ACC 401 Ch.11 Review

The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to

Corroborate information regarding deposit and loan balances.

When auditing a client's statement of cash flows, an auditor will rely primarily upon

Cross-referencing to balances and transactions considered in connection with the audit of the other financial statements.

Which of the following comparisons would be most useful to an auditor in evaluating the results of an entity's operations?

Current-year revenue to budgeted current-year revenue.

In the confirmation of accounts receivable, the auditor would most likely

Request confirmation of a sample of the inactive accounts.

A company issued bonds for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditor's best course of action is to

Trace the cash received from the issuance to the accounting records.

Tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of

Cutoff.

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?

Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts.

Which of the following is not a principal objective of the auditor in the audit of revenues?

To verify cash deposited during the year.

Fact Pattern: The following was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ended December 31, Year 1. Assume all checks are dated and issued on December 30, Year 1. Disbursement Date Receipt Date Check Bank Accounts Per Per Per Per No. From To Books Bank Books Bank 101 National Federal Dec. 30 Jan. 4 Dec. 30 Jan. 3 202 County State Jan. 3 Jan. 2 Dec. 30 Dec. 31 303 Federal American Dec. 31 Jan. 3 Jan. 2 Jan. 2 404 State Republic Jan. 2 Jan. 2 Dec. 31 Jan. 2 Which of the following checks illustrate deposits or transfers in transit at December 31, Year 1?

#101 and #303.

Fact Pattern: The following was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ended December 31, Year 1. Assume all checks are dated and issued on December 30, Year 1. Disbursement Date Receipt Date Check Bank Accounts Per Per Per Per No. From To Books Bank Books Bank 101 National Federal Dec. 30 Jan. 4 Dec. 30 Jan. 3 202 County State Jan. 3 Jan. 2 Dec. 30 Dec. 31 303 Federal American Dec. 31 Jan. 3 Jan. 2 Jan. 2 404 State Republic Jan. 2 Jan. 2 Dec. 31 Jan. 2 Which of the following checks might indicate kiting?

#202 and #404.

Fact Pattern: Listed below are four of a client's interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, for late December and early in the following January. Your answer choice for each question should be selected from this list. Bank Account One Bank Account Two Disbursing Date Receiving Date (Month/Day) (Month/Day) Per Per Per Per Bank Books Bank Books 1. 12/31 12/30 12/31 12/30 2. 1/2 12/30 12/31 12/31 3. 1/3 12/31 1/2 1/2 4. 1/3 12/31 1/2 12/31 Which of the cash transfers would not appear as an outstanding check on the December 31 bank reconciliation?

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A CPA is engaged in the annual audit of a calendar year client. The client took a complete physical inventory under the CPA's observation on December 15 and adjusted its inventory account and detailed perpetual inventory records to agree with the physical inventory. The client considers a sale to be made in the period that goods are shipped. Listed below are four items taken from the CPA's sales cutoff test worksheet. Which item does not require an adjusting entry on the client's books? 1. Shipped 2. Recorded as sale 3. Credited to inventory

1. 12/10 2. 12/19 3. 12/12

The negative request form of accounts receivable confirmation may be used when the 1. Risk of material misstatements is 2. Number of small balances is 3. Consideration by the recipient is

1. Low 2. Many 3. Likely

Which of the following cash transfers results in a misstatement of cash at December 31, Year 1? Bank Transfer Schedule Disbursement Receipt Recorded Paid by Recorded Received in Books Bank in Books by Bank

1/4/Yr 2 1/5/Yr 2 12/31/Yr 1 1/4/Yr 2

Fact Pattern: Listed below are four of a client's interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, for late December and early in the following January. Your answer choice for each question should be selected from this list. Bank Account One Bank Account Two Disbursing Date Receiving Date (Month/Day) (Month/Day) Per Per Per Per Bank Books Bank Books 1. 12/31 12/30 12/31 12/30 2. 1/2 12/30 12/31 12/31 3. 1/3 12/31 1/2 1/2 4. 1/3 12/31 1/2 12/31 Which of the cash transfers would appear as a deposit in transit on the December 31 bank reconciliation?

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If the objective of a test of details is to detect overstatements of sales, the auditor should compare transactions in the

Accounting records with the source documents.

An inappropriate audit procedure relative to accounts receivable is to determine that the

Accounts are collected by the balance sheet date.

For the fiscal year ending December 31 of the previous year and for the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and an allowance for uncollectible accounts receivable of $30,000 and $50,000, respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions to be drawn?

Accounts receivable turnovers are 10.0 and 6.7, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.17, respectively. Examine allowance for possible understatement of the allowance.

A cutoff test of sales complements the verification of

Accounts receivable.

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?

Allowance for doubtful accounts.

An auditor is reviewing a sales cutoff as of March 31. All sales are shipped FOB destination, and the company records sales 3 days after shipment. The auditor notes the following items: (Amounts in Thousands) Date Month Selling Shipped Recorded Price Cost March 28 March $192 $200 March 29 March 44 40 March 30 April 77 81 April 2 March 208 220 April 5 April 92 84 If the client records the required adjustments, the net effect on income in thousands of dollars for the period ended March 31 is

An increase of $8.

Which of the following most likely would give the most assurance concerning the valuation assertion about accounts receivable?

Assessing the allowance for uncollectible accounts for reasonableness.

The best evidence regarding year-end bank balances is documented in the

Bank reconciliations.

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may

Be unaware of all the financial relationships that the bank has with the client.

Which of the following procedures would an auditor most likely perform to identify unusual sales transactions?

Performing a trend analysis of quarterly sales.

Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?

Preliminary judgments about materiality levels.

