Audit Exam 2

Which of the following best describes the reason that the auditors record their inventory test counts in the working papers? A. To document every test count. B. For subsequent comparison with the completed inventory listing. C. To document compliance with generally accepted accounting principles. D. For use in subsequent audits.

For subsequent comparison with the completed inventory listing.

During an audit of a publicly-held company, the auditors should obtain written confirmation regarding debenture transactions from the: A. Debenture holders. B. Client's attorney. C. Internal auditors. D. Trustee.

Trustee.

A client's previous two years financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, both immaterial amounts. This year, the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit, $55,000 represents a material amount. Assuming that the entire understatement is to be recorded based on SEC SAB 108, the decrease in this year's income due to these understatements is: A. $0. B. $60,000. C. $110,000. D. $140,000.

$60,000

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? A. A bank lockbox system. B. Approval of all disbursements by an individual independent of cash receipts. C. Monthly bank cutoff statements. D. Prenumbered remittance advices.

A bank lockbox system.

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? A. A bank lockbox system. B. Prenumbered remittance advices. C. Monthly bank reconciliations. D. Daily deposit of cash receipts.

A bank lockbox system.

The auditors may expect a proper debit to goodwill due to: A. Purchase of a trademark. B. Establishment of an extraordinarily profitable product. C. A business combination. D. Capitalization of human resources.

A business combination.

The Parmalat fraud case involved: A. A fraudulent cash confirmation. B. Kiting of funds between banks in India and banks in Pakistan. C. A bank reconciliation performed by the client that systematically understated cash. D. Major unrecorded disbursements for equipment.

A fraudulent cash confirmation.

Which of the following would indicate the need to use positive accounts receivable confirmation requests? A. A large population consisting of small balances. B. Good internal control over accounts receivable. C. Most accounts are with large reputable companies. D. A large number of accounts receivable are in dispute.

A large number of accounts receivable are in dispute.

A registrar/transfer agent system relating to capital stock is most likely used by: A. A small, nonpublic company. B. A large, publicly traded company. C. All companies must use this type of system. D. No companies use this system anymore.

A large, publicly traded company.

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally NOT be able to detect: A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An unrecorded check cashed during that month. D. A bank charge during the month not recorded on the books.

A second payment of an account payable which had already been paid in full two months earlier.

Which of the following audit procedures is aimed at determining whether every name on the company payroll is an employee actually on the job? A. A surprise observation of a paycheck distribution. B. A test of payroll extensions. C. Analytical comparisons of budgeted to actual payroll expense. D. Comparison of payee names on canceled payroll checks with the payroll register.

A surprise observation of a paycheck distribution.

A continuing audit client's property, plant, and equipment and accounts receivable accounts have approximately the same year-end balance. In this circumstance, when compared to property, plant and equipment, one would normally expect the audit of accounts receivable to require: A. More audit time. B. Less audit time. C. Approximately the same amount of audit time. D. Similar confirmation procedures.

Accounts Receivable - More audit time

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

Accounts receivable are overstated at December 31, 20X0. Transactions posted in December 20X0 could overstate A/R for 20X0

The auditors who physically examine securities should insist that a client representative be present in order to: A. Detect fraudulent securities. B. Lend authority to the auditors' directives. C. Acknowledge the receipt of securities returned. D. Coordinate the return of securities to the proper locations.

Acknowledge the receipt of securities returned.

In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the: A. Extent of the control risk. B. Extent of property abandoned during the year. C. Adequacy of replacement funds. D. Reasonableness of the depreciation.

Adequacy of replacement funds.

Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts? A. Accounts receivable divided by Cost of goods sold. B. Aging of accounts receivable. C. Cash Sales divided by Accounts receivable. D. Year 2 accounts receivable compared to year one accounts receivable.

Aging of accounts receivable.

Which of the following best describes the auditors' approach to the audit of the ending balance of property, plant, and equipment for a continuing nonpublic client? A. Direct audit of the ending balance. B. Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts. C. Audit of changes in the accounts since inception of the company. D. Audit of selected purchases and retirements for the last few years.

Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts.

