Audit Ch9 and Ch10

An auditor reviews job cost sheets to test which transaction assertion? Occurrence. Completeness. Accuracy. Classification.

Accuracy.

From the auditors' point of view, inventory counts are more acceptable prior to the year-end when Significant amounts of inventory are held on a consignment basis. Accurate perpetual inventory records are maintained. Inventory is slow moving. Internal control is weak.

Accurate perpetual inventory records are maintained.

The auditors should insist that a representative of the client be present during the inspection and count of securities to Coordinate the return of all securities to proper locations. Acknowledge the receipt of securities returned. Lend authority to the auditors' directives. Detect forged securities.

Acknowledge the receipt of securities returned.

When auditing inventories, an auditor would least likely verify that Damaged goods and obsolete items have been properly accounted for. The financial statement presentation of inventories is appropriate. The client has used proper inventory pricing. All inventory owned by the client is on hand at the time of the count.

All inventory owned by the client is on hand at the time of the count.

Which of the following would not result in the audit team's selecting a larger sample of controls for examination? A reduction in the risk of overreliance from 10 percent to 5 percent. An increase in the tolerable rate of deviation from 3 percent to 6 percent. An increase in the expected population deviation rate from 2 percent to 4 percent. All of the above would result in a larger sample of controls.

An increase in the tolerable rate of deviation from 3 percent to 6 percent.

Which of the following questions would auditors most likely include on an internal control questionnaire for notes payable? Are direct borrowings on notes payable authorized by the board of directors? Are assets that collateralize notes payable critically needed for the entity's continued existence? Are the proceeds from notes payable used to purchase noncurrent assets? Are two or more authorized signatures required on checks that repay notes payable?

Are direct borrowings on notes payable authorized by the board of directors?

In connection with the audit of an issue of long-term bonds payable, the audit team should Calculate the effective interest rate to see whether it is substantially the same as the rates charged for similar issues. Determine whether bondholders are persons other than owners, directors, or officers of the company issuing the bond. Decide whether the bond issue was made without violating state or local laws or regulations. Ascertain that the client has obtained the opinion of counsel on the legality of the issue.

Ascertain that the client has obtained the opinion of counsel on the legality of the issue.

The type of sampling most frequently used by auditors during their study of internal control is referred to as Attributes sampling. Control sampling. Monetary unit sampling. Variables sampling.

Attributes sampling.

To make a year-to-year comparison of inventory turnover most meaningful, the auditor performs the analysis For the company as a whole. By division. By product. All of the above.

By product.

A related party is a person or entity that Does business with the company. Is a member of the company's management team or board of directors. Can exert significant influence over or be influenced by the company. Has a family tie to a management member.

Can exert significant influence over or be influenced by the company.

A limitation of systematic random selection is that this method Results in a larger sample size than other selection methods. Has a relatively low likelihood of yielding a representative sample. Cannot be used with statistical sampling plans. Can result in bypassing a number of items having similar characteristics.

Can result in bypassing a number of items having similar characteristics.

An audit team's purpose in reviewing the documentation concerning the renewal of a note payable shortly after the balance-sheet date most likely is to obtain evidence concerning management's assertions about Completeness. Classification. Existence. Valuation.

Classification.

In auditing for unrecorded long-term bonds payable, an audit team most likely will Compare interest expense with the bond payable amount for reasonableness. Perform analytical procedures on the bond premium and discount accounts. Confirm the existence of individual bondholders at year-end. Examine documentation of assets purchased with bond proceeds for liens.

Compare interest expense with the bond payable amount for reasonableness.

Which of the following audit procedures would not likely be performed for audits of shareholders' equity? Obtain management representation about number of shares issued and outstanding. Confirm outstanding common and preferred stock with stock registrar. Compare valuation of stock to published market prices. Read board of directors' minutes for authorization of equity transactions.

Compare valuation of stock to published market prices.

An audit team testing long-term investments would ordinarily use analytical procedures to ascertain the reasonableness of the Valuation of trading securities. Existence of unrealized gains or losses. Completeness of recorded investment income. Classification as available-for-sale or trading securities.

