Audit Final Ch. 11-21

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11 Which of the following best represents a situation in which an auditor would use a tax specialist for the audit of the tax provision? A) The company has several temporary differences. B) The company has several permanent differences. C) The company has deferred tax liabilities. D) The company does business overseas.

11 Which of the following does not represent a major classification of expenses identified by FASB Concept Statement No. 5? A) Product costs. B) Functional costs. C) Period costs. D) Allocable costs.

11 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.

11 & 12 Assertions about classes of transactions and events for the period under audit include A. occurrence, completeness, and valuation and allocation. B. existence, completeness, and accuracy. C. existence, completeness, and classification. D. occurrence, completeness, and cutoff.

11 & 12 In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of A. valuation and allocation. B. completeness. C. rights and obligations. D. existence.

11 & 12 Which of the following internal control objectives is likely to be a larger concern in the audit of the payroll cycle? A. Payroll transactions are properly disclosed. B. Payroll transactions are recorded in the appropriate time period. C. Recorded payroll transactions are valid. D. All payroll transactions have been recorded.

12 Which of the following is not a function in the payroll process? A) Human resources. B) Timekeeping. C) Payroll processing. D) Accounts payable.

12 Which of the following is not a required disclosure for payroll-related items? A) Healthcare coverage for retirees. B) Profit sharing plans. C) Average percentage rate of salary increases. D) Deferred compensation arrangements.

12 Which of the following procedures would normally be performed by the auditor when conducting tests of payroll transactions? A) Interview employees selected in a statistical sample of payroll transactions. B) Trace number of hours worked as shown on payroll to time cards and time reports signed by the foreman. C) Confirm amounts withheld from employees' salaries with proper governmental authorities. D) Examine signatures on paid salary checks.

13 Inventory obsolescence relates to A) Completeness. B) Occurrence. C) Valuation and allocation. D) Classification.

13 & 14 An auditor typically sets inherent risk for intangible assets at this level A. high. B. moderate. C. zero. D. low.

13 & 14 When perpetual inventory records are maintained in quantities and in dollars and internal control over inventory is weak, the auditor would probably A. have to disclaim an opinion on the income statement for that year. B. insist that the entity perform physical counts of inventory items several times during the year. C. want the entity to schedule the physical inventory count at the end of the year. D. increase the extent of tests for unrecorded liabilities at the end of the year.

14 An example of a deferred charge is A) Trademarks. B) Prepaid interest. C) Prepaid insurance. D) Goodwill.

15 What assertion is tested by vouching stock repurchases to the canceled stock certificates? A) Occurrence. B) Valuation. C) Completeness. D) Disclosure.

15 When an entity does not maintain its own shareholder records, the auditor should obtain written confirmation from the transfer agent and registrar concerning A) Guarantees of preferred stock liquidation value. B) The number of shares subject to repurchase agreements (treasury). C) Any restrictions on dividend payments. D) The type and number of shares issued and outstanding.

15 & 16 An imprest cash account is A. used for investing in marketable securities. B. one that contains a stipulated amount of money and is used for limited purposes. C. the principal checking account for a branch of an entity. D. the principal cash account for an entity.

15 & 16 Reviewing interest expense to examine payments to debt holders not listed on the debt analysis schedule is a procedure that can be used to test the audit assertion of A. accuracy. B. cutoff. C. occurrence. D. completeness.

16 The cash account is affected by the A) Revenue cycle. B) Financing cycle. C) Purchasing cycle. D) All of the above.

16 Which of the following is not a classification of investment securities according to GAAP? A) Diversified. B) Held-to-maturity. C) Trading. D) Available-for-sale.

17 All of the following are typical audit procedures used to identify subsequent events except: A) Inquiring of management as to their knowledge of subsequent events. B) Reading available interim financial statements from after year end. C) Reading board meeting minutes for meetings held after year end. D) Extending the search for unrecorded liabilities to the report date.

17 When auditing contingent liabilities, which of the following procedures would generally be least effective? A) Reading the minutes of the board and other committee meetings. B) Examining all IRS documentation related to possible tax disputes. C) Examining legal letters. D) Examining accounts payable confirmations.

17 & 18 A written representation from an entity's management that, among other matters, acknowledges responsibility for the fair presentation of financial statements should normally be signed by the A. chief financial officer and the chairman of the board of directors. B. chairman of the audit committee of the board of directors. C. chief executive officer and the chief financial officer. D. chief executive officer, the chairman of the board of directors and the entity's lawyer.

17 & 18 Which of the following auditing procedures is ordinarily performed last? A. Testing the purchasing function. B. Reading the minutes of directors' meetings. C. Obtaining a management representation letter. D. Confirming accounts payable.

21 When conducting a review, the accountant's work would generally not include which of the following procedures? A) Performing analytical procedures. B) Obtaining a general understanding of the entity's methods and policies related to the capitalization of assets. C) Obtaining a representation letter from management. D) Observing the year-end inventory count and subsequent testing of inventory counts.

21 When engaged to compile the financial statements of a nonpublic entity, the CPA is required to possess a general knowledge of the entity's accounting principles and practices. This requirement will most likely include obtaining an understanding of the A) Qualifications of the accounting department personnel. B) Risk factors associated with potential illegal acts. C) Internal control structure in place. D) None of the above are required for a compilation.

21 Which of the following is a performance standard from the International Standards for the Professional Practice of Internal Auditing? A) Purpose, authority, and responsibility. B) Proficiency and due professional care. C) Independence and objectivity. D) Managing the internal audit function.

21 Which of the following is not a service typically provided by the internal audit function? A) Audit of financial statements for SEC filing. B) Operational auditing. C) Compliance reviews. D) Evaluation of risks and controls.

21 Which of the following is not one of the Principles in the IIA Code of Ethics? A) Integrity. B) Objectivity. C) Due Professional Care. D) Competency.

21 Which of the following services would be considered an attest engagement? A) Compilation of financial statements from an entity's accounting records. B) Providing information systems advice to a former audit client. C) Reporting on compliance with a university's accreditation requirements. D) Providing advice on the structure of the internal audit function for an entity whose external audit is performed by another firm.

11 Accounts payable (A/P) confirmations are generally used less frequently than accounts receivable confirmations since A) Other procedures such as the search for unrecorded liabilities are generally very effective. B) A/P confirmations generally have lower response rates than accounts receivable confirmations. C) A/P confirmations do not address the existence assertion. D) A/P confirmations do not address specific audit assertions.

11 All of the following are inherent risk factors for the purchasing process except: A) Whether the supply of raw materials is adequate. B) How volatile raw material prices are. C) Misstatements detected in prior audits. D) A new IT system placed in operation during the year.

11 An auditor gathers receiving reports from the few days before and after year-end to determine that purchases made before the end of the current year have not been recorded in the following year to provide assurance about management's assertion of A) Valuation or allocation. B) Existence or occurrence. C) Authorization. D) Cutoff.

11 An entity erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this in a timely, efficient manner? A) Periodically tracing the purchases journal daily totals to the applicable postings in the general ledger. B) Sending quarterly confirmations to all vendors. C) Reconciling monthly statement received from the vendor with the accounts payable subsidiary ledger. D) Tracing the totals from the purchases journal to the various general ledger accounts.

11 Auditors perform a test to verify that all merchandise received has been recorded, in part, to satisfy the completeness assertion with regard to accounts payable. Which of the following would represent the population of documents for this test? A) Purchase requisitions. B) Payment vouchers. C) Vendor invoices. D) Receiving reports.

11 Identify the assertion that is represented by the following statement: "Accounts payable and accrued expenses are included in the financial statements at appropriate amounts." A) Existence. B) Completeness. C) Valuation and allocation. D) Rights and Obligations.

11 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 entity has done business with during the year. D) Invoices filed in the entity's open (unpaid) invoice file at year-end.

