ACCT 404 Exam 3

The basic activities in revenue and collection cycle for manufacturing companies are:

1. receiving and processing customer orders 2. Delivering goods and services to customers 3. billing customers and accounting for accounts receivable 4. collecting and depositing cash

Which of the following is not generally done with tests of controls? inspections confirmations observations recalculations

b

revenue recognition

must be realized or realizable and earned

The materials requisition is also called a materials:

transfer ticket

Accounts to be debited and who verified the invoice and reconciled the purchase order, receiving report, and vendor invoice are included on the

voucher

Bill of lading

a form that the carrier signs to verify the goods are shipped

Choose the correct ASB assertion: Review a sample of vendor invoices for prices paid for inventory

accuracy

Which of the following statements are correct? Auditors should ask management about any lawsuits or defects related to intangible assets Goodwill is of special interest due to special impairment Vouching may be extensive in the areas of R&D

b and d

The search for unrecorded liabilities is normally performed from the audit client's:

balance sheet date to date of the audit report

January sales recorded in December

cutoff

______________ assertions tend to be a higher risk than ____________ in receivables and revenues

existence completeness

The principal goal of the physical inspection of PP&E is to determine actual __________ and ____________

existence and valuation

In order to ensure proper separation of duties, the same department that performs sales and credit authorization may have custody of goods but should not have record keeping duties associated with the transactions

false - all three should be separate

The person who has the ability to change invoices should not:

have custody of assets or recording responsibilities but can mail invoices

Material misstatement is a combination of

inherent and control risk

When testing controls around inventory, auditors are considering the ____ transaction cycle

purchasing

The audit procedure used in an observation of the client's physical inventory taking are designed primarily to:

test and observe the client's physical count of inventory

A comparison of the prior year's sales forecast with actual sales may provide an indication of slow-moving inventory.

true

Positive confirmations are weighted heavier than negative confirmations

true

Inventories are often a large ________ asset of a company's balance sheet.

valuation

State the procedure best suited for the assertion: The client company has a legal right to all accounts receivable at the balance sheet date.

Review loan agreements for indications of whether accounts receivable have been factored or pledged

State the procedure best suited for the assertion: Accounts receivable are properly described and presented in the financial statements

Review the accounts receivable trial balance for amounts due from officers and employees

State the procedure best suited for the assertion: Accounts receivable are stated at net realizable value

Review the aged trial balance for significant past due accounts

Valuation issues related to the inventory account include: obsolete inventory GAAP accounting used All included items in inventory Accurate recording

a b and d

production order

a document authorizing the manufacture of a specified quantity of a particular product

receiving report

a document that records details about each delivery, including the date received, shipper, supplier, quantity received

voucher package

a document used as a source for recording payables. It shows approvals

voucher

a document used to establish a formal means of recording and controlling acquisitions, primarily by enabling each acquisition transaction to be sequentially numbered

Liabilities not being recorded until receiving reports have been matched to purchase orders and invoices is referred to as:

a three-way match results in understated expenses and overstated profits near year end when documents are not matched

A blank form confirmation:

a variation of a positive confirmation may produce better evidence than a positive confirmation may result in a lower response rate

The cost accounting department produces analyses of actual cost per unit, standard cost, and variances. Cost accounting also may determine the _________________ to production in general, to production orders, and to finished units

overhead allocation

Sales transactions that were initiated but not yet completed are kept in the

pending order master file

A blank form is a variation of the ______ confirmation

positive

Accounts in dispute and individual balances are relatively large would require _______ confirmation

positive

Choose the correct ASB assertion: Review inventory footnote for the financial statements

presentation

An important step of testing controls is comparing quantity and ______ in the invoice, purchase order, and receiving report

price

Because individuals may attempt to run personal expenses through accounts payable, the (existence/validity) of expenses is a significant risk in the expenditures cycle.

validity

Choose the correct ASB assertion: Review the appropriateness of standard costs to price inventory issues and cost of goods sold

valuation

Choose the correct ASB assertion: Select a sample of shipping documents and review the accounting summary of the quantities and prices

valuation

vendor's invoice

A bill sent from the vendor to the entity purchasing the goods or services

Pending order files should be reviewed frequently in order to

avoid failure to bill and record shipment

An auditor is examining a nonpublic company's inventory procurement system and has decided to perform tests of controls. Under which of the following conditions should the auditor perform tests of controls? The auditor believes that testing the controls could lead to a reduction in overall audit time and cost The auditor hopes to reduce the amount of work to be done in assessing inherent risk Significant weaknesses are found in the company's internal control

