Unit 3 (Ch. 10-16)

valuation

Inquiries of warehouse personnel concerning possibly obsolete or slow moving inventory items provide assurance about management's assertion of _______________.

receiving

Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the ______________ department.

rights & obligations

Reviewing loan agreements and minutes of board of directors' meetings tests what assertion?

d

Reviewing the expenditures included in repairs and maintenance for unusually large items is used to test A) Completeness. B) Occurrence. C) Existence. D) Classification.

a

Tracing a sample of entries in the cash receipts journal to daily deposit slips tests which of the following assertions for cash? A) Occurrence. B) Completeness. C) Valuation. D) Cutoff.

true

True or False: A bank reconciliation is a type of internal control.

true

True or False: Accounts payable confirmations are used less frequently than accounts receivable confirmations.

false (more likely to overstate sales)

True or False: Auditors are concerned about the occurrence assertion for revenue transactions because clients are more likely to understate sales than to overstate them.

false

True or False: Inquiry is an audit procedure.

true

True or False: The auditor should not use negative confirmation requests as the sole substantive auditor procedure.

false (low risk)

True or False: There is a huge risk related to rights and obligation assertion because entities have an incentive to record liabilities that are not obligations of the entity.

cutoff

When auditing merchandise inventory at year end, the auditor performs a purchase __________ test to obtain evidence that all goods owned at year end are included in the inventory balance.

low control risk, small balances, good chance they will respond

When can you use negative confirmations?

authorization

assertion about classes of transactions; all purchase and cash disbursement transactions and events are properly authorized

occurrence

assertion about classes of transactions; all purchase and cash disbursement transactions and events that have been recorded have occurred and pertain to the entity

accuracy

assertion about classes of transactions; amounts and other data relating to recorded purchase and cash disbursement transactions and events have been recorded appropriately

cutoff

assertion about classes of transactions; purchase and disbursement transactions and events have been recorded in the correct accounting period

a

A decrease in inventory turnover that is not consistent with the change in sales may signal to the auditor A) An overstatement of ending inventory. B) The existence of many open purchase orders. C) A change from FIFO to LIFO (assume prices are increasing). D) Duplicate payments on inventory orders.

b

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items a. included in the listing have been counted b. represented by inventory tags are included in the listing c. included in the listing are represented by inventory tags d. represented by inventory tags are bona fide

d

All of the following are inherent risk factors for the purchasing process except: A) Whether the supply of raw materials is adequate. B) How volatile raw material prices are. C) Misstatements detected in prior audits. D) A new IT system placed in operation during the year.

d

Although the quantity and content of audit working papers vary with each engagement, an auditor's permanent files most likely include a. schedules that support the current year's adjusting entries b. prior years' accounts receivable confirmations that were classified as exceptions c. documentation indicating that the audit work was adequately planned and supervised d. information regarding the different classes of stock and the number of shares of each class that are authorized to be issued

b

An audit program for long term debt would most likely include steps that require a. comparing the carrying amount of the debt to its year end market value b. correlating the interest expense recorded for the period with the debt outstanding for the period c. verifying the existence of the holders of the debt by direct confirmation d. inspecting the accounts payable subsidiary ledger for unrecorded long term debt

b

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the assertion that all a. noncapitalizable expenditures for repairs and maintenance have been properly charged to expense b. expenditures for property and equipment have not been charged to expense c. noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period d. expenditures for property and equipment have been recorded in the proper period

b

An auditor compares the current year revenues and expenses with those of the prior year and investigates all changes exceeding 5%. By this procedure, the auditor would be most likely to learn that a. fourth-quarter payroll taxes in the current year were not paid b. the entity changed its capitalization policy for small tools in the current year c. a current year increase in property tax rates has not been recognized in the entity's accrual d. the current year provision for uncollectible accounts is inadequate because of worsening economic conditions

c

An auditor is most likely to perform substantive tests of details on payroll transactions and balances when a. cutoff tests indicate a substantial amount of accrued payroll expense b. the level of control risk relative to payroll transactions is set at low c. substantive analytical procedures indicate unusual fluctuations in recurring payroll entries d. accrued payroll expense consists primarily of unpaid commissions

a

An auditor may conclude that depreciation expense charges are insufficient by noting A) Excessive recurring losses on the disposal of assets. B) Insured values in excess of book values. C) Continual trade-ins on relatively new assets. D) Large amounts of fully-depreciated assets remain in operation.

d

An auditor ordinarily sends a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year end balance. One purpose of this procedure is to a. provide the data necessary to prepare a proof of cash b. request that a cutoff bank statement and related checks be sent to the auditor c. detect kiting activities that may otherwise not be discovered d. seek information about loans from the banks

positive

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when no reply to a _____________ confirmation request is received.

