audit exam 3 - phan 2

20) When using a transaction cycle approach to assessing control risk, the auditor most likely would test control activities related to customer sales transactions with the: A) Collection of receivables. B) Purchase of merchandise inventory. C) Payment of accounts payable. D) Sale of long-term debt.

A) Collection of receivables.

45) Which of the following is not one of the criteria for revenue recognition? A) Collection of the contract amount must be probable. B) A contract must exist. C) All performance obligations must be satisfied. D) Revenue must be allocated to performance obligations.

A) Collection of the contract amount must be probable.

19) An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the inventory summary sheets. Which assertion does this procedure relate to most directly? A) Completeness. B) Existence. C) Legality. D) Valuation.

A) Completeness.

5) A receiving department compares inventory items received with copies of purchase orders. The purchase orders list the name of the vendor and do not list the quantities of the material ordered. Using the purchase orders, the receiving department is most likely to detect: A) Deliveries for which no purchase order was issued. B) Unapproved sales orders. C) Partial deliveries. D) Deliveries of a greater quantity of items than those ordered.

A) Deliveries for which no purchase order was issued.

49) A company's decision to use the fair value option for valuation of marketable securities is most likely to affect which of the following assertions the most? A) Completeness. B) Existence. C) Fairness. D) Presentation and Disclosure.

D) Presentation and Disclosure.

*9) A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end? A) Cash receipts. B) Payroll. C) Purchases. D) Sales.

D) Sales.

*10) Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product? A) Factory supervisor salary. B) Indirect materials. C. Miscellaneous expense D) Selling expense.

D) Selling expense.

30) To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from: A) The sales journal. B) The billing clerk's file of sales orders. C) Duplicate copies of sales invoices. D) The shipping clerk's file of duplicate copies of bills of lading.

D) The shipping clerk's file of duplicate copies of bills of lading.

*10) Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts? A) Examine cash receipts received after year-end. B) Confirm receivables. C) Examine dates of purchase orders. D) Foot the receivables lead schedule.

A) Examine cash receipts received after year-end.

34) It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations, the best alternative procedure the auditors might resort to would be: A) Examining subsequent receipts of year-end accounts receivable. B) Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a subsequent date. C) Requesting that management increase the allowance for uncollectible accounts by an amount equal to some percentage of the balance in those accounts that cannot be confirmed. D) Applying analytical procedures to accounts receivable and sales on a year-to-year basis.

A) Examining subsequent receipts of year-end accounts receivable.

43) For purposes of an audit of financial statements, electronic confirmation of cash balances: A) Is acceptable when properly controlled. B) Is acceptable, but only when combined with a non-electronic approach. C) Is only acceptable for immaterial accounts. D) Is not acceptable.

A) Is acceptable when properly controlled.

59) Salem Corporation engages in complex sales contracts. As the auditor you are trying to determine if revenue should be recognized on a group of contracts. Which of the true with respect to the recognition of revenue: A) Revenue should be recognized only if it is at least probable that the contract amounts will be collected. B) Revenue should be recognized if it is at least certain that the contract amounts will be collected. C) Revenue should be recognized if it is at least more likely than not that the revenue will be collected. D) Revenue should be recognized in all cases when it has been earned.

A) Revenue should be recognized only if it is at least probable that the contract amounts will be collected.

48) When a client engages in transactions involving derivatives, the auditor should: A) Review agreements underlying the derivative. B) Confirm with the client's broker whether the derivatives are for trading purposes. C) Notify the audit committee about the risks involved in derivative transactions. D) Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative.

A) Review agreements underlying the derivative.

62) If the objective of an auditor's test of details is to detect the overstatement of sales, the auditor should trace transactions from the: A) Sales journal to the shipping documents. B) Shipping documents to the cash receipts journal. C) Cash receipts journal to the customer's purchase orders. D) Customer's purchase orders to the sales journal.

A) Sales journal to the shipping documents.

7) Which of the following audit procedures most likely would provide assurance that a manufacturing entity's inventory valuation is proper? A) Testing the entity's computation of standard overhead rates. B) Obtaining confirmation of inventories pledged under loan agreements. C) Reviewing a cutoff procedure for inventories. D) Tracing test counts to the entity's inventory listing.