An auditor should test bank transfers for the last part of the audit period and first part of the subsequent period to detect whether

Cash balances were overstated because of kiting.

A large university has relatively ineffective internal control. The university's auditor seeks assurance that all tuition revenue has been recorded. The auditor could best obtain the desired assurance by

Comparing business office revenue records with registrar's office records of students enrolled.

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of

Completeness.

An auditor suspects 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 auditor most likely would compare the

Dates checks are deposited per bank statements with the dates remittance credits are recorded.

Fact Pattern: Miles Company Bank Transfer Schedule December 31 Date Date Disbursed Deposited Accounts Per Per Check Number From To Amount Books Bank Books Bank 2020 1st Natl. Suburban $32,000 12/31 1/5 þ 12/31 1/3Ø 2021 1st Natl. Capital 21,000 12/31 1/4 þ 12/31 1/3Ø 3217 2nd State Suburban 6,700 1/3 1/5 1/3 1/6 0659 Midtown Suburban 5,500 12/30 1/5 þ 12/30 1/3Ø The tick mark Ø most likely indicates that the amount was traced to the

Deposits in transit of the applicable bank reconciliation.

Customers having substantial year-end past due balances fail to reply after second request forms have been mailed directly to them. Which of the following is the most appropriate alternative audit procedure?

Examine shipping documents.

Once a CPA has determined that accounts receivable have increased because of slow collections in a tight money environment, the CPA is likely to

Expand tests of collectibility.

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose

Individual invoices.

Which of the following might be detected by an auditor's review of the client's sales cutoff?

Inflated sales for the year.

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

Inspect the shipping records documenting the merchandise sold to the debtors.

All of the following are examples of substantive tests to verify the valuation of net accounts receivable except the

Inspection of accounts for current versus non-current status in the statement of financial position.

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

Material to the financial statements.

An auditor who has confirmed accounts receivable may discover that the sales journal was held open past year end if

Most of the returned positive confirmation requests indicate that the debtor owes a smaller balance than the amount being confirmed.

Fact Pattern: Miles Company Bank Transfer Schedule December 31 Date Date Disbursed Deposited Accounts Per Per Check Number From To Amount Books Bank Books Bank 2020 1st Natl. Suburban $32,000 12/31 1/5 þ 12/31 1/3Ø 2021 1st Natl. Capital 21,000 12/31 1/4 þ 12/31 1/3Ø 3217 2nd State Suburban 6,700 1/3 1/5 1/3 1/6 0659 Midtown Suburban 5,500 12/30 1/5 þ 12/30 1/3Ø The tick mark þ likely indicates that the amount was traced to the

Outstanding check list of the applicable bank reconciliation.

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year end?

Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year end.

The auditing standards define external confirmation as "a direct written response to the auditor from a third party (the confirming party), either in paper form or by electronic or other medium." The assertions for which confirmation of accounts receivable balances provides primary evidence are

Rights and obligations and existence.

In the audit of which of the following general ledger accounts will tests of controls be particularly appropriate?

Sales.

An entity's financial statements were misstated over a period of years because large amounts of revenue were recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this fraud by

Scanning the general journal for unusual entries.

To establish illegal "slush funds," corporations may divert cash received in normal business operations. An auditor would encounter the greatest difficulty in detecting the diversion of proceeds from

Scrap sales.

Assuming a low assessed risk of material misstatement, which of the following audit procedures would be least likely to be performed?

Search for unrecorded cash receipts.

An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to

Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation.

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 ineffective. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely

Send positive confirmation requests.

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would

Send the customer a second confirmation request.

During a recent audit of the revenue cycle, a CPA found the client had $1 million in accounts receivable recorded for fictitious customers. Which of the following tests most likely facilitated identification of the fraud?

Sending positive confirmations to all of the client's customers with balances on December 31.

Tracing bills of lading to sales invoices provides evidence that

Shipments to customers were invoiced.

Tracing shipping documents to pre-numbered sales invoices provides evidence that

Shipments to customers were properly invoiced.

An auditor is determining whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices. The auditor most likely would select a sample of transactions from the population represented by the

Shipping document file.

If the objective of an auditor's test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the

Shipping documents to the sales invoices.

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 not materially changed over the past 5 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.

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?

The client opened a second retail outlet during the current year, and its credit sales approximately equaled the older outlet.

Confirmation of accounts receivable is a generally accepted auditing procedure. The presumption is that an auditor will request confirmation of accounts receivable. Confirmation is necessary when

The combined assessed level of inherent and control risk is high.

The accounts receivable turnover ratio increased significantly over a two-year period. This trend could indicate that

The company is more aggressively collecting customer accounts.

Many of the Granada Corporation's convertible bondholders have converted their bonds into stock during the year under audit. The independent auditor should review the Granada Corporation's statement of cash flows and related disclosures to ascertain that they show

The issuance of the stock and reduction in convertible debt.

The standard AICPA form directed to financial institutions requests all of the following except

The principal amount paid on a direct liability.

When scheduling the audit work to be performed on an engagement, the auditor should consider confirming accounts receivable balances at an interim date if

The risk of material misstatement relative to financial statement assertions about receivables is acceptably low.

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that

There was an improper cutoff of sales at the end of the year.

Auditors are often concerned with the possibility of overstatement of sales and receivables. However, management may also have reasons for understating these balances. Which of the following would explain understatement of sales and receivables?

To avoid paying taxes.

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning relevant assertions about

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

Valuation and allocation.

During the process of confirming receivables as of December 31, Year 1, a positive confirmation was returned indicating the "balance owed as of December 31 was paid on January 9, Year 2." The auditor would most likely

Verify that the amount was received.

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would

Verify the sources and contents of the faxes in telephone calls to the senders.