Audit Exam 3

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:

Estimate credit losses

Which of the following is LEAST likely to be used as an alternative procedure for handling nonreplies to accounts receivable confirmation requests?

Physically examine items sold

Which of the following is now of the better auditing techniques that might be used by an auditor to detect kiting?

Prepare a schedule of bank transfers

The client's physical count of inventories is lower than the inventory quantities in the perpetual records. This could be the result of a failure to record:

Purchases

Which of the following statements is correct concerning statistical sampling in tests of controls?

The population size has little effect on determining sample size except for very small populations.

When there are numerous property and equipment transactions during the year, an auditor planning to assess the risk of material misstatement at a low risk level must perform:

Test of controls and limited tests of current year property and equipment transactions

Which of the following is not a procedure that typically is used by the auditors in their examination of a client's goods held in the custody of a public warehouse?

Communicate with the regulatory agency about the legitimacy of the public warehouse.

The individual looking for guidance on revenue recognition is most likely to appropriately review:

FASB ASC 606

An auditor decides to use the blank form of positive accounts receivable confirmation. The auditor should be aware that the blank form may be ineffective because:

Few responses may occur because more effort is required of the recipients

Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated relating to the year XX financial statements?

Inventory

For purposes of an audit of financial statements, electronic confirmation of cash balances:

Is acceptable when properly controlled

Which of the following is an advantage of systematic selection over random number selection?

It does not require that random numbers corresponded to items in the population.

Which of the following is correct relating to kiting?

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

A certified public accountant (CPA) examines a sample of credit memoranda to ensure they were • ned by an officer of the company. This is an example of:

Test of control

Which of the following audit procedures most likely would provide assurance that a manufacturing entity's inventory valuation is proper?

Testing the entity's computation of standard overhead rates

When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables?

The account balances as of year-end will generally be confirmed

Which of the following statements are correct about the sample size in statistical sampling when testing controls?

The auditor should consider the tolerable deviation rate from the controls being tested in determining sample size.

Which of the following is true about the auditors' observation of the client's physical inventory?

The auditors observation addresses the existence assertion

Which of the following is true about the auditors' observation of the client's physical inventory?

The auditors should evaluate the condition of the inventory

An inventory turnover analysis is useful to the auditor because it may detect:

The existence by obsolete merchandise

The Parmalat fraud case involved:

A fraudulent cash confirmation

Which of the following would indicate the need to use positive accounts receivable confirmation requests?

A large number of accounts receivable are is dispute.

The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of accounts receivable confirmation be useful?

A low exception rate is expected

An auditor may obtain information on December 31 month-end balance per bank in which of the following? Standard Confirmation Form, January 1 to 10 cutoff statement A.) Yes, Yes B.). Yes, No C.). No , Yes D.) No, Yes

A.) Yes , Yes

The confirmation process may be performed using a(n): Paper form, Electronic Form A.) Yes, Yes B.) Yes, No C.) No, Yes D.) No, No

A.) Yes, Yes

Which of the following factors does an auditor need to consider in planning a particular audit sample for a test of control?

Acceptable level of risk of assessing control risk too low.

Which of the following policies is an internal control weakness related to the acquisition of factory equipment?

Acquisitions are made through and approved by the department in need of the equipment

In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the:

Adequacy of replacement funds

Which of the following may be used to reduce the risk of nonsampling errors?

Adequately planning audit samples

Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts?

Aging of accounts receivable

After the certified public accountants (CPAs) have selected particular accounts receivable for confirmation:

All requests for confirmation should be mailed personally by the auditors at a post office.

An overstatement of repairs and maintenance expense may be due to:

An understatement of property, plant and equipment

When considering the operating effectiveness of a control, which of the following sampling approaches is most likely to be used by auditors?

Attributes sampling

An auditor may obtain information on the December 31 month-end balance per bank in which of the following? December 31 Bank Statement , Schedule of Bank (cash) Transfers A.). Yes, Yes B.). Yes, No C.). No, Yes D.). No , No

B.) Yes, No

Tracing copies of sales invoices to shipping documents will provide evidence that all:

Billed sales were shipped

Which of the following sets of duties would ordinarily be considered incompatible in terms of good internal control?

Collection of receipts on account and maintaining accounts receivable records

Which of the following procedures in the cash disbursement cycle should NOT be performed by the accounts payable department

Cancelling supporting documentation after the payments

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

On receiving the bank cuttoff statement, the auditor should trace:

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

An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the inventory summary sheets. Which assertion does this procedure relate to most directly?

Completeness

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

Completeness

Which of the following is NOT true about confirmation of accounts receivables?

