Auditing Exam 3

current

Inventories are often a large __________ asset of a company's balance sheet.

obsolescence

Inventories with a high risk of __________ may be warranted as a significant risk.

Improperly excluded from AP

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

Properly excluded from AP

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

Properly included in AP

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

Improperly included in AP

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

custody of goods received from vendors is properly maintained.

The objectives of internal control for the raw material stores function are to provide assurance that:

Overstated sales

Auditor Vance was testing the sales cutoff assertion at year-end and detected

directly

The determination of the value of ending inventory __________ affects net income.

substantive analytical procedures indicate unusual fluctuations in recurring payroll entries.

An auditor is most likely to perform substantive tests of details on payroll transactions and balances when:

represented by inventory tags are included in the listing.

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items:

no reply to a positive confirmation request is received.

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:

Test a sample of checks before and after the reporting period end-date and trace them into the payroll register and related cash and expense accounts.

An auditor who is testing controls in the payroll cycle has determined there to be a significant risk that not all payments to employees are recorded and expensed. The audited entity has put controls in place to reduce this risk of misstatement. Which of the following tests of controls would effectively address the completeness assertion?

economic reorder quantity

An auditor would probably be least interested in which of the following fields in an electronic perpetual inventory file?

examination of materials requisitions and reperformance of entity controls designed to process and record issuances.

An auditor's tests of controls over the issuance of raw materials to production would most likely include:

request that the entity schedule the physical inventory count at the end of the year.

An entity maintains perpetual inventory records in both quantities and dollars. If the level of control risk were set at high, an auditor would probably:

price

An important step of testing controls is comparing quantity and __________ in the invoice, purchase order, and receiving report.

Select and examine canceled checks to confirm that the related receiving reports are dated no later than the checks.

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?

records

Audit procedures for consignment inventory could include a comparison of the physical inventory with the client's __________.

evaluate the valuation of the allowance for doubtful accounts.

Auditor Vance asked the client for an aging schedule of accounts receivable at year-end to

authorization and accuracy

Auditor Vance asked the junior auditor to compare prices and terms on a sample of sales invoices with the authorized price list and terms of trade to test the ________ assertion.

overstatement of revenues and receivables and an understatement of inventory.

Auditor Vance discovered inadequate controls over the invoicing function that allowed goods to be shipped that were not invoiced. This may result in an

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

Auditor Vance explained to the junior auditor that when auditing accounts payable, the cutoff assertion

completeness

Auditor Vance focuses primarily on the ________ assertion when auditing accounts payable.

occurrence

Auditor Vance is more concerned about the ________ assertion for revenues because entities are more likely to overstate than understate revenues.

Trace shipping documents to sales invoices and the sales journal.

Auditor Vance should use which test of controls for the completeness assertion for revenue?

Revenue should not be recognized in the current period.

Best Products is a retailer of appliances that offers "layaway" sales to its customers twice a year. Best retains the merchandise, sets it aside in its inventory, and collects a cash deposit from the customer. The customer signs an installment note at the time the initial deposit is received, but no payments are due until 30 days after delivery. 1. Select which option is correct according to the situation above:

Step 5

Best Products is a retailer of appliances that offers "layaway" sales to its customers twice a year. Best retains the merchandise, sets it aside in its inventory, and collects a cash deposit from the customer. The customer signs an installment note at the time the initial deposit is received, but no payments are due until 30 days after delivery. 2. Select the correct step from of the 5-step process that should be used to draw your conclusion:

understating the sales journal

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this theft and be least likely to be detected by an auditor?

Substantive analytical procedures

Compare payables turnover to previous years' data.

Substantive analytical procedures

Compare purchase returns and allowances as a percentage of revenue or cost of sales to industry data.

Valuation of assets

Compare the amount of credits given to customers in the subsequent period to the amount estimated by management

Existence of assets

Confirm a sample of receivables by direct communication with the debtors

Confirmation of accounts receivable.

Confirm that recorded accounts receivable are valid (existence).

Revenue should be recognized with the passage of time.

Dave's Discount Stores is a discount retailer that generates revenue from the sale of membership fees it charges customers to shop at its stores. The membership arrangement requires the customer to pay the entire membership fee (usually $48) at the beginning of the arrangement. However, the customer can unilaterally cancel the membership arrangement and receive a refund of the unused portion. Based on past experiences, Dave's estimates that 35 percent of the customers will cancel their memberships before the end of the contract. 1. Select which option is correct according to the situation above:

Step 4

Dave's Discount Stores is a discount retailer that generates revenue from the sale of membership fees it charges customers to shop at its stores. The membership arrangement requires the customer to pay the entire membership fee (usually $48) at the beginning of the arrangement. However, the customer can unilaterally cancel the membership arrangement and receive a refund of the unused portion. Based on past experiences, Dave's estimates that 35 percent of the customers will cancel their memberships before the end of the contract. 2. Select the correct step from of the 5-step process that should be used to draw your conclusion:

Select a sample of shipping documents, match them with related sales invoices, and determine that they have been included in the sales journal and accounts receivable subsidiary ledger.

