Audit Final study guide

a. 1 b. 2 c. 6 d. 4 e. 8 f. 7 g. 3 h. 5

1. A contractual obligation to carry out a transaction at specified terms in the future. Material commitments should be disclosed in the financial statements. 2. A possible liability, stemming from past events, that will be resolved as to existence and amount by some future event. 3. A possible loss, stemming from past events, that will be resolved as to existence and amount by some future event. 4. An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements (including projecting misstatements where appropriate) existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current year or previous years. 5. An approach to making materiality judgments that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements(including projecting misstatements where appropriate) only during the current year. 6. An element of the business environment that involves some risk of a future loss. Examples include the risk of accident, strike, price fluctuations, or natural catastrophe. General risk contingencies should not be disclosed in financial statements. 7. Misstatements identified by the auditors during the course of the audit that are due to either extrapolation from audit evidence or differences in accounting estimates. 8. Specific misstatements identified by the auditors during the course of the audit. a. commitment b. contingent liablility c. general risk contingency d. iron curtain approach e. known misstatements f. likely misstatements g. loss contingency h. rollover approach

Qualified Yes Unmodified with Emphasis-of-Matter no

A change in accounting principles that the auditors believe is not justified is likely to result in which of the following types of audit opinions? Qualified Unmodified with Emphasis-of-Matter Yes Yes Yes No No Yes No No

render an adverse opinion and give reasons

A client company has changed its accounting practices during the year, materially affecting its financial statements so as to make them seriously misleading and not in conformity with generally accepted accounting principles. The CPAs examining these financial statements should: - modify the opinion with respect to consistency and, in an emphasis-of-matter paragraph, explain the changes and their effects on the net income of the period. - disclaim an opinion and give reasons. - modify the opinion with respect to consistency, referring to explanatory notes of the financial statements to fulfill disclosure requirements. - render an adverse opinion and give reasons.

False

A client has $100,000 on deposit at year-end and owes the bank $250,000 on a note payable. The borrowing agreement calls for the client to maintain a minimum (compensating) balance of $40,000 on deposit during the life of the bank loan. On the balance sheet, the asset cash should be stated at $60,000, the excess of the deposit over the compensating balance. True or False

A substantial portion of the company's inventory was written off as obsolete on January 31.

A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements? - A major subsidiary was sold on February 7. - The client decided to change depreciation methods in the coming year. - A substantial portion of the company's inventory was written off as obsolete on January 31. - The factory building was damaged by a fire on January 19.

sales

A client's physical count of inventories was lower than the inventory quantities shown in its perpetual records. This situation could be the result of the failure to record: - sales. - sales returns. - purchases. - purchase discounts.

Whether to issue an adverse opinion rather than a qualified opinion

A material departure from generally accepted accounting principles will result in auditor consideration of: - Whether to issue an adverse opinion rather than a disclaimer of opinion. - Whether to issue a disclaimer of opinion rather than a qualified opinion. - Whether to issue an adverse opinion rather than a qualified opinion. - Nothing, because none of these opinions is applicable to this type of exception.

expenditures for fixed assets have been capitalized

A normal audit procedure is to analyze the current year repairs and maintenance accounts to provide evidence in support of the audit proposition that: - capital expenditures have been properly authorized. - non capitalizable expenditures have been properly expensed. - expenditures for fixed assets have been recorded in the proper period. - expenditures for fixed assets have been capitalized.

Loss contingency

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n): - Analytical process. - Loss contingency. - Probable loss. - Unasserted claim.

True

A salesperson who uses a cash register to record over the counter sales should, at the end of each workday, turn over to a supervisor the cash register tape and a corresponding amount of cash. True or False

names on the company payroll are those of bonafide employees presently on the job

A surprise observation by an auditor of a client's regular distribution of paychecks is primarily designed to satisfy the auditor that: - all employees have in their possession proper employee identification. - all unclaimed payroll checks are properly returned to the cashier. - names on the company payroll are those of bona fide employees presently on the job. - the paymaster is not involved in the distribution of payroll checks.

Standards of the Public Company Accounting Oversight Board (United States)

An audit report for a public client indicates that the audit was performed in accordance with: - Generally accepted auditing standards (United States). - Standards of the Public Company Accounting Oversight Board (United States). - Generally accepted accounting principles (United States). - Generally accepted accounting principles (Public Company Accounting Oversight Board).

Generally accepted accounting principles (United States)

An audit report for a public client indicates that the financial statements were prepared in conformity with: - Generally accepted auditing standards (United States). - Standards of the Public Company Accounting Oversight Board (United States). - Generally accepted accounting principles (United States). - Generally accepted accounting principles (Public Company Accounting Oversight Board).

February 10, 20X9

An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated: - December 31, 20X8. - January 17, 20X9. - February 10, 20X9. - February 16, 20X9.

all inventory represented by an inventory tag is listed on the inventory sheets

An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the physical inventory sheets. The purpose of this procedure is to obtain assurance that: - the final inventory is valued at cost. - all inventory represented by an inventory tag is listed on the inventory sheets. - all inventory represented by an inventory tag is bona fide. - inventory sheets do not include untagged inventory items.

