Audit Exam 3

The typical business activity in the financing and investment cycle that requires an accounting entry is

Investment of excess funds in temporary or long-term securities.

When verifying debits to the perpetual inventory records of a nonmanufacturing company, auditors would be most interested in examining a sample of purchase

Invoices

A voucher would typically contain (5)

1. A purchase requisition 2. Purchase order 3. Vendor invoice 4. Receiving report 5. Check copy

When considering assertions and obtaining evidence about accounts payable, auditors must put emphasis on the __________ assertion

When considering assertions and obtaining evidence about accounts payable, auditors must put emphasis on the COMPLETENESS assertion

Type of commitment - vouching of open purchase orders; inquiry of purchasing personnel; confirmation by supplier

commitments to purchase at fixed prices

Type of commitment - vouching of sales contracts; inquiry of sales personnel; confirmation by customer

commitments to sell at fixed prices

T/F: Attorneys should always provide a dollar estimate of the amount of potential loss for items included in the attorney letter.

false

T/F: The engagement quality review of audit documentation by a different partner focuses on whether all appropriate steps in the audit were performed and whether the referencing among all audit documentation is clear

false

T/F: The preferred source of fair values for investments is management's estimate of what the market value should be

false

T/F: While useful, analytical procedures are not required in the final review stages of the audit.

false

T/F: Written representations should be dated as of the date of the financial statements

false

Type of commitment - vouching of contracts; confirmation by customer; inquiry of client management

repurchase or remarketing agreements

T/F: Auditors can inspected the unmatched invoice file and compare it to the unmatched receiving report file to determine whether liabilities are unrecorded

True

T/F: Evidence is harder to obtain to verify completeness assertions for liabilities that existence assertions for assets

True

Separation of duties (5)

1. Authorization of the purchase is done by the purchasing department 2. Custody of the inventory item(s) is held by the receiving department, and ultimately, the requesting department 3. Transactions are recorded by general accounting (control account) and AP department (subsidiary accounts) 4. Reconcile liabilities to customer statements and GL account 5. Bids are received by someone independent of purchasing decision

Which of these persons generally participate in writing the management letter? (3)

1. Client's accounting and production managers. 2. Public accounting firm's audit team on the engagement. 3. Public accounting firm's consulting and tax experts.

Explain why auditors must put more emphasis on the completeness and obligation assertion when auditing payables and contrast this with the audit of asset accounts

1. Companies are less concerned about timely recording of expenses and liabilities 2. More concerned with timely recording of revenues and assets. 3. For asset accounts, emphasis is on existence and rights

The permanent reference files (master files) in a personnel and payroll database ordinarily include

1. Deduction table 2. Payroll master 3. Compensation table

Testing legal and professional expenses

A client should list legal and professional expenses and significant amounts should be vouched so the auditors can determine what legal and professional services the client is using

Which party should request a letter regarding litigation, claims, and assessments from the client's attorney?

Client

_______ can be used in connection with knowledge of the shape of management's plans for the year under audit

FORECASTS can be used in connection with knowledge of the shape of management's plans for the year under audit

Issuing/receiving/time period - Attorney letter response

From: Attorney To: Auditors When: Near date of auditors' report

Issuing/receiving/time period - Communication with individuals charged with governance

From: Auditors To: Individuals charged with governance (audit committee) When: After engagement

Selecting inventory from locations on the warehouse floor, obtaining a test count, and tracing the count to the final inventory compilation produces evidence for the _______ ASB balance assertion

Selecting inventory from locations on the warehouse floor, obtaining a test count, and tracing the count to the final inventory compilation produces evidence for the COMPLETENESS ASB balance assertion

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

Interest Expense.

In an audit test of recorded interest expense and accrued interest, the auditor was able to detect that the recorded interest expense was higher than the calculations showed. This may indicate

Interest was paid on an unknown debt or unrecorded liability

Raw materials inventory status report

Shows whether enough raw materials are in stock to complete production

To test the transaction assertion of occurrence in the area of payroll, the auditor most likely would

Select a sample of payroll register entries and vouch hours worked to clock time cards

A weakness in internal control over recording retirements of equipment may cause an auditor to

Select certain items of equipment from the accounting records and locate them in the plant

T/F: Confirmation requests should be sent only to lenders with a liability balance at the audit date

false

Which of the following are included in the inquiry letter sent to the client's attorneys? (4)

• List of pending or threatened litigation, claims, or assessments • Description of each item, including the nature of the case and management responses or intended responses to the case • Evaluation of the likelihood of an unfavorable outcome • Estimate of the range of potential loss

What events or activities may occur following the audit report release date? (4)

• Subsequently discovered facts • Omitted audit procedures • Management letter • Communications with those charged with governance

A charge following the date of the financial statements to a notes receivable account from the cash disbursements journal should alert auditors to the possibility that a

Contingent liability has become a real liability and has been settled.

An audit plan to examine long-term debt most likely would include steps that require

Correlating interest expense recorded for the period with outstanding debt

The primary reason auditors request responses to attorney letters is to provide auditors

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

When testing a company's cost accounting system, the auditor uses procedures that are primarily designed to determine that

Costs have been properly assigned to finished goods, work-in-process, and cost of goods sold

A retailer's physical count of inventory was higher than that shown by the perpetual records. Which of the following could explain the difference?

Credit memos for several items returned by customers had not been recorded

The decision of a company to have a transfer agent handle exchanges of shares is related primarily to which of the functional responsibilities?

Custody

Management assertion - Does the accounting manual give instructions to date purchase entries on the date of receipt of goods?

Cutoff

Counting different parts of inventory at different times of the year is called

Cycle counting

ASB balance assertion - selected a sample of inventory items from the perpetual records and vouch additions to receiving reports

existence

ASB balance assertions - the auditor has received a letter of confirmation directly from the broker for investments listed on the statement

existence

ASB balance assertions - vouched purchases listed on the statement to authorization by senior management or the board of directors

existence

PCAOB assertion - select a sample of inventory item from perpetual records and vouch additions to receiving reports

existence

T/F: Auditors' initial source of information about litigation, claims, and assessments is the client's attorney

false

T/F: Confirmation and inquiry procedures are not required for a class of items loosely termed off-balance-sheet information

false

T/F: If the attorney's views differ from information provided in the attorney letter, the attorney is not expected to provide additional explanation to auditors

false

T/F: If the client refuses to provide written representations, auditors should issue either a qualified opinion or adverse opinion, depending on the importance of the omission

false

T/F: In large companies, custody of stock certificate books is a significant management problem

false

T/F: Reliance on controls normally reduces the extent of substantive audit procedures on finance and investment cycle accounts

false

T/F: Roll-forward procedures are normally conducted prior to the date of the financial statements

false

T/F: Standard costing of inventory is a generally accepted accounting principle

false

T/F: Subsequently discovered facts are matters identified by auditors after the date of the financial statements but prior to the date of the auditors' report

false

T/F: The auditor ordinarily requests the attorney letter directly from the attorneys

false

T/F: The balance-sheet classification of investments by management should be confirmed with outside parties

false

T/F: The segregation of functional responsibilities is relatively easy for the finance and investment cycle

false

T/F: When there are no independent agents, most audit evidence about capital stock is gathered by confirmation directly with the stockholders

false

Production balance assertions - valuation and allocation

inventory is included in the financial statements at appropriate amounts and any resulting valuation adjustments are properly recorded

Your client plans to count inventory at several locations on the same day. No location is material in amount, but the total of inventory is quite material. How is an auditor likely to plan to observe?

Observe a sample of locations on a surprise basis

In determining the effectiveness of an entity's policies and procedures relating to the occurrence assertion for payroll transactions, auditors most likely would inquire about and

Observe the separation of duties concerning personnel responsibilities and payroll disbursement

When auditing the valuation assertion of an equity method investment, which of the following is the auditor most likely to do?

Obtain audited financial statements of the investee company

Management assertion - Are shipping documents authorized and prepared for goods returned to vendors?

Occurrence

Management assertion - Are vendors' invoices matched against purchase orders and receiving reports before a liability is recorded?

Occurrence

Transaction assertion - Select a sample of open accounts payable and vouch to supporting documents of purchase

Occurrence

Transaction assertion - Vouch a sample of receiving reports to related purchase orders

Occurrence

Transaction assertion - obtain control of a periodic payroll and conduct a surprise distribution of paychecks

Occurrence

A voucher package is used to

Provide a source document for recording the purchase of a good or service

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?

The warehouse manager is responsible for maintenance of perpetual inventory records.

Written representations

There have been no irregularities involving management or employees who have significant roles in the client's internal control

What is the primary purpose of obtaining written representations?

To impress upon management its primary responsibility for the financial statements

To obtain evidence regarding litigation, claims, and assessments, auditors request that the client send a letter to its ________.

To obtain evidence regarding litigation, claims, and assessments, auditors request that the client send a letter to its ATTORNEYS.

Inventory count tags are controlled

To prevent subsequent addition of goods to the inventory

Loan covenants are used for which of the following reasons?

To protect the lender from the borrower substantially weakening the borrower's financial position

Which of the following best describes the role of analytical procedures in the review stages of the audit engagement?

To provide an overall review of the financial information and assessment of the adequacy of evidence gathered during the audit engagement

Keeping track of securities owners for payment of interest or dividends is usually done by the company's

Transfer Agent

Selecting a sample of cost accounting reports for labor and vouching it to time records is a procedure designed to test the ASB transaction assertion of

Valuation

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?

Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices

An auditor who wished to test for the existence or occurrence of inventory would most likely select a sample of inventory items from the perpetual records and

Vouch additions to receiving reports

The usual source for journal entries posted to the general ledger to record the purchase of inventory is

Vouchers payable journal from the accounts payable department

_______ are obtained by auditors from the client to impress upon management their primary responsibility for the financial statements.

WRITTEN REPRESENTATIONS are obtained by auditors from the client to impress upon management their primary responsibility for the financial statements.

Management letter

We discussed the following recommendation for streamlining the receiving department document flow with Phyllis Cook, receiving department supervisor

When the ______, _______ and ________are in hand, the accountants can record the accounts payable

When the PURCHASE ORDER, VENDOR'S INVOICE and RECEIVING REPORT are in hand, the accountants can record the accounts payable

With a sample of open and closed production cost reports, vouching labor cost to _____ is a test for ____.

