Audit Chapter 16

The aggregated misstatement in the financial statements is made up of: Factual Misstatements Projected Misstatements Judgmental Misstatements(1)Yes Yes Yes(2)Yes Yes No(3)No Yes No(4)No Yes Yes Multiple Choice Option (1) Option (2) Option (3) Option (4)

Option (1) (1)Yes Yes Yes

For clients that distribute checks or cash payments and have significant payroll control weakness, which of the following audit procedures is aimed at determining whether every name on the company payroll is a bona fide employee actually on the job? a. A surprised observation of a paycheck distribution, while establishing the identity of each employee receiving payment. b. A test of payroll extensions. c. Analytical comparisons of budgeted to actual payroll expense. d. Comparison of payee names on canceled payroll checks with the payroll register.

a. A surprised observation of a paycheck distribution, while establishing the identity of each employee receiving payment

If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first: a. Attempt to determine whether their report is still being relied upon b. Notify regulatory agencies. c. Notify legal counsel. d. Wait until the beginning of the next year's audit to determine whether misstatements have occurred.

a. Attempt to determine whether their report is still being relied upon

An auditor's decision concerning whether or not to "dual-date" the audit report is based upon the auditor's willingness to: a. Extend auditing procedures. b. Accept responsibility for year-end adjusting entries. c. Permit inclusion of a note captioned: event (unaudited) subsequent to the date of the auditor's report. d. Assume responsibility for resolving all events subsequent to the issuance of the auditor's report.

a. Extend auditing procedures.

The date of the management representation letter should coincide with the: a. date of the auditor's report. b. balance sheet date. c. date of the latest subsequent event referred to in the notes to the financial statements. d. date of the engagement agreement.

a. date of the auditor's report.

The primary difference between an audit of the balance sheet and an audit of the income statement lies in the fact that the audit of the income statement deals almost completely with the verification of: a. transactions. b. authorizations. c. costs. d. cutoffs.

a. transactions.

Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job? a. Examine human resources records for accuracy and completeness. b. Examine employees' names listed on payroll tax returns for agreement with payroll accounting records. c. Make a surprise observation of the company's regular distribution of paychecks on a test basis. d. Visit the working areas and verify that employees exist by examining their badge or identification numbers.

c. Make a surprise observation of the company's regular distribution of paychecks on a test basis.

In connection with the annual audit, which of the following is not a "subsequent events" procedure? a. Review available interim financial statements. b. Read available minutes of meetings of stockholders, directors, and committees. With regard to meetings for which minutes are not available, inquire about matters dealt with at such meetings. c. Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report. d. Discuss with officers the current status of items in the financial statements that were accounted for on the basis of tentative, preliminary, or inconclusive data.

c. Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report.

The date the auditor grants the client permission to use the audit report in connection with the financial statements is the: a. Last day of significant field work. b. Report cutoff date. c. Report release date. d. Representation date.

c. Report release date.

Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements? a. A business combination. b. Early retirement of bonds payable. c. Settlement of litigation. d. Plant closure due to a strike.

c. Settlement of litigation.

Which of the following best describes proper internal control over payroll? a. The preparation of the payroll must be under the control of the personnel department. b. The confidentiality of employee payroll data should be carefully protected to prevent fraud. c. The duties of hiring, payroll computation, and payment to employees should be segregated. d. The payment of cash to employees should be replaced with payment by checks.

c. The duties of hiring, payroll computation, and payment to employees should be segregated.

When examining a client's statement of cash flows, for audit evidence, an auditor will rely primarily upon: a. determination of the amount of working capital at year-end. b. analysis of significant ratios of prior years as compared to the current year. c. cross-referencing to balances and transactions audited in connection with the examination of the other financial statements. d. the guidance provided by the FASB Statement on the statement of cash flows.

c. cross-referencing to balances and transactions audited in connection with the examination of the other financial statements.

Which of the following situations has the best chance of being detected when a CPA compares 200X revenues and expenses with the prior year and investigates all changes exceeding a fixed percentage? a. An increase in property tax rates has not been recognized in the company's 200X accrual. b. The cashier began lapping accounts receivable in 200X. c. Because of worsening economic conditions, the 200X provision for uncollectible accounts was inadequate. d. The company changed its capitalization policy for small tools in 200X.

d. The company changed its capitalization policy for small tools in 200X.

Effective internal control over the payroll function would include which of the following? a. Total time recorded on time clock cards should be reconciled to job reports by employees responsible for those specific jobs. b. Payroll department employees should be supervised by the management of the personnel department. c. Payroll department employees should be responsible for maintaining employee personnel records. d. Total time spent on jobs should be compared with total time indicated on time clock punch cards.

d. Total time spent on jobs should be compared with total time indicated on time clock punch cards.

Which of the following is not a procedure normally performed while completing the audit of a public company? a. Obtain a lawyer's letter. b. Obtain a representations letter. c. Perform an overall review using analytical procedures. d. Update internal control questionnaire.

d. Update internal control questionnaire.