An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31, 20X0. By this procedure, the auditor would be most likely to learn which of the following? - An account balance is past due and should be written off. - An October check from a customer was posted in error to the account of another customer with a similar name. - An October invoice was improperly computed. - An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.

the auditors' report

An auditors' opinion exception arising from a limitation on the scope of the audit should be explained in: - a note to the financial statements. - both a note to the financial statements and the auditors' report. - the mandatory adjusting entry whenever such a scope limitation occurs. - the auditors' report.

Select items of equipment in the accounting records and then locate them in the plant

An effective procedure for identifying unrecorded retirements of equipment is to: - Foot related property records. - Recalculate depreciation on the related equipment. - Select items of equipment in the accounting records and then locate them in the plant. - Select items of equipment and then locate them in the accounting records.

distributing payroll checks to subordinate employees

An example of an internal control weakness is to assign to a supervisor the responsibility for: - reviewing and approving time reports for subordinate employees. - authorizing payroll checks for terminated employees. - distributing payroll checks to subordinate employees. - initiating requests for salary adjustments for subordinate employees.

whether a large recorded gain on trade of equipment is appropriate

An important consideration to the auditor in the audit of equipment is to determine: - hat the equipment is properly maintained. - that theft of the equipment is impossible. - when the client should replace the equipment. - whether a large recorded gain on a trade of equipment is appropriate.

the existence of obsolete merchandise

An inventory turnover analysis is useful to the auditor because it may detect: - inadequacies in inventory disclosures. - methods of avoiding cyclical holding costs. - the optimum automatic reorder points. - the existence of obsolete merchandise.

Consider the possibility of a misstatement in the financial statements

As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should: - Express an opinion that is qualified due to the inability of the client company to continue as a going concern. - Evaluate management's performance in causing this decline. - Require note disclosure. -Consider the possibility of a misstatement in the financial statements

more difficult to accomplish

As compared to manual processing, electronic processing of cash transactions generally makes kiting: - more difficult to accomplish - easier to accomplish - neither easier, nor more difficult to accomplish - impossible to accomplish

An improper type of reporting

Assume that the opinion paragraph of an auditors' report begins as follows: "With the explanation given in Note 6, . . . the financial statements referred to above present fairly. . ." This is: - An unmodified opinion. - A disclaimer of opinion. - An "except for" opinion. - An improper type of reporting.

Accumulated depreciation

Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment? - Accumulated depreciation. - Cost of goods sold. - Purchase returns and allowances. - Purchase discounts.

Substantive Procedures: a. Prepare a bank transfer schedule. 1 b. Prepare a four-column proof of cash. 5 c. Use a standard confirmation form to confirm account balance information. 7 d. Obtain bank cutoff statements. 6 e. Search for large checks to directors, officers, and employees. 8

Auditors perform a number of procedures relating to cash—some unique, some not unique. For each substantive procedure below, identify its primary objective or indicate that the procedure serves no purpose. The primary objective of the procedure may be selected once, or not at all. Replies: A primary objective of the procedure is to: 1. Detect kiting. 2. Detect lapping. 3. Determine that receivables are converted to cash in a reasonable amount of time. 4. Establish the valuation of cash to reflect currency translation losses and gains. 5. Reconcile cash receipt and disbursement totals between company records and bank records. 6. Verify reconciling items on the year-end bank reconciliation. 7. Verify year-end cash and liability balance information. 8. Identify related party transactions. 9. None. This procedure serves no purpose related to cash.

the auditors' report

Auditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of: - a postdated footnote. - the final billing for audit services rendered. - the auditors' report. - the next scheduled interim visit.

a. yes b. no c. yes d. yes e. yes f. no g. yes

Auditors report on the consistency of application of accounting principles. Assume that the following list describes changes that have a material effect on a client's financial statements for the current year. For each of the following situations, state whether the audit report should include an emphasis-of-matter paragraph on consistency. a. A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction contracts. b. A change in the estimated service lives of previously recorded plant assets based on newly acquired information. c. Correction of a mathematical error in inventory pricing made in a prior period. d. A change from direct costing to full absorption costing for inventory valuation. e. A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits. f. A change to including the employer's share of FICA taxes as "Retirement benefits" on the income statement. This information was previously included with "Other taxes." g. A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing.

treasurer

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: - controller - treasurer - executive committee - board of directors

Send positive confirmation requests

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. - Send negative confirmation requests. - Examine evidence of subsequent cash receipts. - Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

Completeness

During the inventory count an auditor selects items and determines that the proper description and quantity were recorded by the client. This procedure is most closely related to: - Existence. - Valuation. - Completeness. - Rights.

Processes cash disbursements

Reconciliation of the bank account should not be performed by an individual who also: - Processes cash disbursements. - Has custody of securities. - Prepares the cash budget. - Reviews inventory reports.

Transactions that occurred during the year

For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on: - All transactions resulting in the ending balance. - Tests of controls over disposals. - Transactions that occurred during the year. - Performing analytical procedures on beginning balances of the accounts.

Miscellaneous expense

For which of the following ledger accounts would the auditor be most likely to analyze the details? - Postage expense. - Miscellaneous expense. - Supplies expense. - Sales salaries expense.

accurate perpetual inventory records are maintained

From the auditor's point of view, inventory counts are more acceptable prior to the year-end when: - internal control is weak. - accurate perpetual inventory records are maintained. - inventory is slow-moving. - significant amounts of inventory are held on a consignment basis.

