AUDIT FINAL
A CPA learns that his client has paid a vendor twice for the same shipment, once based upon the original invoice and once based upon the monthly statement. A control procedure that should have prevented this duplicate payment is: A) attachment of the receiving report to the disbursement report. B) prenumbering of disbursement vouchers. C) use of a limit or reasonableness test. D) prenumbering of receiving reports.
Attachment of the receiving report to the disbursement report
Which of the following statements is correct regarding the capital acquisition and payment cycle?
Audit procedures for notes payable and interest income are often performed simultaneously
Auditor tests of the physical controls over raw materials, work in process, and finished goods are generally limited to: A) observation and confirmation. B) observation and inquiry. C) inquiry and reconciliation. D) observation and reconciliation.
Observation and inquiry
The auditor's internal control objective to determine that "recorded acquisitions are for goods and services received" satisfies the audit objective of: A) accuracy. B) occurrence. C) authorization. D) completeness.
Occurrence
The audit objective that requires the auditor to determine that notes payable on the notes payable schedule are properly classified can be tested by performing the procedure to:
Review the notes to determine whether any are with related parties
A ____ is a document that is matched with the customer order to assure that the correct quantity and type of goods are shipped.
Sales order
Which of the following accounts is NOT part of the acquisition and payment cycle?
Sales returns and allowances
Which one of the following is of the least concern to the auditor when designing substantive tests of transactions for the sales/collections cycle?
Sales to related parties, such as officers and subsidiaries
Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sale transaction?
Selling of goods for cash
You are performing an audit of Hawk Company. In evaluating the accounts payable balance, you are concerned with the completeness assertion. Which of the following audit procedures best satisfies your concern?
Send confirmations to vendors with large, active, zero balance accounts and a representative sample of all others.
The record of the outstanding shares at any given time is maintained in the:
Shareholder's capital stock master file
When auditing interest-bearing debt, the auditor should _______ verify the related interest expense no interest payable.
Simultaneously
Petty cash is verified primarily because of the potential for defalcation and the client's expectation of an audit review even when the amount is immaterial
True
Sales returns and allowances are often ignored by auditors because they are often immaterial
True
Separation of duties in the sales/collection cycle should mandate that the credit-granting function be separate from the sale function.
True
The American Bar Association amended its attorney-client confidentiality rules to permit attorneys to breach confidentiality if a client is committing a crime or fraud.
True
The appropriate test of controls for separation of duties are ordinarily restricted to the auditor's observations of activities and discussions with personnel.
True
An auditor selects a random sampling of tag numbers and identifies the tag with that number attached to that actual inventory. The purpose of the procedure is to:
Uncover the inclusion of nonexistent items as inventory
A document that specifies the details of the acquisition transaction and amount of money owed to the vendor for an acquisition.
Vendor's invoice
An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all: A) Merchandise received. B) Vendor's invoices. C) Cancelled checks. D) Receiving reports.
Vendor's invoices
This IRS form is used to authorize the number of exemptions for withholding income taxes.
W4
Auditors are likely to prepare a proof of cash when the client has: A) material control weaknesses in cash receipts and cash disbursements. B) material control weaknesses in accounts receivable and revenue. C) material control weaknesses in accounts payable and inventory. D) material control weaknesses in payroll.
material control weaknesses in cash receipts and cash disbursements
Auditors test the quantity of materials charged to work-in-process by tracing these quantities to: A) cost ledgers. B) perpetual inventory records. C) receiving reports. D) material requisitions.
material requisitions
The most important aspect of evaluating the client's method of obtaining a reliable cutoff is to:
evaluate the client's control procedures around cutoff
The auditor's primary concern in performing audit procedures of the write-off of uncollectible accounts relates to the risk that the client writes off customer accounts that have already been collected. The primary control for preventing this fraud is:
examining the uncollectible account authorization form
The reliability of perpetual inventory master files affects the timing and ______ of the auditor's observation of inventory.