Completeness of recorded investment income.

An auditor selected items for test counts while observing a client's physical inventory count. 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 Existence. Completeness. Valuation and allocation. Rights and obligations.

Completeness.

The likelihood that an identified precision interval contains the true (but unknown) population value is the Sampling risk. Confidence. Precision. Mean.

Confidence.

Which of the following audit procedures would not likely be performed for audits of investments? Compare valuation to published market prices. Confirm investments with registrar. Read board of directors' minutes for authorization of investment strategies. Confirm investments with broker or trustee.

Confirm investments with registrar.

A portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods? Confirmation. Observation. Calculation. Inspection.

Confirmation.

When evaluating inventory controls, an auditor would be least likely to Make inquiries. Consider policy and procedure manuals. Observe procedures. Inspect documents.

Consider policy and procedure manuals.

Which of the following components of the audit risk model is most closely associated with attributes sampling? Detection risk. Inherent risk. Audit risk. Control risk.

Control risk.

When testing a company's cost accounting system, the auditor uses procedures that are primarily designed to determine that The system is in accordance with generally accepted accounting principles and is functioning as planned. Physical inventory counts agree substantially with book inventories. Quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand. Costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.

Costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.

A retailer's physical count of inventory was higher than that shown by the perpetual records. Which of the following could explain the difference? Inventory items had been counted but the tags placed on the items had not been taken off and added to the inventory accumulation sheets. An item purchased FOB shipping point had not arrived at the date of the inventory count and had not been reflected in the perpetual records. No journal entry had been made on the retailer's books for several items returned to its suppliers. Credit memos for several items returned by customers had not been recorded.

Credit memos for several items returned by customers had not been recorded.

The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense in the financial statements is to Detect unrecorded liabilities. Ascertain the reasonableness of imputed interest. Evaluate internal control over securities. Determine the validity of prepaid interest expense.

Detect unrecorded liabilities.

The risks of incorrect acceptance in variables sampling and of assessing control risk too low in attributes sampling both relate to IMPORTANT Evidence about assertions in financial statements. Efficiency of an audit. Control risk assessment decisions. Effectiveness of an audit.

Effectiveness of an audit.

The risk of incorrect rejection and the risk of underreliance relate to the IMPORTANT Preliminary estimates of performance materiality. Effectiveness of the audit. Tolerable misstatement. Efficiency of the audit.

Efficiency of the audit.

Which of the following is the most important audit consideration when examining the stockholders' equity section of a client's balance sheet? Stock dividends and stock splits during the year under audit were approved by the stockholders. Changes in the capital stock account are verified by an independent stock transfer agent. Entries in the capital stock account can be traced to resolutions in the minutes of meetings of the board of directors. Stock dividends are capitalized at par or stated value on the dividend declaration date.

Entries in the capital stock account can be traced to resolutions in the minutes of meetings of the board of directors.

Which of the following steps would normally be performed last in a sampling application? Examine sample items and determine the sample estimate. Determine the appropriate sample size. Determine the level of reliability for the sampling application. Identify the objective of the sampling application.

Examine sample items and determine the sample estimate.

Which of the following approaches is most suitable for auditing the finance and investment cycle? Perform extensive tests of controls and limit substantive procedures to analytical procedures. Ignore internal controls and limit substantive procedures to analytical procedures. Gain an understanding of internal controls and perform extensive substantive procedures. Ignore internal controls and perform extensive substantive procedures.

Gain an understanding of internal controls and perform extensive substantive procedures.

Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars? Have separate warehouse space for the more valuable items with frequent periodic physical inventory counts and comparison to perpetual inventory records. Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the accuracy of the perpetual inventory record. Have an independent accounting firm prepare an internal control report on the effectiveness of the controls over inventory. Require a manager's signature for the removal of any inventory item with a value of more than $50.

Have separate warehouse space for the more valuable items with frequent periodic physical inventory counts and comparison to perpetual inventory records.