Observation of physical inventory counts

From which of the following evidence gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories? - Observation of physical inventory counts. - Written inventory representations from management. - Confirmation of inventories in a public warehouse. - Auditor's recomputation of inventory extensions.

An investment committee of the board of directors

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. - The chief operating officer. - The corporate controller. - The treasurer.

Write-offs must be approved by a responsible official review of credit department

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. - Write-offs must be approved by the accounts receivable department. - Write-offs must be authorized by the shipping department. - Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.

qualify their opinion or issue an adverse opinion

If the auditors believe that related party transactions are not adequately described in the notes to the financial statements, they should: - qualify their opinion or issue an adverse opinion. - add an emphasis-of-matter paragraph to their unmodified opinion. -consider more thoroughly the client's going concern status. -disclaim an opinion.

properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors

If the auditors indicate in the report that the opinion is based, in part, on the report of component auditors who were responsible for the audit of part of the total financial statement data, the auditors are: - properly indicating a division of responsibility, and the report should further indicate in an appropriate quantitative form the proportionate responsibility being assumed by each set of auditors. - abrogating responsibility to those users who rely on the CPA firm's reputation as a basis for relying on the reported financial statements. - in effect qualifying the opinion. - taking complete responsible for the work of the other auditors.

Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms

In an audit report on combined financial statements, reference to the fact that a portion of the audit was performed by a component auditor is: - Not to be construed as a qualification, but rather as a division of responsibility between the two CPA firms. - Not in accordance with generally accepted auditing standards. - A qualification that lessens the collective responsibility of both CPA firms. - An example of a dual opinion requiring the signatures of both auditors.

a. adjustment b. adjustment c. consider disclosure d. consider disclosure e. consider disclosure

In connection with her audit of the financial statements of Flowmeter, Inc., for the year ended December 31, 20X3, Joan Hirsch, CPA, is aware that certain events and transactions that have taken place after December 31, 20X3, but before she has issued her report dated February 28,20X4, may affect the company's financial statements. The following material events or transactions have come to her attention: a. On January 3, 20X4, Flowmeter, Inc., received a shipment of raw materials from Canada. The materials had been ordered in October 20X3 and shipped FOB shipping point in December 20X3. b. On January 15, 20X4, the company settled and paid a personal injury claim of a former employee as the result of an accident that had occurred in March 20X3. The company had not previously recorded a liability for the claim. c. On January 25, 20X4, the company agreed to purchase for cash the outstanding stock of Porter Electrical Co. The business combination is likely to double the sales volume of Flowmeter, Inc. d. On February 1, 20X4, a plant owned by Flowmeter, Inc., was damaged by a flood, resulting in an uninsured loss of inventory. e. On February 5, 20X4, Flowmeter, Inc., issued to an underwriting syndicate $2 million in convertible bonds. Required: For each of the subsequent events, indicate whether they should result in: Adjustment—an adjusting entry as of 20X3. Possible Disclosure—Consider note disclosure as of 20X3.

1. a. adjustment b. consider disclosure c. consider disclosure d. adjustment e. consider disclosure 2. c,e

In connection with your audit of the financial statements of Hollis Mfg. Corporation for the year ended December 31, 20X3, your review of subsequent events disclosed the following items: a. January 7, 20X4: The mineral content of a shipment of ore en route to Hollis Mfg. Corporation on December 31, 20X3, was determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent by a debit to Raw Materials Inventory and a credit to Accounts Payable in the amount of $82,400. The final liability to the vendor is based on the actual mineral content of the shipment. b. January 15, 20X4: Following a series of personal disagreements between Ray Hollis, the president, and his brother-in-law, the treasurer, the latter resigned, effective immediately, under an agreement whereby the corporation would purchase his 10 percent stock ownership at book value as of December 31, 20X3. Payment is to be made in two equal amounts in cash on April 1 and October 1, 20X4. In December, the treasurer had obtained a divorce from his wife, who is Ray Hollis's sister. c. January 16, 20X4: As a result of reduced sales, production was curtailed in mid-January and some workers were laid off. d. On January 18, 20X4, a major customer filed for bankruptcy. The customer's financial condition had been degenerating over recent years. e. On January 28, 20X4, a famous analyst who followed the industry provided a negative report on his expectations concerning the short and intermediate term for the industry. 1. For each of the subsequent events, indicate whether they should result in: Adjustment—an adjusting entry as of 20X3. Consider Disclosure—consideration of note disclosure as of 20X3. 2. Select the two events least likely to be reflected (resulting in adjustment or disclosure) in the financial statements.

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

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 one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. - Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. - Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. - Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

Is responsible for mailing the checks

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: - Reviews the monthly bank reconciliation. - Returns the checks to accounts payable. - Is denied access to the supporting documents. - Is responsible for mailing the checks.

