Auditing & Systems Exam 2 MC

Selected data pertaining to Lore Co. for the calendar Year 4 is as follows: Net cash sales - $3,000 Cost of goods sold - 18,000 Inventory at beginning of year - 6,000 Purchases - 24,000 Accounts receivable at beginning of year - 20,000 Accounts receivable at end of year - 22,000 The accounts receivable turnover for Year 4 was 5.0 times. What were Lore's Year 4 sales (net)? a. $105,000 b. $107,000 c. $110,000 d. $210,000

$105,000

At December 31, Year 2, Curry Co. had the following balances in selected asset accounts: Year 2 : Increase over Year 1 Cash - $ 300 : $100 Accounts receivable, net - 1,200 : 400 Inventory - 500 : 200 Prepaid expenses - 100 : 40 Other assets - 400 : 150 Total assets - $2,500 : $890 Curry also had current liabilities of $1,000 at December 31, Year 2, and sales (net) of $7,200 for the year then ended. What is Curry's quick ratio at December 31, Year 2? a. 1.5 b. 1.6 c. 2.0 d. 2.1

1.5

The following data pertain to Cowl Inc., for the year ended December 31 , Year 4: Net sales - $600,000 Net income - 150,000 Total assets , January 1, Year 4 - 2,000,000 Total assets , December 31, Year 4 - 3,000,000 What was Cowl's return on assets for Year 4? a. 5% b. 6% c. 20% d. 24%

6%

Which of the following statements concerning audit evidence is correct? a. Reliable evidence supporting management's assertions should be conclusive rather than merely persuasive b. An effective internal control structure contributes little to the reliability of the evidence created within the entity c. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained d. A client's accounting data cannot be considered sufficient audit evidence to support the financial statements

A client's accounting data cannot be considered sufficient audit evidence to support the financial statements

Which of the following situations most likely represents the highest risk of a material misstatement arising from misappropriations of assets? a. A large number of bearer bonds on hand b. A large number of inventory items with low sales prices c. A large number of transactions processed in a short period of time d. A large number of fixed assets with easily identifiable serial numbers

A large number of bearer bonds on hand

If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the: a. Cash receipts journal to the sales journal b. Sales journal to the cash receipts journal c. Source documents to the accounting records d. Accounting records to the source documents

Accounting records to the source documents

In testing the existence assertion for an asset, an auditor ordinarily works from the: a. Financial statements to the potentially unrecorded items b. Potentially unrecorded items to the financial statements c. Accounting records to the supporting evidence d. Supporting evidence to the accounting records

Accounting records to the supporting evidence

Which of the following types of audit evidence is the most persuasive? a. Prenumbered client purchase order forms b. Client work sheets supporting cost allocations c. Bank statements obtained from the client d. Client representation letter

Bank statements obtained from the client

Which of the following statements best describes an auditor's responsibility to detect errors and fraud? a. An auditor should design an audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements b. An auditor has a responsibility to detect material errors, but has no responsibility to detect fraud that is concealed through employee collusion or management override of internal control c. An auditor has no responsibility to detect errors and fraud unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated d. An auditor has no responsibility to detect errors and fraud because an auditor is not an insurer and an audit does not constitute a guarantee

An auditor should design an audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements

What is the definition of fraud in an audit of financial statements? a. An intentional act that results in a material misstatement in financial statements that are the subject of an audit b. The unintentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure c. An intentional act that results in a material weakness in financial statements that are the subject of an audit d. Management's inability to design and implement programs and controls to prevent, deter , and detect material misstatements

An intentional act that results in a material misstatement in financial statements that are the subject of an audit

The acceptable level of detection risk is inversely related to the: a. Assurance provided by substantive tests b. Risk of misapplying auditing procedures c. Preliminary judgment about materiality levels d. Risk of failing to discover material misstatements .