completeness

An auditor testing long term investments would ordinarily use substantive analytical procedures to ascertain the reasonableness of the __________________ of recorded investment income.

c

An auditor who is testing IT controls in a payroll system would most likely use test data that contain conditions such as a. deductions not authorized by employees b. overtime not approved by supervisors c. time cards with invalid job numbers d. payroll checks with unauthorized signatures

c

An auditor would most likely verify the interest earned on bond investments by a. vouching the receipt and deposit of interest checks b. confirming the bond interest rate with the issuer of the bonds c. recomputing the interest earned on the basis of face amount, interest rate, and period held d. testing the controls over cash receipts

presentation and disclosure (classification)

An auditor's primary purpose in examining a letter received from the bank shortly after the balance sheet date that renews and extends an entity's note payable is most likely to obtain evidence concerning management's assertions about ______________________.

c

An entity erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this in a timely, efficient manner? A) Periodically tracing the purchases journal daily totals to the applicable postings in the general ledger. B) Sending quarterly confirmations to all vendors. C) Reconciling monthly statement received from the vendor with the accounts payable subsidiary ledger. D) Tracing the totals from the purchases journal to the various general ledger accounts.

bond trustee

An entity has established a bond sinking fund to repurchase a portion of the outstanding bonds each year. The auditor can best verify the entity's bond sinking fund transactions and year end bond balance by confirmation with the ________ ____________.

a

An example of a deferred charge is A) Trademarks. B) Prepaid interest. C) Prepaid insurance. D) Goodwill.

completeness, occurrence

Cash disbursements made but not recorded deals with the _______________ assertion. Cash disbursements recorded but not made deal with the ________________ assertion.

a

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this and be least likely to be detected by an auditor? a. understating the sales journal b. overstating the accounts receivable control account c. overstating the accounts receivable subsidiary ledger d. understating the cash receipts journal

completeness

Customers are more likely to complain to the entity if which of the assertions for cash receipts is violated?

b

Due to a weakness observed in an entity's control over recording retirement of equipment the auditor may decide to a. vouch additions to the other assets account to search for equipment that is still on hand but no longer being used b. select certain items of equipment from the accounting records and locate them in the plant c. inspect certain items of equipment in the plant and trace those items to the accounting records d. review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year

b

During the year being audited, the Matthews Corporation changed from a system of recording time worked on clock cards to an IT payroll system in which employees record time in and out with magnetic cards. The IT system automatically updates all payroll records. Because of this change a. a generalized computer audit program must be used b. without paper clock cards, part of the audit trail is altered c. the potential for payroll-related fraud is diminished d. transactions must be processed in batches

b

Effective control activities over the payroll function may include a. reconciliation of totals on job time cards with job reports by employees responsible for those specific jobs b. verification of agreement of job time cards with employee clock card hours by a payroll department employee c. preparation of payroll transaction journal entries by an employee who reports to the supervisor of the personnel department d. custody of rate authorization records by the supervisor of the payroll department

c

Fleming, the purchasing manager at Sparks Hardware Wholesalers, has a relative named Patterson who owns a retail hardware store. Fleming arranged for hardware to be delivered by manufacturers directly to the retail store on a C.O.D. (cash-on-delivery) basis to enable Patterson to buy at lower wholesale prices. Fleming was most likely able to do this because of Sparks' poor internal control regarding A) Perpetual inventory records. B) Processing of cash receipts. C) Processing of purchase orders. D) Processing of invoices.

a

Footing the shares outstanding in the stock register and comparing the total to shares outstanding in the general ledger stock account addresses the audit objective of A) Completeness B) Occurrence. C) Rights and obligations. D) Valuation.

general accounting

For an appropriate segregation of duties, journalizing and posting summary payroll transactions should be assigned to ____________ ______________.

treasurer

For effective internal control purposes, who should be responsible for mailing signed checks?

c

For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve a. employee overtime wages b. credit granted to customers c. write offs of customer accounts d. cash disbursements

lower of cost and market

How is inventory valued?

year end

If the control risk were set at high, an auditor would request that the entity schedule the physical inventory count at _____________.

b

If the number of days' sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable is most likely violated? a. existence b. completeness c. rights and obligations d. classification

b

In a properly designed purchasing process, the same employee most likely would match vendors' invoices with receiving reports and a. post the detailed accounts payable records b. recompute the calculations on vendors' invoices c. reconcile the accounts payroll ledger d. cancel vendors' invoices after payment

completeness (don't want to underestimate liabilities)