An auditor usually traces 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 Physically present at the time of the preparation of the final inventory schedule. Not obsolete. Owned by the client. Included in the final inventory schedule

Included in the final inventory schedule

Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories? Select the last few shipping documents used before the physical count and determine whether the shipments were recorded as sales. Inspect the open purchase order file for significant commitments that should be considered for disclosure. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens. Trace test counts noted during the entity's physical count to the entity's summarization of quantities.

Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance? Inventory is properly presented in the financial statements. The entity has rights to the inventory. Inventory is complete. Inventory is properly valued.

Inventory is complete.

The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to Perpetual inventory records. Cost ledgers. Receiving reports. Material requisitions.

Material requisitions.

All corporate capital stock transactions should ultimately be traced to the Cash receipts journal. Numbered stock certificates. Cash disbursements journal. Minutes of the meetings of the board of directors.

Minutes of the meetings of the board of directors.

Which of the following is not a method that auditors use to control their exposure to sampling risk during the examination? Evaluating sample results using a mathematical basis. Performing the appropriate audit procedure. Determining an appropriate sample size. Ensuring that all items have an equal opportunity to be selected.

Performing the appropriate audit procedure.

In an audit sampling application, an auditor Performs procedures on all items in a balance and makes a conclusion about the entire balance. Performs procedures on less than 100 percent of the items in a balance and formulates a conclusion about the entire balance. Performs analytical procedures on the client's unaudited financial statements when planning the audit. Performs procedures on less than 100 percent of the items in a class of transactions to become familiar with the client's accounting system.

Performs procedures on less than 100 percent of the items in a balance and formulates a conclusion about the entire balance.

The distance from the sample estimate that has a certain likelihood (equal to reliability) of including the true population value is known as the Confidence. Precision. Mean. Precision interval.

Precision.

To determine the client's planned amount and timing of production of a product, the auditor reviews the Purchases journal. Inventory reports. Production plan. Sales forecast.

Production plan.

Which of the following internal control activities most likely addresses the completeness assertion for inventory? Receiving reports are prenumbered, and the numbering sequence is checked periodically. The work-in-process account is periodically reconciled with subsidiary inventory records. There is a separation of duties between the payroll department and inventory accounting personnel. Employees responsible for custody of finished goods do not perform the receiving function.

Receiving reports are prenumbered, and the numbering sequence is checked periodically.

An audit team would most likely verify the interest earned on bond investments by Testing internal controls relevant to cash receipts. Vouching the receipt and deposit of interest checks. Recomputing the interest earned on the basis of face amount, interest rate, and period held. Confirming the bond interest rate with the issuer of the bonds.

Recomputing the interest earned on the basis of face amount, interest rate, and period held.

The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items Represented by tags were included on the listing. Included on the listing were properly counted. Included in the listing were properly valued. Represented by tags were reduced to the lower of cost or market.

Represented by tags were included on the listing.

A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditors are unable to count securities at the balance sheet date, they most likely will Examine supporting evidence for transactions occurring during the year. Request the client to have the bank seal the safe deposit box until the auditors can count the securities at a subsequent date. Count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the balance sheet date. Request the bank to confirm to the auditors the contents of the safe deposit box at the balance-sheet date.

Request the client to have the bank seal the safe deposit box until the auditors can count the securities at a subsequent date.

Your client counts inventory three months before the end of the fiscal year because controls over inventory are excellent. Which procedure is not necessary for the roll-forward? Request the client to recount inventory at the end of the year. Compare gross margin percentages for the last three months. Trace receiving reports for the last three months to perpetual records. Check that shipping documents for the last three months agree with perpetual records.

Request the client to recount inventory at the end of the year.

A client maintains perpetual inventory records in quantities and in dollars. If the assessed control risk is high, an auditor would probably Increase the extent of tests of controls relevant to the inventory cycle. Insist that the client perform physical inventory counts of inventory items several times during the year. Request the client to schedule the physical inventory count at the end of the year. Apply gross profit tests to ascertain the reasonableness of the physical inventory counts.

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

Which of the following would not result in exposure to nonsampling risk? Measuring the characteristic of interest in an inappropriate manner. Selecting items that are not representative of the population of interest. Making an unintentional mistake in measuring the characteristic of interest. All of the above would result in exposure to nonsampling risk.