extent
An inventory acquisition is received late in the afternoon of December 31 after the physical inventory is completed. If the acquisition is included in accounts payable and purchases, but excluded from inventory, the result: A) is an understatement of net earnings. B) is an overstatement of net earnings. C) is an overstatement of working capital. D) is an overstatement of owner's equity.
is an understatement of net earnings
If a company employs a capital stock registrar and/or transfer agent, the registrar or agent, or both, should be requested to confirm directly to the auditor the number of shares of each class of stock:
issued and outstanding at the balance sheet date
In addition to confirming bank balances of your audit client, a bank confirmation would normally contain: A) the client's bank loans with due date, interest rate, and collateral requested. B) the client's credit history as regards to paying back loans. C) the client's managements bank account information. D) the client's business prospects
the client's bank loans with due date, interest rate, and collateral requested
The process of transferring money from one bank account to another and improperly recording the transaction is referred to as:
kiting
Which type of audit procedure would normally be sufficient for purposes of auditing prepaid expenses and deferred charges?
Analytical procedures
What needs to be included in a letter of inquiry sent to a client's legal counsel?
Any pending threatened litigation with which the attorney has had significant involvement AND any asserted/unasserted claims or assessments with which the attorney has had significant involvement
A document prepared to initiate shipment of the goods sold by an independent shipper is the:
Bill of lading
When the auditor observes the client counting inventory, they should be careful to do all the following except:
Calculate the unit cost of the inventory items
The record of the issuance and repurchase of capital stock for the life of the corporation is maintained in the:
Capital stock certificate record
A proof of cash is effective at identifying which of the following misstatements? A) Checks written for incorrect amounts B) Checks issued to invalid vendors C) Fraudulent checks D) Checks recorded in the books for an amount different from that on the check
Checks recorded in the books for an amount different from that on the check
Who has the responsibility for identifying accounting treatment for contingent liabilities?
Company Management
Controls which provide a means of ensuring that the physical counts are properly summarized, priced at the same amount as the unit records, correctly extended and totaled, and included in the general ledger at the proper amount are known as:
Compilation internal controls
For cash receipts, the occurrence transaction-related audit objective affects which of the following balance-related audit objective? A) Existence B) Completeness C) Rights D) Detail tie-in
Completeness
The tests of details balances procedure which requires the auditor to examine notes paid after year end to determine whether they were liabilities at the balance sheet date is an attempt to satisfy the audit objective of:
Completeness
Major balance-related audit objectives in notes payable are:
Completeness, accuracy, and presentation and disclosure
Auditors are especially concerned about the ________ and ________ balance-related audit objectives because of the potential for understatements in the account balance. A) completeness, cutoff B) completeness, accuracy C) classification, realizable value D) classification, cutoff
Completeness, cutoff
In connection with a review of the prepaid insurance account, which of the following audit procedures would you be likely to use?
Confirm premium rates with an independent insurance broker
Which of the following is most reliable for verifying the correct balance of accounts payable?
Confirmations
The date of the management representation letter received from the client should coincide with which of the following? A) Date of latest subsequent event disclosed in the notes to the financial statements B) Date of the auditor's report C) Balance sheet date D) Engagement agreement
Date of the auditor's report
Which of the following misstatements will be uncovered by a carefully prepared independent bank reconciliation?
Deposits received by the bank on behalf of the company from credit card agencies and other vendors making payments electronically, but not recorded in the client's records.
Audit procedures related to contingent liabilities are initially focused on:
Disclosure and occurrence
Which of the following expenses is NOT typically evaluated as part of the audit of the acquisition and payment cycle?
Estimated liability for warranties
Which of the following audit tests is tested in the sales and collection cycle?
Examine shipped goods records and recorded revenue and costs
Which of the following balance-related audit objectives typically is assessed as having high inherent risk for cash?
Existence
Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account?
