AUD 4

An auditor usually tests the reasonableness of dividend income from investments in publicly held companies by computing the amounts that should have been received by referring to a. Dividend record books produced by investment advisory services. b. Stock indentures published by corporate transfer agents. c. Stock ledgers maintained by independent registrars. d. Annual audited financial statements issued by the investee companies.

a. Dividend record books produced by investment advisory services.

In assessing the competence of a client's internal auditor, an independent auditor most likely would consider the a. Internal auditor's compliance with professional internal auditing standards. b. Client's policies that limit the internal auditor's access to management salary data. c. Evidence supporting a further reduction in the assessed level of control risk. d. Results of ratio analysis that may identify unusual transactions and events.

a. Internal auditor's compliance with professional internal auditing standards.

A client has accounts receivable that consist of many small accounts, each of which is not significant. The company has a collection period of approximately one month and cash flows generally correspond to the previous month's sales. As a result, the auditor considers the risk of material misstatement to be relatively low. Which type of accounts receivable confirmation is likely to be used by the auditor in these circumstances? a. Negative confirmations b. Positive confirmations c. Open ended confirmations d. Blank confirmations

a. Negative confirmations

Which of the following types of audit evidence is the least persuasive? a. Pre-numbered purchase order forms. b. Bank statements obtained from the client. c. Test counts of inventory performed by the auditor. d. Correspondence from the client's attorney about litigation.

a. Pre-numbered purchase order forms.

Which of the following is not a responsibility of management in relation to fraud that would be required to be included in a management representation letter? Your Answer: a. To report any significant fraud to the appropriate authorities. b. To design, implement, and maintain a system of internal control designed to prevent and detect fraud. c. To disclose to the auditor any knowledge or suspicion of fraud involving management. d. To disclose to the auditor the results of the client's assessment of the risk that the financial statements may be materially misstated due to fraud.

a. To report any significant fraud to the appropriate authorities.

An auditor is concerned that costs that should be recognized as repairs and maintenance expense have been inappropriately capitalized and are reported as assets. Which of the following procedures would not be effective in determining whether or not this is the case? Your Answer: a. Tracing amounts recorded as repairs and maintenance expense to supporting documentation. b. Physically inspecting property, plant, and acquisitions for the period. c. Comparing repairs and maintenance expense to budgeted amounts. d. Comparing asset acquisitions to budgets of capital expenditures.

a. Tracing amounts recorded as repairs and maintenance expense to supporting documentation.

An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of a. Valuation or allocation. b. Completeness. c. Existence or occurrence. d. Rights and obligations.

a. Valuation or allocation.

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of a. Valuation. b. Rights. c. Existence. d. Presentation.

a. Valuation.

Which of the following items would be the most persuasive type of audit evidence? a. A letter of representation signed by the client's president and chief executive officer. b. A schedule comparing an estimate of interest expense, prepared by the auditor, to the amount reported on the client's trial balance. c. A confirmation of bank balances as of year-end received by the auditor directly from the bank. d. A copy of a bank statement provided to the auditor by the client.

b. A schedule comparing an estimate of interest expense, prepared by the auditor, to the amount reported on the client's trial balance.

When auditing an entity's reported amount for property, plant, and equipment, which assertion will be supported with evidence obtained by the auditor during an examination of the repairs and maintenance expense account? Your Answer: a. Existence b. Completeness c. Valuation and allocation d. Rights and obligations

b. Completeness

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 a. Payment vouchers. b. Receiving reports. c. Purchase requisitions. d. Vendor's invoices.

b. Receiving reports.

Which of the following financial ratios would be most useful to an auditor seeking information on a company's ability to cover current obligations? a. Earnings per share b. Quick ratio c. Gross profit margin d. Sales to assets

b. Quick ratio

Which of the following parties should request inquiry of a client's lawyer? a. The auditor. b. The stockholders. c. Client management. d. The auditor's attorney.

c. Client management.

Which of the following procedures would an auditor most likely follow to assess the client's rights and obligations regarding its inventory? Your Answer: a. Review supplier catalogs to estimate the replacement cost of the inventory on hand b. Inspect the inventory on hand c. Examine vendor invoices for the inventory d. Read the financial statements and trace purchases into the purchases journal

c. Examine vendor invoices for the inventory

Which of the following would more likely be included in the current file rather than the permanent file? 1.Audit program 2.Lead schedule for the Inventory account balance 3.Equity accounts analysis Your Answer: a. II and III only b. II only c. I and II only d. I, II, and III

c. I and II only

Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess a. Control risk at below the maximum level. b. Inherent risk at the maximum level. c. The difficulty in controlling the incremental audit risk. d. Materiality for the accounts tested as insignificant.

c. The difficulty in controlling the incremental audit risk.

Which of the following activities is an analytical procedure an auditor would perform in the final overall review stage of an audit to ensure that the financial statements are free from material misstatement? a. Reading the minutes of the board of directors' meetings for the year under audit. b. Obtaining a letter concerning potential liabilities from the client's attorney. c. Comparing the current year's financial statements with those of the prior year. d. Ensuring that a representation letter signed by management is in the file.

c. Comparing the current year's financial statements with those of the prior year.

Which of the following ratios would an engagement partner most likely consider in the overall review stage of an audit? a. Total liabilities/net sales. b. Accounts receivable/inventory. c. Cost of goods sold/average inventory. d. Current assets/quick assets.

c. Cost of goods sold/average inventory.

An auditor most likely would apply analytical procedures in the overall review stage of an audit to a. Enhance the auditor's understanding of subsequent events. b. Identify auditing procedures omitted by the staff accountants. c. Determine whether additional audit evidence may be needed. d. Evaluate the effectiveness of the internal control activities.

c. Determine whether additional audit evidence may be needed.

The blank form of accounts receivable confirmations may be less efficient than the positive form because a. Shipping documents need to be inspected. b. Recipients may sign the forms without proper investigation. c. More nonresponses to the requests are likely to occur. d. Subsequent cash receipts need to be verified.

c. More nonresponses to the requests are likely to occur.

Analytical procedures are most appropriate when testing which of the following types of transactions? a. Payroll and benefit liabilities. b. Acquisitions and disposals of fixed assets. c. Operating expense transactions. d. Long-term debt transactions.

c. Operating expense transactions.

If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the a. Cash receipts journal to the sales journal. b. Sales journal to the cash receipts journal. c. Source documents to the accounting records. d. Accounting records to the source documents.

d. Accounting records to the source documents.

Which of the following presumptions is correct about the reliability of evidential matter? a. Information obtained indirectly from outside sources is the most reliable evidential matter. b. To be reliable, evidential matter should be convincing rather than persuasive. c. Reliability of evidential matter refers to the amount of corroborative evidence obtained. d. An effective internal control structure provides more assurance about the reliability of evidential matter.

d. An effective internal control structure provides more assurance about the reliability of evidential matter.

Which of the following assertions applies to an audit of inventory? Your Answer: a. Occurrence b. Classification c. Cutoff d. Completeness

d. Completeness

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? a. Review the cash receipts journal for the month prior to the year-end. b. Intensify the study of the internal control structure concerning the revenue cycle. c. Increase the assessed level of detection risk for the existence assertion. d. Inspect the shipping records documenting the merchandise sold to the debtors.

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

When would it not be appropriate to apply analytical procedures in an audit of financial statements? Your Answer: a. Planning the engagement. b. Performing substantive testing c. Overall engagement review. d. Performing tests of controls.

d. Performing tests of controls.

In evaluating an entity's accounting estimates, one of the auditor's objectives is to determine whether the estimates are a. Prepared in a satisfactory control environment. b. Consistent with industry guidelines. c. Based on verifiable objective assumptions. d. Reasonable in the circumstances.

d. Reasonable in the circumstances.

Which of the following events most likely would indicate the existence of related parties? a. Granting stock options to key executives at favorable prices. b. High turnover of senior management and members of the board of directors. c. Failure to correct internal control weaknesses on a timely basis. d. Selling real estate at a price significantly different from appraised value.

d. Selling real estate at a price significantly different from appraised value.

Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer? a. "Sufficient evidential matter has been made available to the auditor to permit the issuance of an unqualified opinion." b. "There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed." c. "We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities." d. "No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements."

a. "Sufficient evidential matter has been made available to the auditor to permit the issuance of an unqualified opinion."

Which of the following items would be the least persuasive type of audit evidence? Your Answer: a. A letter of representation signed by the client's president and chief executive officer. b. A schedule comparing an estimate of interest expense, prepared by the auditor, to the amount reported on the client's trial balance. c. A confirmation of bank balances as of year-end received by the auditor directly from the bank. d. A copy of a bank statement provided to the auditor by the client.

a. A letter of representation signed by the client's president and chief executive officer.

An auditor's objective in the performance of audit procedures is to obtain evidence that either supports or refutes management assertions. Which of the following is a procedure designed to achieve that objective? Your Answer: a. Analytical procedures. b. Developing and maintaining a system of quality control. c. Preparing adequate and appropriate documentation. d. Increasing the desired level of detection risk.

a. Analytical procedures.

The acceptable level of detection risk is inversely related to the a. Assurance provided by substantive tests. b. Risk of misapplying auditing procedures. c. Preliminary judgment about materiality levels. d. Risk of failing to discover material misstatements.

a. Assurance provided by substantive tests.

Analytical procedures are required for which of the following? a. Audit planning. b. Tests of balances. c. Client retention decision. d. Internal control evaluation.

a. Audit planning.

The current file of an auditor's working papers most likely would include a copy of the Your Answer: a. Bank reconciliation. b. Pension plan contract. c. Articles of incorporation. d. Flowchart of the internal control procedures.

a. Bank reconciliation

Which of the following fraud schemes might be detected through the use of a bank cutoff statement? Your Answer: a. Checks were written near year-end to reduce the balance in accounts payable, but were not mailed until a week after year-end. b. Checks received by the cashier were not deposited and accounts receivable was not appropriately reduced. c. Checks were written in amounts in excess of invoice amounts in a collusion scheme in which the accounts payable clerk was misappropriating refunds of excess payments. d. Checks were written to nonexistent payees and mailed to the home addresses of officers.

a. Checks were written near year-end to reduce the balance in accounts payable, but were not mailed until a week after year-end.

Which of the following is not a type of audit procedure that an auditor uses to obtain evidence in an audit of financial statements? Your Answer: a. Clarification procedures b. Test of controls c. Risk assessment procedures d. Substantive procedures

a. Clarification procedures

When testing investments in equity securities of publicly held entities, the auditor prepares a schedule of dividends received and compares it to dividend information available to the public. Which assertion is the auditor testing? Your Answer: a. Completeness b. Existence c. Valuation and allocation d. Rights and obligation

a. Completeness

When assessing internal auditors' objectivity, an independent auditor should a. Consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned. b. Review the internal auditors' reports to determine that their conclusions are consistent with the work performed. c. Verify that the internal auditors' assessment of control risk is comparable to the independent auditor's assessment. d. Evaluate the quality of the internal auditors' working paper documentation and their recent audit recommendations.

a. Consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.

An auditor is recalculating depreciation on real property acquired during the year. Which of the following documents will provide the most relevant information regarding a property's depreciable base? Your Answer: a. Deed b. Bank confirmation of mortgage loan c. Closing statement d. Flood insurance policy

a. Deed

Which of the following account balances reported on Hermida Co.'s balance sheet dated December 31, 2015 is most likely to rely on management estimates? Your Answer: a. Deferred income taxes of $30,000. b. Cash of $10,000. c. Investment in Gruler Co., accounted for under the equity method. d. Accounts payable of $7,000.

a. Deferred income taxes of $30,000.

The objective of tests of details of transactions performed as a substantive test is to a. Detect material misstatements in the financial statements. b. Evaluate whether management's policies and procedure operated effectively. c. Identify specific financial statement assertions that satisfy the audit objectives. d. Verify that significant deficiencies in the accounting system are discovered.

a. Detect material misstatements in the financial statements.

Which of the following can be affected by the actions of the auditor? Your Answer: a. Detection risk b. Risk of material misstatement c. Inherent risk d. Control risk

a. Detection risk

Choose the answer which best describes the relationship between the attribute given for a financial statement account and the likely reliance on substantive analytical procedures for that account within an audit: Adequacy of Internal Controls Risk of Material Misstatement Predictability of Relationships Among Data Your Answer: a. Direct Inverse Direct b. Inverse Inverse Direct c. Inverse Direct Inverse d. Direct Direct Inverse

a. Direct Inverse Direct

Which of the following procedures would be most appropriate when obtaining evidence to support management's valuation and allocation assertion in relation to derivatives? Your Answer: a. Estimating the market value of stock options using the Black-Scholes-Merton model. b. Confirming the terms of an interest rate swap with the counterparty. c. Observing a physical count of marketable securities at year-end. d. Evaluating management's documentation measuring the effectiveness of cash flow hedges.

a. Estimating the market value of stock options using the Black-Scholes-Merton model.

