Audit chapter 12

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the relevant assertion that all

Expenditures for property and equipment have not been charged to expense.

In verifying the amount of goodwill recorded by a client in the current period, the most convincing evidence an auditor can obtain is by comparing the recorded amounts of assets acquired and liabilities assumed with the

Fair values as evidenced by independent appraisals.

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.

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance?

Inventory is complete.

The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to

Observe physical counts of the inventory items.

The auditor is concerned with establishing that dividends are paid to client corporation shareholders who hold stock as of the

Record date.

To check the accuracy of hours worked, an auditor would ordinarily compare clock cards with

Shop job time tickets.

In performing tests concerning the granting of stock options, an auditor should

Trace the authorization for the transaction to a vote of the board of directors.

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.

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.

When confirmation for accounts payable is undertaken, which form of confirmation should be used?

Positive confirmation.

Which of the following is the best reason an auditor should consider observing a client's distribution of regular payroll checks?

Separation of payroll duties is not effective enough to reduce control risk.

Which of the following auditing procedures most likely would provide assurance regarding a manufacturing entity's relevant assertions about inventory valuation?

Testing the entity's computation of standard overhead rates.

An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning relevant assertions about

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.

In auditing for unrecorded noncurrent bonds payable, an auditor most likely will

Compare interest expense with the bond payable amount for reasonableness.

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 nonissuer's sub-ledger. Which of the following management assertions is supported by this test?

Completeness.

In auditing accounts payable, an auditor's procedures most likely will focus primarily on the relevant assertion about

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 procedures would an auditor least likely perform before the balance sheet date?

Confirmation of accounts payable.

The auditor can best verify a client's bond sinking-fund transactions and year-end balance by

Confirmation with the bond trustee.

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.

To establish the existence and rights of an investment in the common stock of a publicly traded company, an auditor ordinarily performs a security count or

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

A charge in the subsequent period to a notes receivable account from the cash disbursements journal should alert the auditor to the possibility that a

Contingent liability has become a real liability and has been settled.

An auditor's plan to audit noncurrent debt most likely includes steps that require

Correlating interest expense recorded for the period with outstanding debt.

To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into

Cost of goods sold.

Which of the following ratios would an engagement partner most likely consider in forming an overall audit conclusion?

Cost of goods sold/average inventory.

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.

The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference?

Credit memos for several items returned by customers had not been recorded.

Under which of the following circumstances would it be advisable for the auditor to confirm accounts payable with creditors?

Creditor statements are not available and internal controls relating to accounts payable are unsatisfactory.

Confirmation of accounts payable with creditors is most appropriate when

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

When few property and equipment transactions occur during the year, the continuing auditor usually obtains an understanding of the related internal controls and performs

Extensive tests of current year property and equipment transactions.

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 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.

Compare payroll costs with entity standards or budgets.

Overpayments are discovered in performing tests of details.

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.

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?

Performing cutoff procedures for shipping and receiving.

The safeguarding of inventory most likely includes

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

Periodic or cycle counts of selected inventory items are made at various times during the year rather than a single inventory count at year end. Which of the following is necessary if the auditor plans to observe inventories at interim dates?

Perpetual inventory records are maintained.

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.

If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded

Purchases.

When title to merchandise in transit has passed to the audit client, the auditor engaged in the performance of a purchase cutoff will encounter the greatest difficulty in gaining assurance with respect to the

Quality.

Which of the following qualitative factors would an auditor consider most relevant to the consideration of whether a discovered misstatement is material?

The audit team found a misstatement that, if recorded, affects the client's compliance with loan covenants.

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.

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.

Which of the following control objectives is achieved by reviewing and testing control procedures over physical inventory count?

Verification of existence of inventory.

The primary audit procedure to determine whether accounts payable are measured properly is

Vouching accounts payable to supporting documentation.

Which of the following would provide an auditor of a nonissuer with the best evidence of fair value pertaining to a client's investments in derivative instruments that are listed on a national exchange and disclosed at fair value?

Quoted market prices.

Which of the following results of analytical procedures would most likely indicate possible unrecorded liabilities?

Ratio of accounts payable to total current liabilities of 4:1, compared to 6:1 for the prior period.

When the risk of material misstatement is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and

Recalculating payroll accruals.