Extraordinary repairs have lengthened the life of an asset
All of the following would be uncovered by a bank reconciliation except for:
Failure to bill a customer
Any company with a stock listed on a securities exchange may engage an independent registrar as a control to make sure stock certificates are issued properly.
False
It is ordinarily not necessary for the independent auditor to be present at the time of the count.
False
Misstatements involving the completeness objective for sales lead to overstatements of assets and income.
False
The prelisting of cash receipts should be prepared by the individual who has primary responsibility for the recording of cash receipts.
False
Auditing standards requires the auditor to evaluate whether there is substantial doubt about a client's ability to continue going concern for at least one year from:
Financial statement issuance date
What should the auditor do if the client does not allow inquiry of outside legal counsel?
Give a disclaimer audit report
Inventory is a complex area to audit for all but which of the following reasons?
Inventory valuation includes few estimates
Some companies have customers send payments directly to an address maintained by a bank. This is called a(n) _____ system.
Lockbox
You have been assigned to the accounts payable transaction cycle as part of your auditing responsibilities. You have decided to vouch a sample of entries in the accounts payable master file to supporting documents. Which assertion is this test of controls most likely to support?
Occurence
When determining the sample size for the number of items the auditor should count during the physical inventory
One of the key determinants that must be considered is internal control over physical count
To prevent fraud, management should deny cash access to anyone responsible for:
Opening mail from customers - no Entering sales transactions -yes Entering cash receipt transactions - yes
The capital acquisition and repayment cycle does NOT include:
Payment of taxes
In an effort to to satisfy the completeness objective, the auditor could perform which of the following test of details balance procedures?
Perform a four-column proof of cash
Which of the following is NOT a function within the inventory and warehousing cycle?
Process invoices for shipped goods
The tests of detail balance procedure which requires the auditor to perform tests of lower of cost or market, selling price, and obsolescence is an attempt to satisfy the objective of:
Realizable value
Which balance-related audit objective is NOT relevant to an audit of prepaid expenses? A) Rights B) Accuracy C) Detail tie-in D) Realizable value
Realizable value
Which of the following balance-related audit objectives is NOT applicable to the audit of notes payable?
Realizable value
______ is a balance-related audit objective that is not applicable to liabilities.
Realizable value
Which of the following internal control objectives is likely to be the most important in the audit of the payroll cycle?
Recorded transactions represent valid payments
When positive confirmations are used, auditing standards require alternative procedures for confirmations not returned by the customer. Which of the following would not be considered an alternative procedure? A) Send a second confirmation request. B) Examine subsequent cash receipts to determine if the receivable has been paid. C) Examine shipping documents to verify that the merchandise was shipped. D) Examine customer's purchase order and the duplicate sales invoice to determine that the merchandise was ordered.
Send a second confirmation request
Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?
The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
Which of the following audit procedures would be the most effective in testing for nonexistent employees?
Trace transactions recorded in the payroll journal to the HR department to determine employee status
Congress included provision in Sarbanes-Oxley Act directing the SEC to issue rules requiring attorneys serving public companies to report material violations by the company of federal securities laws.
True
Deduction authorization form is a form authorizing payroll deductions, including the number of exemptions for withholding income taxes, 401K, and other retirement savings plans, U.S. savings bonds, and union dues.
True
Gain contingencies need not be recorded or disclosed.
True
The most difficult type of cash embezzlement for the auditor to detect is when the cash is stolen before it can be recorded in the cash receipts journal.
True
The most important part of the observation of inventory is determining whether the physical count is being taken in accordance with the clients instruction.
True
There should generally be correspondence in the client's file establishing the uncollectibility of their account.
True
Generally, this many signatures of properly authorized officials are required for all loan agreements.
Two
An attorney is aware of a violation of a patent agreement that could result in a significant loss to the client if it were known. This is an example of a(n):
Unasserted claim
After the receipt of attorney's letter with no significant disagreement with the client assessment of contingent liabilities, the attorney resigns. Under this circumstance:
Undisclosed unasserted claims may have arisen and the auditor should examine such issue.
