Exam 2 ACC 6510 Chpt 7-9

Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern

"These goods were returned for credit on November 15" This should have been recorded as a reduction or credit to the receivable by 12/31.

When an audit team traces a sample of shipping documents to the related sales invoices copies, they are trying to find relevant evidence that

Shipments to customers were invoiced Shipments are traced to customers' invoices. (This does not imply that the invoices were recorded in the sales journal.)

All pay base data (hours, job number, absences, etc.) should be approved by an employee's immediate supervisor.

True

An objective for an audit is to obtain evidence related to management's financial statement assertions

True

Auditors can inspect the "unmatched invoice file" and compare it to the "unmatched receiving report" file to determine whether liabilities are unrecorded.

True

Most businesses try to estimate sales levels and seasonal timing and then try to plan production schedules to meet customer demand.

True

Proper separation of duties involves authorization of purchases by persons who do not have custody, recording, or reconciliation duties.

True

Purchase orders are "open" from the time they are issued until the goods are received.

True

Purchases are ordered by a purchasing department that seeks the best prices and quality.

True

The accountants who record cash receipts and credits to customer accounts should not handle the cash

True

The aging information for accounts receivable is typically used in connection with assessing the allowance for doubtful accounts

True

The auditors must be present during some counting operations to evaluate cycle inventory counting plans and the execution.

True

The use of confirmations to test accounts receivable is considered a generally accepted audit procedure.

True

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

Understating the sales journal Not recording sales on account in the books of original entry is the most effective way to conceal a subsequent theft of cash receipts. The accounts will be incomplete but balanced, and procedures applied to the accounting records will not detect the defalcation.

Computer controls that might be found in an advanced on-line acquisition and expenditure system would not include

all vendor invoices are prenumbered and the numbers accounted for.

Effective control over the cash payroll function would mandate which of the following?

Each employee should be asked to sign a receipt. Under a cash payroll system, the receipt signed by the employee is the only document in support of payment. The signed receipt is essential to verify both occurrence and accuracy of payment.

A computer generally cannot be used for scanning large files of accounts receivable for unusual credit balances.

False

When verifying debits to the perpetual inventory records of a nonmanufacturing company, auditors would be most interested in examining a sample of purchase

Invoices. Invoices supply relevant information about the quantities purchased and the prices paid.

An internal control questionnaire for evaluating the occurrence objective of revenues would not include which of the following questions?

Is the customer credit approved before orders are shipped?

An auditor is required to confirm accounts receivable if the accounts receivable balance are

Material to the financial statements Confirmation are generally reserved for accounts that are material to the balance being examined, in this case, accounts receivable.

Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries?

Personnel

Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?

Require employees to have their direct supervisors approve their time cards. The employee's direct supervisor is in the best position to know if the employee worked the hours indicated on the time card. The supervisor's approval is the best evidence that the hours on the time card were for hours worked

Which of the following accounts does not appear in the acquisition and expenditure cycle?

Sales returns. Although similar to purchases because they require a receiving report, sales returns are considered part of the revenue and collection cycle because they affect accounts receivable.

Write-offs of doubtful accounts should be approved by

The treasurer The treasurer or another high-ranking manager should approve write-offs.

Inquiries of management usually do not provide very convincing evidence about the existence and rights assertions.

True

Which of the following activities performed by a department supervisor most likely would help to prevent or detect a payroll fraud?

Approving a summary of hours each employee worked during the pay period. A summary of hours worked would not provide any additional opportunities for fraud and may detect a payroll fraud if some employees were working a significant number of hours above other employees in the same areas.

When auditing account balances of liabilities, auditors are most concerned with management's assertion about

Completeness. Completeness is the most important assertion in this cycle. The hiding of liabilities is a primary concern for all auditors in the liability and expense areas. Supplies expense is generally audited in connection with supplies inventory.

Prenumbering invoices, shipping documents, and sales orders is a practice to achieve which of the following assertions?

