audit quiz #15+#16
Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer?
"Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."
A client's previous two years of financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit $100,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is:
$140,000
A client's previous two years financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit $55,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is:
$60,000
Which of the following best describes a voucher prepared under good internal control?
A document prepared by Accounts Payable authorizing a cash disbursement.
A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements?
A substantial portion of the company's inventory was written off as obsolete on January 31.
A client's procurement system ends with the assumption of a liability and the eventual payment of the liability. Which of the following best describes the auditors' primary concern with respect to liabilities resulting from the procurement system?
Accounts payable are not materially understated.
Which of the following best describes the specific accounts payable that are selected for confirmation?
Accounts with a large amount of activity regardless of their balance.
Accrued liabilities generally differ from accounts payable in that accrued liabilities:
Accumulate over time.
A nonpublic client has provided required supplementary information with its audited financial statements. The auditor's proper reporting responsibility includes:
An emphasis-of-matter paragraph that should be added to the audit report.
Which of following audit procedures is least likely to detect an unrecorded liability?
Analysis and recomputation of depreciation expense.
Which of the following audit procedures is least likely to detect an unrecorded liability?
Analysis and recomputation of depreciation expense.
If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first:
Attempt to determine whether their report is still being relied upon by third parties.
An example of an internal control weakness is to assign the payroll department the responsibility for:
Authorizing increases in pay.
Which of the following statements is correct regarding accounts payable and the auditor's procedures?
Because it is generally more difficult to discover a transaction that has not been recorded than to discover one that has been recorded incorrectly, the audit objective of completeness drives many of the substantive procedures applied to these balances.
An entity's internal control 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 for testing from the population of:
Canceled checks.
When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments?
Capitalization.
To avoid potential errors and fraud, well-designed internal control in the accounts payable area should include a separation of which of the following functions?
Cash disbursements and invoice verification.
The audit of which of the following balance sheet accounts does not normally result in verification of an income statement account?
Cash.
Which of the following is the most efficient audit procedure for the detection of unrecorded liabilities?
Compare cash disbursements in the subsequent period with the accounts payable trial balance at year-end.
Which of the following is an analytical procedure that should be applied to the income statement?
Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.
Which of the following assertions is of principle concern to the auditors in the examination of accounts payable?
Completeness
Ordinarily, the most significant assertion relating to accounts payable is:
Completeness.
The assertion most directly addressed when performing the search for unrecorded liabilities is:
Completeness.
In an audit, the valuation of year-end accounts payable is most likely addressed by:
Confirmation
Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies?
Confirming accounts payable.
As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should:
Consider the possibility of a misstatement in the financial statements.
Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditor with:
Corroborative audit evidence.
Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditors with:
Corroborative audit evidence.
Under which of the following circumstances would it be advisable for the auditors to confirm accounts payable with creditors?
Creditor statements are not available and internal control over accounts payable is unsatisfactory.
Which of the following is most likely to be considered a Type 1 subsequent event?
Customer checks deposited prior to year-end, but determined to be uncollectible after year-end.
The search for unrecorded liabilities for a public company includes procedures usually performed through the:
Date of the auditors' report.
To minimize the opportunities for fraud, unclaimed cash payroll should be:
Deposited in a special bank account.
The confirmation of accounts payable is most closely associated with:
Detection risk.
Which of the following is most likely to be an audit objective in the audit of owners' equity?
Determine that the presentation and disclosure of owners' equity is appropriate.
Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next:
Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit?
Develop an estimate of the total likely misstatement in the financial statements.
A CPA reviews a client's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for:
Distributing payroll checks to employees.
An example of an internal control weakness is to assign the personnel department responsibility for:
Distribution of paychecks.
A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that:
Employees worked the number of hours for which their pay was computed.
Which of the following procedures for detecting unrecorded transactions at the client's December 31 year-end is least likely to result in discovery of an unrecorded year-end account payable?