In accounts payable, you are most concerned with which assertion?

b

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 a. existence b. valuation and allocation c. completeness d. rights and obligations

realized, earned

In order for revenue to be recorded, it must be _____________ and ___________.

c

In performing a search for unrecorded retirements of plant assets, an auditor most likely would A) Analyze the entity's repairs & maintenance account and then tour the plant facilities. B) Tour the facilities and then inspect the entity's plant asset ledger along with insurance and tax records. C) Inspect the entity's plant asset ledger along with insurance and tax records, and then tour the facilities. D) Tour the facilities and then analyze the repairs and maintenance account.

b

Information regarding which of the following would normally not be included in an entity's financial statement disclosures related to plant assets? A) Capital leases. B) Depreciation expenses for tax purposes. C) Major acquisitions/disposals of operating assets. D) Depreciation methods and useful lives.

b

It would be appropriate for the payroll department to be responsible for which of the following functions? a. approval of employee time records b. preparation of periodic governmental reports as to employees' earnings and withholding taxes c. maintenance of records of employment, discharges, and pay increases d. distribution of paychecks to employees

a

Key segregations of duties for investments include all of the following except: A) Whoever is responsible for investment activities should not also ensure that all dividend and interest income was received. B) Whoever initiates the purchase of investments should not also grant final approval. C) Whoever oversees security valuation should not also acquire securities. D) Whoever maintains custody of the securities should not also account for the securities.

d

On 12/31/11, Hoover Co. erroneously credited accounts payable (Dr. Cash; Cr. Accounts Payable) for a transfer of funds between two bank accounts that resulted in an overstatement of both cash and accounts payable at year-end. The check was not recorded until it cleared the bank on 1/2/12. Which of the following procedures would be least effective in detecting this misstatement? A) Review of the 12/31/11 bank reconciliations for the 2 bank accounts. B) Review of the schedule of interbank transfers. C) Review of the accounts payable supporting documentation at 12/31/11. D) Review of the December check register for both accounts.

b

On receiving the cutoff bank statement, the auditor should vouch a. deposits in transit on the year end bank reconciliation to deposits in the cash receipts journal b. checks dated before year end listed as outstanding on the year end bank reconciliation to the cutoff statement c. deposits listed on the cutoff statement to deposits in the cash receipts journal d. checks dated after year end to outstanding checks listed on the year end bank reconciliation and to the cutoff statement

variances

Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for investigation of _______________ within a formal budgeting system.

c

Property, plant, and equipment transactions include all of the following, except: A) Self-construction of a new office building. B) Acquiring capital assets in exchange for stock. C) Recording operating leases. D) Abandoning capital assets.

realized

Revenue is ______________ when a product or service is exchanged for cash, a promise to pay cash, or other assets that can be converted into cash.

earned

Revenue is ______________ when an entity has delivered a product or provided a service.

cutoff

Purchase _______________ procedures should be designed to test whether all inventory purchased and received before the end of the year was recorded.

occurrence, completeness

Purchases recorded but goods not received deals with the _________________ assertion. Purchases made but not recorded deals with the _________________ assertion.

a

Segregation of duties for stockholders' equity transactions include all of the following except: A) The person who maintains the stockholders' ledger should be separate from the individual ensuring that dividend transactions comply with the corporate charter. B) Those responsible for issuing stock certificates should be separate from accounting. C) The person responsible for keeping detailed stockholder records should be separate from the general ledger function. D) The person responsible for keeping detailed stockholder records should be separate from processing cash disbursements.

direct

Substantive testing provides _____________ evidence.

existence, overstated

The _____________ of accounts receivable is one of the more important assertions because the auditor wants assurance that this balance is not ____________ through the inclusion of fictitious customer accounts.

voucher

The _____________ packet contains all the relevant documentation supporting a purchase transaction.

equity method, consolidation

The ______________ ______________ is used if ownership is between 20 and 50%, and _________________ is used if ownership is greater than 50%.

cutoff

The ___________________ assertion is the one that is most often conducted as a substantive procedure.

existence

The auditor is most concerned with which management assertion during the audit of cash?

b

The auditor typically uses the following procedures to detect fraud in the cash accounts: A) Bank confirmations. B) Bank transfer schedule. C) Normal bank reconciliation procedures. D) Inquiries of management

b

The auditor typically uses the following procedures to detect fraud in the cash accounts: A) Bank confirmations. B) Bank transfer schedule. C) Normal bank reconciliation procedures. D) Inquiries of management.

existence

The auditor's major concern with the ______________ assertion is whether the recorded liabilities are valid obligation of the entity.