Standard cost records are:
Used to indicate variances between projected material, labor, and OH and actual costs
______ expense is rarely analyzed unless analytical procedures indicate high potential for material misstatement.
Utilities
You are the in-charge auditor for a company who has been an audit client for several years. Which of the following is NOT a category of tests commonly associated with the audit of manufacturing equipment?
Verification of the beginning balance in the equipment accounts
A document generally received from the vendor which indicates a reduction in the amount owed due t the company granting an allowance is:
a debit memo
While there is no professional requirement to do so on audit engagements, CPAs frequently issue a formal "management" letter to clients. The primary purpose of this letter is to provide:
a written record of discussions between auditor and client concerning the auditor's observations and suggestions for improvements.
In the accounts receivable subsidiary ledger the length of time the account has been due can be useful to the client and the auditor in preparing the:
aged accounts receivable trial balance
The standard letter of inquiry to the client's legal counsel should be prepared on: A) plain paper (no letterhead) and be unsigned. B) lawyer's stationery and signed by the lawyer. C) auditor's stationery and signed by an audit partner. D) client's stationery and signed by a company official.
client's stationary and signed by company official
When auditors verify accrued property taxes two audit objectives are especially significant. These are: A) completeness and accuracy. B) completeness and net realizable value. C) detail tie-in and completeness. D) accuracy and classification.
completeness and accuracy
Imprest bank account:
consist of one bank account for receipts and a separate one for disbursement
Most companies recognize sales revenue when:
goods are shipped
The auditor needs to be aware that most users of financial statements rely most heavily on the ________ for making decisions. A) balance sheet B) income statement C) statement of cash flows D) statement of stockholders' equity
income statement
Which of the following would generally not need to be approved by the board of directors?
payment of a dividend
When reviewing the controls and procedures in the acquisition and payment cycle:
personnel who record the acquisition should NOT have access to cash or other assets
After a purchase requisition is approved, a _____ must be initiated to purchase the good or services.
purchase order
Cost accounting controls are those related to the physical inventory and the consequent costs from the point at which:
raw materials requisitioned until the finished product is sent to storage
Prenumbered documents will only be useful for control purposes if: A) a different numerical sequence is used for each company. B) the sequence is accounted for periodically. C) employees are allowed to use documents out of numerical sequence. D) the same numerical sequence is used each accounting period.
the sequence is accounted for periodically
A document used by an organizations to establish a formal means of recording and controlling acquisitions which usually contain a package of documents:
voucher
Which of the following would have the least amount of importance regarding controls over the processing of payroll?
A check signing machine should not be used to replace a manual signature.
When there are no perpetual inventory mater files and inventory is material:
A physical inventory count should be taken by the client near year end
Transactions in the acquisitions and payment cycle include: A) Acquisitions of goods and services B) Cash disbursements C) Purchase returns and allowances and purchase discounts D) A and B E) A, B, and C
A, B, and C
Which of the following audit procedures are used to test if existing capital stock transactions are recorded? A) Review minutes of BOD, especially near balance sheet date B) Confirm with registrar or transfer agent C) Examine client-held stock record books D) A and B E) A, B, and C
A, B, and C
To assure proper segregation of duties, who should maintain the perpetual inventory master files? A) Production personnel B) Inventory storeroom personnel C) Inventory receiving personnel D) Accounting department personnel
Accounting department personnel
Which of the following is an account that is not affected by the sales and collection cycle?