Well-kept records of perpetual inventory are maintained

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. - Inventory is slow-moving. - Computer error reports are generated for missing prenumbered inventory tickets. - Obsolete inventory items are segregated and excluded.

records credits to individual accounts receivable

Internal control over cash receipts is weakened when an employee who receives customer mail receipts also: - maintains a petty cash fund - prepares bank deposit slips for all mail receipts - records credits to individual accounts receivable - prepares initial cash receipts records

be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows

Jones, CPA, accepts a new client late in Year 5 and therefore had no opportunity to observe the physical inventory taken at December 31, Year 4. Jones found it impossible to obtain evidence by other auditing procedures as to the beginning inventories for Year 5. Jones observed the physical inventory at December 31, Year 5 and completed the audit satisfactorily. The report to be issued should: - be unmodified as to the balance sheet and with a disclaimer of opinion as to the income statement and the statement of cash flows. - be unmodified. - be a disclaimer of opinion. - be qualified as to all of the statements.

1. "Lapping" of accounts receivable. b 2. Using the company's securities during the year and replacing them. c 3. "Kiting" of cash. a 4. Understating the outstanding checks on the year-end bank reconciliation. d 5. Recording fictitious cash sales. e

Listed below are types of errors or fraud that might occur in financial statements. Select the audit procedure with the error or fraud that the procedure is likely to detect. Audit Procedure a. Preparing and verifying a schedule of bank transfers. b. Tracing remittance advices to postings in the accounts receivable records. c. Comparing the serial numbers of securities on hand to numbers recorded in the prior year's audit working papers. d. Review of the bank cutoff statement. e. Preparing a "proof of cash" for the entire audit period.

False

Marketable equity securities should valued at cost. True or False

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

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. - Should comment in the scope paragraph as to her inability to observe year-end inventories, but can nevertheless issue an unqualified opinion. - Is required, if the inventories are material, to disclaim an opinion on the financial statements taken as a whole. - Should, if the inventories are material, qualify her opinion.

revenue and expense account totals to the corresponding figures of the preceding years

Overall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly: - revenue and expense account totals to the corresponding figures of the preceding years. - income statement ratios to published industry averages. - income statement ratios to balance sheet ratios. - revenue and expense account balances to the monthly reported net income.

confer with management regarding transfer of the amount from the balance sheet to the income statement

Patentex developed a new secret formula that is of great value because it resulted in a virtual monopoly. Patentex has capitalized all of its research and development costs associated with this formula. Greene, CPA, who is examining this account will probably: - confer with management regarding a change in the title of the account to "goodwill". - confer with management relating to controls maintained over formula confidentiality. - confirm that the secret formula is registered and on file with the county clerk's office. - confer with management regarding transfer of the amount from the balance sheet to the income statement.

is owned by the company

Purchase cutoff procedures should be designed to test whether purchases recorded near year-end: - is owned by the company. - on the year-end balance sheet was carried at lower of cost or market. -on the year-end balance sheet was paid for by the company. - is in the possession of the company.

a. Disclaimer b. Unmodified - standard c. Qualified d. Unmodified with an emphasis of matter paragraph e. Adverse

Select the type of audit report the auditors generally should issue in the situations presented below. Type of audit report may be used once, more than once, or not at all. Disclaimer Unmodified - standard Qualified Unmodified with an emphasis of matter paragraph Adverse a. Client-imposed restrictions significantly limit the scope of the auditors' procedures, and they are unable to obtain sufficient appropriate audit evidence. The possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive. b. The auditors decide not to make reference to the report of a component auditor that audited a portion of group financial statements. c. The auditors believe that the financial statements have been presented in conformity with generally accepted accounting principles in all respects, except that a loss contingency that should be disclosed through a note to the financial statements is not included. While they consider this a material omission, they do not believe that it pervasively affects the financial statements. d. The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors concur with this change. The effect is considered material to the financial statements, although inventory is not a large part of total assets. e. The client has changed from LIFO to FIFO for inventory valuation purposes; the auditors do not concur with this change. The effect is considered material and pervasive.

Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information

Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next: - Notify the board of directors that the auditor's report must no longer be associated with the financial statements. - Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. - Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. - Issue revised pro forma financial statements taking into consideration the newly discovered information.

reviewing the titles and descriptions for all construction work orders issued during the year

Tennessee Company violated company policy by erroneously capitalizing the cost of painting its warehouse. The auditors examining Tennessee's financial statements would most likely learn of this error by: - discussing Tennessee's capitalization policies with its controller. - observing, during the physical inventory - observation that the warehouse has been painted. - examining in detail a sample of construction requests. - reviewing the titles and descriptions for all construction work orders issued during the year.

Misstatements Projected yes Misstatements Other yes Misstatements Known yes

The aggregated misstatement in the financial statements is made up of: Misstatements Known Misstatements Projected Misstatements Other Yes Yes Yes Yes Yes No No Yes No No Yes Yes

test of controls

The auditor is examining copies of sales invoices only for the initials of the person responsible for checking the extensions. This is an example of a: - test of balances. - substantive procedure. - dual purpose test. - test of controls.

Uses a standard cost system that produces variance reports

The auditor's analytical procedures will be facilitated if the client: - Uses a standard cost system that produces variance reports. - Segregates obsolete inventory before the physical inventory count. - Corrects material weaknesses in internal control before the beginning of the audit. - Reduces inventory balances to the lower of cost or market.