In searching for unrecorded liabilities, an auditor most likely would examine the

Receiving reports for items received before year end, but not yet recorded.

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 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

A client has a large and active investment portfolio that is kept in a bank safe-deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will

Request the client to have the bank seal the safe-deposit box until the auditor can count the securities at a subsequent date.

In the audit of property, plant, and equipment, the auditor tries to do all of the following except to

Assess the adequacy of replacement funds.

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning relevant assertions about

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.

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of the relevant financial statement assertion of

Valuation and allocation.

The auditor should test closing entries to determine whether net income has been closed to retained earnings. This test primarily relates to which assertion?

Valuation and allocation.

Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management's assertion of

Valuation.

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely is

Vendors with whom the entity has previously done business.

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 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.

An auditor who wishes to test for the occurrence of equity transactions should complete which of the following procedures?

Vouch entries to supporting documents

A company sells a particular product only in the last month of its fiscal year. The company uses commission agents for such sales and pays them 6% of their net sales 30 days after the sales are made. The agents' sales were $10,000,000. Experience indicates that 10% of the sales are usually not collected and 2% are returned in the first month of the new year. The auditor would expect the year-end balance in the accrued commissions payable account to be

$588,000

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

Accounting records to the supporting evidence.

A client's procurement system ends with the assumption of a liability and the eventual payment of the liability. Which of the following best describes the auditor's primary concern with respect to liabilities resulting from the procurement system?

Accounts payable are not materially understated.

The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because

Accrued liabilities usually pertain to services of a continuing nature whereas accounts payable are the result of completed transactions.

When completing substantive testing of equity, which of the following accounts should an auditor consider?

Accumulated other comprehensive income.

The auditor should insist that a representative of the client be present during the physical examination of securities to

Acknowledge the receipt of securities returned.

When auditing inventories, an auditor would least likely verify that

All inventory owned by the client is on hand at the time of the count.

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 audit of owners' equity normally would not include

An audit of owners' equity normally would not include

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.

An auditor most likely would perform substantive tests of details on payroll transactions and balances when

Analytical procedures indicate unusual fluctuations in recurring payroll entries

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.

The auditor's primary objectives in an audit of an investment in securities do not include determining whether the securities are

Authentic.

An audit program for the retained earnings account should include a step that requires verification of the

Authorization for both cash and stock dividends.

During an audit, Mr. Wick learns that the audit client was granted a 3-month waiver of the repayment of principal on the installment loan with Blank Bank without an extension of the maturity date. With respect to this loan, the audit program used by Mr. Wick is least likely to include a verification of the

Balloon payment.

McPherson Corp. does not make an annual physical count of year-end inventories but instead makes test counts on the basis of a statistical plan. During the year, Mullins, CPA, observes such counts as are deemed necessary and is able to become satisfied as to the reliability of the client's procedures. In reporting on the results of the audit, Mullins

Can express an unmodified opinion without disclosing that (s)he did not observe year-end inventories.

An entity's internal control requires that an approved voucher, a prenumbered purchase order, and a prenumbered receiving report accompany every check request. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all

Canceled checks.

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.

An auditor testing investments would ordinarily use analytical procedures to ascertain the reasonableness of the

Completeness of recorded investment income.

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. Tracing test counts most likely obtained evidence concerning the relevant assertion about

Completeness.

An auditor considers stock sales that occurred near the end of the year to verify that they were not recorded in the following year. Which assertion is the auditor testing?

Cutoff.

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.

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.

Treetop Corporation acquired a building and arranged mortgage financing during the year. Verification of the related mortgage acquisition costs would be least likely to include an examination of the related

Deed.

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's principal objective in analyzing repairs and maintenance expense accounts is to

Discover expenditures that were expensed but should have been capitalized.

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.

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 vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that

Employees work the number of hours for which they are paid.

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.

To test the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would

Examine the audited financial statements of the investee company.

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.

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.

An auditor usually obtains evidence of a company's equity transactions by reviewing its

Minutes of board of directors' meetings.

An auditor should vouch corporate stock issuances and treasury stock transactions to the

Minutes of the board of directors.

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.

When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor's original invoices have been misplaced. What should the auditor do in response to this situation?

Reevaluate the risk of fraud and design alternate tests for the related transactions.