With a sample of open and closed production cost reports, vouching labor cost to LABOR REPORTS is a test for OCCURRENCE.

Physical inventory not on year-end date

With an intervening period between count date and year-end, additional inventory roll-forward auditing procedures must be performed on transactions during that period

A form of communication used by auditors to corroborate information received orally from the client during the audit examination is a(n):

Written representation.

Production balance assertions - completeness

all inventory that should have been recorded has been recorded

Time period - interim testing related to tests of controls

prior to FS date

Time period - interim testing relating to substantive procedures

prior to FS date

Which of the following substantive procedures would auditors ordinarily use in evaluating the potential existence of subsequent events? (4)

Obtain an understanding of procedures management performed to identify subsequent events Inquire management and those charged with governance as to the existence of subsequent events Read minutes of meetings of owners, management, or those charged with governance held after the date of the FS Review the entity's latest interim FS

ASB transaction assertion - are bank due notices compared with records of unpaid liabilities?

valuation or allocation

Type of communication - Discusses management's responsibility for the fairness of the financial statements.

written representations

Type of communication - Discusses the absence of fraud activity by the client and its personnel

written representations

Type of communication - Is obtained on the date of the auditors' report

written representations

Type of communication - Is signed by an executive of the client

written representations

Payroll segregation of duties

1. Authorization (personnel department hiring, terminating, determining pay rate) by persons who do not have payroll preparation, paycheck distribution, or reconciliation duties 2. Payroll distribution is in the hands of people who do not authorize employees' pay rates or time or prepare the payroll checks 3. Record keeping is performed by payroll and cost accounting personnel who do not make authorizations or distribute pay

Accounts within the acquisition and expenditure cycle

1. Cash 2. Purchases returns 3. Prepaid insurance

Which of the following are typically specific relevant assertions about fixed asset accounts?

1. Fixed assets in the accounts exist and are in productive use. 2. Depreciation has been calculated properly using accepted methods and reasonable estimates of useful life and other factors. 3. Fixed assets are properly classified in the balance sheet under appropriate descriptive captions.

What two assertions are the physical observation procedures designed for?

1. existence 2. completeness

Transaction assertion - trace a sample of voucher debits to general and subsidiary ledger accounts

Accuracy

A ______ is a financial institution appointed to record the issuance and ownership of company securities

A REGISTRAR is a financial institution appointed to record the issuance and ownership of company securities

A list of all purchases might exist only in a __________ file rather than a _______.

A list of all purchases might exist only in a COMPUTER TRANSACTION file rather than a PURCHASE JOURNAL.

Sales forecast

A marketing projection of product sale, based on past performance and marketing initiatives

An increase in inventory turnover probably indicates

An improvement in inventory management

To whom should written representations be addressed?

Auditors.

For which of the following accounts would the matching concept be the most appropriate?

COGS

Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of

Completeness

Management assertion - Are vendors' invoices listed immediately upon receipt?

Completeness

Management assertion for asset and revenue accounts

Existence

Roll-forward work normally occurs between what two dates?

Date of the financial statements and date of the auditors' report.

Issuing/receiving/time period - Internal control deficiency communication

From: Auditors To: Individuals charged with governance (audit committee) When: Prior to audit report release date (for public entities) or within 60 days of audit report release date (for nonpublic entities)

Issuing/receiving/time period - Acceptance letter

From: Client To: Auditors When: Before engagement

Issuing/receiving/time period - Written representations

From: Client To: Auditors When: Date of auditors' report

Which of the following approaches is most suitable for auditing the finance and investment cycle?

Gain an understanding of internal controls and perform extensive substantive procedures

A transfer agent

Handles the exchange of shares, canceling the shares surrendered by sellers and issuing new certificates

Inventories located off the client's premises

If material and weak controls, audit team may wish to visit locations and conduct on-site test counts If not material, alternative evidence (periodic reports, cash receipts, receivables reports, shipping records) is adequate or control risk is low, then direct confirmation with the custodian may be considered sufficient appropriate evidence of the existence of quantities

If a subsequent event provides new information regarding a condition that existed at the date of the financial statements, auditors would ensure that the client's financial statements were ___ to reflect the new information related to the matter.

If a subsequent event provides new information regarding a condition that existed at the date of the financial statements, auditors would ensure that the client's financial statements were ADJUSTED to reflect the new information related to the matter.

If auditors learn of facts after the date of the auditors' report but prior to the audit report release date, they may ___ the auditors' reports.

If auditors learn of facts after the date of the auditors' report but prior to the audit report release date, they may DUAL DATE the auditors' reports.

If substantial doubt exists about the entity's ability to continue as a going concern, auditors should ensure that appropriate disclosures are provided in the financial statements and modify their on the entity's financial statements _________

If substantial doubt exists about the entity's ability to continue as a going concern, auditors should ensure that appropriate disclosures are provided in the financial statements and modify their on the entity's financial statements OPINION

If the client fails to provide written representations to the auditor, a qualified opinion or _________ should be issued.

If the client fails to provide written representations to the auditor, a qualified opinion or DISCLAIMER OF OPINION should be issued.

A major objective of written representations is to

Impress on management its ultimate responsibility for the financial statements and disclosures.

An auditor will usually trace the details of the test counts made during the observation of physical inventory counts to a final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are

Included in the final inventory schedule

To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace

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

Which of the following items would appear in written representations in the audit of a public entity but not a nonpublic entity?

Management's opinion as to the effectiveness of its internal control over financial reporting.

Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and its auditors began the fieldwork on February 17, year 2. Hall completed gathering sufficient appropriate evidence on March 24, year 2; Hall's report and XYZ's financial statements were released on March 28, year 2. The written representations normally would be dated

March 24, year 2

The preferred method of determining fair value of transactions is

Market-based values

The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to

Material requisitions

A cutoff test reveals goods received and counted in inventory but not recorded in purchases. The effect on the financial statements is

Net income is overstated

Which of the following events occurring after the audit report release date most likely would cause auditors to make further inquiries about the previously issued financial statements?

New information concerning undisclosed lease transactions during the period under audit is discovered.

An important method used by auditors to learn of material contingencies is

Obtaining responses to an attorney letter

Vouching

Occurrence - did all recorded purchases actually occur? 1. Vouch a sample of purchases to vendor invoices Did all invoiced purchases actually occur? 1. Vouch sample of vendor invoices to receiving reports

_______ of securities can prevent the use of company securities as ______ for personal loans

PROPER CUSTODIAL CONTROL of securities can prevent the use of company securities as COLLATERAL for personal loans

Matthew Corp. has changed from a system of recording time worked on clock cards to a computerized payroll system in which employees record time in and out with magnetic cards. The computerized system automatically updates all payroll records. Because of this change,

Part of the audit trail is altered.

Cycle counts

Physical counts of selected inventory throughout the year

What is the main feature of custody in the payroll cycle?

Possession of the payroll checks

Auditors record the last bill of lading used at the time of the inventory count to

Test cutoff

The confirmation of notes payable to banks may use the ___________ confirmation.

The confirmation of notes payable to banks may use the STANDARD BANK confirmation.

The overall production starts with production planning, which usually is based on a _________.

The overall production starts with production planning, which usually is based on a SALES FORECAST.

T/F: Most businesses try to estimate sales levels and seasonal timing and then try to plan production schedules to meet customer demand.

True

The physical observation procedures for inventory are principally designed to audit for the balance assertions of _________, ________, and _________.

The physical observation procedures for inventory are principally designed to audit for the balance assertions of EXISTENCE, COMPLETENESS, and VALUATION.

Tests of controls in the finance and investment cycle

Typically amount to inquiries and observations related to management involvement

Taking a "big bath" in the financial statements refers to

Understating income

On March 15, 2013, Kent, CPA, issued an unqualified opinion on a client's audited financial statements for the year ended December 31, 2012. On May 4, 2013, Kent's internal inspection program disclosed that engagement personnel failed to observe the client's physical inventory. Omission of this procedure impairs Kent's present ability to support the unqualified opinion. If the stockholders are currently relying on the opinion, Kent should first

Undertake to apply alternative procedures that would provide a satisfactory basis for the opinion.

Transaction assertion - select a sample of personnel files and trace pay rate to union contracts

accuracy

Production cycle assertion - completeness

all production events that should have been recorded have been recorded

ASB transaction assertion - the production supervisor is required to account for all material and labor used as direct or indirect

classification

ASB transaction assertion - payroll reviews the allocation of payroll for pay periods that begin in one reporting period and end in the next reporting period

cutoff

Time period - identification of subsequent events

date of FS and date of auditors' report

Time period - attorney letters

date of FS and date of auditors' report

T/F: Reviewing the latest interim financial statements is one method of identifying subsequent events

true

Effect on inventory/ cost of sales - december sales recorded in january

inventory - no effect cost of sales - no effect

Effect on inventory/ cost of sales - unrecorded shipment of inventory

inventory - overstated cost of sales - understated

Effect on inventory/ cost of sales - december purchase recorded in january

inventory - understated cost of sales - no effect

Effect on inventory/ cost of sales - unrecorded receipt of inventory

inventory - understated cost of sales - no effect

Effect on inventory/ cost of sales - inventory omitted during physical count

inventory - understated cost of sales - overstated

Production balance assertions - existence

inventory exists

Type of commitment - vouching of lease agreement; confirmation with lessor or lessee

lease commitments

Type of commitment - vouching of open commitment file; inquiry of loan officers

loan commitments (as in a savings and loan association)

Type of communication - Is not required by generally accepted auditing standards

management letter

Type of communication - Is typically prepared following the audit report release date

management letter

ASB transaction assertion - are notes payable kept by someone who cannot sign notes or checks?

occurrence

ASB transaction assertion - are paid notes canceled, stamped PAID, and filed?