Existence of obsolete machinery

The auditors are most likely to seek information from the plant manager with respect to the - Adequacy of the provision for uncollectible accounts. - Appropriateness of physical inventory observation procedures. - Existence of obsolete machinery. - Deferral of procurement of certain necessary insurance coverage.

neither a comment on the use of alternative auditing procedures nor an opinion qualification

The auditors have not been able to confirm a large account receivable, but they have satisfied themselves as to the proper amount of the receivable by means of alternative auditing procedures. The auditors' report on the financial statements should include: - neither a comment on the use of alternative auditing procedures nor an opinion qualification. - both a scope qualification and an opinion qualification. - a description of the limitation on the scope of their audit and the alternative auditing procedures used, but an opinion qualification is not required. - an opinion qualification, but reference to the use of alternative auditing procedures is not required.

Excessive recurring losses on assets retired

The auditors may conclude that depreciation charges are insufficient by noting: - Insured values greatly in excess of book values. - Large amounts of fully depreciated assets. - Continuous trade-ins of relatively new assets. - Excessive recurring losses on assets retired.

excessive recurring losses on assets retired

The auditors may conclude that depreciation charges are insufficient by noting: - continuous trade-ins of relatively new assets. - insured values greatly in excess of book values. - large amounts of fully depreciated assets. - excessive recurring losses on assets retired.

And accounts receivable are immaterial, or the use of confirmations would be ineffective

The auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low. - And accounts receivable are immaterial, or the use of confirmations would be ineffective. - And accounts receivable are composed of large accounts. - And the effectiveness of confirmations is absolutely determined. - Or accounts receivable are from extremely reputable customers.

Details of bank deposit slips with details of credits to customer accounts

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: - Details of bank deposit slips with details of credits to customer accounts. - Daily cash summaries with the sums of the cash receipts journal entries. - Individual bank deposit slips with the details of the monthly bank statements. - Dates uncollectible accounts are authorized to be written off with the dates the writeoffs are actually recorded.

verify reconciling items on the client's bank reconciliation

The auditors who are engaged to examine the financial statements of a business enterprise with request a cutoff bank statement primarily in order to: -detect kiting - verify reconciling items on the client's bank reconcilliation - verify the cash balance reported on the standard financial institution confirmation form -detect lapping

Acknowledge the receipt of securities returned

The auditors who physically examine securities should insist that a client representative be present in order to: - Detect fraudulent securities. - Lend authority to the auditors' directives. - Acknowledge the receipt of securities returned. - Coordinate the return of securities to the proper locations.

An emphasis-of-matter paragraph to the auditors' report

The auditors who wish to draw reader attention to a financial statement note disclosure on significant transactions with related parties should disclose this fact in: - An emphasis-of-matter paragraph to the auditors' report. - A footnote to the financial statements. - The body of the financial statements. - The "summary of significant accounting policies" section of the financial statements.

Auditors have accumulated sufficient evidence

The auditors' report should be dated as of the date the: - Report is delivered to the client. - Auditors have accumulated sufficient evidence. - Fiscal period under audit ends. - Peer review of the working papers is completed.

Verification by reference to dividend record books

The best way to verify the amounts of dividend revenue received during the year is: - Recomputation. - Verification by reference to dividend record books. - Confirmation with dividend-paying companies. - Examination of cash disbursements records.

substantive procedure

The confirmation of the client's trade accounts receivable as a means of obtaining audit evidence is ordinarily considered to be a: - test of a control. - required observation technique. - substantive procedure. - basic principle of attestation

date of the auditor's report

The date of the management representation letter should coincide with the: - date of the auditor's report. - date of the engagement agreement. - date of the latest subsequent event referred to in - the notes to the financial statements. balance sheet date.

Bill of Lading

The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the: - Bill of lading. - Job time shipping. - Production order. - Production schedule.

Custody of the securities should be assigned to persons who have the accounting responsibility for securities

The financial management of a company should take steps to see that company's investment securities are protected. Which of the following is not a step that is designed to protect investment securities? - Securities should be properly controlled physically in order to prevent unauthorized usage. - Access to securities should be vested in more than one person. - Custody of securities should be assigned to persons who have the accounting responsibility for securities. - Securities should be registered in the name of the owner.

Cost Accounting Standards Board

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. -mFinancial Accounting Standards Board. - Public Company Accounting Oversight Board. - Securities and Exchange Commission.

transactions

The primary difference between an audit of the balance sheet and an audit of the income statement lies in the fact that the audit of the income statement deals almost completely with the verification of: - transactions. - costs. - authorizations. - cutoffs.

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

The primary objective of a CPA's observation of a client's physical inventory count is to: - Discover whether a client has counted a particular inventory item or group of items. - Obtain direct knowledge that the inventory exists and has been properly counted. - Provide an appraisal of the quality of the merchandise on hand on the day of the physical count. - Allow the auditor to supervise the conduct of the count in order to obtain assurance that inventory quantities are reasonably accurate.

management of the company

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly-held company rests with the: - management of the company. - partner assigned to the audit engagement. - auditor in charge of the field work. - Securities and Exchange Commission.

Preparation of a shipping document

The receiving department is least likely to be responsible for the: - Determination of quantities of goods received. - Detection of damaged or defective merchandise. - Preparation of a shipping document. - Transmittal of goods received to the store's department.