A

Holding supervisors accountable for production is an important component of control over ________ inventory WIP all types raw materials finished goods

A

Which procedure would be most appropriate for testing the completeness assertion of inventory? Performing cutoff procedures for shipping and receiving Scanning perpetual inventory, production, and purchasing records Tracing inventory items from the tag listing back to the physical inventory quantities Examining paid vendor invoices

A

Bill of Materials

A document that shows the quantity of each type of direct material required to make a product.

raw material inventory status report

A periodic report (usually daily or weekly) that includes a list of all raw materials and the inventoried quantity of each material

customer master file

A record of pertinent information on an entity's customers, including current credit authorization

approved vendor list

A record of vendors that have been vetted to ensure that vendors meet company policy and procedure in terms of price, quality, delivery, etc. This control activity provides evidence of vendor existence to auditors.

aged trial balance

A schedule that lists each individual receivable and indicates whether it is current or past due and if past due, for how long. The total should equal the accounts receivable general ledger balance

Dual-purpose procedure (test)

An audit procedure that serves as a test of controls and a substantive test of the details of the transactions that occurred during the year. For example, a test of controls over equipment acquisitions may address authorization (providing evidence on control effectiveness) and whether the transaction tested has been properly recorded in the year's acquisitions (providing substantive evidence on the dollar amounts). As another example, a substantive procedure may reveal a misstatement and be extended to determine the nature of the control that did not operate effectively, thereby providing evidence on operating effectiveness.

Purchase Requisition (PR)

An internal company document that issues a request for a purchase. When accepted, data from the purchase requisition is used in the purchase order.

sales invoice

An invoice used as a source document for recording a sale on account the bill sent to the customer

State the procedure best suited for the assertion: Accounts receivable represent all amounts owed to the client company at the balance sheet date.

Analyze the relationship of accounts receivable and sales and compare with relationships for preceding periods.

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except: A. Examine client correspondence files B. Do nothing for immaterial balances C. Examine shipping documents D. Send a second request

B

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable? Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail Have customers send payments directly to the company's depository bank Separate duties so that no employee has access to both checks from customers and currency from daily cash receipts

B

Which of the following statements are correct? confirmations of accounts, loans, and notes receivable produces sufficient evidence of the rights assertion confirming a specific transaction may be more effective than confirming the account balance confirmation returned as undeliverable are always a red flag auditors may not receive an oral response to a confirmation

B and C

Which of the following steps would not normally be included in a program for a physical inventory observation? Obtain the numbers of the last five receiving reports and last five shipping documents Inspect the tags used and unused and record tag number used Vouch unit prices to vendors' invoices or other cost records

C

An auditor selected a product maintained in the finished goods warehouse. The auditor counted the product and compared this amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor likely testing?

Completeness

Choose the correct ASB assertion: Trace posting of sample of sales invoices to amounts in general ledger

Completeness

Choose the correct ASB assertion: Select a sample of inventory item from perpetual records and vouch additions to receiving reports

Existence

Choose the correct ASB assertion: Selected a sample of inventory items from the perpetual records and vouch additions to receiving reports.

Existence

For each of the following substantive procedures, (1) cite one assertion most closely related to the evidence the procedure will produce (the primary assertion) and (2) when appropriate, cite one or more other assertions that also are related to the evidence the procedure will produce—the secondary assertion(s). Determine whether corresponding retirements of replaced PP&E have occurred and have been properly entered in the detail records

Existence

For each of the following substantive procedures, (1) cite one assertion most closely related to the evidence the procedure will produce (the primary assertion) and (2) when appropriate, cite one or more other assertions that also are related to the evidence the procedure will produce—the secondary assertion(s). Select major additions for the year and a random sample of other additions, and inspect the physical assets.

Existence

Inventory observation must be observed is one of the major assets listed on the balance sheet.

False

The sales forecast is the document that production uses to determine what to produce and when to produce it.

False

True or False: Standard costing is an acceptable, recognized method per GAAP

False

When you capitalize an expense, it is never recognized on the income statement. Instead, it is an asset.

False; it is an asset but it is amortized/depreciated

When considering WCGW in the expenditure and acquisition cycle, auditors consider five primary concerns:

Have liabilities and corresponding expenses or assets been recorded (completeness)? Have liabilities and corresponding expenses or assets been recorded in the proper period (cutoff)? Do liabilities reflect the actual needs and obligations of the company (occurrence and obligation)? Have liabilities and corresponding expenses or assets been recorded at their proper amount (valuation)? Have expenses been recorded in the proper account (classification)?

Net Realizable Value (NRV)

In the lower-of-cost-or-market approach, the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal. The NRV represents the ceiling (upper limit) under LCM.

