Audit 2 Midterm

6. Which of the following is not a typical reconciling item that auditors would expect to see on a client's bank reconciliation when auditing cash? A. Bad debt expenses B. Deposits in transit C. Bank fees D. Outstanding checks

A. Bad debt expense

8. To test for the completeness of accounts payable as of a 12/31 year-end, the auditor's population that they would select samples from would most likely be: A. Cash disbursements made in January. B. Unpaid invoices in December. C. Cash disbursements made in December. D. Unpaid invoices in January.

A. Cash disbursements made in January.

In auditing accounts payable, an auditor's procedures most likely will focus primarily on the relevant assertion about: Completeness. Existence. Accuracy, valuation, and allocation. Classification.

Completeness.

Key Segregation of Duties in Revenue Process

Credit v Billing A/R v GL Shipping v Billing Cash Receipts v A/R

Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff? a. unrecorded sales for the year b. lapping of year-end accounts receivable c. excessive sales discounts d. unauthorized goods returned for credit

a. unrecorded sales for the year

Which of the following matters should an auditor communicate to those charged with governance? Significant Audit Adjustments _____ Management's Consultations with Other Accountants________ a. yes; yes b. no; no c. yes; no d. no; yes

a. yes; yes

A substantive test of transactions to test the completeness assertion includes: A. agreeing a sample of time sheets to the payroll detail. B. testing a sample of payroll checks for the presence of an authorized time sheet. C. agreeing a sample of payroll items from the general ledger detail to time sheets. D. review benefits contracts for proper disclosure of pension benefits.

A. agreeing a sample of time sheets to the payroll detail.

Which of the following departments most likely would approve the termination of employees? A. human resource B. treasurer C. controller D. payroll

A. human resource

Key Documents for A/R

A/R Confirmations A/R Aging Report Allowance for Doubtful Accounts

If the objective of a test of details is to detect overstatements of sales, the auditor should compare transactions in the: Sales journal with the cash receipts journal. Cash receipts journal with the sales journal. Source documents with the accounting records. Accounting records with the source documents.

Accounting records with the source documents.

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning relevant assertions about Classification. Rights and obligations. Accuracy, valuation, and allocation. Existence.

Accuracy, valuation, and allocation.

Which of the following matters is an auditor required to communicate to the audit committee? A. The basis for assessing control risk at low. B. Management's consultations with other accountants. C. The auditor's preliminary judgments about materiality levels. D. The justification for performing substantive procedures at interim dates.

B. Management's consultations with other accountants.

A Type 2 subsequent event usually requires: A. an adjustment to the financial statements. B. disclosure in the financial statements. C. withdrawal from the engagement. D. no action.

B. disclosure in the financial statements.

Which of the following procedures would normally be performed by the auditor when conducting tests of payroll transactions? A. interview employees selected in a statistical sample of payroll transactions B. recompute the mathematical accuracy of a sample of payroll checks C. confirm amounts withheld from employees' salaries with proper governmental authorities D. examine signatures on paid salary checks

B. recompute the mathematical accuracy of a sample of payroll checks

7. Which of the following inventory arrangements likely presents the greatest risk related to the rights and obligations assertion? A. Inventory is experiencing rapidly decreasing costs for production. B. Limited freezer space is available in a warehouse that holds fish and other seafood inventory. C. A retailer's warehouse holds some inventory on consignment. D. A large number of sales returns were processed the month after year-end.

C. A retailer's warehouse holds some inventory on consignment.

Which of the following is not a key segregation of duties in the revenue process? A. The credit function should be segregated from the billing function. B. The shipping function should be segregated from the billing function. C. The accounts receivable function should be segregated from the invoice preparation function. D. The cash receipts function should be segregated from the accounts receivable function.

C. The accounts receivable function should be segregated from the invoice preparation function.

Which of the following would normally be part of cutoff testing for payroll-related liabilities? A. compare items in accrued payroll taxes to state and federal withholding rates. B. search for unrecorded liabilities C. examine payroll tax returns and time cards to determine that the expense was recorded in the proper period D. review payroll liabilities for proper classification as short-or long-term

C. examine payroll tax returns and time cards to determine that the expense was recorded in the proper period

In auditing payroll when control risk is assessed as low, an auditor most likely will: Verify that checks representing unclaimed wages are mailed. Observe entity employees during a payroll distribution. Compare payroll costs with entity standards or budgets. Trace individual employee deductions to entity journal entries.