A) Testing the entity's computation of standard overhead rates.

5) When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables? A) The account balances as of year-end will generally be confirmed. B) The auditors will in general use blank rather than positive confirmation requests. C) The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year-end. D) Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports.

A) The account balances as of year-end will generally be confirmed.

4) Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable? A) The confirmation requests are sent on the client's letterhead. B) The confirmation requests are mailed to customers by the internal auditors. C) The client's mailroom personnel closely monitor and inspect confirmation requests during mailing. D) The return address on the envelope used to send the confirmation request is that of the client.

A) The confirmation requests are sent on the client's letterhead.

25) To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors: A) Trace a sample of the bills of lading to sales invoices. B) Confirm a sample of accounts payable. C) Review the aging of accounts receivable. D) Trace a sample of recorded sales to shipping documents.

A) Trace a sample of the bills of lading to sales invoices.

66) The existence of which of the following is most likely to increase audit risk in an audit client? A) Anthony Company was started as a local family business and has received additional funding over the years from several investors. B) A new chief financial officer (CFO) is redesigning Anthony's accounting policies and procedures. C) Anthony Company consists of three core business operations: product sales in its retail store, product sales to food and specialty stores, and food services. D) The company experienced significant sales growth during its history and continues to expand its product offerings and market reach.

B) A new chief financial officer (CFO) is redesigning Anthony's accounting policies and procedures.

11) Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts? A) Accounts receivable divided by Cost of goods sold. B) Aging of accounts receivable. C) Cash Sales divided by Accounts receivable. D) Year 2 accounts receivable compared to year one accounts receivable.

B) Aging of accounts receivable.

*39) Tracing copies of sales invoices to shipping documents will provide evidence that all: A) Shipments to customers were recorded as receivables. B) Billed sales were shipped. C) Debits to the subsidiary accounts receivable ledger are for sales shipped. D) Shipments to customers were billed.

B) Billed sales were shipped.

56) To establish the existence and ownership of a large long-term investment in the common stock of a publicly traded company, the auditors ordinarily perform a security count or: A) Rely on the client's internal controls if the auditors have reasonable assurance that the control procedures are being applied as prescribed. B) Confirm the number of shares owned that are held by an independent custodian. C) Determine the market price per share at the balance sheet date from published quotations. D) Confirm the number of shares owned with the issuing company.

B) Confirm the number of shares owned that are held by an independent custodian.

28) Which of the following is not true about the confirmation of accounts receivable? A) Confirmation requests should bear the auditors' return address. B) Confirmation requests should be signed by the auditors. C) Confirmation requests should be mailed directly by the auditors. D) Confirmation requests should include a return envelope addressed to the office of the auditors.

B) Confirmation requests should be signed by the auditors.

54) If a company failed to record goods returned by customers near year end, the auditors would most likely discover this issue by: A) Reviewing records of sales returns. B) Confirming accounts receivable. C) Examining sales orders. D) Reviewing the accounts receivable subsidiary ledger.

B) Confirming accounts receivable.

60) Which of the following controls are most relevant the client's application of accounting standards to revenue recognition for complex sales agreements? A) Segregation of duties and control procedures. B) Control environment and management review controls. C) Application controls and transaction approval. D) Risk assessment and control procedures.

B) Control environment and management review controls.

6) To measure how effectively a client employs its assets, an auditor calculates inventory turnover by dividing the average inventory into: A) Net sales. B) Cost of goods sold. C) Operating income D) Gross sales.

B) Cost of goods sold.

15) The confirmation of accounts receivable is most closely associated with: A) Business risk. B) Detection risk. C) Inherent risk. D) Relative risk.

B) Detection risk.

*25) Which of the following best describes the reason that the auditors record their inventory test counts in the working papers? A) To document every test count. B) For subsequent comparison with the completed inventory listing. C) To document compliance with generally accepted accounting principles. D) For use in subsequent audits.

B) For subsequent comparison with the completed inventory listing.