An example of an internal control weakness is to assign to a supervisor the responsibility for: a. reviewing and approving time reports for subordinate employees. b. initiating requests for salary adjustments for subordinate employees. c. authorizing payroll checks for terminated employees. d. distributing payroll checks to subordinate employees.

d. distributing payroll checks to subordinate employees.

A surprise observation by an auditor of a client's regular distribution of paychecks is primarily designed to satisfy the auditor that: a. all unclaimed payroll checks are properly returned to the cashier. b. the paymaster is not involved in the distribution of payroll checks. c. all employees have in their possession proper employee identification. d. names on the company payroll are those of bona fide employees presently on the job.

d. names on the company payroll are those of bona fide employees presently on the job.

When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments? a. Capitalization. b. Financing. c. Investing. d. Operations.

a. Capitalization.

A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements? a. The client decided to change depreciation methods in the coming year. b. A substantial portion of the company's inventory was written off as obsolete on January 31. c. The factory building was damaged by a fire on January 19. d. A major subsidiary was sold on February 7.

b. A substantial portion of the company's inventory was written off as obsolete on January 31.

Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies? a. Obtaining a lawyers' letter. b. Confirming accounts payable. c. Reviewing the minutes of board of directors' meetings. d. Review correspondence with banks.

b. Confirming accounts payable.

Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next: a. Notify the board of directors that the auditor's report must no longer be associated with the financial statements. b. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. c. Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. d. Issue revised pro forma financial statements taking into consideration the newly discovered information.

b. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n): a. Analytical process. b. Loss contingency. c. Probable loss. d. Unasserted claim.

b. Loss contingency.

Which of the following information need not be reported in the auditors' report of a nonpublic company if the information is considered to be properly stated after performing appropriate procedures? a. FASB-required supplementary information. b. Other information in documents containing audited financial statements. c. Supplementary information in relation to the financial statements as a whole. d. GASB-required supplementary information.

b. Other information in documents containing audited financial statements.

Which of the following is most likely to be considered a Type 1 subsequent event? a. A business combination completed after year-end, but for which negotiations began prior to year-end. b. A strike subsequent to year-end due to employee complaints about working conditions that originated two years ago. c. Customer checks deposited prior to year-end but determined to be uncollectible after year-end. d. Introduction of a new line of products after year-end for which major research had been completed prior to year-end.

c. Customer checks deposited prior to year-end but determined to be uncollectible after year-end.

The search for unrecorded liabilities for a public company includes procedures usually performed through the: a. Day the audit report is issued. b. End of the client's year. c. Date of the auditors' report. d. Date the report is filed with the SEC.

c. Date of the auditors' report.

An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated: a. December 31, 20X8. b. January 17, 20X9. c. February 10, 20X9. d. February 16, 20X9.

c. February 10, 20X9.

For which of the following ledger accounts would the auditor be most likely to analyze the details? a. Postage expense. b. Supplies expense. c. Miscellaneous expense. d. Sales salaries expense.

c. Miscellaneous expense.

As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should: a. Express an opinion that is qualified due to the inability of the client company to continue as a going concern. b. Evaluate management's performance in causing this decline. c. Require note disclosure. d. Consider the possibility of a misstatement in the financial statements.

d. Consider the possibility of a misstatement in the financial statements.

Which of the following procedures is most likely to be included near completion of an audit? a. Obtaining an understanding of internal control. b. Confirmation of receivables. c. Observation of inventory. d. Performing analytical procedures.

d. Performing analytical procedures.

The purpose of segregating the duties of distributing payroll checks and hiring personnel is to: a. Separate the custody of assets from the accounting for those assets. b. Establish clear lines of authority and responsibility. c. Separate duties within the accounting function. d. Separate the authorization of transactions from the custody of related assets.

d. Separate the authorization of transactions from the custody of related assets.

Which of the following is least likely to be considered a substantive procedure relating to payroll? a. Investigate fluctuations in salaries, wages, and commissions. b. Test computations of compensation under profit sharing for bonus plans. c. Test commission earnings. d. Test whether employee time reports are approved by supervisors.

d. Test whether employee time reports are approved by supervisors.

Which of the following is not correct relating to representation letters? a. They are ordinarily dated as of the date of the audit report. b. They are signed by members of top management. c. They must be obtained for audits. d. They often serve as a substitute for the application of other procedures.

d. They often serve as a substitute for the application of other procedures.

Overall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly: a. income statement ratios to balance sheet ratios. b. revenue and expense account balances to the monthly reported net income. c. income statement ratios to published industry averages. d. revenue and expense account totals to the corresponding figures of the preceding years.

d. revenue and expense account totals to the corresponding figures of the preceding years.

Auditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of: a. a postdated footnote. b. the next scheduled interim visit. c. the final billing for audit services rendered. d. the auditors' report.

d. the auditors' report.