Examination of January receiving reports prepared for goods shipped FOB destination in December to the client.
Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?
Examine selected cash disbursements in the period subsequent to year-end.
Which of the following audit procedures is aimed most directly at testing the completeness assertion for accounts payable:
Examining underlying documentation for cash disbursements in the period after year-end.
In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to the supporting documents. Which assertion would this test of controls most likely test?
Existence
An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to:
Extend auditing procedures.
All information included in a financial report prepared and submitted by the auditors must be audited.
False
Companies typically send statements to vendors detailing their accounts payable to the vendors.
False
Disclosure checklists are used to test the completeness of audit working papers.
False
Dual-dating of an audit report occurs when the auditors are not able to complete an audit engagement as of a particular date and must return to complete the audit work on a later date.
False
The representations letter from management should be dated and signed on the balance sheet date.
False
To overstate net income requires the recording of an improper accounting entry.
False
Vouching of selected accounts payable on the client's year-end trial balance is primarily a test of completeness of recorded accounts payable.
False
An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated:
February 10, 20X9.
An auditor will ordinarily examine invoices from lawyers primarily in order to:
Identify possible unasserted litigation, claims, and assessments.
To determine that each voucher is submitted and paid only once, when a payment is approved, supporting documents should be canceled by the:
Individual who signs the checks.
Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n):
Known misstatement.
In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate:
Known, projected, and other estimated misstatements in the financial statements.
The auditor's primary means of obtaining corroboration of management's information concerning litigation is a:
Letter of audit inquiry to the client's lawyer.
The auditors' primary means of obtaining corroboration of management's information concerning litigation is a:
Letter of audit inquiry to the client's lawyer.
The auditor will most likely perform extensive tests for possible understatement of:
Liabilities
With respect to issuance of an audit report which is dual dated for a subsequent event occurring after the completion of field work but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the date of the audit report:
Limited to the specific event referred to.
A possible loss, stemming from past events that will be resolved as to existence and amount by some future event, is referred to as a(n):
Loss contingency.
Which of the following subsequent events might require an adjustment to the client's financial statements?
Loss on the sale of a closely-held investment.
Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job?
Make a surprise observation of the company's regular distribution of paychecks on a test basis.
In connection with the annual audit, which of the following is not a "subsequent events" procedure?
Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report.
An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's:
Minutes of board of directors meetings.
The auditors' program for the examination of long-term debt should include steps that require the:
Minutes of the board of directors.
For which of the following ledger accounts would the auditor be most likely to analyze the details?
Miscellaneous expense.
The review of audit working papers by the audit partner is normally completed:
Near the completion of the audit.
An auditor wishes to perform tests of controls on a client's cash disbursements relating to accounts payable. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by:
Observation and inquiry.
Which of the following is not a procedure normally performed while completing the audit?
Obtain confirmation of capital stockholdings from shareholders.
Which of the following auditing procedures is ordinarily performed last?
Obtaining a management representation letter.
Which of the following information need not be reported in the auditors' report if the information is considered to be properly stated after performing appropriate procedures?
Other information in documents containing audited financial statements.
Auditors may choose not to confirm accounts payable because:
Other reliable external evidence to support the balances is likely to be available.
Which of the following manipulations would understate accounts payable on the financial statements?
Overstating purchase returns.
Which of the following procedures is most likely to be included in the final review stage of an audit?
Perform analytical procedures.
It would be appropriate for the payroll accounting department to be responsible for which of the following functions?
Preparation of periodic governmental reports as to employees' earnings and withholding taxes.
Which of the following procedures relating to the audit of accounts payable would the auditors be most likely to delegate entirely to the clients' employees?
Prepare a schedule of accounts payable.
Which of the following is an example of an accrued liability?
Product warranty liability.
Internal control over accounts payable is improved when:
Purchase orders show approved prices.