Accounts Payable
The computer-generated file which records acquisitions, disbursements, and allowances for each vendor is the:
Accounts payable master file
With which of the following client personnel would it generally not be appropriate to inquire about commitments or contingent liabilities? A) controller B) president C) accounts receivable clerk D) VP of sales E) Both C and D
Accounts receivable clerk
Because of its central role in auditing of accounts receivable, which of the following would normally be one of the first items tested? A) Accounts receivable master file B) Customer file C) Aged trial balance D) Sales register
Aged trial balance
Normally is may be necessary to examine supporting documentation for each addition to property, plant, and equipment, but it would be customary to verify:
All large transactions, all unusual transactions, and a representative sample of typical additions
Auditing standards does not require the auditor to communicate all management frauds and illegal acts to the audit committee: A) only if the act is immaterial B) only if the act is material C) only if the act is highly material D) All of the above is required to be communicated with the audit committee
All of the above is required to be communicated with the audit committee
Contingent liability disclosure in the footnotes of the financial statements would normally be made when:
A reasonable estimation of the loss cannot be made, but the outcome is reasonably possible AND the outcome of the accounting event is deemed probable, but a reasonable estimation as to the amount cannot be made by the client or auditor
When there are not numerous transactions involving notes payable during the year, the normal starting point for the audit of notes payable is:
A schedule of notes payable and accrued interest obtained from the client
Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor's report would not require disclosure in the financial statements? A) Sale of a bond or capital stock issue B) Loss of plant or inventories as a result of fire or flood C) A significant decline in the market price of the corporation's stock D) A merger or acquisition
A significant decline in the market price of the corporation's stock
Important differences between the Acquisition and Payment Cycle transactions compared to other cycles is (are): A) Larger number of transactions B) Significant judgement C) Wide range of dollar amount D) A and C E) A, B, and C
A, B, and C
Which of the following is a contingent liability with which an auditor is particularly concerned? A) Income tax disputes B) Product warranties C) Notes receivable discounted D) A and B E) A, B, and C
A, B, and C
A listing of the amount owed to each vendor at a point in time.
Accounts payable trial balance
Which of the following is likely to be determined first when performing tests of details for accounts receivable?
Accounts receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger.
The primary audit objectives to focus one when auditing debt are:
Accuracy and completeness
What are the two major balance-related audit objectives in testing payroll liabilities?
Accuracy and cutoff
Which of the following is NOT a key control in the acquisition and payment cycle?
Authorization of credit
Which one of the following best describes the auditors responsibilities regarding appropriate authorizations in the sales/collections cycle? A) B, C, and D should all be concerns of the auditor B) Credit must be authorized before the sale C) Goods must be shipped after the authorization D) Prices must be authorized
B, C, and D should all be concerns of the auditor
Which of the following statements is false?
Balance sheet accounts related to payroll are genuinely more significant than related transactions
Which of the following misstatements will be uncovered by a carefully prepared independent bank reconciliation?
Bank debit memo that should have been charged to a different customer
Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts?
Bank employees
All of the following would be uncovered by a bank reconciliation except for:
Billing a customer at a lower price than called for by company policy
Responsibility for the issuance of new notes payable would normally be vested in the:
Board of directors
Which of the following is a characteristic of the capital acquisition and repayment cycle: A) There is a legal relationship between the client entity and the holder of the stock, bond, or similar ownership document B) There is a direct relationship between the interest and dividends accounts and debt and equity C) Both A and B D) Neither A not B
Both A and B
Failure to capitalize a fixed asset at the correct amount would impact which financial statements until the company disposes of the asset? A) The balance sheet only B) The income statement only C) The cash flow statement only D) Both the income statement and the balance sheet
Both the income statement and the balance sheet
Which of the following departments is most likely responsible for pay rate changes and changes in deductible amounts for employees?
Human resources
Which of the following accounts is NOT associated with the acquisition and payment cycle? A) Common stock B) PPE C) Accrued property taxes D) Income tax expense
Common stock
Which of the following is an analytical procedure to determine if there is idle equipment or equipment that was disposed of but not written off?
Compare gross manufacturing cost divided by some measure of production with previous years
Which one of the following analytical procedures would be most useful in alerting the auditor to the possibility of obsolete inventory?
Compare inventory turnover ratio with previous years
When designing audit procedures, tracing of source documents to the customer's subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion?