11 Which of the following audit procedures is best for identifying unrecorded trade accounts payable? A) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the period before the balance sheet date and whether it was recorded. B) Investigating payables recorded just before and after the balance sheet date to determine whether they are supported by receiving reports. C) Examining unusual relationships between monthly accounts payable balances and recorded cash payments. D) Reconciling monthly vendor statements to the receiving report file to identify items received just before the balance sheet date.

11 Which of the following controls would most effectively ensure that recorded purchases are free of material misstatements? A) The receiving department compares the quantity ordered on purchase orders with the quantity received on receiving reports. B) Vendor invoices are compared with purchase orders by an employee who is independent of the receiving department. C) Receiving reports require the signature of the individual who authorized the purchase. D) Purchase orders, receiving reports, and vendor invoices are independently matched when preparing vouchers.

11 Which of the following does not represent a major accounting transaction type processed in the purchasing cycle? A) Requisition of goods. B) Purchase of goods and services. C) Payment of liabilities. D) Return of goods to suppliers.

11 Which of the following is not considered an important element of segregation of duties in the purchasing process? A) Separating the check signing and check mailing functions. B) Separating the accounts payable and check signing functions. C) Separating the accounts payable and receiving functions. D) Separating the purchasing function from the receiving function.

11 Which of the following procedures involved in processing accounts payable and cash disbursements should not be performed by the accounts payable department? A) Counting and inspection of purchased materials. B) Updating of accounts payable records. C) Determining appropriate account distribution. D) Comparing the vendor's invoice against information on the receiving report.

11 & 12 A CPA reviews an entity's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for A. reviewing and approving time reports for subordinate employees. B. distributing payroll checks to employees. C. hiring subordinate employees. D. initiating requests for salary adjustments for subordinate employees.

11 & 12 A voucher A. serves as the basis for recording a vendor's invoice in the purchases journal. B. is a document that records the receipt of goods. C. is a bill from the vendor. D. is a document that requests goods from an authorized individual in the entity.

11 & 12 An effective system of internal control over the payroll function would include A. reconciliation of totals on job time tickets with job reports by employees responsible for those specific jobs. B. custody of rate authorization records by the supervisor of the payroll department. C. verification of agreement of job time tickets with employee clock card hours by a payroll department employee. D. preparation of payroll transaction journal entries by an employee who reports to the supervisor of the human resource department.

11 & 12 Assertions about account balances at the period end include A. existence, completeness, and accuracy. B. existence, rights and obligations, and completeness. C. existence, rights and obligations, and classification. D. existence, completeness, and classification.

11 & 12 During the current year being audited, Hitech, Inc. changed from a conventional payroll punch clock to a computerized payroll time system. Factory employees now record time in and out with magnetic cards and the IT system automatically updates all payroll records. Because of this change A. internal control has improved. B. the potential for payroll related fraud has been diminished. C. the auditor must audit through the computer. D. without paper clock cards, part of the audit trail has been altered.

11 & 12 If payables turnover has increased significantly since the prior year, this is an indication that which of the following assertions for accounts payable might be violated? A. Valuation and allocation. B. Existence or occurrence. C. Completeness. D. Rights and obligations.

11 & 12 In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support? A. Occurrence. B. Accuracy. C. Classification. D. Completeness.

11 & 12 In determining the effectiveness of an entity's policies and procedures relating to the existence or occurrence assertion for payroll transactions, an auditor most likely would inquire about and A. verify the preparation of the monthly payroll account bank reconciliation. B. recompute the payroll deductions for employee fringe benefits. C. observe the segregation of duties concerning human resource responsibilities and payroll disbursement. D. inspect evidence that all prenumbered payroll checks are accounted for.

11 & 12 In testing controls over cash disbursements, an auditor most likely would determine that the person who signs the checks also A. is responsible for mailing the checks. B. returns the checks to accounts payable. C. reviews the monthly bank reconciliation. D. is denied access to the supporting documents.

11 & 12 Purchase cutoff procedures should be designed to test whether or not all inventory A. on the year-end balance sheet was carried at lower of cost or market. B. on the year-end balance sheet was paid for by the company. C. owned by the company is in the possession of the company. D. purchased and received before the year-end was recorded before year-end.

11 & 12 The authority to accept incoming goods in receiving should be based on a(an) A. materials requisition. B. vendor's invoice. C. approved purchase order. D. bill of lading.

11 & 12 The cash disbursements journal is also called the A. check register. B. purchases journal. C. voucher register. D. accounts payable subsidiary ledger.

11 & 12 The proper use of prenumbered termination notice forms by the Payroll Department should provide assurance that all A. uncashed payroll checks were issued to employees who have not been terminated. B. employees who have not been terminated receive their payroll checks. C. personnel files are kept up to date. D. terminated employees are removed from the payroll.

11 & 12 To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all A. receiving reports. B. vendors' invoices. C. purchase requisitions. D. payment vouchers.

11 & 12 Which of the following accounts is not affected by cash disbursement transactions? A. Purchase discounts. B. Accounts payable. C. Cash. D. Purchase returns.

11 & 12 Which of the following control activities is not usually performed in the accounts payable department? A. Determining the mathematical accuracy of the vendor's invoice. B. Matching the receiving report with the purchase order. C. Controlling the mailing of the check and remittance advice. D. Having an authorized person approve the voucher.

11 & 12 Which of the following describes a permanent difference? A. A difference arising from an uncertain tax position. B. A fundamental difference in what constitutes revenue or expense for GAAP and tax purposes. C. A timing difference between the recognition of revenue or expense under GAAP and tax purposes. D. A difference that will be corrected in an amended tax return.

11 & 12 Which of the following is required of an auditor who is testing the fair value of options in share-based compensation? A. Using a specialist. B. Using the work of the internal audit function. C. Testing the inputs used in the valuation model. D. Becoming an expert in option-pricing.

11 & 12 Which of the following is the most effective control activity to detect vouchers prepared for the payment of goods that were not received? A. Comparison of goods received with goods requisitioned in the receiving department. B. Counting of goods upon receipt in the storeroom. C. Verification of vouchers for accuracy and approval in the internal audit department. D. Matching of purchase order, receiving report, and vendor invoice for each voucher in the accounts payable department.

11 & 12 Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the entity's employees? A. Test footings in the accounts payable ledger. B. Mail confirmations for selected account balances. C. Reconcile unpaid invoices to vendors' statements. D. Prepare a schedule of accounts payable.

11 & 12 Which of the following procedures would normally be performed by the auditor when conducting tests of payroll transactions? A. Interview employees selected in a statistical sample of payroll transactions. B. Confirm amounts withheld from employees' salaries with proper governmental authorities. C. Vouch number of hours worked as shown on payroll to time sheets and time reports signed by the foreman. D. Examine signatures on paid salary checks.

11 & 12Effective internal control over the payroll function would include which of the following? A. Payroll Department employees should be supervised by the management of the Human Resource Department. B. Payroll Department employees should be responsible for maintaining employee personnel records. C. Total time spent on jobs should be compared with total time indicated on time clock punch cards. D. Total time recorded on time-clock punch cards should be reconciled to job reports by employees responsible for those specific jobs.

12 An auditor is most likely to perform substantive tests of details on payroll transactions and balances when A) The assessed level of control risk is low. B) Substantive analytical procedures indicate possible unusual fluctuations in recurring payroll entries. C) Accrued payroll expenses relate primarily to unpaid sales commissions. D) Cutoff tests indicate a large accrued payroll expense at year-end.

12 An auditor may vouch data for a sample of hourly employees in a payroll register back to the approved weekly time card/time sheet files to provide assurance that A) Employees work the number of hours for which they are paid. B) Payments to employees agree with authorized rates. C) Segregation of duties exist in the processing of payroll. D) Those approving time card/time sheet files are not distributing paychecks.

12 When appropriate substantive procedures are completed A) Each individual error found in the testing is compared to tolerable misstatement to determine the individual materiality of the errors. B) All identified misstatements are aggregated (including likely or projected misstatement) and the total is compared to tolerable misstatement to evaluate the materiality of the aggregate (known and likely) misstatement. C) All identified errors must be adjusted in order for the auditor to be satisfied with the payroll accounts. D) Appropriate testing of controls can begin.

