ACC 401 Ch.12 Review

An auditor usually tests the reasonableness of dividend income from investments in publicly held companies by computing the amounts that should have been received by referring to

Dividend record books produced by investment advisory services.

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 test consists of all

Receiving reports.

An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of

Classification and understandability.

Determining that proper amounts of depreciation are expensed provides assurance about management's assertions of valuation and allocation and

Classification and understandability.

During an audit of a company's equity accounts, the auditor determines whether restrictions have been imposed on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify relevant assertion about

Classification and understandability.

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?

Compare cash payments made after the balance sheet date with the accounts payable trial balance.

In auditing payroll when control risk is assessed as low, an auditor most likely will

Compare payroll costs with entity standards or budgets.

How should an auditor verify the valuation of marketable securities at the balance sheet date?

Compare the prices of the securities to published closing prices at the balance sheet date.

An auditor traces the serial numbers on equipment to a non-issuer's sub-ledger. Which of the following management assertions is supported by this test?

Completeness.

In connection with an audit of the prepaid insurance account, which of the following procedures is usually not performed by the auditor?

Confirm premium rates with an independent insurance broker.

In establishing the existence and ownership of an investment held by a corporation in the form of publicly traded stock, an auditor should inspect the securities or

Confirm the number of shares owned that are held by an independent custodian.

In establishing the existence and ownership of long-term investments in the form of publicly traded stock, an auditor most likely would inspect the securities or

Confirm the number of shares owned that are held by an independent custodian.

Which of the following statements regarding the audit of negotiable notes receivable in bearer form is not correct?

Confirmation by the debtor is an acceptable alternative to inspection.

A portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?

Confirmation.

When an auditor tests a client's cost accounting system, the auditor's tests are primarily designed to determine that

Costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.

Confirmation of accounts payable with creditors is most appropriate when

Creditor statements are not available, and internal control over accounts payable is unsatisfactory.

Tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about the relevant assertion regarding

Cutoff.

Vouching selected items from the payroll journal to employee time cards that have been approved by supervisory personnel provides evidence that

Employees worked the number of hours for which their pay was computed.

Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account?

Extraordinary repairs have lengthened the life of an asset.

When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection. The policy's absence most likely indicates the possibility of a(n)

Lien on the plant equipment.

Which of the following procedures would an auditor most likely complete to test the existence assertion for property, plant, and equipment?

Obtaining a listing of all current-year additions, vouching significant additions to original invoices, and determining that they have been placed in service.

When performing procedures to test assertions about purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which relevant assertion would this procedure most likely support?

Occurrence.

When auditing payroll transactions, an auditor is primarily concerned with the possibility of

Overpayments and unauthorized payments.

In the audit of a medium-sized manufacturing company, which one of the following areas would be expected to require the least amount of audit time?

Owners' equity.

The safeguarding of inventory most likely includes

Periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count.

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to accumulated depreciation accounts in the current year?

Plant assets were retired during the current year.

Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the client's employees?

Prepare a schedule of accounts payable.

Purchase cutoff procedures should be designed to test whether all inventory

Purchased and whose title has passed before year end was recorded.

In an audit of a purchasing department, which of the following usually is considered a risk factor?

Purchases are made from parties related to buyers or other company officials.

Florida Corporation declared a 100% stock split-up effected in the form of a dividend. In connection with the audit of Florida's financial statements, Florida's auditor should determine that

The additional shares issued do not exceed the number of authorized but previously unissued shares.

Unrecorded liabilities are most likely to be found during the review of which of the following documents?

Unpaid bills.

An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all

Vendors' invoices.

Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence and valuation assertions about recorded accounts payable?

Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.

An auditor would most likely verify the interest earned on bond investments by

Recomputing the interest earned on the basis of face amount, interest rate, and period held.

Which of the following is the most effective audit procedure for verification of dividends earned on investments in marketable equity securities?

Reconciling amounts received with published dividend records.