Completeness
If the auditor concludes that physical controls over inventory are so inadequate that the inventory will be difficult to count, the auditor should ordinarily:
Conduct expanded observation tests of physical inventory
Which of the following audit procedures would NOT likely detect a client's decision to pledge or factor accounts receivable?
Confirmation of receivables
Auditors are especially concerned with three aspects of internal control for the sales and collection cycle. Which of the following is not one of their major concerns? A) Controls over cutoff B) Controls that prevent or detect embezzlements C) Controls over sales discounts D) Controls related to the allowance for uncollectible accounts
Controls over sales discounts
When auditing depreciation expense, the two major concerns related to the accuracy audit objective are: A) consistent application of depreciation method and useful lives. B) consistent application of depreciation method and classification of assets. C) correctness of calculations and consistent application of depreciation policies. D) cost of the fixed asset and useful lives.
Correctness of calculations and consistent application of depreciation policies
A _____ is a document that indicates a request for merchandise by a customer?
Customer order
What event initiates a transaction in the sales and collection cycle?
Customer request for goods
Audit procedures designed to uncover credit sales made after the client's fiscal year end that relate to the current year being audited provide evidence for which of the following audit objectives?
Cutoff
Which of the following balance-related audit objectives applies to auditing the general cash account?
Cutoff
A partial-period bank statement and the related cancelled checks, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the auditor.
Cutoff bank statement
Which of the following is NOT an important control over notes payable?
Notes payable are issued when the business climate is favorable
Which of the following is NOT considered a commitment? A) Agreements to purchase raw materials B) Pension plans C) Agreements to lease facilities at set prices D) All are commitments
Each of the above is a commitment
If the auditor determines that a subsequent event that affects the current period financial statements occurred after fieldwork was completed but before the audit report was issued, what date(s) may the auditor use on the report? A) The date of the original last day of fieldwork only. B)The date of the subsequent event only. C) The date on which the last day of fieldwork occurred along with the date of the subsequent event. D) Either A or B E) Either B or C
Either B or C
To which attorney should the auditor send inquiry?
Every attorney that the client has been involved with in the current year, every attorney that the client has been involved with in the last year, and every occasional attorney
To determine if notes payable are included within the proper period, the auditor should:
Examine duplicate copies of notes to determine whether the notes were dated on or before the balance sheet date (cutoff)
What typically initiates the acquisitions and payment cycle?
Issuance of a purchase requisition or request for purchase of goods/services
This document indicates the jobs on which an employee worked during a given time period:
Job time ticket
In valuing inventory, the auditor must consider all but which of the following factors?
LIFO must be used for WIP inventory
When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger, purposefully enters cash received onto the wrong customer's account that employee may be suspected of:
Lapping
The least time-consuming account to verify by substantive tests of details balances is: accounts receivable, inventory, fixed assets, accounts payable, and expense accounts
Leases
Which of the following is NOT a "cash equivalent"? A) Time deposits B) Certificates of deposit C) Money market funds D) Marketable securities
Marketable securities
Which of the following is NOT one of the categories of items included in the client letter of representation?
Materiality
The audit of owners' equity of public and private companies is very different. Which of the following is NOT one of these differences? a. The number of transactions (private companies have fewer transactions). b. Payment of dividends (public companies rarely pay dividends). c. Complexity of transactions (public companies generally have more complex transactions). d. Type of noncurrent debt (public companies issue more bonds).
Payment of dividends (public companies rarely pay dividends)
A report generated from the payroll transaction file that typically includes the employee name, date, gross and net payroll amounts, withholding amounts, and account classification or classification for each transaction.
Payroll journal or listing
This file is used for recording each payroll transaction for each employee and maintaining total employee wages paid for the year to date
Payroll master file
Which of the following includes all payroll transactions processed by the accounting system for a given period of time?
Payroll transaction file
Records that include such data such as the date of employment, personnel investigations, rates of pay, authorized deductions, performance evaluations, and termination of employment.
