Auditing Final Exam Part 3

A. The company utilizes the services of a bond trustee.

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.

D. Must be included in all nonpublic company audit reports.

A basis for a modification paragraph in the audit of the financial statements of a nonpublic company: A. Is only included with qualified, adverse, or disclaimers of opinion. B. Is presented after the opinion paragraph. C. Has a section title: Emphasis-of-Matter. D. Must be included in all nonpublic company audit reports.

B. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

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

B. Iron curtain approach.

An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current or previous years is referred to as the: A. Evaluation materiality approach. B. Iron curtain approach. C. Projected misstatement approach. D. Rollover approach.

d. verifying the existence of the bondholders

An audit plan for noncurrent debt should include steps that require a. examining bond trust indentures b. inspecting the accounts payable subsidiary ledger c. investigating credits to the bond interest income account d. verifying the existence of the bondholders

C. Authorization for both cash and stock dividends.

An audit plan for the examination of the retained earnings account should include a step that requires verification of the: A. Market value used to charge retained earnings to account for a two for one stock split. B. Approval of the adjustment to the beginning balance as a result of a write down of an account receivable. C. Authorization for both cash and stock dividends. D. Gain or loss resulting from disposition of treasury shares.

B. Plant assets were retired during the year.

An auditor has identified numerous debits to accumulated depreciation of equipment. Which of the following is most likely? A. The estimated remaining useful lives of equipment were increased. B. Plant assets were retired during the year. C. The prior year's deprecation expense was erroneously understated. D. Overhead allocations were revised at year-end.

D. Group engagement partner assumes responsibility for the work of a component auditor.

An auditor may issue an unmodified audit report when the: A. Auditor refers to the findings of an auditor's specialist. B. Financial statements are derived from audited financial statements but contain less detail. C. Financial statements are prepared on the cash receipts and disbursements basis of accounting chosen by management. D. Group engagement partner assumes responsibility for the work of a component auditor.

C. Overpayments are discovered in performing tests of details

An auditor most likely increases substantive tests of payroll when A. Payroll is extensively audited by the state government B. Payroll expense is substantially higher than in the prior year C. Overpayments are discovered in performing tests of details D. Employees complain to management about too much overtime

C. Analytical procedures indicate unusual fluctuations recurring payroll entries.

An auditor most likely would perform substantive tests of details on payroll transactions and balances when: A. Cutoff tests indicate a substantial amount of accrued payroll expenses. B. The assessed risk of material misstatement relative to payroll transactions is low. C. Analytical procedures indicate unusual fluctuations recurring payroll entries. D. Accrued payroll expense consists primarily of unpaid commissions.

a. minutes of board of directors meetings

An auditor usually obtains evidence of a company's equity transactions by reviewing its a. minutes of board of directors meetings b. transfer agent's records c. canceled stock certificates d. treasury stock certificate book

D. A matter appropriately presented and disclosed in the financial statements.

An emphasis-of-matter paragraph is used in the auditor's report to draw user's attention to: A. A material misstatement. B. A matter that is not presented or disclosed in the financial statements that is relevant to users' understanding of the audit. C. A matter that management wishes to highlight. D. A matter appropriately presented and disclosed in the financial statements.

B. Follows the opinion paragraph.

An emphasis-of-matter paragraph ordinarily: A. Relates to a report with a modified opinion. B. Follows the opinion paragraph. C. May either precede or follow the opinion paragraph. D. Is only included in an audit report with an adverse opinion.

A. Unmodified opinion with an appropriate emphasis-of-matter paragraph.

An independent auditor has concluded that substantial doubt remains about a client's ability to continue as a going concern, but the client's financial statements have properly disclosed all of its solvency problems. The auditor would probably issue a(an): A. Unmodified opinion with an appropriate emphasis-of-matter paragraph. B. "Except for" qualified opinion. C. Standard unmodified opinion. D. Adverse opinion.