After the CPAs have selected particular accounts receivable for confirmation: A. As a control measure, the CPAs should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail. B. It is important that every account selected that has a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow- up through alternative procedures. C. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm. D. All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client.

All request for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm.

Hall Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The best person or persons to make periodic reviews of the investment activity would be: A. An investment committee of the board of directors. B. The chief operating officer. C. The corporate controller. D. The treasurer.

An investment committee of the board of directors.

By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect: A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An embezzlement of cash receipts not recorded in the cash receipts journal before they had been deposited into the bank. D. A receivable collected that had previously been written off as uncollectible.

An unrecorded deposit made at the bank at the end of the month.

Which of the following is used to obtain evidence that the client's equipment accounts are not understated? A. Analyzing repairs and maintenance expense accounts. B. Vouching purchases of plant and equipment. C. Recomputing depreciation expense. D. Analyzing the miscellaneous revenue account.

Analyzing repairs and maintenance expense accounts.

A primary responsibility of a registrar of capital stock is to: A. Determine that dividends paid do not exceed the amount allowable by law. B. Act as an independent third party between the board of directors and outside investors concerning, mergers, acquisitions, and other major decisions. C. Avoid any over issuance of stock. D. Maintain detailed stockholder records and carrying out transfers of stock ownership.

Avoid any over issuance of stock.

Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation? A. Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal. B. Receive a cutoff statement directly from the client's bank. C. Prepare a four column bank reconciliation using the year-end bank statement. D.Confirm the year-end balance using the standard form to confirm account balance information with financial institutions.

B. Receive a cutoff statement directly from the client's bank.

Which of the following statements is correct regarding accounts payable and the auditor's procedures? A. Because it is generally more difficult to discover a transaction that has not been recorded than to discover one that has been recorded incorrectly, the audit objective of completeness drives many of thesubstantive procedures applied to these balances. B. A judgment whether an unrecorded payable should be recorded before the financial statements are prepared depends entirely upon the source of the payable. C. The confirmation of accounts payable selected from the year-end trial balance of such accounts is most effective in discovering unrecorded liabilities. D. Unrecorded payables are often discovered through examining vouchers payable entered into the voucher register prior to the balance sheet date.

Because it is generally more difficult to discover a transaction that has not been recorded than to discover one that has been recorded incorrectly, the audit objective of completeness drives many of the substantive procedures applied to these balances.

Tracing copies of sales invoices to shipping documents will provide evidence that all: A. Shipments to customers were recorded as receivables. B. Billed sales were shipped. C. Debits to the subsidiary accounts receivable ledger are for sales shipped. D. Shipments to customers were billed.

Billed sales were shipped.

Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the: A. Check Clearing for the 21st Century Act. B. Public Company Accounting Oversight Board's Standard No. 2. C. Foreign Corrupt Practices Act. D. Sarbanes-Oxley Act.

Check Clearing for the 21st Century Act.

Company A does not employ an independent stock transfer agent, but rather issues its own stock and maintains its stock records. When outstanding shares are transferred from one holder to another, the certificate of the selling shareholder should be: A. Canceled (generally by perforation) and attached to the certificate book. B. Destroyed to prevent fraudulent reissuance. C. Retained by the selling shareholder. D. Sent to the state's registrar of investment securities.

Canceled (generally by perforation) and attached to the certificate book.

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department? A. Comparing the vendor's invoice with the receiving report. B. Canceling supporting documentation after payment. C. Verifying the mathematical accuracy of the vendor's invoice. D. Preparing the check for signature by an authorized person.

Canceling supporting documentation after payment.

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: A. Cash disbursements. B. Approved vouchers. C. Receiving reports. D. Vendors' invoices.

Cash Disbursements.

The auditors use a bank cutoff statement to compare: A. Deposits in transit on the year-end cash general ledger account to deposits in the cash receipts journal. B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. C. Deposits listed on the cutoff statement to disbursements in the cash disbursements journal. D. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank statement.

Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

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

Closing the sales journal prior to year-end.