Which of the following audit procedures is most likely to be conducted only after year-end? Your Answer: a. Evaluation of management's adjusting journal entries to the financial statements. b. Accounts receivable confirmations as evidence of existence and valuation of balance sheet accounts receivable balance. c. Testing of property, plant, and equipment disposals to validate balance sheet PP&E account. d. Analysis of stockholders' equity transactions to validate balance sheet equity accounts.

a. Evaluation of management's adjusting journal entries to the financial statements.

Which of the following actions might management of a company take in an attempt to fraudulently overstate income? 1.Lapping of accounts receivable. 2.Increasing product warranty periods without increasing warranty reserves. 3.Relaxing credit policies without changing accounts receivable collectability assumptions. Your Answer: a. II and III only b. III only c. I and III only d. I, II, and III

a. II and III only

Which of the following strategies most likely could improve the response rate of the confirmation of accounts receivable? a. Including a list of items or invoices that constitute the account balance. b. Restricting the selection of accounts to be confirmed to those customers with relatively large balances. c. Requesting customers to respond to the confirmation requests directly to the auditor by fax or email. d. Notifying the recipients that second requests will be mailed if they fail to respond in a timely manner.

a. Including a list of items or invoices that constitute the account balance.

A company's management provided its auditors with information concerning litigation, claims, and assessments. Which of the following is the auditor's primary means of corroborating management's information? Your Answer: a. Inquiring of company's outside counsel. b. Meeting with the company's audit committee. c. Meeting with the company's Chairman of the Board. d. Inquiring of the company's in-house counsel.

a. Inquiring of company's outside counsel.

In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity's financial statements most likely would consider the a. Internal auditing standards developed by The Institute of Internal Auditors. b. Tests of internal control activities that could detect errors and fraud. c. Materiality of the accounts recently inspected by the internal auditors. d. Results of the tests of transactions recently performed by the internal auditors.

a. Internal auditing standards developed by The Institute of Internal Auditors.

Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? a. "I believe that the plaintiff will have problems establishing any liability." b. "I believe that this action has only a remote chance in establishing any liability." c. "I believe that the plaintiff's case against the company is without merit." d. "I believe that the company will be able to defend this action successfully."

a. "I believe that the plaintiff will have problems establishing any liability."

A client's attorney refuses to provide an appropriate response to a letter of inquiry regarding litigation, claims, and assessments. Under such circumstances, the auditor: Your Answer: a. May apply alternate procedures to obtain sufficient appropriate audit evidence regarding litigation, claims, and assessments, in which case an unmodified opinion may be issued. b. Is required to withdraw from the engagement. c. May apply alternate procedures to obtain sufficient appropriate audit evidence regarding litigation, claims, and assessments, in which case a report will be issued with a modification for a scope limitation. d. Will issue a disclaimer of opinion.

a. May apply alternate procedures to obtain sufficient appropriate audit evidence regarding litigation, claims, and assessments, in which case an unmodified opinion may be issued.

Which of the following actions is an analytical procedure that an auditor most likely would use while auditing a company's notes payable? a. Multiplying the average outstanding loan balance by the interest rate and comparing the result to interest expense actually recorded. b. Performing calculations to determine if the company is in compliance with debt covenants. c. Sending a confirmation to the lender requesting verification of the loan's outstanding balance. d. Reviewing the details of the company's loan and interest expense accounts to determine that all payments were properly recorded.

a. Multiplying the average outstanding loan balance by the interest rate and comparing the result to interest expense actually recorded.

Which of the following expressions most likely would be included in a management representation letter? a. No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements. b. There are no significant deficiencies or material weaknesses identified during the prior-year's audit of which the audit committee of the board of directors is unaware. c. We do not intend to provide any information that may be construed to constitute a waiver of the attorney-client privilege. d. Certain computer files and other required evidential matter may exist only for a short period of time and only in computer-readable form.

a. No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements.

Which of the following pairs of accounts would an auditor most likely analyze on the same working paper? a. Notes receivable and interest income. b. Accrued interest receivable and accrued interest payable. c. Notes payable and notes receivable. d. Interest income and interest expense.

a. Notes receivable and interest income.

An auditor traces a recorded long-term debt to its debt covenant documentation, and discovers that the company is in violation of the debt covenant. Which management assertion regarding the debt is most likely affected by the violation? Your Answer: a. Presentation and disclosure b. Completeness c. Rights and obligations d. Valuation and allocation

a. Presentation and disclosure

On receiving a client's bank cutoff statement, an auditor most likely would trace a. Prior-year checks listed in the cutoff statement to the year-end outstanding checklist. b. Deposits in transit listed in the cutoff statement to the year-end bank reconciliation. c. Checks dated after year-end listed in the cutoff statement to the year-end outstanding checklist. d. Deposits recorded in the cash receipts journal after year-end to the cutoff statement.

a. Prior-year checks listed in the cutoff statement to the year-end outstanding checklist.

An auditor's documentation serves mainly to Your Answer: a. Provide the principal support for the auditor's report. b. Satisfy the auditor's responsibilities concerning the Code of Professional Conduct. c. Monitor the effectiveness of the CPA firm's quality control procedures. d. Document the level of independence maintained by the auditor.

a. Provide the principal support for the auditor's report.

An auditor's working papers serve mainly to a. Provide the principal support for the auditor's report. b. Satisfy the auditor's responsibilities concerning the Code of Professional Conduct. c. Monitor the effectiveness of the CPA firm's quality control procedures. d. Document the level of independence maintained by the auditor.

a. Provide the principal support for the auditor's report.

An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for Your Answer: a. Reclassifications and adjustments. b. Reconciliations and tick marks. c. Accruals and deferrals. d. Expense and revenue summaries.

a. Reclassifications and adjustments.

In testing management's rights and obligations assertion in relation to inventories, which of the following procedures would the auditor most likely consider most reliable? Your Answer: a. Review consignment agreements. b. Trace inventory counts to accounting records. c. Trace inventory in accounting records to inventory counts. d. Make inquiries and analyze inventory turnover to identify slow-moving or obsolete items.

a. Review consignment agreements.

An audit team has concluded that inventory is highly susceptible to misappropriation and that a potential misstatement would be material to the financial statements. How should the audit team address the audit procedures to the increased risk? Your Answer: a. Review the client's control procedures over the safeguarding of inventory, and perform a physical inventory count on the last day of the current year. b. Review the client's control procedures over the safeguarding of inventory, incorporate the use of substantive analytical procedures, and develop an expectation. c. Review the client's control procedures over the safeguarding of inventory, but do not modify substantive procedures over inventory. d. Review the client's control procedures over the safeguarding of inventory, and perform physical inventory counts throughout the current year.

a. Review the client's control procedures over the safeguarding of inventory, and perform a physical inventory count on the last day of the current year.

If the predecessor auditor refuses to give the current auditor of a nonissuer access to the documentation, what should the current auditor do? Your Answer: a. Review the risk assessment of the opening balances of the financial statements. b. Withdraw from the engagement. c. Disclaim an opinion due to a scope limitation. d. Discuss the matter with the client's legal counsel.

a. Review the risk assessment of the opening balances of the financial statements.

Which of the following procedures would not be effective for obtaining evidence of the accuracy of the amount recorded as interest expense? Your Answer: a. Reviewing minutes of meetings of the board of directors. b. Calculating an estimate of interest expense based on average liability balances and comparing the amount to recognized interest expense. c. Sending confirmations to a sample of creditors. d. Tracing loans and notes payable to original loan documents.

a. Reviewing minutes of meetings of the board of directors.

A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year-end, the auditor would be most concerned about Your Answer: a. Suspense debits that management believes will benefit future operations. b. Suspense debits that the auditor verifies will have realizable value to the client. c. Suspense credits that management believes should be classified as ''Current liability". d. Suspense credits that the auditor determines to be customer deposits.

a. Suspense debits that management believes will benefit future operations.

If interim substantive procedures for an account identified no exceptions, which of the following would the auditor not perform on that account at year end? Your Answer: a. Tests of details for the entire year under audit. b. Tests of details of activity during the period since the interim testing date. c. Reconciliation of year-end balances to interim balances. d. Substantive analytical procedures of the period since the interim testing date.

a. Tests of details for the entire year under audit.

Which of the following factors most likely would affect an auditor's judgment about the quantity, type, and content of the auditor's working papers? Your Answer: a. The assessed level of control risk. b. The likelihood of a review by a concurring partner. c. The number of personnel assigned to the audit. d. The content of the management representation letter.

a. The assessed level of control risk

In a CPA's audit of a jewelry operation, the auditor relied heavily on a specialist for the purpose of verifying the value of the client's inventory. The auditor was able to obtain sufficient appropriate audit evidence, relying on the work of the specialist, and decided to issue an unmodified report. a. The auditor may not refer to the specialist in the report. b. The auditor may, but is not required to, refer to the specialist and, if so, will do so in an emphasis-of-matter paragraph. c. The auditor is required to refer to the specialist. d. The auditor may, but is not required to, refer to the specialist and, if so, will do so in an other-matter paragraph.

a. The auditor may not refer to the specialist in the report.

After fieldwork audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up working paper review. This second review usually focuses on a. The fair presentation of the financial statements in conformity with GAAP. b. Irregularities involving the client's management and its employees. c. The materiality of the adjusting entries proposed by the audit staff. d. The communication of internal control weaknesses to the client's audit committee.

a. The fair presentation of the financial statements in conformity with GAAP.

Which of the following statements is generally correct about the competence of evidential matter? a. The more effective the internal control structure, the more assurance it provides about the reliability of the accounting data and financial statements. b. Competence of evidential matter refers to the amount of corroborative evidence obtained. c. Information obtained indirectly from independent outside sources is more persuasive than the auditor's direct personal knowledge obtained through observation and inspection. d. Competence of evidential matter refers to the audit evidence obtained from outside the entity.

a. The more effective the internal control structure, the more assurance it provides about the reliability of the accounting data and financial statements.

Which of the following factors most likely would assist an independent auditor in assessing the objectivity of the internal auditor? a. The organizational status of the director of internal audit. b. The professional certifications of the internal audit staff. c. The consistency of the internal audit reports with the results of work performed. d. The appropriateness of internal audit conclusions in the circumstances.

a. The organizational status of the director of internal audit.

Regarding warranty reserves and their associated auditing issues, which of the following statements is true? Your Answer: a. The warranty reserve account can be manipulated to understate income during a good sales year. b. A known decrease in product reliability, with all other factors remaining the same, should lead to a decrease in the warranty reserve account. c. A common fraud scheme known as 'channel stuffing' relies on manipulation of reserve accounts, sometimes including the warranty reserve account. d. An inherent risk of warranty reserves is the reliance on outside parties.

a. The warranty reserve account can be manipulated to understate income during a good sales year.

Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriations of assets? a. A large number of bearer bonds on hand. b. A large number of inventory items with low sales prices. c. A large number of transactions processed in a short period of time. d. A large number of fixed assets with easily identifiable serial numbers.

a. A large number of bearer bonds on hand.

An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by a. An error in recording amortization of the excess of the investor's cost over the investment's underlying book value. b. The investee's decision to reduce cash dividends declared per share of its common stock. c. An error in recording the unrealized gain from an increase in the fair value of available-for sale securities in the income account for trading securities. d. A substantial fluctuation in the price of the investee's common stock on a national stock exchange.

a. An error in recording amortization of the excess of the investor's cost over the investment's underlying book value.

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all a. Cash disbursements. b. Approved vouchers. c. Receiving reports. d. Vendors' invoices.

a. Cash disbursements.

The auditor's inventory observation test counts are traced to the client's inventory listing to test for which of the following financial statement assertions? a. Completeness. b. Rights and obligations c. Valuation or allocation. d. Presentation and disclosure.

a. Completeness.

An auditor performs a procedure in which the volume produced by a manufacturing entity is compared to the capacity of the entity's manufacturing equipment to determine if the entity is operating within its relevant range. This procedure will provide evidence about which assertion? a. Existence b. Rights and obligations c. Valuation and allocation d. This is a review procedure and is not appropriate for an audit engagement.

a. Existence

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 a. Fictitious credit sales have been recorded during the year. b. Employees have stolen inventory just before the year end. c. The client recently tightened its credit-granting policies. d. An employee has been lapping receivables in both years.

a. Fictitious credit sales have been recorded during the year.