12) Which of the following is an auditor least likely to consider a departure from U.S. generally accepted accounting principles? A) Valuing inventory at cost. B) Including in inventory items that are consigned out to vendors, but not yet sold. C) Using standard cost as the measure of inventory cost. D) Including in inventory items shipped subsequent to year-end, but for which valid orders did exist at year-end.

B) Including in inventory items that are consigned out to vendors, but not yet sold.

53) A computer software firm allows its sales team to make material modifications to standard software contracts. What should be the auditors' primary concern in this situation? A) Increased risk of misstatement of commissions expense. B) Increased risk of misstatement of revenue. C) Increased risk of uncollectible accounts. D) Increased risk of loss of software copyright.

B) Increased risk of misstatement of revenue.

29) Which of the following is not true about the auditors' verification of notes receivable? A) The interest revenue on notes receivable is usually audited by independent computation. B) Inspecting the notes is sufficient evidence of existence of the notes. C) The auditors may evaluate the collectability of notes by inspecting credit files. D) It is sufficient to confirm notes receivable with the note holder.

B) Inspecting the notes is sufficient evidence of existence of the notes.

33) When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if: A) Subsequent collections are to be reviewed. B) Internal control over receivables is good. C) Negative confirmation requests are to be used. D) There is a simultaneous examination of cash and accounts receivable.

B) Internal control over receivables is good.

51) Which of the following does not meet the definition of an external confirmation in the context of accounts receivable? A) Fax responses. B) Oral responses obtained by the auditor through a telephone call. C) Written responses to negative confirmation requests. D) Written response to confirmations sent out without balances due.

B) Oral responses obtained by the auditor through a telephone call.

2) Which of the following is least likely to be used as an alternate procedure for handling nonreplies to accounts receivable confirmation requests? A) Examine bills of lading. B) Physically examine items sold. C) Examine correspondence. D) Examine subsequent cash receipts.

B) Physically examine items sold.

18) The client's physical count of inventories is lower than the inventory quantities in the perpetual records. This could be the result of a failure to record: A) Purchases. B) Purchase discounts. C) Sales. D) Sales discounts.

B) Purchase discounts.

*22) Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts? A) Investigate confirmation exceptions for indication of amounts in dispute. B) Review accounts which have been written off as uncollectible prior to year-end. C) Investigate credit ratings for large accounts receivable. D) Discuss with the credit manager the current status of doubtful accounts.

B) Review accounts which have been written off as uncollectible prior to year-end.

4) Which of the following is not true relating to the auditors' observation of the client's physical inventory? A) The auditors should evaluate the client's planning of the physical inventory. B) The auditors should supervise the taking of the inventory. C) The auditors should evaluate the adequacy of the client's counting procedures. D) The auditors should take test counts of the client's inventory.

B) The auditors should supervise the taking of the inventory.

*14) Which of the following is not a reason for the special significance attached by the auditors to the verification of inventories? A) The determination of inventory valuation directly affects net income. B) The existence of inventories is inherently difficult to substantiate. C) Special valuation problems often exist for inventories. D) Inventories are often the largest current asset of an enterprise.

B) The existence of inventories is inherently difficult to substantiate.

9) Which of the following is not a control that generally is established over cash receipts? A) To prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel. B) To ensure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks. C) To ensure accuracy of the accounts receivable records, the records should be reconciled monthly to the accounts receivable controlling account. D) To prevent theft of cash, receipts should be deposited daily.

B) To ensure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks.

7) Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests? A) Examine sales invoices. B) Trace the balances from accounts receivable ledger to the billing statements. C) Examine correspondence. D) Examine any subsequent cash receipts.

B) Trace the balances from accounts receivable ledger to the billing statements.

41) Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate: A) Board of Directors. B) Treasurer. C) Controller. D) Executive Committee.

B) Treasurer.

50) An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that: A) Fourth quarterpayroll taxes were properly accrued and recorded, but were not paiduntil early in the subsequent year. B) Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. C) The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. D) Notice of anincrease in property tax rates was received by management, but was notrecorded until early in the subsequent year.

B) Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

21) An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all: A) Merchandise received. B) Vendor's invoices. C) Canceled checks. D) Receiving reports.

B) Vendor's invoices.

49) The individual looking for guidance on revenue recognition is most likely to appropriately review: A) APB 99. B. SAB 104 C) ASR 44. D) B1 Document.

B. SAB 104

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

C) Accounts receivable subsidiary ledger.

*17) After the certified public accountants (CPAs) have selected particular accounts receivable for confirmation: A) As a control measure, the certified public accountants (CPAs) should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail. B) It is important that every account selected that has a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow-up through alternative procedures. C) All requests for confirmation should be mailed personally by the auditors at a post office. D) All differences between confirmation replies and book values should be reconciled by the certified public accountants (CPAs), rather than the client.

C) All requests for confirmation should be mailed personally by the auditors at a post office.

*26) Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts? A) Reviewing an aging of accounts receivable. B) Examination of cash receipts subsequent to the balance sheet date. C) Confirming current (0-30 day) year-end accounts receivable. D) Reviewing credit files for selected account.

C) Confirming current (0-30 day) year-end accounts receivable.

33) The auditors' count of the client's cash should be coordinated to coincide with the: A) Consideration of the internal controls with respect to cash. B) Close of business on the balance sheet date. C) Count of investment securities. D) Count of inventories.

C) Count of investment securities.

54) In which of the following areas are the auditors least likely to use the work of a specialist? A) Determining the value of complex financial instruments. B) Assessing control risk for clients using complex derivatives for hedging. C) Determination of the existence of a complex financial instrument. D) Valuing an equity investment that must be valued using a complex valuation model.

C) Determination of the existence of a complex financial instrument.

48) Which of the following revenue related transactions is not linked to the accounts indicated? A) Recognize revenuestoo early-accounts receivable and revenue. B) Understateallowance for doubtful accounts-bad debt expense, allowance for doubtfulaccounts. C) Don't write offuncollectible receivables-sales returns, sales discounts. D) Don't recorddiscounts given to customers-cash, sales discounts, accounts receivable.

C) Don't write offuncollectible receivables-sales returns, sales discounts.

55) Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide evidence concerning the A) Collectability of the balances confirmed. B) Ownership of the balances confirmed. C) Existence of the balances confirmed. D) Internal control over balances confirmed.

C) Existence of the balances confirmed.

63) An auditor decides to use the blank form of positive accounts receivable confirmation. The auditor should be aware that the blank form may be ineffective because: A) All accounts do not have an equal opportunity to be selected for confirmation. B) Accounts unconfirmed may have already been written off as uncollectible. C) Few responses may occur because more effort is required of recipients. D) Accounts actually confirmed may not be representative of the population.

C) Few responses may occur because more effort is required of recipients.

61) Why do estimates of recognized revenue generally present high risk for the auditors? A) Employee fraud often involves overstatement of revenue. B) Revenue is eventually converted to cash. C) Management often has an incentive to misstate revenue. D) Revenue generally affects the amount of inventories.

C) Management often has an incentive to misstate revenue.

*24) Tracing recorded sales transactions to the bills of lading provides evidence about the: A) Completeness of sales transactions. B) Collectibility of sales transactions. C) Occurrence of sales transactions. D) Billing of all sales transactions.

C) Occurrence of sales transactions.

23) Which of the following is true about the auditors' observation of the client's physical inventory? A) The auditors should plan the physical inventory. B) The auditors should segregate damaged and obsolete goods. C) The auditors should evaluate the condition of the inventory. D) The auditors should supervise the client's personnel.

C) The auditors should evaluate the condition of the inventory.

*15) Which of the following is true about the auditors' observation of the client's physical inventory? A) The count must be made at year-end. B) The auditors should supervise the client's personnel. C) The auditors' observation addresses the existence assertion. D) The auditors should justify any omission of the observation in the audit report.

C) The auditors' observation addresses the existence assertion.

*16) Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor? A) A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year. B) Internal control activities over the recording of cash receipts have been improved since the end of the prior year. C) The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet. D) The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.