a

The best procedure for an auditor to test whether credit limits are being exceeded would be to a. develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations b. develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit c. request a printout of all account balances so that they can be manually checked against the credit limits d. request a printout of a sample of account balances so that they can be individually checked against the respective credit limits

credit approval

The main control that authorizes shipment of goods or performance of services is payment or proper ____________ ___________ for the transaction.

valuation

The major _____________ issue related to accounts receivable is concerned with the net realizable value of accounts receivable.

chart of accounts

The major control for preventing cash from being recorded in the wrong account is a ___________ ___ ____________.

completeness

The major misstatement related to the ___________________ assertion is that a cash disbursement is made but not recorded in the entity's records. `

low, high, likely

The negative request form of accounts receivable confirmation is useful particularly when the assessed level of CR is ________, the number of small balances is _______, and consideration by the recipient is _________.

d

The primary responsibility of a bank acting as a registrar of capital stock is to a. ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation b. account for stock certificates by comparing the total shares outstanding to the total in the shareholders' subsidiary ledger c. act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury stock d. verify that stock has been issued in accordance with the authorization of the board of directors and the articles of incorporation

revenue

Three types of transaction are typically processed through the _____________ process: sale of goods or services for cash, receipt of cash from the customer in payment for goods/services, and the return of goods by the customer.

purchasing

Three types of transaction that are processed through the ______________ process are purchase of goods and services for cash, payment of the liabilities arising from purchases, and return of goods to suppliers for cash.

receiving reports

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this tests consists or all ______________ ____________.

b

To establish the existence and rights of a long-term investment in the common stock of a publicly traded company, an auditor ordinarily performs a security count or a. relies on the entity's internal controls if the auditor has reasonable assurance that the control activities are being applied as prescribed b. confirms the number of shares owned that are held by an independent custodian c. determines the market price per share at the balance sheet date from published quotations d. confirms the number of shares owned with the issuing company

minutes of the board of directors

To obtain evidence on the authorization assertion, an auditor should trace corporate stock issuances and treasury stock transaction to what?

b

To strengthen control over the custody of equipment, the entity would most likely institute a policy requiring a periodic a. increase in insurance b. inspection of equipment and reconciliation with accounting records c. verification of liens, pledges, and collateralizations d. accounting for work orders

d

To test the assertion of existence for long-term debt, the auditor could complete which of the following procedures? A) Recompute accrued interest payable. B) Obtain an analysis of notes payable and reconcile to the general ledger. C) Review interest expense for payments to debt holders not listed on the debt analysis schedule. D) Examine copies of debt agreements and contracts.

existence, completeness

Vouching tests for ________________. Tracing tests for ________________.

look at market, look for similar instruments, valuation expert

What are the 3 levels of fair value valuation?

held to maturity, available for sale, trading

What are the 3 types of debt investments?

equity method, trading, available for sale, consolidation

What are the 4 types of equity investments?

inquiry, inspection of documents, observation, reperformance (walkthroughs)

What are the audit procedures used to test controls?

sales to fictitious accounts, recording revenue when goods have not been shipped

What are the auditor's two primary concerns for revenue transactions?

industry related, complexity of revenue recognition, difficulty of auditing transactions and balances, misstatements detected in prior audits

What are the four inherent risk factors that may affect the revenue process?

order entry, credit authorization, shipping, billing, cash receipts, accounts receivable, general ledger

What are the functions in the revenue process?

requisitioning, purchasing, receiving, invoice processing, disbursements, accounts payable, general ledger

What are the functions of the purchasing process?

analytical procedures, tracing, vouching, confirmation, physical examination

What are the substantive tests?

inquiry, inspection of documents, observation, reperformance (walkthrough)

What are the tests of controls?

entity's organizational structure, its methods of assigning authority and responsibility

What are the two important factors to consider over the control environment and purchasing process?

a

What assertion is tested by vouching stock repurchases to the canceled stock certificates? A) Occurrence. B) Valuation. C) Completeness. D) Disclosure.

custody, authorization, recording

What duties must be separated?

receiving goods

What event leads to recognition of the liability by the entity?

segregation of duties

What internal control would most likely deter the lapping of collections from customers?

direct knowledge of the auditor

What is considered the strongest evidence?

private company

What is implied by using a substantive strategy when auditing a company?

gains/losses for available for sale securities are reported in OCI

What is the difference between accounting for available for sale and trading securities?

confirmation

What is the most common audit procedure for accounts receivable?

shipping documents

What is the population the auditor is most likely to draw from in order to test the cutoff assertion for revenue?

valuation

What is the primary concern when auditing intangible assets?

sales invoice

What is the source document that signals the recognition of revenue?

aged trial balance

What report does the auditor use for much of the substantive audit work in accounts receivable?

b

When an entity does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning a. restrictions on the payment of dividends b. the number of shares issued and outstanding c. guarantees of preferred stock liquidation value d. the number of shares subject to agreements to repurchase

vendor shipping document, purchase order

When goods are received, the receiving clerk should match the goods with the ________ _________ __________ and the __________ __________.

RMM is low (specifically CR), small number of negative confirmations sent, low exception rate is expected, not of aware of conditions that would cause recipients to disregard requests

When should the auditor use negative confirmations?

b

When there are numerous plant asset transactions during the year, an auditor who plans to assess control risk at a high level for a non-public entity usually performs A) Extensive test of controls and limited tests of current year transactions. B) Limited or no tests of controls and extensive substantive tests of current year transactions and ending balances. C) Primarily substantive analytical procedures on year end balances. D) Primarily substantive analytical procedures on current year transactions.

tests of control, limited

When there are numerous property and equipment transactions during the year, an auditor who plans to set the control risk at a low level usually performs ________________________ and ___________ tests of current year property and equipment transactions.

a

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be a. vendors with whom the entity has previously done business b. amounts recorded in the accounts payable subsidiary ledger c. payees of checks drawn in the month after year end d. invoices filed in the entity's open invoice file

standard bank confirmations

Where is the primary evidence regarding year end bank balances documented?

a

Which of the following audit procedures is best for identifying unrecorded trade accounts payable? A) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the period before the balance sheet date and whether it was recorded. B) Investigating payables recorded just before and after the balance sheet date to determine whether they are supported by receiving reports. C) Examining unusual relationships between monthly accounts payable balances and recorded cash payments. D) Reconciling monthly vendor statements to the receiving report file to identify items received just before the balance sheet date.

d

Which of the following audit procedures is best for identifying unrecorded trade accounts payable? a. examination of unusual relationships between monthly accounts payable balances and recorded cash payments b. reconciliation of vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date c. investigation of payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports d. review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period

c

Which of the following audit procedures would not likely be performed when auditing stockholders' equity? A) Read over board of directors' minutes for authorization of equity transactions. B) Confirm outstanding common and preferred stock with the stock registrar. C) Compare valuation of stock accounts to published market prices. D) Obtain management representation about the number of shares issued and outstanding.

c

Which of the following audit tests would most likely be used to test the occurrence assertion for payroll transactions? a. trace a sample of time sheets to the payroll register b. recompute the mathematical accuracy of a sample of payroll checks c. vouch a sample of payroll checks to the approved time sheet summary and the master employee list to verify validity d. test a sample of time sheets for the presence of authorization

d

Which of the following best represents a situation in which an auditor would use a tax specialist for the audit of the tax provision? A) The company has several temporary differences. B) The company has several permanent differences. C) The company has deferred tax liabilities. D) The company does business overseas.

a

Which of the following combinations of procedures would an auditor be most likely to perform to obtain evidence about fixed asset additions? a. inspecting documents and physically examining assets b. recomputing calculations and obtaining written management representations c. observing operating activities and comparing balances to prior period balances d. confirming ownership and corroborating transactions through inquiries of entity personnel

c

Which of the following comparisons would be most useful to an auditor in evaluating the overall financial results of an entity's operations? a. prior year accounts payable to current year accounts payable b. prior year payroll expense to budgeted current year payroll expense c. current year revenue to budgeted current year revenue d. current year warranty expense to current year contingent liabilities

c

Which of the following control activities could best prevent direct labor from being charged to manufacturing overhead? A) Examination of routine tickets from finished goods on delivery. B) Reconciliation of work-in-process inventory with cost records. C) Comparison of daily journal entries with factory labor summary. D) Recomputation of direct labor based on inspection of time cards.

d

Which of the following control activities is not usually performed in the accounts payable department? a. matching vendor's invoice with the related receiving report b. approving vouchers for payment by having an authorized employee sign the vouchers c. indicating the asset and expense accounts to be debited d. accounting for unused prenumbered purchase orders and receiving reports

a

Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions? a. inventory manager does not have ability to record inventory transactions b. summary of the receiving reports is independently compared to the inventory c. inventory is periodically reviewed for slow moving or obsolete items, which may require a write down d. subsidiary ledgers are periodically reconciled with inventory control accounts