In auditing long-term debt, an auditor would be most likely to: A. Perform analytical procedures on the bond prenumbered discount accounts. B. Examine documentation of assets purchased with bond proceeds for liens. C. Compare interest expense with the long-term debt amount for reasonableness. D. Confirm the existence of individual long-term debt holders at year-end.

Compare interest expense with the long-term debt amount for reasonableness.

A practical and effective audit procedure for the detection of lapping is: A. Preparing an interbank transfer schedule. B. Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank. C. Tracing recorded cash receipts to postings in customers' ledger cards. D. Preparing a proof of cash.

Comparing recorded cash receipts in detail against items making up the bank deposit slips validated by the bank.

Jones was engaged to audit the financial statements of Gamma Corporation for the year ended June 30, 200X. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? A. Tracing recorded dividend income to cash receipts records and validated deposit slips. B. Utilizing analytical techniques and statistical sampling. C. Comparing recorded dividends with amounts appearing on federal information form 1099s. D. Comparing recorded dividends with a standard financial reporting service's record of dividends.

Comparing recorded dividends with a standard financial reporting service's record of dividends.

Which of the following is the best audit procedure for the detection of lapping? A. Comparison of postings of cash receipts to accounts with the details of cash deposits. B. Confirmation of the cash balance. C. Reconciliation of the cash account balances. D. Preparing a proof of cash.

Comparison of postings of cash receipts to accounts with the details of cash deposits.

Which of the following statements is NOT correct? A. Cash is important to the audit process because of its vulnerability to misappropriation, despite the fact that the balance at the balance sheet date may be immaterial. B. Payroll cash account balances kept on an imprest basis are more easily controlled than others not so kept. C. Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date. D. Reviewing interbank transfers is important to the auditor because of the possibility that the client may be engaged in kiting.

Confirmation of cash should only be performed as of the balance statement date because the auditor expresses an opinion as of that date.

Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice? A. Footing the sales journal. B. Confirming accounts receivable. C. Tracing the total sales in the sales journal to the general ledger. D. Observation of the physical inventory count at year-end.

Confirming accounts receivable.

Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts? A. Reviewing an aging of accounts receivable. B. Examination of cash receipts subsequent to the balance sheet date. C. Confirming current (0-30 day) year-end accounts receivable. D. Reviewing credit files for selected account.

Confirming current (0-30 day) year-end accounts receivable.

You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to: A. Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. B. Coordinate the count of cash with the cutoff of accounts payable. C. Coordinate the count of cash with the count of marketable securities and other negotiable assets. D. Count the cash immediately upon the return of the confirmation letters from the financial institution.

Coordinate the count of cash with the count of marketable securities and other negotiable assets.

For audit purposes, a corporation's articles of incorporation are normally: A. Copied and placed on the owners' equity lead schedule. B. Copied and placed in the permanent file. C. Confirmed with the transfer agent. D. Ignored since they are not normally considered to be related to the internal control structure.

Copied and placed in the permanent file.

The auditors' count of the client's cash should be coordinated to coincide with the: A. Consideration of the internal controls with respect to cash. B. Close of business on the balance sheet date. C. Count of investment securities. D. Count of inventories.

Count of investment securities.

An auditor may obtain information on the December 31 month-end balance per bank in which of the following? December 31 Bank Statement? (Y/N) Schedule of Bank (Cash) Transfers?(Y/N)

December 31 Bank Statement? Yes Schedule of Bank (Cash) Transfers? No

The confirmation of accounts payable is most closely associated with: A. Assertion risk. B. Detection risk. C. Inherent risk. D. Relative risk.

Detection risk.

The confirmation of accounts receivable is most closely associated with: A. Business risk. B. Detection risk. C. Inherent risk. D. Relative risk.

Detection risk.

Which of the following is NOT a primary objective of the auditors in the examination of accounts receivable? A. Determine the approximate realizable value. B. Consider the adequacy of internal control. C. Establish the existence of receivables. D. Determine the expected day of collection of each of the receivables.

Determine the expected day of collection of each of the receivables.

A CPA reviews a client's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for: A. Reviewing and approving time reports for subordinate employees. B. Distributing payroll checks to employees. C. Hiring subordinate employees. D. Initiating requests for salary adjustments for subordinate employees.