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following?

One of the cashiers has been covering a personal embezzlement by lapping

A company's cost accountant periodically reconciles job cost sheets to the work-in-process inventory accounts. This reconciliation is most likely performed to provide assurance that

Production accounting and posting is complete

Electronic Data Interchange (EDI)

The transfer of data between/among different companies using networks such as the Internet

For each of the following substantive procedures, (1) cite one assertion most closely related to the evidence the procedure will produce (the primary assertion) and (2) when appropriate, cite one or more other assertions that also are related to the evidence the procedure will produce—the secondary assertion(s). Evaluate the policy and procedures for allocating overhead to the work orders, recalculate their application.

Valuation and Allocation

For each of the following substantive procedures, (1) cite one assertion most closely related to the evidence the procedure will produce (the primary assertion) and (2) when appropriate, cite one or more other assertions that also are related to the evidence the procedure will produce—the secondary assertion(s). Review the useful lives, depreciation methods, and salvage values for reasonableness. Recalculate depreciation.

Valuation and Allocation

The most difficult inventory control issues relate to:

WIP

Cash custody rests largely in the hands of persons who: sign checks write checks mail checks

a

Cycle counts: require the auditors' presence at some of the counts only are most appropriate when a high level of control risk is present assist with maintaining accurate perpetual inventory records

a and c

Observation can be used to help determine: proper inventory authorizations separation of duties in the inventory area proper recording and allocation of labor and material costs physical controls over inventory

a b and d

Auditors must ensure that the cost of goods sold includes all applicable cost at the proper amounts. This addresses the ________ assertion

accuracy

Choose the correct ASB assertion: Reviewed vendor invoices and purchase orders for terms of the contract

accuracy

Identify the assertion about the transactions: goods shipped to a bad credit risk customer

accuracy

Identify the assertion about the transactions: sales billed at the wrong price or quantity

accuracy

From the auditors' point of view, inventory counts are more acceptable prior to the year end when

accurate perpetual inventory records are maintained

The production cycle links the ____________ and the ____________

acquisition cycle revenue cycle

To help assess the allowance for doubtful accounts, auditors use the:

aged trial balance

production plan

an outline of the activities undertaken to combine resources (inputs) to create goods or services (outputs)

Observing the movement of inventory from raw materials to finished goods can help the auditor ensure proper:

authorizations and documentation

In the audit of accounts receivable, the most important emphasis should be on the rights and obligations assertion existence assertion

b

The auditor selects a sample of recorded sales invoices and vouches them to shipping documents. This procedure is related to: cutoff occurrence accuracy completeness

b

A small business owner can best offset the lack of separation of duties by:

being actively involved in the accounting process

To determine that customers were sent the goods ordered at the correct price and quantity, customer invoices should be compared to

bills of lading customer orders

Significant risk in the production cycle relates to the correct valuation of: overhead direct materials labor

c

Identify the assertion about the transactions: product line A sales recorded as Product line B sales

classification

The overall physical inventory count is generally taken by:

company personnel

When testing other accrued liabilities, auditors may independently calculate the amount and ______ it to management's estimate.

compare

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's balance assertion of

completeness

Auditors review items in the pending order file for evidence of the _________ of recorded sales and accounts receivable

completeness

Choose the correct ASB assertion: Test counted inventory and traced the count to the perpetual inventory record

completeness

Choose the correct PCAOB assertion: Trace a sample of sales invoices to perpetual inventory record entry of issue

completeness

For each of the following substantive procedures, (1) cite one assertion most closely related to the evidence the procedure will produce (the primary assertion) and (2) when appropriate, cite one or more other assertions that also are related to the evidence the procedure will produce—the secondary assertion(s). Vouch a sample of receiving reports to related purchase orders.

completeness

Identify the assertion about the transactions: Failure to post charges to customers for sales

completeness

Identify the assertion about the transactions: goods shipped, sales not recorded

completeness

Selecting a sample of closed purchase orders and tracing them to the accounts payable journal provides evidence of:

completeness

Required disclosures must ensure that the presentation and disclosure assertions of _______ are all met

completeness classification occurrence

The most significant risks in the expenditures cycles generally relate to the ____________ of expenditures and ___________ of acquisitions

completeness valuation

What are relevant assertions and risks in expenses?

completeness - high cutoff - high accuracy - high classification - high

What are the relevant assertions of accounts payable?

completeness - high cutoff - high existence - moderate rights and obligations - moderate valuation - moderate

___________ and __________ go hand-in-hand because management may desire to improve the books by not recording an obligation in the correct period.

