ACCT 470 Exam 2

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) Pre-numbered and accounted for. D) Approved for authorized purchases.

B) Stamped "paid" by the check signer.

Auditors fail to receive confirmations for a large percentage of accounts receivable even after second request forms have been mailed directly to the customers of the audit client. If we assume that the audit client has solid internal control, which of the following is the most appropriate audit procedure? A) Examine shipping documents. B) Review cash collections during the year being examined. C) Conduct further study of the client's system of internal control for receivables. D) Increase the ending balance in the allowance for uncollectible accounts.

A) Examine shipping documents

For sales, the occurrence transaction-related audit assertion affects which of the following balance-related audit assertion for A/R account? A) Existence B) Completeness C) Rights D) Detail tie-in

A) Existence

When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is: A) Existence. B) Completeness. C) Obligation. D) Presentation.

A) Existence

Reconciliation of the bank account should NOT be performed by an individual who also: A) Processes cash disbursements and sign checks. B) Perform cash-related bookkeeping. C) Prepares the cash budget. D) Reviews inventory reports.

A) Processes cash disbursements and sign checks

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 A) Sales. B) Sales returns. C) Purchases. D) Purchase discount (a cash discount given to a customer who pays early).

A) Sales.

To determine that all sales have been recorded, the auditors would select a sample of transactions from the: A) Shipping documents file (Note: to start from the MOST original document) B) Sales journal. C) Accounts receivable subsidiary ledger. D) Remittance advices.

A) Shipping documents file

Instead of taking a physical count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and: A) Well-kept records of perpetual inventory are maintained. B) Inventory is slow-moving. C) Computer error reports are generated for missing pre-numbered inventory tickets. D) Obsolete inventory items are segregated and excluded.

A) Well-kept records of perpetual inventory are maintained.

Which of the following is necessary if the auditor can plan to observe inventory at interim dates rather than the end of fiscal year? A) Complete recounts are performed by independent teams. B) Perpetual inventory records are maintained. C) Unit cost records are integrated with production-accounting records. D) The company adopted a sophisticated Peachtree-based accounting system

B) Perpetual inventory records are maintained.

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. An auditor most likely will use A) The positive form to confirm all balances regardless of size. B) A combination of the two forms, with the positive form used for large balances and the negative form used for the small balances. C) A combination of the two forms, with the positive form used for trade receivables and the negative form for other receivables. D) The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory.

B) A combination of the two forms, with the positive form used for large balances and the negative form used for the small balances.

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

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

The primary evidence regarding year-end bank balances is documented in the A) Outstanding check list. B) Standard bank confirmation C) Interbank transfer schedule. D) Cash receipt journal.

B) Standard bank confirmation

An independent auditor asked a client's internal auditor to assist in preparing a standard bank confirmation request for a payroll-related account that had been closed during the year under the audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure? A) The internal auditor did not sign the form. B) The form was mailed by the controller. C) The form was prepared by the internal auditor. D) The account was closed, so the balance was zero.

B) The form was mailed by the controller

When evaluating the sufficiency of the allowance for doubtful accounts, an auditor usually reviews the entity's aging analysis sheet for accounts receivable in order to support management's financial statement assertion of A) Existence. B) Valuation C) Completeness D) Obligation.

B) Valuation

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to A) Verify the cash balance reported on the bank confirmation form. B) Verify reconciling items on the client's bank reconciliation. C) Detect internal control weakness. D) Detect kiting problem.

B) Verify reconciling items on the client's bank reconciliation.

Which of the following controls is most likely to be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs? A) Employees responsible for authorizing sales and bad debt write-offs are denied access to cash. B) Shipping documents and sales invoices are matched by an employee who does not have authority to write off bad debts. C) Employees involved in the credit-granting function are separated from the sales function. D) Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.

C) Employees involved in the credit-granting function are separated from the sales function.

The audit working papers often include an aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditor to A) Evaluate internal control over credit sales. B) Test the accuracy of recorded charge sales. C) Estimate credit losses. D) Verify the validity of the recorded receivables.

C) Estimate credit losses

Which of the following would most likely be an internal control procedure designed to detect fraud in the custody of inventory? A) Periodic reconciliation of work in process with job cost sheets. B) Segregation of duties between general accounting (financial accounting) and cost accounting. C) Independent and periodic comparisons of finished goods records with counts of goods on hand. D) Approval of inventory journal entries by the warehouse manager.

C) Independent and periodic comparisons of finished goods records with counts of goods on hand.

. The receiving department is LEAST likely to be responsible for the: A) Determination of quantities of good received. B) Detection of damaged or defective merchandise. C) Preparation of a shipping document. D) Transmittal of goods received to the store's department.

C) Preparation of a shipping document.

An auditor is comparing the write-off of uncollectible accounts as a percentage of total accounts receivable with previous years. A possible misstatement this procedure could uncover is: A) overstatement or understatement of sales. B) overstatement or understatement of cash. C) overstatement or understatement of bad debt expense. D) overstatement or understatement of sales returns and allowances.

C) overstatement or understatement of bad debt expense.

Which of the following would provide the MOST assurance concerning the valuation of accounts receivable? A) Compare the sum of amounts in accounts receivable subsidiary ledgers to the amount in the general ledger of accounts receivable. 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.

D) Assess the allowance for uncollectible accounts for reasonableness.

To verify cash deposit-in-transit, the auditor can use the following documents except: A) Cutoff bank statement. B) Audit client's cash receipt journal. C) Monthly bank statement for the month just after the previous fiscal year end. D) Audit client's outstanding check list.

D) Audit client's outstanding check list

If accounts receivable turn-over (CREDIT sales revenue divided by average account receivable balance) was 7.1 times in 2005 as compared to only 5.6 times in 2006, it is possible that there were A) Unrecorded credit sales in 2006. B) Unrecorded cash sales in 2005. C) Tighter credit approval in 2006. D) Fictitious credit sales in 2006.

D) Fictitious credit sales in 2006

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.

D) General ledger

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 current fiscal year.

D) Inflated sales for the current fiscal year

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.

D) Is responsible for mailing the checks.

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? A) Inaccurate billing due to lack of controls. B) Accidentally record credit sale to customer A in the A/R subsidiary ledger of customer B. C) Misbilling a client due to a data input error. D) Recording the full sale revenue amount when the customer is likely to return the goods.

D) Recording the full sale revenue amount when the customer is likely to return the goods.

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? (for self-learning) 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 and 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) Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

An auditor reviews credit ratings of customers with delinquent accounts receivable. He or she is mostly likely to obtain evidence concerning management's assertion about A) Presentation and disclosure. B) Allocation. C) Existence or occurrence. D) Valuation

D) Valuation

Enquiries of warehouse personnel concerning possibly obsolete or slow-moving inventory items provide assurance about management's assertion of A) Rights and obligation. B) Completeness. C) Existence. D) Valuation.

D) Valuation