Confirmation requests should be signed by the auditors.

Which of the following procedures would probably be most effective in identifying duplicate billing of customers during the year?

Confirmations of accounts at year end

If a company failed to record goods returned by customers near year end, the auditors would most likely discover this issue by:

Confirming accounts receivable

Which of the following is not a primary objective of the auditors in the examination of accounts receivable?

Determine the expected day of collection of each of the receivables

A receiving department compares inventory items received with copies of purchase orders. The purchase orders list the name of the vendor and do not list the quantities of the material ordered. Using the purchase orders, the receiving department is most likely to detect:

Deliveries for which no purchase order was issued

The auditors expect a population deviation of billing errors of 0%, and have established tolerable rate of 6%. The sampling approach most likely to be used is:

Discovery sampling

Which of the following is NOT a control over cash disbursements?

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

Which of the following revenue related transactions is not linked to the accounts indicated?

Dont write off uncollectible receivables- sales returns, sales discount.

In assessing sampling risk, the risk of incorrect acceptance and the risk of assessing control risk too low relate to the

Effectiveness of the audit

Which of the following is not one of the auditors' objectives in auditing depreciation?

Establishing the cash outflow due to depreciation

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts?

Examine cash receipts received after year-end

It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations, the best alternative procedure the auditors might resort to would be:

Examining subsequent receipts of year-end accounts receivable

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide evidence concerning the

Existence of the balances confirmed

Which of the following best describes the reason that the auditors record their inventory test counts in the working papers?

For subsequent comparison with the completed inventory listing

The auditors 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 auditors at the time of the physical inventory count are:

Included in the final inventory schedule

Which of the following is an auditor least likely to consider a departure from U.S. generally accepted accounting principles?

Including in inventory items that are consigned out to venders, but not yet sold

Anderson embezzled $20,000 from her company's account in Bank X. At year-end, she hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. She has not recorded the transaction on the books. This is an example of:

Kiting

Statistical sampling generally may be applied to test internal control when the client's internal control procedures:

Leave an audit trail in the form of evidence of compliance

When there are a large number of relatively small account receivable balances, negative confirmation requests may be appropriate if the combination of inherent risk and control risk is:

Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration

Why do estimates of recognized revenue generally present high risk for the auditors?

Management often has incentives to misstate revenue

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: No reply to a positive confirmation

No reply to a positive confirmation request is received

The auditors expect a population deviation rate of billing errors of 15%, and have established a tolerable rate of 2%. The sampling approach most likely to be used is:

None, as a sampling does not seem appropriate in this situation.

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

Which of the following is NOT a control the generally is established over cash transactions?

Obtaining a receipt for every disbursement.

Tracing recorded sales transactions to the bills of lading provides evidence about the:

Occurrence of sales transaction

The use of a "blind" purchase order is designed to prevent errors by the:

Receiving department

The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with:

Receiving reports

Which of the following accounts should be reviewed by the auditor to gain reasonable assurance that additions to property, plant, and equipment are not understated?

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 listings

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?

Sales

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

Sales billed to customers were actually shipped

For effective internal control, the billing function should NOT be performed by the:

Sales department

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

Sales journal to shipping documents

In november, two 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 interest revenue. The most effective method for detecting this type of error is

Send a bank confirmation as of year-end

Which of the following is NOT a universal rule for achieving internal control over cash?

Separate recordkeeping from accounting for cash to the extent possible

An auditor who uses non statistical attributes sampling, and has chosen the sample in conformity with random selection procedures:

Should compare the deviation rate of the sample. to the tolerable rate.

Properly designed internal control will permit the same employee to:

Sign checks, and also cancel supporting documents

Effective internal control for purchases generally can be achieved in a well-planned organizational structure with a separate purchasing department that has:

The authority to make purchases of requisitioned materials and services

You were surprised to note that approximately 95% of returned positive accounts receivable confirmation requests indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that:

The cash receipts journal was held open after year-end

To assure that all purchases are authorized before payment is made, accounting department personnel should match the vendor's invoice to:

The purchase order

Which of the following types of risk is of critical importance to auditors in performing tests of controls

The risk of assessing control risk too low

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

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

Which of the following is NOT a control that generally is established over cash receipts?

To ensure accurate postings, the accounts receivable clerk should post the customers receipts from customer checks.

To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors:

Trace a sample of the bills of lading to sales invoices

Which of the following is NOT typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests?

Trace the balances from accounts receivables ledger to the billing statements

Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements?