A likely analytical procedure to test the accuracy of purchase discounts would be to compute the ratio of cash discounts earned to:
Purchases
The auditors' best course of action with respect to "other information (not including required supplemental information)" included in an annual report containing the auditors' report is to:
Read and consider the manner of presentation of the "other financial information."
For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the:
Receiving report and the purchase order.
Which of the following is a control procedure that is usually applied to accounts payable?
Reconciliation of vendor statements with accounts payable.
A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner?
Reconciling vendors' monthly statements with subsidiary payable ledger accounts.
A client recorded a payable for a large purchase twice. Which of the following controls would be most likely to detect this error in a timely and efficient manner?
Reconciling vendors' monthly statements with subsidiary payable ledger accounts.
When the auditors select a sample of items from the vouchers payable register for the last month of the period under audit and trace these items to underlying documents, the auditors are gathering evidence primarily in support of the assertion that:
Recorded obligations occurred prior to year-end.
The date the auditor grants the client permission to use the audit report in connection with the financial statements is the:
Report release date.
The form typically used to confirm accounts payable:
Requires the vendor to indicate the amount of the payable.
Which of the following procedures is not a procedure that is completed near the end of the engagement?
Review cash transactions.
Which of the following is not a procedure that auditors typically perform to search for significant events during the period after year-end but prior to the audit report date?
Review changes in internal control during the period subsequent to the balance sheet date.
Which of the following is the best control procedure to prevent the payment of an invoice twice?
Review of supporting documentation by the person signing the check.
Which of the following procedures is least likely to be completed before the balance sheet date?
Search for unrecorded liabilities.
Which of the following procedures is least likely to be performed before the balance sheet date?
Search for unrecorded liabilities.
When confirming accounts payable, the approach is most likely to be one of:
Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts.
The least likely approach in auditing management's estimate relating to an accrued liability is to:
Send confirmations relating to the estimate.
The purpose of segregating the duties of distributing payroll checks and hiring personnel is to:
Separate the authorization of transactions from the custody of related assets.
Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?
Settlement of litigation in excess of the recorded liability.
Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements?
Settlement of litigation.
For good internal control, a copy of a receiving report should be sent to all of the following departments except:
Shipping
The auditors' search for unrecorded liabilities is completed:
Subsequent to the balance sheet date.
Which of the following best describes the auditors' approach to the audit of accrued liabilities?
Test computations.
Which of the following is least likely to be considered a substantive procedure relating to payroll?
Test whether employee time reports are approved by supervisors.
Auditors must communicate internal control "significant deficiencies" to:
The audit committee.
The statement that best expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of his audit is that:
The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.
Which of the following situations has the best chance of being detected when a CPA compares 200X revenues and expenses with the prior year and investigates all changes exceeding a fixed percentage?
The company changed its capitalization policy for small tools in 200X.
Which of the following best describes proper internal control over payroll?
The duties of hiring, payroll computation, and payment to employees should be segregated.
Which statement is correct with respect to accounts payable confirmations?
They are more frequently used in situations in which some vendors don't send monthly statements.
In the course of the audit of financial statements for the purpose of expressing an opinion thereon, the auditors will normally prepare a schedule of unadjusted differences for which the auditors did not propose adjustment when they were identified. What is the primary purpose served by this schedule?
To identify the potential financial statement effects of misstatement or disputed items that were considered immaterial when discovered.
To which of the following matters would materiality limits not apply when obtaining written client representations?
To which of the following matters would materiality limits not apply when obtaining written client representations?
A company's receiving department should be independent of its purchasing department.
True
Amounts included in the statement of cash flows are audited in conjunction with the audit of balance sheet and income statement accounts.
True
Auditors may discover unrecorded liabilities by reconciling vendors' statements with the accounts payable trial balance.
True
Auditors often confirm vendors' accounts with zero balances at year-end.
True
CPAs have no responsibility to perform audit procedures after the date of their report but must still investigate events that are brought to their attention and might have affected their report.