Date of the auditors' report

The search for unrecorded liabilities for a public company includes procedures usually performed through the: - Day the audit report is issued. - End of the client's year. - Date of the auditors' report. - Date the report is filed with the SEC.

there is reason to believe that a substantial number of accounts may be in dispute

The use of the positive (as opposed to the negative) form of receivables confirmation is indicated when: - control risk for accounts receivable is assessed as low. - there is reason to believe that a substantial number of accounts may be in dispute. - a large number of small balances are involved. - there is reason to believe a significant portion of the requests will be answered.

Utilization of serially numbered retirement work orders

To assure accountability for fixed asset retirements, management should implement an internal control that includes: - Continuous analysis of miscellaneous revenue to locate any cash proceeds from the sale of plant assets. - Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired. -Utilization of serially numbered retirement work orders. - Periodic observation of plant assets by the internal auditors.

Shipping documents file

To determine that all sales have been recorded, the auditors would select a sample of transactions from the: - Shipping documents file. - Sales journal. - Accounts receivable subsidiary ledger. - Remittance advices.

Analyze transactions occurring within a few days before and after year end

To determine that sales transactions have been recorded in the proper accounting period, the auditors perform a cutoff review. Which of the following best describes the overall approach used when performing a cutoff review? - Confirm year-end transactions with regular customers. - Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period. - Analyze transactions occurring within a few days before and after year end. - Examine cash receipts in the subsequent period.

General Ledger

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: - Cutoff bank statement. - Year-end bank statement. - Bank confirmation. - General ledger.

Stamped "paid" by the check signer

To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is: - Supported by a vendor's invoice. - Stamped "paid" by the check signer. - Prenumbered and accounted for. - Approved for authorized purchases.

Inspection of equipment and reconciliation with accounting records

To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic: - Increase in insurance coverage. - Inspection of equipment and reconciliation with accounting records. - Verification of liens, pledges, and collateralizations. - Accounting for work orders.

accept merchandise only if a purchase order or approval granted by the purchasing department is on hand

To strengthen the system of internal control over the purchase of merchandise, a company's receiving department should: - accept merchandise only if a purchase order or approval granted by the purchasing department is on hand. - accept and count all merchandise received from the usual company vendors. - rely on shipping documents for the preparation of receiving reports. - be responsible for the physical handling of merchandise but not the preparation of receiving reports.

Accounts receivable subsidiary ledger

To test the existence assertion for recorded receivables, the auditors would select a sample from the: - Sales orders file. - Customer purchase orders. - Accounts receivable subsidiary ledger. - Shipping documents (bills of lading) file.

should include an additional emphasis-of-matter paragraph highlighting the accounting change

Upon the advice of its auditors, Smith Company changed the method of computing depreciation from the straight-line method to an accelerated method with a material effect upon the financial statements. The auditors' report: - should contain modification of the opinion paragraph. - must be qualified for the accounting change. - should include an additional emphasis-of-matter paragraph highlighting the accounting change. - should be a standard unmodified report.

Qualified No Adverse Yes

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated? Qualified Adverse Yes Yes Yes No No Yes No No

Existence

When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is: - Existence. - Completeness. - Clarity. - Presentation.

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

When an auditor tests a client's cost accounting system, the auditors' tests are primarily designed to determine that: - quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand. - physical inventories are in substantial agreement with book inventories. - the system is in accordance with generally accepted accounting principles and is functioning as planned. - costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.

Capitalization

When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments? - Capitalization. - Financing. - Investing. - Operations.

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

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. - Insist that the client perform physical counts of inventory items several times during the year. - Increase the extent of tests for unrecorded liabilities at the end of the year. - Have to disclaim an opinion on the income statement for that year.

Qualified No Unmodified with Emphasis-of-Matter Yes

When the matter is properly disclosed in the financial statements, the likely result of substantial doubt about the ability of the client to continue as a going concern is the issuance of which of the following audit opinions? Qualified Unmodified with Emphasis-of-Matter Yes Yes Yes No No Yes No No

Completeness

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? - Existence or occurrence. - Completeness. - Rights and obligations. - Presentation and disclosure.

Repairs and Maintenance

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? - Depreciation. - Accounts Payable. - Cash. - Repairs and Maintenance.

Trace sample of initial sales slips through summaries to recorded general ledger sales

Which of the following audit procedures is most effective in testing credit sales for understatement? - Age accounts receivable. - Trace sample of recorded sales from ledger to initial sales slip. - Confirm accounts receivable. - Trace sample of initial sales slips through summaries to recorded general ledger sales.

proof of cash

Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? - Bank reconcilliation - Evaluation of ratio of cash to current liabilities - Cash confirmation - Proof of cash

Review of repairs and maintenance expense

Which of the following audit procedures would be least likely to lead the auditors to find unrecorded fixed asset disposals? - Examination of insurance policies. - Scanning of invoices for fixed-asset additions. - Review of property tax files. - Review of repairs and maintenance expense.

The duties of hiring, payroll computation, and payment to employees should be segregated.

