Audit Quiz 6

Which of the following statements about litigation, claims, and assessments extracted from a letter from a client's legal counsel is most likely to cause the auditor to request clarification

"I believe that the action can be settled for less than the damages claimed"

Subsequent events affecting the realization of assets ordinarily will require adjustments of the financial statements under audit because such events typically represent

Culmination of conditions that existed at the balance sheet date

The objectives of internal control for a production cycle are to provide assurance that transactions are properly executed and recorded, and that

Custody of work-in-process and of finished goods is properly maintained

Which of the following material events occurring subsequent to the Dec. 31, Yr 1, balance sheet date will not ordinarily result in an adjustment of the financial statements before they are issued on March 2, Yr 2

Acquisition of a subsidiary on Jan. 23, Yr. 2. Negotiations had begun in Dec. of Yr 1

A major customer of an audit client suffers a fire prior to completion of year-end field work. The audit client believes that this event could have a significant direct effect on the financial statements. The auditor should

Advise mgmt to disclose the event in notes to the financial statements

When auditing inventories, an auditor would least likely verify that

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

Which of the following is an internal control weakness related to factory equipment

All purchases of factory equipment are required to be made by the department in need of the equipment

Under the AICPA's auditing standards, which of the following statements about an auditor's communication of significant control deficiencies is true

An auditor's report on significant control deficiencies should include a restriction on the use of the report

A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following items would least likely be included in legal counsel's response to the auditor's letter of inquiry

An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. Tracing test counts most likely obtained evidence concerning the relevant assertion about

Completeness

In auditing AP, an auditor's procedures most likely will focus primarily on the relevant assertion about

Completeness

Which of the following is not an audit procedure that the auditor performs with respect to litigation, claims, and assessments

Confirm directly with the client's legal counsel that all claims have been recorded in the financial statements

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern

Confirming with third parties the details of arrangements to maintain financial support

Which of the following control activities is not usually performed with regard to vouchers payable in the accounting department

Controlling the mailing of the check and remittance advice

The primary reason an auditor requests letters of inquiry be sent to a client's legal counsel is to provide the auditor with

Corroboration of the information furnished by mgmt about litigation, claims, and assessments

The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference

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

Subsequent to the date of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. The auditor should

Determine whether the financial statements need revision

Which of the following disagreements between the auditor and mgmt do not have to be communicated by the auditor to those charged with governance

Disagreements of the amount of the LIFO inventory layer based on preliminary information

A written mgmt representation letter is most likely to be an auditor's best source of corroborative information of a client's intention to

Discontinue a line of business

Which of the following matters will an auditor most likely include in a mgmt representation letter

Mgmt's acknowledgement of its responsibility to detect employee fraud

For which of the following matters should an auditor obtain written mgmt representations

Mgmt's compliance with contractual agreements that may affect the financial statements

In a well-designed internal control system, employees in the same department most likely would approve purchase orders, and also

Negotiate terms with vendors

Which of the following are essential elements of the audit trail in an electronic data interchange (EDI) system

Network and sender-recipient acknowledgements

Purchase cutoff procedures should be designed to test whether all inventory

Purchased and whose title has passed before year end was recorded

If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecorded

Purchases

For several years a client's physical inventory count has been lower than what was shown on the books at the time of the count, an downward adjustments of the inventory account have been required. Contributing to the inventory problem could be material weaknesses in internal control that led to the failure to record some

Purchases returned to vendors

When title to merchandise in transit has passed the audit client, the auditor engaged in the performance of a purchase cutoff will encounter the greatest difficulty in gaining assurance with respect to the

Quality

Which of the following procedures should an auditor ordinarily perform regarding subsequent events

Read the latest subsequent interim financial statements

Which of the following is usually a benefit of using electronic funds transfer for international cash transactions

Reduction of the frequency of data entry errors

Under which of the following circumstances would an auditor be most likely to intensify an audit of a $500 imprest petty cash fund

Reimbursement occurs twice each week

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 items

Represented by inventory tags are including in the listing

A client maintains perpetual inventory records in both quantities and dollars. If the assessment of the risks of material misstatement is high, an auditor will probably

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

Which of the following controls will most likely allow for a reduction in the scope of the auditor's tests of depreciation expense

Review and approval of the periodic equipment depreciation entry by a supervisor who does not actively participate in its preparation

An auditor would be most likely to learn of slow-moving inventory through

Review of perpetual inventory records

Which of the following procedures would best detect a liability omission by mgmt

Review purchase contracts and other legal documents

Which of the following audit procedures is best for identifying unrecorded trade accounts payable

Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period

The audit of year-end physical inventories should include steps to verify that the client'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

Sale in the current period

Which of the following procedures is least likely to be performed before the balance sheet date

Search for unrecorded liabilities

An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively

Select and examine cancelled checks and ascertain that the related vouchers are dated no later than the checks

Based on observations made during an audit, the auditor should discuss with management the effectiveness of the company's controls that protect against the purchase of

Supplies individually ordered, without considering possible volume discounts

After an audit report containing an unmodified opinion on a nonissuer's financial statements was dated and the financial statements issued, the client decided to sell the shares of a subsidiary that accounts for 30% of its revenue and 25% of its net income. The auditor should

Take no action because the auditor has no obligation to make any further inquiries

When a contingency is resolved immediately subsequent to the issuance of financial statements with a report that included a paragraph emphasizing the contingency, the auditor should

Take no action regarding the event

Legal counsel's response to an auditor's inquiry about litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client's financial statements. Which parties may reach an understanding on the limits of materiality for this purpose that are stated in the letter of inquiry

The auditor and the client's management

An auditor is most likely to communicate to those charged with governance that

The auditor encountered significant difficulties during the audit

Which of the following statements about an auditor's communication of internal control related matters identified in an audit of a nonissuer is true

The auditor should communicate significant internal control related matters no later than 60 days after the report release date

Which of the following circumstances most likely would require an auditor to apply an omitted procedure after the audit report issuance date

The auditor's report is unsupported as a result of the omitted procedure

If mgmt refuses to provide certain written representations that the auditor believes are essential, which of the following is appropriate

The client's refusal may have an effect on the auditor's ability to rely on other representations of mgmt

Which of the following events occurring after the date of the report will most likely cause the auditor to make further inquiries about the previously issued financial statements

The discovery of information regarding a contingency that existed before the financial statements were issued

Which of the following matters will an auditor most likely communicate to those charged with governance

The effects of significant accounting policies adopted by mgmt in emerging areas for which no authoritative guidance exists

Which of the following internal control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments

The internal auditor compares the securities in the bank safe-deposit box with recorded investments

A purpose of a mgmt representation letter is to reduce

The possibility of a misunderstanding concerning mgmt's responsibility for the financial statements

Which of the following matters should an auditor communicate to those charged with governance

The process used by mgmt in formulating sensitive accounting estimates

When communicating significant deficiencies in internal control noted in a financial statement audit of a nonissuer, the communication should indicate that

The purpose of the audit was to report on the financial statements, not to provide assurance of internal control

An auditor concludes that the omission of a substantive procedure considered necessary at the time of the audit may impair the auditor's current ability to support the previously expressed opinion. The auditor need not apply the omitted procedure if

The results of the other procedures that were applied tend to compensate for the procedure omitted

Effective controls relevant to the efficiency of purchases will result in proper evaluation of the time for ordering merchandise. When making this evaluation, the purchasing company should give primary consideration to

The trade-offs between the cost of owning and storing excess merchandise and the risk of loss by not having merchandise on hand

Which of the following representations should not be included in a written report on internal control related matters identified in an audit under the AICPA's auditing standards

There are no significant deficiencies or material weaknesses in the design or operation of internal control

Operating control of the check-signing machine normally should be the responsibility of the

Treasury Function

When an entity uses a trust company as custodian of its trading securities, the possibility of concealing fraud most likely will be reduced if the

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

Which of the following is usually a benefit of transmitting transactions in an electronic data interchange (EDI) envioronment

A compressed business cycle with lower year-end receivables balance

The auditor learned of the following situations after issuing the audit report on Feb. 6. Each is important to users of the financial statements. For which one does the auditor have responsibility for disclosures of the newly discovered facts

A conflict of interest involving credit officers and a principal company supplier that existed during the audit year was discovered on March 3

The refusal of a client's legal counsel to provide a representation on the legality of a particular act committed by the client is ordinarily

A scope of limitation

Which of the following activities is most likely to prevent the improper disposition of equipment

A segregation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders

Which control is most likely to give the greatest assurance that securities held as investments are safeguarded

Access to securities requires the signature and presence of two designated officials

Which of the following internal control activities is not usually performed in the vouchers payable department

Accounting for unused prenumbered purchase orders and receiving reports

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable

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

Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions

Are procedures in place to monitor and properly restrict access to equipment?