Assurance provided by substantive tests

In analyzing a company's financial statements, which financial statement would a potential investor primarily use to assess the company's liquidity and financial flexibility? a. Balance sheet b. Income statement c. Statement of retained earnings d. Statement of cash flows

Balance sheet

Which of the following evidence provides the greatest assurance of reliability? a. Bank statement b. Bank reconciliation c. Cash receipts journal d. Cash disbursements journal

Bank statement

How would an auditor of a nonissuer most appropriately respond to a heightened assessed risk of material misstatement? a. By obtaining a management representation letter b. By performing analytical procedures, but not substantive procedures, at period end c. By assigning more experienced staff or those with specialized skills to high-risk areas d. By performing tests of controls at interim and period-end dates

By assigning more experienced staff or those with specialized skills to high-risk areas

Which of the following types of audit evidence generally is the most reliable? a. Inquiries made of management b. Confirmation of account information c. Analytical procedures d. Review of prior -year audit procedures

Confirmation of account information

To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into: a. Net sales b. Cost of goods sold c. Operating income d. Gross sales

Cost of goods sold

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed risk of material misstatement from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would: a. Decrease substantive testing b. Decrease detection risk c. Increase inherent risk d. Increase materiality levels

Decrease detection risk

Journal entry to record an error in adjusting entry: DR Cost of sales $45 DR PP&E $45 DR Utilities expense $12 DR Cash $10 CR Sales $45 CR Accrued expenses $12 CR Inventory $45 CR Interest expense $10

Earnings per share: Decrease Days sales in accounts receivable: Decrease Gross profit: No impact

Journal entry to record current and deferred income taxes: DR Income tax expense—current $50 DR Deferred tax asset $15 CR Income tax expense—deferred $10 CR Deferred tax liability $5 CR Income tax payable $50

Earnings per share: Decrease Days sales in accounts receivable: No impact Gross profit: No impact

Journal entry to record sales reported after year-end that should have been reported before year-end: DR Cost of sales $90 DR Accounts receivable $100 CR Sales $100 CR Inventory $90

Earnings per share: Increase Days sales in accounts receivable: Increase Gross profit: Increase

Selected data pertaining to Lore Co. for the calendar Year 4 is as follows: Net cash sales - $3,000 Cost of goods sold - 18,000 Inventory at beginning of year - 6,000 Purchases - 24,000 Accounts receivable at beginning of year - 20,000 Accounts receivable at end of year - 22,000 Lore would use which of the following to determine the days in inventory? a. 365 / Average inventory b. 365 / Ending inventory c. Ending inventory / Cost of goods sold divided by 365 d. Sales divided by 365 / Inventory turnover

Ending inventory / Cost of goods sold divided by 365

Inherent risk and control risk differ from detection risk in that they: a. Arise from the misapplication of auditing procedures b. May be assessed in either quantitative or nonquantitative terms c. Exist independently of the financial statement audit d. Can be changed at the auditor's discretion

Exist independently of the financial statement audit

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that: a. Fictitious credit sales have been recorded during the year b. Employees have stolen inventory just before the year-end c. The client recently tightened its credit-granting policies d. An employee has been lapping receivables in both years

Fictitious credit sales have been recorded during the year

Which of the following best characterizes an auditor's exercise of professional skepticism? a. Conducting all fraud-related inquiries in a nonconfrontational manner b. Obtaining adequate conclusive evidence in support of the fairness of the financial statements c. Having an attitude that includes a questioning mind d. Taking into account past relationships and experiences with management.

Having an attitude that includes a questioning mind

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? a. Inability to generate cash flows from operations while reporting substantial earnings growth b. Management's lack of interest in increasing the entity's stock trend c. Large amounts of liquid assets that are easily convertible into cash d. Inability to borrow necessary capital without granting debt covenants

Inability to generate cash flows from operations while reporting substantial earnings growth

At December 30, Year 3, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of .5:1. On December 31, Year 3, all cash was used to reduce accounts payable. How did these cash payments affect the ratios? Current Ratio : Quick Ratio a. Increased : Decreased b. Increased : No effect c. Decreased : Increased d. Decreased : No effect

Increased : Decreased

In which of the following circumstances is substantive testing of accounts receivable before the balance sheet date most appropriate? a. The client has a new sales incentive program in place b. Internal controls during the remaining period are effective c. There is a high turnover of senior management d. It is a first engagement of a new client

Internal controls during the remaining period are effective

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatement arising from fraudulent financial reporting? a. There is a lack of interest by management in maintaining an earnings trend b. Computer hardware is usually sold at a loss before being fully depreciated c. Management had frequent disputes with the auditor on accounting matters d. Monthly bank reconciliations usually include several large checks outstanding.