Determine that recorded accounts receivable include all amounts owed to the client (completeness).

Obtain a listing of the accounts payable and agree total to general ledger control account.

Determine whether accounts payable have been properly accumulated from the journal to the general ledger. (accuracy)

Compare selected amounts from the accounts payable listing with the voucher and supporting documents.

Determine whether recorded accounts payable are valid. (existence/occurrence)

without paper time sheets, part of the audit trail is altered.

During the year being audited, the Matthews Corporation changed from a system of recording time worked on time sheets to an IT payroll system in which employees record time in and out with magnetic cards. The IT system automatically updates all payroll records. Because of this change:

verification of agreement of job time sheets with employee recorded hours by a payroll department employee.

Effective control activities over the payroll function may include:

Review of drafts of the financial statements.

Ensure that all revenue-related disclosures are made in the financial statements.

Select a sample of items during the physical inventory count and determine that they have been included on count sheets.

Ensure that recorded inventory quantities include all products on hand (completeness).

Review of aging of accounts receivable with the credit manager.

Ensure that the allowance for uncollectible accounts is properly stated (accuracy, valuation, and allocation).

Review of bank confirmations and loan agreements.

Ensure that the entity has legal title to accounts receivable (rights and obligations).

Review loan agreements and minutes of board of directors' meetings.

Ensure that the entity has legal title to inventory (rights and obligations).

receiving department.

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

general accounting within the entity's IT system.

For an appropriate segregation of duties, journalizing and posting summary payroll transactions should be assigned to:

treasurer

For effective internal control purposes, which of the following individuals should be responsible for mailing signed checks?

write-offs of customer accounts.

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

Fraud

Holding sales journal open to record next year's sales in the current year.

fictitious sales in the current year.

If accounts receivable turnover (credit sales/receivables) was 7.1 times last year compared to only 5.6 times in the current year, it is possible that there were:

completeness

If the number of days' sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated?

entering of the voucher into the voucher register.

In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition, and receiving report are verified. The next step in the system is:

recompute the calculations on vendors' invoices.

In a properly designed purchasing process, the same employee most likely would match vendors' invoices with receiving reports and:

valuation and allocation.

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

compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory.

Independent internal verification of inventory (i.e., proper segregation of duties) occurs when employees who:

valuation.

Inquiries of warehouse personnel concerning possibly obsolete or slow-moving inventory items provide assurance about management's assertion of:

Fraud

Intentional overshipment of goods.

Segregation of duties between granting credit and sales functions.

Internal Auditor Vance implemented a control to minimize sales personnel from creating high bad debt write-offs from maximizing sales volume. what was the most likely control implemented?

preparation of periodic governmental reports as to employees' earnings and withholding taxes

It would be appropriate for the payroll department to be responsible for which of the following functions?

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

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

the risk of material misstatement is low.

Negative confirmation requests are used in auditing accounts receivable when

Tests of details of account balances

Obtain selected vendors' statements and reconcile to vendor accounts.

Perpetual inventory records are maintained.

Periodic or cycle counts of selected inventory items are made at various times during the year rather than via a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventory at interim dates?

Financial statement presentation and disclosure of assets

Provide a list of related parties to all members of the audit team to assist in identification of the transactions

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

Purchase cutoff procedures should be designed to test whether all inventory:

fraud

Purchasing and cash disbursements can provide opportunity for __________ by employees.

vendors with small or zero accounts payable balances.

The completeness assertion for accounts payable is assessed at high risk for Vance Corporation. The auditor decided to send accounts payable confirmations to

Fraud

Recording a fictious sale without receiving a customer order for the goods.

Fraud

Recording a sale for goods that the customer is anticipated to return.

Error

Recording sales in the wrong period based on incorrect shipping information.

Error

Revenue earned from franchise is incorrectly calculated.

Rights to assets

Review confirmations of liabilities to determine if receivables have been sold

Tests of details of account balances

Review results of confirmation of selected accounts payable.

Completeness of assets

Select a sample of sales invoices in the subsequent period and examine the related shipping documents for date of shipment to ascertain whether some of those shipments at the end of the period were inadvertently not recorded

develop a routine in IDEA or an audit data analytic to compare credit limits with account balances and identify any account with a balance exceeding its credit limit.

Smith Corporation has numerous customers. A customer file is maintained and includes a customer record with a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to:

Tests of details of transactions

Test a sample of purchase requisitions for proper authorization.

Tests of details of transactions

Test transactions around year-end to determine if they are recorded in the proper period.

effectiveness

Tests to help identify the __________ of controls help to evaluate the client's internal control structure.

valuation

The accounting profession allows various methods for the __________ of inventory.

compare purchase order quantity to invoice quantity.