Completness

Which of the following might be detected by auditors' cutoff review and examination of sales journal entries for several days prior to the balance sheet date

Inflating sales for the year False sales journal entries made near the end of the year may have shipping or other documents that reveal later dates or show lack of sufficient documentation.

An audit plan for accounts payable would not include which of the following procedures?

Reviewing cash receipts for period after year-end.

An audit team most likely would assess control risk at the maximum if the payroll department supervisor is responsible for

authorizing payroll rate changes for all employees.

The inherent risk that accounts payable may be omitted or otherwise understated typically is

high.

Specific balance assertions typical of accounts payable would not include

accounts payable are not pledged as collateral.

Which of the following would not typically be a specific relevant assertion about fixed asset accounts?

net carrying book values in the accounts are reflected at current market values.

A person who has access to both cash and accounts receivable records may be able to take cash receipts by

A lapping operation

In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these assertions. Here is a selection of accounts receivable assertions: Accounts receivable represent all amounts owed to the client company at the balance sheet date. The client company has a legal right to all accounts receivable at the balance sheet date. Accounts receivable are stated at net realizable value. Accounts receivable are properly described and presented in the financial statements. Required: For each of these assertions, select the following audit procedure that is best suited for the audit plan. Analyze the relationship of accounts receivable and sales and compare with relationships for preceding periods. Perform sales cutoff tests to obtain assurance that sales transactions and corresponding entries for inventories and cost of goods sold are recorded in the same and proper period. Review the aged trial balance for significant past due accounts. Obtain an understanding of the business purpose of transactions that resulted in accounts receivable balances. Review loan agreements for indications of whether accounts receivable have been factored or pledged. Review the accounts receivable trial balance for amounts due from officers and employees. Analyze unusual relationships between monthly accounts receivable and monthly accounts payable balances. a. Accounts receivable represent all amounts owed to the client company at the balance sheet date. b. The client company has a legal right to all accounts receivable at the balance sheet date. c. Accounts receivable are stated at net realizable value. d. Accounts receivable are properly described and presented in the financial statements.

A. 2 B. 5 C. 3 D. 6

The following questions appeared on an internal control questionnaire for sales. Next to each of the questions, indicate the related assertion. A. Are sales invoice blanks prenumbered? B. Are all credit sales approved by the credit department prior to shipment? C. Are invoice quantities compared to shipped quantities? D. Are summary journal entries approved before posting? E. Are sales prices and terms based on approved standards? F. Is access to sales invoice blanks restricted? G. Does the accounting manual contain instructions to date sales invoices on the shipment date? H Are returned sales credits supported by documentation? I. Are prenumbered bills of lading prepared in the shipping department? J. Are periodic sales data reported directly to general ledger accounting independent of accounts receivable accounting?

A. Completeness B. Accuracy C. Accuracy D. Accuracy E. Accuracy F. Occurence G. Cutoff H. Occurence I. Completeness J. Accuracy

During the confirmation of accounts receivable, an auditor receives a confirmation via the client's fax machine. Which of the following actions should the auditor take

Accept the confirmation but verify the source and content through a telephone call to the respondent When a reply to a confirmation is received via fax the auditor must determine that the fax actually came from the appropriate person at the client. A telephone call to an appropriate person at the respondent's company is an acceptable method for verifying the legitimacy of the response.

The positive form of confirmation is best used when

Account balances are relatively large

When auditing the revenue and collection cycle, auditors normally select balances to confirm from the

Account receivable listing This would have the balance for confirming

A client's purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes auditors' primary concern with respect to liabilities resulting from the purchasing system?

Accounts payable are not materially understated. The completeness assertion is very important in the audit of liabilities.

An audit team most likely would assess control risk at the maximum if the payroll department supervisor is responsible for.

Authorizing payroll rate changes for all employees.