Selecting items that are not representative of the population of interest.

In which of the following circumstances would the audit team most likely use attributes sampling? Selecting customer accounts receivable for confirmation. Selecting purchase orders for indication of proper authorization. Selecting inventory items for verification of physical quantities. Selecting additions to property, plant, and equipment during the year.

Selecting purchase orders for indication of proper authorization.

A type of sampling application in which a relatively small initial sample is examined and decisions regarding expanding that sample are based on the results of this initial sample is known as Discovery sampling. Statistical sampling. Attributes sampling. Sequential sampling.

Sequential sampling.

When the client holds a large amount of negotiable securities, auditors need to plan to guard against Substitution of authentic securities with counterfeit securities. Substitution of securities already counted for other securities that should be on hand but are not. Unrecorded sales of securities after they are counted. Unauthorized negotiation of the securities before they are counted.

Substitution of securities already counted for other securities that should be on hand but are not.

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 do GAAS require tests of controls be performed by an auditor? The auditor hopes to reduce the amount of work to be done in assessing inherent risk. The auditor believes that testing the controls could lead to a reduction in overall audit time and cost. Significant weaknesses were found in the company's internal control. Tests of controls are always performed when the auditor begins to assess control risk.

The auditor believes that testing the controls could lead to a reduction in overall audit time and cost.

If the auditors discover that the carrying amount of a client's investments is overstated because of a loss in value that is other than a temporary decline in market value, they should insist that The loss in value be recognized in the financial statements. The equity section of the balance sheet separately show a charge equal to the amount of the loss. The approximate market value of the investments be shown in parentheses on the face of the balance sheet. The investments be classified as long term for balance sheet purposes with full disclosure in the footnotes.

The loss in value be recognized in the financial statements.

In which of the following scenarios would the use of sampling be most appropriate? The costs associated with an incorrect decision are extremely high. The population consists of a relatively small number of items. The decision to be made is relatively critical. The need for precise information about the population is not important.

The need for precise information about the population is not important.

When a client company does not maintain its own capital stock records, the auditors should obtain written confirmation from the transfer agent and registrar concerning Restrictions on the payment of dividends. The number of shares issued and outstanding. The number of shares subject to agreements to repurchase. Guarantees of preferred stock liquidation value.

The number of shares issued and outstanding.

In audit sampling applications, sampling risk is The probability that the audit team will fail to recognize erroneous accounting in the client's documentation. The probability that an audit team's conclusion based on a sample might be different from the conclusion based on an audit of the entire population. A characteristic of statistical sampling applications but not of nonstatistical applications. The probability that accounting misstatements will arise in transactions and enter the accounting system.

The probability that an audit team's conclusion based on a sample might be different from the conclusion based on an audit of the entire population.

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items? The cycle basis is used for physical inventory counts. Perpetual inventory records are maintained only for items of significant value. Supplies of relatively little value are expensed when purchased. The warehouse manager is responsible for maintenance of perpetual inventory records.

The warehouse manager is responsible for maintenance of perpetual inventory records.

ABC Company has 100 shares of IBM stock that it holds as an investment. The stock was purchased three years ago and has been in the client's safe deposit box along with other investment securities. During an inspection of securities held by the client, the auditor noted the 100 shares of IBM stock had a different CUSIP number than the number listed when purchased and the number verified during the previous audit. Which of the following would be the auditor's main concern about this discovery? The certificates in the safe deposit box were forgeries. ABC Company no longer owns the securities. There had been unauthorized buying and selling of investment securities. The securities may be misclassified on the balance sheet.

There had been unauthorized buying and selling of investment securities.

In a sampling application to determine the average weight of students enrolled in a fitness class, if the sample estimate is 120 pounds, the precision is 10 pounds, and the reliability is 90 percent, which of the following statements is true? There is 10 percent likelihood that the average weight of a student in the class is more than 130 pounds. There is a 90 percent likelihood that the average weight of a student in the class is between 110 and 130 pounds. There is 90 percent likelihood that the average weight of a student in the class is less than 110 pounds or more than 130 pounds. There is 10 percent likelihood that the average weight of a student in the class is less than 110 pounds.