The accounts payable department receives the purchase order form to

authorization of transactions from the custody-related assets.

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the:

receiving reports.

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

sales invoices.

To test the control that goods shipped are properly billed, an auditor would most likely examine shipping documents and search for

In meeting the control objective of safeguarding of assets, which department should be responsible for the following? Distribution of Paychecks Custody of Unclaimed Paychecks

Treasurer Treasurer

receiving report and the purchase order.

Vance Corporation's accounts payable department has been instructed by Dr. Vance to compare the data on the vendor invoice with the

Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

Vance Corporation's accounts payable department recorded a large purchase twice. Dr. Vance implemented an internal control to detect this error in a timely and efficient manner in the future. What was the most likely internal control implemented?

Select a sample of receiving documents for a few days before and after year-end.

Verify that all accounts payable are recorded in the correct period. (cutoff)

Select a sample of shipping documents for a few days before and after year-end.

Verify that all accounts receivable are recorded in the correct period (cutoff).

Examine current vendor price lists.

Verify that inventory has been reduced, when appropriate, to replacement cost or net realizable value (valuation).

Search for unrecorded liabilities.

Verify that recorded accounts payable include all amounts owed to vendors. (completeness)

Select a sample of recorded items and examine supporting vendor invoices and contracts.

Verify that the cost of inventory has been properly determined (accuracy).

Review drafts of the financial statements.

Verify that the major categories of inventory and their bases of valuation are adequately reported in the financial statements (completeness and accuracy and valuation for presentation and disclosure).

Cutoff of transactions

Vouch sales and cash receipt transactions occurring near period end

Review shipping documents.

What is the appropriate audit procedure to implement when customers that have large year-end past due balances fail to reply after second request confirmation forms have been mailed directly to them?

Examine cash disbursements after the balance sheet date in conjunction with the related vendor invoice(s).

What is the most likely procedure that Auditor Vance instructs junior auditors to follow in searching for unrecorded liabilities?

segregation of duties between receiving cash and posting the accounts receivable ledger

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

all goods owned at year-end are included in the inventory balance.

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that:

the approved purchase order.

When goods are received, the receiving clerk should match the goods with:

purchasing

When testing controls around inventory, auditors are considering the __________ transaction cycle.

vendors with whom the entity has previously done business.

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

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

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

During physical observation of inventory verify that "bill-and-hold" inventory is segregated and not included in the ending inventory count.

Which of the following audit procedures would probably provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventory?

Trace a sample of payroll checks to the approved time sheet summary and the master employee list to verify validity.

Which of the following audit tests would most likely be used to test the occurrence assertion for payroll transactions?

accounting for unused prenumbered purchase orders and receiving reports

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

Inventory manager does not have ability to record inventory transactions.

Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions?

The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded?

Receiving reports are prenumbered and periodically reconciled.

Which of the following internal control activities is most likely to address the completeness assertion for inventory?

Difficulty of revenue recognition standards.

Which of the following is an inherent risk factor for the revenue process?

unrecorded sales for the year

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

search for unrecorded liabilities

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

The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department.

Which of the following procedures would most likely be considered a weakness in an entity's internal controls over payroll?

independent comparisons of finished goods records with counts of goods on hand

Which of the following would most likely be an internal control activity designed to detect errors and fraud concerning the custody of inventory?

Revenue should not be recognized in the current period.

Your client, Thomson Telecom, maintains an inventory of telecommunications equipment. Bayone Telephone Company placed an order for 10 new transformers valued at $5 million, and Thomson delivered them just prior to December 31. Thomson's normal business practice for this class of customer is to enter into a written sales agreement that requires the signatures of all the authorized representatives of Thomson and its customer before the contract is binding. However, Bayone has not signed the sales agreement because it is awaiting the requisite approval by the legal department. Bayone's purchasing department has orally agreed to the contract, and the purchasing manager has assured you that the contract will be approved the first week of next year. 1. Select which option is correct according to the situation above:

Step 1

Your client, Thomson Telecom, maintains an inventory of telecommunications equipment. Bayone Telephone Company placed an order for 10 new transformers valued at $5 million, and Thomson delivered them just prior to December 31. Thomson's normal business practice for this class of customer is to enter into a written sales agreement that requires the signatures of all the authorized representatives of Thomson and its customer before the contract is binding. However, Bayone has not signed the sales agreement because it is awaiting the requisite approval by the legal department. Bayone's purchasing department has orally agreed to the contract, and the purchasing manager has assured you that the contract will be approved the first week of next year. 2. Select the correct step from of the 5-step process that should be used to draw your conclusion:

After

________ considering information about the client and its environment, the auditors must assess the risks of material misstatement related to assertions about inventory.

The negative request form of accounts receivable confirmation is useful particularly when: The Assessed Level of Control Risk Relating to Receivables Is The Number of Small Balances Is Consideration by the Recipient Is

low high likely