Presentation & Disclosure. Completeness & Cutoff. Existence. Rights.

Completeness & Cutoff.

When auditing the Statement of Cash Flows of a profitable, rapidly growing, and expanding company that is past the startup phase, which combination is most likely (where "positive" = "source of cash" and "negative" = "use of cash")? CF Operating CF Investing + + + - - + - -

Option B

Invoice dated 12/20 for maintenance services and unpaid as of year-end; listed in A/P at 12/31

Properly included in A/P

Which of the following procedures is least likely a procedure that is completed near the end of the engagement? Review to identify subsequent events. Review accumulated depreciation. Obtain the letter of representations. Perform procedures to identify loss contingencies.

Review accumulated depreciation.

In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable? Interest and Bad Debt Expense. Sales and Bad Debt Expense. Interest and Cost of Goods Sold. Sales and Cost of Goods Sold.

Sales and Bad Debt Expense.

Type 2 subsequent events come into existence ____ the balance sheet date

after

The auditors' search for unrecorded liabilities is completed: during an interim period. subsequent to the balance sheet date. at any time during the examination. at the balance sheet date.

subsequent to the balance sheet date.

Auditors must communicate internal control "significant deficiencies" to: the audit committee. the SEC. the shareholders. the Federal Trade Commission.

the audit committee.

Changes in and/or additions to capital stock accounts should normally be approved by: the audit committee. the vice president of sales. the stockholders. the board of directors.

the board of directors.

A flood damages a significant portion of the operating facility after year-end

type 2

Financial statements that ______ the results almost never lead to legal action by financial statement users

understate

When the auditors discover an understatement of liabilities, they would most likely also expect to find an: overstatement of expenses. understatement of revenues. understatement of owners' equity. understatement of assets.

understatement of assets.