Audit Exam #3 Homeworks

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities? Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable. Examine unusual relationships between monthly accounts payable balances and recorded purchases. Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded. Examine selected cash disbursements in the period subsequent to year-end.

Examine selected cash disbursements in the period subsequent to year-end.

Match the descriptions provided below with the appropriate audit procedure. The auditor asked the warehouse manager about whether certain inventory items were becoming obsolete.

Inquiry

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: An investment committee of the board of directors. The chief operating officer. The corporate controller. The treasurer.

An investment committee of the board of directors.

Which of the following would most likely be detected by an auditor's review of the client's sales cutoff? Excessive goods returned for credit. Unrecorded sales discounts. Lapping of year-end accounts receivable. Inflated sales for the year.

Inflated sales for the year.

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

Processes cash disbursements.

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? Restrictions placed on sales by laws and regulations. Decline in sales due to economic declines. Decline in sales due to product obsolescence. Over-recorded sales due to a lack of control over the sales entry function.

Over-recorded sales due to a lack of control over the sales entry function.

The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the: Bill of lading. Job time shipping. Production order. Production schedule.

Bill of lading.

During the inventory count an auditor selects items and determines that the proper description and quantity were recorded by the client. This procedure is most closely related to: Rights. Completeness. Existence. Valuation.

Completeness.

In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to the supporting documents. Which assertion would this test of controls most likely test? Completeness. Existence. Valuation. Rights.

Existence.

Match the descriptions provided below with the appropriate audit procedure. During a site visit to a construction site, the auditor determined that all employees were wearing proper safety equipment.

Observation

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? Inaccurate billing due to a lack of controls. Lapping of accounts receivable. Misbilling a client due to a data input error. Recording sales when the customer is likely to return the goods.

Recording sales when the customer is likely to return the goods.

Match the descriptions provided below with the appropriate audit procedure. The auditor obtained a purchase order from the purchase order file and compared it to the authorized supplier list to determine that the related goods had been purchased from an approved supplier.

Reperformance

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? Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. 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.

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? Existence or occurrence. Completeness. Rights and obligations. Presentation and disclosure.

Completeness.

An auditor selects items from the client's inventory listing and identifies the items in the warehouse. This procedure is most likely related to: Rights. Completeness. Existence. Valuation.

Existence

When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is: Existence. Completeness. Clarity. Presentation.

Existence

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

A bank lockbox system.

To test the existence assertion for recorded receivables, the auditors would select a sample from the: Sales orders file. Customer purchase orders. Accounts receivable subsidiary ledger. Shipping documents (bills of lading) file.

Accounts receivable subsidiary ledger.

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

Acknowledge the receipt of securities returned.

Match the descriptions provided below with the appropriate audit procedure. The auditor calculated the accounts receivable turnover for the year.

Analytical procedure

The auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low: And accounts receivable are immaterial, or the use of confirmations would be ineffective. And accounts receivable are composed of large accounts. And the effectiveness of confirmations is absolutely determined. Or accounts receivable are from extremely reputable customers.

And accounts receivable are immaterial, or the use of confirmations would be ineffective.

McPherson Corporation does not make an annual physical count of year-end inventories, but instead makes weekly test counts on the basis of a statistical plan. During the year, Sara Mullins, CPA, observes such counts as she deems necessary and is able to satisfy herself as to the reliability of the client's procedures. In reporting on the results of her examination, Mullins: Can issue an unqualified opinion without disclosing that she did not observe year-end inventories. Should comment in the scope paragraph as to her inability to observe year-end inventories, but can nevertheless issue an unqualified opinion. Is required, if the inventories are material, to disclaim an opinion on the financial statements taken as a whole. Should, if the inventories are material, qualify her opinion.

Can issue an unqualified opinion without disclosing that she did not observe year-end inventories.

For the independent situation described below select the appropriate inherent risk factor described and the effect of the inherent risk factor on the company's net income. Gold Miner Inc. has gold mines in a number of states. To hedge the price of its gold inventory, Gold Miner purchases gold futures contracts. The fair value of gold has declined significantly in the last few months.

Complexity, Overstatement

For each objective, select a substantive procedure (from the list of substantive procedures) that will help achieve that objective Determine the existence of year-end recorded accounts payable and that the client has obligations to pay these liabilities. -Confirm outstanding year-end balances of payables. -Vouch purchases recorded after year-end. -Inquire of management concerning the existence of related party transactions. -Test the computations made by the client to set up the accrual.

Confirm outstanding year-end balances of payables.

In an audit, the valuation of year-end accounts payable is most likely addressed by: Confirmation. Examination of cash disbursements immediately prior to year-end. Examination of cash disbursements immediately subsequent to year-end. Analytical procedures applied to vouchers payable at year-end.

Confirmation.

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: Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. Coordinate the count of cash with the cutoff of accounts payable. Coordinate the count of cash with the count of marketable securities and other negotiable assets. 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.