occurrence

ASB transaction assertion - labor usage reports are compared to job time tickets

occurrence

Transaction assertion - select a sample of cost accounting analyses of payroll and vouch to time records

occurrence

The auditor's best opportunity to detect inventory errors and frauds is during a

physical inventory observation of the inventory count taken by company personnel

ASB balance assertion - review inventory footnote for the F/S

presentation and disclosure

Production cycle assertion - occurrence

production and related events that have been recorded have occurred and pertain to the entity

Production cycle assertion - cutoff

production events have ben recorded in the correct accounting period

Production cycle assertion - accuracy

production information including costs has been properly calculated and recorded

ASB balance assertions - verified the name on the account was the name of the company's account?

rights and obligations

Production balance assertions - rights and obligations

the entity holds or controls the rights to inventory

T/F: Documenting ownership of bonds can be handled by a trustee having duties and responsibilities similar to those of registrars and transfer agents

true

T/F: Forecasts of the following year can be used in connection with valuing the inventory at lower of cost or market, which influences the amount of cost of goods sold that is shown in the financial statements

true

T/F: If a necessary audit procedure has been omitted, auditors should first identify whether individuals are currently relying on the client's financial statements and auditors' reports

true

T/F: Interim testing is ordinarily done prior to the date of the financial statements

true

T/F: It is ultimately the client's responsibility for adjusting the financial statements for matters identified during the audit

true

T/F: A primary purpose of obtaining written representations is for management to acknowledge their responsibility for the fairness of the financial statements

true

T/F: All investment policies should be approved by the board of directors or its investment committee

true

T/F: Auditors are not responsible for evaluating the accuracy of management's estimates but the reasonableness of those estimates

true

T/F: Auditors' communications with the individuals charged with governance of the client can be provided either during the audit or at the conclusion of the audit.

true

PCAOB assertion - review the appropriateness of the standard costs to price inventory issues and COGS

valuation

PCAOB assertion - select a sample of shipping documents and review the accounting summary of the quantities and prices

valuation

ASB balance assertions - the auditor compared the price of the securities listed on the broker's statement with the price listed on that day in the WSJ to the price used to record the investment on the balance sheet

valuation or accuracy

T/F: The audit procedures for inventory and related cost of sales accounts frequently are typically extensive in an audit engagement

true

T/F: The chief executive officer, chief financial officer, or other executive-level client personnel should sign written representations

true

T/F: The existence of "miscellaneous" revenue or expense accounts may signal the practice of earnings management

true

T/F: The most significant reconciliation opportunities in the investment and intangible accounts are confirmation with brokers and the inspection and count of negotiable securities certificates

true

For which of the following objectives would auditors be likely to use analytical procedures in the completion stages of the audit? (3)

1. Evaluating the adequacy of evidence gathered in response to unexpected account balances. 2. Identifying unusual or unexpected account balances or relationships among account balances that were not identified during the audit. 3. Evaluating the adequacy of evidence gathered in response to unexpected relationships among account balances.

Which of the following would ordinarily be considered when using analytical procedures to verify the overall reasonableness of revenue and expense accounts? (3)

1. Expected balances using a statistical analysis or relationships among accounts. 2. Internal budgets and reports. 3. Prior-year balances.

Purchase journal provides information for (2)

1. The analysis of purchasing patterns that can exhibit characteristics of errors or frauds 2. The same selection of transactions for tests of controls

A production order usually includes a _______.

A production order usually includes a BILL OF MATERIALS.

Purpose of the review of audit documentation by a supervisor during fieldwork? (3)

A. To ensure that all appropriate steps in the audit plan is performed. B. To ensure that referencing among audit documentation is clear. C. To ensure that the explanations included in the audit documentation are understandable.

Which of the following are examples of an inventory record error or fraud?

A. Unrecorded receipts or shipments. B. Incorrect date of recording. C. Incorrect sales price.

Transaction assertion - test a sample of cash disbursement voucher documents for accurate mathematics

Accuracy

Before the impact of adjusting entries proposed by auditors are included in the client's financial statements, the adjustments must be approved by the

Client's management.

The primary source of information auditors use to obtain information about litigation, claims, and assessments is the

Client's management.

Auditors ordinarily ascertain whether payroll checks are properly endorsed during the audit of

Clock cards

What procedures would an auditor most likely perform in searching for unrecorded payables?

Compare cash payments occurring after the balance sheet date with the accounts payable trial balance

In auditing for unrecorded long-term bonds payable, an audit team most likely will

Compare interest expense with the bond payable amount for reasonableness

What course of action should auditors take if, after evaluating management's plan to mitigate the effect of factors that suggest going-concern uncertainties, they believe that substantial doubt about going-concern status does not exist?

Conclude that substantial doubt about going-concern status does not exist and not require financial statement disclosure or modification of the auditors' report.

An auditor most likely would assess control risk at the maximum if the payroll department supervisor is responsible for

Distribute payroll checks to all employees

The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense in the financial statements is to

Detect unrecorded liabilities

The inherent risk that accounts payable may be omitted or otherwise understated typically is

High

If overhead is miscalculated so that it is underabsorbed, the result if the error is not corrected will be that

Inventory and net income will be understated

Which of the following procedures would auditors most likely perform in obtaining evidence about subsequent events?

Investigate changes in long-term debt occurring after cutoff.

Related party transactions

Must be disclosed in the financial statements

Which of the following is ordinarily performed last in the audit examination?

Obtaining signed written representations.

"All purchase orders are supported by requisitions from proper persons" is a specific example of which management assertion?

Occurrence

"Recorded vouchers (accounts payable entries) in the voucher register (e.g., purchases journal) supported by completed voucher documentation" is a specific example of which management assertion?

Occurrence

Management assertion - Are all purchases made only on the basis of approved purchase requisitions?

Occurrence

Improperly capitalizing an expense item results in

Overstatement of profit in the current year and understatement in future years

Vouchers should be stamped PAID to

Prevent duplicate payment

Small Corporation uses a Wages Clearing Account for its payroll disbursements. At the end of February, a reasonably large debit balance remained in this account. The most likely reason for this is that

Some labor cost had not been properly classified in the expense accounts

Derivative instruments include

Stock options

The _______ inspects the goods received for _______ and _______and then puts them in the hands of other responsible persons.

The RECEIVING DEPARTMENT inspects the goods received for QUANTITY and QUALITY and then puts them in the hands of other responsible persons.

The _______ is a set of procedures designed to yield audit evidence of liabilities that were not recorded in the reporting period

The SEARCH FOR UNRECORDED LIABILITIES is a set of procedures designed to yield audit evidence of liabilities that were not recorded in the reporting period

An auditor is examining a nonpublic company's inventory procurement system and has decided to perform tests of controls. Under which of the following conditions should the auditor perform tests of controls?

The auditor believes that testing the controls could lead to a reduction in overall audit time and cost

A partner of the accounting firm who has not been involved in the audit performs an engagement quality review of documentation. This review usually focuses on

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

Why is it the client's decision to record adjustments to the financial statements?

The financial statements are the responsibility of the client's management.

An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain evidence concerning management's balance assertions about

Valuation

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of the ASB balance assertion of

Valuation

Can the payroll bank account be reconciled like other bank accounts?

Yes

Responsible party - identify whether cleitn's views expressed in the attorney letter are appropriate

attorney

Responsible party - respond to attorney letter

attorney

Type of communication - Is intended to be returned to auditors as a form of evidence

attorney letter

Type of communication - Provides auditors with significant evidence regarding litigation, claims, and assessments

attorney letter

T/F: Based on the production orders, management develops a plan for the amount and timing of production

true

T/F: Sales of capital stock and debt financing transactions usually are authorized by the board of directors

true

Engagement quality review

Audit documentation and financial statements, including footnotes, are reviewed by a partner who did not participate on the audit

Auditors have a responsibility to evaluate whether financial statements properly reflect all known events through the

Audit report release date.

Audit plan for the observation of an inventory count

1. obtain client's inventory counting instructions and review for completeness 2. tour facility before count looking for out of the way items, obsolete items, and movement of inventory 3. observe client personnel counting inventory for compliance with instructions 4. test count a selection of items throughout the facility and record a sample of your test counters. note description, stage of completion, counting unit, and condition 5. inspect tags used and unused and record tag numbers used 6. select a sample of sued tags and trace each to the items on the floor 7. obtain the number of the last five receiving reports and the last give shipping documents. record the numbers of the next unused items in sequence 8. tour facilities to ensure all items have been counted

A communication that provides the client with recommendations for improving the effectiveness and efficiency of its operations is known as a(n) ______.

A communication that provides the client with recommendations for improving the effectiveness and efficiency of its operations is known as a(n) MANAGEMENT LETTER.

Cash disbursements are authorized by

A complete voucher package.

A ____ handles the exchange of shares, canceling the shares surrendered by sellers and issuing new certificates to buyers.

A TRANSFER AGENT handles the exchange of shares, canceling the shares surrendered by sellers and issuing new certificates to buyers.

Ambrose is auditing the financial statements of Mays (dated December 31, 2012). The date of the auditors' report is February 17, 2013 and the audit report release date is February 20, 2013. For which of the following matters would Ambrose have the least responsibility:

A major loss due to a catastrophe that occurred and was known by Ambrose on March 1, 2013.

A material error or fraud in inventory typically has a _______ on financial statements

A material error or fraud in inventory typically has a PERVASIVE EFFECT on financial statements

Management assertion - Are vendors' monthly statements reconciled with individual AP accounts?

Accuracy

Management assertion - Is the AP customer ledger balanced periodically with the GL control account?

Accuracy

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about

Accuracy and valuation

Assume that T. Rory is auditing the financial statements of Augusta, Inc. Rory completes fieldwork on February 25 and issues the report (along with Augusta's financial statements) on March 1. On March 3, a hurricane destroys a warehouse that contains a significant amount of uninsured inventory. Which of the following best describes Rory's responsibility with respect to the effects of this hurricane on Augusta's financial statements?

Because the hurricane occurred after the release of the financial statements and Rory's report, he has no responsibility to perform additional procedures or reissue his report.

Interim testing normally occurs between what two dates?

Beginning of the year under audit and date of the financial statements.