Which of the following best describes proper internal control over payroll? - The duties of hiring, payroll computation, and payment to employees should be segregated. - The preparation of the payroll must be under the control of the personnel department. - The payment of cash to employees should be replaced with payment by checks. - The confidentiality of employee payroll data should be carefully protected to prevent fraud.

A bank lockbox system.

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? - A bank lockbox system. - Prenumbered remittance advices. - Monthly bank reconciliations. - Daily deposit of cash receipts.

Settlement of litigation

Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements? - A business combination. - Early retirement of bonds payable. - Settlement of litigation. - Plant closure due to a strike.

Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations

Which of the following is a frequent control over cash disbursements? - Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations - Checks should be signed by the controller and at least one other employee of the company - Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement - Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation

The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records

Which of the following is an effective control over accounts receivable? - Responsibility for approval of the write-off of uncollectible accounts receivable should be assigned to the cashier. - The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records. - Only persons who handle cash receipts should be responsible for the preparation of documents that reduce accounts receivable balances. - Balances in the subsidiary accounts receivable ledger should be reconciled to the general ledger control account once a year, preferably at year end.

Quantities ordered are excluded from the receiving department copy of the purchase order

Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received? - Quantities ordered are excluded from the receiving department copy of the purchase order. - Vouchers are prepared by accounts payable department personnel only after they match item counts on the receiving report with the purchase order. - Receiving department personnel are expected to match and reconcile the receiving report with the purchase order. - Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports.

Theft of cash register sales

Which of the following is an example of misappropriation of assets relating to sales? - Accidentally recording cash that represents a liability as revenue. - Holding the sales journal open to record next year's sales as having occurred in the current year. - Intentionally recording cash received from a new debt agreement as revenue. - Theft of cash register sales.

All purchases of factory equipment are required to be made by the department in need of the equipment

Which of the following is an internal control weakness related to factory equipment? - Checks issued in payment of purchases of equipment are not signed by the controller. - All purchases of factory equipment are required to be made by the department in need of the equipment. - Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired. - Proceeds from sales of fully depreciated equipment are credited to other income. References

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

Which of the following is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold? - Determine that the valuation of inventories and cost of goods sold is arrived at by appropriate methods. - Determine the existence of inventories and the occurrence of transactions affecting cost of goods sold. - Establish that the client includes only inventory on hand at year-end in inventory totals. - Establish the completeness of inventories.

Test whether employee time reports are approved by supervisors.

Which of the following is least likely to be considered a substantive procedure relating to payroll? - Investigate fluctuations in salaries, wages, and commissions. - Test computations of compensation under profit sharing for bonus plans. - Test commission earnings. - Test whether employee time reports are approved by supervisors.

Over-recorded sales due to economic declines

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? -Restrictions placed on sales by laws and regulations. -Decline in sales due to economic declines. -Decline in sales due to product obsolescence. -Over-recorded sales due to a lack of control over the sales entry function.

A decision not to confirm accounts receivable

Which of the following is least likely to result in inclusion of an emphasis-of-matter paragraph in an audit report? - The company is a component of a larger business enterprise. - An unusually important significant event. - A decision not to confirm accounts receivable. - A risk or uncertainty.

Recording sales when the customer is likely to return the goods.

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? - Inaccurate billing due to a lack of controls. - Lapping of accounts receivable. - Misbilling a client due to a data input error. - Recording sales when the customer is likely to return the goods.

Customer checks deposited prior to year-end, but determined to be uncollectible after year-end

Which of the following is most likely to be considered a Type 1 subsequent event? - A business combination completed after year-end, but for which negotiations began prior to year-end. - A strike subsequent to year-end due to employee complaints about working conditions which originated two years ago. - Customer checks deposited prior to year-end, but determined to be uncollectible after year-end. - Introduction of a new line of products after year-end for which major research had been completed prior to year-end.

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

Which of the following is not among the criteria that ordinarily exist for revenue to be recognized? - Collectibility is reasonably assured. - Delivery has occurred or is scheduled to occur in the near future. - Persuasive evidence of an arrangement exists. - The seller's price to the buyer is fixed or determinable.

Generally accepted auditing standards basis

Which of the following is not an acceptable financial reporting framework? - Cash basis. - Generally accepted auditing standards basis. - International accounting standards basis. - Tax basis.

Test deductions from accumulated depreciation for assets purchased during the year

Which of the following is not an overall test of the annual provision for depreciation expense? - Compare rates used in the current year with those used in prior years. - Test computation of depreciation provisions for a representative number of units. - Test deductions from accumulated depreciation for assets purchased during the year. - Perform analytical procedures.

It includes the term "PCAOB Compliant" in the title

Which of the following is not correct relating to an audit report for a public company? - It includes an additional paragraph indicating that the auditors have also issued a report on the client's internal control over financial reporting. - It must include the city and state in which it was issued. - It refers to standards of the Public Company Accounting Oversight Board. - It includes the term "PCAOB Compliant" in the title.

Observe merchandise and raw materials during the client's physical inventory taking

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory? - Compare the physical quantities of slow-moving items with corresponding quantities in the prior year. - Observe merchandise and raw materials during the client's physical inventory taking. - Review the management's inventory representations letter for accuracy. - Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average.

paid real estate tax bills

Which of the following is the best evidence of real estate ownership at the balance sheet date? - Paid real estate tax bills. - Original deed held in the client's safe. - Title insurance policy. - Closing statement.