B. Other reliable external evidence to support the balances is likely to be available.

Auditors may choose not to confirm accounts payable because: A. Confirmation obtains evidence identical to that obtained by cutoff tests. B. Other reliable external evidence to support the balances is likely to be available. C. A reading of the corporate minutes reveals that confirmation is unnecessary. D. The balances due will have changed between the year-end and the date of confirmation.

C. Through the date of the audit report.

Auditors should perform audit procedures relating to subsequent events? A. Through year end. B. Through issuance of the audit report. C. Through the date of the audit report. D. For a reasonable period after year end.

D. Compare the prior year's financial statements with those of the current year.

Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to: A. Make inquiries about actions taken at meetings at the board of directors during the current year. B. Verify that the reissued report will not be used to obtain credit from a financial institution. C. Review the successor's accountant's working papers for matters affecting the prior year. D. Compare the prior year's financial statements with those of the current year.

A. See Accountant's Review Report.

Each page of a nonissuer's financial statements reviewed by an accountant should include the following reference: A. See Accountant's Review Report. B. Reviewed. No Accountant's Assurance Expressed. C. See Accompanying Accountant's Notes. D. Reviewed, No Material Modifications Required.

C. Includes primarily applying analytical procedures to management's financial data and making inquiries of company management.

Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that a review: A. Provides only limited assurance that the financial statements are fairly presented. B. Includes examining, on a test basis, information that is the representation of management. C. Includes primarily applying analytical procedures to management's financial data and making inquiries of company management. D. Does not contemplate obtaining corroborating evidential matter or applying certain other procedures ordinarily performed during an audit.

D. Each of the years in the two-year period.

For a continuing audit client, when a complete set of financial statements is presented on a comparative basis for two years, the auditors' opinion would refer to: A. Only the current year under audit. B. Either one or both years at the option of the auditors. C. Each of the two years plus the preceding year. D. Each of the years in the two-year period.

C. A change in the useful life used to calculate the provision for depreciation expense.

For which of the following events would an auditor issue a report that omits any reference to a change in accounting principle or correction of a material misstatement? A. A change in the method for accounting for inventories. B. A change from an accounting principle that is not in accordance with the applicable reporting framework to one that is. C. A change in the useful life used to calculate the provision for depreciation expense. D. Management's lack of reasonable justification for a material change in accounting principle.

B. The auditors should issue a qualified report for the departure from generally accepted accounting principles.

If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows: A. The auditors may still issue an unmodified opinion. B. The auditors should issue a qualified report for the departure from generally accepted accounting principles. C. The auditors should issue a qualified report indicating a scope limitation in that no statement of cash flows is presented. D. The auditors should disclaim an opinion on the overall financial statements.

A. Valuation and allocation

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of the relevant financial statement assertion of A. Valuation and allocation B. Existence C. Completeness D. Rights and obligations

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

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.

C. Sales and Bad Debt Expense.

In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable? A. Sales and Cost of Goods Sold. B. Interest and Bad Debt Expense. C. Sales and Bad Debt Expense. D. Interest and Cost of Goods Sold.

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

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would A. Inspect the property ledger and the insurance and tax records, and then tour the client's facilities B. Tour the client's facilities, and then inspect the property ledger and the insurance and tax records C. Analyze the repair and maintenance account, and then tour the client's facilities D. Tour the client's facilities, and then analyze the repair and maintenance account

D. Compilation report with an indication that all required disclosures under GAAP may not be presented with the statements.

It is the end of his client's first quarter and Bill Smith, CPA is performing a compilation of his client's interim financial statements. He has discovered that the client does not wish to present notes to the financial statements. The appropriate CPA report includes: A. Qualified opinion ("subject to" the omission of the notes). B. Compilation report with an adverse opinion due to inadequate disclosure. C. Standard compilation report. D. Compilation report with an indication that all required disclosures under GAAP may not be presented with the statements.