True
In the audit of financial statements, the auditors are particularly concerned with possible understatement of liabilities and the possible overstatement of revenues.
True
Subsequent events, which provide additional evidence regarding conditions existing at the balance sheet date, may result in adjustment of the financial statements.
True
The auditors generally perform review procedures on FASB-required supplementary information.
True
The auditors should accumulate known, projected, and other estimated misstatements in the financial statements to determine whether an unmodified opinion should be issued on the financial statements.
True
The financial statements should not be adjusted for subsequent events that provide important evidence about conditions that did not exist at the balance sheet date but arose subsequent to that date.
True
The loss of an account receivable because of a major customer declaring bankruptcy subsequent to the balance sheet date might or might not require adjustment of the financial statements, depending upon the cause of the customer's bankruptcy.
True
When a second partner review of an audit engagement is to be performed, it should occur prior to issuance of the audit report.
True
When the auditors discover an understatement of liabilities, they would most likely also expect to find an:
Understatement of assets.
Auditors should be aware that a voucher system may result in which of the following at year-end:
Understatement of liabilities.
Unrecorded liabilities are most likely to be found during the review of which of the following documents?
Unpaid bills.
One reason why the independent auditors perform analytical procedures on the client's operations is to identify:
Unusual transactions.
Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors?
Write-off of trade accounts receivable.
The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because:
accrued liabilities usually pertain to services of a continuing nature while accounts payable are the result of completed transactions.
Bell's accounts-payable clerk has a brother who is one of Bell's vendors. The brother will often invoice Bell twice for the same delivery. The accounts-payable clerk removes the receiving report for the first invoice from the paid voucher file and uses it for support of payment for the duplicate invoice. The most effective procedure for preventing this activity is to:
cancel vouchers and supporting papers when payment is made.
When an auditor finds a debit to accounts payable, which of the following accounts is most likely to be credited?
cash
In order to efficiently establish the accuracy of the accounts payable cutoff, the auditors will be most likely to:
coordinate cutoff tests with physical inventory observation.
When examining a client's statement of cash flows, for audit evidence, an auditor will rely primarily upon:
cross referencing to balances and transactions audited in connection with the examination of the other financial statements.
The date of the management representation letter should coincide with the:
date of the auditor's report.
An audit of the balance in the accounts payable account is ordinarily not designed to:
detect accounts payable which are substantially past due.
An example of an internal control weakness is to assign to a supervisor the responsibility for:
distributing payroll checks to subordinate employees.
A surprise observation of the distribution of paychecks is designed to detect employees that are paid for more hours than they worked.
f
Accounts payable generally present the auditors with difficult valuation problems.
f
All unrecorded liabilities of the same dollar total have the same effect on the client's net income.
f
Auditors are concerned with the discovery of receivables from related parties, but not with the discovery of payables from related parties.
f
Business segment information required by the FASB is supplementary and need not be audited to provide a basis for an opinion on the client's financial statements.
f
Common to future purchase commitments is the fact that they should be recorded as liabilities at discounted values as of year-end.
f
Confirmation of accrued liabilities is ordinarily a required audit procedure.
f
Dual dating of an audit report extends the auditors' liability for disclosure through the later date for all areas of the financial statements.
f
For effective internal control over accounts payable, the purchasing department should approve invoices for payment.
f
For effective internal control over payroll, the personnel department should prepare the payroll records and checks.
f
It is more important to maintain effective internal control over accounts payable as it is to maintain effective internal control over accounts receivable.
f
Most of the audit work on liabilities is ordinarily performed during the interim period.
f
Payroll frauds are easier to conceal today than they were in the past.
f
Since it is difficult to detect unrecorded liabilities, auditors rely primarily on the client's representations that no unrecorded liabilities exist.
f
The amount of accrued payroll is typically verified by confirmation with selected employees.
f
The audit procedure of confirmation by direct communication is just as important for accounts payable as it is for accounts receivable.
f
The payroll department of a company should sign and distribute company paychecks.
f
Unclaimed payroll checks should be returned to the payroll department for safekeeping.
f
Unless the auditors are engaged to prepare the client's tax return, there is no need for the auditors to review the return.
f
The auditors would be most likely to find unrecorded long-term liabilities by analyzing:
interest payments
A surprise observation by an auditor of a client's regular distribution of paychecks is primarily designed to satisfy the auditor that:
names on the company payroll are those of bona fide employees presently on the job.