12 Which of the following account types would typically be assessed with a higher level of inherent risk? A) Payroll expense for office staff. B) Executive compensation. C) Commission expense. D) Social security taxes payable.

12 Which of the following control activities could best prevent direct labor from being charged to manufacturing overhead? A) Examination of routine tickets from finished goods on delivery. B) Reconciliation of work-in-process inventory with cost records. C) Comparison of daily journal entries with factory labor summary. D) Recomputation of direct labor based on inspection of time cards.

12 Which of the following departments/individuals would likely approve changes in pay rates and deductions from employee earnings? A) Treasurer. B) Human Resources. C) Payroll. D) Controller.

12 Which of the following is not part of the control risk assessment process for the human resource management process? A) Understand and document the human resource management process. B) Plan and perform tests of controls on payroll transactions. C) Plan and perform substantive tests on payroll transactions. D) Set and document the control risk for the human resource management process.

12 Which of the following is the best possible explanation for a manufacturing firm with a gross profit substantially higher this year in comparison with last year? A) The amount of payroll expense allocated to direct labor was understated. B) The amount of payroll expense allocated to direct labor was overstated. C) Too much direct labor was allocated to cost of goods sold as opposed to ending inventory. D) Payroll taxes were withheld at excessive rates.

12 Which of the following possible misstatements related to payroll do not involve the assertions of occurrence or existence? A) Payments to fictitious employees. B) Payments to terminated employees. C) Payments to valid employees who have not worked. D) Payments to valid employees at a rate in excess of the authorized amount.

12 Which of the following procedures would an auditor most likely employ to determine that every name on an entity's payroll represents an actual employee that is presently employed? A) Make a surprise observation of the entity's regular distribution of paychecks. B) Examine personnel records for accuracy and completeness. C) Maintain control over the mailing of W-2 forms to employee addresses as listed in their personnel files. D) Compare names listed on payroll tax returns with those in the personnel files.

12 Which of the following statements is true regarding substantive procedures in the human resource management process? A) If the results of the tests of controls for payroll do not support the planned level of control risk, substantive procedures must be increased. B) If the results of the tests of controls for payroll do not support the planned level of control risk, substantive procedures must be reduced. C) If the results of the tests of controls for payroll support the planned level of control risk, substantive procedures must be increased. D) There is no relationship between the results of the tests of controls and the substantive procedures that should be performed.

12 With properly designed internal controls, an entity's payroll department would be responsible for which of the following functions? A) Approval of employee time records. B) Preparation of periodic reports of employee earnings and withholding taxes. C) Temporary retention of unclaimed employee paychecks. D) Maintenance of records of employment, termination, pay increases, etc.

13 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.

13 After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all of the selected items A) Represented by inventory tags are actual inventory owned by the entity (Rights and obligations). B) Included on the inventory listing have been counted. C) Represented by inventory tags are included in the entity's inventory balance (Completeness). D) Included in the listing are represented by inventory tags (Existence).

13 An auditor would most likely make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's assertion of A) Rights and obligations. B) Presentation and disclosure. C) Existence or occurrence. D) Valuation and allocation.

13 An entity maintains perpetual inventory records in terms of both quantities and dollar amounts. If the assessed level of control risk is high, the auditor would probably A) Insist that the entity take a physical count of inventory at least four times a year. B) Request that the entity take the physical count on or very near year-end. C) Rely mainly on tests of controls in the inventory and warehousing area. D) Rely on analytical procedures (i.e., gross profit test and inventory turnover) to ascertain the reasonableness of the physical count.

13 Fleming, the purchasing manager at Sparks Hardware Wholesalers, has a relative named Patterson who owns a retail hardware store. Fleming arranged for hardware to be delivered by manufacturers directly to the retail store on a C.O.D. (cash-on-delivery) basis to enable Patterson to buy at lower wholesale prices. Fleming was most likely able to do this because of Sparks' poor internal control regarding A) Perpetual inventory records. B) Processing of cash receipts. C) Processing of purchase orders. D) Processing of invoices.

13 Key segregations of duties in the inventory management process include separation of all of the following except: A) Inventory management from cost accounting. B) Cost accounting from the general ledger function. C) Supervision of physical inventory from perpetual inventory recordkeeping. D) Cost accounting from review of variance reports.

13 The most effective control for preventing fictitious inventory is A) Using a perpetual inventory system. B) Using a periodic inventory system. C) Segregation of duties. D) Periodic review of inventory levels by those in charge of inventory requisitions.

13 Which of the following control activities would be most effective in maintaining accurate perpetual inventory records? A) Independent matching of purchase orders, receiving reports, and vendor invoices prior to payment. B) Independent count of goods received by storeroom personnel. C) Periodic independent reconciliation of inventory control account with the subsidiary detailed records. D) Periodic independent reconciliation of perpetual records with actual goods on hand.

13 Which of the following is not a major function in the inventory management process? A) Inventory management. B) Manufacturing. C) Receiving. D) Cost accounting.

13 Which of the following is not a role of the inventory management function (not the inventory management process as a whole)? A) Authorization of production. B) Maintenance of the cost of manufacturing in cost records. C) Maintenance of inventory at appropriate levels. D) Issuance of purchase requisitions.

13 Which of the following is not a typical document included in the Inventory Management Process? A) Receiving report. B) Purchase order. C) Inventory status report. D) Shipping order.

13 Which of the following is not an inherent risk factor in the audit of the inventory management process? A) The lack of prenumbered materials requisition forms. B) Industry competition. C) The acquisition of raw materials from related parties. D) Technology changes.

13 Which of the following is not one of the auditor's objectives relating to the examination of inventories in a financial statement audit? A) Verifying that the entity has used proper inventory pricing. B) Verifying that the inventory counted is actually owned by the entity. C) Verifying that all inventory owned by the entity is on hand at the main warehousing location for the physical count. D) Ascertaining the physical quantities of inventory on hand.

13 While observing an entity's annual physical inventory count, an auditor recorded test counts for several inventory items and noticed that certain test counts were higher than recorded quantities in the entity's perpetual records. This situation could be the result of the entity's failure to record A) Purchase returns. B) Sales returns. C) Sales. D) Either sales or purchase returns.

13 & 14 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 A. completeness. B. valuation. C. rights and obligations. D. existence.

13 & 14 An auditor selected items for test counts while observing an entity's physical inventory. The auditor then traced the test counts to the entity's inventory listing. This procedure most likely provided evidence concerning management's assertion of A. rights and obligations. B. existence. C. completeness. D. valuation.

13 & 14 Auditors will examine the insurance register primarily to A. ensure that dollar coverage amounts are adequate. B. ensure that all assets are insured. C. examine policy expiration dates to verify that prepaid insurance is properly stated. D. ensure that insurance agents are not related parties.

13 & 14 For the purpose of determining proper cutoff for inventory, the auditor will select a sample from which of the following for a few days before and after year-end? A. Production schedules. B. Receiving documents. C. Materials requisitions. D. Purchase orders.

13 & 14 In a manufacturing company, which one of the following audit procedures would give the least assurance about the valuation of inventory at the audit date? A. Examining paid vendors' invoices. B. Testing the computation of standard overhead rates. C. Obtaining confirmation of inventories pledged under loan agreements. D. Reviewing direct labor rates.

13 & 14 In an audit of inventories, an auditor would least likely verify that A. the entity has used proper inventory pricing. B. damaged goods and obsolete items have been properly accounted for. C. the financial statement presentation of inventories is appropriate. D. all inventory owned by the entity is on hand at the time of the count.

13 & 14 In an interview with the plant manager regarding operations, the auditor is most likely to obtain evidence that raises concerns regarding A. the capitalization vs. expensing policy. B. the adequacy of depreciation expense. C. the need to write-off equipment that has become obsolete. D. the allocation of fixed and variable costs.