Understatements of outstanding checks

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:

Vendor's invoices

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to:

Verify reconciling items on the clients bank reconciliations

Which one of the following would not be an appropriate audit procedure related to the client's physical inventories?

Supervising the taking of annual physical inventory

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

Accounting records to the source documents

What type of error is the certified public accountant (CPA) most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped on free board (FOB) shipping point, which were recorded in December of 20X0 as credit sales?

Accounts receivable are overstated at December 31, 20X0

To test the existence assertion for recorded receivables, an auditor would select a sample FROM the:

Accounts receivable subsidiary ledger

Which of the following statistical selection techniques is LEAST desirable for use by an auditor

Block selection

When using a transaction cycle approach to assessing control risk, the auditor most likely would test control activities related to customer sales transactions with the:

Collection of receivables

Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice?

Confirming accounts receivable

Which of the following controls are most relevant the client's application of accounting standards to revenue recognition for complex sales agreements?

Control environment and management review controls

The confirmation of accounts receivable is most closely associated with

Detection risk

The audit procedure of analyzing the repairs and maintenance accounts is primarily designed to provide evidence that all:

Expenditures for fixed assets have been capitalized

A dual purpose test simultaneously:

Functions as a substantive test and as a test of controls

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except

General ledger

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 merchandise

Complex sales contracts are most likely to result in higher risks regarding all of the following except:

Identifying the contracting parties

While performing a substantive test of details, the auditor determined that the sample results showed that the recorded amount balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of:

Incorrect rejection

A computer software firm allows its sales team to make material modifications to standard software contracts. What should be the auditors' primary concern in this situation?

Increased risk of misstatement of revenue

A decrease in the tolerable misstatement has what effect on the required sample size?

Increases

Changing from a sampling plan using random selection without replacement to random selection with replacement has what effect on required sample size?

Increases

Which of the following is NOT true about auditors verification of notes receivable?

Inspecting the notes is sufficient evidence of existence of the notes.

To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic:

Inspection of equipment and reconciliation with accounting records

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

Internal control over receivables is good

Your client left the cash receipts journal open after year-end for an extra day and included January 1 cash receipts in the 12/31/XX totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the year XX financial statements?

Net income is overstated

Which of the following does not meet the definition of an external confirmation in the context of accounts receivable?

Oral responses obtained by the auditor through a telephone call

Purchase cutoff procedures should be designed to test whether all inventory:

Owned by the company was recorded

An auditor would be least likely to use confirmations in connection with the examination of:

Property, plant, and equipment

To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditors should review and test the:

Purchase cuttoff 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:

Purchases

Salem Corporation engages in complex sales contracts. As the auditor you are trying to determine if revenue should be recognized on a group of contracts. Which of the true with res t to the recognition of revenue:

Revenue should be recognized only if it is at least probable that the contract amounts will be collected

Which of the following is generally NOT true about statistical sampling as compared to non statistical sampling?

Statistical samples are more representative of the population.

Which of the following best describes the auditors' response to a client's use of statistical sampling techniques to estimate the inventory?

The auditors should satisfy themselves as to statistical validation of the technique, and the reasonable of the allowance for sampling risk and sampling error used

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

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

Which of the following would be LEAST likely to diminish the validity of evidence obtained through confirmation of accounts receivable?

The confirmation requests are sent on the clients letterhead

Which of the following is the best argument against the use of negative accounts receivable confirmation requests?

The inference drawn from receiving no reply may not be correct

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?

The positive form used for large balances and the negative form for the small balances.

To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from:

The shipping clerk's file of duplicate copies of bills of lading

In performing a test of a control last year the auditors specified a tolerable deviation rate of X percent. This year the auditors have specified a tolerable rate higher than X percent. Assuming that all other factors remain the same, which of the following is true regarding the relationship between this years sample size compared to last years sample size

This years sample size is smaller than last years sample.

Which of the following best describes the reason for the auditors' review of the client's cost accounting system?

To obtain evidence about the valuation of work in process, finished goods, and cost of goods sold

An auditor plans to examine a sample of 20 checks for authorized signatures as prescribed by the clients control procedures. One of the checks in the chose sample of 20 cannot be found. The auditor should consider the reasons for limitation and :

Treat the missing check as a deviation for the purpose of evaluating the sample.

Which of the following is not one of the independent auditor's objectives regarding the examination of inventories?

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

An advantage of using statistical sampling techniques is that such techniques

mathematically measure risk

In testing accounting receivable, an auditor sends out positive confirmation requests to 100 randomly selected customers. A customer returns the confirmation indicating that the balance is correct when, in fact, the balance is overstated. This is an example of:

non smapling error