Under SEC rules, which of the following is not among the criteria that ordinarily exist for revenue to be recognized? Collectibility is reasonably assured. Delivery has occurred or is scheduled to occur in the near future. Persuasive evidence of an arrangement exists. The seller's price to the buyer is fixed or determinable.

Delivery has occurred or is scheduled to occur in the near future.

The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare the: Details of bank deposit slips with details of credits to customer accounts. Daily cash summaries with the sums of the cash receipts journal entries. Individual bank deposit slips with the details of the monthly bank statements. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded.

Details of bank deposit slips with details of credits to customer accounts.

An audit of the balance in the accounts payable account is ordinarily not designed to: Detect accounts payable that are substantially past due. Verify that accounts payable were properly authorized. Ascertain the reasonableness of recorded liabilities. Determine that all existing liabilities at the balance sheet date have been recorded.

Detect accounts payable that are substantially past due.

Which of the following should be included as a part of inventory costs of a manufacturing company? Direct Labor: Yes, Raw Materials: Yes, Factory Overhead: Yes Direct Labor: Yes, Raw Materials: No, Factory Overhead: No Direct Labor: No, Raw Materials: Yes, Factory Overhead: No Direct Labor: No, Raw Materials: No, Factory Overhead: No

Direct Labor: Yes, Raw Materials: Yes, Factory Overhead: Yes

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

General ledger.

To determine that each voucher is submitted and paid only once, when a payment is approved, supporting documents should be canceled by the: Authorized members of the audit committee. Accounting department. Individual who signs the checks. Chief executive officer.

Individual who signs the checks.

For each objective, select a substantive procedure (from the list of substantive procedures) that will help achieve that objective Determine that the presentation and disclosure of accounts payable are appropriate. -Confirm outstanding year-end balances of payables. -Vouch purchases recorded after year-end. -Inquire of management concerning the existence of related party transactions. -Test the computations made by the client to set up the accrual.

Inquire of management concerning the existence of related party transactions.

Match the descriptions provided below with the appropriate audit procedure. The auditor obtained a copy of the company's accounting manual and read the section on inventory to prepare for the physical inventory observation.

Inspection of records or documents

Match the descriptions provided below with the appropriate audit procedure. During the physical inventory count, the auditor asked the client to open various boxes of inventory items so she was able to assess the quality of the item.

Inspection of tangible assets

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? Observe the consistency of the employees' use of cash registers and tapes. Inquire about employees' access to recorded but undeposited cash. Trace deposits in the cash receipts journal to the cash balance in the general ledger. 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.

The primary objective of a CPA's observation of a client's physical inventory count is to: Discover whether a client has counted a particular inventory item or group of items. Obtain direct knowledge that the inventory exists and has been properly counted. Provide an appraisal of the quality of the merchandise on hand on the day of the physical count. Allow the auditor to supervise the conduct of the count in order to obtain assurance that inventory quantities are reasonably accurate.

Obtain direct knowledge that the inventory exists and has been properly counted.

Which of the following procedures is least likely to be completed before the balance sheet date? Confirmation of receivables. Search for unrecorded liabilities. Observation of inventory. Review of internal accounting control over cash disbursements.

Search for unrecorded liabilities.

When confirming accounts payable, the approach is most likely to be one of: Selecting the accounts with the largest balances at year-end, plus a sample of other accounts. Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts. Selecting a random sample of accounts payable at year-end. Confirming all accounts.

Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts.

To determine that all sales have been recorded, the auditors would select a sample of transactions from the: Shipping documents file. Sales journal. Accounts receivable subsidiary ledger. Remittance advices.

Shipping documents file.

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: Supported by a vendor's invoice. Stamped "paid" by the check signer. Prenumbered and accounted for. Approved for authorized purchases.

Stamped "paid" by the check signer.

Which of the following is an example of misappropriation of assets relating to sales? Accidentally recording cash that represents a liability as revenue. Holding the sales journal open to record next year's sales as having occurred in the current year. Intentionally recording cash received from a new debt agreement as revenue. Theft of cash register sales.

Theft of cash register sales.

The auditor's analytical procedures will be facilitated if the client: Uses a standard cost system that produces variance reports. Segregates obsolete inventory before the physical inventory count. Corrects material weaknesses in internal control before the beginning of the audit. Reduces inventory balances to the lower of cost or market.

Uses a standard cost system that produces variance reports.

An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion is most likely related to presentation and disclosure and: Valuation. Completeness. Existence. Rights.

Valuation

An auditor most likely would analyze inventory turnover rates to obtain evidence about: Existence. Rights. Presentation. Valuation.

Valuation.

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete inventory to address: Valuation. Rights. Existence. Presentation

Valuation.

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

Verification by reference to dividend record books.

For the independent situation described below select the appropriate inherent risk factor described and the effect of the inherent risk factor on the company's net income. Sales orders for a textbook distributor have increased 100% over the last year. Additionally, the company's inventory turnover has doubled since the previous year.

