Auditing Chapter 16

A manufacturer's employees are paid once a month, on the 3rd of the following month. What audit issue pertaining to labor costs exists at year end? A)Rights B)Existence C)Completeness D)Presentation

C)Completeness

Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n): A) Extrapolation difference. B) Known misstatement. C) Likely misstatement. D) Projected misstatement.

B) Known misstatement.

The aggregated misstatement in the financial statements is made up of. Known, Projected, Other (1) Yes, Yes, Yes (2) Yes, Yes, No (3) No, Yes, No (4) No, Yes, Yes

(1)

When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments? (1)Capitalization. (2)Financing. (3)Investing. (4)Operations.

(1)Capitalization.

Subsequent to the issuance 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. After determining that the information is reliable, the auditor should next: (1)Notify the board of directors that the auditor's report must no longer be associated with the financial statements. (2)Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. (3)Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. (4)Issue revised pro forma financial statements taking into consideration the newly discovered information.

(2)Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The known misstatement in this situation is: A) $0 B) $30,000 C) $40,000 D) $50,000

A) $0

Which of the following audit procedures is aimed at determining whether every name on the company payroll is an employee actually on the job? A) A surprise observation of a paycheck distribution. B) A test of payroll extensions. C) Analytical comparisons of budgeted to actual payroll expense. D) Comparison of payee names on canceled payroll checks with the payroll register.

A) A surprise observation of a paycheck distribution.

The audit of which of the following balance sheet accounts does not normally result in verification of an income statement account? A) Cash. B) Accounts receivable. C) Property, plant, and equipment. D) Intangible assets.

A) Cash.

Auditors must communicate internal control "significant deficiencies" to: A) The audit committee. B) The shareholders. C) The SEC. D) The Federal Trade Commission.

A) The audit committee.

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The likely misstatement in this situation is: A) $0 B) $30,000 C) $40,000 D) $50,000

B) $30,000

Which of the following is not correct concerning a type I and a type II subsequent event? A)A type I may require adjustment to financial statements while a type II will not. B)Both a type I and a type II subsequent event may require note disclosure. C)A type I is an event that occurred prior to year end, but was discovered after, while a type II is one that arose subsequent to year end. D)A type II event may require adjustment to the financial statements and a type I may require note disclosure.

D)A type II event may require adjustment to the financial statements and a type I may require note disclosure.

To have strong internal control over payroll, which of the following functions does not need to be separated from the others? A)Personnel B)Timekeeping C)Payroll preparation D)Personnel verification

D)Personnel verification

Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job? (1)Examine human resources records for accuracy and completeness. (2)Examine employees' names listed on payroll tax returns for agreement with payroll accounting records. (3)Make a surprise observation of the company's regular distribution of paychecks on a test basis. (4)Visit the working areas and verify that employees exist by examining their badge or identification numbers.

(3)Make a surprise observation of the company's regular distribution of paychecks on a test basis.

Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements? (1)A business combination. (2)Early retirement of bonds payable. (3)Settlement of litigation. (4)Plant closure due to a strike.

(3)Settlement of litigation.

As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should: (1)Express an opinion that is qualified due to the inability of the client company to continue as a going concern. (2)Evaluate management's performance in causing this decline. (3)Require note disclosure. (4)Consider the possibility of a misstatement in the financial statements.

(4)Consider the possibility of a misstatement in the financial statements.

Which of the following procedures is most likely to be included in the final review stage of an audit? (1)Obtain an understanding of internal control. (2)Confirmation of receivables. (3)Observation of inventory. (4)Perform analytical procedures.

(4)Perform analytical procedures.

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n): (1)Analytical process. (2)Loss contingency. (3)Probable loss. (4)Unasserted claim.

(2)Loss contingency.

Which of the following is most likely to be considered a Type 1 subsequent event? (1)A business combination completed after year-end, but for which negotiations began prior to year-end. (2)A strike subsequent to year-end due to employee complaints about working conditions which originated two years ago. (3)Customer checks deposited prior to year-end, but determined to be uncollectible after year-end. (4)Introduction of a new line of products after year-end for which major research had been completed prior to year-end.

(3)Customer checks deposited prior to year-end, but determined to be uncollectible after year-end.

Management estimates the company's allowance for doubtful accounts as $100,000, and the auditors develop an estimate that suggests that the amount should be between $115,000 and $125,000. The likely misstatement in this situation is: A)$0. B)$15,000. C)$20,000. D)$25,000.

B)$15,000.

A company oil tanker recently spilled a large amount of oil in a pristine fishing area. No lawsuits have yet been filed. What is the audit issue? A)Account payable B)Unasserted claim C)Valuation of oil & gas holdings D)General risk contingency

B)Unasserted claim

Auditors should perform audit procedures relating to subsequent events? A) Through year-end. B) Through issuance of the audit report. C) Through the date of the audit report. D) For a reasonable period after year-end.