C. Preparation of periodic governmental reports as to employees' earnings and withholding taxes.

It would be appropriate for the payroll accounting department to be responsible for which of the following functions? A. Approval of employee time records. B. Maintenance of records of employment, discharges, and pay increases. C. Preparation of periodic governmental reports as to employees' earnings and withholding taxes. D. Distribution of paychecks to employees.

D. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements rather than being recorded therein, the auditor may issue an unqualified opinion.

Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. These considerations will affect the audit report as follows: A. If a loss has been recorded in accordance with these criteria, the auditor may issue an unqualified opinion but is required to point out the contingency in an explanatory paragraph of the report. B. If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but is required to point out the contingency in an explanatory paragraph of the report. C. If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but should consider adding an explanatory paragraph as a means of emphasizing the disclosure. D. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements rather than being recorded therein, the auditor may issue an unqualified opinion.

A. Lack of sufficient appropriate evidence.

Tech Company has disclosed an uncertainty due to pending litigation. The auditor's decision to issue a qualified opinion rather than an unmodified opinion most likely would be determined by the: A. Lack of sufficient appropriate evidence. B. Inability to estimate the amount of loss. C. Entity's lack of experience with such litigation. D. Lack of insurance coverage for possible losses from such litigation.

C. Cutoff.

Tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about the relevant assertion regarding: A. Valuation and allocation. B. Existence. C. Cutoff. D. Classification and understandability.

B. Completion of compilation procedures.

The accountants' compilation report should be dated as of the date of: A. Completion of fieldwork. B. Completion of compilation procedures. C. Transmittal of the compilation report. D. The latest subsequent event referred to in the notes to the financial statements.

B. Vouching borrowing and repayment transactions.

The auditor's plan to examine interest bearing debt most likely will include steps that require: A. Comparing the book value of the debt to its year end market value. B. Vouching borrowing and repayment transactions. C. Verifying the proper presentation of the debt through confirmation. D. Inspecting the accounts payable subsidiary ledger for unrecorded interest bearing debt.

C. A business combination.

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.

B. Receiving reports.

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all A. Payment vouchers. B. Receiving reports. C. Purchase requisitions. D. Vendors' invoices.

C. Cash.

When an auditor finds a debit to accounts payable, which of the following accounts is most likely to be credited? A. Accounts Receivable. B. Accrued liabilities. C. Cash. D. Cost of goods sold.

A. Disclose that the income tax basis is a comprehensive basis of accounting other than generally accepted accounting principles.

When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should: A. Disclose that the income tax basis is a comprehensive basis of accounting other than generally accepted accounting principles. B. Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards. C. Not express an opinion on whether the statements are presented in conformity with the comprehensive basis of accounting used. D. Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting.

b. the number of shares issued and outstanding

When an entity does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning a. restrictions on the payment of dividends b. the number of shares issued and outstanding c. guarantees of preferred stock liquidation value d. the number of shares subject to agreements to repurchase

C. Issue an "except for" qualification or an adverse opinion.

When financial statements are affected by a material departure from generally accepted accounting principles, the auditors should: A. Issue an unmodified opinion with a basis for modification paragraph. B. Withdraw from the engagement. C. Issue an "except for" qualification or an adverse opinion. D. Issue an "except for" qualification or a disclaimer of opinion.

A. A surprise observation of a paycheck distribution.

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.

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

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.

D. Establish the basis for depreciable assets and verify the depreciation expense

Which of the following best describes the independent auditors' approach to obtaining satisfaction concerning depreciation expense in the income statement? A. Verify the mathematical accuracy of the amounts charged to income as a result of depreciation expense. B. Determine the method for computing depreciation expense and ascertain that is in accordance with generally accepted accounting principles. C. Reconcile the amount of depreciation expense to those amounts credited to accumulated depreciation accounts. D. Establish the basis for depreciable assets and verify the depreciation expense

A. There are significant unexplained variances between standard and actual labor costs

Which of the following circumstances most likely will cause an auditor to suspect an employee payroll fraud scheme? A. There are significant unexplained variances between standard and actual labor costs B. Payroll checks are disbursed by the same employee each payday C. Employee time cards are approved by individual departmental supervisors D. A separate payroll bank account is maintained on an imp rest basis

A. Inspecting documents and physically examining assets

Which of the following combinations of procedures would an auditor most likely perform to obtain evidence about fixed asset additions? A. Inspecting documents and physically examining assets B. Recomputing calculations and obtaining written management representations C. Observing operating activities and comparing balances with prior-period balances D. Confirming ownership and corroborating transactions through inquiries of client personnel

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

Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence and valuation assertions about rcorded accounts payable? A. Investigating the open purchase order file to ascertain that renumbered purchase orders are used and accounted for. B. Receiving the client's mail, unopened, for a reasonable period of time after year end to search for unrecorded vendor's invoices. C. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports. D. Confirming accounts payable balances with known suppliers who have zero balances.

D. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.

Which of the following is an analytical procedure that should be applied to the income statement? A. Select sales and expense items and trace amounts to related supporting documents. B. Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement. C. Obtain from the proper client representatives, the beginning and ending inventory amounts that were used to determine costs of sales. D. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.

D. Product warranty liability.

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

A. A compilation report must be issued.

Which of the following is correct relating to compiled financial statements? A. A compilation report must be issued. B. Omission of note disclosures is unacceptable. C. A written agreement with the client (ordinarily an engagement letter) is not required. D. Each page of the financial statements should have a restriction such as "Restricted for Management's Use Only."

B. Establish the legality of outstanding debt.

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.

D. Confirm directly with shareholders the total capital stock held by each.

Which of the following is not a procedure normally performed while completing the audit of a public company? A. Obtain a lawyer's letter. B. Obtain a representations letter. C. Perform an overall review using analytical procedures. D. Confirm directly with shareholders the total capital stock held by each.

D. Vouching retirements of plant and equipment.

Which of the following is not a test primarily used to test property, plant and equipment accounts for overstatement? A. Investigation of reductions in insurance coverage. B. Review of property tax bills. C. Examination of retirement work orders prepared during the year. D. Vouching retirements of plant and equipment.

A. Analyzing repairs and maintenance expense accounts.

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.

C. Travel expense.

Which of the following ledger accounts would be least likely to be analyzed in detail by auditors? A. Miscellaneous revenue. B. Professional fees. C. Travel expense. D. Repairs and maintenance.

B. Obtain a general understanding of the entity's organization, its operating characteristics, and its products or services.

Which of the following procedures is usually the first step in reviewing the financial statements of a nonpublic entity? A. Make preliminary judgments about risk and materiality to determine the scope and nature of the procedures to be performed. B. Obtain a general understanding of the entity's organization, its operating characteristics, and its products or services. C. Assess the risk of material misstatement arising from fraudulent financial reporting and the misappropriation of assets. D. Perform a preliminary assessment of the operating efficiency of the entity's internal control activities.

B. Obtaining a client representation letter from members of management.

Which of the following procedures should an accountant perform during an engagement to review the financial statements of a nonissue? A. Communicate control deficiencies discovered during the assessment of control risk. B. Obtaining a client representation letter from members of management. C. Sending bank confirmation letters to the entity's financial institution. D. Examining cash disbursements in the subsequent period or unrecorded liabilities.

A. Confirmation of accounts payable.

Which of the following procedures would an auditor least likely perform before the balance sheet date? A. Confirmation of accounts payable. B. Observation of merchandise inventory. C. Assessment of the risks of material misstatement. D. Identification of related parties.

B. Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance.

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? A. Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file. B. Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance. C. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices. D. Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions.

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 the substantive procedures applied to these balances.

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 the substantive 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.