An audit team most likely would assess control risk at the maximum if the payroll department supervisor is responsible for

Authorizing payroll rate changes for all employees. The payroll department should be independent of the personnel department, which would be responsible for authorizing all payroll rate changes for the employees of the entity. A supervisor would be authorized, however, to initiate requests for rate increases for supervised employees.

A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows: Employee Responsibility Clerk 1 Reviews vendor invoices for proper signature approval. Clerk 2 Enters vendor invoices into the accounting system and verifies payment terms. Clerk 3 Posts entered vendor invoices to the accounts payable ledger for payment and mails checks. Treasurer Reviews the vendor invoices and signs each check. Which of the following would indicate a weakness in the company's internal control?

Clerk 3 mails the checks and remittances after they have been signed. Clerk 3 has recordkeeping responsibilities. Providing a signed check to Clerk 3 provides the clerk access to an asset and violates the separation of duties.

Auditors ordinarily ascertain whether payroll checks are properly endorsed during the audit of

Clock cards. Ordinarily, the auditor examines the endorsements on payroll checks while obtaining an understanding of and testing the payroll cycle, which includes consideration of clock cards.

In a test of controls, auditors may trace receiving reports to vouchers recorded in the voucher register. This is a test for

Completeness. This test ensures that liabilities generated by the receipt of goods are recorded in the voucher register.

Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what assertion?

Completness

For which of the following accounts would the matching concept be the most appropriate?

Cost of goods sold. Cost of goods sold should be matched with sales by using inventory to record cost of goods not yet sold.

In the revenue and collection cycle, the order of the activities in the cycle are best illustrated by:

Customer ordering, credit granting, delivering goods, billing customer

A large retail enterprise has established a policy that requires the paymaster to deliver all unclaimed payroll checks to the internal audit department at the end of each payroll distribution day. This policy was most likely adopted to

Detect any fictitious employee who may have been placed on the payroll. A follow-up of unclaimed checks may result in identification of fictitious or terminated employees, thus eliminating an employee's opportunity to claim a paycheck belonging to a terminated employee. The unclaimed checks should then be turned over to a custodian so the internal audit function does not assume operating responsibilities.

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except

Do nothing for immaterial balances Because the confirmations are a sample of the account balance, even immaterial items should be followed up as they represent other balances in the universe of receivables.

Which of the following is the best reason for prenumbering in numerical sequence documents such as sales orders, shipping documents, and sales invoices

Enables personnel to check the numerical sequence for missing documents and unrecorded transactions Checking the sequence for missing numbers identifies documents not yet fully processed in the revenue cycle. It does not provide evidence about accuracy, cutoff, or occurrence.

An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the account receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that

Entries in the accounts receivable subsidiary ledger were properly invoiced Vouching is used to establish support for recorded amounts.

Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This audit team uses this aging primarily to

Estimate credit losses The age of accounts is an indication of credit losses.

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?

Examine a sample of cash disbursements in the period subsequent to year-end. Auditors may be able to determine that cash disbursements in the subsequent period are paying liabilities of the period under audit.

Which of the following is not an alternative procedure when a confirmation is not received?

Examine payments received before the end of the period

Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?

Examining vendor statements for amounts not reported as purchases. A purchased item listed on the monthly vendor statement should be included in the accounts payable. If it cannot be traced to the accounts payable record, the vendor account will be understated.

In the audit of accounts receivable, the most important emphasis should be on the

Existence assertion Financial statement users are more likely to be damaged if assets are found not to exist or assets are overstated.

Confirmation of individual accounts receivable balances directly with debtors, will, of itself, normally provide the strongest evidence concerning the

Existence of the balance confirmed Accounts receivable confirmation enables recipients to respond that they owe the company or that they dispute or disagree with the amount the company says they owe.

Which of the following would not overstate current-period net income?

Failing to record a check paying an item in Vouchers Payable. Has no effect on net income. It overstates cash and payables.

Which of the following would not overstate current-period net income?

Failing to record a check paying an item in vouchers payable

Checks are signed by the accounts payable department after assembling the invoice, purchase order, and receiving report.