To make a year-to-year comparison of inventory turnover most meaningful, the auditor will perform the analysis

By product

"Are interest payments and accruals monitored for due dates and financial statement dates?" is an internal control questionnaire item that is related to the ASB transaction assertion of

Cutoff

Which of the following is the most important audit consideration when examining the stockholders' equity section of a client's balance sheet?

Entries in the capital stock account can be traced to resolutions in the minutes of meetings of the board of directors

L. Martinez, CPA, was auditing a client, Marvelous Retail Company and selected a sample of inventory items from the perpetual records and vouched additions to receiving reports. This procedure was intended to satisfy which POCAOB assertion?

Existence or occurrence

T/F: Checks are signed by the AP department after assembling the invoice, purchase order and receiving report

False

Time period/written or oral - Communications with individuals charged with governance

Following the date of the auditors' report Either oral or written

Time period/written or oral - Management letter

Following the date of the auditors' report Either oral or written

Issuing/receiving/time period - Management letter

From: Auditors To: Client When: After engagement

Issuing/receiving/time period - Engagement letter

From: Auditors To: Client When: Before engagement

Inventory observation may need to be scheduled on the year-end date, making a large number of test counts if the test of controls __________.

Inventory observation may need to be scheduled on the year-end date, making a large number of test counts if the test of controls REVEALS WEAKNESSES (ASSESSED HIGH).

Which of the following substantive procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events?

Investigate changes in shareholders' equity occurring after the date of the financial statements.

Investment accounting may be on the _____ method, ______ method, or _______ method

Investment accounting may be on the COST method, EQUITY method, or CONSOLIDATION method

Orange Corporation was audited for the year ended December 31. The audit was completed on January 25; prior to the release of the report, auditors learned of a two-for-one stock split on February 1. If dual dating is used, what are the proper dates for the auditors' reports?

January 25 and February 1.

A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only 48 tables, but the receiving department at the furniture company accepted the tables. The invoice was eventually received but was for the 84 tables ordered. The furniture company paid the entire amount. Which of the following controls would have been least likely to have prevented this erroneous payment?

Personnel in the furniture company's purchasing department should compare the purchase requisition to the purchase order.

What account would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment account are not understated?

Repairs and maintenance expense to make sure that it does not include items that should have been capitalized

To test the control assertion of completeness in the area of work-in-process inventory, the auditor most likely would

Select a sample of issue slips from the raw materials stores file and trace materials-used reports to production cost reports

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is

Stamped "paid" by the check signer

The ASB balance assertion of ______ is paramount in the verification of long-term liabilities and determination that all liabilities are recorded

The ASB balance assertion of COMPLETENESS is paramount in the verification of long-term liabilities and determination that all liabilities are recorded

The auditing standards regarding subsequently discovered facts refers to knowledge obtained after

The date of the auditors' report.

When should liabilities be normally recorded?

The date the goods are received and accepted

Which of the following activities most likely would be considered a weakness in an entity's internal control over payroll?

The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department

A liability for a long-term purchase contract should generally be recognized when

The goods are received

If a company keeps investments in a bank safe deposit box, which of the following two people ideally should have access to the safe deposit box?

The president and vice president for finance.

The primary audit concern with the verification of long-term liabilities is that all ______ are recorded and that the ______ is properly paid or _____.

The primary audit concern with the verification of long-term liabilities is that all LIABILITIES are recorded and that the INTEREST is properly paid or ACCRUED.

The responsibility for financing and investment transactions is basically in the hands of ________.

The responsibility for financing and investment transactions is basically in the hands of SENIOR MANAGEMENT OFFICIALS.

Responsible party - request attorney letter

client

Auditors conclude that the omission of a substantive procedure considered necessary at the time of the examination may impair their present ability to support the previously expressed opinion. Auditors need not try to perform the omitted procedure if

The results of other procedures that were applied at the time compensated adequately for the omitted procedure by providing sufficient appropriate evidence.

The review of audit documentation by a partner or equivalent within the firm who has not been involved with the audit is referred to as a(n) ______ review.

The review of audit documentation by a partner or equivalent within the firm who has not been involved with the audit is referred to as a(n) ENGAGEMENT QUALITY review.

T/F: The search for unrecorded liabilities should normally be performed up to the last day of fieldwork in the period following the audit client's balance sheet date

True

ABC Company has 100 shares of IBM stock that is held as an investment. The stock was purchased three years ago and has been in the client's safe deposit box along with other investment securities. During an inspection of securities held by the client, the auditor noted the 100 shares of IBM stock had a different CUSIP number than the number listed when purchased and the number verified during the previous audit. Which of the following would be the auditor's main concern about this discovery?

There was unauthorized buying and selling of investment securities

Why should auditors be particularly concerned with "miscellaneous" "other," and "clearing" accounts classified as revenues or expenses?

These accounts may represent attempts of earnings management.

Responsible party - respond directly to auditors' initial inquires regarding litigation, claims, and assessments

client

Tracing production cost accumulation forward into the production cost reports in the cost accounting department is a test for _____________.

Tracing production cost accumulation forward into the production cost reports in the cost accounting department is a test for COMPLETENESS.

Long and Short, CPAs, were auditing Island Corporation for the year ended December 31, 2012. On January 11, 2013, a major customer of Island Corporation declared bankruptcy as the result of an uninsured loss due to a major fire in its warehouse on January 8, 2013. As a result, a material accounts receivable from the customer was determined to be uncollectible. Long and Short, CPAs, would expect the client to

Treat the loss as a subsequent event and provide a footnote about the loss in the 2012 financial statements.

When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the

Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records

An agent of a bond issuer who handles the administrative aspects of a loan and ensures that the borrower complies with the terms of the bond indenture is called a

Trustee

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 (PCAOB) assertion of

Valuation or allocation

Vendor invoices should be compared to __________ and ________ to determine that the vendor is charging the approved price and for quantity received

Vendor invoices should be compared to PURCHASE ORDERS and RECEIVING REPORTS to determine that the vendor is charging the approved price and for quantity received

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be

Vendors with whom the entity has previously done business.

When circumstances call for extended procedures, information on outstanding stock may be _________.

When circumstances call for extended procedures, information on outstanding stock may be CONFIRMED DIRECTLY WITH STOCKHOLDERS.

ASB balance assertion - test counted inventory and traced the count to the perpetual inventory record

completeness

ASB balance assertions - vouched items listed on the statement to the investment account

completeness

ASB transaction assertion - all documents are renumbered and the numerical sequence is reviewed

completeness

ASB transaction assertion - is all borrowing authorization by the directors checked to determine whether all notes payable are recorded?

completeness

T/F: If control risk is assessed very low, cost accumulations will require additional substantive procedures to lower the risk of failing to detect material misstatements in inventory

false

T/F: Owners' equity transactions usually are not well documented

false

T/F: Subsequent events may provide additional information about a condition that existed at the date of the financial statements

true

T/F: When fixed assets are acquired during the year under audit, auditors should inquire about the source of funds for financing the new asset

true

T/F: When inventory quantities are determined solely by means of a physical count, it is necessary for the auditor to be present at the time of the count

true

The _________ is the primary original record for payroll accounting.

The PAYROLL REGISTER is the primary original record for payroll accounting.

In an audit of contingent liabilities, which of the following procedures would are most effective? (7)

Obtain from management a description and evaluation Examine documents in the client's possession Obtain assurance that management has disclosed all material unasserted claims Read meeting minutes Read contracts, loan agreements, leases, and correspondence Obtain information concerning guarantees from bank confirmations Review legal expense account, cash disbursements records, and invoices related to legal services

Which of the following statements is most likely to be included in an attorney letter?

"Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information."

What would you use as a sample design for accounts payable confirmations?

1. AP that are more likely understated 2. Small and 0 balances should be included 3. Vendors with high activity during the year

Acquisition and Expenditure Cycle - Recording the asset or expense and related liability

1. AP usually are recorded when the purchaser receives the goods or services ordered 2. The AP department attaches a voucher to the purchase order, vendor's invoice and receiving report (combined documents = voucher package)

Which of the following are relevant aspects of internal controls over estimates?

1. Adequate review by appropriate levels of authority. 2. Comparison of prior estimates with subsequent results.

Supervisor activities (4)

1. Assign employees to their jobs 2. Approve overtime 3. Approve all employee activity data 4. Compare production plans and budget reports to actual employee costs for discrepancies

Cycle Inventory Counting

1. Auditors are present for only some of the physical inventory counts 2. Only under unusual circumstances and as an extended procedure are auditors present every month to observe all counts 3. Auditors must be present during some counting operations to evaluate the counting plans and their execution

Personnel/HR activities (4)

1. Authority to add new employees 2. Delete terminated employees 3. Obtain authorizations for deductions 4. Transmit authority for pay rate changes to the payroll department

Auditors not present for client's beginning inventory count

1. Beginning inventory amount affects COGS, so auditors must disclaim an opinion on the I/S and may have substantial concerns with SE, CF statement and additional items affected by net income 2. The auditor can employ analytical procedures using such interrelationships as sales activity, physical volume, price variation, standard costs, and gross profit margins for the decision about beginning inventory responsibleness

Acquisition and Expenditure Cycle - Information processing controls (6)

1. Compare purchase order number on bill of lading with company purchase order 2. Compare quantities against receiving report and purchase order 3. Compare prices against quoted price or catalog listing 4. Recomputed vendor's invoices 5. Properly prepare voucher

Acquisition and Expenditure Cycle - Performance reviews (2)

1. Compare purchases data to data from previous years or expected purchasing data 2. Review bids to ensure that documentation exists regarding the selection of the vendor

Acquisition and Expenditure Cycle - Purchase the goods and services

1. Department requesting the purchase of items prepares a purchase requisition 2. Purchasing department seeks the best prices and quality and issues a purchase order to select a vendor from an approved vendor list Inventory is often ordered automatically from approved vendors through electronic data interchange (EDI) Bidding may be required on high dollar purchases to ensure that the company gets the best price, delivery, and payment terms

Client control activities performed in the vouchers payable (accounts payable) department

1. Determining the mathematical accuracy of the vendors' invoices 2. Writing checks for the treasurer's signature to take advantage of purchase discounts 3. Checking the prices on the vendor's invoice

Computer controls that might be found in an advanced on-line acquisition and expenditure system would include

1. Each terminal performs only designated functions. 2. An identification number and password are required to enter the nonautomatic purchase orders. 3. The check signature is printed using a signature plate that is installed on the computer printer only when checks are printed.