Personal records
Which of the following is a business function related to sales a returns and allowances?
Processing and recording credit memos
Which of the following is NOT a business function within the "sales" class of transactions?
Processing and recording sales returns and allowances
Which of the following accounts is NOT included in the acquisition class of transactions?
Purchase discounts
Methods used to determine if there are legal encumbrances related to fixed assets includes all but which of the following?
Reading terms of loan and credit agreements, reviewing loan confirmations received from banks, and having discussions with the client or sending letters to the legal council
An auditor is performing a credit analysis of customers with balances over 60 days due. She is most likely obtaining evidence for which audit related objective? A) Realizable value B) Existence C) Completeness D) Occurrence
Realizable value
The most important balance-related audit objectives in the audit of cash included all but which of the following?
Realizable value
Which of the following balance-related audit objectives is not applicable to owner's equity?
Realizable value and rights/obligations
The audit procedures for the subsequent events review can be divided into two categories: (1) procedures integrated as part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is NOT in category 2:
Subsequent period sales and purchase transactions are examined to determine whether the cutoff is accurate.
In addition to proper instructions for the physical count of inventory, which of the following controls must also be in place:
Supervision by responsible personnel, independent internal verification of the counts, independent reconciliation of the physical counts with perpetual inventory master files, adequate control over count sheets or tags
Because the failure to record disposals of property, plant, and equipment can significantly affect the financial statements, the search for unrecorded disposals is essential. Which of the following is not a procedure used to verify disposals? A) Make inquiries of management and production personnel about the possibility of the disposal of assets. B) Review whether newly acquired assets replace existing assets. C) Test the valuation of fixed assets recorded in prior periods. D) Review plant modifications and changes in product line, taxes, or insurance coverage.
Test the valuation of fixed assets recorded in prior periods
It is frequently possible to test the physical inventory prior to the balance sheet date when:
There are accurate perpetual inventory master files
SUBSEQUENT EVENTS Which type of subsequent event requires consideration by management and evaluation by the auditor?
Those that have a direct effect on the financial statements and require adjustment AND those that have no direct effect on the financial statements but for which disclosure is advisable
This document indicates the time the employee started and stopped working each day and the number of hours the employee worked:
Time card
Which of the following is NOT an objective of the auditor's examination of notes payable?
To determine whether client's financing arrangements are effective and efficient
Imprest dividend payment account is desirable because it could prevent the payment of a larger amount of dividends than what was authorized.
True
When a company maintains its own records of stock transactions and outstanding stock, internal controls must be adequate to ensure that:
Who are actual owners of the stock AND the correct amount of dividends is paid to stockholders owning the stock on the dividend record date.
Changing circumstances may require a change in the useful life of an asset. When this occurs, it involves a change in: A) accounting estimate rather than a change in accounting principle. B) accounting principle rather than a change in accounting estimate. C) both accounting principle and accounting estimate. D) neither accounting principle nor accounting estimate.
accounting estimate rather than a change in accounting principle
When a company has treasury stock certificates on hand, a year-end count of the certificates by the auditor is:
always required
A written purchase order is a contractual document that is: A) an offer to buy goods or services. B) not enforceable if it is not in writing. C) a binding agreement between purchaser and vendor. D) an acceptance of a vendor's catalog offer to sell
an offer to buy goods or services
Before goods are shipped on account, a properly authorized person must:
approve the customer's credit
Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements, it is common in this audit area to use: A) block sampling. B) variables sampling. C) attributes sampling. D) probability proportional to size sampling.
attributes sampling
A document that initiates shipment of goods and indicates the description of the merchandise, the quantity shipped, and customer name and address is the:
bill of lading
The auditor's starting point for verifying disposals of property, plant, and equipment is the:
client's schedule of recorded disposals
You are auditing Rodgers and Company. You are aware of a potential loss due to non-compliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to: A) accrue a $4 million liability. B) disclose a liability and provide a range of outcomes. C) since there is less than a 50% chance of occurrence, ignore. D) since there is greater that a remote chance of occurrence, accrue the $10 million.
