Audit: Chapter 7

When an account receivable is considered uncollectible the person who generally authorizes the write-off is the client's...

Treasurer

Alpha Brewery Corporation recorded sales through January 4, 2005, dating them December 31, 2004. This situation is an example of a violation of which of the following assertions?

Cutoff

A voucher would typically contain...

- a purchase requisition - purchase order - vendor invoice - receiving report - check copy.

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances

A decrease in inventory turnover that is not consistent with the change in sales may signal to the auditor... A) An overstatement of ending inventory. B) The existence of many open purchase orders. C) A change from FIFO to LIFO (assume prices are increasing). D) Duplicate payments on inventory orders.

A) An overstatement of ending inventory.

Scanning sales invoices for missing numbers in the sequence would be a procedure intended to satisfy what control assertion? A) Completeness B) Accuracy C) Occurrence D) Classification

A) Completeness

Which of the following internal controls most likely would assure that all billed sales are correctly posted to the accounts receivable ledger? A) Daily sales summaries are compared to daily postings to the accounts receivable ledger. B) Each sales invoice is supported by a prenumbered shipping document. C) The accounts receivable ledger is reconciled daily to the control account in the general ledger. D) Each shipment on credit is supported by a prenumbered sales invoice.

A) Daily sales summaries are compared to daily postings to the accounts receivable ledger. Comparison of daily sales summaries to daily postings to the accounts receivable ledger would ensure the completeness of the accounts receivable ledger.

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor? A) Understating the sales journal. B) Overstating the accounts receivable control account. C) Overstating the accounts receivable subsidiary ledger. D) Understating the cash receipts journal.

A) Understating the sales journal

Vouchers should be stamped PAID to... A) prevent duplicate payment. B) generate a new purchase order. C) indicate posting in the voucher register. D) facilitate preparation of the bank reconciliation.

A) prevent duplicate payment.

The SEC requires all of the following for revenue to be recognized except,

A. Cash is collected

Which of the following is most likely to be detected by an auditor's review of a client's sales cutoff? A) Unrecorded sales for the year. B) Lapping of year-end accounts receivable. C) Excessive sales discounts. D) Unauthorized goods returned for credits.

A. Unrecorded sales for the year.

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of... A) Presentation. B) Completeness. C) Rights. D) Existence.

B) Completeness.

Which of the following is not one of the major steps in setting control risk for the purchasing process? A) Understand and document the purchasing process. B) Plan and perform analytical procedures on accounts used in the purchasing process. C) Plan and perform tests of controls on purchase transactions. D) Set and document the control risk for the purchasing process.

B) Plan and perform analytical procedures on accounts used in the purchasing process.

Which of the following would not be included in the supporting documents for a voucher?

Blank check.

In performing a search for unrecorded retirements of plant assets, an auditor most likely would... A) Analyze the client's repairs & maintenance account and then tour the plant facilities. B) Tour the client facilities and then inspect the client's plant asset ledger along with insurance and tax records. C) Inspect the client's plant asset ledger along with insurance and tax records, and then tour the facilities. D) Tour the client facilities and then analyze the repairs and maintenance account.

C) Inspect the client's plant asset ledger along with insurance and tax records, and then tour the facilities.

A client's physical count of inventories was lower than the inventory quantities per the perpetual records. This situation could be the result of the failure to record: A) Sales. B) Sales returns. C) Purchases. D) Purchase discounts.

C) Purchases.

The most effective audit procedure for determining the collectibility of an AR is the... A) Review of authorization of credit sales to the customer and the previous history of collections B) Confirmation of the account C) Review of the subsequent cash collection D) Examination of the related sales invoice(s)

C) Review of the subsequent cash collection

Two assertions for which confirmation of accounts receivable balances provides primary evidence are... A) Completeness and valuation. B) Valuation, rights and obligations. C) Rights & Obligations and existence. D) Existence and completeness.

C) Rights & Obligations and existence.

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population would most likely be... A) Payees of checks written in the month after year-end. B) Those vendors with balances in the year-end accounts payable subsidiary ledger. C) Vendors with whom the client has done business with during the year. D) Invoices filed in the client's open (unpaid) invoice file at year- end.

C) Vendors with whom the client has done business with during the year.

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.

C. Vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices. Vouching a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices would enable the auditor to determine if the goods were actually received or owned before year end. As a result, the amounts paid after year end would need to be accrued as year-end liabilities.

An entity's internal control structure requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all..

Canceled checks.

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?

Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.

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 the relevant assertion about...

Completeness

An auditor selected an inventory item on the warehouse floor, test counted it, and traced the count to the final inventory compilation. The auditor most likely was testing the...

Completeness assertion.

Which of the following client control procedures is not usually performed in the vouchers payable (accounts payable) department?

Controlling the mailing of the check and remittance advice.

To be recognized, revenues must also be realized or realizable and...

Earned

Martinez, CPA, was auditing his client, Marvelous Retail Company. He selected a sample of inventory items from the perpetual records and vouched additions to receiving reports. This procedure was intended to satisfy which control assertion?

Existence or occurrence.

Selecting a sample of cost accounting analyses of payroll and vouching it to time records is a procedure designed to test the control assertion of...

Existence or occurrence.

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

Inspect the shipping records documenting the merchandise sold to debtors

Failure to record a liability generally results in...

Overstatement of Sales (Existence of Revenue)

Tracing shipping documents to prenumbered sales invoices provides evidence that...

Shipments to customers were properly invoiced Existence of A/R

Auditors record the last bill of lading used at the time of the inventory count to...

Test cut-off.

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support the relevant assertion about...

Valuation and allocation

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of... A) Existence B) Valuation and allocation. C) Completeness. D) Rights and obligations.

Valuation and allocation.

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of...

Valuation or allocation.

Which of the following situations indicates a potential material weakness in internal control over acquisition and expenditure?

Voucher packages are authorized and checks are signed by the same person.

When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to obtain evidence that

all goods owned at year end are included in the inventory balance.

Inventory count tags are controlled in order to...

prevent subsequent addition of goods to the inventory.