Make a surprise observation of the company's regular distribution of paychecks on a test basis

Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job? - Examine human resources records for accuracy and completeness. - Examine employees' names listed on payroll tax returns for agreement with payroll accounting records. -Make a surprise observation of the company's regular distribution of paychecks on a test basis. - Visit the working areas and verify that employees exist by examining their badge or identification numbers.

A consistency modification

Which of the following ordinarily involves the addition of an emphasis-of-matter paragraph to an audit report? - A consistency modification. - An adverse opinion. - A qualified opinion. - Part of the audit has been performed by component auditors.

Acquisitions are to be made through and approved by the department in need of the equipment

Which of the following policies is an internal control weakness related to the acquisition of factory equipment? - Advance executive approvals are required for equipment acquisitions. - Acquisitions are to be made through and approved by the department in need of the equipment. - Depreciation policies are reviewed only once a year. - Variances between authorized equipment expenditures and actual costs are to be immediately reported to management.

Perform analytical procedures

Which of the following procedures is most likely to be included near completion of an audit? - Obtain an understanding of internal control. - Confirmation of receivables. - Observation of inventory. - Perform analytical procedures.

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

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. - Inquire about employees' access to recorded but undeposited cash. - Trace deposits in the cash receipts journal to the cash balance in the general ledger. - Compare the cash balance in the general ledger with the bank confirmation request.

The company changed its capitalization policy for small tools in 200x.

Which of the following situations has the best chance of being detected when a CPA compares 200X revenues and expenses with the prior year and investigates all changes exceeding a fixed percentage? - An increase in property tax rates has not been recognized in the company's 200X accrual. - The company changed its capitalization policy for small tools in 200X. - The cashier began lapping accounts receivable in 200X. - Because of worsening economic conditions, the 200X provision for uncollectible accounts was inadequate.

A property, plant, and equipment cutoff error near year-end has a more significant effect on net income

Which of the following statements is not typical of property, plant, and equipment as compared to most current asset accounts? - A property, plant, and equipment cutoff error near year-end has a more significant effect on net income. - Relatively few transactions occur in property, plant, and equipment during the year. - The assets involved with property, plant, and equipment ordinarily have relatively longer lives. - Property, plant, and equipment accounts typically have a higher dollar value.

Confirmation in writing from the holder of the note is considered an acceptable alternative to inspection

Which of the following statements regarding the audit of negotiable notes receivable is correct? - Notes receivable discounted without recourse are confirmed via the standard form for confirmation of deposits and loans at financial institutions used in the audit of cash. - Physical inspection of a note by the auditors provides conclusive evidence. - Notes receivable discounted with recourse need not be confirmed. - Confirmation in writing from the holder of the note is considered an acceptable alternative to inspection.

Have customers send payments directly to the company's depository bank

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable? - Request that customers' payment checks be made payable to the company and addressed to the treasurer. - Have customers send payments directly to the company's depository bank. - Segregate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. - Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts.

Inflated sales for the year

Which of the following would most likely be detected by an auditor's review of the client's sales cutoff? - Excessive goods returned for credit. - Unrecorded sales discounts. - Lapping of year-end accounts receivable. - Inflated sales for the year.

Assess the allowance for uncollectible accounts for reasonableness

Which of the following would provide the most assurance concerning the valuation of accounts receivable? - Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. - Compare receivable turnover ratios to industry statistics for reasonableness. - Inquire about receivables pledged under loan agreements. - Assess the allowance for uncollectible accounts for reasonableness.

Coordinate the count of cash with the count of marketable securities and other negotiable assets.

You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to: - Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. - Coordinate the count of cash with the cutoff of accounts payable. - Coordinate the count of cash with the count of marketable securities and other negotiable assets. - Count the cash immediately upon the return of the confirmation letters from the financial institution.

You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes

Your audit of the Abbox Co. reveals that the firm's poor financial condition creates substantial doubt about its ability to continue as a going concern. Assuming that the financial statements have otherwise been prepared in accordance with generally accepted accounting principles and do include proper presentation of the matter, what disclosure should you make of the company's precarious financial position? - You should provide adequate disclosure and appropriately qualify your opinion because of the uncertainty. - You should issue an unmodified opinion, but use an emphasis-of-matter paragraph to direct the reader's attention to the poor financial condition of the company as described in the financial statements and the notes. - You need not insist on any particular disclosure, since the company's poor financial condition is clearly indicated by the financial statements themselves. - You should issue an adverse opinion on the financial statements.

adequacy of replacement funds

n the examination of property, plant, and equipment, the auditors try to determine all of the following except the: - reasonableness of the depreciation. - adequacy of replacement funds. - adequacy of internal control. - extent of property abandoned during the year.

authorization and approval of major fixed-asset additions

o achieve effective internal control over fixed-asset additions, a company should establish procedures that require: - performance of recurring fixed-asset maintenance work solely by maintenance department employees. - classification as investments of those fixed-asset additions that are not used in the business. - authorization and approval of major fixed-asset additions. - capitalization of the cost of fixed-asset additions in excess of a specific dollar amount.