a

Which of the following control activities would most likely allow for a reduction in the scope of the auditor's tests of depreciation expense? a. review and approval of the periodic equipment depreciation entry by a supervisor b. comparison of equipment account balances for the current year with the current year budget and prior year actual balance c. review of the miscellaneous income account for salvage credits and scrap sales of partially depreciated equipment d. authorization of payment of vendor's invoices by a designed employee who is independent of the equipment receiving function

d

Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? a. The billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the customer's authorized credit limit and current account balance. b. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account each month. c. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers. d. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

d

Which of the following controls would most effectively ensure that recorded purchases are free of material misstatements? A) The receiving department compares the quantity ordered on purchase orders with the quantity received on receiving reports. B) Vendor invoices are compared with purchase orders by an employee who is independent of the receiving department. C) Receiving reports require the signature of the individual who authorized the purchase. D) Purchase orders, receiving reports, and vendor invoices are independently matched when preparing vouchers.

d

Which of the following controls would most effectively ensure that the proper custody of assets in the investing process is maintained? a. direct access to securities in the safe deposit box is limited to one officer b. personnel who post investment transaction to the general ledger are not permitted to update the investment subsidiary ledger c. purchase and sale of investments are executed on the specific authorization of the board of directors d. the recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe deposit box by independent personnel

b

Which of the following does not represent a major classification of expenses identified by FASB Concept Statement No. 5? A) Product costs. B) Functional costs. C) Period costs. D) Allocable costs.

c

Which of the following internal control activities is most likely to address the completeness assertion for inventory? a. the work in process account is periodically reconciled with subsidiary records b. employees responsible for custody of finished goods do not perform the receiving function c. receiving reports are prenumbered and periodically reconciled d. there is a separation of duties between payroll department and inventory accounting personnel

a

Which of the following internal controls is most likely to justify a reduction of control risk concerning plant and equipment acquisitions? a. periodic physical inspection and reconciliation of plant and equipment to the detailed accounting records by the internal audit staff b. comparison of current year plant and equipment account balances with prior year actual balances c. review of prenumbered purchase orders to detect unrecorded trade ins d. approval of periodic depreciation entries by a supervisor independent of the accounting department

b

Which of the following is likely to be the most effective audit procedure for verifying dividends earned on investments in publicly traded equity securities? a. trace deposits of dividend checks to the cash receipts book b. reconcile recorded earnings with the dividend earnings reported in the investment broker statement c. compare the amounts received with prior year dividends received d. recompute selected extensions and footings of dividend schedules and compare totals to the general ledger

a

Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff? a. unrecorded sales for the year b. lapping of year end accounts receivable c. excessive sales discounts d. unauthorized goods returned for credit

b

Which of the following is necessary if the auditor plans to observe inventory at interim dates? a. complete recounts are performed by independent teams b. perpetual inventory records are maintained c. unit cost records are integrated with production accounting records d. inventory balances are rarely at low levels

d

Which of the following is not a common internal control activity related to the acquisition of property, plant, and equipment? A) Using a budget to forecast and control acquisitions and retirements. B) Analyzing monthly variances between authorized expenditures and actual costs. C) Requiring acquisitions to be authorized in relevant departments by the appropriate level of management. D) Establishing a written company policy regarding the acquisition of raw material.

b

Which of the following is not a role of the inventory management function (not the inventory management process as a whole)? A) Authorization of production. B) Maintenance of the cost of manufacturing in cost records. C) Maintenance of inventory at appropriate levels. D) Issuance of purchase requisitions.

b

Which of the following is not a typical document included in the Inventory Management Process? A) Receiving report. B) Purchase order. C) Inventory status report. D) Shipping order.

c

Which of the following is not one of the auditor's objectives relating to the examination of inventories in a financial statement audit? A) Verifying that the entity has used proper inventory pricing. B) Verifying that the inventory counted is actually owned by the entity. C) Verifying that all inventory owned by the entity is on hand at the main warehousing location for the physical count. D) Ascertaining the physical quantities of inventory on hand.

d

Which of the following pairs of income statement and balance sheet accounts typically would not be audited in conjunction with each other? A) Discount on bonds payable and interest expense. B) Accounts receivable and bad debt expense. C) Prepaid insurance and insurance expense. D) Long-term debt and interest income.

c

Which of the following procedures is least likely to be performed before the balance sheet date? a. test of internal control over cash b. confirmation of receivables c. search for unrecorded liabilities d. observation of inventory

a

Which of the following procedures would an auditor most likely employ to determine that every name on an entity's payroll represents an actual employee that is presently employed? A) Make a surprise observation of the entity's regular distribution of paychecks. B) Examine personnel records for accuracy and completeness. C) Maintain control over the mailing of W-2 forms to employee addresses as listed in their personnel files. D) Compare names listed on payroll tax returns with those in the personnel files.