Overall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly:
revenue and expense account totals to the corresponding figures of the preceding years.
Cash or other assets set aside for the retirement of a debt
sinking fund
An institution charged with responsibility for avoiding overissuance of a corporation's stock
stock registrar
An institution responsible for maintaining detailed records of shareholders and handling changes of ownership of stock ownership
stock transfer agent
Accounts payable confirmation requests usually have the vendor indicate the amount of the payable from the client.
t
Accounts payable with debit balances should be reclassified as receivables.
t
Analytical procedures are often used for verification of income statement accounts.
t
Auditors generally consider the evidence regarding accounts payable in the client's possession as more reliable than that for accounts receivable.
t
Budgets are an important internal control over revenue and expenses.
t
If management fails to list an unasserted claim in the letter of inquiry to a lawyer, the lawyer is not required to inform the auditors of the omission.
t
If not adjusted, a situation in which the total likely misstatement in the financial statements exceeds a material amount is likely to lead to an audit report modification.
t
In the audit of a nonpublic company, the auditors have a responsibility to report on all FASB-required supplementary information.
t
Information regarding the proper cutoff of accounts payable is generally obtained in conjunction with the audit of inventories.
t
Maintaining records of attendance of employees for payroll should be performed by the employees' supervisors.
t
Making payroll expenditures from an imprest payroll bank account ordinarily is a strength relating to internal control, rather than a weakness.
t
Normally, general risk contingencies need not be disclosed in the financial statements.
t
Overstatement of financial results can involve failure to record a transaction.
t
Review of a client's cash payments subsequent to the balance sheet date is an important test of the completeness of recorded payables.
t
Subsequent events that provide additional evidence as to conditions that existed at the balance sheet date may result in adjusting journal entries.
t
Tests of revenue and expenses often involve analytical procedures.
t
The auditors generally perform an analysis of the miscellaneous revenue account to determine the nature of the items recorded to the account.
t
The auditors perform an analysis of professional fees in part to determine that they have considered obtaining a lawyer's letter from all attorneys that are handling litigation for the client.
t
The confirmation of existing accounts payable does not prove the completeness of recorded accounts payable.
t
Unclaimed payroll checks should be voided and the amount should be recorded in a special liability account.
t
When testing the amount of pension liability, the auditors typically rely on a specialist.
t
Auditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of:
the auditors' report.
Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:
there is likely to be other reliable external evidence available to support the balances.
The primary difference between an audit of the balance sheet and an audit of the income statement lies in the fact that the audit of the income statement deals almost completely with the verification of:
transactions.
Shares of its own stock acquired by a corporation for the purpose of being reissued at a later date
treasury stock
The formal agreement between bondholders and the issuer as to the terms of the debt
trust indenture
Assume that the auditors are concerned about disbursement transactions that have been recorded for improper amounts. Which procedure(s) would possibly identify these transactions?
yes and yes
Shortly after year-end Zero Corporation was informed of the bankruptcy of Bingo. Zero Corporation showed a receivable of $10,000 due from Bingo as of year-end—none of which seems recoverable. The receivable had been questionable for some time as Bingo had been experiencing financial difficulties for the past several years. Yet, Bingo's bankruptcy did not occur until after Zero Corporation's year-end. Under these circumstances:
yes, no, and yes
The aggregated misstatement in the financial statements is made up of:
yes, yes, and yes