Auditors try to identify predictable relationships when applying analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence? a. Interest expense. b. Allowance for doubtful accounts. c. Accounts receivable. d. Accounts payable.

a. Interest expense.

The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to a. Observe physical counts of the inventory items. b. Trace the total on the inventory listing to the general ledger inventory account. c. Obtain a confirmation from the client indicating inventory ownership. d. Analytically compare the current-year inventory balance to the prior-year balance.

a. Observe physical counts of the inventory items.

Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? a. Reading the minutes of meetings of the stockholders and the board of directors. b. Comparing the market value of property to amounts owed on the property. c. Reviewing lease agreements to determine whether leased assets should be capitalized. d. Inspecting title documents to verify whether any assets are pledged as collateral.

a. Reading the minutes of meetings of the stockholders and the board of directors.`

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows? a. Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts. b. Vouch a sample of cash receipts and disbursements for the last few days of the current year. c. Reconcile the cutoff bank statement to the proof of cash to verify the accuracy of the year-end cash balance. d. Confirm the amounts included in the statement of cash flows with the entity's financial institution.

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

The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items a. Represented by tags were included on the listing. b. Included on the listing were properly counted. c. Represented by tags were reduced to the lower of cost or market. d. Included in the listing were properly valued.

a. Represented by tags were included on the listing.

In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified? a. Test the computation of standard overhead rates. b. Tour the manufacturing plant or production facility. c. Compare inventory balances to anticipated sales volume. d. Review inventory experience and trends.

a. Test the computation of standard overhead rates.

As part of the process of observing a client's physical inventories, an auditor should be alert to a. The inclusion of any obsolete or damaged goods. b. Any change in the method of pricing from prior years. c. The existence of outstanding purchase commitments. d. The verification of inventory values assigned to goods in process.

a. The inclusion of any obsolete or damaged goods.

Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? a. "We believe that the possible liability to the company is nominal in amount." b. "We believe that the action can be settled for less than the damages claimed." c. "We believe that the plaintiff's case against the company is without merit." d. "We believe that the company will be able to defend this action successfully."

b. "We believe that the action can be settled for less than the damages claimed."

Based on the following cash transfer schedule, by how much will cash be overstated as a result of kiting? Date of Disbursement Date of Receipt Per Books Per Bank Per Books Per Bank $3,000 12/31/X1 01/05/X2 12/31/X1 01/04/X2 $3,500 01/04/X2 01/11/X2 12/31/X1 01/04/X2 $2,700 12/31/X1 01/04/X2 12/31/X1 12/31/X1 $4,100 01/4/02 01/05/X2 12/31/X1 01/04/X2 Your Answer: a. $3,500 b. $7,600 c. $10,300 d. $13,300

b. $7,600

The refusal of a client's attorney to provide information requested in an inquiry letter generally is considered a. Grounds for an adverse opinion. b. A limitation on the scope of the audit. c. Reason to withdraw from the engagement. d. Equivalent to a significant deficiency.

b. A limitation on the scope of the audit.

Which of the following audit procedures can only be effective if performed after the end of the entity's fiscal year? Your Answer: a. Observing the physical inventory count. b. A search for unrecorded liabilities. c. Confirmation of accounts receivable. d. Testing depreciation expense.

b. A search for unrecorded liabilities.

Which of the following presumptions does not relate to the competence of audit evidence? a. The more effective the internal control structure, the more assurance it provides about the accounting data and financial statements. b. An auditor's opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost. c. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. d. The independent auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly.

b. An auditor's opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.

Which of the following sets of information does an auditor usually confirm on one form? a. Accounts payable and purchase commitments. b. Cash in bank and collateral for loans. c. Inventory on consignment and contingent liabilities. d. Accounts receivable and accrued interest receivable.

b. Cash in bank and collateral for loans.

Which of the following is not an objective that is intended to be achieved by proper audit documentation? Your Answer: a. Assisting in the planning and performance of the engagement. b. Comparing actual time spent to engagement budgets. c. Retaining a record of matters that may be of continuing significance in future audits. d. Enable supervisors to direct and supervise the engagement.

b. Comparing actual time spent to engagement budgets.

An auditor has decided to select certain items recorded as accounts payable and trace them to the original transaction documentation. This will provide evidence about all of the assertions related to accounts payable except which of the following? Your Answer: a. Rights and obligations b. Completeness c. Existence d. Valuation and allocation

b. Completeness

Which of the assertions related to accounts receivable will confirmations be least likely to provide evidence in support of? a. Rights and obligations b. Completeness c. Allocation and valuation d. Existence

b. Completeness

The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to a. Detect kiting activities that may otherwise not be discovered. b. Corroborate information regarding deposit and loan balances. c. Provide the data necessary to prepare a proof of cash. d. Request information about contingent liabilities and secured transactions.

b. Corroborate information regarding deposit and loan balances.

An auditor requests a client to send letters of audit inquiry to attorneys who have been consulted concerning litigation, claims, and assessments. The primary reason for this request is to obtain a. The attorneys' assurance that litigation, claims, and assessments that are probable of assertion are properly accounted for. b. Corroboration of the information furnished by management concerning litigation, claims, and assessments. c. A description of litigation, claims, and assessments that have a reasonable possibility of unfavorable outcomes. d. The opinion of an expert whether any loss contingencies are possible, probable, or remote.

b. Corroboration of the information furnished by management concerning litigation, claims, and assessments.

Upon obtaining an understanding of a client's internal controls in relation to payroll, the auditor has assessed control risk as low on a preliminary basis. As a result, the auditor will likely: Your Answer: a. Reduce the extent of tests of control in relation to the payroll cycle. b. Decrease the number of payroll transactions selected for the application of substantive testing. c. Decrease the acceptable level of detection risk in designing substantive testing. d. Increase the amount that would be considered material for identifying exceptions when testing payroll.

b. Decrease the number of payroll transactions selected for the application of substantive testing.

The risk that an auditor will conclude, based on substantive tests, that a material error does not exist in an account balance when, in fact, such error does exist is referred to as a. Sampling risk. b. Detection risk. c. Non-sampling risk. d. Inherent risk.

b. Detection risk.

Which of the following auditing procedures will provide evidence to support management's assertions regarding the allocation and valuation of inventories? Your Answer: a. Tracing inventories to purchase documents. b. Determining the replacement cost of inventories. c. Tracing inventory counts to accounting records. d. Tracing items reported in the accounting records to inventory counts.

b. Determining the replacement cost of inventories.

In performing which of the following may an auditor not rely on assistance from internal auditors? a. Determining what control procedures the entity has in regard to the custody of inventory. b. Determining whether or not inventory is properly reported at the lower of cost or market. c. Determining whether or not equipment reported on the balance sheet actually exists. d. Determining whether or not the entity's control procedures in regard to the custody of inventory are functioning as intended.

b. Determining whether or not inventory is properly reported at the lower of cost or market.

Which of the following would be considered an analytical procedure? a. Examining a sample of paid vendors' invoices for proper approval by an authorized supervisor. b. Developing the current year's expected net sales based on the entity's sales trend of prior years. c. Projecting a deviation rate by comparing the results of a sample with the actual population characteristics. d. Evaluating management's plans for dealing with the adverse effects of recurring operating losses.

b. Developing the current year's expected net sales based on the entity's sales trend of prior years.

If management refuses to provide written representations in the form of a management letter, the auditor should: Your Answer: a. Discuss the matter with management. b. Disclaim an opinion or withdraw from the engagement. c. Reevaluate management's integrity and the effect it has on the reliability of evidence obtained. d. Consider modifying the auditor's opinion to indicate items affected.

b. Disclaim an opinion or withdraw from the engagement.

Which of the following procedures would an auditor most likely perform regarding litigation? a. Confirm directly with the clerk of the court that the client's litigation is properly disclosed. b. Discuss with management its policies and procedures for identifying and evaluating litigation. c. Inspect the legal documents in the client's lawyer's possession regarding pending litigation. d. Confirm the details of pending litigation with the client's adversaries' legal representatives.

b. Discuss with management its policies and procedures for identifying and evaluating litigation.

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that a. Payments to employees are computed at authorized rates. b. Employees work the number of hours for which they are paid. c. Segregation of duties exists between the preparation and distribution of the payroll. d. Internal controls relating to unclaimed payroll checks are operating effectively.

b. Employees work the number of hours for which they are paid.

Analytical procedures used in planning an audit should focus on: Your Answer: a. Identifying material weaknesses in internal control. b. Enhancing the auditor's understanding of the client's business. c. Testing individual account balances that depend on accounting estimates. d. Evaluating the adequacy of the evidence gathered concerning unusual balances.

b. Enhancing the auditor's understanding of the client's business.

When evaluating management's fair value estimates of items for which only Level III inputs are available, an auditor would be most likely to Your Answer: a. Consider the Pareto Principle and how it governs the relationship between cost and fair market value. b. Evaluate how consistently the process by which management made the fair value estimates was applied from item to item. c. Advise the client to solicit bids on the items in order to determine their fair market values. d. Gather evidence of known prices for identical items actively traded in open markets.

b. Evaluate how consistently the process by which management made the fair value estimates was applied from item to item.

To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would Your Answer: a. Inspect the stock certificates evidencing the investment. b. Examine the audited financial statements of the investee company. c. Review the broker's advice or canceled check for the investment's acquisition. d. Obtain market quotations from financial newspapers or periodicals.

b. Examine the audited financial statements of the investee company.

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertions of I. Existence or occurence. II. Presentation and disclosure. a. Both I and II. b. I only. c. II only. d. Neither I nor II.

b. I only.

Which of the following is an example of an auditor's response to the risk of material misstatement at the financial statement level? Your Answer: a. Determine if existing control procedures will prevent the theft of inventory. b. Increase the need for professional skepticism among members of the engagement team. c. Trace recorded transactions to shipping documents. d. Test the shipping terms of sales near the end of the year.

b. Increase the need for professional skepticism among members of the engagement team.

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events? a. Examine a sample of transactions that occurred since the year end to verify the effectiveness of computer controls. b. Inquire of management whether there have been significant changes in working capital since the year end. c. Recompute depreciation charges for plant assets sold for substantial gains since the year end. d. Reperform the tests of controls that indicated significant deficiencies in the operation of internal control.

b. Inquire of management whether there have been significant changes in working capital since the year end.

Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories? Your Answer: a. Trace test counts noted during the entity's physical count to the entity's summarization of quantities. b. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens. c. Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales. d. Inspect the open purchase order file for significant commitments that should be considered for disclosure.

b. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.

Harriott, CPA is conducting an audit of Calashni Co. and receives a letter from Calashni Co.'s attorney stating the following regarding the company's only pending lawsuit: Outcome Probability Gain or Loss Win Most likely Gain of $500,000 Lose Possible Loss of $500,000 Lose Remote Loss of $1,500,000 Harriott notes there is no entry in the accounting records regarding the effects of the pending litigation. As a result, what type and amount of adjusting journal entry should Harriott propose to Calashni Co.? Your Answer: a. A loss contingency of $500,000. b. None c. A gain contingency of $500,000 d. A loss contingency of $1,500,000

b. None

For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by a. Reperformance and corroboration. b. Observation and inquiry. c. Inspection and vouching. d. Confirmation and recomputation.

b. Observation and inquiry.

Audit evidence concerning segregation of duties ordinarily is best obtained by a. Performing tests of transactions that corroborate management's financial statement assertions. b. Observing the employees as they apply control procedures. c. Obtaining a flowchart of activities performed by available personnel. d. Developing audit objectives that reduce control risk.

b. Observing the employees as they apply control procedures.

Periodic or cycle counts of selected inventory items are made at various times during the year rather than a single inventory count at year end. Which of the following is necessary if the auditor plans to observe inventories at interim dates? a. Complete recounts by independent teams are performed. b. Perpetual inventory records are maintained. c. Unit cost records are integrated with production accounting records. d. Inventory balances are rarely at low levels.

b. Perpetual inventory records are maintained.

As the acceptable level of detection risk decreases, an auditor may a. Reduce substantive testing by relying on the assessments of inherent risk and control risk. b. Postpone the planned timing of substantive tests from interim dates to the year-end. c. Eliminate the assessed level of inherent risk from consideration as a planning factor. d. Lower the assessed level of control risk from the maximum level to below the maximum.

b. Postpone the planned timing of substantive tests from interim dates to the year-end.

An auditor should obtain sufficient knowledge of an entity's accounting system to understand the a. Safeguards used to limit access to computer facilities. b. Process used to prepare significant accounting estimates. c. Procedures used to assure proper authorization of transactions. d. Policies used to detect the concealment of irregularities.

b. Process used to prepare significant accounting estimates.