Distributing payroll checks to employees.

An example of an internal control weakness is to assign the personnel department responsibility for: A. Distribution of paychecks. B. Hiring personnel. C. Authorizing deductions from pay. D. Interviewing employees for jobs.

Distribution of paychecks.

Which of the following is NOT a control over cash disbursements? A. Disbursements should be made by check. B. A check protecting machine should be used. C. Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse. D. Voided checks should be defaced and filed with paid checks.

Documents supporting the payment of a disbursement should be canceled by the person preparing the check to prevent reuse.

The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditors to: A. Consider internal control over credit sales. B. Test the accuracy of recorded charge sales. C. Estimate credit losses. D. Verify the validity of the recorded receivables.

ESTIMATE credit losses.

Which of the following is NOT a primary objective in the audit of interest-bearing debt? A. Establish the completeness of recorded interest-bearing debt. B. Establish the legality of outstanding debt. C. Determine that debt is properly valued. D. Determine that the presentation and disclosure of interest-bearing debt is appropriate.

Establish the legality of outstanding debt.

Which of the following is a customary audit procedure for the verification of the legal ownership of real property? A. Examination of correspondence with the corporate counsel concerning acquisition matters. B. Examination of ownership documents registered and on file at a public hall of records. C.Examination of corporate minutes and resolutions concerning the approval to acquire property, plant, and equipment. D. Examination of deeds and title guaranty policies on hand.

Examination of deeds and title guaranty policies on hand.

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts? A. Examine cash receipts received after year-end. B. Confirm receivables. C. Examine dates of purchase orders. D. Foot the receivables lead schedule.

Examine cash receipts received after year-end.

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts? A. Examine cash receipts received after year-end. B. Confirm receivables. C. Examine dates of purchase orders. D. Foot the receivables lead schedule.

Examine cash receipts received after year-end.

Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed? A. Scan the sales journal for sequential and unusual entries. B. Examine shipping documents for matching sales invoices. C. Compare the accounts receivable ledger to daily sales summaries. D. Inspect unused sales invoices for consecutive prenumbering.

Examine shipping documents for matching sales invoices.

A plant manager would be most likely to provide information on which of the following? A. Adequacy of the provision for uncollectible accounts. B. Appropriateness of physical inventory valuation techniques. C. Existence of obsolete production equipment. D. Deferral of certain purchases of office supplies.

Existence of obsolete production equipment.

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: A. Cutoff bank statement. B. Year-end bank statement. C. Bank confirmation. D. General ledger.

General ledger.

An auditor will ordinarily examine invoices from lawyers primarily in order to: A. Substantiate accruals. B. Assess the legal ramifications of litigation in progress. C. Estimate the dollar amount of contingent liabilities. D. Identify possible unasserted litigation, claims, and assessments.

Identify possible unasserted litigation, claims, and assessments.

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: A. Reviews the monthly bank reconciliation. B. Returns the checks to accounts payable. C. Is denied access to the supporting documents. D. Is responsible for mailing the checks.

Is responsible for mailing the checks.

Which of the following is correct relating to kiting? A. It is ordinarily used to understate cash. B. It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment. C. It is a lapping approach performed using receivable accounts. D. It is seldom, if ever, used.

It is more difficult to accomplish in an electronic environment as contrasted to a non-electronic environment.

Jones embezzled $10,000 from his company's account in Bank A. At year-end, he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This is an example of: A. Lapping. B. Kiting. C. Effective cash management. D. Related party transactions.

Kiting

The auditors' primary means of obtaining corroboration of management's information concerning litigation is a: A. Letter of audit inquiry to the client's lawyer. B. Letter of corroboration from the auditor's lawyer upon review of the legal documentation. C. Confirmation of claims and assessments from the other parties to the litigation. D. Confirmation of claims and assessments from an officer of the court presiding over the litigation.

Letter of audit inquiry to the client's lawyer.

The auditor will most likely perform extensive tests for possible understatement of: A. Revenues. B. Assets. C. Liabilities. D. Capital.

Liabilities.