completeness and cutoff

Prenumbered documents are important for testing:

completeness and occurrence

Test of controls are designed to test production accounting in two directions:

completeness and occurrence

What are the three most important assertions for accounts payable?

completeness, cutoff, and valuation

Auditors test effectiveness of controls to ensure they can justify their planned levels of ______ risk.

control

Which documents should be matched before recording revenue?

customer invoice evidence of shipment customer sales order

Auditors should inspect the unmatched invoice file and compare it with the unmatched receiving report file to determine:

unrecorded liabiliites

packing slip

describes the goods being shipped and the quantity being shipped

Auditors must confirm that the _______ of PP&E agree with the general ledger

detail ledgers

sales detail file

detailed sales entries

Substantive procedures:

differ from tests of controls in their basic purpose are designed to obtain direct evidence about account balances

The determination of the value of ending inventory _____ affects net income

directly

To be effective, auditor tests of control in the revenue cycle must be performed using ________ tests of controls

dual direction

An audit test that provides evidence on both controls and relevant assertions is called a:

dual purpose procedure

Inventory can be automatically ordered from approved vendors through:

electronic data interchange (EDI)

What would not be tested for by examining lease agreements?

estimates

Auditors should inspect the unmatched receiving report file to find evidence of:

unrecorded liabilities

A way to subject all items in a population of occurrences for a particular control activity in the revenue cycle is to use __________ testing

exception

An automated procedure designed to test all items in a population in order to identify violations of a particular control activity is called

exception testing

Selecting items from a perpetual inventory record and obtaining a test count can be done to produce evidence for the _______ balance assertion, while tracing items from the inventory floor to the inventory records produces evidence for the _______ balance assertion

existence completeness

Because of the tendency to use fictitious sales to overstate assets and revenues, __________ assertions are important for accounts receivable, and _____ is important for sale

existence occurrence

The most significant risks in the production cycle often relate to the _________ and ________ inventory

existence valuation

GAAP does not mandate bad debt expense but does allow it to be done

false; must have an estimate

Property taxes are typically _______ in number

few

The sales detail file can be checked for:

fictitious sales and sales recorded before shipment

When using confirmations, auditors should:

follow-up on electronic and telephone responses consider features of the reply control the mailing

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

included in the final inventory schedule

According to the FASB Statement of Concepts, expenses may be recognized when they are:

incurred allocated to future periods matched to revenue

After obtaining an understanding of the client and its environment, auditors must identify the _______ risks related to the accounts

inherent

Ways to determine if a company has factored accounts receivable include:

inquiring of management examining support for large cash receipts

The actions in tests of controls involve:

inspecting, inquiry, observing, scanning, matching, recalculating

Information about the control system is often gathered by completing an:

internal control questionnaire

When testing customer deposits, auditors typically review a(n) ______of the individual deposits.

list

Auditors should examine the open purchase order file to find evidence of:

losses on purchase commitments

Inventory control will receive a ________ or ____________ that authorizes inventory to release raw materials and supplies to production

materials requisition or materials transfer ticket

What is included in the purchase requisition?

name of requesting department listing of the requested items account number to charge authorization signature might include a recommended vendor

Control risk assessment is important because it governs the ______,__________ and __________ of substantive procedures

nature, timing, extent

A large number of small balances, customers are expected to consider the confirmations properly, and risk of material misstatement is low would require _______ confirmation

negative

Identify the assertion about the transactions: Sales recorded, goods not shipped

occurence

Tests of controls over _______ involves tests of the additions to the expense accounts

occurrence

Tests of controls over ________ involves tests of the additions to the expense accounts

occurrence

Vouching of expenses may be limited to significant items if _______ controls are strong

occurrence

When performing tests of controls, auditors are interested in determining that WIP and FG inventory items were actually produced as part of the ______ direction

occurrence

backorder master file

orders for products currently out of stock

As the time for production nears, the production planner issues a __________________ to the appropriate production personnel including inventory control and production managers

production order

The documents that authorize the inventory record keepers to update the raw material inventory files are the:

production order materials requisition

Once purchasing identifies the appropriate vendor for the purchase, a ___________ is sent to the selected vendor.

purchase order

The expenditure cycle begins when an individual or department needs supplies, materials, equipment, or services. The individual department requests these items by sending a ____________ to the purchasing department

purchase requisition

What is arguably the most important process to an organization?