Volume, Overstatement

For each objective, select a substantive procedure (from the list of substantive procedures) that will help achieve that objective Establish the completeness of recorded accounts payable. -Confirm outstanding year-end balances of payables. -Vouch purchases recorded after year-end. -Inquire of management concerning the existence of related party transactions. -Test the computations made by the client to set up the accrual.

Vouch purchases recorded after year-end.

When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably: Want the client to schedule the physical inventory count at the end of the year. Insist that the client perform physical counts of inventory items several times during the year. Increase the extent of tests for unrecorded liabilities at the end of the year. Have to disclaim an opinion on the income statement for that year.

Want the client to schedule the physical inventory count at the end of the year.

Instead of taking a physical inventory count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and: Well-kept records of perpetual inventory are maintained. Inventory is slow-moving. Computer error reports are generated for missing prenumbered inventory tickets. Obsolete inventory items are segregated and excluded.

Well-kept records of perpetual inventory are maintained.

Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable: Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. Write-offs must be approved by the accounts receivable department. Write-offs must be authorized by the shipping department. Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.

Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence.

Which of the following would provide the most assurance concerning the valuation of accounts receivable? Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. Compare receivable turnover ratios to industry statistics for reasonableness. Inquire about receivables pledged under loan agreements. Assess the allowance for uncollectible accounts for reasonableness.

Assess the allowance for uncollectible accounts for reasonableness.

Ordinarily, the most significant assertion relating to accounts payable is: Completeness. Existence. Presentation. Valuation.

Completeness.

The organization established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles is the: Cost Accounting Standards Board. Financial Accounting Standards Board. Public Company Accounting Oversight Board. Securities and Exchange Commission.

Cost Accounting Standards Board.

Which of the following is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold? Determine that the valuation of inventories and cost of goods sold is arrived at by appropriate methods. Determine the existence of inventories and the occurrence of transactions affecting cost of goods sold. Establish that the client includes only inventory on hand at year-end in inventory totals. Establish the completeness of inventories.

Establish that the client includes only inventory on hand at year-end in inventory totals.

For the independent situation described below select the appropriate inherent risk factor described and the effect of the inherent risk factor on the company's net income. Joe's Computers provides three-year money-back warranties on all laptops. During year 1, warranty claims decreased significantly and the company has not reduced the warranty reserve.

Estimates, Understatement

For the independent situation described below select the appropriate inherent risk factor described and the effect of the inherent risk factor on the company's net income. Global Co. imports most of its products from a foreign supplier. During year 1, a new technology made part of the Global Co. inventory obsolete.

Industry circumstances, Overstatement

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

Is responsible for mailing the checks.

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory? Compare the physical quantities of slow-moving items with corresponding quantities in the prior year. Observe merchandise and raw materials during the client's physical inventory taking. Review the management's inventory representations letter for accuracy. Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average.

Observe merchandise and raw materials during the client's physical inventory taking.

The receiving department is least likely to be responsible for the: Determination of quantities of goods received. Detection of damaged or defective merchandise. Preparation of a shipping document. Transmittal of goods received to the store's department.

Preparation of a shipping document.

Match the descriptions provided below with the appropriate audit procedure. The auditing firm's computer-assisted audit specialist obtained an electronic inventory file from the company and checked the accuracy of the extensions and footings.

Recalculation

For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the: Receiving report and the purchase order. Receiving report and the voucher. Vendor's packing slip and the purchase order. Vendor's packing slip and the voucher.

Receiving report and the purchase order.

A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner? Footing the purchases journal. Reconciling vendors' monthly statements with subsidiary payable ledger accounts. Tracing totals from the purchases journal to the ledger accounts. Sending written quarterly confirmation to all vendors.

Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

The least likely approach in auditing management's estimate relating to an accrued liability is to: Independently develop an estimate of the amount to compare to management's estimate. Review and test management's process of developing the estimate. Review subsequent events or transactions bearing on the estimate. Send confirmations relating to the estimate.

Send confirmations relating to the estimate.

Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely: Send positive confirmation requests. Send negative confirmation requests. Examine evidence of subsequent cash receipts. Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

Send positive confirmation requests.

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because: This is a duplication of cutoff tests. Accounts payable balances at the balance sheet date may not be paid before the audit is completed. Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment. There is likely to be other reliable external evidence available to support the balances.

There is likely to be other reliable external evidence available to support the balances.

For the independent situation described below select the appropriate inherent risk factor described and the effect of the inherent risk factor on the company's net income. Metal Inc. supplies copper pipes to home builders. During year 1, copper prices doubled. At any given time, a significant amount of inventory is in transit or located at job sites.

Susceptibility of asset to theft, Overstatement

For each objective, select a substantive procedure (from the list of substantive procedures) that will help achieve that objective Determine that the valuation of warranty loss reserves is measured in accordance with GAAP. -Confirm outstanding year-end balances of payables. -Vouch purchases recorded after year-end. -Inquire of management concerning the existence of related party transactions. -Test the computations made by the client to set up the accrual.

Test the computations made by the client to set up the accrual.