Which of the following is correct concerning "window dressing" for cash? A. A segregation of duties within the cash function effectively eliminates its occurrence. B. It generally involves manipulation of inventory. C. It is illegal, and an audit is designed to provide reasonable assurance of its detection. D. Many forms of it require no action by the auditors.

Many forms of it require no action by the auditors.

An auditor obtains evidence of stockholders' equity transactions for a publicly traded company by reviewing the entity's: A. Minutes of board of directors meetings. B. Registrar's record of interbank transfers. C. Canceled stock certificates. D. Treasury stock certificate book.

Minutes of board of directors meetings.

The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that: A. Recorded cash disbursement transactions are properly authorized. B. Proper cash purchase discounts have been recorded. C. Cash disbursements are for goods and services actually received. D. No discrepancies exist between the data on the checks and the data in the journal.

No discrepancies exist between the data on the checks and the data in the journal.

Tracing recorded sales transactions to the bills of lading provides evidence about the: A. Completeness of sales transactions. B. Collectibility of sales transactions. C. Occurrence of sales transactions. D. Billing of all sales transactions.

OCCURRENCE of sale transactions.

Which of the following procedures would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? A. Observe the consistency of the employees' use of cash registers and tapes. B. Inquire about employees' access to recorded but undeposited cash. C. Trace deposits in the cash receipts journal to the cash balance in the general ledger. D. Compare the cash balance in the general ledger with the bank confirmation request.

Observe the consistency of the employees' use of cash registers and tapes.

Purchase cutoff procedures should be designed to test whether all inventory: A. Owned by the company was recorded. B. On the year-end balance sheet was carried at lower-of-cost-or-market. C. On the year-end balance sheet was paid for by the company. D. Owned by the company is in the possession of the company.

Owned by the company was recorded.

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

Physically examine items sold.

A company's decision to use the fair value option for valuation of marketable securities is most likely to affect which of the following assertions the most? A. Completeness. B. Existence. C. Fairness. D. Presentation and Disclosure.

Presentation and disclosure

Reconciliation of the bank account should not be performed by an individual who also: A. Processes cash disbursements. B. Has custody of securities. C. Prepares the cash budget. D. Reviews inventory reports.

Processes cash disbursements.

Which of the following is an example of an accrued liability? A. Accounts payable. B. Notes payable. C. Prepaid insurance. D. Product warranty liability.

Product warranty liability.

To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditors should review and test the: A. Terms of the open purchase orders. B. Purchase cutoff procedures. C. Contractual commitments made by the purchasing department. D. Purchase invoices received on or around year-end.

Purchase cutoff procedures.

A client's physical count of inventories was higher than the inventory quantities per the perpetual records. This situation could be the result of the failure to record: A. Sales. B. Sales discounts. C. Purchases. D. Purchase returns.

Purchases.

The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client: A. Confirmation. B. Observation. C. Recomputation. D. Inquiry.

Re-computation.

When the auditors select a sample of items from the vouchers payable register for the last month of the period under audit and trace these items to underlying documents, the auditors are gathering evidence primarily in support of the assertion that: A. Recorded obligations were paid. B. Incurred obligations were recorded in the correct period. C. Recorded obligations occurred prior to year-end. D. Cash disbursements were recorded as incurred obligation.

Recorded obligations occurred prior to year-end.

When performing an audit of the property, plant, and equipment accounts, an auditor should expect which of the following to be most likely to indicate a departure from generally accepted accounting principles? A. Repairs have been capitalized to repair equipment that had broken down. B. Interest has been capitalized for self-constructed assets. C Assets have been acquired from affiliated corporations with the related transactions recorded and described in the financial statements. D. The cost of freight-in on an acquisition has been capitalized.

Repairs have been capitalized to repair equipment that had been broken down.

The date the auditor grants the client permission to use the audit report in connection with the financial statements is the: A. Last day of significant field work. B. Report cutoff date. C. Report release date. D. Representation date.

Report release date.

Which of the following is not confirmed on the standard confirmation form used for cash balances at financial institutions? A. Cash checking account balances. B. Cash savings account balances. C. Loans payable. D. Securities held for the client by the financial institution.

Securities held for the client by the financial institution.

