Auditing Exam 2 - Chapt 10, 11, 12

You are auditing a client who makes widgets. You identify the following budgetary information: Total sales and production for the year 5,000 units Sales price per widget $20.00 Cost of direct materials per widget $ 4.00 Cost of direct labor per widget $ 6.00 Cost of lease space for manufacturing $12,000 per month What is the variable cost per unit? $20,000 / 5,000 units = $4 $4 $12,000 / 5,000 = $2.40 $10 $6 $8,000 / 5,000 = $1.60

$10

You are auditing a client who makes widgets. You identify the following budgetary information: Total sales and production for the year 5,000 units Sales price per widget $20.00 Cost of direct materials per widget $ 4.00 Cost of direct labor per widget $ 6.00 Cost of lease space for manufacturing $12,000 per month If the client sells and produces 4,000 units, what is the total amount of annual fixed costs included as a production cost at this level of production? $194,000 $240,000 $96,000 $144,000 $90,000 $24,000

$144,000

You are auditing a client who makes widgets. You identify the following budgetary information: Total sales and production for the year 5,000 units Sales price per widget $20.00 Cost of direct materials per widget $ 4.00 Cost of direct labor per widget $ 6.00 Cost of lease space for manufacturing $12,000 per month If the audit client makes 4,000 widgets, what is the total amount of variable costs associated with this level of production? $16,000 None of the other choices are correct. $24,000 $20,000 $40,000

$40,000

You are auditing a client who makes widgets. You identify the following budgetary information: Total sales and production for the year 5,000 units Sales price per widget $20.00 Cost of direct materials per widget $ 4.00 Cost of direct labor per widget $ 6.00 Cost of lease space for manufacturing $12,000 per month What is the break-even point expressed in units? 14,400 12,200 600 None of the other choices are correct. 15,000

14,400 Contribution margin = ($20 sales price) - (variable costs per unit of $4 + $6) = $10 Fixed costs = $12,000 x 12 months = $144,000 $144,000 / $10 = 14,400 units Proof: sales of 14,400 units x $20 $288,000 less: variable costs ($6 + $4) x 14,400 units (144,000) less: fixed costs (144,000) remaining profit (BEP) $ 0

What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales? Sales returns and allowance are overstated at December 31, 20X0. Accounts receivable are overstated at December 31, 20X0. Accounts receivable are understated at December 31, 20X0. Operating expenses are overstated for the 12 months ended December 31, 20X0.

Accounts receivable are overstated at December 31, 20X0.

To test the existence assertion for recorded receivables, the auditors would select a sample from the: Accounts receivable subsidiary ledger. Sales orders file. Customer purchase orders. Shipping documents (bills of lading) file.

Accounts receivable subsidiary ledger.

The auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low. And accounts receivable are immaterial, or the use of confirmations would be ineffective. And the effectiveness of confirmations is absolutely determined. And accounts receivable are composed of large accounts. Or accounts receivable are from extremely reputable customers.

And accounts receivable are immaterial, or the use of confirmations would be ineffective.

In class, we discussed how sales discounts must be examined closely in auditing accounts receivable. Crucial to the auditor is the determination of when the sales discount period starts. Thus, it is best for the auditor to determine when the sales discount period starts by doing which of the following? Ask the audit client what its agreement is with its vendors and verify this by examining a sample of the audit client's sales invoices. Ask the audit client what its agreement is with its customers and verify this by examining a sample of the audit client's cash receipts. None of the other choices are correct. Ask the audit client what its agreement is with its customers and verify this by examining a sample of the audit client's sales invoices. Verify when the sales discount period starts based upon the Purchase Order's stated terms.

Ask the audit client what its agreement is with its customers and verify this by examining a sample of the audit client's sales invoices.

Which of the following would provide the most assurance concerning the valuation of accounts receivable? Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. Compare receivable turnover ratios to industry statistics for reasonableness. Inquire about receivables pledged under loan agreements. Assess the allowance for uncollectible accounts for reasonableness.

Assess the allowance for uncollectible accounts for reasonableness.

The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the: Bill of lading. Job time shipping. Production order. Production schedule.

Bill of lading.

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all: Cash disbursements. Receiving reports. Vendors' invoices. Approved vouchers.

Cash disbursements.

Which of the following is a frequent control over cash disbursements? Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement. Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations. Checks should be signed by the controller and at least one other employee of the company. Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation.

Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.

The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful? A substantial number of accounts are in disputes. Client records include a large number of relatively small balances. The auditors believe that recipients of the requests are unlikely to give them consideration. The combination of inherent risk and control risk is high.

Client records include a large number of relatively small balances.

Which of the following manipulations would understate receivables on the financial statements? Underestimating the allowance for doubtful accounts. Closing the sales journal prior to year-end. Understatement of cash sales. Closing the cash receipts journal prior to year-end.