Management had frequent disputes with the auditor on accounting matters

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements? a. Turnover of senior accounting personnel is low b. Insiders recently purchased additional shares of the entity's stock c. Management places substantial emphasis on meeting earnings projections d. The rate of change in the entity's industry is slow

Management places substantial emphasis on meeting earnings projections

The blank form of accounts receivable confirmations may be less efficient than the positive form because: a. Shipping documents need to be inspected b. Recipients may sign the forms without proper investigation c. More nonresponses to the requests are likely to occur d. Subsequent cash receipts need to be verified

More nonresponses to the requests are likely to occur

Which of the following pairs of accounts would be analyzed together in the audit documentation? a. Notes receivable and interest income b. Accrued interest receivable and accrued interest payable c. Notes payable and notes receivable d. Interest income and interest expense

Notes receivable and interest income

In determining whether transactions have been recorded, the direction of the audit testing should be from the: a. General ledger balances b. Adjusted trial balance c. Original source documents d. General journal entries

Original source documents

As the acceptable level of detection risk decreases, an auditor may: a. Reduce substantive testing by relying on the assessments of inherent risk and control risk b. Postpone the planned timing of substantive tests from interim dates to the year-end c. Eliminate the assessed level of inherent risk from consideration as a planning factor d. Lower the assessed level of control risk.

Postpone the planned timing of substantive tests from interim dates to the year-end

Review the confirmation response and select the appropriate audit response by clicking in the associated cell and selecting from the list provided: No way! Rachel Industries promised these goods in 10 days on December 2, Year 1. When we didn't receive them, I canceled the order on December 12, Year 1. General Wholesaling shipped us similar goods overnight!

Propose that Rachel Industries book an adjusting entry

Review the confirmation response and select the appropriate audit response by clicking in the associated cell and selecting from the list provided: Rachel Industries sent a duplicate shipment; we only ordered $40,000 of goods.

Propose that Rachel Industries book an adjusting entry

Review the confirmation response and select the appropriate audit response by clicking in the associated cell and selecting from the list provided: Sure we ordered $25,000 of merchandise on October 10, Year 1, but Rachel Industries was out of stock until recently. They back-ordered the goods and we finally received them on January 6, Year 2.

Propose that Rachel Industries book an adjusting entry

Review the confirmation response and select the appropriate audit response by clicking in the associated cell and selecting from the list provided: We received goods with a cost of $24,000 and a retail value of $32,000 on consignment from Rachel Industries on December 10, Year 1, but they're not sold yet!

Propose that Rachel Industries book an adjusting entry

An auditor has identified a risk of material misstatement due to fraud related to the inventory function. Which is least likely to be an appropriate response? a. Observing inventory counts on an unannounced basis b. Requesting that management more closely monitor the inventory function c. Assigning more experienced personnel to the engagement d. Requesting that inventory be counted on a date close to the end of the reporting period.

Requesting that management more closely monitor the inventory function

Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that: a. Shipments to customers were properly billed b. Entries in the accounts receivable subsidiary ledger were for sales actually shipped c. Sales billed to customers were actually shipped d. No duplicate shipments to customers were made

Sales billed to customers were actually shipped

Which of the following evidence provides the least assurance of reliability? a. Accounts receivable confirmation b. Sales invoice c. Vendor invoice d. Bank statement

Sales invoice

An auditor suspects that a client is fraudulently overstating revenue by recording fictitious sales. Which of the following audit procedures would most likely be used to identify this situation? a. Select a sample of shipping documents and trace to the related sales invoices b. Select a sample of sales invoices and trace to the related shipping documents c. Select a sample of sales invoices and trace into the sales journal d. Select a sample of entries in the sales journal and trace to the related sales invoices

Select a sample of sales invoices and trace to the related shipping documents

Which of the following procedures is performed first for unreturned positive confirmations of accounts receivable? a. Comparing current sales with budgeted sales b. Sending second requests for confirmation of accounts receivable c. Performing subsequent procedures d. Asking the client to obtain additional correspondence from the customers

Sending second requests for confirmation of accounts receivable

Tracing shipping documents to prenumbered sales invoices provides evidence that: a. No duplicate shipments or billings occurred b. Shipments to customers were properly invoiced c. All goods ordered by customers were shipped d. All prenumbered sales invoices were accounted for