When assessing the competence of the internal auditors, an independent CPA should obtain information about the a. Organizational level to which the internal auditors report. b. Quality of the internal auditors' working paper documentation. c. Policies prohibiting internal auditors from auditing sensitive matters. d. Internal auditors' preliminary assessed level of control risk.

b. Quality of the internal auditors' working paper documentation.

Which of the following statements is correct regarding the predictability of analytical procedures in a financial statement audit? a. Relationships involving only balance sheet accounts tend to be more predictable than relationships involving income statement accounts. b. Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts. c. Relationships involving transactions subject to management discretion tend to be more predictable than automated transactions. d. Relationships in a dynamic environment tend to be more predictable than relationships in a stable environment.

b. Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts.

Which of the following steps should an auditor perform first to determine the existence of related parties? a. Examine invoices, contracts, and purchasing orders. b. Request a list of related parties from management. c. Review the company's business structure. d. Review proxy and other materials filed with the SEC.

b. Request a list of related parties from management.

A client has recently granted stock options to its employees and the auditor is developing an audit program for their examination. Which of the following procedures will the auditor likely perform? Your Answer: a. Examine payroll records or stock ledgers to verify the existence of the option holders. b. Review minutes of board of director meetings to verify authorization of the grant. c. Evaluate treasury stock to determine if there is a sufficient amount to cover the stock options. d. Send a confirmation to the Secretary of State in the state of incorporation.

b. Review minutes of board of director meetings to verify authorization of the grant.

Which assertions may be supported by evidence obtained when an auditor traces items recorded in inventory to purchase documents? Your Answer: a. Rights & obligations and completeness b. Rights & obligations and valuation & allocation c. Valuation & allocation and completeness d. Valuation & allocation and existence

b. Rights & obligations and valuation & allocation

Which of the following procedures would be appropriate to test the existence assertion during an audit of accounts receivable? Your Answer: a. Trace transactions from the subsidiary ledger to the general ledger. b. Send confirmations to customers. c. Trace a sample of invoices to recording in the general ledger. d. Determine that all shipments before year end are recorded as sales.

b. Send confirmations to customers.

Tracing shipping documents to pre-numbered sales invoices provides evidence that a. No duplicate shipments or billings occurred. b. Shipments to customers were properly invoiced. c. All goods ordered by customers were shipped. d. All pre-numbered sales invoices were accounted for.

b. Shipments to customers were properly invoiced.

An auditor intends to use the work of an actuary who has a relationship with the client. Under these circumstances, the auditor a. Is required to disclose the contractual relationship in the auditor's report. b. Should assess the risk that the actuary's objectivity might be impaired. c. Is not permitted to rely on the actuary because of a lack of independence. d. Should communicate this matter to the audit committee as a significant deficiency.

b. Should assess the risk that the actuary's objectivity might be impaired.

Which of the following procedures would be appropriate for an auditor testing management's assertion related to the allocation and valuation of investments in marketable securities? Your Answer: a. Trace acquisitions to purchase documentation. b. Test the amortization of discount or premium on bond holdings. c. Confirm with 3rd party custodians. d. Review bank confirmations for information about loan collateral arrangements.

b. Test the amortization of discount or premium on bond holdings.

Under what circumstances would an auditor likely perform additional substantive procedures to the details of payroll transactions? Your Answer: a. Control risk relative to payroll is assessed as low. b. Unusual fluctuations were identified during the performance of analytical procedures. c. Accrued payroll expense is materially higher than the previous period's corresponding amount. d. Accrued payroll predominantly consists of commissions due to sales agents.

b. Unusual fluctuations were identified during the performance of analytical procedures.

Kiboshny Co. is desperate to remain in good standing with its long-term debt covenants. Which of the following measures, if not detected by the auditor, might allow Kiboshny to fraudulently overstate its current ratio? 1.Improperly Classifying Current Debt as Noncurrent 2.Improperly Recording Expenses as Debits to Retained Earnings 3.Failing to Record Interest Expense on Long-Term Debt a. Yes-Yes-Yes b. Yes-No-Yes c. Yes-Yes-No d. Yes-No-No

b. Yes-No-Yes

Choose the correct statement(s) regarding the auditing of debt obligations. I. A typical audit plan for debt obligations will rely heavily on sampling. II. An auditor will focus on the management assertion of existence in order to determine that debt obligations are not understated. III. Common analytical procedures performed while auditing debt obligations include analyzing ratios between related accounts such as interest expense and notes payable. a. II and III only b. III only c. I and II only d. I, II, and III

b. III only

Which of the following strategies most likely could improve the response rate of the confirmations of accounts receivable? a. Restrict the selection of accounts to be confirmed to those customers with large balances. b. Include a list of items or invoices that constitute the customers' account balances. c. Explain to customers that discrepancies will be investigated by an independent third party. d. Ask customers to respond to the confirmation requests directly to the auditor by fax.

b. Include a list of items or invoices that constitute the customers' account balances.

In which of the following circumstances is substantive testing of accounts receivable before the balance sheet date most appropriate? a. The client has a new sales incentive program in place. b. Internal controls during the remaining period are effective. c. There is a high turnover of senior management. d. It is a first engagement of a new client.

b. Internal controls during the remaining period are effective.

An auditor is required to confirm accounts receivable if the accounts receivable balances are a. Older than the prior year. b. Material to the financial statements. c. Smaller than expected. d. Subject to valuation estimates.

b. Material to the financial statements.

Evidence concerning the proper segregation of duties for receiving and depositing cash receipts ordinarily is obtained by a. Completing an internal control questionnaire that describes the control activities. b. Observing the employees who are performing the control activities. c. Performing substantive tests to verify the details of the bank balance. d. Preparing a flow chart of the duties performed and the entity's available personnel.

b. Observing the employees who are performing the control activities.

An auditor believes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to a. Purchase production facilities currently being leased from a third party. b. Postpone expenditures to upgrade its information technology system. c. Pay cash dividends that are in arrears to the preferred stockholders d. Increase the useful lives of plant assets for depreciation purposes.

b. Postpone expenditures to upgrade its information technology system.

A CPA firm is completing the fieldwork for an audit of Swenson Co. for the current year ended December 31. The manager in charge of the audit is performing the final steps in the evidence accumulation phase of the audit and notes that there have been several changes in Swenson during the year under audit. Which of the following items would indicate there could be substantial doubt about Swenson's ability to continue as a going concern for a reasonable period of time? a. Cash infusion by a venture capital firm. b. Recurring working capital shortages. c. A lack of significant contracts with new customers. d. Term debt refinanced with a new bank.

b. Recurring working capital shortages.

When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor's original invoices have been misplaced. What should the auditor do in response to this situation? a. Increase randomly the number of items in the substantive test to increase the reliance that may be placed on the overall test. b. Reevaluate the risk of fraud, and design alternate tests for the related transactions. c. Increase testing by agreeing more of the payments to this particular vendor to the photocopies of its invoices. d. Count the missing original documents as misstatements, and project the total amount of the error based on the size of the population and the dollar amount of the errors.

b. Reevaluate the risk of fraud, and design alternate tests for the related transactions.

Which of the following documents are examples of audit evidence generated by the client? a. Customer purchase orders and bank statements. b. Shipping documents and receiving reports. c. Vendor invoices and packing slips. d. Bills of lading and accounts receivable confirmations.

b. Shipping documents and receiving reports.

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements? a. The entity's management places no emphasis on meeting publicized earnings projections. b. Significant differences between the physical inventory count and the accounting records are not investigated. c. Monthly bank reconciliations ordinarily include several large outstanding checks. d. Cash transactions are electronically processed and recorded, leaving no paper audit trail.

b. Significant differences between the physical inventory count and the accounting records are not investigated.

Which of the following statements is most accurate regarding sufficient and appropriate documentation? a. Accounting estimates are not considered sufficient and appropriate documentation. b. Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed. c. If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the working papers. d. Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least five years.

b. Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements? a. Senior financial management participates in the selection of accounting principles and the determination of significant estimates. b. Supporting accounting records and files that should be readily available are not produced promptly when requested. c. Related party transactions take place in the ordinary course of business with an entity that is audited by another CPA firm. d. Senior management has an excessive interest in upgrading the entity's information technology capabilities.

b. Supporting accounting records and files that should be readily available are not produced promptly when requested.

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably a. Insist that the client perform physical counts of inventory items several times during the year. b. Apply gross profit tests to ascertain the reasonableness of the physical counts. c. Increase the extent of tests of controls of the inventory cycle. d. Request the client to schedule the physical inventory count at the end of the year.

d. Request the client to schedule the physical inventory count at the end of the year.

The auditor wishes to obtain evidence to support management's assertion as to the completeness of long-term debt. Which of the following procedures would likely be most effective? Your Answer: a. Trace a sample of loans to the original documentation. b. Trace a sample of loans to subsequent payments. c. Confirm a sample of loans with creditors. d. Review minutes of board of director meetings.

d. Review minutes of board of director meetings.

Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements? a. Inquire about the existence of related party transactions. b. Determine whether accounting estimates deviate from historical patterns. c. Confirm inventories at locations outside the entity. d. Review the lawyer's letter for information about litigation.

d. Review the lawyer's letter for information about litigation

An auditor was satisfied that the carrying value of factory equipment was fairly stated as of the beginning of the period. During the period, the entity had several transactions involving the purchase and disposal of equipment. Which of the following would be the most effective in providing evidence that all equipment reported in the financial statements actually exists? Your Answer: a. Select items on the factory floor and trace them to the accounting records. b. Select items from the accounting records and trace them to purchase documents. c. Evaluate the entity's policies for capitalizing and expensing costs related to the acquisition of equipment. d. Select items from the accounting records and observe them in the entity's factory.

d. Select items from the accounting records and observe them in the entity's factory.

Tracing bills of lading to sales invoices provides evidence that a. Shipments to customers were recorded as sales. b. Recorded sales were shipped. c. Invoiced sales were shipped. d. Shipments to customers were invoiced.

d. Shipments to customers were invoiced.

In auditing related party transactions, an auditor ordinarily places primary emphasis on a. The probability that related party transactions will recur. b. Confirming the existence of the related parties c. Verifying the valuation of the related party transactions. d. The adequacy of the disclosure of the related party transactions.

d. The adequacy of the disclosure of the related party transactions.

In auditing accounts receivable, the negative form of confirmation request most likely would be used when a. The total recorded amount of accounts receivable is immaterial to the financial statements taken as a whole. b. Response rates in prior years to properly designed positive confirmation requests were inadequate. c. Recipients are likely to return positive confirmation requests without verifying the accuracy of the information. d. The combined assessed level of inherent risk and control risk relative to accounts receivable is low.

d. The combined assessed level of inherent risk and control risk relative to accounts receivable is low.

When evaluating the sufficiency and appropriateness of audit evidence, the auditor should consider all of the following except: Your Answer: a. Management's responses to auditor inquiries. b. Knowledge of the client from previous engagements. c. The results of tests of controls evaluating the effectiveness of internal controls over financial reporting. d. The extent to which the auditor was involved in maintaining the client's accounting records and preparing the financial statements.

d. The extent to which the auditor was involved in maintaining the client's accounting records and preparing the financial statements.

Regarding pension obligations and their associated auditing issues, which of the following statements is true? Your Answer: a. The independent actuarial firm relied upon by an entity's management provides certain assumptions, such as workforce life expectancy, which are trusted implicitly by the auditor. b. If all other factors remain the same, a decrease in the discount rate assumption will reduce an entity's pension liability. c. Defined contribution plans require more accounting estimates than defined benefit plans. d. The findings of a specialist, such as an actuary, constitute audit evidence to be evaluated by the auditor.

d. The findings of a specialist, such as an actuary, constitute audit evidence to be evaluated by the auditor.

An auditor concludes that a substantive auditing procedure considered necessary during the prior year's audit was omitted and there are persons currently relying on the auditor's report. The auditor most likely would promptly apply the omitted procedure if a. Control risk was assessed at the maximum level for the relevant financial statement assertions. b. The auditor's working papers will be subject to post-issuance review in connection with a peer review program. c. The results of other procedures that were applied tend to compensate for the one omitted. d. The omission of the procedure impairs the auditor's present ability to support the previously expressed opinion.

d. The omission of the procedure impairs the auditor's present ability to support the previously expressed opinion.

Which of the following audit procedures would likely be most effective in providing the auditor with evidence regarding the completeness of accounts payable? Your Answer: a. Tracing items included on the accounts payable listing to subsequent payments. b. Tracing amounts recorded in the general ledger to original transaction documentation. c. Sending confirmations to a sample of vendors included on the accounts payable listing. d. Tracing subsequent payments to amounts included on the accounts payable listing.

d. Tracing subsequent payments to amounts included on the accounts payable listing.