13 & 14 Purchase cutoff activities should be designed to test that merchandise is included in the inventory of the entity company if the company A. has paid for the merchandise. B. holds legal title to the merchandise. C. has physical possession of the merchandise. D. holds the shipping documents for the merchandise issued in the company's name.

13 & 14 The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with A. purchase orders. B. purchase requisitions. C. receiving reports. D. vendor payments.

13 & 14 The audit of year-end physical inventories should include steps to verify that the entity's purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a A. sale in the current period. B. purchase in the current period. C. sale in the subsequent period. D. purchase return in the subsequent period.

13 & 14 The auditor is least likely to learn of retirement of equipment through which of the following? A. Reviewing insurance policy riders. B. Reviewing the purchase return and allowance account. C. Reviewing depreciation. D. Analyzing debits to the accumulated depreciation account.

13 & 14 The auditor may conclude that depreciation charges are insufficient by noting A. insured values greatly in excess of book values. B. excessive recurring losses on assets retired. C. continuous trade-ins of relatively new assets. D. large amounts of fully depreciated assets.

13 & 14 The element of the audit planning process most likely to be agreed upon with the entity before implementation of the audit strategy is the determination of the A. evidence to be gathered to provide a sufficient basis for the auditor's opinion. B. pending legal matters to be included in the inquiry of the entity's attorney. C. procedures to be undertaken to discover litigation, claims, and assessments. D. timing of inventory observation procedures to be performed.

13 & 14 The physical count of inventory of a retailer was higher than shown in its perpetual records. Which of the following could explain the difference? A. 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. B. Inventory items had been counted but tags placed on the items had not been taken off the items and added to the inventory accumulation sheets. C. Credit memos for several items returned by customers had not been prepared. D. No journal entry had been made on the retailer's books for several items returned to its suppliers.

13 & 14 To improve accountability for fixed asset retirements, management most likely would implement a system of internal control that includes A. continuous analysis of the repairs and maintenance account. B. continuous utilization of sequentially numbered retirement work orders. C. periodic inspection of insurance policies by the internal auditors. D. periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired.

13 & 14 Which assertion for ending inventory is most likely violated if the gross profit percentage is much greater than last year? A. Completeness. B. Existence. C. Valuation and allocation. D. Rights and obligations.

13 & 14 Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to property, plant, and equipment are not understated? A. Repairs and maintenance expense. B. Accounts payable. C. Cash. D. Depreciation expense.

13 & 14 Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment account are not understated? A. Accounts payable. B. Depreciation expense. C. Repairs and maintenance expense. D. Gain on disposal of equipment.

13 & 14 Which of the following constitutes a control weakness related to factory equipment? A. Proceeds from sales of fully depreciated equipment are credited to other income. B. Checks issued in payment of purchases of equipment are not signed by the controller. C. Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired. D. A policy requiring all purchases of factory equipment to be made by the department in need of the equipment.

13 & 14 Which of the following departments typically approves purchase requisitions? A. Inventory management. B. Raw materials stores. C. Cost accounting. D. IT.

13 & 14 Which of the following is a plausible explanation for a large increase in the number of days outstanding in inventory? A. Obsolete inventory. B. Manufacturing salaries were recorded as administrative expenses. C. New product line where sales exceed production. D. Manufacturing overhead was not allocated to the production process.

13 & 14 Which of the following is the best audit procedure for the discovery of damaged merchandise in an entity's ending inventory? A. Observe the condition of merchandise and raw materials during the entity's physical inventory count. B. Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average. C. Compare the physical quantities of slow-moving items with corresponding quantities of the prior year. D. Review the management's inventory representation letter for accuracy.

13 & 14 Which one of the following procedures would not be appropriate for an auditor in discharging his or her responsibilities concerning the entity's physical inventories? A. Carrying out physical inventory procedures at an interim date. B. Supervising the annual physical inventory count. C. Obtaining written representation from the entity as to the existence, quality, and dollar amount of the inventory. D. Confirmation of goods in the hands of public warehouses.

14 An auditor may conclude that depreciation expense charges are insufficient by noting A) Excessive recurring losses on the disposal of assets. B) Insured values in excess of book values. C) Continual trade-ins on relatively new assets. D) Large amounts of fully-depreciated assets remain in operation.

14 In auditing intangible assets, an auditor would likely review or recompute amortization expense and determine whether the write-off period appears reasonable. This would support management's assertion of A) Valuation and allocation. B) Existence. C) Completeness. D) Rights & obligations.

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

14 In testing plant asset account balances, an auditor decides to physically examine a sample of new additions listed on a client-prepared analysis. The procedure most likely contains evidence concerning management's assertion of A) Valuation. B) Existence. C) Rights & Obligations. D) Completeness.

14 Information regarding which of the following would normally not be included in an entity's financial statement disclosures related to plant assets? A) Capital leases. B) Depreciation expenses for tax purposes. C) Major acquisitions/disposals of operating assets. D) Depreciation methods and useful lives.

14 Prepaid insurance should be A) Amortized over the fiscal period. B) Expensed when paid. C) Amortized over the period of coverage. D) Amortized over the calendar period.

14 Property, plant, and equipment transactions include all of the following, except: A) Self-construction of a new office building. B) Acquiring capital assets in exchange for stock. C) Recording operating leases. D) Abandoning capital assets.

14 Reviewing the expenditures included in repairs and maintenance for unusually large items is used to test A) Completeness. B) Occurrence. C) Existence. D) Classification.

14 Tracing a sample of purchase requisitions to receiving reports and to the PP&E records is used to test A) Classification. B) Cutoff. C) Occurrence. D) Completeness.

14 Vouching significant PP&E additions and dispositions to vendor invoices or other supporting documentation is used to test A) Classification. B) Cutoff. C) Occurrence. D) Completeness.

14 When there are numerous plant asset transactions during the year, an auditor who plans to assess control risk at a high level for a non-public entity usually performs A) Extensive test of controls and limited tests of current year transactions. B) Limited or no tests of controls and extensive substantive tests of current year transactions and ending balances. C) Primarily substantive analytical procedures on year end balances. D) Primarily substantive analytical procedures on current year transactions.

14 Which of the following is not a common internal control activity related to the acquisition of property, plant, and equipment? A) Using a budget to forecast and control acquisitions and retirements. B) Analyzing monthly variances between authorized expenditures and actual costs. C) Requiring acquisitions to be authorized in relevant departments by the appropriate level of management. D) Establishing a written company policy regarding the acquisition of raw material.

14 Which of the following is not an example of segregation of duties in the property management process? A) The employee responsible for taking a physical inventory of property should be independent of the record-keeping function. B) The property records function should be separate from the general ledger function. C) The employee who computes depreciation for accounting purposes should be separate from the employee who computes depreciation for tax purposes. D) The property records function should be separate from the custodial [handling of assets] function.

14 Which of the following would be considered an internal control weakness associated with plant assets? A) The estimated useful lives used for financial reporting purposes in some cases are slightly different than IRS classifications used for tax purposes. B) Factory equipment acquisitions are initiated by the department head requesting the item, approved by the divisional manager, and sent to the purchasing department to acquire bids (estimates). C) Periodic physical examination of plant assets is made and independently compared to the plant asset subsidiary ledger. D) Replacements for plant assets are automatically authorized and processed in the next-to-last year of their estimated useful life.

15 A transfer agent is responsible for A) Ensuring that all stock issued complies with the corporate charter. B) Preparing and mailing dividend checks to the stockholders of record. C) Preparing stock certificates and maintaining adequate stockholders' records. D) Transferring funds from one equity account to another.

15 An audit program for the examination of stockholders' equity would not likely include a step that requires the auditor to verify that stock and dividend transactions A) Comply with the corporate charter. B) Have been properly posted and summarized in the accounting records. C) Have been processed by the same employee that processes cash receipts. D) Have been properly valued.

15 An example of a disclosure item for stockholders' equity may include A) Number of shares authorized, issued, and outstanding for each class of stock. B) Details of stock option or stock repurchase plans. C) Any restrictions on retained earnings and dividends. D) All of the above items represent examples of disclosure items for stockholders' equity.

15 Financial statement audits tend to emphasize the examination of balance sheet accounts rather than income statement information. Which of the following types of procedures is least likely to be used to gather evidence in support of income statement accounts? A) Substantive analytical procedures. B) Testing of controls. C) Direct tests of transactions and detailed account balances. D) Confirmations.

15 Footing the shares outstanding in the stock register and comparing the total to shares outstanding in the general ledger stock account addresses the audit objective of A) Completeness B) Occurrence. C) Rights and obligations. D) Valuation.

15 Segregation of duties for stockholders' equity transactions include all of the following except: A) The person who maintains the stockholders' ledger should be separate from the individual ensuring that dividend transactions comply with the corporate charter. B) Those responsible for issuing stock certificates should be separate from accounting. C) The person responsible for keeping detailed stockholder records should be separate from the general ledger function. D) The person responsible for keeping detailed stockholder records should be separate from processing cash disbursements.

15 The audit program in the area of bonds payable and other long-term debt would most likely involve a procedure to A) Confirm the existence of individual bondholders at year-end. B) Perform substantive analytical procedures on bond premium and discount accounts. C) Compare recorded interest expense with estimated interest expense based on the recorded bonds payable balance. D) Examine the documentation of assets acquired with bond proceeds.

15 To test the assertion of existence for long-term debt, the auditor could complete which of the following procedures? A) Recompute accrued interest payable. B) Obtain an analysis of notes payable and reconcile to the general ledger. C) Review interest expense for payments to debt holders not listed on the debt analysis schedule. D) Examine copies of debt agreements and contracts.

15 Which of the following audit procedures would not likely be performed when auditing stockholders' equity? A) Read over board of directors' minutes for authorization of equity transactions. B) Confirm outstanding common and preferred stock with the stock registrar. C) Compare valuation of stock accounts to published market prices. D) Obtain management representation about the number of shares issued and outstanding.

15 Which of the following is not a major transaction that occurs in stockholders' equity? A) Issuance of stock. B) Repurchase of stock. C) Payment of dividends. D) Adjustment of stock value to market.

15 Which of the following pairs of income statement and balance sheet accounts typically would not be audited in conjunction with each other? A) Discount on bonds payable and interest expense. B) Accounts receivable and bad debt expense. C) Prepaid insurance and insurance expense. D) Long-term debt and interest income.

15 Which of the following questions would most likely be found on an auditor's internal control questionnaire related to notes payable? A) Are two or more signatures required on checks written on repayment of the notes? B) Are the proceeds from borrowing used solely to acquire non-current assets? C) Are the assets that serve as collateral on the debt reviewed monthly for possible impairment? D) Are all note payable borrowings authorized by the board of directors?

15 Which of the following should not be considered when evaluating the proper valuation of bonds? A) Debt issue costs. B) Unamortized discounts on bonds issued. C) Unamortized premiums on bonds issued. D) The call price of the bonds.

15 & 16 All of the following can assist the auditor in testing the existence assertion for investment securities except: A. physical examination. B. confirmation with the issuer. C. comparing fair value to cost. D. confirmation with the custodian.

15 & 16 An audit of stockholders' equity ordinarily should include A. reviewing minutes of board meetings to determine the number of shares outstanding. B. determining that dividend declarations comply with debt agreements. C. confirming shares outstanding with state officials. D. tracing individual dividend payments to the capital stock records.

15 & 16 An auditor testing long-term investments would ordinarily use substantive analytical procedures as the primary audit evidence to support the reasonableness of the A. valuation of marketable equity securities. B. existence and ownership of investments. C. classification of gains and losses on the disposal of securities. D. completeness of recorded investment income.

15 & 16 During an examination of a public company, the auditor should obtain written confirmation regarding bond transactions from the A. internal auditors. B. entity's attorney. C. bond broker. D. trustee.

15 & 16 During its fiscal year, a company issued, at a discount, a substantial amount of bonds. When performing audit work in connection with the bond issue, the independent auditor should A. inspect the records maintained by the bond trustee. B. confirm the existence of the bond holders. C. trace the net cash received from the issuance to the bond payable account. D. review the board of directors' minutes for authorization.

15 & 16 During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditor to suspect that A. discount on bonds payable is overstated. B. long-term debt is understated. C. long-term debt is overstated. D. premium on bonds payable is understated.

15 & 16 During the course of an audit, a CPA's substantive analytical procedure provides an expected interest expense that is significantly higher than the amount recorded in the entity's accounting records. This observation would most likely lead the auditor to suspect that A. discount on Bonds is misstated. B. interest income is overstated. C. the entity failed to record all debt. D. the entity failed to record all interest expense.

15 & 16 Examining cancelled stock certificates addresses the assertion of A. valuation. B. disclosures. C. occurrence. D. completeness.

15 & 16 If recorded interest expense is higher than the auditor's expectation calculated using recorded debt, all of the following are potential explanations except that A. the entity used the face interest rate to calculate interest expense on a bond issued at a premium. B. the entity used the face interest rate to calculate interest expense on a bond issued at a discount. C. debt was recorded as equity. D. the entity failed to record debt.

15 & 16 In performing tests concerning the granting of stock options, an auditor should A. trace the authorization for the transaction to a vote of the board of directors. B. confirm the transaction with the Secretary of State in the state of incorporation. C. determine that sufficient treasury stock is available to cover any new stock issued. D. verify the existence of option holders in the entity's payroll records or stock ledgers.

15 & 16 Of the following, which is the most efficient audit procedure for verification of interest earned on bond investments? A. Recomputing interest earned using the interest rate and bond amount. B. Tracing interest declarations to an independent record book. C. Vouching the receipt and deposit of interest checks. D. Confirming the interest rate with the issuer of the bonds.

15 & 16 Overall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly A. income statement ratios to published industry averages. B. income statement ratios to balance sheet ratios. C. revenue and expense account balances to the monthly reported net income. D. revenue and expense account totals to the corresponding figures of the preceding years.

15 & 16 Reviewing notes paid or renewed after the balance sheet date to determine if there are unrecorded liabilities at year-end can be used to test the assertion of A. completeness. B. existence. C. valuation and allocation. D. rights and obligations.

15 & 16 Several years ago, Conway, Inc., secured a conventional real estate mortgage loan. Which of the following audit procedures would least likely be performed by an auditor examining the mortgage balance? A. Review the mortgage amortization schedule. B. Recompute mortgage interest expense. C. Inspect public records of lien balances. D. Examine the current year's canceled checks.

15 & 16 The auditor gathers evidence about dividends that are declared and paid primarily because of A. fraud concerns. B. concerns with violations of corporate bylaws or debt covenants. C. the large dollar value of the transactions. D. the ease with which the transactions can be audited.

15 & 16 The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial statements is to A. evaluate internal control over securities. B. ascertain the reasonableness of imputed interest. C. detect unrecorded liabilities. D. determine the validity of prepaid interest expense.

15 & 16 Two months before year-end, the bookkeeper erroneously recorded the receipt of a long-term bank loan by a debit to cash and a credit to sales. Which of the following is the most effective procedure for detecting this type of error? A. Analysis of the notes payable journal. B. Analysis of bank confirmation information. C. Preparation of a year-end bank reconciliation. D. Preparation of a year-end bank transfer schedule.

15 & 16 Under which of the following circumstances would an auditor be most likely to intensify an examination of a $1,000 petty cash fund maintained on an imprest basis? A. The custodian endorses reimbursement checks. B. Reimbursement vouchers are not prenumbered. C. Reimbursement of the fund from the general cash account occurs twice or more each week. D. The custodian occasionally uses the cash fund to cash employee checks.

15 & 16 When there is a large number of negotiable securities in multiple locations, careful planning of the physical inspection and count of the securities by the auditor is necessary to guard against A. substitution of authentic securities with counterfeit securities. B. unrecorded sales of securities after they are counted. C. unauthorized negotiation of the securities before they are counted. D. substitution of securities already counted at one location for other securities that should be on hand at a different location but are not.

15 & 16 Which of the following control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments? A. The internal auditor compares the securities in the bank safe-deposit box with recorded investments. B. Senior management verifies that securities in the bank safe-deposit box are registered in the entity's name. C. The controller compares the current market prices of recorded investments with the brokers' advices on file. D. The treasurer vouches the acquisition of securities by comparing brokers' advices with canceled checks.

15 & 16 Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting between intercompany banks? A. Prepare a schedule of bank transfers. B. Review the composition of authenticated deposit slips. C. Review subsequent bank statements received directly from the banks. D. Prepare year-end bank reconciliations.

15 & 16 Which of the following is the most important consideration of an auditor when examining the stockholders' equity section of an entity's balance sheet? A. Stock dividends are capitalized at par or stated value on the dividend declaration date. B. Stock dividends and/or stock splits during the year under audit were approved by the stockholders. C. Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors' meetings. D. Changes in the capital stock account are verified by an independent stock transfer agent.

15 & 16 Which of the following procedures most likely would give the greatest assurance that securities held as investments are safeguarded? A. There is no access to securities between the year-end and the date of the auditor's security count. B. Proceeds from the sale of investments are received by an employee who does not have access to securities. C. Investment acquisitions are authorized by a member of the Board of Directors before execution. D. Access to securities requires the presence of two designated officials.

16 "Quoted prices from an active market" is an example of what level of valuation criteria? A) Level 1. B) Level 3. C) Lower level. D) Basic level.

16 Comparing the dates for a sample of checks with the dates the checks cleared the bank is used to test A) Existence. B) Cutoff. C) Accuracy. D) Authorization.

16 Key segregations of duties for investments include all of the following except: A) Whoever is responsible for investment activities should not also ensure that all dividend and interest income was received. B) Whoever initiates the purchase of investments should not also grant final approval. C) Whoever oversees security valuation should not also acquire securities. D) Whoever maintains custody of the securities should not also account for the securities.

16 Kiting can best be defined as a situation in which A) An entity employee is diverting deposits to his personal bank account. B) The entity fails to complete bank reconciliations on a timely basis. C) An employee fraudulently covers a cash shortage by transferring money from one bank account to another. D) Entity checks include unauthorized signatures.

16 On 12/31/11, Hoover Co. erroneously credited accounts payable (Dr. Cash; Cr. Accounts Payable) for a transfer of funds between two bank accounts that resulted in an overstatement of both cash and accounts payable at year-end. The check was not recorded until it cleared the bank on 1/2/12. Which of the following procedures would be least effective in detecting this misstatement? A) Review of the 12/31/11 bank reconciliations for the 2 bank accounts. B) Review of the schedule of interbank transfers. C) Review of the accounts payable supporting documentation at 12/31/11. D) Review of the December check register for both accounts.

16 The auditor is most concerned with which management assertion during the audit of cash A) Valuation and Allocation. B) Rights and Obligations. C) Existence. D) Presentation and Disclosure.

16 The auditor typically uses the following procedures to detect fraud in the cash accounts: A) Bank confirmations. B) Bank transfer schedule. C) Normal bank reconciliation procedures. D) Inquiries of management.

16 To establish the existence and ownership of an investment in common stock of a public company, an auditor ordinarily performs a security count or A) Determines the market share at the balance sheet date using published quotations. B) Corresponds with the investee regarding the number of shares owned. C) Relies on the internal control structure if the auditor has tested the controls and has reasonable assurance they are operating as prescribed. D) Confirms the number of shares owned with an independent registrar.

16 Tracing a sample of entries in the cash receipts journal to daily deposit slips tests which of the following assertions for cash? A) Occurrence. B) Completeness. C) Valuation. D) Cutoff.

16 Which of the following best explains why an auditor obtains a bank cutoff statement in connection with his/her examination of year-end cash balances? A) It is the best available procedure to detect kiting. B) Entities with poor liquidity may be likely to alter the year-end bank statement amounts. C) It assists in verifying deposits in transit and outstanding checks from the year-end bank reconciliation on a timely basis. D) It is required per GAAS if the auditor is unable to prepare a bank transfer schedule.

16 Which of the following is true regarding petty cash? A) The petty cash fund should be maintained by someone involved in other cash functions. B) The petty cash fund is almost always the subject of heavy substantive testing. C) Few entities maintain petty cash funds because of the risk of defalcation. D) Auditors typically perform limited testing of the controls over the petty cash fund.

16 Which of the following statements is false regarding a four-column bank reconciliation or "proof of cash"? A) It is generally prepared by auditors in situations where internal controls in the cash area are considered very weak. B) It can be effective in detecting kiting since cash receipts and disbursements are reconciled with those on the bank statement. C) It can be effective in detecting unrecorded checks that have not yet cleared the bank since cash disbursements per book and bank will not equal. D) It is often used by the auditor to detect certain types of fraud.

17 A lawyer's response to an auditor's inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the entity's financial statements. Which parties should reach an understanding on the limits of materiality for this purpose? A) The auditor and the entity's management. B) The entity's audit committee and the lawyer. C) The lawyer and the auditor. D) The entity's management and the lawyer.

17 According to FASB ASC Topic 450, "Contingencies," which of the following terms means that the future event is "likely to occur"? A) Probable. B) Likely. C) Reasonably possible. D) More than remote.

17 According to the Public Company Accounting Oversight Board's (PCAOB) third auditing standard related to audit documentation and retention, an auditor should retain audit documentation for how long of a period of time beyond completion of the engagement? A) Seven years, unless a shorter period is required by state law. B) Seven years, unless a longer period is required by state law. C) Seven years for electronic documentation; ten years for physical documentation. D) The same period as required under state tax law.

17 Analytical procedures performed at the overall review stage of an audit appear to indicate that several accounts have unexpected balances and/or relationships. The result of these procedures most likely would indicate that A) Internal control activities are not operating effectively. B) The communications with the audit committee should be revised. C) Additional detail tests of account balances are necessary. D) Fraud exists among the relevant account balances involved.

17 Dewey, Needham, & Howe accept an engagement to audit the 2013 financial statements of Syracuse Co. and begin fieldwork in September 2013. Syracuse (December 31st year-end) gives the unaudited financial statements to the auditors on 1/17/2014. The auditors completed the fieldwork on 3/12/2014 and distributed the audit report on 3/23/2014. The entity's letter of representation should be dated ________ and the audit report should be dated __________. A) March 23rd; March 12th. B) March 12th; March 12th. C) January 17th; March 23rd. D) March 23rd; March 23rd.

17 In most cases, commitments A) Are likely to result in additional losses to the entity. B) Are found through the accounts payable search for unrecorded liabilities. C) Require adjustments to the financial statement amounts. D) Are disclosed in a footnote to the financial statements.

17 The auditor must communicate several items to "those charged with governance" at the conclusion of the audit. Which of the following is not a typical communication? A) Significant audit adjustments. B) The auditor's responsibilities under GAAS. C) The planned audit procedures for the audit. D) The planned scope and timing of the audit.

17 To which of the following matters would an auditor not apply materiality limits when obtaining specific written management representations? A) Disclosure of compensating balance arrangements involving restrictions on cash balances. B) Information concerning related-party transactions and related amounts receivable or payable. C) Fraud involving employees with significant roles in the internal control system. D) The absence of errors and unrecorded transactions in the financial statements.

17 Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern? A) Communications with the audit committee indicate a higher than normal rate of employee turnover. B) Normal trade credit from major suppliers has recently been restricted or denied. C) There are a significant number of related party transactions occurring. D) Plans to repurchase a large block of treasury stock have been delayed.

17 Which of the following is an example of a contingent liability? A) Accounts payable. B) Long term debt. C) Warranty payable. D) All liabilities are "contingent."

17 Which of the following is an example of a subsequent event that requires disclosure in the notes to the financial statements (but not adjustments to the financial statements)? A) An entity's customer, who has been experiencing financial difficulty for several months, declares bankruptcy. The customer is one of over 1000 customers of the entity and appropriate reserves for any related accounts receivable have been properly maintained. B) The entity completes an environmental cleanup. The liability for the clean-up was recorded as a contingent liability at the balance sheet date. C) An event that confirms the auditor's belief that a large portion of the entity's inventory is obsolete. The issue was documented prior to the end of the fiscal year and appropriate inventory adjustments were made at the balance sheet date. D) A chemical explosion at a customer's warehouse causes all accounts receivable from that customer to be uncollectible.

17 Which of the following material events occurring after the issuance of an auditor's report would most likely cause the auditor to make further inquiries about the previously issued financial statements to determine if they may need to be restated? A) An uninsured flood occurs that may affect the entity's ability to continue as a going concern. B) A major contingency is resolved that had been disclosed in the audited financial statements. C) New information is discovered leading the auditor to believe that lease transactions during the audit period should have been accounted for as capital rather than operating leases. D) A subsidiary is sold that accounts for 25% of the entity's consolidated revenues.

17 With respect to the issuance of an audit report that is dual dated because of an event occurring after the date on which the auditor has obtained sufficient appropriate audit evidence but before the audit report was issued, the auditor's responsibility for events occurring after the completion of fieldwork is A) Extended to include all events occurring before the audit report is issued. B) Nonexistent- auditors have no responsibility for subsequent events. C) Extended to cover the period up to the issuance of the next audit report. D) Limited to the specific event referred to.

17 & 18 A predecessor auditor should complete the following before reissuing a report on statements presented on a comparative basis: A. obtain a letter of representations from the current-year, successor auditor. B. read the financial statements of the current period and obtain a letter of representation from the current-year, successor auditor. C. read the financial statements of the past five years. D. read the financial statements of the current period.

17 & 18 After an audit report containing an unqualified opinion on a nonpublic entity's financial statements is issued, the auditor learns that the entity has decided to sell the shares of a subsidiary that accounts for 30 percent of its revenue and 25 percent of its net income. The auditor should A. take no action because the auditor has no obligation to make any further inquiries. B. notify the entity that the auditor's report may no longer be associated with the financial statements. C. describe the effects of this subsequently discovered information in communications with persons known to be relying on the financial statements. D. determine whether the information is reliable and, if it is determined to be reliable, request that revised financial statements be issued.

17 & 18 After issuance of the auditor's report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by that report unless A. a development occurs that may affect the entity's ability to continue as a going concern. B. an investigation of the auditor's practice by a peer review committee ensues. C. new information is discovered concerning undisclosed related party transactions of the previously audited period. D. a final resolution of a contingency that had resulted in a qualification of the auditor's report is made.

17 & 18 If a public company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(an) A. qualified opinion. B. review report. C. unqualified opinion with a separate explanatory paragraph. D. disclaimer of opinion.

17 & 18 In an engagement to express an opinion on one or more specified elements, accounts, or items of a financial statement, the auditor can generally audit only those specified elements and not the entire set of financial statements. However, the auditor is required to audit the entire set of financial statements if the elements specified include A. assets. B. net Income and Stockholders' Equity. C. net Income. D. stockholders' Equity.

17 & 18 In the course of the examination of financial statements for the purpose of expressing an opinion, the auditor normally prepares a schedule of unadjusted differences for which the auditor did not propose adjustments when they were discovered. What is the primary purpose of this schedule? A. To summarize the errors made by the company so that corrections can be made after the audited financial statements are released. B. To summarize the adjustments that must be made before the company can prepare and submit its federal tax return. C. To identify the potential financial statement effects of errors or disputed items that were considered immaterial when discovered. D. To point out to the responsible entity officials the errors made by various company personnel.

17 & 18 In the first audit of an entity, because of the entity's record retention policies, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and the prior year, as well as the amounts of assets or liabilities at the beginning of the current year. If the amounts in question could materially affect current operating results, the auditor would A. withdraw from the engagement and refuse to be associated with the financial statements. B. specifically state that the financial statements are not comparable to the prior year because of an uncertainty. C. express a qualified opinion on the financial statements because of a client-imposed scope limitation. D. be unable to express an opinion on the current year's results of operations and cash flows.

17 & 18 Other bases of accounting (special purpose frameworks) include all of the following except: A. non-GAAP methods used for internal reporting. B. tax basis. C. cash basis. D. regulatory basis.

17 & 18 Subsequent events for which the auditor has a responsibility to actively search are defined as events that occur subsequent to the A. date of the auditor's report and concern contingencies that are not reflected in the financial statements. B. balance sheet date but prior to the date of the auditor's report. C. balance sheet date. D. date of the auditor's report.

17 & 18 The management letter is used A. to allow management to document, in writing, oral representations to the auditor. B. to list all reportable conditions with respect to internal controls. C. to make recommendations to the entity based on observations made during the audit. D. to confirm the terms of the audit engagement.

17 & 18 The primary reason an auditor requests letters of inquiry be sent to an entity's attorneys is to provide the auditor with A. a description and evaluation of litigation, claims, and assessments that existed at the date of the balance sheet. B. corroboration of the information furnished by management concerning litigation, claims, and assessments. C. an expert opinion as to whether a loss is possible, probable, or remote. D. the opportunity to examine the documentation concerning litigation, claims, and assessments.

17 & 18 The refusal of an entity's attorney to provide a representation on the legality of a particular act committed by the entity is generally A. insufficient reason to modify the auditor's report because of the attorney's obligation of confidentiality. B. sufficient reason to issue a "subject to" qualified opinion. C. considered to be a scope limitation. D. proper grounds to withdraw from the engagement without further consideration.

17 & 18 What is an auditor's responsibility for supplementary information, such as segment information, that is outside the basic financial statements, but required by the FASB? A. The auditor should apply tests of details of transactions and balances to the required supplementary information and report any material misstatements in such information. B. The auditor is required to read the other information and consider whether such information is consistent with the information in the financial statements. C. The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements. D. The auditor's only responsibility for required supplementary information is to assist in preparing the supplementary information.

17 & 18 When a question arises about an entity's continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow. An example of such a factor is the A. possibility of purchasing certain assets rather than leasing them. B. marketability of property and equipment that management plans to keep. C. capability of extending the due dates of existing debt. D. appropriateness of changing depreciation methods from double declining balance to straight line.

17 & 18 When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditor's report should cover A. both years. B. only the current year. C. only the current year, but the prior year's report should be presented. D. only the current year, but the prior year's report should be referred to.

17 & 18 Which of the following circumstances normally does not affect the consistency phrase in the auditor's standard report? A. A change in accounting estimate. B. A change in the companies included in combined financial statements. C. A correction of an error in principle. D. A change in accounting principle.

17 & 18 Which of the following events occurring after the issuance of an entity's financial statements and the auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements? A. A subsidiary that accounts for 25 percent of the entity's consolidated net income is sold. B. A contingency is resolved that had been disclosed in the audited financial statements. C. An uninsured natural disaster occurs that may affect the entity's ability to continue as a going concern. D. New information is discovered concerning undisclosed lease transactions in the audited period.

17 & 18 Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued? A. Sale of long-term debt or capital stock. B. Loss of a plant as a result of a flood. C. Settlement of litigation, in excess of the previously recorded liability. D. Major purchase of a business that is expected to double sales volume.

17 & 18 Which of the following procedures would an auditor most likely perform to obtain evidence about an entity's subsequent events? A. Obtain a letter from the entity's attorney describing any pending litigation, unasserted claims, and loss contingencies. B. Reconcile bank activity for the month after the balance sheet date with cash activity reflected in the accounting records. C. Review the treasurer's monthly reports on temporary investments owned, purchased, and sold. D. Examine on a test basis the purchase invoices and receiving reports for several days after the inventory date.