Compare payroll costs with entity standards or budgets.

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. Tracing test counts most likely obtained evidence concerning the relevant assertion about: Completeness. Existence. Rights and obligations. Accuracy, valuation, and allocation.

Completeness

Kiting can best be defined as a situation in which: A. An entity employee is diverting deposits to their personal bank account. B. The entity fails to complete bank reconciliations on a timely basis. C. Entity checks include unauthorized signatures. D. An employee fraudulently covers a cash shortage by transferring money from one bank account to another.

D. An employee fraudulently covers a cash shortage by transferring money from one bank account to another.

Which of the following is not a typical class of documents that an auditor would examine when conducting a test of details for sales revenue? A. Purchase order. B. Shipping documents. C. Sales invoices. D. Cash receipts.

D. Cash Receipts

An auditor finds several misstatements in the financial statements that the client prefers not to correct. The auditor determines that the misstatements are not material in the aggregate. Which of the following actions by the auditor is most appropriate? Do not accumulate the uncorrected misstatements in the audit documentation, and do not document a conclusion about whether the uncorrected misstatements cause the financial statements to be misstated. Document all misstatements accumulated during the audit and the conclusion about whether uncorrected misstatements are material. Accumulate the uncorrected misstatements in the working papers, but do not document whether they cause the financial statements to be misstated. Document the conclusion that the misstatements do not cause the financial statements to be misstated, but do not accumulate uncorrected misstatements in the audit documentation.

Document all misstatements accumulated during the audit and the conclusion about whether uncorrected misstatements are material.

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

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

Auditors would never be concerned about the completeness assertion for revenue.

False

Key Documents for Payroll

GL (Books) World: Time sheets Payroll checks Payroll tax returns Corporate benefit policies and benefit contracts

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events? Verify inventory pledged under loan agreements by confirming the details with financial institutions. Compare the financial statements being reported on with those of the prior year. Trace information from shipping documents to sales invoices and sales journal transactions. Inquire about the current status of transactions that were recorded on the basis of preliminary data.

Inquire about the current status of transactions that were recorded on the basis of preliminary data.

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? Performing cutoff tests of sales transactions with customers with long-standing receivable balances. Inquiring of the entity's legal counsel about litigation, claims, and assessments. Evaluating the entity's procedures for identifying and recording related party transactions. Inspecting title documents to verify whether any real property is pledged as collateral.

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

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? Inspect the open purchase order file for significant commitments that should be considered for disclosure. Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales. Trace test counts noted during the entity's physical count to the entity's summarization of quantities. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.

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

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? Inspect the shipping records documenting the merchandise sold to the customers. Intensify the study of internal control concerning the revenue cycle. Increase the assessed level of detection risk for the existence assertion. Review the cash receipts journal for the month prior to year end.

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

Which of the following matters will an auditor most likely include in a management representation letter? Management's acknowledgment of its responsibility to detect employee fraud. Communications with the audit committee concerning weaknesses in internal control. Plans to acquire or merge with other entities in the subsequent year. All concentrations of credit risk not expected to change materially within the next year.

Management's acknowledgment of its responsibility to detect employee fraud.

The client's bookkeeper perpetrated a theft by preparing erroneous W-2 forms. The bookkeeper's FICA withheld was overstated by $2,000 and the FICA withheld from all other employees was understated by the same amount. Which of the following is an audit procedure that would detect such a fraud? Utilizing Form W-4 and withholding charts to determine whether deductions authorized per pay period agree with amounts deducted per pay period. Multiplication of the applicable FICA rate by each individual's gross annual taxable earnings. Vouching canceled checks to the appropriate federal tax form. Footing and crossfooting of the payroll register followed by tracing postings to the general ledger.

Multiplication of the applicable FICA rate by each individual's gross annual taxable earnings.

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following? One of the sales clerks has not been preparing charge slips for credit sales to family and friends. One of the cashiers has been covering a personal embezzlement by lapping. The credit manager has misappropriated remittances from customers whose accounts have been written off. One of the computer control clerks has been removing all sales invoices applicable to his account from the data file.