Closing the sales journal prior to year-end.

In order to audit financial investments, it is necessary to know how to account for financial investments. Company X acquired 1,000 shares out of 10,000 shares of Company Y. Company Y is publicly traded. Company X has the stated purpose of acquiring sequential blocks of shares ultimately allowing for Company X to exercise significant influence over Company Y. How does GAAP require Company X to account for this investment? Company X must account for this investment under the cost method because the stated purpose of acquiring significant influence over Company Y is regarded as an attempt to manipulate Company Y which forces Company X to use the most conservative method of accounting for this investment - the cost method. None of the other choices are correct. Company X must account for this investment as an available for sale security, which means that unrealized gains and losses are accounted for as other comprehensive income and are closed out to accumulated other comprehensive income at the end of the accounting period. Company X must account for this investment as an available for sale security, which means that only realized gains and losses are accounted for as accumulated other comprehensive income which is closed out to accumulated other comprehensive income at the end of the accounting period. Company X must account for this investment as an available for sale security, which means that unrealized gains and losses are accounted for as a component of net income which is closed out to retained earnings at the end of the accounting period.

Company X must account for this investment as an available for sale security, which means that unrealized gains and losses are accounted for as other comprehensive income and are closed out to accumulated other comprehensive income at the end of the accounting period.

In order to audit financial investments, it is necessary to know how to account for financial investments. Company X acquired 1,000 shares out of 10,000 shares of Company Y. Company Y is publicly traded. Company X has the stated purpose of acquiring sequential blocks of shares ultimately allowing for Company X to exercise significant influence over Company Y. How does GAAP require Company X to document its stated intent, if at all? Company X documents its intent in acquiring this investment on or before the date of acquisition, with the type of journal entry it uses to recognize the investment on the date of acquisition. Company X must document its intent in acquiring this investment, preferably in the minutes of the meeting of the board of directors before the end of the year in which the acquisition is made. Company X must document its intent in acquiring this investment on or before the date of acquisition, preferably in the minutes of the meeting of the board of directors when it was decided to acquire this investment. Company X must communicate its intent in acquiring this investment to the auditors of the financial statements in the year the acquisition is made, anytime before such financial statements are published. None of the other choices are correct.

Company X must document its intent in acquiring this investment on or before the date of acquisition, preferably in the minutes of the meeting of the board of directors when it was decided to acquire this investment.

In order to audit financial investments, it is necessary to know how to account for financial investments. Company X acquired 1,000 shares out of 10,000 shares of Company Y. Company Y is publicly traded. Company X has the stated purpose of acquiring these shares for the purpose of selling these shares of Company Y in the future for the purpose of speculation. How does GAAP require Company X to account for such an investment? Company X reports this investment as an available for sale security, which means the unrealized gain or loss is recognized as a part of net income, which is closed out to retained earnings at the end of the accounting period. None of the other choices are correct. Company X reports this investment as a marketable security, which means the unrealized gain or loss is recognized as a part of other comprehensive income, which is closed out to retained earnings at the end of the accounting period. Company X reports this investment as a marketable security, which means the unrealized gain or loss is recognized as a part of net income, which is closed out to retained earnings at the end of the accounting period. Company X reports this investment as a marketable security, which means only the realized gain or loss is recognized as a part of net income, which is closed out to retained earnings at the end of the accounting period.

Company X reports this investment as a marketable security, which means the unrealized gain or loss is recognized as a part of other comprehensive income, which is closed out to retained earnings at the end of the accounting period. Company X reports this investment as a marketable security, which means the unrealized gain or loss is recognized as a part of net income, which is closed out to retained earnings at the end of the accounting period.

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? Rights and obligations. Completeness. Existence or occurrence. Presentation and disclosure.

Completeness.

Which of the following is not true about the confirmation of accounts receivable? Confirmation requests should bear the auditors' return address. Confirmation requests should be mailed directly by the auditors. Confirmation requests should include a return envelope addressed to the office of the auditors. Confirmation requests should be signed by the auditors.

Confirmation requests should be signed by the auditors.

The organization established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles is the: Cost Accounting Standards Board. Financial Accounting Standards Board. Public Company Accounting Oversight Board. Securities and Exchange Commission.

Cost Accounting Standards Board.

To measure how effectively a client employs its assets, an auditor calculates inventory turnover by dividing the average inventory into: Cost of goods sold. Net sales. Operating income. Gross sales.

Cost of goods sold.

The financial management of a company should take steps to see that company's investment securities are protected. Which of the following is not a step that is designed to protect investment securities? Access to securities should be vested in more than one person. Securities should be registered in the name of the owner. Securities should be properly controlled physically in order to prevent unauthorized usage. Custody of securities should be assigned to persons who have the accounting responsibility for securities.

Custody of securities should be assigned to persons who have the accounting responsibility for securities.

In class, we discussed accounting for bad debt expense and allowance for doubtful accounts as a prerequisite to auditing accounts receivable. If the audit client is using allowance for doubtful accounts, and the audit client finds it necessary, and is justified in writing off a customer's account, what accounts will be debited and credited to recognize the writeoff of the account? Debit Bad Debt Expense, credit Accounts Receivable Debit Bad Debt Expense, credit Allowance for Doubtful Accounts Debit Allowance for Doubtful Accounts, credit Bad Debt Expense None of the other choices are correct. Debit Allowance for Doubtful Accounts, and credit Accounts Receivable

Debit Allowance for Doubtful Accounts, and credit Accounts Receivable

Which of the following is not among the criteria that ordinarily exist for revenue to be recognized? Collectibility is reasonably assured. Delivery has occurred or is scheduled to occur in the near future. Persuasive evidence of an arrangement exists. The seller's price to the buyer is fixed or determinable.

Delivery has occurred or is scheduled to occur in the near future.

Which of the following is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold? Determine that the valuation of inventories and cost of goods sold is arrived at by appropriate methods. Determine the existence of inventories and the occurrence of transactions affecting cost of goods sold. Establish that the client includes only inventory on hand at year-end in inventory totals. Establish the completeness of inventories.

Establish that the client includes only inventory on hand at year-end in inventory totals.

When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is: Existence. Completeness. Clarity. Presentation.

Existence.

In class, we identified material discrepancies in one of the Figures illustrated in the textbook. Identify which Figure was the one so discussed and studied in class. Figure 11.4 None of the other choices are correct. Figure 11.2 Figure 11.3 Figure 11.1

Figure 11.3

With regard to the audit of inventories, GAAS and GAAP require which, if any, of the following? None of the other choices are correct. GAAS and GAAP require use of absorption cost accounting for manufacturing inventories. GAAS and GAAP require use of absorption cost accounting for merchansing inventories. GAAS and GAAP do not require use of absorption cost accounting for manufacturing inventories because audit procedures for a cost accounting system must be designed to fit the specific circumstances encountered in each case. GAAS and GAAP require use of variable cost accounting for manufacturing inventories.

GAAS and GAAP require use of absorption cost accounting for manufacturing inventories.

In class, we discussed accounting for bad debt expense and allowance for doubtful accounts as a prerequisite to auditing accounts receivable. If the audit client is using allowance for doubtful accounts, and the audit client finds it necessary, and is justified in writing off a customer's account, what journal will the client use to record this accounting event? General journal Sales journal Accounts receivable journal None of the other choices are correct. Expenses journal

General journal

Which of the following is an auditor least likely to consider a departure from U.S. generally accepted accounting principles? Including in inventory items that are consigned out to vendors, but not yet sold. Using standard cost as the measure of inventory cost. Including in inventory items shipped subsequent to year-end, but for which valid orders did exist at year-end. Valuing inventory at cost.

Including in inventory items that are consigned out to vendors, but not yet sold.

Which of the following would most likely be detected by an auditor's review of the client's sales cutoff? Lapping of year-end accounts receivable. Inflated sales for the year. Excessive goods returned for credit. Unrecorded sales discounts.

Inflated sales for the year.

If the audit client measures the cost of inventory using the LIFO method, then how does the audit client report the value of its ending inventory? FIFO Lower of cost or net realizable value. Average cost LIFO Lower of cost or market

Lower of cost or market

If the audit client measures the cost of inventory using the average cost method, then how does the audit client report the value of its ending inventory? LIFO Lower of cost or market FIFO Lower of cost or net realizable value. Average cost

Lower of cost or net realizable value.

In order to audit inventory, we need to know what GAAP requires in accounting for inventory. If the audit client measures the cost of inventory using the FIFO method, then which method does GAAP require the audit client to use in reporting the value of its ending inventory? LIFO FIFO Average cost Lower of cost or net realizable value. Lower of cost or market

Lower of cost or net realizable value.

You are auditing X Inc. X Inc. transfers inventory to an unrelated corporation Y Inc. on January 1, 2017. This transfer is for $100,000 inventory at cost, with a sales value of $150,000. The purpose of the transfer is to allow Y Inc. to have possession of the inventory in order to sell the inventory. Thus, Y Inc. has only possession of the inventory. X Inc. uses the periodic inventory method of accounting for its inventory. As of January 31, 2017, Y Inc. still has all of this inventory in its ending inventory account. Which of the following is correct? The consignee recognizes revenue of $150,000 and cost of goods sold of $100,000, and the consignor recognizes inventory for $150,000. None of the other choices are correct. Neither the consignor nor the consignee records revenue or cost of goods sold because neither revenue or cost of goods sold has been realized yet. The consignor recognizes revenue of $150,000 and cost of goods sold of $100,000, and the consignee recognizes inventory for $150,000. Neither the consignor nor the consignee recognizes revenue, but the consignor debits accounts receivable for $100,000 and credits inventory for $100,000, and the consignee debits inventory for $100,000 and credits accounts payable for $100,000.

Neither the consignor nor the consignee records revenue or cost of goods sold because neither revenue or cost of goods sold has been realized yet.

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: No reply to a positive confirmation request is received. Pledging of the receivables is probable. Collectibility of the receivables is in doubt. No reply to a negative confirmation request is received.

No reply to a positive confirmation request is received.

Employee X works for ABC Company. Employee X has successfully breached the internal controls of ABC Company. How Employee X was able to breach internal controls is only partially known. However, the results are as follows: On 01-01-17 Employee X succeeded in forging the necessary signatures of ABC Company corporate officers to obtain a $10,000 line of credit from First Bank. The line of credit shows ABC Company as the debtor. The line of credit requires monthly payment of interest, and accrues interest only if some, or all, of the $10,000 is spent (i.e. similar to a credit card). Of course, ABC Company knows nothing about this First Bank line of credit. On 01-02-17, Employee X steals $10,000 cash from the ABC Company operating account and spends it on personal frivolities. On 01-25-17, Employee X withdraws $10,000 against the line of credit, and deposits this $10,000 cash into the ABC Company operating account. On 01-31-17, Employee X forges the signature of the Treasurer of ABC Company on an ABC Company check used to pay the interest on the line of credit from First Bank. The interest expense is not a material amount when compared to the interest expense legitimately incurred by ABC Company, and the check is well camouflaged by the numerous other debits to the interest expense account. Employee X repeats this forgery on 02-28-17, 03-31-17, and each month thereafter to pay the interest expense accrued for those time periods. Upon ABC Company performing a bank reconciliation, what would they discover? The $10,000 stolen by Employee X on 01-02-17. The fraudulent nature of the checks paying the interest expense. All of the other choices would be revealed by the bank reconciliation, excluding the choice "None of the other choices are correct." The deposit of the $10,000 cash by Employee X on 01-25-17. None of the other choices are correct.

None of the other choices are correct.

In order to audit financial investments, it is necessary to know how to account for investments. Which of the following is required of a derivative? An initial investment cost at least equal to the value of the notional amount It must be discounted at the market rate of interest. The derivative must have a present value at least equal to the value of the notional Settlement by payment of a security only. None of the other choices are correct.

None of the other choices are correct.

Which of the following correctly states the distinction between marketable securities and available for sale securities? None of the other choices are correct. The distinction is based upon the percentage of ownership of the total fair value of all classes of stock that the investor acquires in the investee. The distinction is based upon whether the investor acquires control (50% of the outstanding voting stock plus one share) or not. The distinction is based upon whether the investee is publicly traded or privately held. The distinction is based upon the percentage of ownership of outstanding voting stock that the investor acquires in the investee.

None of the other choices are correct.

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory? Compare the physical quantities of slow-moving items with corresponding quantities in the prior year. Observe merchandise and raw materials during the client's physical inventory taking. Review the management's inventory representations letter for accuracy. Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average.

Observe merchandise and raw materials during the client's physical inventory taking.

A client uses a perpetual inventory system. Would one expect a credit to which of the following accounts at the point of sale? Sales Inventory A. Yes Yes B. Yes No C. No Yes D. No No Option B Option C Option A Option D

Option A

A client uses a periodic inventory system. Would one expect a credit to which of the following accounts at the point of sale? Sales Inventory A. Yes Yes B. Yes No C. No Yes D. No No Option D Option A Option B Option C

Option B

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? Decline in sales due to product obsolescence. Restrictions placed on sales by laws and regulations. Over-recorded sales due to a lack of control over the sales entry function. Decline in sales due to economic declines.

Over-recorded sales due to a lack of control over the sales entry function.

Which of the following is least likely to be typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests? Examine bills of lading. Examine subsequent cash receipts. Physically examine items sold. Examine correspondence.

Physically examine items sold.

The receiving department is least likely to be responsible for the: Determination of quantities of goods received. Detection of damaged or defective merchandise. Preparation of a shipping document. Transmittal of goods received to the store's department.

Preparation of a shipping document.

Employee X works for ABC Company. Employee X has successfully breached the internal controls of ABC Company. How Employee X was able to breach internal controls is only partially known. However, the results are as follows: On 01-01-17 Employee X succeeded in forging the necessary signatures of ABC Company corporate officers to obtain a $10,000 line of credit from First Bank. The line of credit shows ABC Company as the debtor. The line of credit requires monthly payment of interest, and accrues interest only if some, or all, of the $10,000 is spent (i.e. similar to a credit card). Of course, ABC Company knows nothing about this First Bank line of credit. On 01-02-17, Employee X steals $10,000 cash from the ABC Company operating account and spends it on personal frivolities. On 01-25-17, Employee X withdraws $10,000 against the line of credit, and deposits this $10,000 cash into the ABC Company operating account. On 01-31-17, Employee X forges the signature of the Treasurer of ABC Company on an ABC Company check used to pay the interest on the line of credit from First Bank. The interest expense is not a material amount when compared to the interest expense legitimately incurred by ABC Company, and the check is well camouflaged by the numerous other debits to the interest expense account. Employee X repeats this forgery on 02-28-17, 03-31-17, and each month thereafter to pay the interest expense accrued for those time periods. What measure could ABC Company use to detect this problem. Bank reconciliation. Proof of cash. Confirmation of cash balances with financial institutions. Cutoff bank statement. Comparison of details of cash receipts listings to the cash receipts journal, accounts receivable postings, and authenticated deposit slips. None of the other choices are correct.

Proof of cash.

Which of the following audit procedures is the most appropriate when internal control over cash is weak or when a client requests an investigation of cash transactions? Evaluation of ratio of cash to current liabilities. Proof of cash. Bank reconciliation. Cash confirmation.

Proof of cash.

Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received? Quantities ordered are excluded from the receiving department copy of the purchase order. Vouchers are prepared by accounts payable department personnel only after they match item counts on the receiving report with the purchase order. Receiving department personnel are expected to match and reconcile the receiving report with the purchase order. Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports.

Quantities ordered are excluded from the receiving department copy of the purchase order.

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? Inaccurate billing due to a lack of controls. Lapping of accounts receivable. Misbilling a client due to a data input error. Recording sales when the customer is likely to return the goods.

Recording sales when the customer is likely to return the goods.

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500 imprest petty cash fund? Reimbursement occurs twice each week. Reimbursement vouchers are not prenumbered. The custodian occasionally uses the cash fund to cash employee checks. The custodian endorses reimbursement checks.

Reimbursement occurs twice each week.

In order to avoid the misappropriation of company-owned financial investments, which of the following is the best course of action that can be taken by the management of a company with a large portfolio of financial investments? Require that the safekeeping function for securities be assigned to a securities broker who will act as a custodial agent. Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis.

Require that the safekeeping function for securities be assigned to a securities broker who will act as a custodial agent.

Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product? Factory supervisor salary. Indirect materials. Miscellaneous expense. Sales expense.

Sales expense.

If the audit client sells goods to Customer X on account, which special journal should the audit client use? Sales journal Revenue journal Accounts receivable journal General journal

Sales journal

The client's physical count of inventories is lower than the inventory quantities in the perpetual records. This could be the result of a failure to record: Purchases. Sales discounts. Sales. Purchase discounts.

Sales.

To determine that all sales have been recorded, the auditors would select a sample of transactions from the: Accounts receivable subsidiary ledger. Sales journal. Shipping documents file. Remittance advices.

Shipping documents file.

A CPA examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitative data. This is an example of a: Cutoff test. Substantive test. Test of a control. Statistical test.

Test of a control.

Employee X works for ABC Company. Employee X has successfully breached the internal controls of ABC Company. How Employee X was able to breach internal controls is only partially known. However, the results are as follows: On 01-01-17 Employee X succeeded in forging the necessary signatures of ABC Company corporate officers to obtain a $10,000 line of credit from First Bank. The line of credit shows ABC Company as the debtor. The line of credit requires monthly payment of interest, and accrues interest only if some, or all, of the $10,000 is spent (i.e. similar to a credit card). Of course, ABC Company knows nothing about this First Bank line of credit. On 01-02-17, Employee X steals $10,000 cash from the ABC Company operating account and spends it on personal frivolities. On 01-25-17, Employee X withdraws $10,000 against the line of credit, and deposits this $10,000 cash into the ABC Company operating account. On 01-31-17, Employee X forges the signature of the Treasurer of ABC Company on an ABC Company check used to pay the interest on the line of credit from First Bank. The interest expense is not a material amount when compared to the interest expense legitimately incurred by ABC Company, and the check is well camouflaged by the numerous other debits to the interest expense account. Employee X repeats this forgery on 02-28-17, 03-31-17, and each month thereafter to pay the interest expense accrued for those time periods. In Texas, which of the following correctly states the law applicable to a criminal charge of forgery? The Check Clearing for the 21st Century Act is a federal law, thus it applies to a state criminal charge of forgery only if the bank that paid the check is not federally insured by FDIC (Federal Deposit Insurance Corporation). The Check Clearing for the 21st Century Act is a federal law, thus it does not apply to a state criminal charge of forgery because such federal statutes apply only in a federal court, not a state court. The Check Clearing for the 21st Century Act is a federal law that has vastly improved the ability to prosecute a forgery in state court in Texas regardless of whether the bank that paid the check is federally insured by FDIC (Federal Deposit Insurance Corporation). None of the other choices are correct. The Check Clearing for the 21st Century Act is a federal law that has made it more difficult to prove a forgery in state court in Texas regardless of whether the bank that paid the check is federally insured by FDIC (Federal Deposit Insurance Corporation).

The Check Clearing for the 21st Century Act is a federal law that has made it more difficult to prove a forgery in state court in Texas regardless of whether the bank that paid the check is federally insured by FDIC (Federal Deposit Insurance Corporation).

When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables? Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports. The auditors will in general use blank rather than positive confirmation requests. The account balances as of year-end will generally be confirmed. The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year-end.

The account balances as of year-end will generally be confirmed.

If the audit client receives a payment of $100 from its Customer X who has an account receivable balance of $500, which of the following is true? The audit client will journalize a debit to cash and a credit to accounts receivable - Customer X in the sales journal. The audit client will journalize a debit to cash and a credit to Sales - Customer X in the Sales journal. The audit client will journalize a debit to cash and a credit to accounts receivable - Customer X in the cash receipts journal. The audit client will post a debit to cash and a credit to accounts receivable - Customer X in the cash receipts journal. None of the other choices are correct.

The audit client will journalize a debit to cash and a credit to accounts receivable - Customer X in the cash receipts journal.

If the audit client receives a payment of $100 from its Customer X who has an account receivable balance of $500, which of the following is true? The audit client will post the $100 payment to Customer X's account in the general ledger for Accounts Receivable after journalizing the payment in the cash receipts journal. None of the other choices are correct. The audit client will post the $100 payment to Customer X's account in the subsidiary ledger for Accounts Receivable after journalizing the payment in the sales journal. The audit client will post the $100 payment to Customer X's account in the general ledger for Accounts Receivable after journalizing the payment in the general journal. The audit client will post the $100 payment to Customer X's account in the subsidiary ledger for Accounts Receivable after journalizing the payment in the cash receipts journal.

The audit client will post the $100 payment to Customer X's account in the subsidiary ledger for Accounts Receivable after journalizing the payment in the cash receipts journal.

Which of the following is not true relating to the auditors' observation of the client's physical inventory? The auditors should evaluate the client's planning of the physical inventory. The auditors should take test counts of the client's inventory. The auditors should evaluate the adequacy of the client's counting procedures. The auditors should make certain that consigned items from suppliers are included in physical inventory totals.

The auditors should make certain that consigned items from suppliers are included in physical inventory totals.

Which of the following is true about the auditors' observation of the client's physical inventory? The auditors should supervise the client's personnel. The auditors' observation addresses the existence assertion. The count must be made at year-end. The auditors should justify any omission of the observation in the audit report.

The auditors' observation addresses the existence assertion.

Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable? The return address on the envelope used to send the confirmation request is that of the client. The client's mailroom personnel closely monitor and inspect confirmation requests during mailing. The confirmation requests are mailed to customers by the internal auditors. The confirmation requests are sent on the client's letterhead.

The confirmation requests are sent on the client's letterhead.

In class, we discussed accounting for bad debt expense and allowance for doubtful accounts as a prerequisite to auditing accounts receivable. Which of the following is true? The difference between Accounts Receivable and Allowance for Doubtful Accounts before the writeoff should be less than the difference between Accounts Receivable and Allowance for Doubtful Accounts after the writeoff. None of the other choices are correct. The difference between Bad Debt Expense and Allowance for Doubtful Accounts before the writeoff should be greater than the difference between Accounts Receivable and Allowance for Doubtful Accounts after the writeoff. The difference between Accounts Receivable and Allowance for Doubtful Accounts before the writeoff should be the same amount as the difference between Accounts Receivable and Allowance for Doubtful Accounts after the writeoff. The difference between Bad Debt Expense and Allowance for Doubtful Accounts before the writeoff should be the same amount as the difference between Bad Debt Expense and Allowance for Doubtful Accounts after the writeoff.

The difference between Bad Debt Expense and Allowance for Doubtful Accounts before the writeoff should be the same amount as the difference between Bad Debt Expense and Allowance for Doubtful Accounts after the writeoff.

In class, we discussed a number of documents as presented in Chapter 11. We checked them for accuracy and found that there was one discrepancy, apparent from the face of the documents, that warranted further inquiry. What was the apparent discrepancy that called for additional inquiry? None of the other choices are correct. The difference in "Per Inventory Quantity/Price" and "Quantity & Price". The difference in total hours incurred on a job. The difference in a unit cost between two related documents. The difference in "Quantity Completed" and "Quantity".

The difference in a unit cost between two related documents.

Employee X works for ABC Company. Employee X has successfully breached the internal controls of ABC Company. How Employee X was able to breach internal controls is only partially known. However, the results are as follows: On 01-01-17 Employee X succeeded in forging the necessary signatures of ABC Company corporate officers to obtain a $10,000 line of credit from First Bank. The line of credit shows ABC Company as the debtor. The line of credit requires monthly payment of interest, and accrues interest only if some, or all, of the $10,000 is spent (i.e. similar to a credit card). Of course, ABC Company knows nothing about this First Bank line of credit. On 01-02-17, Employee X steals $10,000 cash from the ABC Company operating account and spends it on personal frivolities. On 01-25-17, Employee X withdraws $10,000 against the line of credit, and deposits this $10,000 cash into the ABC Company operating account. On 01-31-17, Employee X forges the signature of the Treasurer of ABC Company on an ABC Company check used to pay the interest on the line of credit from First Bank. The interest expense is not a material amount when compared to the interest expense legitimately incurred by ABC Company, and the check is well camouflaged by the numerous other debits to the interest expense account. Employee X repeats this forgery on 02-28-17, 03-31-17, and each month thereafter to pay the interest expense accrued for those time periods. Which of the following is true with regard to the Texas law of forgery. None of the other choices are correct. The forgeries of the signatures of the ABC Company corporate officers on the original documents used to obtain the line of credit does not have as good a chance of convicting Employee X of forgery as the forgeries of the signatures of the ABC Company Treasurer on the checks used to pay the interest expense because the checks have greater protection as negotiable instruments under the Check Clearing for the 21st Century Act. The forgeries of the signatures of the ABC Company corporate officers on the original documents used to obtain the line of credit does not have as good a chance of convicting Employee X of forgery than the forgeries of the signatures of the ABC Company Treasurer on the checks used to pay the interest expense. The forgeries of the signatures of the ABC Company corporate officers on the original documents used to obtain the line of credit has a better chance of convicting Employee X of forgery than the forgeries of the signatures of the ABC Company Treasurer on the checks used to pay the interest expense. The forgeries of the signatures of the ABC Company corporate officers on the original documents used to obtain the line of credit has the same chance of convicting Employee X of forgery as the forgeries of the signatures of the ABC Company Treasurer on the checks used to pay the interest expense.

The forgeries of the signatures of the ABC Company corporate officers on the original documents used to obtain the line of credit has a better chance of convicting Employee X of forgery than the forgeries of the signatures of the ABC Company Treasurer on the checks used to pay the interest expense.

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use? The positive form used for trade receivables and the negative form for other receivables. The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory. The positive form used for large balances and the negative form for the small balances. The positive form for small balances, and the negative form for large balances.

The positive form used for large balances and the negative form for the small balances.

Which of the following is an example of misappropriation of assets relating to sales? Accidentally recording cash that represents a liability as revenue. Holding the sales journal open to record next year's sales as having occurred in the current year. Intentionally recording cash received from a new debt agreement as revenue. Theft of cash register sales.

Theft of cash register sales.

You are auditing X Inc. X Inc. transfers inventory to an unrelated corporation Y Inc. on January 1, 2017. This transfer is for $100,000 inventory at cost, with a sales value of $150,000. The purpose of the transfer is to allow Y Inc. to have possession of the inventory in order to sell the inventory. Thus, Y Inc. has only possession of the inventory. X Inc. uses the periodic inventory method of accounting for its inventory. What entry does X Inc. enter in its accounting records on January 1, 2017? None of the other choices are correct. This is a consignment of goods, which means the entry made by X Inc. for the sale of goods to Y Inc. as of January 1, 2017 should be a debit to accounts receivable - Y Inc. and credit to sales because the revenue has been both realized and recognized. Debit Accounts Receivable - Y Inc. $150,000, credit Sales $150,000. Because X Inc. uses the periodic inventory method of accounting for its inventory, it cannot account for the cost of goods sold on this sale until X Inc. takes a physical count of the inventory until the end of the month. This is a consigment of goods, which means there is no entry made by X Inc. recognizing a sale of goods to Y Inc. as of January 1, 2017. This is a consigment of goods, which means there is no entry made by X Inc. recognizing a sale of goods to Y Inc. as of January 1, 2017, but there is a debit to accounts receivable and a credit to deferred revenue.

This is a consigment of goods, which means there is no entry made by X Inc. recognizing a sale of goods to Y Inc. as of January 1, 2017.

Employee X works for ABC Company. Employee X has successfully breached the internal controls of ABC Company. How Employee X was able to breach internal controls is only partially known. However, the results are as follows: On 01-01-17 Employee X succeeded in forging the necessary signatures of ABC Company corporate officers to obtain a $10,000 line of credit from First Bank. The line of credit shows ABC Company as the debtor. The line of credit requires monthly payment of interest, and accrues interest only if some, or all, of the $10,000 is spent (i.e. similar to a credit card). Of course, ABC Company knows nothing about this First Bank line of credit. On 01-02-17, Employee X steals $10,000 cash from the ABC Company operating account and spends it on personal frivolities. On 01-25-17, Employee X withdraws $10,000 against the line of credit, and deposits this $10,000 cash into the ABC Company operating account. On 01-31-17, Employee X forges the signature of the Treasurer of ABC Company on an ABC Company check used to pay the interest on the line of credit from First Bank. The interest expense is not a material amount when compared to the interest expense legitimately incurred by ABC Company, and the check is well camouflaged by the numerous other debits to the interest expense account. Employee X repeats this forgery on 02-28-17, 03-31-17, and each month thereafter to pay the interest expense accrued for those time periods. Which of the following correctly states the forgery law in Texas? Under Texas law, a witness is competent to testify as a handwriting expert if the witness can prove that the witness has testified before as such an expert. This is true even if there is an objection to competence. Under Texas law, a witness is competent to testify as a handwriting expert if the witness has graduated with at least a Master's degree in Forensic Science. This is true even if there is an objection to competence. Under Texas law, a witness is competent to testify as a handwriting expert if the witness has graduated with at least a Master's degree in Forensic Science. This is true even if there is an objection to competence. Under Texas law, a witness is competent to testify as a handwriting expert if the witness works as a handwriting analyst at one of two DPS crime labs - one is in Austin and the other is in Houston. This is true even if there is an objection to competence. All of the other choices are correct.

Under Texas law, a witness is competent to testify as a handwriting expert if the witness works as a handwriting analyst at one of two DPS crime labs - one is in Austin and the other is in Houston. This is true even if there is an objection to competence.

In class we discussed the "Texas Miltronics" problem. To avoid this problem, what substantive audit procedure should be employed to detect this problem? Understand the audit client's loan agreements for purchases of equipment, and determine the quality and quantity of equipment purchased and are serving as collateral for those loan agreements. Then verify with observation of the equipment on the balance sheet date. Understand the audit client's contracts for sales of its manufactured goods and determine the quality and quantity of raw materials required under those contracts. Then verify purchases in the Inventory account to make sure that the purchases in inventory comply with the quality and quantity of raw materials required under those contracts. None of the other choices are correct. Review the terms of the contract between the audit client and its customer in which the audit client manufactures and sells tangible inventory to its customer. Verify that the audit client has done all that is necessary to have a right to claim the amount of the contract as a debit to Accounts Receivable and a credit to Sales by confirming cost of goods sold on the contract with confirmations from vendors. After confirmation with corporate counsel about the probability of civil or criminal litigation, confirm this confirmation with the audit committee and verify with records from the audit client which support the estimation of probability that litigation will occur.

Understand the audit client's contracts for sales of its manufactured goods and determine the quality and quantity of raw materials required under those contracts. Then verify purchases in the Inventory account to make sure that the purchases in inventory comply with the quality and quantity of raw materials required under those contracts.

The auditor's analytical procedures will be facilitated if the client: Uses a standard cost system that produces variance reports. Segregates obsolete inventory before the physical inventory count. Corrects material weaknesses in internal control before the beginning of the audit. Reduces inventory balances to the lower of cost or market.

Uses a standard cost system that produces variance reports.

When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably: Want the client to schedule the physical inventory count at the end of the year. Insist that the client perform physical counts of inventory items several times during the year. Increase the extent of tests for unrecorded liabilities at the end of the year. Have to disclaim an opinion on the income statement for that year.

Want the client to schedule the physical inventory count at the end of the year.

Instead of taking a physical inventory count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and: Well-kept records of perpetual inventory are maintained. Inventory is slow-moving. Computer error reports are generated for missing prenumbered inventory tickets. Obsolete inventory items are segregated and excluded.

Well-kept records of perpetual inventory are maintained.

Which of the following should be included as a part of inventory costs of a manufacturing company? Direct Labor Raw Materials Factory Overhead Yes Yes Yes Yes No No No Yes No No No No

Yes Yes Yes

As compared to manual processing, electronic processing of cash transactions generally makes kiting: impossible to accomplish. easier to accomplish. more difficult to accomplish. neither easier, nor more difficult to accomplish.

more difficult to accomplish.

Internal control over cash receipts is weakened when an employee who receives customer mail receipts also: records credits to individual accounts receivable. prepares initial cash receipts records. prepares bank deposit slips for all mail receipts. maintains a petty cash fund.

records credits to individual accounts receivable.

The least crucial element of internal control over cash is: canceling the supporting documents for disbursements. preparation of the monthly bank reconciliation. separation of cash record keeping from custody of cash. separation of cash receipts from preparing deposits.

separation of cash receipts from preparing deposits.

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: controller. board of directors. executive committee. treasurer.

treasurer.

The auditors who are engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: detect kiting. verify the cash balance reported on the standard financial institution confirmation form. verify reconciling items on the client's bank reconciliation. detect lapping.

verify reconciling items on the client's bank reconciliation.