C) The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.

13) Which of the following is least likely to be an accurate statement concerning characteristics of an audit? A) An analysis of inventory turnover can indicate possible obsolescence of inventory. B) Characteristics of the double entry bookkeeping system make it possible to test for overstated sales when tests of accounts receivable are being performed. C) The direction of tests for understatement errors is generally directed from the recorded entry to source documents. D) Use of a perpetual rather than a periodic inventory system is likely to affect the nature of cutoff errors made at year-end.

C) The direction of tests for understatement errors is generally directed from the recorded entry to source documents.

22) To assure that all purchases are authorized before payment is made, accounting department personnel should match the vendor's invoice to: A) The purchase requisition. B) The receiving report. C) The purchase order. D) The voucher.

C) The purchase order.

38) As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a confirmation request for a bank account that had been closed during the year. After the client's treasurer has signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure? A) The confirmation request was signed by the treasurer. B) Sending the request was meaningless because the account was closed before the year-end. C) The request was mailed by the assistant treasurer. D) The Certified Public Accountant (CPA) did not sign the confirmation request before it was mailed.

C) The request was mailed by the assistant treasurer.

14) An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific procedures to apply to the accounts and transactions. In a particular case, s/he might do this by: A) Tracing sales invoices to shipping documents to test the completeness of reported sales. B) Tracing shipping documents to sales invoices to test the occurrence of reported sales. C) Tracing sales invoices to shipping documents to test the occurrence of reported sales. D) Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.

C) Tracing sales invoices to shipping documents to test the occurrence of reported sales.

67) Which of the following is most likely to increase days' sales in accounts receivable at the end of the year for Anthony Company? A) Operating expenses increased at a higher rate than sales revenue. B) Sales revenue increased at a higher rate than operating expenses. C) A smaller percentage of sales occurred during the last month of the year, as compared to the prior year. D) A larger percentage of sales occurred during the last month of the year, as compared to the prior year.

D) A larger percentage of sales occurred during the last month of the year, as compared to the prior year.

56) If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the A) Cash receipts journal to the sales journal. B) Sales journal to the cash receipts journal. C) Source documents to the accounting records. D) Accounting records to the source documents.

D) Accounting records to the source documents.

32) The auditors should insist that a representative of the client be present during the physical examination of securities in order to: A) Lend authority of the auditor's directives. B) Detect forged securities. C) Coordinate the return of all securities to proper locations. D) Acknowledge the receipt of securities returned.

D) Acknowledge the receipt of securities returned.

24) Which of the following is not a procedure that typically is used by the auditors in their examination of a client's goods held in the custody of a public warehouse? A) Confirmation. B) Obtaining reports on internal control at the warehouse. C) Observation. D) Communicate with the regulatory agency about the legitimacy of the public warehouse.

D) Communicate with the regulatory agency about the legitimacy of the public warehouse.

35) Garcia was engaged to audit the financial statements of Delta Corporation for the year ended September 30, 20X0. 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) Utilizing analytical techniques and statistical sampling. C) Comparing recorded dividends with amounts appearing on federal information form 1099s. D) Comparing recorded dividends with a standard financial reporting service's record of dividends.

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

*36) Which of the following is not a primary objective of the auditors in the examination of accounts receivable? A) Determine the approximate realizable value. B) Consider the adequacy of internal control. C) Establish the existence of receivables. D) Determine the expected day of collection of each of the receivables.

D) Determine the expected day of collection of each of the receivables.

52) Which of the following could not be more efficiently performed with data analytics? A) Identification of possible duplicate payments. B) Identification of unusual expense reimbursements. C) Identification of cash recorded from an unusual accounting source. D) Identification of an unrecorded cash deposit.

D) Identification of an unrecorded cash deposit.

34) The auditors compare information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that: A) Recorded cash disbursement transactions are properly authorized. B) Proper cash purchase discounts have been recorded. C) Cash disbursements are for goods and services actually received. D) No discrepancies exist between the data on the checks and the data in the journal.

D) No discrepancies exist between the data on the checks and the data in the journal.