Management assertions for AP

1. Existence - select a same of AP and send confirmations to vendors - select a sample of recorded AP and vouch them to vendor statements received after BS date 2. Completeness - select a small sample of small and zero balances and send confirmations to vendors - select a sample of (or scan) cash disbursements recorded after year-end and determine whether they should have been recorded as AP at year end - list unmatched vendor invoices and determine when the goods received. review whether invoices should have been recorded at year end - scan open purchase order file for old orders that might have been received and trace to purchases journal 3. Valuation or allocation - Interview the AP manager about disputed AP - audit the confirmations returned for evidence of disputed balances - obtain written client representations on the payables total

Which of the following statements are true with respect to the auditors' evaluation of going-concern uncertainties?

1. If management's plans to mitigate going-concern uncertainties reduces the risk to a low level, auditors are not required to revise their opinion on the entity's financial statements. 2. Auditors are required to document the conditions or events that suggested going-concern uncertainties. 3. Auditors are required to evaluate the ability of an entity to continue in existence for up to one year beyond the date of the financial statements being audited.

Auditors' search for unrecorded liabilities (8)

1. Inquire of client about procedures for identifying and recording liabilities 2. Scan open purchase order file 3. Examine unmatched vendor invoices and determine when goods were received with a focus on the unmatched receiving reports and receiving reports prepared around year-end 4. Examine unmatched receiving reports and determine whether entries are recorded in proper accounting period 5. Vouch a sample of cash disbursements from the accounting period following the B/S date to supporting documents to determine whether the related liabilities were recorded in the proper period 6. Confirm AP with vendors, especially those most likely to be understated (regular suppliers showing small or zero balances in the year-end accounts payable ledger) 7. Perform analytical procedures - AP volume and period-end balances should increase when the company experiences increases in physical production volume or engages in inventory stockpiling 8. Verify cut-offs for purchases - purchase cutoff must be tested both at year-end and in conjunction with the observation of physical inventory count. Auditors check to ensure that the goods received on the issued reports are included in inventory and payables to ensure that no goods are recorded to unissued receiving reports

When a company keeps its own stock records, which of the following procedures are required? (3)

1. Inspect the stock record stubs for certificate numbers and number of shares. 2. Inspect the unissued certificates. 3. Obtain written representation about the number of shares issued and outstanding.

The typical assertion relating to investments and related accounts in a manufacturing company would include assertions that (3)

1. Investment securities are on hand or held in safekeeping by a trustee. 2. Investment income has been received and recorded. 3. Investments are adequately classified and described in the balance sheet, including disclosures.

Which of the following are subjects that appears in all written representations without regard to materiality? (3)

1. Management's responsibility for the fair presentation of the financial statements. 2. Availability of all financial records and related data. 3. Information concerning management fraud.

Which of the following would be places in which owners' equity transactions would be documented? (3)

1. Minutes of the meetings of the board of directors. 2. Proxy statements. 3. Securities offering registration statements.

Steps included in a program for a physical inventory observation

1. Obtain the client's inventory counting instructions and review them for completeness. 2. Inspect the tags used and unused and record the tag numbers used. 3. Obtain the numbers of the last five receiving reports and last five shipping documents.

An audit plan for accounts payable would include the following procedures?

1. Obtaining a trial balance of recorded accounts payable 2. Sending confirmation to accounts with zero balances 3. Obtaining written client representations about related-party payables and pledges of assets as collateral for liabilities

Internal control procedures for control checking

1. Periodic comparison of the payroll register to the personnel department files to check hiring authorizations and any terminated employees who have not been deleted 2. Periodic rechecking of wage rate and deduction authorizations 3. Reconcilliation of time and production paid to cost accounting calculations 4. Quarterly reconciliation of YTD earnings records with tax returns 5. Payroll bank account reconciliation

The five functional responsibilities of a payroll cycle are

1. Personnel 2. Supervision 3. Timekeeping 4. Record keeping 5. Payroll distribution

Acquisition and Expenditure Cycle - Physical controls (3)

1. Prepare a receiving report upon initial receipt of inventory 2. Count and verify inventory quantities upon delivery to the inventory warehouse 3. Restrict access to inventories by keeping them in a secured location

Payroll activities

1. Prepare individual paychecks, pay envelopes or electronic transfers supplied by personnel & timekeeping/supervisors 2. Persons in charge of hiring, supervision, and timekeeping functions should not also prepare payroll

Activities within production cycle

1. Production activity starts with a sales forecast 2. Based on the forecast, the production planner can determine the type and quantity of products that need to be produced 3. Production planner schedules products in a production plan 4. Once production plan is finalized, it is shared with managers in sales/marketing department, production department and HR 5. Production order is issued as time for production nears 6. When production is completed, production orders and the related records of materials and labor used are sent to the cost accounting department

To execute job production, a foreperson would typically need

1. Production orders. 2. Bills of materials. 3. Manpower needs.

Activities in the Acquisition and Expenditure Cycle (4)

1. Purchase goods and services 2. Receive the goods or services 3. Record the asset or expense and related liability 4. Pay the invoice through the cash disbursement process

Open purchase orders

1. Purchase orders are open from the time they are issued until all goods and services have been received 2. Auditors can find evidence of losses on purchase commitments in this file if market prices have fallen below purchase price shown in purchase orders

Specific balance assertions typical of accounts payable would include

1. Recorded liabilities are obligations of the entity. 2. Estimated liabilities are properly valued 3. Payables are recorded in the proper period

The typical functions of the personnel and payroll cycle include

1. Report of attendance and work performed. 2. Allocation to cost of goods sold. 3. Payroll accounting.

GAAP ways to record inventory (4)

1. Specific item 2. FIFO 3. LIFO 4. Weighted average costing

Which of the following functional responsibilities typically relate to salaried employees?

1. Supervision. 2. Personnel or labor relations. 3. Payroll distribution.

Acquisition and Expenditure Cycle - Receiving the goods or services

1. When the goods arrive at the company, the purchase order number on the bill of lading should be matched with the company purchase order 2. Goods are inspected by the receiving department for quantity and quality 3. A receiving report is completed to indicate the quantity and description of the item 4. The receiving department should receive a "blind" purchase order that has all purchase information except for the quantity, which is left blank for the receiving department to fill in after an independent inspection and count

Bill of materials

A specification of the type and quantity of component materials authorized for production

Two directions of inventory counts

1.completeness - basic transaction files to perpetual inventory records 2. existence or occurrence - perpetual inventory records to the detail source documents

A __________ is a cover sheet containing all supporting documentation for an acquisition

A VOUCHER is a cover sheet containing all supporting documentation for an acquisition

A ______ approved by the board of directors constitutes the authorization for capital asset acquisitions and investments

A CAPITAL BUDGET approved by the board of directors constitutes the authorization for capital asset acquisitions and investments

A ______ is a control feature relied upon when a standard internal control procedure is not in place

A COMPENSATING CONTROL is a control feature relied upon when a standard internal control procedure is not in place

A personnel file should establish the reality of a person's ______ and ________.

A personnel file should establish the reality of a person's EXISTENCE and EMPLOYEMTN.

A sample from the perpetual inventory records meets the ________ requirement to determine whether all recorded transactions are supported by reports and documents.

A sample from the perpetual inventory records meets the OCCURRENCE requirement to determine whether all recorded transactions are supported by reports and documents.

A sample from the source documents meets the _________ requirement to determine whether transactions were actually recorded in the inventory records

A sample from the source documents meets the COMPLETENESS requirement to determine whether transactions were actually recorded in the inventory records

If the date of an entity's financial statements is December 31, the date of the auditor's report is February 20, and the audit report release date is February 22, which of the following is considered a subsequent event?

A significant acquisition that was announced on February 1 and will be finalized on October 1.

A situation in which substantial doubt exists about the client's ability to continue in existence is known as _____.

A situation in which substantial doubt exists about the client's ability to continue in existence is known as GOING CONCERN.

A(n) ________ is a proposed adjustment auditors decide not to insist that the client make because it does not have a material effect on the client's financial statements.

A(n) UNCORRECTED MISSTATEMENT is a proposed adjustment auditors decide not to insist that the client make because it does not have a material effect on the client's financial statements.

Typical features of management's control over the production of estimates (3)

A. Accumulation of relevant, sufficient, and reliable data. B. Preparation of estimates by qualified personnel. C. Consideration by management of whether particular accounting estimates are consistent with the company's operational plans.

Which cycles are directly linked to the production cycle?

A. Acquisition and expenditure cycle. B. Payroll cycle. C. Revenue and collection cycle. *Finance and investment cycle is not

Which of the following are estimates required in the finance and investment cycle? (2)

A. Actuarial assumptions for pension accruals. B. Residual values for leases.

Substantive tests of account balances in the payroll cycle are likely to include the following procedures (3)

A. Analytical review procedures. B. Recalculation of accruals. C. Comparison of accruals to subsequent payments.

An internal control questionnaire for payroll processing occurrence assertion would include the following questions?

A. Are names of terminated employees reported in writing to the payroll department? B. Is the payroll compared to personnel files periodically? C. Are checks distributed by the employee's immediate supervisor?

The internal control questionnaire for receipt of purchases completeness objective would include which of the following questions?

A. Are the purchase order forms prenumbered and the numerical sequence checked for missing documents? B. Are receiving report forms prenumbered and the numerical sequence checked for missing documents? C. Is the accounts payable department notified of goods returned to vendors?

The typical assertions related to investments and related accounts would include the PCAOB assertions that (3)

A. Capitalized intangible costs relate to intangibles acquired in exchange transactions. B. Amortization is properly calculated. C. Research and development costs are properly classified.

Which of the following would overstate current-period net income? (2)

A. Capitalizing an expenditure that should be expensed. B. Failing to record a liability for an expenditure. **Failing to record a check paying an item in vouchers payable would NOT

Your client counts inventory three months before the end of the fiscal year. Internal controls over inventory are excellent. Which procedures are necessary for the inventory roll-forward?