purchasing process

An unexpected increase in _____ may be a red flag indicating bribes and kickbacks

raw materials

The production planner uses the _______ to determine if there is sufficient stock to complete production

raw materials inventory status report

After the delivery is verified as the company's purchase, the receiving department inspects the goods received for quantity and quality and prepares a _________

receiving report

Federal and state governments do not specify the exact ____ to be maintained, but do specify amounts to be withheld

records

Accounting Standard Codification 740 (ASC 740)

requires companies to estimate deferred income tax assets and liabilities, both of which are very subjective. An important aspect of ASC 740 requires a higher standard for tax benefits before they can be recognized in a company's financial statements

For each of the following substantive procedures, (1) cite one assertion most closely related to the evidence the procedure will produce (the primary assertion) and (2) when appropriate, cite one or more other assertions that also are related to the evidence the procedure will produce—the secondary assertion(s). inspect title documents for automotive and real estate assets

rights

For each of the following substantive procedures, (1) cite one assertion most closely related to the evidence the procedure will produce (the primary assertion) and (2) when appropriate, cite one or more other assertions that also are related to the evidence the procedure will produce—the secondary assertion(s). Study loan documents for terms and security of loans obtained for purchase of PP&E

rights and obligations

Required disclosures must ensure that the presentation and disclosure assertions of _________ are all met

rights and obligations understandability accuracy and valuation

Inspecting bank confirmations, loan agreements, and BOD minutes provides evidence regarding:

rights and obligations of accounts receivable

The _______ is one of the most important documents in any organization

sales forecast

search for unrecorded liabilities

set of procedures designed to yield audit evidence of liabilities that were not recorded in the reporting period

Cost accounting generally records finished goods at

standard costs

The most effective alternative procedure to confirmations to ensure existence is examining

subsequent cash receipts

audit procedures to gather evidence on the assertions in account balances are:

substantive procedures

Sending confirmations to customers to substantiate the existence and rights and obligations assertions of accounts receivable is an example of a:

substantive test of details

If the risk of material misstatement is high, auditors can look for evidence of significant transaction that are properly recorded using:

tests of details

bill of lading

the contract existing between the consignor (shipper) and the carrier; includes shipping information

Auditors can perform tests of controls to determine whether company controls are actually in place and operating effectively, including identification of:

the control that will be relied on to reduce assessed control risk and the data population from which the sample of items will be selected for audit

Because expenses affect the income statement, the misstatement of expenses is often the objective of misstating a purchase or payable.

true

Inherent risk is considered completely independent of internal controls

true

Specifically, the persons authorizing purchases should not be responsible for recording them. Persons who actually handle the receipt and storage of goods should neither authorize nor account for them. Page 347The persons who sign checks should not prepare the vouchers, nor should they mail the checks

true

There is no such thing as a typical revenue and collection cycle

true

Vendor invoices should be compared to purchase orders and receiving reports to determine that the vendor is charging the approved price and that the quantity being billed is the same as the quantity received.

true

The objective of misstating a purchase or payable is often to:

understate expenses

Risks in the acquisition and expenditure cycle include _____________ liabilities and ______________ purchase agreements

unrecorded noncancelable

For each of the following substantive procedures, (1) cite one assertion most closely related to the evidence the procedure will produce (the primary assertion) and (2) when appropriate, cite one or more other assertions that also are related to the evidence the procedure will produce—the secondary assertion(s). Analyze the productive economic use of PP&E to determine whether any other-than-temporary impairment is evident

valuation

For each of the following substantive procedures, (1) cite one assertion most closely related to the evidence the procedure will produce (the primary assertion) and (2) when appropriate, cite one or more other assertions that also are related to the evidence the procedure will produce—the secondary assertion(s). For a sample of capitalized PP&E, examine construction work orders in detail

valuation

For each of the following substantive procedures, (1) cite one assertion most closely related to the evidence the procedure will produce (the primary assertion) and (2) when appropriate, cite one or more other assertions that also are related to the evidence the procedure will produce—the secondary assertion(s). For a sample of construction work orders, vouch time and material charges to supporting payroll and material usage records. Review the reasonableness of the hours worked, the work description, and the material used.

valuation

For each of the following substantive procedures, (1) cite one assertion most closely related to the evidence the procedure will produce (the primary assertion) and (2) when appropriate, cite one or more other assertions that also are related to the evidence the procedure will produce—the secondary assertion(s). For major amounts charged to PP&E and a sample of smaller charges, examine supporting documentation for expenditure amounts, budgetary approvals, and capital work orders.

valuation, existence

The accts payable department attaches a ________ to the purchase order, a vendor's invoice, and a receiving report.

voucher

The two primary means of gathering evidence to support management's assertions with respect to PP&E are physical inspection and

vouching

Auditors typically achieve an understanding of controls by completing a ____________ of the processes in the revenue and collection cycle

walkthrough