While auditing inventory, the auditor analyzed inventory turnover rates and made inquiries of production supervisors and inventory control personnel about slow-moving or obsolete items in inventory. These procedures are designed to provide evidence to support management's assertion regarding: Your Answer: a. Rights and obligations b. Completeness c. Existence d. Valuation and allocation

d. Valuation and allocation

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable is most likely to obtain evidence concerning management's assertions about Your Answer: a. Completeness b. Existence. c. Rights and obligations. d. Valuation and allocation.

d. Valuation and allocation.

Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management's assertion of Your Answer: a. Completeness. b. Existence. c. Rights and obligations. d. Valuation and allocation.

d. Valuation and allocation.

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's assertions about a. Existence. b. Rights. c. Presentation. d. Valuation.

d. Valuation.

Which of the following events least likely would indicate the existence of related party transactions? a. Making a loan with no scheduled date for the funds to be repaid. b. Maintaining compensating balance arrangements for the benefit of principal stockholders. c. Borrowing funds at an interest rate significantly below prevailing market rates. d. Writing off obsolete inventory to net realizable value just before year end.

d. Writing off obsolete inventory to net realizable value just before year end.

Which of the following procedures would yield the most competent evidence? a. A scanning of trial balances. b. An inquiry of client personnel. c. A comparison of beginning and ending retained earnings. d. A recalculation of bad debt expense.

d. A recalculation of bad debt expense.

During the confirmation of accounts receivable, an auditor receives a confirmation via the client's fax machine. Which of the following actions should an auditor take? a. Not accept the confirmation and select another customer's balance to confirm. b. Not accept the confirmation and treat it as an exception. c. Accept the confirmation and file it in the working papers. d. Accept the confirmation but verify the source and content through a telephone call to the respondent.

d. Accept the confirmation but verify the source and content through a telephone call to the respondent.

A primary objective of analytical procedures used in the final review stage of an audit is to a. Identify account balances that represent specific risks relevant to the audit. b. Gather evidence from tests of details to corroborate financial statement assertions. c. Detect fraud that may cause the financial statements to be misstated. d. Assist the auditor in evaluating the overall financial statement presentation.

d. Assist the auditor in evaluating the overall financial statement presentation.

Which of the following would not be an appropriate use of confirmations? a. Confirming accounts receivable balances with customers. b. Confirming inventories on hand with warehouses. c. Confirming loan terms and amounts with lenders. d. Confirming authorization for major transactions with directors.

d. Confirming authorization for major transactions with directors.

Which of the following procedures would an auditor most likely perform during an audit engagement's overall review stage in formulating an opinion on an entity's financial statements? a. Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements. b. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement. c. Determine whether inadequate provisions for the safeguarding of assets have been corrected. d. Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud.

d. Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud.

Which of the following presumptions is correct about the reliability/validity of audit evidence? a. Information obtained indirectly from outside sources is the most reliable audit evidence. b. To be reliable, audit evidence should be convincing rather than persuasive. c. Reliability of audit evidence refers to the amount of corroborative evidence obtained. d. Effective internal control provides more assurance about the reliability of audit evidence.

d. Effective internal control provides more assurance about the reliability of audit evidence.

Which of the following statements relating to the appropriateness of audit evidence is always true? a. Audit evidence gathered by an auditor from outside an enterprise is reliable. b. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions. c. Oral representations made by management are not valid evidence. d. Evidence gathered by auditors must be both reliable and relevant to be considered appropriate.

d. Evidence gathered by auditors must be both reliable and relevant to be considered appropriate.

In designing written audit programs, an auditor should establish specific audit objective that relate primarily to the a. Timing of audit procedures. b. Cost-benefit of gathering evidence. c. Selected audit techniques. d. Financial statement assertions.

d. Financial statement assertions.

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to a. Verify that payroll taxes are deducted from employees' gross pay. b. Determine whether internal control activities are operating effectively. c. Uncover fictitious employees who are receiving payroll checks. d. Identify potential liabilities for unpaid payroll taxes.

d. Identify potential liabilities for unpaid payroll taxes.

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? a. Performing cutoff tests of sales transactions with customers with long-standing receivable balances. b. Evaluating the entity's procedures for identifying and recording related party transactions. c. Inspecting title documents to verify whether any real property is pledged as collateral. d. Inquiring of the entity's legal counsel about litigation, claims, and assessments.

d. Inquiring of the entity's legal counsel about litigation, claims, and assessments.

To obtain assurance that all inventory items in a client's inventory listing are valid, an auditor most likely would trace a. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices. b. Items listed in receiving reports and vendors' invoices to the inventory listing. c. Inventory tags noted during the auditor's observation to items in the inventory listing. d. Items in the inventory listing to inventory tags and the auditor's recorded count sheets.

d. Items in the inventory listing to inventory tags and the auditor's recorded count sheets.

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that a. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. b. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. c. The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. d. Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

d. Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

Which of the following procedures should an auditor perform concerning litigation, claims, and assessments? a. Inspect legal documents in the possession of the client's lawyer that are relevant to pending litigation and unasserted claims and assessments. b. Discuss with the client's lawyer its philosophy of defending litigation, claims, and assessments that have a high probability of being resolved unfavorably. c. Confirm directly with the client's lawyer that all litigation, claims, and assessments have been properly recorded in the financial statements. d. Obtain assurance from management that it has disclosed all unasserted claims that its lawyer has advised are probable of assertion.

d. Obtain assurance from management that it has disclosed all unasserted claims that its lawyer has advised are probable of assertion.

An entity's income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor most likely could have detected this irregularity by a. Tracing a sample of journal entries to the general ledger. b. Evaluating the effectiveness of the internal control structure policies and procedures. c. Investigating the reconciliation's between controlling accounts and subsidiary records. d. Performing analytical procedures designed to disclose differences from expectations.

d. Performing analytical procedures designed to disclose differences from expectations.

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory? a. Scanning perpetual inventory, production, and purchasing records. b. Examining paid vendor invoices. c. Tracing inventory items from the tag listing back to the physical inventory quantities. d. Performing cutoff procedures for shipping and receiving.

d. Performing cutoff procedures for shipping and receiving.

A test of a payroll system involved comparing an individual's number of overtime hours a week with an average of weekly overtime during a similar period in a prior year and evaluating the results. This is an example of what type of test? a. Range test. b. Detail test. c. Category test. d. Reasonableness test.

d. Reasonableness test.

An analysis of which of the following accounts would best aid in verifying that all fixed assets have been capitalized? a. Cash. b. Depreciation expense. c. Property tax expense. d. Repairs and maintenance.

d. Repairs and maintenance.

Which of the following procedures would an auditor most likely perform prior to the balance sheet date? a. Review subsequent events. b. Perform search for unrecorded liabilities. c. Send inquiry letter to client's legal counsel. d. Review detail and test significant travel and entertainment expenses.

d. Review detail and test significant travel and entertainment expenses.

Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern? a. Confirmation of accounts receivable from principal customers. b. Reconciliation of interest expense with debt outstanding. c. Confirmation of bank balances. d. Review of compliance with terms of debt agreements.

d. Review of compliance with terms of debt agreements.

Which of the following procedures would best detect a liability omission by management? a. Inquiry of senior support staff and recently departed employees. b. Review and check mathematical accuracy of financial statements. c. Review articles of incorporation and corporate bylaws. d. Review purchase contracts and other legal documents.

d. Review purchase contracts and other legal documents.

Which of the following procedures would least likely result in the discovery of possible noncompliance (illegal acts)? a. Reading the minutes of the board of directors' meetings. b. Making inquiries of the client's management. c. Performing tests of details of transactions. d. Reviewing an internal control questionnaire.

d. Reviewing an internal control questionnaire.

An auditor's analytical procedures performed during the overall review stage indicated that the client's accounts receivable had 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 most likely would satisfy the auditor? a. The client liberalized its credit standards in the current year and sold much more merchandise to customers with poor credit ratings. b. Twice as many accounts receivable were written off in the prior year than in the current year. c. A greater percentage of accounts receivable were currently listed in the "more than 90 days overdue" category than in the prior year. d. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

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

Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale? a. When the assessed level of control risk over the sale is low. b. When the assessed level of detection risk over the sale is high. c. When the combined assessed level of inherent and control risk over the sale is moderate. d. When the combined assessed level of inherent and control risk over the sale is high.

d. When the combined assessed level of inherent and control risk over the sale is high.

Under which of the following conditions may an auditor's observation procedure for inventory be performed during or after the end of the period under audit? a. When the client maintains periodic inventory records. b. When the auditor finds minimal variations in client records and test counts in prior periods. c. When total inventory has not varied more than 5% in the last five years. d. When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts.

d. When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts.

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 five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue? a. The auditor should perform analytical procedures at an interim date and discuss any changes in the level of sales with senior management. b. 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. c. The auditor should perform tests of controls at an interim date to obtain audit evidence about the operational effectiveness of internal controls over sales. d. The auditor should review period-end compensation to determine if bonuses were paid to meet earnings goals.

b. 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.

Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses? a. The current year's accounts receivable with the prior year's accounts receivable. b. The current year's payroll expense with the prior year's payroll expense. c. The budgeted current year's sales with the prior year's sales. d. The budgeted current year's warranty expense with the current year's contingent liabilities.

b. The current year's payroll expense with the prior year's payroll expense.

Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of noncompliance (illegal acts)? a. The exchange of property for similar property in a nonmonetary transaction. b. The discovery of unexplained payments made to government employees. c. The presence of several difficult-to-audit transactions affecting expense accounts. d. The failure to develop adequate procedures that detect unauthorized purchases.

b. The discovery of unexplained payments made to government employees.

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 a. Obsolete inventory has not yet been reduced to fair market value. b. There was an improper cutoff of sales at the end of the year. c. An unusually large receivable was written off near the end of the year. d. The aging of accounts receivable was improperly performed in both years.

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

What is the maximum number of days in which a nonissuer's auditor should complete the assembly of the final audit file following the report release date? Your Answer: a. 30 days. b. 45 days. c. 60 days. d. 75 days.

c. 60 days.

Which of the following cannot be determined by performing analytical procedures involving the quick ratio? Your Answer: a. Collection of an account receivable was incorrectly recorded with a credit to accounts payable. b. The amount indicated as the current portion of long-term debt has not been adjusted from the previous year's higher amount. c. A collection of a payment on account from one of the entity's regular customers was never recorded. d. A collection of a payment on account from one of the entity's regular customers was recognized as a cash sale rather than a payment on account.

c. A collection of a payment on account from one of the entity's regular customers was never recorded.

Which of the following matters most likely would be included in a management representation letter? a. An assessment of the risk factors concerning the misappropriation of assets. b. An evaluation of the litigation that has been filed against the entity. c. A confirmation that the entity has complied with contractual agreements. d. A statement that all material internal control weaknesses have been corrected.

c. A confirmation that the entity has complied with contractual agreements.

Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular audit objective? a. The audit is being performed soon after the balance sheet date. b. Audit staff are experienced in performing the planned procedures. c. Analytical procedures have revealed no unusual or unexpected results. d. There were many transactions posted to the account during the period.

c. Analytical procedures have revealed no unusual or unexpected results.

An auditor most likely would perform substantive tests of details on payroll transactions and balances when a. Cutoff tests indicate a substantial amount of accrued payroll expense. b. The assessed level of control risk relative to payroll transactions is low. c. Analytical procedures indicate unusual fluctuations in recurring payroll entries. d. Accrued payroll expense consists primarily of unpaid commissions.

c. Analytical procedures indicate unusual fluctuations in recurring payroll entries.

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would a. Inspect the allowance account to verify whether the accounts were subsequently written off. b. Increase the assessed level of detection risk for the valuation and completeness assertions. c. Ask the client to contact the customers to request that the confirmations be returned. d. Increase the assessed level of inherent risk for the revenue cycle.

c. Ask the client to contact the customers to request that the confirmations be returned.

An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning which of management's assertions related to presentation and disclosure? Your Answer: a. Occurrence and rights and obligations. b. Completeness. c. Classification and understandability. d. Accuracy and valuation.

c. Classification and understandability.

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables? a. Reconcile receiving reports with related cash payments made just prior to the year end. b. Review the responses of accounts receivable confirmations for indications of disputes with customers. c. Compare cash payments made after the balance sheet date with the accounts payable trial balance. d. Examine a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.

c. Compare cash payments made after the balance sheet date with the accounts payable trial balance.