In an audit engagement, should an auditor communicate the following matters to those charged with governance

Auditor's judgments about the quality of the client's accounting Principles: YES Issues discussed with mgmt prior to the auditor's retention: YES

An auditor is concerned with completing various phases of the audit after the balance sheet date. This subsequent period extends to the date of the

Auditor's report

Subsequent events are defined as events that occur subsequent to the

Balance sheet date but prior to the auditor's report date

Which of the following matters is an auditor required to communicate to those in the entity charged with governance

Both I and II

A secondary result of the auditor's understanding of internal control for a nonissuer is that the understanding may

Bring to the auditor's attention possible control conditions required to be communicated to the client

Which of the following conditions or events is most likely to cause an auditor to have substantial doubt about an entity's ability to continue as a going concern

Cash flows from operating activities are negative

Which of the following is a standard control over cash disbursements

Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations

A written representation from a client's mgmt that, among other matters, acknowledges responsibility for the fair presentation of financial statements, should normally be signed by the

Chief executive officer and the chief financial officer

An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support mgmt's financial statement assertion of

Classification and understandability

The primary source of information to be reported about litigation, claims, and assessments is the

Client's management

When considering the use of mgmt's written representation as audit evidence about the completeness assertion, an auditor should understand that such representations

Complement, but do not replace, substantive procedures designed to support the assertion

An auditor finds several misstatements in the financial statements that the client prefers not to correct. The auditor determines that the misstatements are not material in the aggregate. Which of the following actions by the auditor is most appropriate

Document all misstatements accumulated during the audit and the conclusion about whether uncorrected misstatements are material

Which of the following statements is true concerning the security of messages in an electronic data interchange (EDI) system

Encryption performed by physically secure hardware devices is more secure than encryption performed by software

Which of the following tests of details most likely would help an auditor determine whether AP have been misstated

Examining vendor statements for amounts not reported as purchases

An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to

Extend the due dates of existing loans

Zero Corp. suffered a loss having a material effect on its financial statements as a result of a customer's bankruptcy that rendered a trade receivable uncollectible. This bankruptcy occurred suddenly because of a natural disaster 10 days after Zero's balance sheet date but 1 month before the issuance of the financial statements and the auditor's report. Under these circumstances, the

Financial Statements should be adjusted: NO Event requires financial statement disclosure, but no adjustment: YES Auditor's report should be modified for a lack of consistency : NO

To which of the following matters would an auditor not apply material limits when obtaining specific written mgmt respresentations

Fraud involving employees with significant roles in internal control

An auditor should communicate misstatements to those charged with governance

If they are uncorrected

After issuing an auditor's report, an auditor has no obligation to make continuing inquiries about audited financial statements unless

Information that existed at the report date and may affect the report comes to the auditor's attention

Which of the following procedures will an auditor most likely perform to obtain evidence about the occurrence of subsequent events

Inquiring as to whether any unusual adjustments were made after year end

Which of the following procedures will an auditor most likely perform to obtain evidence about the occurrence of subsequent events

Inquiring of the entity's legal counsel concerning litigation, claims, and assessments arising after year end

Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories

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

When auditing a public warehouse, which of the following is the most important audit procedure with respect to disclosing unrecorded liabilities

Inspection of receiving and issuing procedures

Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control activity that provides for

Investigation of variances within a formal budgeting system

In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the purchase

Invoices

Key Co. plans to present comparative financial statements for the years ended Dec. 31, Yr 1 and Yr 2, respectively. Smith CPA, audited Key's financial statements for both years and plans to report on the comparative financial statements on May 1, Yr 3. Key's current mgmt team was not present until Jan. 1, Yr 2 What period of time should be covered by Key's mgmt representation letter

Jan. 1, Yr 2, through Dec. 31, Yr 2

Some firms that dispose of only a small part of their total output by consignment shipments fail to make any distinction between consignment shipments and regular sales. Which of the following would suggest to the auditor that the client's goods have been shipped on consignment

Large debits to accounts receivable and small periodic credits

The letter of audit inquiry addressed to the client's external legal counsel will not ordinarily be

Limited to references concerning only pending or threatened litigation in connection with which the legal counsel has been engaged

In a well-designed internal control system, the same employee may be permitted to

Mail signed checks and also cancel supporting documents

Which of the following procedures will best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars

Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the validity of the perpetual inventory record

When outside firms of nonaccountants specializing in the taking of physical inventories are used to count, list, price, and subsequently compute the total dollar amount of inventory on hand at the data of the physical count, the auditor will ordinarily

Make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions

An auditor should obtain written representation from mgmt about litigation, claims, and assessments. These representations may be limited to matters that are considered either individually or collectively material provided an understanding on the limits of materiality for this purpose has been reached by