A. Check that shipping documents for the last three months agree with perpetual records. B. Tracing receiving reports for the last three months to perpetual records. C. Compare gross margin percentages for the last three months. **Do not have to request the client to recount inventory at the end of the year

Which of the following conditions or set of circumstances would ordinarily raise questions about the entity's ability to continue as a going concern: (3)

A. Default on a loan due in the previous year. B. Legal proceedings that may have a significant negative impact on the entity. C. Negative cash flow from operations for each of the last three years.

When auditing the market value of an investment, an auditor would be likely to (3)

A. Examine quoted market prices. B. Evaluate management's procedure for determining market prices. C. Confirm market prices with a broker.

When a job is completed, the foreperson typically prepares a completion report, a copy of which is sent to or kept in the following departments

A. Finished goods stores accompanying the finished goods. B. Cost accounting to transfer the job from work-in-process to finished goods inventory. C. Production department, which retains a copy for its own file.

Which of the following would ordinarily be performed in the auditors' examination of litigation, claims, and assessments? (3)

A. Inquire of client management with respect to litigation, claims, and assessment. B. Examine documentary evidence maintained by the client with respect to litigation, claims, and assessments. C. Read minutes of meetings of stockholders, directors, and appropriate committees.

When evaluating inventory controls, an auditor would be most likely to (3)

A. Inspect documents. B. Make inquiries. C. Observe procedures. **Least likely to consider policy and procedure manuals

Documentation of a count of equity securities should include all of the following (3)

A. Interest rate. B. Serial numbers. C. Number of shares.

The review phase of the transaction flow in the acquisition and expenditure cycle includes

A. Interviews. B. Observations. C. Collecting sample documents.

The functions typically related to inventory flow of transactions and control would include

A. Inventory record keeping. B. Physical count of inventory. C. Reconciliation of physical count to perpetual inventory records.

Which of the following are ordinarily associated with the time period following the audit report release date? (3)

A. Management letters. B. Omitted audit procedures. C. Subsequently discovered facts.

Which of the following procedures are used in auditors' examination of litigation, claims, and assessments? (3)

A. Obtaining a description and evaluation of litigation, claims, and assessments from management. B. Examining documentary evidence regarding litigation, claims, and assessments. C. Reading minutes of meetings of stockholders, directors, and appropriate committees.

The typical functions of the production and conversion cycle include

A. Production planning and control. B. Inventory planning and control. C. Reduction of inventory records for goods shipped.

The typical business activity of the finance and investment cycle includes

A. Proposals for cash forecasts, capital budgets, and business expansion. B. Analyses of excess cash funds. C. Sale of stocks, bonds, or notes.

Which of the following are off-balance-sheet items? (3)

A. Purchase commitment. B. Loan commitment. C. Synthetic lease.

Which of the following audit procedures would likely be performed for audits of shareholders' equity? (3)

A. Read board of directors' minutes for authorization of equity transactions. B. Confirm outstanding common and preferred stock with stock registrar. C. Obtain management representation about number of shares issued and outstanding.

Which of the following audit procedures would likely be performed for audits of investments? (3)

A. Read board of directors' minutes for authorization of investment strategies. B. Confirm investments with broker or trustee. C. Compare valuation to published market prices.

Which of the following are substantive audit procedures for estimates of management? (3)

A. Recalculating the mathematical estimate. B. Developing an independent estimate based on alternative assumptions. C. Comparing the estimates of management to subsequently discovered facts before the end of fieldwork.

Management letters are a means of (3)

A. Reporting recommendations to the client. B. Assisting the client in improving its operations. C. Developing rapport with the client.

The information for inventory record keeping typically comes from all of the following sources

A. Shipping department when goods have been shipped. B. Receiving department when customers return goods. C. Inventory stores when purchased goods are received.

Specific assertions typical of inventory and cost of sales accounts would include that inventory

A. Shown in the accounts is on hand, in outside warehouses, or on consignment. B. On hand is owned by the company. C. Is properly classified in the balance sheet.

Which of the following statements is true with respect to written representations? (3)

A. The failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion. B. They should address management's responsibility for designing internal control to prevent and detect fraud. C. They are dated the same date as the auditors' reports.

Which of the following are typical assertions relating to owners' equity? (3)

A. The number of shares shown as issued is in fact issued. B. The accounting is proper for options, warrants, and other stock issue plans, and related disclosure is adequate. C. All owners' equity transactions have been authorized by the board of directors. **Not - The valuation of shares issued for noncash consideration is reflected at book value

Appropriate audit inquiries regarding estimates include all of the following (3)

A. Who prepares the estimates? B. What data are used? C. When are they prepared?

_______ are used by auditors to evaluate the relationship among financial and nonfinancial data.

ANALYTICAL PROCEDURES are used by auditors to evaluate the relationship among financial and nonfinancial data.

A client's purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes auditors' primary concern with respect to liabilities resulting from the purchasing system?

Accounts payable are not materially understated

When confirming accounts payable, emphasis should be put on what kind of accounts?

Accounts with small or zero balances

An auditor reviews job cost sheets to test which transaction assertion?

Accuracy

From the auditors' point of view, inventory counts are more acceptable prior to the year end when

Accurate perpetual inventory records are maintained

The auditors should insist that a representative of the client be present during the inspection and count of securities to

Acknowledge the receipt of securities returned

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that

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

When auditing inventories, an auditor would least likely verify that

All inventory owned by the client is on hand at the time of the count

Which of the following management assertions for long-term liabilities is related to the ASB balance assertion of completeness?

All material long-term liabilities are recorded

Assertions for purchases and AP - Completeness

All purchases and related events that should have been recorded have been recorded

Acquisition and Expenditure Cycle - Completeness

All purchases and related events that should have been recored have been recorded

Acquisition and Expenditure Cycle - Accuracy

Amounts and other data related to purchase transactions and events have been recorded properly

Assertions for purchases and AP - Accuracy

Amounts and other data related to purchase transactions and events have been recorded properly

An ______ is an approximation of a financial statement element, item, or account

An ACCOUNTING ESTIMATE is an approximation of a financial statement element, item, or account

If it would be appropriate to confirm capital stock, the auditor would obtain the confirmation from

An independent registrar

internal control communication definition

An internal control communication is normally made by auditors to the client or client's audit committee (those charged with governance). It involves the communication of deficiencies in the client's internal control. This communication is required by generally accepted auditing standards and should be made in writing.

An inventory trial balance can be used to scan for __________ and as a population for sample selection for the _________.

An inventory trial balance can be used to scan for UNUSUAL CONDITIONS and as a population for sample selection for the PHYSICAL INVENTORY OBSERVATION.

Failure to record a liability generally results in

An overstatement of profit

An auditor most likely would perform substantive procedures on payroll transactions and balances when

Analytical procedures indicate unusual fluctuations in recurring payroll entries

Which of the following questions would auditors most likely include on an internal control questionnaire for notes payable?

Are direct borrowings on notes payable authorized by the board of directors?

In connection with the audit of an issue of long-term bonds payable, the audit team should

Ascertain that the client has obtained the opinion of counsel on the legality of the issue

Assessment of ________ of ________ is important because it governs the nature, timing, and extent of substantive procedures that will be applied in the audit of account balances in the acquisition cycle

Assessment of RISK of MATERIAL MISSTATEMENT is important because it governs the nature, timing, and extent of substantive procedures that will be applied in the audit of account balances in the acquisition cycle

The primary objective of analytical procedures used in the final review stage of an audit is to

Assist auditors in evaluating the overall financial statement presentation.

Which of the following forms of communication serves as a critical part of auditors' examination of litigation, claims, and assessments?

Attorney letter

Interim audit work

Audit procedures performed several weeks or months before the date of the financial statements

Auditors must complete various phases of an audit after the date of the financial statements. The auditors' responsibility for matters affecting the client extends from the date of the financial statements to the

Audit report release date.

An engagement quality review by a second partner of the audit documentation and financial statements is performed to ensure that the:

Audit work meets the quality standards of the firm.

Auditors ________ the inventory taking and make _____, but they seldom _______ the entire inventory

Auditors OBSERVE the inventory taking and make TEST COUNTS, but they seldom COUNT the entire inventory

Auditors are not required to evaluate the accuracy of management's estimates but are required to evaluate the _____ of those estimates as well as the process used in developing those estimates.

Auditors are not required to evaluate the accuracy of management's estimates but are required to evaluate the REASONABLENESS of those estimates as well as the process used in developing those estimates.

Which of the following best describes auditors' responsibilities with respect to evaluating the going-concern status of the entity?

Auditors are required to consider evidence obtained during the audit that may provide information with respect to going-concern status and modify their report on the financial statements if substantial doubts exist.

Auditors can compare the ________ file to the _________ to determine whether the company has material unrecorded liabilities on the financial statement date

Auditors can compare the UNMATCHED RECEIVING REPORTS file to the PAYABLES LISTING to determine whether the company has material unrecorded liabilities on the financial statement date

Unmatched vendor invoices

Auditors can inspect the unmatched invoice file and compare it with the unmatched receiving report file to determine whether liabilities are recorded

Unmatched receiving reports

Auditors can inspect the unmatched receiving report file to determine whether the company has material unrecorded liabilities on the financial statement date for goods that were received but not matched to invoices

Auditors should communicate matters such as the quality of the client's accounting principles to _______.

Auditors should communicate matters such as the quality of the client's accounting principles to INDIVIDUALS CHARGED WITH GOVERNANCE.

Professional inventory teams

Auditors should review inventory team qualifications, training requirements, and standard policies and procedures

Fixed asset reports

Auditors should trace large purchases to the fixed asset reports and ensure that the details of fixed assets in control accounts are consistent with purchase orders

Audit evidence - inventory reports

Auditors use inventory reports to: 1) Scan for unusual conditions (negative item balances, overstocking, and valuation problems) 2) As a population for sample selection for physical inventory observation

An audit plan for the examination of the retained earnings account should include a step that requires verification of the

Authorization for both cash and stock dividends

Production reports

Authorization for the finished goods inventory custodian to place the units in the finished goods inventory & authorizes the inventory record keepers to update the finished goods inventory

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the

Authorization of transactions from the custody of related assets

Materials requisition & materials transfer ticket

Authorizes inventory to release raw materials and supplies to production These documents are the inventory record keepers' authorizations to update raw materials inventory files to record the reductions of the raw materials inventory

Which of the following personnel department procedures reduces the risk of payroll fraud and represents an appropriate responsibility for the department?

Authorizing the addition or deletion of employees from the payroll.

Which of the following forms of communication ordinarily takes place following completion of the audit examination? (3)

B. Communications with individuals charged with governance. C. Internal control deficiency communications. D. Management letter.

Attorney letters

Based on the facts, known to us, after a full investigation, it is our opinion that no liability will be established against this entity

When independent stock transfer agents are not employed and the corporation issues its own stock and maintains stock records, canceled stock certificates should

Be defaced to prevent reissuance and attached to their corresponding stubs

K. Navarre, CPA, has just issued her report on Big Blue's financial statements. Following the audit report release date, she learned of an event that occurred after the date of the auditors' report. What is Navarre's most appropriate response?

Because the event occurred after the date of the auditors' report, Navarre has no responsibility for the event.

Which of the following procedures are likely to be performed before the balance-sheet date?

Observation of inventory Review of internal control over cash disbursements Confirmation of receivables

_______ is responsible for making estimates and should have a ________ and _______ designed to reduce the likelihood of material misstatements in them

CLIENT'S MANAGEMENT is responsible for making estimates and should have a PROCESS and CONTROLS designed to reduce the likelihood of material misstatements in them

A related party is a person or entity that

Can exert significant influence over or be influenced by the company

An entity's internal control structure requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all

Canceled checks

Capital stock may be subject to _____ when independent registrars and transfer agents are employed

Capital stock may be subject to CONFIRMATION when independent registrars and transfer agents are employed

An audit team's purpose in reviewing the documentation concerning the renewal of a note payable shortly after the balance-sheet date most likely is to obtain evidence concerning management's assertions about

Classification

Transaction assertion - Trace payroll information to management reports and to general ledger account postings

Classification

Transaction assertion - trace debits arising from AP transactions for proper acct

Classification

In auditing long-term bonds payable, an auditor most likely would

Compare interest expense with the bond payable amount for reasonableness

What could detect the understatement of a purchase discount?

Compare purchase disbursement records and checks with invoice terms.

Which of the following substantive procedures should auditors ordinarily perform regarding subsequent events?

Compare the latest available interim financial statements with the financial statements being audited.

Jones was engaged to examine the financial statements of Gamma Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?

Comparing recorded dividends with a standard financial reporting service's record of dividends

ABC Company has issued a bond that pays 5% interest semiannually to bond holders on record June 30 and December 30. Payments are made on July 15 and January 15. ABC Company has a December 31 fiscal year-end. The auditor vouches the January 15, 2010 payment to the liabilities recorded on the December 31, 2009 balance sheet. Which of the following ASB balance assertions is the auditor testing?

Completeness

An auditor selected a product maintained in the finished goods warehouse. The auditor counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor most likely testing?

Completeness

Management assertion - Is the AP department notified of goods returned to vendors?

Completeness

Management assertion for AP and other liabilities

Completeness

PCAOB assertion - trace a sample of sales invoices to perpetual inventory record entry of issue

Completeness

Selecting a sample of paid notes and tracing interest to the general ledger account is a test of the PCAOB assertion for

Completeness

Tracing a sample of inventory receiving reports to the perpetual inventory record entry achieves the specific ASB balance assertion of

Completeness

Transaction assertion - Scan a sample of vouchers for missing numbers

Completeness

Transaction assertion - Select a sample of receiving reports and trace to inventory record posting of additions

Completeness

Transaction assertion - select a sample of clock time cards and trace to payroll register

Completeness

Which ASB balance assertion is of the most importance to auditors for long-term liabilities?

Completeness

Tracing

Completeness - were all vendor invoices recorded? 1. Trace samples of vendor invoices to purchase journal Were all receipts invoiced by the vendors? 1. Trace sample of receiving reports to vendor invoices

An audit team testing long-term investments would ordinarily use analytical procedures to ascertain the reasonableness of the

Completeness of recorded investment income

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. This procedure most likely obtained evidence concerning management's balance assertion of

Completeness.

Which of the following auditing procedures most likely would assist auditors in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

Confirming with third parties the details of arrangements to maintain financial support.

Subsequent events occur between which two dates?

Date of the financial statements and date of the auditors' report.

Mary Monitor, CPA, noted that ABC Co. received goods prior to year-end that were included in physical inventory but had not been recorded. In this case, which of the following adjustments should be made?

Debit Inventory/credit Accounts Payable

A large retail enterprise has established a policy that requires the paymaster to deliver all unclaimed payroll checks to the internal audit department at the end of each payroll distribution day. This policy was most likely adopted to

Detect any fictitious employee who may have been placed on the payroll

Two goals of the physical inspection of PPE

Determine 1) existence and 2) condition of property

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal. The purpose of this substantive audit procedure most likely was to

Determine that purchases were properly recorded

After the audit report release date, the auditors determine that an important auditing procedure was omitted. Which of the following initial courses of action is most appropriate?

Determine whether the omitted procedure is important in supporting the auditors' opinion on the entity's financial statements.

Following the audit report release date, auditors became aware of facts existing at the report date that would have affected the reports had auditors then been aware of such facts. What is the most appropriate initial course of action that auditors should take?

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

Vouching production (occurrence)

Determining that items composing WIP and finished goods inventories recorded in the GL were produced Sample from the GL and vouch to production reports (quantity and cost) recorded in inventory accounts

Which of the following is an audit procedure that auditors most likely would perform concerning litigation, claims, and assessments?

Discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and assessments.

Effective control over the cash payroll function would mandate which of the following?

Each employee should be asked to sign a receipt for wages received

Time period/written or oral - Internal control deficiencies

Either following the date of the auditors' report or as significant matters are identified Written

Which of the following parties provides a review of audit documentation for the primary purpose of ensuring that the quality of the work and reporting is consistent with the quality standards of the accounting firm?

Engagement quality partner.

Tracing production (completeness)

Ensures that all production that was started was recorded Sample is taken from the population of production orders found in the production-planning department. Procedures trace the cost accumulation forward to the production cost reports in the acctg department

Which of the following best describes the auditors' responsibility with respect to management's estimates?

Evaluating the reasonableness of management's estimates

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?

Examine a sample of cash disbursements in the period subsequent to year-end

When auditing PP&E, the auditor's approach is generally to

Examine evidence supporting additions during the year

An auditor's tests of controls over the issuance of raw materials to production would most likely include

Examining material requisitions and reperforming client controls designed to process and record issuances

An auditor selected a product recorded in the finished goods perpetual inventory subsidiary account. The auditor went to the warehouse and counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor most likely testing?

Existence

Auditors count investment securities held by the client primarily to test the ASB balance assertion of

Existence

Selecting a sample of notes payable transactions and vouching payments to canceled checks is a test of the ASB balance assertion of

Existence

Testing maintenance and repairs expenses

Expenses should be examined to determine whether any items should be capitalized

Testing miscellaneous expenses

Expenses should be listed and examined for significant unusual times

Time period - preparation of proposed adjusting journal entries

FS date and auditors' report date

Time period - written representations

FS date and date of auditors' report

Compensating controls in the finance and investment cycle

Feature involvement of two or more persons handling all important responsibilities

If auditors are appointed on January 3, 2012, the date of the financial statements is December 31, 2012, the date of the auditors' report is February 7, 2013 and the audit report release date is March 3, 2013, what is the appropriate date of the written representations?

February 7, 2013

Standard costs

Finished goods are recorded at standard costs

Which of the following accounts would most likely be audited in connection with a related balance sheet account?

Property Tax Expense.

Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?

Have separate warehouse space for the more valuable items with frequent periodic physical counts and comparison to perpetual inventory records

Purchase cutoff procedures should be designed to produce evidence of whether merchandise is included in the inventory of the client company if the company

Holds legal title to the merchandise

Communication with individuals charged with governance

Includes statements regarding auditors' judgment of the quality of the client's accounting principles

Which of the following controls would be most effective in ensuring that the proper custody of assets in the investing cycle is maintained?

Independent personnel periodically compare the recorded balances in the investment subsidiary ledger with the contents of the safety deposit box.

Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

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

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would

Inspect the property ledger and the insurance and tax records, and then tour the client's facilities

Interim testing occurs between the ________ of the year and the date of the financial statements

Interim testing occurs between the BEGINNING of the year and the date of the financial statements

What is the physical output of a production cycle?

Inventory

An auditor wishes to perform tests of controls on a client's purchasing procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the procedures by

Observation and inquiry

A. Griffin audited the financial statements of Dodger Magnificat Corporation for the year ended December 31, 2012. She completed gathering sufficient appropriate evidence on January 30 and later learned of a stock split voted by the board of directors on February 5. The financial statements were changed to reflect the split, and she now needs to dual date the report on the company's financial statements before sending it to the company. Which of the following is the proper form?

January 30, 2013, except as to Note X, which is dated February 5, 2013

Assume that Krenzel Company is subject to a class action lawsuit from its customers resulting from the failure of one of its projects. The suit was filed on November 10, 2012 and properly disclosed in Krenzel's December 31, 2012 financial statements. How would a settlement of this lawsuit on January 17, 2013 be properly reflected in Krenzel's financial statements?

Krenzel would adjust its disclosure of the lawsuit to reflect the effects of this settlement.

Auditors may conclude that depreciation charges are too small by noting

Large and frequent losses on assets retired

Which of the following subsequent events would provide information about conditions that arose following the date of the financial statements?

Loss of inventory as a result of a flood.

_________ are used by the purchasing department to place orders for materials.

MATERIALS REQUISITION are used by the purchasing department to place orders for materials.

Materials requisitions should be compared in the __________ department with the __________ on the production order

Materials requisitions should be compared in the COST ACCOUNTING department with the LIST (BILL) OF MATERIALS on the production order

The scope of an audit is not restricted when an attorney letter limits the response to

Matters to which the attorney has given substantive attention in the form of legal representation.