An auditor observes new equipment while walking around a client's factory and traces the new equipment to schedules of property, plant, and equipment that support the information in the financial statements. Which assertion is supported by the evidence obtained? Your Answer: a. Existence b. Rights and obligation c. Completeness d. Valuation and allocation

c. Completeness

Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should a. Assess control risk at below the maximum for the assertions embodied in the accounts selected for interim testing. b. Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole. c. Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable. d. Obtain written representations from management that all financial records and related data will be made available.

c. Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

Which of the following financial ratios would be most useful to an auditor seeking information on a company's ability to sustain losses? Your Answer: a. Inventory turnover b. Earnings per share c. Debt to equity d. Days' sales in accounts receivable

c. Debt to equity

The objective of tests of details of transactions performed as substantive tests is to a. Comply with generally accepted auditing standards. b. Attain assurance about the reliability of the accounting system. c. Detect material misstatements in the financial statements. d. Evaluate whether management's policies and procedures operated effectively.

c. Detect material misstatements in the financial statements.

When developing audit programs, the auditor will apply tests of details to accomplish which of the following? Your Answer: a. Complying with generally accepted auditing standards. b. Evaluating the operating effectiveness of management's policies and procedures. c. Detecting material misstatements affecting the financial statements. d. Determining whether or not the accounting system is reliable.

c. Detecting material misstatements affecting the financial statements.

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to a. Identify unusually large purchases that should be investigated further. b. Verify that cash disbursements were for goods actually received. c. Determine that purchases were properly recorded. d. Test whether payments were for goods actually ordered.

c. Determine that purchases were properly recorded.

Which of the following steps should be performed first in applying analytical procedures? a. Determine whether the difference between the expectation and the recorded amount is reasonable. b. Investigate and evaluate significant differences from the expectation. c. Develop an expectation of a balance or ratio by using relationships that are expected to exist. d. Compare the client's recorded balance or ratio with the expectation.

c. Develop an expectation of a balance or ratio by using relationships that are expected to exist.

In evaluating the reasonableness of an entity's accounting estimates, an auditor most likely concentrates on key factors and assumptions that are a. Stable and not sensitive to variation. b. Objective and not susceptible to bias. c. Deviations from historical patterns. d. Similar to industry guidelines.

c. Deviations from historical patterns.

An auditor is seeking evidence in an examination of bonds payable. Which of the following procedures would the auditor likely perform? Your Answer: a. Send confirmations to bondholders. b. Trace assets purchased with bond proceeds to documentation for evidence of liens. c. Evaluate reasonableness of interest expense in relation to bonds payable balances. d. Perform analytical procedures relative to bond discount or premium.

c. Evaluate reasonableness of interest expense in relation to bonds payable balances.

In which of the following circumstances is an auditor most likely to rely on work done by internal auditors? Your Answer: a. If financial statement amounts are material and the degree of subjectivity in evaluating the audit evidence is high. b. If the internal auditors have concluded that the risk of material misstatement at the overall financial level is negligible. c. For financial statement amounts judged by the auditor to require little or no subjectively evaluated audit evidence. d. For financial statement amounts determined largely or entirely on the basis of estimates made by management.

c. For financial statement amounts judged by the auditor to require little or no subjectively evaluated audit evidence.

Identify the correct statement(s) regarding analytical procedures conducted while obtaining an understanding of the entity and its environment, including its internal controls, during an audit: I. Analytical procedures conducted while obtaining an understanding of the entity and its environment are considered risk assessment procedures and are required. II. As a planning analytical procedure an auditor may plan walkthroughs of internal control processes in order to gather information for risk assessment on the client's internal control environment. III. As a planning analytical procedure an auditor may develop an expectation for the current period's net income on the basis of the client's interim forecasts and interim financial statements. Your Answer: a. II and III only b. III only c. I and III only d. I, II, and III

c. I and III only

An auditor observed that a client mails monthly statements to customers. Subsequently, the auditor reviewed evidence of follow-up on the errors reported by the customers. This test of controls most likely was performed to support management's financial statement assertion(s) of I. Completeness II. Rights and obligations. a. Both I and II. b. I only. c. II only. d. Neither I nor II.

c. II only.

Identify the correct statement regarding analytical procedures used in a review conducted at the conclusion of an audit. Your Answer: a. The ultimate purpose of analytical procedures used in a review conducted at the conclusion of the audit is to uncover fraud schemes that may have been missed previously during the audit. b. Typically a more junior member of the engagement team will perform the analytical procedures applied at the conclusion of the audit because less precision is required. c. If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit. d. Analytical procedures used in the review near the conclusion of the audit are not required.

c. If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit.

Which of the following statements is correct regarding the auditing of management estimates? Your Answer: a. Management bias is rarely a consideration in the auditing of management estimates. b. The auditor will often adjust downward the inherent lack of precision associated with an accounting estimate. c. In testing the underlying data of an estimate and the process used by management in making it, the auditor should evaluate the reasonableness of related management assumptions given the measurement requirements of the applicable financial reporting framework. d. Developing a point estimate or range to evaluate management estimates is a presumptively mandatory requirement of the auditor.

c. In testing the underlying data of an estimate and the process used by management in making it, the auditor should evaluate the reasonableness of related management assumptions given the measurement requirements of the applicable financial reporting framework.

Which of the following statements ordinarily is correct concerning the content of working papers? Your Answer: a. Whenever possible, the auditor's staff should prepare schedules and analyses rather than the entity's employees. b. It is preferable to have negative figures indicated in red figures instead of parentheses to emphasize amounts being subtracted. c. It is appropriate to use calculator tapes with names or explanations on the tapes rather than writing separate lists onto working papers. d. The analysis of asset accounts and their related expense or income accounts should not appear on the same working paper.

c. It is appropriate to use calculator tapes with names or explanations on the tapes rather than writing separate lists onto working papers.

"We have disclosed to you all known instances of non-compliance with laws and regulations whose effects should be considered when preparing financial statements". The foregoing passage is most likely from a a. Report on internal control. b. Special report. c. Management representation letter. d. Letter for underwriters.

c. Management representation letter.

Which of the following would be considered corroborative evidence? Your Answer: a. Checks, invoices, and contracts. b. General and subsidiary ledgers. c. Minutes from meetings of the board of directors. d. Worksheets and spreadsheets supporting cost allocations.

c. Minutes from meetings of the board of directors.

An auditor observes the mailing of monthly statement to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertion(s) of Completeness Existence Your Answer: a. Yes Yes b. Yes No c. No Yes d. No No

c. No Yes

Which of the following procedures would an auditor ordinarily perform first in evaluating the reasonableness of management's accounting estimates? a. Review transactions occurring prior to the completion of field work that indicate variations from expectations. b. Compare independent expectations with recorded estimates to assess management's process. c. Obtain an understanding of how management developed its estimates. d. Analyze historical data used in developing assumptions to determine whether the process is consistent.

c. Obtain an understanding of how management developed its estimates.

An opportunity for fraud involving lapping of accounts receivable is more likely when which two duties involving accounts receivable are not segregated? Your Answer: a. Authorization and reconciliation. b. Receipt of returned goods and recording. c. Opening the mail and recording. d. Recording and reconciliation.

c. Opening the mail and recording.

Which of the following audit procedures is most likely to be included in an audit program to examine long-term debt Your Answer: a. Comparing the carrying value of debt to its market value as of the balance sheet date. b. Sending confirmations to verify the existence of the individual holders of the entity's bonds. c. Performing an analytical procedure comparing interest expense to an auditor expectation based on debt balances. d. Inspecting the subsidiary ledger for unrecorded liabilities.

c. Performing an analytical procedure comparing interest expense to an auditor expectation based on debt balances.

In assessing the competence of internal auditors, an independent CPA most likely would obtain information about the a. Influence of management on the scope of the internal auditors' duties. b. Policies limiting internal auditors from communicating with the audit committee. c. Quality of the internal auditors' working paper documentation. d. Entity's ability to continue as a going concern for a reasonable period of time.

c. Quality of the internal auditors' working paper documentation.

Under which of the following circumstances would using the blank form of confirmation of accounts receivable most likely be preferable to other types of positive confirmations? a. The auditor's combined assessed level of control risk and inherent risk is low. b. Prior years' audits indicate a pattern of overstatement of account balances. c. Recipients are likely to sign other types of positive confirmations without careful investigation. d. Accounts receivable are immaterial to the entity's financial statements.

c. Recipients are likely to sign other types of positive confirmations without careful investigation.

Which of the following procedures would be appropriate for an auditor testing management's assertion related to the existence of investments in securities? Your Answer: a. Review bank confirmations for information about collateral arrangements. b. Compare recorded amounts with published market value information. c. Reconcile interest and dividends received. d. Review financial statements of investees accounted for under the equity method.

c. Reconcile interest and dividends received.

Which of the following audit procedures would most likely provide evidence regarding the existence of cash and cash equivalents? a. Review bank reconciliations to verify amounts b. Perform analytical procedures to determine if amounts and volume of transactions match expectations c. Review bank confirmations to verify bank balances d. Test translation of foreign currency transactions.

c. Review bank confirmations to verify bank balances

An auditor is unable to observe the physical count of inventory. Which of the following would not be an appropriate alternate procedure? Your Answer: a. Perform test counts to items in inventory. b. Apply procedures to transactions occurring between the count date and the date of the financial statements. c. Review shipping terms for all inventory in transit on the balance sheet date. d. Evaluate internal controls related to the maintenance of perpetual inventory records.

c. Review shipping terms for all inventory in transit on the balance sheet date.

Question 33: Question ID #492 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? a. Send confirmations for all new customer balances incurred from the interim date to year end. b. Resend confirmations for any significant customer balances remaining at year end. c. Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year end. d. Review cash collections subsequent to the interim date and the year end.

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

Which of the following procedures would most likely assist an auditor in identifying related party transactions? Your Answer: a. Evaluate the reasonableness of management's accounting estimates that are subject to bias. b. Retest ineffective internal control activities for evidence of management override. c. Review the minutes of the meetings of the board of directors and its committees. d. Send second requests for unanswered positive confirmations of accounts receivable.

c. Review the minutes of the meetings of the board of directors and its committees.

Which of the following procedures most likely could assist an auditor in identifying related party transactions? a. Performing tests of controls concerning the segregation of duties. b. Evaluating the reasonableness of management's accounting estimates. c. Reviewing confirmations of compensating balance arrangements. d. Scanning the accounting records for recurring transactions.

c. Reviewing confirmations of compensating balance arrangements.

What is an auditor's primary method to corroborate information on litigation, claims, and assessments? a. Examining legal invoices sent by the client's attorney. b. Verifying attorney-client privilege through interviews. c. Reviewing the response from the client's lawyer to a letter of audit inquiry. d. Reviewing the written representation letter obtained from management.

c. Reviewing the response from the client's lawyer to a letter of audit inquiry.

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 a. Sales invoices to the shipping documents. b. Cash receipts journal to the sales journal. c. Shipping documents to the sales invoices. d. Sales journal to the cash receipts journal.

c. Shipping documents to the sales invoices.

An auditor most likely would modify an unmodified opinion if the entity's financial statements include a footnote on related-party transactions a. Disclosing loans to related parties at interest rates significantly below prevailing market rates. b. Describing an exchange of real estate for similar property in a nonmonetary related-party transaction. c. Stating that a particular related-party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction. d. Presenting the dollar volume of related-party transactions and the effects of any change in the method of establishing terms from prior periods.

c. Stating that a particular related-party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction.

At the completion of an audit, which of the following entities has ownership of the audit working papers? Your Answer: a. The client. b. The client's audit committee. c. The CPA firm that performed the audit. d. The client's stockholders.

c. The CPA firm that performed the audit.

Management's written representations should be in the form of a letter addressed to: Your Answer: a. The audit committee of the board of directors. b. The stockholders of the entity c. The auditor d. The board of directors

c. The auditor

Management's written representations should be in the form of a letter that should be addressed to: Your Answer: a. The audit committee of the board of directors. b. The stockholders of the entity. c. The auditor. d. The board of directors.

c. The auditor.

Which of the following statements is correct regarding a management representation letter? Your Answer: a. A representation letter can be used in place of specific, previously identified audit procedures. b. A representation letter encompasses a different set of assertions than those inherent in the financial statements. c. The date of the representation letter should typically be the same as the audit report. d. The representations made apply until the date of a client's financial statements.

c. The date of the representation letter should typically be the same as the audit report.

Which of the following will generally not be included in a standard bank confirmation? Your Answer: a. Balances in deposit accounts as of the balance sheet date. b. Balances of outstanding loan as of the balance sheet date. c. The dates on which inactive accounts were closed. d. Agreements related to compensating balances and collateral for loans.

c. The dates on which inactive accounts were closed.

As the acceptable level of detection risk increases, an auditor may change the a. Assessed level of control risk from below the maximum to the maximum level. b. Assurance provided by tests of controls by using a larger sample size than planned. c. Timing of substantive tests from year-end to an interim date. d. Nature of substantive tests from a less effective to a more effective procedure.

c. Timing of substantive tests from year-end to an interim date.

Which of the following most likely would be detected by an auditor's review of a client's sales cut-off? a. Shipments lacking sales invoices and shipping documents. b. Excessive write-offs of an accounts receivable. c. Unrecorded sales at year-end. d. Lapping of year-end accounts receivable.

c. Unrecorded sales at year-end.

A client has disposed of several pieces of manufacturing equipment at a significant gain. This raises question as to which assertion in regard to property, plant, and equipment? Your Answer: a. Existence b. Rights and obligations c. Valuation and allocation d. Completeness

c. Valuation and allocation

The fact that a company has significant amounts of cash in the form of foreign currency would raise the inherent risk of which management assertion regarding cash? Your Answer: a. Completeness b. Rights and obligations c. Valuation or allocation d. Presentation and disclosure

c. Valuation or allocation

Which of the following is a substantive test that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable? a. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and accounted for. b. Receiving the client's mail, unopened, for a reasonable period of time after the year-end to search for unrecorded vendor's invoices. c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports. d. Confirming accounts payable balances with known suppliers who have zero balances.

c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.

Which of the following relates to the sufficiency of audit evidence? Your Answer: a. The client maintains good perpetual inventory records, enabling the auditor to reconcile amounts to inventory counts that were taken prior to year-end. b. Because of a large number of small balances, the auditor decides to use negative accounts receivable confirmations rather than positive confirmations. c. When no exceptions were discovered in a preliminary sample, the auditor decided that no further testing was necessary. d. The auditor reviewed vendor invoices to support a sample of purchases rather than rely exclusively on the client's receiving reports.

c. When no exceptions were discovered in a preliminary sample, the auditor decided that no further testing was necessary.

To be effective, analytical procedures in the overall review stage of an audit engagement should be performed by a. The staff accountant who performed the substantive auditing procedures. b. The managing partner who has responsibility for all audit engagements at that practice office. c. A manager or partner who has a comprehensive knowledge of the client's business and industry. d. The CPA firm's quality control manager or partner who has responsibility for the firm's peer review program.

c. A manager or partner who has a comprehensive knowledge of the client's business and industry.

Which of the following documentation is required for an audit in accordance with generally accepted auditing standards? a. A flowchart or an internal control questionnaire that evaluates the effectiveness of the entity's internal control policies and procedures. b. A client engagement letter that summarizes the timing and details of the auditor's planned fieldwork. c. An indication in the working papers that the accounting records agree or reconcile with the financial statements. d. The basis for the auditor's conclusions when the assessed level of control risk is at the maximum level for all financial statement assertions.

c. An indication in the working papers that the accounting records agree or reconcile with the financial statements.

Which of the following types of audit evidence is the most persuasive? a. Prenumbered client purchase order forms. b. Client work sheets supporting cost allocations. c. Bank statements obtained from the client. d. Client representation letter.

c. Bank statements obtained from the client.

When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations a. Copies of the client's shipping documents that support the account balances. b. Lists of the customers' recent payments that the client has already recorded. c. Client-prepared statements of account that show the details of the account balances. d. Copies of the customers' purchase orders that support the account balances.

c. Client-prepared statements of account that show the details of the account balances.

An auditor's principal objective in analyzing repairs and maintenance expense accounts is to a. Determine that all obsolete plant and equipment assets were written off before the year end. b. Verify that all recorded plant and equipment assets actually exist. c. Discover expenditures that were expensed but should have been capitalized. d. Identify plant and equipment assets that cannot be repaired and should be written off.

c. Discover expenditures that were expensed but should have been capitalized.

An auditor is testing the reasonableness of dividend income from investments in publicly-held companies. The auditor most likely would compute the amount that should have been received and recorded by the client by a. Reading the details of the board of directors' meetings. b. Confirming the details with the investee companies' registrars. c. Electronically accessing the details of dividend records on the Internet. d. Examining the details of the client's most recent cutoff bank statement.

c. Electronically accessing the details of dividend records on the Internet.

Which of the following procedures would an auditor most likely perform to obtain assurance that slow-moving and obsolete items included in inventories are properly identified? a. Testing shipping and receiving cutoff procedures. b. Confirming inventories at locations outside the entity's premises. c. Examining an analysis of inventory turnover. d. Tracing inventory observation test counts to perpetual listings.

c. Examining an analysis of inventory turnover.

An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate? a. Observation and inspection of records. b. Confirmation and reperformance. c. Inquiry and inspection of records. d. Analytical procedures and reperformance.

c. Inquiry and inspection of records.

Which of the following characteristics most likely would be indicative of check kiting? a. High turnover of employees who have access to cash. b. Many large checks that are recorded on Mondays. c. Low average balance compared to high level of deposits. d. Frequent ATM checking account withdrawals.

c. Low average balance compared to high level of deposits.

An auditor should consider which of the following when evaluating the ability of a company to continue as a going concern? a. Audit fees. b. Future assurance services. c. Management's plans for disposal of assets. d. A lawsuit for which judgment is not anticipated for 18 months.

c. Management's plans for disposal of assets.

When a company's stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the a. Amount of dividends paid to related parties. b. Expected proceeds from stock subscriptions receivable. c. Number of shares issued and outstanding. d. Proper authorization of stock rights and warrants.

c. Number of shares issued and outstanding.

At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. Which of the following actions is the auditor most likely to take? a. Consult with the audit committee and issue a disclaimer of opinion. b. Consult with the audit committee and issue a qualified opinion. c. Obtain additional evidence regarding the valuation of inventory. d. Obtain a statement from management supporting their inventory valuation.

c. Obtain additional evidence regarding the valuation of inventory.

Which of the following procedures would an auditor most likely perform to assist in the evaluation of loss contingencies? a. Checking arithmetic accuracy of the accounting records. b. Performing appropriate analytical procedures. c. Obtaining a letter of audit inquiry from the client's lawyer. d. Reading the financial statements, including footnotes.

c. Obtaining a letter of audit inquiry from the client's lawyer.

In determining whether transactions have been recorded, the direction of the audit testing should be from the a. General ledger balances. b. Adjusted trial balance. c. Original source documents. d. General journal entries.

c. Original source documents.

An auditor's decision whether to apply analytical procedures as substantive tests usually is determined by the a. Availability of documentary evidence that should be verified. b. Extent of accounting estimates used in preparing the financial statements. c. Precision and reliability of the data used to develop expectations. d. Number of transactions recorded just before and just after the year end.

c. Precision and reliability of the data used to develop expectations.

Which of the following would not be considered an analytical procedure? a. Converting dollar amounts of income statement account balances to percentages of net sales for comparison with industry averages. b. Developing the current year's expected net sales based on the sales trend of similar entities within the same industry. c. Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics. d. Estimating the current year's expected expenses based on the prior year's expenses and the current year's budget.

c. Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics.

In auditing contingent liabilities, which of the following procedures would an auditor most likely perform? a. Confirm the details of outstanding purchase orders. b. Apply analytical procedures to accounts payable. c. Read the minutes of the board of directors' meetings. d. Perform tests of controls on the cash disbursement activities.

c. Read the minutes of the board of directors' meetings.

Which of the following is an analytical procedure that an auditor most likely would perform during the final review stage of an audit? a. Comparing each individual expense account balance with the relevant budgeted amounts and investigating any significant variations. b. Testing the effectiveness of internal control procedures that appear to be suitably designed to prevent or detect material misstatements. c. Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified. d. Calculating each individual expense account balance as a percentage of total entity expenses and comparing the results with industry averages.

c. Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified.

Question ID #473 An auditor usually determines whether dividend income from publicly-held investments is reasonable by computing the amounts that should have been received by referring to a. Stock ledgers maintained by independent registrars. b. Dividend records on file with the SEC. c. Records produced by investment services. d. Minutes of the investee's board of directors.

c. Records produced by investment services.

Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that a. Shipments to customers were properly billed. b. Entries in the accounts receivable subsidiary ledger were for sales actually shipped. c. Sales billed to customers were actually shipped. d. No duplicate shipments to customers were made.

c. Sales billed to customers were actually shipped.

Which of the following courses of action is the most appropriate if an auditor concludes that there is a high risk of material misstatement? a. Use smaller, rather than larger, sample sizes. b. Perform substantive tests as of an interim date. c. Select more effective substantive tests. d. Increase of tests of controls.

c. Select more effective substantive tests.

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? a. A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year. b. Internal control activities over the recording of cash receipts have been improved since the end of the prior year. c. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet. d. The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.

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

The accounts receivable turnover ratio increased significantly over a two-year period. This trend could indicate that Your Answer: a. The accounts receivable aging has deteriorated. b. The company has eliminated its discount policy. c. The company is more aggressively collecting customer accounts. d. Customer sales have substantially decreased.

c. The company is more aggressively collecting customer accounts.

The auditor is considering the use of the client's internal auditors to assist in the audit. As a result, the auditor is evaluating the competence and objectivity of the internal auditors. Factors the auditor will consider when evaluating an internal auditor's competence will include all of the following except: a. The internal auditor's education. b. The internal auditor's professional certifications. c. The organizational level to which the internal auditor reports d. The internal auditor's experience.

c. The organizational level to which the internal auditor reports

Which of the following most likely would cause an auditor to consider whether a client's financial statements contain material misstatements? a. Management did not disclose to the auditor that it consulted with other accountants about significant accounting matters. b. Audit trails of computer-generated transactions exist only for a short time. c. The results of an analytical procedure disclose unexpected differences. d. The chief financial officer will not sign the management representation letter until the last day of the auditor's field work.

c. The results of an analytical procedure disclose unexpected differences.

Which of the following factors would most likely influence an auditor's consideration of the reliability of data when performing analytical procedures? a. Whether the data were developed in a computerized or a manual accounting system. b. Whether the data were prepared on the cash basis or in conformity with GAAP. c. Whether the data were developed under a system with adequate controls. d. Whether the data were processed in an online system or a batch entry system.

c. Whether the data were developed under a system with adequate controls.

Which of the following cash transfers results in a misstatement of cash at December 31, 20X1? a. Bank Transfer Schedule Disbursement date Receipt date Transfers per books per bank per books per bank 12/31/X1 01/05/X2 12/31/X1 01/04/X2 b. Bank Transfer Schedule Disbursement date Receipt date Transfers per books per bank per books per bank 01/04/X2 01/11/X2 01/04/X2 01/04/X2 c. Bank Transfer Schedule Disbursement date Receipt date Transfers per books per bank per books per bank 12/31/X1 01/04/X2 12/31/X1 12/31/X1 d. Bank Transfer Schedule Disbursement date Receipt date Transfers per books per bank per books per bank 01/04/X2 01/05/X2 12/31/X1 01/04/X2

d. Bank Transfer Schedule Disbursement date Receipt date Transfers per books per bank per books per bank 01/04/X2 01/05/X2 12/31/X1 01/04/X2

Which of the following factors would least likely affect the quantity and content of an auditor's documentation? Your Answer: a. The condition of the client's records. b. The assessed level of control risk. c. The nature of the auditor's report. d. The content of the representation letter.

d. The content of the representation letter.

Which of the following statements concerning evidential matter is correct? a. Competent evidence supporting management's assertions should be convincing rather than merely persuasive. b. An effective internal control structure contributes little to the reliability of the evidence created within the entity. c. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained. d. A client's accounting data cannot be considered sufficient audit evidence to support the financial statements.

d. A client's accounting data cannot be considered sufficient audit evidence to support the financial statements.

In the audit of a nonissuer, which of the following statements is correct regarding the use of external confirmations to obtain audit evidence? Your Answer: a. Management's refusal to allow an auditor to perform external confirmation procedures is considered a departure from GAAP sufficient to qualify the opinion. b. Negative confirmations provide more persuasive audit evidence than positive confirmations. c. Negative confirmations should be used only if a very high exception rate is expected. d. A factor for an auditor to consider when designing confirmation requests is the assertion being tested.

d. A factor for an auditor to consider when designing confirmation requests is the assertion being tested.

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified? a. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers. b. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances. c. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers. d. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

d. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following items would least likely be included in the attorney's response to the auditor's letter of inquiry? a. A description of potential litigation in other matters or related to an unfavorable verdict in the patent infringement lawsuit. b. A discussion of case progress and the strategy currently in place by client management to resolve the lawsuit. c. An evaluation of the probability of loss and a statement of the amount or range of loss if an unfavorable outcome is reasonably possible. d. An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.

d. An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.

Although the quantity and content of audit working papers vary with each particular engagement, an auditor's permanent files most likely include Your Answer: a. Schedules that support the current year's adjusting entries. b. Prior years' accounts receivable confirmations that were classified as exceptions. c. Documentation indicating that the audit work was adequately planned and supervised. d. Analyses of capital stock and other owners' equity accounts.

d. Analyses of capital stock and other owners' equity accounts.

Before applying principal substantive tests to an entity's accounts receivable at an interim date, an auditor should a. Consider the likelihood of assessing the risk of incorrect rejection too low. b. Project sampling risk at the maximum for tests covering the remaining period. c. Ascertain that accounts receivable are immaterial to the financial statements. d. Assess the difficulty in controlling the incremental audit risk.

d. Assess the difficulty in controlling the incremental audit risk.

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may a. Not believe that the bank is obligated to verify confidential information to a third party. b. Sign and return the form without inspecting the accuracy of the client's bank reconciliation. c. Not have access to the client's cutoff bank statement. d. Be unaware of all the financial relationships that the bank has with the client.

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

During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify which of management's assertions related to presentation and disclosure? Your Answer: a. Classification and understandability. b. Completeness. c. Neither a nor b are correct. d. Both a and b are correct.

d. Both a and b are correct.

An auditor is establishing procedures for testing management's assertion regarding rights and obligations in relation to reported investments in marketable securities. The auditor is considering using confirmations or observation. Which of these techniques would be appropriate for obtaining evidence about rights and obligations? Your Answer: a. Confirmations only b. Observation only c. Neither confirmations nor observation d. Both confirmations and observation

d. Both confirmations and observation

An auditor is establishing procedures for testing management's assertions regarding existence in relation to reported investments in marketable securities. The auditor is considering using confirmations or observation. Which of these techniques would be appropriate for obtaining evidence about existence? Your Answer: a. Confirmations only b. Observation only c. Neither confirmations nor observation d. Both confirmations and observation

d. Both confirmations and observation

King Corporation often transfers funds from its general account into a special account that is used exclusively to make debt payments. Near the end of the year, the company had the following transfers: Amount From General Account To Special Account Recorded in Books Recorded by Bank Recorded in Books Recorded by Bank $35,000 12/29/X1 1/2/X2 12/31/X1 12/31/X1 $20,000 12/30/X1 12/31/X1 1/2/X2 1/2/X2 $30,000 12/31/X1 1/2/X2 12/31/X1 1/2/X2 $40,000 1/2/X2 1/4/X2 12/31/X1 1/3/X2 a. Cash is fairly stated. b. Cash is overstated by $15,000. c. Cash is overstated by $40,000. d. Cash is overstated by $20,000.

d. Cash is overstated by $20,000.

A letter from the client's attorney: Your Answer: a. Results from a request from the auditor. b. Is the primary source of evidence an auditor obtains about litigation, claims, and assessments. c. Is always required if the auditor is to express an opinion. d. Corroborates evidence already obtained through the client.

d. Corroborates evidence already obtained through the client.

Tests performed on transactions just prior to and just after the entity's year-end are 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 Your Answer: a. Occurrence. b. Completeness. c. Accuracy. d. Cutoff.

d. Cutoff.

The permanent file of an auditor's working papers most likely would include copies of the Your Answer: a. Lead schedules. b. Attorney's letters. c. Bank Statements. d. Debts agreements.

d. Debts agreements.

Evidential matter concerning proper segregation of duties ordinarily is best obtained by a. Preparation of a flowchart of duties performed by available personnel. b. Inquiring whether control procedures operated consistently throughout the period. c. Reviewing job descriptions prepared by the personnel department. d. Direct personal observation of the employees who apply control procedures.

d. Direct personal observation of the employees who apply control procedures.

Due to a change in the economic environment, the auditor has determined that a client's inherent risk (IR) has increased in comparison to the prior year. In order to maintain an acceptably low level of audit risk, the auditor may: 1.Reduce control risk by performing more tests of controls and placing more reliance on client internal controls 2.Reduce detection risk by enhancing the nature, timing, or extent of substantive testing Your Answer: a. I only b. II only c. Neither I nor II d. Either I or II, or both

d. Either I or II, or both

Which of the following procedures would not provide evidence about whether payroll checks were issued to nonexistent employees? Your Answer: a. Observing the distribution of payroll checks. b. Performing test of controls on procedures for the handling of unclaimed payroll checks. c. Comparing the number of payroll checks written in a period to the number of employees observed by the auditor during the period. d. Examining payroll tax returns.

d. Examining payroll tax returns.

Audit documentation should enable an experienced auditor with no previous connection to the particular audit to understand which of the following? I. The nature, timing, and extent of procedures performed. II. The results of procedures performed. III. The total difference between items examined and their recorded amounts. Your Answer: a. I, II, and III b. II and III only c. I and III only d. I and II only

d. I and II only

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 a. Customers with credit balances. b. Small account balances. c. Individual overdue balances. d. Individual invoices.

d. Individual invoices.

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance? a. The entity has rights to the inventory. b. Inventory is properly valued. c. Inventory is properly presented in the financial statements d. Inventory is complete.

d. Inventory is complete.

The audit working paper that reflects the major components of an amount reported in the financial statements is the Your Answer: a. Interbank transfer schedule. b. Carryforward schedule. c. Supporting schedule. d. Lead schedule.

d. Lead schedule.

When using a specialist to obtain evidence in an audit, the auditor will consider the specialist's competence and objectivity. Which of the following would the auditor do when evaluating the specialist's objectivity? a. Make inquiries about the specialist's reputation. b. Read the specialist's written reports. c. Make inquiries regarding the specialist's licenses and certifications. d. Make inquiries regarding the specialist's relationships.

d. Make inquiries regarding the specialist's relationships.

An auditor decides to use the blank form of accounts receivable confirmation rather than the positive form. The auditor should be aware that the blank form may be less efficient because a. Subsequent cash receipts need to be verified. b. Statistical sampling may not be used. c. A higher assessed level of detection risk is required. d. More nonresponses are likely to occur.

d. More nonresponses are likely to occur.

RJS CPAs has an audit client that has been involved in numerous related party transactions. In developing a plan for obtaining audit evidence, the auditor's objectives will be to obtain evidence to ascertain whether: I. The terms were similar to an arms-length's transaction II. The transaction would have taken place in the absence of the relationship a. I only b. II only c. Both I and II d. Neither I nor II

d. Neither I nor II

Choose the correct statement(s) regarding an auditor's final assessment, near the end of an audit, of significant accounting estimates made by management: 1.Recalculating most estimates is typical at this stage. 2.Overly conservative estimates are preferable to overly aggressive estimates. 3.A company's accounting for compensation plans involving stock options requires little additional scrutiny if the stock is publicly traded at a known market price. Your Answer: a. II and III only b. II only c. I and II only d. None of the above

d. None of the above

Which of the following procedures would an auditor ordinarily perform first in evaluating management's accounting estimates for reasonableness? a. Develop independent expectations of management's estimates. b. Consider the appropriateness of the key factors or assumptions used in preparing the estimates. c. Test the calculations used by management in developing the estimates. d. Obtain an understanding of how management developed its estimates.

d. Obtain an understanding of how management developed its estimates.

In developing an audit program, the auditor wishes to test the assertion of completeness. From which population should the auditor draw a sample? Your Answer: a. Amounts on the trial balance. b. Amounts in the general ledger. c. Amounts in the journals. d. Original source documents.

d. Original source documents.

An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice a. Eliminates the use of certain statistical sampling methods that would otherwise be available. b. Presumes that the auditor will reperform the tests as of the balance sheet date. c. Should be especially considered when there are rapidly changing economic conditions. d. Potentially increases the risk that errors that exist at the balance sheet date will not be detected.

d. Potentially increases the risk that errors that exist at the balance sheet date will not be detected.

An auditor scans a client's investment records for the period just before and just after the year end to determine that any transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evidence about management's financial statement assertions of a. Rights and obligations, and existence or occurrence. b. Valuation or allocation, and rights and obligations. c. Existence or occurrence, and presentation and disclosure. d. Presentation and disclosure, and valuation or allocation

d. Presentation and disclosure, and valuation or allocation

Which of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments? a. Inspect checks included with the client's cutoff bank statement. b. Obtain a letter of representations from the client's underwriter of securities. c. Apply ratio analysis on the current-year's liability accounts. d. Read the file of correspondence from taxing authorities.

d. Read the file of correspondence from taxing authorities.

If not already performed during the overall review stage of the audit, the auditor should perform analytical procedures relating to which of the following transaction cycles? a. Payroll. b. Revenue. c. Purchasing. d. Inventory.

b. Revenue.

Which of the following is not an assertion that relates to events and transactions? Your Answer: a. Completeness b. Cutoff c. Existence d. Classification

c. Existence

For the fiscal year ending December 31, previous year and 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 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? a. Accounts receivable turnovers are 10.0 and 6.6 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible overstatement of the allowance. b. Accounts receivable turnovers are 10.0 and 6.6 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible understatement of the allowance. c. Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable is 0.42 and 0.20, respectively. Examine allowance for possible overstatement of the allowance. d. Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.42 and 0.20, respectively. Examine allowance for possible understatement of the allowance.

b. Accounts receivable turnovers are 10.0 and 6.6 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible understatement of the allowance.

An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed? a. Test of transactions. b. Analytical procedures. c. Test of controls. d. Test of details.

b. Analytical procedures.

Which of the following factors most likely would cause an auditor to question the integrity of management? a. Management has an aggressive attitude toward financial reporting and meeting profit goals. b. Audit tests detect material fraud that was known to management, but not disclosed to the auditor. c. Managerial decisions are dominated by one person who is also a stockholder. d. Weaknesses in internal control reported to the audit committee are not corrected by management.

b. Audit tests detect material fraud that was known to management, but not disclosed to the auditor.

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events? a. Examine changes in the quoted market prices of investments purchased since the year end. b. Compare the latest available interim financial information with the financial statements being reported upon. c. Apply analytical procedures to the details of the balance sheet accounts that were tested at interim dates. d. Inquire about payroll checks that were recorded before the year end but cashed after the year end.

b. Compare the latest available interim financial information with the financial statements being reported upon.

In establishing the existence and ownership of long-term investments in the form of publicly-traded stock, an auditor most likely would inspect the securities or a. Correspond with the investee company to verify the number of shares owned. b. Confirm the number of shares owned that are held by an independent custodian. c. Apply analytical procedures to the dividend income and investments accounts. d. Inspect the cash receipts journal for amounts that could represent the sale of securities.

b. Confirm the number of shares owned that are held by an independent custodian.

Which of the following types of evidential matter generally is the most competent? a. Inquiries made of management. b. Confirmation of account information. c. Analytical procedures. d. Review of prior-year audit procedures.

b. Confirmation of account information.

A portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods? a. Observation. b. Confirmation. c. Calculation. d. Inspection.

b. Confirmation.

Analytical procedures performed in the final review stage of an audit generally would include a. Reassessing the factors that assisted the auditor in deciding on preliminary materiality levels and audit risk. b. Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning. c. Summarizing uncorrected misstatements specifically identified through tests of details of transactions and balances. d. Calculating projected uncorrected misstatements estimated through audit sampling techniques.

b. Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.

Which of the following circumstances most likely would cause an auditor to suspect that material misstatements exist in a client's financial statements? a. The assumptions used in developing the prior year's accounting estimates have changed. b. Differences between reconciliations of control accounts and subsidiary records are not investigated. c. Negative confirmation requests yield fewer responses than in the prior year's audit. d. Management consults with another CPA firm about complex accounting matters.

b. Differences between reconciliations of control accounts and subsidiary records are not investigated.

What type of evidence would provide the highest level of assurance in an attestation engagement? a. Evidence secured solely from within the entity. b. Evidence obtained from independent sources. c. Evidence obtained indirectly. d. Evidence obtained from multiple internal inquiries.

b. Evidence obtained from independent sources.

An auditor's inquiries of management disclosed that the entity recently invested in a series of energy derivatives to hedge against the risks associated with fluctuating oil prices. Under these circumstances, the auditor should a. Perform analytical procedures to determine if the derivatives are properly valued. b. Examine the contracts for possible risk exposure and the need to recognize losses. c. Confirm the marketability of the derivatives with a commodity specialist. d. Document the derivatives in the auditor's communication with the audit committee.

b. Examine the contracts for possible risk exposure and the need to recognize losses.

Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated? a. Examining reported purchase returns that appear too low. b. Examining vendor statements for amounts not reported as purchases. c. Searching for customer-returned goods that were not reported as returns. d. Reviewing bank transfers recorded as cash received from customers.

b. Examining vendor statements for amounts not reported as purchases.