Chapters 10+11 Auditing

a.

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: a. An investment committee of the board of directors. b. The chief operating officer. c. The corporate controller. d. The treasurer.

d.

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

d.

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

a.

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

a.

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

a.

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

c.

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

b.

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

a.

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

d.

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

b.

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: a. Supported by a vendor's invoice. b. Stamped "paid" by the check signer. c. Prenumbered and accounted for. d. Approved for authorized purchases.

c.

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

a.

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

d.

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

d.

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

d.

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

b

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

a.

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? a. Observe the consistency of the employees' use of cash registers and tapes. b. Inquire about employees' access to recorded but undeposited cash. c. Trace deposits in the cash receipts journal to the cash balance in the general ledger. d. Compare the cash balance in the general ledger with the bank confirmation request.

d.

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

d.

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

c.

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: a. Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. b. Coordinate the count of cash with the cutoff of accounts payable. c. Coordinate the count of cash with the count of marketable securities and other negotiable assets. d. Count the cash immediately upon the return of the confirmation letters from the financial institution.