False

Evidence is much easier to obtain to verify the completeness assertion for liabilities than the existence assertion for assets.

False

If control risk is assessed very low, the substantive audit procedures on account balances must be expanded

False

If the risk of material misstatement is assessed as very low, it is likely that additional substantive procedures will be required.

False

The emphasis is on the existence assertion because financial statement users tend to be more concerned about understated expenses and liabilities.

False

The payroll bank account cannot be reconciled like the other bank accounts.

False

When obtaining evidence about accounts receivable, auditors must put emphasis on the completeness and the obligations assertions.

False

An auditor noted that client sales increased 10 percent for the year. At the same time, cost of goods sold as a percentage of sales had decreased from 45 percent 40 percent and year-end accounts receivable had increased by 8 percent. Based on the information, the auditor is most likely concerned about

Fictitious sales Fictitious sales would increase sales. Because no actual product was shipped, COGS as a percent of sales would decrease. The most likely debit for fictitious sales is accounts receivable, causing accounts receivable to increase.

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable

Have customers send payments directly to the company's depository bank The cash is not in the same physical place as the employees; therefore it cannot be stolen.

The financial records of the Movitz Company show that R. Dennis owes $4,100 on an account receivable. An independent audit is being carried out, and the auditors send a positive confirmation to R. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here

Inherent risk was particularly high for accounts receivable Because detection risk is lower for positive confirmations than negative confirmations, a positive confirmation is more likely when inherent risk is high.

An audit team would most likely examine the detail support for charges to which of the following accounts?

Legal expense. The auditor examines the specific charges to determine potential litigation.

In determining the effectiveness of an entity's policies and procedures relating to the occurrence assertion for payroll transactions, auditors most likely would inquire about and

Observe the separation of duties concerning personnel responsibilities and payroll disbursement. In considering whether transactions actually occurred, the auditor is most concerned about the proper separation of duties between the personnel department (authorization) and the payroll department (processing the transactions).

An auditor noted that client sales increased 10 percent for the year. At the same time, cost of goods sold as a percentage of sales had decreased from 45 percent 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor interviewed the sales manager, who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor test the sales manager's representation

Obtain copies of all price lists in use during the year and vouch the prices to sales invoices Reviewing the changes in pricing during the year and ensuring that customers were charged the new prices provides sufficient, reliable evidence to support the sales manager's representation.

Matthew Corp. has changed from a system of recording time worked on clock cards to a computerized payroll system in which employees record time in and out with magnetic cards. The computerized system automatically updates all payroll records. Because of this change

Part of the audit trail is altered. In a manual payroll system, a paper trail of documents would be created to provide audit evidence that controls over each step in processing were in place and functioning. One element of a computer system that differentiates it from a manual system is that a transaction trail useful for auditing purposes might exist only for a brief time or only in computer-readable form.

A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only 48 tables, but the receiving department at the furniture company accepted the tables. The invoice was eventually received but was for the original 84 tables. The furniture company paid the entire amount. Which of the following controls would have been least likely to have prevented this erroneous payment?

Personnel in the furniture company's purchasing department should compare the purchase requisition with the purchase order. The purchase order and requisition would both show 84 tables.

Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries?

Personnel. The personnel department provides the authorization for payroll-related transactions (e.g., hiring, termination, and changes in pay rates and deductions).

Which of the following controls is designed to meet the completeness assertion?

Prenumbering invoices, shipping documents, and sales orders

Which of the following accounts would most likely be audited in connection with a related balance-sheet account?

Property Tax Expense. Property tax expense is audited in conjunction with accrued property taxes.

Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a cash-on-delivery (C.O.D) basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over?

Purchase orders. Nobody at Lake was reviewing purchase orders to notice the delivery and payment by another party (Budd's relative's store). This deviation caused no direct loss to Lake, but it is a misuse of Lake's pricing agreements with its vendors and puts Lake at risk.