Shipments to customers were properly invoiced

Which of the following documents are examples of audit evidence generated by the client? a. Customer purchase orders and bank statements b. Shipping documents and receiving reports c. Vendor invoices and packing slips d. Bills of lading and accounts receivable confirmations

Shipping documents and receiving reports

If the objective of an auditor's test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the: a. Sales invoices to the shipping documents b. Cash receipts journal to the sales journal c. Shipping documents to the sales invoices d. Sales journal to the cash receipts journal

Shipping documents to the sales invoices

As the acceptable level of detection risk decreases, the assurance directly provided from: a. Substantive tests should increase b. Substantive tests should decrease c. Tests of controls should increase d. Tests of controls should decrease

Substantive tests should increase

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements? a. Senior financial management participates in the selection of accounting principles and the determination of significant estimates b. Supporting accounting records and files that should be readily available are not produced promptly when requested c. Related party transactions take place in the ordinary course of business with an entity that is audited by another CPA firm d. Senior management has an excessive interest in upgrading the entity's information technology capabilities.

Supporting accounting records and files that should be readily available are not produced promptly when requested

Under which circumstance would an auditor be most likely to perform substantive tests before the balance sheet date? a. The account in question is not reasonably predictable in terms of its relative significance to the financial statements b. The account in question has a high level of both inherent risk and control risk c. The account in question fluctuates based on management's discretion d. The account in question has very little activity from year to year

The account in question has very little activity from year to year

In auditing accounts receivable, the negative form of confirmation request most likely would be used when: a. The total recorded amount of accounts receivable is immaterial to the financial statements taken as a whole b. Response rates in prior years to properly designed positive confirmation requests were inadequate c. Recipients are likely to return positive confirmation requests without verifying the accuracy of the information d. The combined assessed level of inherent risk and control risk relative to accounts receivable is low

The combined assessed level of inherent risk and control risk relative to accounts receivable is low

The accounts receivable turnover ratio increased significantly over a two-year period. This trend could indicate that: a. The accounts receivable aging has deteriorated b. The company has eliminated its discount policy c. The company is more aggressively collecting customer accounts d. Customer sales have substantially decreased

The company is more aggressively collecting customer accounts

Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses? a. The current year's accounts receivable with the prior year's accounts receivable b. The current year's payroll expense with the prior year's payroll expense c. The budgeted current year's sales with the prior year's sales d. The budgeted current year's warranty expense with the current year's contingent liabilities

The current year's payroll expense with the prior year's payroll expense

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements in an entity's financial statements? a. The entity's industry is experiencing declining customer demand b. Employees who handle cash receipts are not bonded c. Bank reconciliations usually include in-transit deposits d. Equipment is often sold at a loss before being fully depreciated

The entity's industry is experiencing declining customer demand

As the acceptable level of detection risk increases, an auditor may change the: a. Assessed level of control risk from low to high b. Assurance provided by tests of controls by using a larger sample size than planned c. Timing of substantive tests from year-end to an interim date d. Nature of substantive tests from a less effective to a more effective procedure

Timing of substantive tests from year-end to an interim date

Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements? a. Management places little emphasis on meeting earnings projections b. The board of directors makes all major financing decisions c. Significant deficiencies in internal control previously communicated to management are not corrected d. Transactions selected for testing are not supported by proper documentation

Transactions selected for testing are not supported by proper documentation

Which of the following most likely would be detected by an auditor's review of a client's sales cut-off? a. Shipments lacking sales invoices and shipping documents b. Excessive write-offs of accounts receivable c. Unrecorded sales at year-end d. Lapping of year-end accounts receivable

Unrecorded sales at year-end

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about: a. Valuation and allocation b. Understandability and classification c. Existence d. Rights and obligations

Valuation and allocation

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of: a. Existence b. Valuation and allocation c. Completeness d. Rights and obligations

Valuation and allocation

Review the confirmation response and select the appropriate audit response by clicking in the associated cell and selecting from the list provided: Our records show that a check for $75,000 was mailed on December 31, Year 1.

Verify the cash receipt and deposit

Review the confirmation response and select the appropriate audit response by clicking in the associated cell and selecting from the list provided: Yes, we ordered $15,000 worth of merchandise from Rachel Industries in November. However, we mailed a check for this merchandise in the amount of $15,000 on December 18, Year 1.

Verify the cash receipt and deposit