c

Which of the following procedures would most likely be considered a weakness in an entity's internal controls over payroll? a. A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary b. Payroll checks are prepared by the payroll department and signed by the treasurer. c. The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department. d. The personnel department sends employees' termination notices to the payroll department.

b

Which of the following procedures would normally be performed by the auditor when conducting tests of payroll transactions? A) Interview employees selected in a statistical sample of payroll transactions. B) Trace number of hours worked as shown on payroll to time cards and time reports signed by the foreman. C) Confirm amounts withheld from employees' salaries with proper governmental authorities. D) Examine signatures on paid salary checks.

d

Which of the following questions would an auditor most likely include on a control questionnaire for notes payable? a. Are assets that collateralize notes payable critically needed for the entity's continued existence? b. Are two or more authorized signatures required on checks that repay notes payable? c. Are the proceeds from notes payable used to purchase noncurrent assets? d. Are direct borrowings on notes payable authorized by the board of directors?

d

Which of the following questions would most likely be found on an auditor's internal control questionnaire related to notes payable? A) Are two or more signatures required on checks written on repayment of the notes? B) Are the proceeds from borrowing used solely to acquire non-current assets? C) Are the assets that serve as collateral on the debt reviewed monthly for possible impairment? D) Are all note payable borrowings authorized by the board of directors?

d

Which of the following situations would not support the auditor's decision to reduce control risk below maximum for the audit of intangible assets? a. the entity employs a qualified specialist who reviews the value of the intangible assets on an annual basis for impairment b. the auditor documented, tested, and developed an understanding of the acquisition process and found the key controls to be effective c. the IT system that maintains the records for intangible assets has adequate controls to prevent unauthorized access d. the company has made no acquisitions of other companies during the fiscal year under audit

c

Which of the following statements is false regarding a four-column bank reconciliation or "proof of cash"? A) It is generally prepared by auditors in situations where internal controls in the cash area are considered very weak. B) It can be effective in detecting kiting since cash receipts and disbursements are reconciled with those on the bank statement. C) It can be effective in detecting unrecorded checks that have not yet cleared the bank since cash disbursements per book and bank will not equal. D) It is often used by the auditor to detect certain types of fraud.

d

Which of the following would be considered an internal control weakness associated with plant assets? A) The estimated useful lives used for financial reporting purposes in some cases are slightly different than IRS classifications used for tax purposes. B) Factory equipment acquisitions are initiated by the department head requesting the item, approved by the divisional manager, and sent to the purchasing department to acquire bids (estimates). C) Periodic physical examination of plant assets is made and independently compared to the plant asset subsidiary ledger. D) Replacements for plant assets are automatically authorized and processed in the next-to-last year of their estimated useful life.

c

Which of the following would most likely be an internal control activity designed to detect errors and fraud concerning the custody of inventory? a. periodic reconciliation of work in process with job cost sheets b. segregation of functions between general accounting and cost accounting c. independent comparisons of finished goods records with counts of goods on hand d. approval of inventory journal entries by the storekeeper

c

Which of the following would not be considered a test in the area of accounts receivable that relates to the existence assertion? A) Evaluate proper segregation of duties. B) Confirm accounts receivable directly with customers. C) Trace the record of shipping to inclusion in the accounts receivable subsidiary ledger. D) Review receipt of cash from customers in the period subsequent to the balance sheet date.

management, auditor

While _________________ is responsible for the financial statements, the ____________ must ensure that all necessary disclosures are made.

b

While observing an entity's annual physical inventory count, an auditor recorded test counts for several inventory items and noticed that certain test counts were higher than recorded quantities in the entity's perpetual records. This situation could be the result of the entity's failure to record A) Purchase returns. B) Sales returns. C) Sales. D) Either sales or purchase returns.

treasurer, treasurer

Who should be responsible for the distribution? Who should have custody of unclaimed paychecks?

can't infer that all nonrespondents have verified their account information

Why are negative confirmations less effective than positive confirmations?

