BISK CH. 5

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all a. Cash disbursements b. Approved vouchers c. Receiving reports d. Vendors' invoices

a. Cash disbursements

An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of a. Completeness of disclosures b. Valuation of inventory c. Existence of inventory d. Completeness of inventory

a. Completeness of disclosures

In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the a. Completeness of recorded investment income b. Classification between current and noncurrent portfolios c. Valuation of marketable equity securities d. Existence of unrealized gains or losses in the portfolio

a. Completeness of recorded investment income

An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the a. Dates checks are deposited per bank statements with the dates remittance credits are recorded. b. Daily cash summaries with the sums of the cash receipts journal entries. c. Individual bank deposit slips with the details of the monthly bank statements. d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded.

a. Dates checks are deposited per bank statements with the dates remittance credits are recorded.

When a client engages in transactions involving derivatives, the auditor should a. Develop an understanding of the economic substance of each derivative b. Confirm with the client's broker whether the derivatives are for trading purposes c. Notify the audit committee about the risks involved in derivative transactions d. Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative

a. Develop an understanding of the economic substance of each derivative

An auditor usually tests the reasonableness of dividend income from investments in publicly-held companies by computing the amounts that should have been received by referring to a. Dividend record books produced by investment advisory services b. Stock indentures published by corporate transfer agents c. Stock ledgers maintained by independent registrars d. Annual audited financial statements issued by the investee companies

a. Dividend record books produced by investment advisory services

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.

a. Fictitious credit sales have been recorded during the year.

Which of the following strategies most likely could improve the response rate of the confirmation of accounts receivable? a. Including a list of items or invoices that constitute the account balance b. Restricting the selection of accounts to be confirmed to those customers with relatively large balances c. Requesting customers to respond to the confirmation requests directly to the auditor by fax or e-mail d. Notifying the recipients that second requests will be mailed if they fail to respond in a timely manner

a. Including a list of items or invoices that constitute the account balance

An auditor usually obtains evidence of stockholders' equity transactions by reviewing the entity's a. Minutes of board of directors meetings b. Transfer agent's records c. Canceled stock certificates d. Treasury stock certificate book

a. Minutes of board of directors meetings

The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items a. Represented by tags were included on the listing b. Included on the listing were properly counted c. Represented by tags were reduced to the lower of cost or market d. Included in the listing were properly valued

a. Represented by tags were included on the listing

To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would a. Request the senders to mail the original forms to the auditor b. Examine subsequent cash receipts for the accounts in question c. Consider the e-mail responses to the confirmations to be exceptions d. Mail second requests to the e-mail respondents

a. Request the senders to mail the original forms to the auditor

Hemp, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Hemp would most likely a. Send positive confirmation requests b. Send negative confirmation requests c. Inspect the internal records such as copies of the tax invoices that were mailed to the residents d. Examine evidence of subsequent cash receipts

a. Send positive confirmation requests

In evaluating the reasonableness of an entity's accounting estimates, an auditor normally would be concerned about assumptions that are a. Susceptible to bias b. Consistent with prior periods c. Insensitive to variations d. Similar to industry guidelines

a. Susceptible to bias

In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified? a. Test the computation of standard overhead rates b. Tour the manufacturing plant or production facility c. Compare inventory balances to anticipated sales volume d. Review inventory experience and trends

a. Test the computation of standard overhead rates

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation? a. Testing the entity's computation of standard overhead rates b. Obtaining confirmation of inventories pledged under loan agreements c. Reviewing shipping and receiving cutoff procedures for inventories d. Tracing test counts to the entity's inventory listing

a. Testing the entity's computation of standard overhead rates

Which of the following statements is correct regarding accounting estimates? a. The auditor's objective is to evaluate whether accounting estimates are reasonable in the circumstances. b. Accounting estimates should be used when data concerning past events can be accumulated in a timely, cost-effective manner. c. An important accounting estimate is management's listing of accounts receivable greater than 90 days past due. d. Accounting estimates should not be used when the outcome of future events related to the estimated item is unknown.

a. The auditor's objective is to evaluate whether accounting estimates are reasonable in the circumstances.

As part of the process of observing a client's physical inventories, an auditor should be alert to a. The inclusion of any obsolete or damaged goods b. Any change in the method of pricing from prior years c. The existence of outstanding purchase commitments d. The verification of inventory values assigned to goods in process

a. The inclusion of any obsolete or damaged goods

Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations? a. The recipients are likely to sign the confirmations without devoting proper attention to them. b. Subsequent cash receipts are unusually difficult to verify. c. Analytical procedures indicate that few exceptions are expected. d. The combined assessed level of inherent risk and control risk is low.

a. The recipients are likely to sign the confirmations without devoting proper attention to them

Which of the following statements is correct concerning the use of negative confirmation requests? a. Unreturned negative confirmation requests rarely provide significant explicit evidence. b. Negative confirmation requests are effective when detection risk is low. c. Unreturned negative confirmation requests indicate that alternative procedures are necessary. d. Negative confirmation requests are effective when understatements of account balances are suspected.

a. Unreturned negative confirmation requests rarely provide significant explicit evidence.

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. Valuation and allocation b. Rights and obligations c. Existence d. Classification and understandability

a. Valuation and allocation

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. Classification and understand ability c. Existence d. Rights and obligations

a. Valuation and allocation

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of a. Valuation and allocation b. Existence c. Completeness d. Rights and obligations

a. Valuation and allocation

On receiving a client's bank cutoff statement, an auditor most likely would trace a. Prior year checks listed in the cutoff statement to the year-end outstanding checks b. Deposits in transit listed in the cutoff statement to the year-end bank reconciliation c. Checks dated after year-end listed in the cutoff statement to the year-end outstanding checks d. Deposits recorded in the cash receipts journal after year-end to the cutoff statement

a. prior year checks listed in the cutoff statement to the year-end outstanding checks

An auditor compared the current year gross margin with the prior year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed? a. Test of transactions b. Analytical procedures c. Test of controls d. Test of details

b. Analytical procedures

An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting a. Opening and closing inventory balances b. Cash receipts and accounts receivable c. Shipping and receiving activities d. Cutoffs of sales and purchases

b. Cash receipts and accounts receivable

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. This procedure most likely obtained evidence concerning management's assertion of a. Rights and obligations b. Completeness c. Existence d. Valuation

b. Completeness

An auditor selects a sample from the file of shipping documents to determine whether invoices were pre- pared. This test is performed to satisfy the audit objective of a. Accuracy b. Completeness c. Existence d. Control

b. Completeness

In establishing the existence and ownership of long-term investments in the form of publicly-traded stock, an auditor most likely would inspect the securities or a. Correspond with the investee company to verify the number of shares owned b. Confirm the number of shares owned that are held by an independent custodian c. Apply analytical procedures to the dividend income and investments accounts d. Inspect the cash receipts journal for amounts that could represent the sale of securities

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

A portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods? a. Observation b. Confirmation c. Calculation d. Inspection

b. Confirmation

An auditor's program to examine long-term debt most likely would include steps that require a. Comparing the carrying amount of the debt to its year-end market value b. Correlating interest expense recorded for the period with outstanding debt c. Verifying the existence of the holders of the debt by direct confirmation d. Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt

b. Correlating interest expense recorded for the period with outstanding debt

The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to a. Detect kiting activities that may otherwise not be discovered b. Corroborate information regarding deposit and loan balances c. Provide the data necessary to prepare a proof of cash d. Request information about contingent liabilities and secured transactions

b. Corroborate information regarding deposit and loan balances

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

b. Cost of goods sold

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that a. Payments to employees are computed at authorized rates. b. Employees work the number of hours for which they are paid. c. Segregation of duties exists between the preparation and distribution of the payroll. d. Internal controls relating to unclaimed payroll checks are operating effectively.

b. Employees work the number of hours for which they are paid.

To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would a. Inspect the stock certificates evidencing the investment b. Examine the audited financial statements of the investee company c. Review the broker's advice or canceled check for the investment's acquisition d. Obtain market quotations from financial newspapers or periodicals

b. Examine the audited financial statements of the investee company

An auditor's inquiries of management disclosed that the entity recently invested in a series of energy derivatives to hedge against the risks associated with fluctuating oil prices. Under these circumstances, the auditor should a. Perform analytical procedures to determine if the derivatives are properly valued b. Examine the contracts for possible risk exposure and the need to recognize losses c. Confirm the marketability of the derivatives with a commodity specialist d. Document the derivatives in the auditor's communication with the audit committee

b. Examine the contracts for possible risk exposure and the need to recognize losses

Which of the following tests of details most likely would help an auditor determine whether accounts pay- able have been misstated? a. Examining reported purchase returns that appear too low b. Examining vendor statements for amounts not reported as purchases c. Searching for customer-returned goods that were not reported as returns d. Reviewing bank transfers recorded as cash received from customers

b. Examining vendor statements for amounts not reported as purchases

Which of the following strategies most likely could improve the response rate of the confirmations of accounts receivable? a. Restrict the selection of accounts to be confirmed to those customers with large balances b. Include a list of items or invoices that constitute the customers' account balances c. Explain to customers that discrepancies will be investigated by an independent third party d. Ask customers to respond to the confirmation requests directly to the auditor by fax

b. Include a list of items or invoices that constitute the customers' account balances

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? a. Inspect the open purchase order file for significant commitments that should be considered for disclosure b. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens c. Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales d. Trace test counts noted during the entity's physical count to the entity's summarization of quantities

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

Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions? a. Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed b. Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal c. Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list d. Inquire about the entity's credit granting policies and the consistent application of credit checks

b. Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts? a. The estimated remaining useful lives of plant assets were revised upward. b. Plant assets were retired during the year. c. The prior year's depreciation expense was erroneously understated. d. Overhead allocations were revised at year-end.

b. Plant assets were retired during the year.

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. Payment vouchers b. Receiving reports c. Purchase requisitions d. Vendor's invoices

b. Receiving reports

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably a. Increase the extent of tests of controls of the inventory cycle b. Request the client to schedule the physical inventory count at the end of the year c. Insist that the client perform physical counts of inventory items several times during the year d. Apply gross profit tests to ascertain the reasonableness of the physical counts

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

In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of management's financial statement assertions of existence and a. Valuation and allocation b. Rights and obligations c. Completeness d. Classification and understandability

b. Rights and obligations

An independent auditor asked a client's internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure? a. The internal auditor did not sign the form. b. The form was mailed by the controller. c. The form was prepared by the internal auditor. d. The account was closed, so the balance was zero.

b. The form was mailed by the controller.

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

b. Valuation and allocation

Cooper, CPA, performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all a. Merchandise received b. Vendors' invoices c. Receiving reports d. Canceled checks

b. Vendors' invoices

In which of the following circumstances is substantive testing of accounts receivable before the balance sheet 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.

b. internal controls during the remaining period are effective

Which of the following statements would an auditor most likely add to the negative form of confirmation of accounts receivable to encourage timely consideration by the recipients? a. "This is not a request for payment; remittances should not be sent to our auditors in the enclosed envelope." b. "Report any differences on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your records." c. "If you do not report a differences within 15days, it will be assumed that this statement is correct." d. "The following invoices have been selected for confirmation and represent amounts that are overdue."

c. "If you do not report a differences within 15days, it will be assumed that this statement is correct."

When auditing inventories, an auditor would least likely verify that a. The financial statement presentation of inventories is appropriate. b. Damaged goods and obsolete items have been properly accounted for. c. All inventory owned by the client is on hand at the time of the count. d. The client has used proper inventory pricing.

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

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would a. Inspect the allowance account to verify whether the accounts were subsequently written off b. Increase the assessed level of detection risk for the valuation and completeness assertions c. Ask the client to contact the customers to request that the confirmations be returned d. Increase the assessed level of inherent risk for the revenue cycle

c. Ask the client to contact the customers to request that the confirmations be returned

n auditor observed that a client mails monthly statements to customers. Subsequently, the auditor reviewed evidence of follow-up on the errors reported by the customers. This test of controls most likely was performed to support management's financial statement assertion(s) of Classification and Rights and understandability obligations a. Yes Yes b. Yes No c. No Yes d. No No

c. No Yes

When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations a. Copies of the client's shipping documents that support the account balances b. Lists of the customers' recent payments that the client has already recorded c. Client-prepared statements of account that show the details of the account balances d. Copies of the customers' purchase orders that support the account balances

c. Client-prepared statements of account that show the details of the account balances

n auditing long-term bonds payable, an auditor most likely would a. Perform analytical procedures on the bond premium and discount accounts b. Examine documentation of assets purchased with bond proceeds for liens c. Compare interest expense with the bonds payable amount for reasonableness d. Confirm the existence of individual bondholders at year-end

c. Compare interest expense with the bonds payable amount for reasonableness

In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of a. Existence b. Classification and understandability c. Completeness d. Valuation and allocation

c. Completeness

In auditing a client's retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate management's financial statement assertion of a. Valuation and allocation b. Occurrence c. Completeness of disclosures d. Rights and obligations

c. Completeness of disclosures

In establishing the existence and ownership of a long-term investment in the form of publicly-traded stock, an auditor should inspect the securities or a. Correspond with the investee company to verify the number of shares owned b. Inspect the audited financial statements of the investee company c. Confirm the number of shares owned that are held by an independent custodian d. Determine that the investment is carried at the fair market value

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

The confirmation of customers' accounts receivable rarely provides reliable evidence about the complete- ness assertion because a. Many customers merely sign and return the confirmation without verifying its details. b. Recipients usually respond only if they disagree with the information on the request. c. Customers may not be inclined to report understatement errors in their accounts. d. Auditors typically select many accounts with low recorded balances to be confirmed.

c. Customers may not be inclined to report understatement errors in their accounts.

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to a. Identify unusually large purchases that should be investigated further b. Verify that cash disbursements were for goods actually received c. Determine that purchases were properly recorded d. Test whether payments were for goods actually ordered

c. Determine that purchases were properly recorded

In evaluating the reasonableness of an entity's accounting estimates, an auditor most likely concentrates on key factors and assumptions that are a. Stable and not sensitive to variation b. Objective and not susceptible to bias c. Deviations from historical patterns d. Similar to industry guidelines

c. Deviations from historical patterns

An auditor's principal objective in analyzing repairs and maintenance expense accounts is to a. Determine that all obsolete property, plant, and equipment assets were written off before the year-end b. Verify that all recorded property, plant, and equipment assets actually exist c. Discover expenditures that were expensed but should have been capitalized d. Identify property, plant, and equipment assets that cannot be repaired and should be written off

c. Discover expenditures that were expensed but should have been capitalized

An auditor is testing the reasonableness of dividend income from investments in publicly-held companies. The auditor most likely would compute the amount that should have been received and recorded by the client by a. Reading the details of the board of directors' meetings b. Confirming the details with the investee companies' registrars c. Electronically accessing the details of dividend records on the Internet d. Examining the details of the client's most recent cutoff bank statement

c. Electronically accessing the details of dividend records on the Internet

Which of the following procedures would an auditor most likely perform to obtain assurance that slow- moving and obsolete items included in inventories are properly identified? a. Testing shipping and receiving cutoff procedures b. Confirming inventories at locations outside the entity's premises c. Examining an analysis of inventory turnover d. Tracing inventory observation test counts to perpetual listings

c. Examining an analysis of inventory turnover

To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace a. Inventory tags noted during the auditor's observation to items listed in the inventory listing schedule b. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices c. Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets d. Items listed in receiving reports and vendors' invoices to the inventory listing schedule

c. Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets

Which of the following characteristics most likely would be indicative of check kiting? a. High turnover of employees who have access to cash b. Many large checks that are recorded on Mondays c. Low average balance compared to high level of deposits d. Frequent ATM checking account withdrawals

c. Low average balance compared to high level of deposits

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.

c. More nonresponses to the requests are likely to occur.

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

c. original source documents

When a company's stock record books are maintained by an outside registrar or transfer agent, the audi- tor should obtain confirmation from the registrar or transfer agent concerning the a. Amount of dividends paid to related parties b. Expected proceeds from stock subscriptions receivable c. Number of shares issued and outstanding d. Proper authorization of stock rights and warrants

c. Number of shares issued and outstanding

Which of the following procedures would an auditor ordinarily perform first in evaluating the reasonable- ness of management's accounting estimates? a. Review transactions occurring prior to the completion of fieldwork that indicate variations from expectations b. Compare independent expectations with recorded estimates to assess management's process c. Obtain an understanding of how management developed its estimates d. Analyze historical data used in developing assumptions to determine whether the process is consistent

c. Obtain an understanding of how management developed its estimates

An auditor most likely would extend substantive tests of payroll when a. Payroll is extensively audited by the state government. b. Payroll expense is substantially higher than in the prior year. c. Overpayments are discovered in performing tests of details. d. Employees complain to management about too much overtime.

c. Overpayments are discovered in performing tests of details.

An auditor usually determines whether dividend income from publicly-held investments is reasonable by computing the amounts that should have been received by referring to a. Stock ledgers maintained by independent registrars b. Dividend records on file with the SEC c. Records produced by investment services d. Minutes of the investee's board of directors

c. Records produced by investment services

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year-end? a. Send confirmations for all new customer balances incurred from the interim date to year-end b. Resend confirmations for any significant customer balances remaining at year-end c. Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end d. Review cash collections subsequent to the interim date and the year-end

c. Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end

Which of the following internal control procedures most likely would deter lapping of collections from customers? a. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries b. Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval c. Segregation of duties between receiving cash and posting the accounts receivable ledger d. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries

c. Segregation of duties between receiving cash and posting the accounts receivable ledger

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

c. Shipping documents to the sales invoices

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs a. Analytical procedures for property and equipment balances at the end of the year b. Analytical procedures for current year property and equipment transactions c. Tests of controls and limited tests of current year property and equipment transactions d. Tests of controls and extensive tests of property and equipment balances at the end of the year

c. Tests of controls and limited tests of current year property and equipment transactions

Which of the following most likely would be detected by an auditor's review of a client's sales cutoff? 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

c. Unrecorded sales at year-end

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? a. Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file b. Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance c. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices d. Scan the cash disbursements entries recorded just before year-end for indications of unusual trans- actions

c. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices

Which of the following is a substantive test that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable? a. Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for b. Receiving the client's mail, unopened, for a reasonable period of time after the year-end to search for unrecorded vendor's invoices c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports d. Confirming accounts payable balances with known suppliers who have zero balances

c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports

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

c. accounting records to the supporting documents

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events? a. Determine that changes in employee pay rates after year-end were properly authorized b. Recompute depreciation charges for plant assets sold after year-end c. Investigate changes in long-term debt occurring after year-end d. Inquire about payroll checks that were recorded before year-end but cashed after year-end

c. investigate changes in long-term debt occurring after year-end

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.

c. sales billed to customers were actually shipped

Which of the following procedures would an auditor LEAST likely perform before the balance sheet date? Confirmation of accounts payable

confirmation of accounts payable

In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely would be included with the client's confirmation letter? a. An auditor-prepared letter explaining that a nonresponse may cause an inference that the account balance is correct b. A client-prepared letter reminding the customer that a nonresponse will cause a second request to be sent c. An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to the auditor d. A client-prepared statement of account showing the details of the customer's account balance

d. A client-prepared statement of account showing the details of the customer's account balance

During the confirmation of accounts receivable, an auditor receives a confirmation via the client's fax machine. Which of the following actions should an auditor take? a. Not accept the confirmation and select another customer's balance to confirm b. Not accept the confirmation and treat it as an exception c. Accept the confirmation and file it in the working papers d. Accept the confirmation but verify the source and content through a telephone call to the respondent

d. Accept the confirmation but verify the source and content through a telephone call to the respondent

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of a. Occurrence b. Rights and obligations c. Valuation and allocation d. Completeness

d. Completeness

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all a. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period. b. Expenditures for property and equipment have been recorded in the proper period. c. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense. d. Expenditures for property and equipment have not been charged to expense.

d. Expenditures for property and equipment have not been charged to expense.

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to a. Verify that payroll taxes are deducted from employees' gross pay b. Determine whether internal control activities are operating effectively c. Uncover fictitious employees who are receiving payroll checks d. Identify potential liabilities for unpaid payroll taxes

d. Identify potential liabilities for unpaid payroll taxes

To obtain assurance that all inventory items in a client's inventory listing are valid, an auditor most likely would trace a. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices b. Items listed in receiving reports and vendors' invoices to the inventory listing c. Inventory tags noted during the auditor's observation to items in the inventory listing d. Items in the inventory listing to inventory tags and the auditor's recorded count sheets

d. Items in the inventory listing to inventory tags and the auditor's recorded count sheets

An auditor decides to use the blank form of accounts receivable confirmation rather than the positive form. The auditor should be aware that the blank form may be less efficient because a. Subsequent cash receipts need to be verified. b. Statistical sampling may not be used. c. A higher assessed level of detection risk is required. d. More nonresponses are likely to occur.

d. More nonresponses are likely to occur.

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory? a. Scanning perpetual inventory, production, and purchasing records b. Examining paid vendor invoices c. Tracing inventory items from the tag listing back to the physical inventory quantities d. Performing cutoff procedures for shipping and receiving

d. Performing cutoff procedures for shipping and receiving

An auditor plans to apply substantive test to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice a. Eliminates the use of certain statistical sampling methods that would otherwise be available b. Presumes that the auditor will reperform the tests as of the balance sheet date c. Should be especially considered when there are rapidly changing economic conditions d. Potentially increases the risk that errors that exist at the balance sheet date will not be detected

d. Potentially increases the risk that errors that exist at the balance sheet date will not be detected

In evaluating an entity's accounting estimates, one of the auditor's objectives is to determine whether the estimates are a. Prepared in a satisfactory control environment b. Consistent with industry guidelines c. Based on verifiable objective assumptions d. Reasonable in the circumstances

d. Reasonable in the circumstances

When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and a. Observing the distribution of paychecks b. Footing and cross-footing the payroll register c. Inspecting payroll tax returns d. Recalculating payroll accruals

d. Recalculating payroll accruals

An analysis of which of the following accounts would best aid in verifying that all fixed assets have been capitalized? a. Cash b. Depreciation expense c. Property tax expense d. Repairs and maintenance

d. Repairs and maintenance

Which of the following payroll control activities would most effectively ensure that payment is made only for work performed? a. Require all employees to record arrival and departure by using the time clock b. Have a payroll clerk recalculate all time cards c. Require all employees to sign their time cards d. Require employees to have their direct supervisors approve their time cards

d. Require employees to have their direct supervisors approve their time cards

Which of the following procedures would best detect a liability omission by management? a. Inquiry of senior support staff and recently departed employees b. Review and check mathematical accuracy of financial statements c. Review articles of incorporation and corporate by laws d. