SU 11

An auditor traces the daily remittance list to the last validated deposit ticket for the period. Which of the following assertions is being tested?

Completeness

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of

Completeness.

At 12:01 a.m. on the first day of the new year, the cash receipts journal for the year just ended is electronically locked down. The new year's cash receipts journal can only be opened by a manager, and the manager notes the time and amount of the first receipt of the new year. This control would best alleviate concerns regarding which assertion?

Cutoff

Tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of

Cutoff.

Once a CPA has determined that accounts receivable have increased because of slow collections in a tight money environment, the CPA is likely to

Expand tests of collectibility.

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?

Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts.

After receiving responses to accounts receivable confirmations, the auditor determined that the evidence was not sufficient to form a conclusion regarding the accounts receivable balance. Which of the following actions should the auditor take next concerning the accounts receivable balance?

Request additional confirmations and perform alternative procedures.

In the confirmation of accounts receivable, the auditor would most likely

Request confirmation of a sample of the inactive accounts.

The most effective audit procedure for determining the collectibility of an account receivable is the

Review of the subsequent cash collections.

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year end?

Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year end.

The auditing standards define external confirmation as "a direct written response to the auditor from a third party (the confirming party), either in paper form or by electronic or other medium." The assertions for which confirmation of accounts receivable balances provides primary evidence are

Rights and obligations and existence.

The negative request form of accounts receivable confirmation may be used when the

Risk of Material Misstatements: Low Number of Small Balances: Many Consideration by the Recipient: Likely

Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that

Sales billed to customers were actually shipped.

If the objective of an auditor's test of details is to detect the overstatement of sales, the auditor should trace transactions from the

Sales journal to the shipping documents.

In the audit of which of the following general ledger accounts will tests of controls be particularly appropriate?

Sales.

The best evidence regarding year-end bank balances is documented in the

Bank reconciliations.

Tracing shipping documents to prenumbered sales invoices provides evidence that

Shipments to customers were properly invoiced.

Which of the following checks illustrate deposits or transfers in transit at December 31, Year 1?

#101 and #303.

Which of the following checks might indicate kiting?

#202 and #404.

Which of the cash transfers would not appear as an outstanding check on the December 31 bank reconciliation?

1

Which of the following cash transfers results in a misstatement of cash at December 31, Year 1?

1/4/Yr 2, 1/5/Yr 2, 12/31/Yr 1, 1/4/Yr 2

Which of the cash transfers would appear as a deposit in transit on the December 31 bank reconciliation?

4

Which of the following sources of corroborating information would most likely increase the assurance that an auditor of a nonissuer obtains from management's representations?

A confirmation received from the entity's bank.

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may

Be unaware of all the financial relationships that the bank has with the client.

If the objective of a test of details is to detect overstatements of sales, the auditor should compare transactions in the

Accounting records with the source documents.

An inappropriate audit procedure relative to accounts receivable is to determine that the

Accounts are collected by the balance sheet date.

For the fiscal year ending December 31 of the previous year and for the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and an allowance for uncollectible accounts receivable of $30,000 and $50,000, respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions to be drawn?

Accounts receivable turnovers are 10.0 and 6.7, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.17, respectively. Examine allowance for possible understatement of the allowance.

A cutoff test of sales complements the verification of

Accounts receivable.

Which of the following controls would best alleviate concerns relating to the occurrence assertion of cash?

All checks written to the company are scanned and stored electronically.

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?

Allowance for doubtful accounts.

If the client records the required adjustments, the net effect on income in thousands of dollars for the period ended March 31 is

An increase of $8.

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account, as of October 31. By this procedure, the auditor would be most likely to learn of which of the following?

An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.

Which of the following most likely would give the most assurance concerning the valuation assertion about accounts receivable?

Assessing the allowance for uncollectible accounts for reasonableness.

Substantive testing of cash addresses assertions by a nonissuer in the

Balance sheet.

Substantive testing of cash addresses assertions related to which of the financial statements?

Balance sheet.

An auditor should test bank transfers for the last part of the audit period and first part of the subsequent period to detect whether

Cash balances were overstated because of kiting.

Which of the following sets of information does an auditor usually confirm on one form?

Cash in bank and collateral for loans.

An auditor most likely would limit substantive audit tests of sales transactions when the risks of material misstatement are assessed as low for the existence and occurrence assertions concerning sales transactions and the auditor has already gathered evidence supporting

Cash receipts and accounts receivable.

A large university has relatively ineffective internal control. The university's auditor seeks assurance that all tuition revenue has been recorded. The auditor could best obtain the desired assurance by

Comparing business office revenue records with registrar's office records of students enrolled.

In an audit of cash, an auditor evaluates the evidence relevant to the classification and understandability assertion. If the client's sinking funds and compensating balances are listed as noncurrent assets, the auditor should

Conclude that they are appropriately reported.

The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to

Corroborate information regarding deposit and loan balances.

When auditing a client's statement of cash flows, an auditor will rely primarily upon

Cross-referencing to balances and transactions considered in connection with the audit of the other financial statements.

Which of the following comparisons would be most useful to an auditor in evaluating the results of an entity's operations?

Current-year revenue to budgeted current-year revenue.

An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the

Dates checks are deposited per bank statements with the dates remittance credits are recorded.

The tick mark Ø most likely indicates that the amount was traced to the

Deposits in transit of the applicable bank reconciliation.

Which of the following audit procedures best tests the classification and understandability of cash?

Determine that restricted cash is accounted for as a noncurrent asset.

Customers having substantial year-end past due balances fail to reply after second request forms have been mailed directly to them. Which of the following is the most appropriate alternative audit procedure?

Examine shipping documents.

On the last day of the fiscal year, the cash disbursements clerk drew a company check on bank A and deposited the check in the company account bank B to cover a previous theft of cash. The disbursement has not been recorded. The auditor will best detect this form of kiting by

Examining paid checks returned with the bank statement of the next accounting period after year end.

Most substantive audit procedures performed on cash are directed toward which assertion?

Existence

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose

Individual invoices.

Which of the following might be detected by an auditor's review of the client's sales cutoff?

Inflated sales for the year.

Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions?

Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal.

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

Inspect the shipping records documenting the merchandise sold to the debtors.

All of the following are examples of substantive tests to verify the valuation of net accounts receivable except the

Inspection of accounts for current versus noncurrent status in the statement of financial position.

An auditor is required to confirm accounts receivable if the accounts receivable balances are

Material to the financial statements.

A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA's best direction of test is from the

Meter department records to the billing (sales) register.

An auditor who has confirmed accounts receivable may discover that the sales journal was held open past year end if

Most of the returned positive confirmation requests indicate that the debtor owes a smaller balance than the amount being confirmed.

The standard AICPA form to financial institutions requesting information on direct liabilities on loans asks for the following information

No, Yes, Yes

Tracing bills of lading to sales invoices provides evidence that

Shipments to customers were invoiced.

Which of the following audit procedures would be most appropriate to test the valuation of the collateral of a delinquent loan receivable?

Obtaining a current value appraisal of the collateral.

An auditor selects a sample of recorded cash receipts and vouches them to accounts receivable and customer orders. This procedure is relevant to which assertion?

Occurrence.

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following?

One of the cashiers has been covering a personal embezzlement by lapping.

An auditor is testing the valuation and allocation assertion about cash. For this purpose, the auditor should

Ordinarily assign a lower inherent risk to U.S. currency than foreign currency.

The tick mark þ likely indicates that the amount was traced to the

Outstanding check list of the applicable bank reconciliation.

Which of the following procedures would an auditor most likely perform to identify unusual sales transactions?

Performing a trend analysis of quarterly sales.

Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?

Preliminary judgments about materiality levels.

An entity's financial statements were misstated over a period of years because large amounts of revenue were recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this fraud by

Scanning the general journal for unusual entries.

To establish illegal "slush funds," corporations may divert cash received in normal business operations. An auditor would encounter the greatest difficulty in detecting the diversion of proceeds from

Scrap sales.

Assuming a low assessed risk of material misstatement, which of the following audit procedures would be least likely to be performed?

Search for unrecorded cash receipts.

An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to

Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation.

Which of the following procedures would be appropriate to test the existence assertion during an audit of accounts receivable?

Send confirmations to customers.

Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is ineffective. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely

Send positive confirmation requests.

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would

Send the customer a second confirmation request.

During a recent audit of the revenue cycle, a CPA found the client had $1 million in accounts receivable recorded for fictitious customers. Which of the following tests most likely facilitated identification of the fraud?

Sending positive confirmations to all of the client's customers with balances on December 31.

A CPA is engaged in the annual audit of a calendar year client. The client took a complete physical inventory under the CPA's observation on December 15 and adjusted its inventory account and detailed perpetual inventory records to agree with the physical inventory. The client considers a sale to be made in the period that goods are shipped. Listed below are four items taken from the CPA's sales cutoff test worksheet. Which item does not require an adjusting entry on the client's books?

Shipped: 12/10 Recorded as Sale: 12/19 Credited to Inventory: 12/12

An auditor is determining whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices. The auditor most likely would select a sample of transactions from the population represented by the

Shipping document file.

If the objective of an auditor's test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the

Shipping documents to the sales invoices.

When counting cash on hand, the auditor must exercise control over all cash and other negotiable assets to prevent

Substitution.

An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past 5 years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?

The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period.

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?

The client opened a second retail outlet during the current year, and its credit sales approximately equaled the older outlet.

An auditor's analytical procedures performed during the overall review stage indicated that the client's accounts receivable had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor?

The client opened a second retail outlet in the current year, and its credit sales approximately equaled those of the older, established outlet.

A bank confirmation request should be authorized and sent by whom?

The client should authorize the request and the auditor should send it.

Confirmation of accounts receivable is a generally accepted auditing procedure. The presumption is that an auditor will request confirmation of accounts receivable. Confirmation is necessary when

The combined assessed level of inherent and control risk is high.

The accounts receivable turnover ratio increased significantly over a two-year period. This trend could indicate that

The company is more aggressively collecting customer accounts.

An independent auditor asked a client's internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure?

The form was mailed by the controller.

Many of the Granada Corporation's convertible bondholders have converted their bonds into stock during the year under audit. The independent auditor should review the Granada Corporation's statement of cash flows and related disclosures to ascertain that they show

The issuance of the stock and reduction in convertible debt.

The standard AICPA form directed to financial institutions requests all of the following except

The principal amount paid on a direct liability.

When scheduling the audit work to be performed on an engagement, the auditor should consider confirming accounts receivable balances at an interim date if

The risk of material misstatement relative to financial statement assertions about receivables is acceptably low.

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that

There was an improper cutoff of sales at the end of the year.

Auditors are often concerned with the possibility of overstatement of sales and receivables. However, management may also have reasons for understating these balances. Which of the following would explain understatement of sales and receivables?

To avoid paying taxes.

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would

Verify the sources and contents of the faxes in telephone calls to the senders.

Which of the following is not a principal objective of the auditor in the audit of revenues?

To verify cash deposited during the year.

A company issued bonds for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditor's best course of action is to

Trace the cash received from the issuance to the accounting records.

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning relevant assertions about

Valuation and allocation.

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of

Valuation and allocation.

During the process of confirming receivables as of December 31, Year 1, a positive confirmation was returned indicating the "balance owed as of December 31 was paid on January 9, Year 2." The auditor would most likely

Verify that the amount was received.

The auditor believes the reported sales balance is overstated due to the large number of goods returned near period end. The auditor should

Vouch sales returns to receiving reports.