C) Through the date of the audit report.

In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable? A)Sales and Cost of Goods Sold B)Interest and Bad Debt Expense C)Sales and Bad Debt Expense D)Interest and Cost of Goods Sold

C)Sales and Bad Debt Expense

Which of the following is not a procedure to discover unasserted claims or contingent liabilities? A)Review of Board of Director minutes B)Sending a letter of inquiry to a client's attorney C)Substantive testing of company prepaid assets D)Searching newspapers and other periodicals for stories on the client and its industry

C)Substantive testing of company prepaid assets

Auditors should perform audit procedures relating to subsequent events: A)Through year end. B)Through issuance of the audit report. C)Through the date of the audit report. D)For a reasonable period after year end.

C)Through the date of the audit report.

A client's previous two years of financial statements understated estimated warranty payable by $15,000 and $25,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $30,000. In this year's audit $50,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is: A)$0. B)$30,000. C)$55,000. D)$70,000.

D)$70,000.

Which of the following is least likely to be considered a substantive procedure relating to payroll? (1)Investigate fluctuations in salaries, wages, and commissions. (2)Test computations of compensation under profit sharing for bonus plans. (3)Test commission earnings. (4)Test whether employee time reports are approved by supervisors.

(4)Test whether employee time reports are approved by supervisors.

The search for unrecorded liabilities for a public company includes procedures usually performed through the: (1)Day the audit report is issued. (2)End of the client's year. (3)Date of the auditors' report. (4)Date the report is filed with the SEC.

(3)Date of the auditors' report.

An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated: (1)December 31, 20X8. (2)January 17, 20X9. (3)February 10, 20X9. (4)February 16, 20X9.

(3)February 10, 20X9.

A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in: A) Confirmation of related lawsuits with the claimants. B) Qualification of the audit report. C) An assessment that loss of the litigation is probable. D) An adverse opinion.

B) Qualification of the audit report.

An example of an internal control weakness is to assign the payroll department the responsibility for: A) Preparing the payroll expense distribution. B) Preparing the payroll checks. C) Authorizing increases in pay. D) Preparing journal entries for payroll expense.

C) Authorizing increases in pay.

In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate: A) Likely misstatements in the financial statements. B) Known misstatements in the financial statements. C) Known, projected, and other estimated misstatements in the financial statements. D) Known, projected, and potential misstatements in the financial statements.

C) Known, projected, and other estimated misstatements in the financial statements.

Analytical procedures are required as a part of the: A) Detailed tests of balances. B) Internal control assessment. C) Procedures performed near the end of the audit. D) Substantive testing.

C) Procedures performed near the end of the audit.

In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing accounts receivable? A) Sales and Cost of Goods Sold. B) Interest and Bad Debt Expense. C) Sales and Bad Debt Expense. D) Interest and Cost of Goods Sold.

C) Sales and Bad Debt Expense.

What audit procedure is not ordinarily used to examine selling, general and administrative expenses? A)Analytical procedures B)Use of budgets to identify unexpected differences C)Confirmations to advertising agencies confirming payments D)Detailed tests of balances

C)Confirmations to advertising agencies confirming payments

In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate: A)Likely misstatements in the financial statements. B)Known misstatements in the financial statements. C)Known, projected and other estimated misstatements in the financial statements. D)Known, projected and potential misstatements in the financial statements.

C)Known, projected and other estimated misstatements in the financial statements.

A common audit procedure in the audit of payroll transactions involves vouching selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit objective of determining that: A)Only bona fide employees worked and their pay was properly computed. B)Jobs on which employees worked were charged with the appropriate labor cost. C)Controls relating to disbursements are operating properly. D)Employees worked the number of hours for which their pay was computed.

D)Employees worked the number of hours for which their pay was computed.

What is ordinarily the primary concern when auditing the income statement? A)Overstatement of Revenues, Expenses and Net Income B)Overstatement of Revenues and Expenses, and understatement of Net Income C)Overstatement of Net Income and understatement of Revenues and Expenses D)Overstatement of Revenues and Net Income, and understatement of Expenses

D)Overstatement of Revenues and Net Income, and understatement of Expenses

The auditors' best course of action with respect to "other financial information" included in a client prepared annual report containing the auditors' report is to: A)Indicate in the auditors' report that the "other financial information" is unaudited. B)Consider whether the "other financial information" is accurate by performing a review. C)Obtain written representations from management as to the material accuracy of the "other financial information." D)Read and consider the manner of presentation of the "other financial information."

D)Read and consider the manner of presentation of the "other financial information."