disclose a liability and provide a range of outcomes
An attorney is responding to an independent auditor as a result of the client's letter of inquiry. The attorney may appropriately limit the response to: A) asserted claims and litigation. B) asserted, overtly threatened, or pending claims and litigation. C) items which have an extremely high probability of being resolved to the client's detriment. D) matters to which the attorney has given substantive attention in the form of legal consultation or representation.
matters to which the attorney has given substantive attention in the form of legal consultation or representation
A document sent to each customer showing his or her beginning accounts receivable balance and the amount and date of each sale, cash payment received, any debit or credit memo issued, and the ending balance is the:
monthly statement
The main difference between job order and process costing system is that:
one accumulates costs by individual jobs and the other by particular processes
An auditor is comparing the write-off of uncollectible accounts as a percentage of total accounts receivable with previous years. A possible misstatement this procedure could uncover is: A) overstatement or understatement of sales. B) overstatement or understatement of accounts receivable. C) overstatement or understatement of bad debt expense. D) overstatement or understatement of sales returns and allowances.
overstatement or understatement of bad debt expense
The accounts payable department usually has responsibility for approving acquisitions for payment by comparing the details on the:
purchase order, receiving report, and vendor's invoice
An auditor is gathering evidence on the completeness assertion. To do so she performs a test to verify that all goods received by the company have been recorded properly. The document population for this test would consist of all: A) vendor invoices. B) purchase orders. C) receiving reports. D) cash disbursements for accounts payables.
receiving reports
The direct receipt of a confirmation from every bank with which the client does business is:
recommended but NOT required by auditing standards
Actual interest expense is significantly higher than the auditor's estimate. This most likely would lead the auditor to conclude that the client has NOT:
recorded all long-term interest bearing debt in the accounting records.
To minimize the opportunity for fraud, unclaimed salary checks should be: A) redeposited. B) kept in the payroll department. C) left with the employee's supervisor. D) held for the employee in the personnel department
redeposited
Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally:
reduce the extent of tests of detail balances
A type of positive confirmation known as a blank confirmation: A) requests the recipient to fill in the amount of the balance. B) is considered less reliable than the regular positive confirmation. C) generates as high a response rate as the regular positive confirmation form. D) is used when the auditor is confirming several small balances.
requests the recipient to fill in the amount of the balance
The document used to indicate to the customer the amount of a sale and payment due date is:
sales invoice
To test for recorded sales for which there were no actual shipments, the auditor vouches from the:
sales journal to the shipping documents
For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be recorded on which of the following documents? A) sales order B) sales invoice C) customer order D) remittance advice
sales order
Which one of the following statements is true? In deciding on substantive test of transactions:
some procedures are commonly employed on every audit regardless of the circumstances
When testing the controls for the completeness transaction-related audit objectives:
the audit time for accounts payable can be reduced if the client has effective internal controls and the auditor properly tests those controls.
When the client's physical inventory occurs before the last day of the year, it is still necessary to perform an accounts payable cutoff at the time of the count. In addition, the auditor must verify whether all acquisitions taking place between the count and the end of the year were added to: A) the physical inventory. B) accounts payable. C) accounts payable and cost of goods sold. D) the physical inventory and accounts payable.
the physical inventory and the accounts payable
Cutoff information for inventory acquisitions should be obtained during: A) the interim period prior to year-end. B) the interim period immediately following year-end. C) the physical observation of inventory. D) either the interim period prior to or immediately following year-end.
the physical observation of the inventory
In auditing debits and credits to retained earnings, OTHER than net income and dividends, the auditors first concern is:
whether the transactions should have been included in retained earnings
The primary concern in determining whether retained earnings is correctly disclosed on the balance sheet is:
whether there are any restrictions on the payment of dividends