One of the cashiers has been covering a personal embezzlement by lapping.

Key Documents for Cash

Original Bank Statement Bank Reconciliations Bank Confirmations

When auditing payroll transactions, an auditor is primarily concerned with the possibility of: Misfooting of employee time records. Overpayments and unauthorized payments. Excess withholding of amounts required to be withheld. Posting of gross payroll amounts to incorrect salary expense accounts.

Overpayments and unauthorized payments.

Which of the following procedures is least likely to be performed before the balance sheet date? a. observation of inventory b. confirmation of receivables c. search for unrecorded liabilities d. test of internal control over cash

c. search for unrecorded liabilities

An auditor most likely increases substantive tests of payroll when: Payroll is extensively audited by the state government. Payroll expense is substantially higher than in the prior year. Employees complain to management about too much overtime. Overpayments are discovered in performing tests of details.

Overpayments are discovered in performing tests of details.

Key Segregation of Duties in Purchasing

Purchasing v Requisition/Receiving Invoice v A/P Disbursement v A/P GL v A/P

The auditing standards define external confirmation as "a direct written response to the auditor from a third party (the confirming party), either in paper form or by electronic or other medium." The assertions for which confirmation of accounts receivable balances provides primary evidence are: Classification and rights and obligations. Rights and obligations and existence. Completeness and presentation. Existence and completeness.

Rights and obligations and existence.

Key Documents for Sales/Revenue

Sales documents and records GL of recorded sales, COGS, discounts, and revenue List of end-of-year and after-year-end sales Sales revenue calculations and policy

Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is ineffective. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely: Send negative confirmation requests. Send positive confirmation requests. Inspect the internal records such as copies of the tax invoices that were mailed to the residents. Examine evidence of subsequent cash receipts.

Send positive confirmation requests.

Tracing shipping documents to prenumbered sales invoices provides evidence that: All goods ordered by customers were shipped. Shipments to customers were properly invoiced. All prenumbered sales invoices were accounted for. No duplicate shipments or billings occurred.

Shipments to customers were properly invoiced.

Key Segregation of Duties in HR Process

Supervision v Personnel Records (HR) Supervision v Payroll-Processing (Payroll) Disbursement v Supervision Disbursement v Personnel Records (HR) Disbursement v Payroll-Processing (Payroll) GL v Payroll-Processing (Payroll)

On February 17, Year 2, a company had a fire that destroyed a plant. The building and equipment had a net carrying amount of $550,000 as of December 31, Year 1. The company anticipates that insurance proceeds of $300,000 will be received. The audit of the financial statements dated December 31, Year 1, was completed February 25, Year 2. How should the fire be reported in the financial statements for the year ended December 31, Year 1? The value of the building and equipment should be adjusted to $250,000 as of December 31, Year 1, and the adjustment disclosed. The December 31, Year 1, financial statements should be adjusted without disclosure. The December 31, Year 1, financial statements should disclose the effect of the fire with no financial statement adjustment. The loss of $250,000 should be recorded as of December 31, Year 1, and disclosed in the notes to the financial statements.

The December 31, Year 1, financial statements should disclose the effect of the fire with no financial statement adjustment.

Auditor observation of physical inventory counts can address both the existence and completeness assertions for inventory.

True

Auditors can remove documentation from their files up to 45 days after the audit is complete.

True

If a lawyer will not send a requested legal letter to an auditor, it very likely precludes an unqualified opinion on the financial statements.

True

An auditor who is testing controls in the payroll cycle has determined there to be a significant risk that not all payments to employees are recorded and expensed. The audited entity has put controls in place to reduce this risk of misstatement. Which of the following tests of control would effectively address the completeness assertion? a. Test a sample of checks before and after the reporting period end-date and trace them into the payroll register and related cash and expense accounts. b. Inspect time sheets presented for approval by the supervisor. c. Test a sample of recorded payments and ensure they were appropriately authorized. d. Test a sample of checks and vouch them to authorized time cards.

a. Test a sample of checks before and after the reporting period end-date and trace them into the payroll register and related cash and expense accounts.

Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? a. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal. b. The billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the customer's authorized credit limit and current account balance. c. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers. d. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account each month.

a. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

An auditor issued an audit report that was dual-dated for a subsequent event occurring after the date on which the auditor has obtained sufficient appropriate audit evidence but before issuance of the financial statements. The auditor's responsibility for events occurring subsequent to the date on which the auditor has obtained sufficient appropriate audit evidence was: a. limited to the specific event referenced. b. extended to subsequent events occurring through the date of issuance of the report. c. limited to events occurring up to the date of the last subsequent event referenced. d. extended to include all events occurring since the date on which the auditor has obtained sufficient appropriate audit evidence.

a. limited to the specific event referenced.

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items: a. represented by inventory tags are included in the listing. b. included in the listing are represented by inventory tags. c. represented by inventory tags are bona fide. d. included in the listing have been counted.

a. represented by inventory tags are included in the listing.

An entity maintains perpetual inventory records in both quantities and dollars. If the level of control risk were set at high, an auditor would probably: a. request that the entity schedule the physical inventory count at the end of the year. b. increase the extent of tests of controls of the inventory system. c. insist that the entity perform physical counts of inventory items several times during the year. d. apply gross profit tests to ascertain the reasonableness of the physical counts.

a. request that the entity schedule the physical inventory count at the end of the year.

An auditor is most likely to perform substantive tests of details on payroll transactions and balances when: a. substantive analytical procedures indicate unusual fluctuations in recurring payroll entries. b. the level of control risk relative to payroll transactions is set at low. c. accrued payroll expense consists primarily of unpaid commissions. d. cutoff tests indicate a substantial amount of accrued payroll expense.

a. substantive analytical procedures indicate unusual fluctuations in recurring payroll entries.

Which of the following events occurring after the issuance of a set of financial statements and the accompanying auditor's report would be most likely to cause the auditor to make further inquiries about the financial statements? a. the discovery of information regarding a contingency that existed before the financial statements were issued b. the final resolution of a lawsuit explained in a separate paragraph of the auditor's report c. the entity's sale of a subsidiary that accounts for 30 percent of the entity's consolidated sales d. a technological development in the industry that could affect the entity's future ability to continue as a going concern

a. the discovery of information regarding a contingency that existed before the financial statements were issued

Which of the following audit procedures would probably provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventory? a. Inquiry of management to determine whether there are significant purchase commitments that should be considered for disclosure. b. During physical observation of inventory verify that "bill-and-hold" inventory is segregated and not included in the ending inventory count. c. Tracing of test counts noted during the entity's physical count to the entity's summarization of quantities. d. Selection of the last few shipping advices used before the physical count and determination of whether the shipments were recorded as sales.

b. During physical observation of inventory verify that "bill-and-hold" inventory is segregated and not included in the ending inventory count.

Which of the following internal control activities is most likely to address the completeness assertion for inventory? a. Employees responsible for custody of finished goods do not perform the receiving function. b. Receiving reports are prenumbered and periodically reconciled. c. The work-in-process account is periodically reconciled with subsidiary records. d. There is a separation of duties between payroll department and inventory accounting personnel.

b. Receiving reports are prenumbered and periodically reconciled.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable? a. Examination of unusual relationships between monthly accounts payable balances and recorded cash payments. b. Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period. c. Investigation of payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. d. Reconciliation of vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date.

b. Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

Auditing standards primarily encourage which of the following conversations between the auditor and another party about financial reporting? a. a conversation with only management to discuss matters pertaining to financial reporting b. a conversation with those charged with governance to discuss matters pertaining to financial reporting c. a conversation with the head of the entity's internal audit department and those charged with governance to discuss matters pertaining to financial reporting d. a conversation in which those charged with governance report on management's views on matters pertaining to financial reporting

b. a conversation with those charged with governance to discuss matters pertaining to financial reporting

An auditor should request that an audited entity send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide: a. an objective appraisal of management's policies and procedures adopted for identifying and evaluating legal matters. 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 outcome. d. the opinion of a specialist as to whether loss contingencies are possible, probable, or remote.