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

Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

The form typically used to confirm accounts payable: A. Does not require a response from the vendor. B. Confirms the balance recorded by the client at year-end. C. Requires the vendor to indicate the amount of the payable. D. Is the same as the form used to confirm accounts receivable.

Requires the vendor to indicate the amount of the payable.

Which of the following procedures is LEAST likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts? A. Investigate confirmation exceptions for indication of amounts in dispute. B. Review accounts which have been written off as uncollectible prior to year-end. C. Investigate credit ratings for large accounts receivable. D. Discuss with the credit manager the current status of doubtful accounts.

Review accounts which have been written off as uncollectible prior to year-end.

The individual looking for guidance on revenue recognition is most likely to appropriately review: A. APB 99. B. SAB 104. C. ASR 44. D. B1 Document.

SAB 104 (Staff Accounting Bulletin)

Tracing copies of computer-generated sales invoices to copies of the corresponding computer-generated shipping documents provides evidence that: A. Shipments to customers were properly billed. B. Entries in the accounts receivable subsidiary ledger were for sales actually shipped. C. Sales billed to customers were actually shipped. D. No duplicate shipments to customers were made.

Sales billed to customers were actually shipped.

For effective internal control, the billing function should not be performed by the: A. Sales department. B. Accounting department. C. Finance department. D. Information Processing department.

Sales department.

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

Sales expense.

A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end? A. Cash receipts. B. Payroll. C. Purchases. D. Sales.

Sales.

Internal control over marketable securities is enhanced when: A. Securities are held by the cashier. B. Securities are registered in the name of the custodian. C. Detailed records of securities are maintained by the custodian of the securities. D. Securities are held under joint control of two or more officials.

Securities are held under joint control of two or more officials.

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? A.Select and examine receiving reports and ascertain that the related canceled checks are dated no earlier than the receiving reports. B.Select and examine receiving reports and ascertain that the related canceled checks are dated no later than the receiving reports. C.Select and examine canceled checks and ascertain that the related receiving reports are dated no earlier than the checks. D. Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.

Select and examine CANCELED CHECKS and ascertain that the related receiving reports are dated no LATER than the checks.

In October, three months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to miscellaneous revenue. The most effective method for detecting this type of error is: A. Foot the cash receipts journal for October. B. Send a bank confirmation as of year-end. C. Prepare a bank reconciliation as of year-end. D. Prepare a bank transfer schedule as of year-end.

Send a bank confirmation as of year-end.

Which of the following is not a universal rule for achieving internal control over cash? A. Separate recordkeeping from accounting for cash to the extent possible. B. Deposit each day's cash receipts intact. C. Separate cash handling from recordkeeping. D. Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks.

Separate recordkeeping from accounting for cash to the extent possible. (All other options provide more effective internal control.)

Properly designed internal control will permit the same employee to: A. Receive and deposit checks, and also approve write-offs of customer accounts. B. Approve vouchers for payment, and also receive and deposit cash. C. Reconcile the bank statements, and also receive and deposit cash. D. Sign checks, and also cancel supporting documents.

Sign checks, and also cancel supporting documents.

To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is: A. Supported by a vendor's invoice. B. Stamped "paid" by the check signer. C. Prenumbered and accounted for. D. Approved for authorized purchases.

Stamped "paid" by the check signer.

An auditor may obtain information on the December 31 month-end balance per bank in which of the following? Standard Confirmation Form? (Y/N) January 1-10 Cutoff Statement? (Y/N)

Standard Confirmation Form? Yes January 1-10 Cutoff Statement? Yes

Which of the following statements is correct relating to common stock certificates of a publicly traded company that uses the services of a transfer agent? A. Stock certificates should exist for all outstanding stock and be held by the owner of the stock. B Stock certificates should exist for all outstanding stock and be held either by the owner of the stock or a . representative of the owner (e.g., brokerage firm). C. A lack of stock certificates is ordinarily considered a material weakness in internal control. D. Stock certificates often are not issued in today's electronic environment.

Stock certificates often are not issued in today's electronic environment.

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

Test of a control.

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs: A. Tests of controls and extensive tests of property and equipment balances at the end of the year. B. Analytical procedures for current year property and equipment transactions. C. Tests of controls and limited tests of current year property and equipment transactions. D. Analytical procedures for property and equipment balances at the end of the year.

Tests of controls and limited tests of current year property and equipment transactions.

The statement that best expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit is that: A. The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date. B. The auditor's responsibility is to determine that a proper cutoff has been made and that transactions . recorded on or before the balance sheet date actually occurred. C. The auditor is fully responsible for events occurring in the subsequent period and should extend all . detailed procedures through the last day of field work. D. The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.

The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.

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

The auditor's observation addresses the existence assertion.

Which of the following is consistent with effective internal control over sales transactions? A. The accounting department prepares a shipping report authorizing the shipment of goods. B. The accounting department accounts for all receiving reports. C. The billing department accounts for all shipping documents. D. The accounts payable department annually approves the extension of credit to customers.

The billing department accounts for all shipping documents.

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor? A. A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year. B. Internal control activities over the recording of cash receipts have been improved since the end of the prior year. C.The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet. D The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.

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

Internal control over bonds payable is best when: A. The company utilizes the services of a bond trustee. B. The company segregates approval from issuance of the bonds. C. Bonds are countersigned by two officers. D. Bonds are serially numbered.

The company utilizes the services of a bond trustee.

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

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

Which of the following is not a reason for the special significance attached by the auditors to the verification of inventories? A. The determination of inventory valuation directly affects net income. B. The existence of inventories is inherently difficult to substantiate. C. Special valuation problems often exist for inventories. D. Inventories are often the largest current asset of an enterprise.

The existence of inventories is inherently difficult to substantiate. (it is not)

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

The positive form used for large balances and the negative form for other receivables.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? A. Merchandise received is not promptly reconciled to the outstanding purchase order file. B. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value. C. The write-off of receivables by personnel who receive cash permits the misappropriation of cash. D. Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.

The write-off of receivables by personnel who receive cash permits the misappropriation of cash.

Which of the following is not correct relating to representation letters? A. They are ordinarily dated as of the date of the audit report. B. They are signed by members of top management. C. They must be obtained for audits. D. They often serve as a substitute for the application of other procedures.

They often serve as a substitute for the application of other procedures.

An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific procedures to apply to the accounts and transactions. In a particular case, s/he might do this by: A. Tracing sales invoices to shipping documents to tests the completeness of reported sales. B. Tracing shipping documents to sales invoices to test the occurrence of reported sales. C. Tracing sales invoices to shipping documents to test the occurrence of reported sales. D. Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.

Tracing SALES INVOICES to SHIPPNIG DOCUMENTS to test the occurrence of reported sales.

Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: A. Board of Directors. B. Treasurer. C. Controller. D. Executive Committee.

Treasurer

Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements? A. Understatement of outstanding checks. B. Overstatement of outstanding checks. C. Understatement of deposits in transit. D. Overstatement of bank services charges.

Understatement of outstanding checks.

Which of the following is the most important control procedure over acquisitions of property, plant, and equipment? A. Establishing a written company policy distinguishing between capital and revenue expenditures. B. Using a budget to forecast and control acquisitions and retirements. C. Analyzing monthly variances between authorized expenditures and actual costs. D. Requiring acquisitions to be made by user departments.

Using a budget to forecast and control acquisitions and retirements.

The best way to verify the amounts of dividend revenue received during the year is: A. Recomputation. B. Verification by reference to dividend record books. C. Confirmation with dividend-paying companies. D. Examination of cash disbursements records.

Verification by reference to dividend record books.

Which of the following is not one of the independent auditor's objectives regarding the examination of inventories? A. Verifying that inventory counted is owned by the client. B. Verifying that the client has used proper inventory pricing. C. Ascertaining the physical quantities of inventory on hand. D. Verifying that all inventory owned by the client is on hand at the time of the count.

Verifying that all inventory owned by the client is on hand at the time of the count.

Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors? A. Dividends. B. New debt issuance. C. New bank accounts. D. Write-off of trade accounts receivable.

Write-off of trade accounts receivable.