An analysis of which of the following accounts would best aid in verifying that all fixed assets have been capitalized?

Repairs and maintenance.

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.

The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items

Represented by tags were included on the listing.

Ajax, Inc., is an affiliate of the audit client and is audited by another firm of auditors. Which of the following is most likely to be used by the auditor of the client to obtain assurance that all guarantees of the affiliate's indebtedness have been detected?

Review client minutes and obtain a representation letter.

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.

During its fiscal year, a company issued, at a discount, a substantial amount of first-mortgage bonds. When performing audit work in connection with the bond issue, the independent auditor should

Review the minutes for authorization.

The auditor is most likely to verify accrued commissions payable in conjunction with the

Sales cutoff test.

Which of the following factors most likely would heighten an auditor's concern about the risk of material misstatement arising from the misappropriation of assets?

The entity's fixed assets lack ownership identification.

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.

During an audit of an issuer of bonds, the auditor should obtain written confirmation regarding debenture transactions from the

Trustee.

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.

Under which of the following conditions may an auditor's observation procedure for inventory be performed during or after the end of the period under audit?

When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts.

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning relevant assertions about Existence Classification and Understandability

YES NO

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

Cash disbursements.

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 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

Which of the following is the most important consideration of an auditor when examining the shareholders' equity section of a client's balance sheet?

Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors' meetings.

An auditor's inquiries of management disclosed that the entity recently invested in a series of energy derivatives to hedge against the risks associated with fluctuating oil prices. Under these circumstances, the auditor should

Evaluate management's conclusion about the recognition of an impairment loss.

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.

A client is holding securities as collateral for an outstanding account receivable. During the course of the audit engagement, the CPA should

Examine the securities and determine their fair value.

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 noncurrent debt should include steps that require

Examining bond trust indentures.

In violation of a company policy, Lowell Company erroneously capitalized the cost of painting its warehouse. The auditor examining Lowell's financial statements would most likely detect this error when

Examining the construction work orders supporting items capitalized during the year.

Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?

Examining vendor statements for amounts not reported as purchases.

The auditor may conclude that depreciation charges are insufficient by noting

Excessive recurring losses on assets retired.

Inspecting the stock certificates of a client tests which of the following?

Existence of treasury stock.

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.

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.

In testing for unrecorded retirements of equipment, an auditor most likely would

In testing for unrecorded retirements of equipment, an auditor most likely would

An auditor will usually trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are

Included in the final inventory schedule.

Several years ago, Conway, Inc., secured a conventional real estate mortgage loan. Which of the following audit procedures would be least likely to be performed by an auditor auditing the mortgage balance

Inspect public records of lien balances.

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would

Inspect the property ledger and the insurance and tax records, and then tour the client's facilities.

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.

In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the purchase

Invoices.

In connection with the audit of bonds payable, an auditor would expect to find in a trust indenture the

Issue date and maturity date of the bond.

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.

To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would vouch

Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets.

Some firms that dispose of only a small part of their total output by consignment shipments fail to make any distinction between consignment shipments and regular sales. Which of the following would suggest to the auditor that the client's goods have been shipped on consignment?

Large debits to accounts receivable and small periodic credits.

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.

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.

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.

When testing the completeness assertion about year-end inventory, the auditor is least likely to consider

Observation of the inventory at year end.

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 prenumbered 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.

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.

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 counterparties to provide information about them, such as whether side agreements have been made.

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.

In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of relevant financial statement assertions about existence or occurrence and

Rights and obligations.

Oftentimes, the auditor will inspect the articles of incorporation and bylaws of a client corporation. This audit procedure most likely is intended to test which relevant assertion?

Rights and obligations.

The audit of year-end physical inventories should include steps to verify that the client's purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year end was not recorded as a

Sale in the current 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.

Which of the following procedures is least likely to be performed before the balance sheet date?

Search for unrecorded liabilities.

An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?

Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks.

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.

In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?

Test the computation of standard overhead rates.

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.

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.

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.

When a client's company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning

The number of shares issued and outstanding.

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.

In performing substantive tests regarding the granting of stock options to senior management of an issuer, an auditor most likely would

Trace the authorization for the options granted to the board of directors' approval.

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.

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

Unpaid bills.