Which of the following accounts is not normally part of the revenue and collection cycle

Purchase returns and allowance Even though this involves shipments, it is considered part of the expenditure and disbursement cycle.

To determine whether accounts payable are complete, auditors perform a test to verify that all merchandise received has been recorded. The population for this test consists of all

Receiving reports. The receiving reports are the population that contains the record of all goods received for which liabilities should be recorded.

Curtis, a maintenance supervisor, submitted maintenance invoices from a phony repair company and received the checks at a post office box. This should have been prevented by

Refusal by the purchasing department to approve the vendor. Vendors should be approved by an independent purchasing department before an order can be placed.

Sales are normally recorded on the date of the

Sales invoice This is often the same as the bill of lading date.

When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to

Sales invoices with shipping documents and customer sales invoices The accounts receivable debits are supposed to represent sales that have been ordered by customers and actually shipped to them.

To conceal a theft involving receivables, a dishonest bookkeeper might charge which of the following accounts

Sales returns Using the sales returns account would raise the least suspicion because this account is more commonly linked to accounts receivable. A bookkeeper could steal money and "write off" to unsuspecting customer's balance with a fictitious "sales return."

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

Search for unrecorded liabilities. The search for unrecorded liabilities generally depends upon using accounting records created in the period after the year end.

A client has a separate sales group for its largest "preferred" customers, a select group of customers who normally make purchases in excess of $250,000 and often of $1 million. Which of the following audit procedures would the auditor most likely perform

Send out positive confirmations on a large sample of these customers The most likely audit step when there are a few large accounts is to send out positive confirmations.

When accounts receivable are confirmed at an interim date, auditors need not be concerned with

Sending negative confirmations to all customers as o the year-end date This is mainly because the other three choices are listed as appropriate work to do. Also, customers are likely to ignore negative confirmations after earlier responding to positive confirmations.

Which of the following internal control activities most likely would deter lapping of collections from customers

Separation of duties between receiving cash and posting the accounts receivable ledger Lapping is the delayed recording of cash receipts to cover a cash shortage. Current receipts are posted to the accounts of customers who paid one or two days previously to avoid complaints (and discovery) when monthly statements are mailed. The best protection is for the customers to send payments directly to the company's depository bank. The next best procedure is to ensure that the accounts receivable clerk has no access to cash received by the mail room. Thus, the duties of receiving cash and posting the accounts receivable ledger are segregated.

An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have no materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue

The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period Since a large portion of the sales occur in the last month the auditor needs to test end of year sales, specifically the determination of the timing of sales is important to ensure sales were recorded in the proper period.

Which of the following is not a valid reason for an auditor deciding not to send accounts receivable confirmations?

The client requests alternative procedures are performed instead

Revenues are normally concerned to have been earned when

The company has substantially accomplished what it must to be entitled to the benefits The earning process is complete at this point.

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

The employee who distributes payroll check returns unclaimed payroll checks to the payroll department. The payroll department assembles payroll information, which is a recording function. Custody of assets, such as unclaimed payroll checks, is incompatible with record keeping.

Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time?

The official who signs the check should compare the check with the voucher and should stamp "PAID" on the voucher documents. Cancellation of vouchers (by marking them as PAID) prevents their use a second time.

A price list master file contains the product unit prices that are used for billing customers.

True

Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities

Unrecorded sales Less sales revenue and correct amount of cost of goods sold results in less gross profit, therefore the ratio of gross profit to sales will decrease. (Actually, the gross profit numerator will decrease at a greater rate than the sales denominator in the ratio, causing the ratio to decrease.)

The control procedure "credit sales approved by credit department" is directed toward which assertion

Valuation/Accuracy Credit approval helps ensure that the sale will be collectible.

Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable

Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence Impropriety of write‑offs can be controlled by the review and approval of someone outside the credit department.

A voucher typically does not have attached to it a copy of which of the following documents?

check register.