Mgmt and the auditor

On Feb. 25, financial statements were released with an auditor's report expressing an unmodified opinion on the statements for the year ended Jan. 31. On March 2, the CPA learned that on Feb. 11, the entity incurred a material loss on an uncollectible trade receivable as a result of the deteriorating financial condition of the entity's principal customer that led to the customer's bankruptcy. Mgmt then refused to adjust the financial statements for this subsequent even. The CPA determined that the information is reliable and that creditors are currently relying on the financial statements. The CPA's next course of action most likely is to

Notify mgmt and those charged with governance that the auditor will seek to prevent future reliance on the auditor's report

When an audit is made in accordance with auditing standards, the auditor should always

Obtain a certain written representation form mgmt

Effective controls relevant to purchasing of raw materials should usually include all of the following except

Obtaining third-party written quality and quantity reports prior to payment for the raw materials

In assessing risk of material misstatement for purchasers, 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

Occurance

Propex Corporation uses a voucher register and does not record invoices in a subsidiary ledger. Propex will probably benefit most from the additional cost of maintaining an AP subsidiary ledger if

Partial payments to vendors are continuously made in the ordinary course of business

Which of the following internal control activities most likely justifies reducing the assessment of the risks of material misstatement for plant and equipment acquisitions

Periodic physical inspection of plant and equipment by the internal audit staff

Periodic or cycle counts of selected inventory items are made at various times during the year rather than a single inventory count at year end. Which of the following is necessary if the auditor plans to observe inventories at interim dates

Perpetual inventory records are maintained

Apex Manufacturing Corporations mass produces eight different products. The controller who is interested in strengthening internal control over the accounting for materials used in production is most likely to implement a

Perpetual inventory system

An auditor has substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time because of negative cash flows and working capital deficiencies. Under these circumstances, the auditor would be most concerned abou the

Possible effects on the entity's financial statements

After performing risk assessment procedures, Cooper,CPA, believes substantial doubt exists about the ability of Zero Corp. to continue as a going concern for a reasonable period of time. In evaluating Zero's plans for dealing with the adverse effects of future conditions and events, Cooper most likely will consider, as mitigating factor, Zero's plans to

Postpone expenditures for research and development projects

Which of the following procedures relating to the examination of AP could the auditor delegate entirely to the client's employees

Prepare a schedule of accounts payable

Which of the following statements is correct concerning internal control in an electronic data interchange system

Preventative controls generally are more important than detective controls in an EDI system

On March 15, Yr 2, Kent, CPA, expressed an unmodified opinion on a client's audited financial statements for the year end December 31, Yr 1. On May 4, Yr 2, Kent's internal inspection program disclosed that engagement personal failed to observe the client's physical inventory. Omission of this procedure impairs Kent's present ability to support the unmodified opinion. If the shareholder are currently relying on the opinion, Kent should first

Undertake to apply alternative procedures that would provide a satisfactory basis for the unmodified opinion

A CPA has received legal counsel's letter in which no significant disagreements with the client's assessments of contingent liabilities were noted. The resignation of the client's legal counsel shortly after receipt of the letter should alert the auditor that

Undisclosed unasserted claims may have arisen

Unrecorded liabilities are most likely to be found during the review of which of the following documents

Unpaid bills

Wilson, CPA, obtained sufficient appropriate audit evidence on which to base the opinion on Abco's Dec. 31, Yr 1, financial statements on March 6, Yr 2, the date of the auditor's report. A subsequently discovered fact requiring revision of the Yr 1 financial statements occurred on April 10, Yr 2, and came to Wilson's attention on April 24, Yr 2. If the fact became known prior to the report release date, and the revision is made, Wilson's report ordinarily should be dated

Using dual dating

An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the relevant assertions regarding inventory, including presentation and disclosure and

Valuation and allocation

When using confirmations to provide evidence about the completeness assertion for AP, the appropriate population most likely is

Vendors with whom the entity has previously done business

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

Vendors' Invoices

In the accounting system of Apogee Company, the quantities counted by the receiving department and entered at a terminal are transmitted to the computer, which immediately transmits the amounts back to the terminal for display on the terminal screen. This display enables the operator to

Verify that the amount was entered accurately

Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence and valuation assertions about recorded AP

Vouching selected entries in the AP subsidiary ledger to purchase orders and receiving reports

Under which of the following circumstances may audited financial statements contain a note that is labeled "unaudited" disclosing an event occurring after the balance sheet date

When the even occurs after the date of the auditor's original report