17 & 18 Which of the following ratios is least likely to assist the auditor in determining whether the entity is experiencing financial difficulties? A. Net worth/total liabilities. B. Net income before taxes/net sales. C. Total liabilities/total assets. D. Cash/total assets.

17 & 18 Which of the following situations would require adjustment to or disclosure in the financial statements? A. The bankruptcy of a customer who regularly purchased 30 percent of the company's output. B. A merger discussion. C. The application for a patent on a new production process. D. Discussions with a customer that could lead to a 40 percent increase in the entity's sales if agreement is successful.

17 & 18 Which of the following statements extracted from an entity's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? A. "I believe that the possible liability to the company is nominal in amount." B. "I believe that the company will be able to defend this action successfully." C. "I believe that the plaintiff's case against the company is without merit." D. "I believe that the action can be settled for less than the damages claimed."

17 & 18 Which of the following statements ordinarily is included among the written management representations obtained by the auditor? A. Compensating balances and other arrangements involving restrictions on cash balances have been disclosed. B. Sufficient evidential matter has been made available to permit the issuance of an unqualified opinion. C. Management acknowledges responsibility for illegal actions committed by employees. D. Management acknowledges that there are no material weaknesses in the account balances.

18 An auditor decides to issue a qualified opinion on an entity's financial statements because a major inadequacy in the entity's electronic accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor's report should state that the qualification pertains to A) A client-imposed scope limitation. B) A departure from generally accepted auditing standards. C) The possible effects of the inadequacy in the entity's records on the financial statements. D) Inadequate disclosure of necessary information.

18 An auditor has previously expressed a qualified opinion on the financial statements of a prior period because of a departure from generally accepted accounting principles. The prior-period financial statements are restated in the current period to conform to generally accepted accounting principles. The auditor's updated report on the prior-period financial statements for this public company should A) Express an unqualified opinion concerning the restated financial statements. B) Be accompanied by the original auditor's report on the prior period. C) Bear the same date as the original auditor's report on the prior period. D) Qualify the opinion concerning the restated financial statements because of a change in accounting principle.

18 An auditor notifies management that there is a material inconsistency between information in the audited financial statements and other information provided in the annual report. If management refuses to correct the material inconsistency, the auditor is not permitted to A) Include an explanatory/emphasis-of-matter paragraph in the otherwise unqualified/unmodified audit report. B) Withhold the audit report until the material is presented consistently. C) Withdraw from the engagement. D) Issue a qualified opinion.

18 If the principal auditor decides to make reference to other auditors used in the engagement, the audit report must make reference to A) The portion or parts of the financial statements examined by the other auditors. B) The name of the other auditor. C) Whether or not a subsidiary corporation was examined. D) Whether the other auditors are members of the SEC Division of firms.

18 In which of the following situations is an auditor permitted to issue an unqualified/unmodified report (assume all information is material)? A) The entity has omitted required footnote disclosures. B) The auditor is not independent of the entity. C) The auditor is unable to gather sufficient evidence in support of assets reported by a consolidated subsidiary. D) The entity failed to make a large debt payment during the subsequent event period.

18 In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion? A) The auditor did not observe the entity's physical inventory and is unable to become satisfied about its balance by other auditing procedures. B) The inventory account is misstated due to improper application of the lower-of-cost-or-market principle. C) There has been a change in accounting principles that has a material effect on the comparability of the entity's financial statements. D) The auditor is unable to apply necessary procedures concerning an investor's share of an investee's earnings recognized on the equity method.

18 Nationwide Life Insurance Co. prepares its financial statements using an accounting basis required according to the rules of its state insurance commission. Fagan, Nationwide's independent auditor, discovers that the financial statements are not titled properly. Nationwide refuses to correct the error. Fagan should A) Explain in the notes to the financials the terminology used. B) Issue a special statutory basis report that disclaims an opinion on the financials. C) Qualify the opinion and disclose his reservations in an explanatory/emphasis-of-matter paragraph. D) Appeal to the state insurance commission for an advisory opinion.

18 The basic elements of a standard unqualified/unmodified report include all of the following except: A) A statement that the financial statements are the responsibility of management. B) A title that includes the word "Independent." C) A statement that although estimates are believed to be reasonable, there are normally differences between actual and estimated results. D) A statement that an audit includes examining supporting "significant accounting estimates made by management."

18 The existence of audit risk is best recognized by the statement in the standard auditor's report that the A) Opinion is based, in part, on the report of other auditors. B) Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement. C) Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. D) Auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management.

18 What type of report is issued when the financial statements are not presented fairly? A) Unqualified/Unmodified. B) Qualified. C) Highly qualified. D) Adverse.

18 Which of the following is a change that affects the consistency of the financial statements? A) Correction of an error that does not involve an accounting principle. B) Change in reporting entity. C) Change in classification of assets from long-term to current. D) Change expected to have a material future effect.

18 Which of the following is a change that does not affect consistency of the financial statements? A) Change in accounting principle. B) Change in accounting estimate. C) Change in reporting entity. D) Correction of an error in principle.

18 Which of the following is not a major element of an unqualified/unmodified report? A) Introductory paragraph. B) Scope paragraph. C) Timeline paragraph. D) Opinion paragraph.

18 Which of the following is not a situation that would require explanatory language in an unqualified/unmodified report? A) The opinion is based, in part, on the report of another auditor. B) The financial statements lack consistency due to an accounting change. C) The auditor wishes to emphasize a matter. D) The auditor is unable to apply necessary procedures concerning the entity's share of an investee's earnings recognized on the equity method.

18 Which of the following is true with respect to a scope limitation? A) The auditor can choose to issue an adverse report or disclaim an opinion. B) The auditor will generally issue a qualified report or disclaim an opinion. C) The auditor may not issue an unqualified/unmodified report even if the auditor can compensate for the scope limitation by performing alternative procedures. D) The auditor should withdraw from the engagement.

21 A review engagement will typically A) Require the accountant to obtain an understanding of internal control. B) Result in a statement of limited assurance about the fair presentation of the financial statements. C) Result in an explicit opinion about whether the financial statements are presented fairly. D) Include only the gathering of financial data for the primary purpose of preparing the financial statements with the related footnotes.

21 Compilation reports can be in any of the following forms except: A) Compilation with full disclosure. B) Compilation that omits substantially all disclosures. C) Compilation with partial assurance. D) Compilation when the accountant is not independent.

21 For nonpublic companies not subject to the standards of the PCAOB, reports on internal control are an example of which of the following types of engagements? A) Audit engagement. B) Attest engagement. C) Assurance engagement. D) Special reports engagement.

21 The accountant provides absolute assurance to the user in the performance of A) A compilation. B) A review. C) An audit. D) None of the above.

21 The objectivity of an internal audit function will most likely be enhanced if the director of the IA department reports to the entity's A) Audit committee. B) Chief Financial Officer [CFO]. C) Controller. D) Senior Management Team [as a group].

21 Unlike GAAS, the attestation standards do not contain a requirement that auditors obtain A) Independence in fact and in mental attitude. B) Sufficient evidence to support the conclusion expressed in their report. C) Adequate background and knowledge in the subject matter being examined. D) An understanding of the entity's internal control structure.

21 When a CPA firm examines projected financial statements, the firm's report should include a separate paragraph that A) Limits distribution of the projections to specified users. B) States that the CPA firm is responsible for the opinion presented for only a specified amount of time. C) Provides an explanation of the difference between an audit and an examination. D) Disclaims an opinion on whether the assumptions listed provide a reasonable basis for the projection.

21 Which of the following is not considered a principle on which Trust Services were established? A) Security. B) Authentication. C) Processing integrity. D) Confidentiality.

21 Which of the following is not considered one of the six general categories of assurance services provided by CPA firms? A) Tax planning. B) Information system reliability. C) Health care performance measurement. D) Risk assessment.

Audit Final Ch. 11-21

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