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

Which of the following audit procedures is most likely to 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. consider management's plans to reduce or delay expenditures b. review compliance with the terms of debt agreements c. evaluate management's plans to borrow money or restructure debt d. review management's plans to dispose of assets

b. review compliance with the terms of debt agreements

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be: a. invoices filed in the entity's open invoice file. b. vendors with whom the entity has previously done business. c. amounts recorded in the accounts payable subsidiary ledger. d. payees of checks drawn in the month before year-end.

b. vendors with whom the entity has previously done business.

For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve: a. Employee overtime wages. b. Credit granted to customers. c. Write-offs of customer accounts. d. Cash disbursements.

c. Write-offs of customer accounts.

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that: a. goods observed during the physical count are pledged or sold. b. all goods purchased before year-end are received before the physical inventory count. c. all goods owned at year-end are included in the inventory balance. d. no goods held on consignment for customers are included in the inventory balance.

c. all goods owned at year-end are included in the inventory balance.

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the: a. administrative controls from the internal accounting controls. b. human resource function from the controllership function. c. authorization of transactions from the custody-related assets. d. operational responsibility from the record-keeping responsibility.

c. authorization of transactions from the custody-related assets.

An auditor would be most likely to identify a contingent liability by obtaining a(n): a. bank confirmation of the entity's cash balance. b. list of subsequent cash receipts. c. letter from the entity's general legal counsel. d. accounts payable confirmation.

c. letter from the entity's general legal counsel.

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: a. pledging of the receivables is probable. b. the collectibility of the receivables is in doubt. c. no reply to a positive confirmation request is received. d. no reply to a negative confirmation request is received.

c. no reply to a positive confirmation request is received.

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because: a. a majority of recipients usually lack the willingness to respond objectively. b. some recipients may report incorrect balances that require extensive follow-up. c. the auditor cannot infer that all nonrespondents have verified their account information. d. negative confirmations do not produce evidence that is statistically quantifiable.

c. the auditor cannot infer that all nonrespondents have verified their account information.

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of: a. rights and obligations. b. completeness. c. valuation and allocation. d. existence

c. valuation and allocation.

Inquiries of warehouse personnel concerning possibly obsolete or slow-moving inventory items provide assurance about managements' assertion of a :presentation. b. existence. c. valuation. d. completeness.

c. valuation.

On receiving the cutoff bank statement, the auditor should vouch: a. deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. b. deposits listed on the cutoff statement to deposits in the cash receipts journal. c. checks dated after year-end to outstanding checks listed on the year-end bank reconciliation and to the cutoff statement. d. checks dated before year-end listed as outstanding on the year-end bank reconciliation to the cutoff statement.

d. checks dated before year-end listed as outstanding on the year-end bank reconciliation to the cutoff statement.

For an appropriate segregation of duties, journalizing and posting summary payroll transactions should be assigned to: a. the timekeeping department. b. payroll accounting department. c. the treasurer's department. d. general accounting within the entity's IT system.

d. general accounting within the entity's IT system.

The negative request form of accounts receivable confirmation is useful particularly when: The Assessed Level of Control Risk Relating to receivables Is _______The Number of Small Balances Is ______ Consideration by the Recipient ______ a. high low likely b. low low unlikely c. high high likely d. low high likely

d. low high likely

Final analytical procedures are generally intended to: a. test transactions to corroborate management's financial statement assertions. b. gather evidence concerning account balances that have not yet been investigated. c. retest control activities that appeared to be ineffective during the assessment of control risk. d. provide the auditor with a final, overall evaluation of the relationships among financial statement balances.

d. provide the auditor with a final, overall evaluation of the relationships among financial statement balances.

Which of the following internal controls would be most likely to deter the lapping of collections from customers? a. authorization of write-offs of uncollectible accounts by a supervisor independent of the credit approval function b. supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries c. independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries d. segregation of duties between receiving cash and posting the accounts receivable ledger

d. segregation of duties between receiving cash and posting the accounts receivable ledger

The primary evidence regarding year-end bank balances is documented in the: a. outstanding check listing. b. bank deposit lead schedule. c. interbank transfer schedule. d. standard bank confirmations and accompanying reconciliation.

d. standard bank confirmations and accompanying reconciliation.