An auditor usually determines whether dividend income from publicly-held investments is reasonable by computing the amounts that should have been received by referring to

Records produced by investment services.

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

Represented by inventory tags are included in the listing.

When a company has a material amount of treasury stock certificates on hand, a year-end count of the certificates by the auditor is

Always part of the audit plan.

In performing a count of negotiable securities, an auditor records the details of the count on a security count worksheet. What other information is usually included on this worksheet?

An acknowledgment by a client representative that the securities were returned intact.

An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by

An error in recording amortization of the excess of the investor's cost over the investment's underlying carrying amount.

Which of the following audit procedures is least likely to detect an unrecorded liability?

Analysis and recomputation of depreciation expense.

In connection with the audit of a current issue of bonds payable, the auditor should

Ascertain that the client has obtained the opinion of counsel on the legality of the issue.

The client asked the auditor to audit financial statements covering the current year. The auditor did not observe at the prior year's physical inventory. Which of the following actions would the auditor most likely take?

Audit the prior year inventory using alternative substantive procedures.

A company owns a 30% voting interest in another entity. Assuming the investor did not elect the fair value option, which of the following provides the best form of audit evidence pertaining to the annual measurement of the investment?

Audited financial statements of the investee.

An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the relevant assertions regarding inventory, including presentation and disclosure and

Valuation and allocation.

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support the relevant assertion about

Valuation and allocation.

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?

Vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices.

In testing the existence assertion for an asset, an auditor ordinarily works from the

Accounting records to the supporting evidence.

An auditor inspects a client's investment records to determine that any transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evidence concerning relevant financial statement assertions about

Classification and understandability, and valuation and allocation.

An audit of owners' equity normally would not include

Detail checking from the dividend payment list to the capital stock records.

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to

Determine that purchases were properly recorded.

When a client engages in transactions involving derivatives, the auditor should

Determine whether the applicable reporting framework specifies the means of measuring fair value.

The best audit procedure for determining the existence of open commodity futures contracts at year end is the review of

Direct confirmations with the client's commodity traders.

An audit assistant found a purchase order for a regular supplier in the amount of $5,500. The purchase order was dated after receipt of the goods. The purchasing agent had forgotten to issue the purchase order. Also, a disbursement of $450 for materials did not have a receiving report. The assistant wanted to select additional purchase orders for investigation but was unconcerned about the lack of a receiving report. The audit director should

Disagree with the assistant because the lack of a receiving report has a greater risk of loss associated with it.

An auditor is testing the reasonableness of dividend income from investments in issuers. The auditor most likely would compute the amount that should have been received and recorded by the client by

Electronically accessing the details of dividend records on the Internet.

An auditor determines that a client has properly capitalized a leased asset (and corresponding lease liability) as representing, in substance, an installment purchase. As part of the auditor's procedures, (s)he should

Evaluate the propriety of the interest rate used in discounting the future lease payments.

In a manufacturing company, which one of the following audit procedures provides the least assurance of the existence of the general ledger balance of investment in stocks and bonds at the audit date?

Examination of paid checks issued in payment of securities purchased.

Which of the following procedures would an auditor most likely perform to obtain assurance that slow-moving and obsolete items included in inventories are properly identified?

Examining an analysis of inventory turnover.

An audit plan for non-current debt should include steps that require

Examining bond trust indentures.

In testing plant and equipment balances, an auditor physically examines new additions listed on an analysis of plant and equipment. This procedure most likely obtains evidence concerning management's assertion of

Existence.

The controller of Excello Manufacturing, Inc. wants to use ratio analysis to identify the possible existence of idle equipment or the possibility that equipment has been disposed of without having been written off. Which of the following ratios would best accomplish this objective?

Gross manufacturing equipment cost to units produced.

Audit procedures applied to purchase transactions at year end address the cutoff assertion. An entity should include goods in its inventory if it

Holds legal title to the goods.

Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client company if the company

Holds legal title to the merchandise.

Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.

Which of the following combinations of procedures would an auditor most likely perform to obtain evidence about fixed asset additions?

Inspecting documents and physically examining assets.

When auditing a public warehouse, which of the following is the most important audit procedure with respect to disclosing unrecorded liabilities?

Inspection of receiving and issuing procedures

To obtain assurance that items reflected in a client's perpetual inventory records actually exist, an auditor would most likely trace

Items in the inventory perpetual records to inventory tags and the auditor's test counts.

If the auditor discovers that the net carrying amount of a client's trading debt securities is overstated because of a loss in fair value, the auditor should insist that the

Loss in fair value be recognized in the financial statements of the client.

When outside firms of nonaccountants specializing in the taking of physical inventories are used to count, list, price, and subsequently compute the total dollar amount of inventory on hand at the date of the physical count, the auditor will ordinarily

Make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions.

The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to

Materials requisitions.

The client's bookkeeper perpetrated a theft by preparing erroneous W-2 forms. The bookkeeper's FICA withheld was overstated by $2,000 and the FICA withheld from all other employees was understated by the same amount. Which of the following is an audit procedure that would detect such a fraud?

Multiplication of the applicable FICA rate by each individual's gross annual taxable earnings.

Which of the following actions is an analytical procedure that an auditor most likely would use while auditing a company's notes payable?

Multiplying the average outstanding loan balance by the interest rate and comparing the result to interest expense actually recorded.

Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?

Notes receivable and interest income.

When a company's stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the

Number of shares issued and outstanding.

If statistical sampling methods are used by a client in the taking of its physical inventory, the auditor must

Observe such test counts as (s)he deems necessary and be satisfied that the sampling plan has statistical validity, that it was properly applied, and that the resulting precision and reliability are reasonable in the circumstances.

The Smith Corporation uses pre-numbered receiving reports that are released in numerical order from a locked box. For 2 days before the physical count all receiving reports are stamped "before inventory," and for 2 days after the physical count all receiving reports are stamped "after inventory." The receiving department continues to receive goods after the cutoff time while the physical count is in process. The least effective method for checking the accuracy of the cutoff is to

Observe that the receiving clerk is stamping the receiving reports properly.

Auditors may need to plan and perform auditing procedures for financial statement assertions about derivatives and hedging activities. Which of the following substantive procedures most clearly tests the completeness assertion about derivatives?

Requesting counter-parties to provide information about them, such as whether side agreements have been made.

An auditor would be most likely to learn of slow-moving inventory through

Review of perpetual inventory records.

The auditor is least likely to learn of retirements of equipment through which of the following?

Review of the purchase return and allowance account.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record

Sales returns.

A weakness in internal control over recording retirements of equipment may cause an auditor to

Select certain items of equipment from the accounting records and locate them in the plant.

The auditor observes the count of marketable securities on December 31. (S)he records the serial number of each security and checks the serial number and number of shares (or principal amount) against company records. Which error or bad practice has the best chance of being detected by this procedure?

The CFO misappropriated and sold securities on April 4. (S)he speculated successfully with the proceeds and replaced the misappropriated securities on December 29.

Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?

The current year's payroll expense with the prior year's payroll expense.

As part of the process of observing a client's physical inventories, an auditor should be alert to

The inclusion of any obsolete or damaged goods.

The auditor who interviews the plant manager is most likely to rely upon this interview as primary support for an audit conclusion on

The necessity to record a provision for deferred maintenance costs.

Which of the following circumstances most likely will cause an auditor to suspect an employee payroll fraud scheme?

There are significant unexplained variances between standard and actual labor cost.

The element of the audit-planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the

Timing of inventory observation procedures to be performed.

During the year under audit, a client issued a substantial amount of bonds to an insurance company (a private placement). Which of the following is the most important step in the auditor's plan for the audit of bonds payable?

Tracing the cash received from the issue to the accounting records.