All corporate capital stock transactions should ultimately be traced to the

Minutes of the meetings of the board of directors

_________ transactions are obligations and commitments that are not required to be recorded.

OFF-BALANCE-SHEET FINANCING transactions are obligations and commitments that are not required to be recorded.

_____ are necessary audit procedures that were not performed prior to the audit report release date that may come to the auditors' attention as a result of a PCAOB inspection, external peer review, or firm's internal inspection program.

OMITTED PROCEDURES are necessary audit procedures that were not performed prior to the audit report release date that may come to the auditors' attention as a result of a PCAOB inspection, external peer review, or firm's internal inspection program.

Production plan

Schedule for manufacturing so that quality of products will be available at the appropriate time for the least cost

Testing payroll expense

Payroll expense is usually audited by testing conrtols or using substantive tests of transactions and performing analytical procedures

The sampling unit in a test of controls pertaining to the existence or occurrence of payroll transactions ordinarily is a(an)

Payroll register (journal) entry

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. Auditors most likely could have detected this irregularity by

Performing analytical procedures designed to disclose differences from expectations.

Periodic or cycle counts of selected inventory items are made at various times during the year rather than during a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventories at interim dates?

Perpetual inventory records are maintained

Time period/written or oral - Attorney letter response

Prior to or at the date of the auditors' report Written

Time period/written or oral - Written representations

Prior to or at the date of the auditors' report Written

Time period/written or oral - Acceptance letter (signed copy of engagement letter)

Prior to the engagement Written

Time period/written or oral - Engagement letter

Prior to the engagement Written

A company's cost accountant periodically reconciles job cost sheets to the work-in-process inventory accounts. This reconciliation is most likely performed to provide assurance that

Production accounting and posting is complete

To determine the client's planned amount and timing of production of a product, the auditor will review the

Production plan

Production planning interacts with the preparation of _______.

Production planning interacts with the preparation of PRODUCTION ORDERS.

Production reports of finished units should be signed by the ______ and finished goods inventory custodian and forwarded to _________.

Production reports of finished units should be signed by the PRODUCTION SUPERVISOR and finished goods inventory custodian and forwarded to COST ACCOUNTING.

The focus of controls in the finance and investment cycle is on

Proper authorizations and competent personnel

A client's physical count of inventories was higher than the inventory quantities shown in the perpetual records. This situation could be the result of the failure to record

Purchases

Acquisition and Expenditure Cycle - Cutoff

Purchases and related events have been recorded in the correct period

Assertions for purchases and AP - Cutoff

Purchases and related events have been recorded in the correct period

Acquisition and Expenditure Cycle - Classification

Purchases and related events have been recorded in the proper accounts

Assertions for purchases and AP - Classification

Purchases and related events have been recorded in the proper accounts

Acquisition and Expenditure Cycle - Occurrence

Purchases and related events that have been recorded have occurred and pertain to the entity

Assertions for purchases and AP - Occurrence

Purchases and related events that have been recorded have occurred and pertain to the entity

Which of the following reporting options is available if the client refuses to provide written representations to auditors?

Qualified opinion or disclaimer of opinion.

______ work extends auditors' conclusion from the date of the interim testing to the date of the financial statements.

ROLLFORWARD work extends auditors' conclusion from the date of the interim testing to the date of the financial statements.

Which of the following procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events?

Reading minutes of meetings of owners, management, or those charged with governance held after the date of the financial statements.

What evidence is appropriate to determine whether recorded purchase transactions are valid and the vendors charged the correct prices?

Receiving reports and purchase orders

Which of the following internal control activities most likely addresses the completeness assertion for inventory?

Receiving reports are prenumbered and the numbering sequence is checked periodically.

An audit team would most likely verify the interest earned on bond investments by

Recomputing the interest earned on the basis of face amount, interest rate, and period held

The focus of substantive tests in the finance and investment cycle is on

Reconciliation of detailed listings with general ledger amounts

Records of interest rates and bonds payable are maintained by the __________ and the _________.

Records of interest rates and bonds payable are maintained by the ACCOUNTING DEPT and the CFO (OR CONTROLLER).

Records of stock and bond certificates are usually maintained by the company's

Registrar

A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditors are unable to count securities at the balance-sheet date, they most likely will

Request the client to have the bank seal the safe deposit box until the auditors can count the securities at a subsequent date

A client maintains perpetual inventory records in quantities and in dollars. If the assessed control risk is high, an auditor would probably

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

Loan covenants

Require the borrower to maintain certain financial characteristics

At the review stage of an audit, the application of analytical procedures is

Required by auditing standards.

Which of the following normally occurs earliest in the audit examination?

Review of audit documentation.

What audit procedure is best for identifying unrecorded accounts payable?

Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period

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 the ASB presentation and disclosure assertion of

Rights and Obligations

In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of ASB balance assertion of existence and

Rights and obligations

_________ are matters that come to the auditors' attention following the date of the auditors' report.

SUBSEQUENTLY DISCOVERED FACTS are matters that come to the auditors' attention following the date of the auditors' report.

_________ and __________ can cause "unmatched" invoices and related "unmatched" receiving reports to be unnoticed

SYSTEM FAILURES and HUMAN CODING ERRORS can cause "unmatched" invoices and related "unmatched" receiving reports to be unnoticed

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record

Sales returns

Which of the following is the most effective method of identifying potential earnings management attempts?

Scanning accounts for unusual items.

In the audit of notes payable, an auditor testing the ASB balance assertion of accuracy and valuation most likely would

Select a sample of paid notes and recalculate interest expense for the period under audit

The auditor decided to test accounts payable by sending open-ended (blank) confirmations to selected vendors. The auditor's best approach in selecting the vendor accounts to confirm is to

Select vendor accounts based on the number of purchases from vendors during the year

Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements?

Settlement of litigation in February for $100,000 that had been estimated at $12,000 in the December 31 financial statements.

To determine whether facts support management's intent to hold securities to maturity, an auditor might

Study the entity's cash flow forecasts

Subsequent events occur between the date of the financial statements and the date of the ______.

Subsequent events occur between the date of the financial statements and the date of the AUDITORS REPORT.

If an entity had litigation pending at the date of the financial statements and auditors learn of the outcome of this litigation following the date of their report (but prior to the audit report release date), this is known as a(n):

Subsequently discovered fact.

Subsequently discovered facts may be identified either following the date of the auditors' report or the ______.

Subsequently discovered facts may be identified either following the date of the auditors' report or the AUDIT REPORT RELEASE DATE.

When the client holds a large amount of negotiable securities, auditors need to plan to guard against

Substitution of securities already counted for other securities that should be on hand but are not

_______ consist of (1) identification of data population for audit and (2) an expression of the action to be taken to produce relevant audit evidence

TESTS OF CONTROLS consist of (1) identification of data population for audit and (2) an expression of the action to be taken to produce relevant audit evidence

Small and Tall, CPAs, completed the December 31, 2012 audit of Big Company on February 10, 2013. After the audit report release date, an outstanding lawsuit against Big Company was settled for materially more than recorded in the December 31, 2012 financial statements. The amount recorded in the financial statements represented the best estimate of management and the company's attorneys at the time the audit was completed. Based on this new information, Small and Tall, CPAs should

Take no action because the event took place after the audit report release date.

The audit procedures used in an observation of the client's physical inventory taking are designed primarily to

Test and observe the client's physical count of inventory

The function of ________ refers to comparing the physical count of inventory to the perpetual inventory records

The function of PERIODIC RECONCILIATION refers to comparing the physical count of inventory to the perpetual inventory records

The _________ method of evaluating adjustments considers the aggregated effect of current and prior misstatements in the entity's balance sheet.

The IRON CURTAIN method of evaluating adjustments considers the aggregated effect of current and prior misstatements in the entity's balance sheet.

If the auditors discover that the carrying amount of a client's investments is overstated because of a loss in value that is other than a temporary decline in market value, they should insist that

The loss in value be recognized in the financial statements

When a client company does not maintain its own capital stock records, the auditors should obtain written confirmation from the transfer agent and registrar concerning

The number of shares issued and outstanding

Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time?

The official who signs the check should compare the check with the voucher and should stamp PAID on the voucher documents

ASB transaction assertion - job cost sheet entries are reviewed by a person independent of their preparation

accuracy

Transaction assertion - select a sample of payroll register entries and recalculate gross pay, deductions and net pay

accuracy

Transaction assertion - select a sample of personnel files and trace pay rate and deduction information to payroll department files

accuracy

ASB balance assertion - reviewed a sample of vendor invoices for prices paid for inventory

accuracy and valuations

ASB balance assertion - reviewed vendor invoices and purchase orders for terms of control

accuracy and valuations

Time period - roll-forward work

after audit report release date

Time period - communications with the individuals charged with governance

after audit report release date or throughout the audit

Responsible party - initiate request for attorney letter

auditor

Responsible party - perform various procedures relating to litigation, claims, and assessments

auditor

Time period - dual dating for subsequently discovered facts

auditors' report and audit report release date

Time period - subsequently discovered facts

auditors' report and audit report release date

Transaction assertion - trace cost accounting labor cost distributions to management reports and postings to GL accounts

classification

Production cycle assertion - classification

classification-related events are recorded in the proper accounts

Responsible party - party the attorney informs if an unasserted claim must be disclosed

client

Responsible party - provide initial description and evaluation of litigation, claims, and assessments

client

PCAOB assertion - trace posting of sample of sales invoices to amounts in GL

completeness

T/F: Auditors' test of controls over the production of estimates amounts to inquiries and observations

true

T/F: It is very common for auditors to perform substantive procedures on 100 percent of the details in the finance and investment accounts

true

T/F: The primary audit concern with the verification of long-term liabilities is that all liabilities are recorded and that the interest expense is properly paid or accrued

true

Indicators of potential fraud

• Photocopies of invoices • Invoices in numerical order • Round numbers • Slightly below authorization threshold • PO boxes (no other addresses) • No listed phone # • Vendor and employee addresses the same • Multiple vendors at same location