positive

_____________ confirmations are used when an account's individual balances are large or if errors are anticipated .

tracing

_________________ goes from the internal source documents to the accounting records.

vouching

___________________ goes from the accounting records to the internal source documents.

imprest account

a bank account containing a stipulated amount of money used for limited purposes; frequently used for disbursing payroll and dividend checks

blank or zero balance (positive) confirmation

a confirmation request on which the recipient fills in the amount or furnishes the information requested

derivative

a contract between two or more parties and its value is determined by fluctuations in the underlying asset; price is dependent upon one or more underlying assets including commodities, stocks, bonds, and interest rates

exception

a response that indicates a difference between information requested to be confirmed, or contained in the entity's records, and information provided by the confirming party

nonresponse

a failure of the confirming party to respond, or fully respond, to a positive confirmation request or a confirmation request returned undelivered

positive confirmation request

a request that the confirming party respond directly to the auditor by providing the requested information or indicating whether the confirming party agrees or disagrees with the information in the request

negative confirmation request

a request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request

proof of cash

a technique used to reconcile the cash receipts and disbursements recorded on the entity's books with the cash deposited into and disbursed from the entity's bank account for a specific time period

walkthrough

a transaction being traced by an auditor from origination through the entity's information system until it is reflected in the entity's financial reports

prepaid expense

a type of asset that arises on a balance sheet as a result of a business making payments for goods and services to be received in the near future; their value is expensed over time as the benefit is received

intangible asset

an asset that is not physical in nature; ex: patents, trademarks, copyrights, goodwill, brand recognition

property, plant, and equipment (PPE)

an asset that is vital to business operations but cannot be easily liquidated; ex: warehouse, equipment

income tax provision

an estimate of the taxes that will ultimately be paid to the government on the current year financial income reported in the financial statements

auditor specialist

an individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence

completeness

assertion about classes of transactions; all purchase and cash disbursement transaction and events that should have been recorded have been recorded

tests of controls

audit procedures performed to test the operating effectiveness of controls in preventing or detecting material misstatements at the relevant assertion level

kiting

can best be defined as a situation in which an employee fraudulently covers a cash shortage by transferring money from one bank account to another.

computer assisted audit techniques (CAATs)

computer programs that allow auditors to test computer files and databases

application controls

controls that apply to the processing of specific computer applications and are part of the computer programs used in the accounting system

general controls

controls that relate to the overall information processing environment and have a pervasive effect on the entity's computer operations

standard costs

costs assigned to products based on expected costs, which may differ from actual costs

permanent differences

differences that are fundamental in what constitutes revenue or expense for GAAP and tax purposes

temporary differences

differences that are timing differences between the recognition of revenue or expense under GAAP and tax and are expected to reverse

customer sales order

document that contains the details of the type and quantity of products or services ordered by the customer

remittance advice

document that is mailed with the customer's bill and returned with the customer's payment; contains information regarding which invoices are being paid by the customer

purchase requisition

document that requests goods or services for an authorized individual or department within the entity

shipping document

document that serves as a bill of lading and contains information on the type of product shipped, the quantity shipped, and other relevant information; copy is sent to initiate the billing process

credit approval form

documents the formal procedure for investigating the creditworthiness of the customer; used to establish the customer's credit limit

analytical procedures

evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data

assertions

expressed or implied representations by management regarding the recognition, measurement, presentation, and disclosure of information in the financial statements and related disclosures

revenue

inflows or other enhancements of assets of an entity or settlements of its liabilities from delivery or producing goods, rendering services, or other activities that constitute the entity's major or central operations

footing

means that each column of the trial balance is added and the column totals are then added to ensure that they agree with the total balance for the account

expenses

outflows or other using up of assets or incurrences of liabilities from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations

registrar

person responsible for ensuring that all stock issued complies with the corporate charter and for maintaining the control totals for total shares outstanding

transfer agent

person responsible for preparing stock certificates and maintaining adequate stockholders' records

dividend disbursing agent

person that prepares and mails dividend checks to the stockholders of record

liabilities

probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events

open order report

report of all customer orders for which processing has not been completed; should be reviewed daily or weekly and old orders should be investigated to determine if any goods have been shipped but not billed

cash equivalents

short-term, highly liquid investments that are readily convertible to cash or so near their maturity that there is little risk of change in their value; ex: money market funds, treasury bills

tests of details of account balances and disclosures

substantive tests that concentrate on the details of amounts contained in an account balance and in disclosures

substantive tests of transactions

tests to detect errors or fraud in individual transactions

classification

the assertion about classes of transactions; purchase and cash disbursement transactions and events have been recorded in the proper accounts

reliance strategy

the auditor's decision to rely on the entity's controls, test those controls, and reduce the direct tests of the financial statement accounts

income tax payable

the estimate of the taxes that the entity will actually pay the government based on the taxable income reported in the current year tax return less any estimated tax payment made during the year

fair value

the price that would be recieved to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

lapping

the process of covering a cash shortage by applying cash from one customer's accounts receivable against another customer's accounts receivable

confirmation

the process of obtaining and evaluating direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions

lien

when a creditor or bank has the right to sell the mortgaged or collateral property of those who fail to meet the obligation of a loan contract