There is a 90 percent likelihood that the average weight of a student in the class is between 110 and 130 pounds.

Loan covenants are used for which of the following reasons? To protect the lender from the borrower's substantially weakening of the latter's financial position. To protect shareholders from management taking on too much debt. To protect the auditors from false information by the borrower. To protect the borrower from the lender's calling the loan early.

To protect the lender from the borrower's substantially weakening of the latter's financial position.

When using sampling in the study of internal control, the audit team would compare the upper limit rate of deviation to the Sample rate of deviation. Expected rate of deviation. Tolerable rate of deviation. Statistical rate of deviation.

Tolerable rate of deviation.

Which of the following factors used to determine sample size is normally based on the extent to which the audit team expects to rely on the internal control being examined? Sample rate of deviation. Expected population deviation rate. Allowance for sampling risk. Tolerable rate of deviation.

Tolerable rate of deviation.

When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records. Interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities. Securities are registered in the name of the trust company rather than the entity itself. The trust company places the securities in a bank safe deposit vault under the custodian's exclusive control.

Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.

Which of the following pairs of selection methods could appropriately be used in statistical sampling applications? Unrestricted random selection, systematic random selection. Block selection, haphazard selection. Systematic random selection, haphazard selection. Unrestricted random selection, block selection.

Unrestricted random selection, systematic random selection.

Selecting a sample using a series of random numbers to identify sample items is referred to as Systematic random selection. Unrestricted random selection. Haphazard selection. Block selection.

Unrestricted random selection.

The audit team will choose to reduce the reliance on controls if the_____ is greater than the_____ Tolerable rate of deviation; expected rate of deviation. Tolerable rate of deviation; upper limit rate of deviation. Upper limit rate of deviation; tolerable rate of deviation. Expected rate of deviation; tolerable rate of deviation.

Upper limit rate of deviation; tolerable rate of deviation.

Using AICPA sample evaluation tables, determine the conclusion from a statistical sample of internal controls when a sample of 125 documents indicates five deviations if the tolerable rate of deviation is 5 percent, the expected population deviation rate is 2 percent, and the allowance for sampling risk is 3 percent. Use the evidence to assess a higher control risk than planned because the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate of deviation. Accept the evidence as support for assessing a low control risk because the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate of deviation.

Use the evidence to assess a higher control risk than planned because the sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate of deviation.

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about Existence. Rights and obligations. Completeness. Valuation and allocation.

Valuation and allocation.

An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain evidence concerning management's balance assertions about Completeness. Valuation. Rights and obligations. Existence.

Valuation.

When independent stock transfer agents are not employed and the corporation issues its own stock and maintains stock records, canceled stock certificates should a. Be defaced to prevent reissuance and attached to their corresponding stubs. b. Be destroyed to prevent fraudulent reissuance. c. Be defaced and sent to the secretary of state. d. Not be defaced but be segregated from other stock certificates and retained in a canceled certificates file.

a. Be defaced to prevent reissuance and attached to their corresponding stubs.

An audit plan to examine long-term debt most likely would include steps that require a. Correlating interest expense recorded for the period with outstanding debt. b. Comparing the carrying amount of held-to-maturity securities with their year-end market values. c. Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt. d. Verifying the existence of the holders of the debt by direct confirmation.

a. Correlating interest expense recorded for the period with outstanding debt.

Jones was engaged to examine the financial statements of Gamma Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? a. Tracing recorded dividend income to cash receipts records and validated deposit slips. b. Comparing recorded dividends with a standard financial reporting service's record of dividends. c. Performing analytical procedures and statistical sampling. d. Comparing recorded dividends with amounts appearing on federal information Form 1099.

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

If the _____ exceeds the _____, the audit team would decide to rely on internal control as planned and maintain control risk at planned levels. upper limit rate of deviation; tolerable rate of deviation. tolerable rate of deviation; expected population deviation rate. expected population deviation rate; tolerable rate of deviation. tolerable rate of deviation; upper limit rate of deviation.

tolerable rate of deviation; upper limit rate of deviation.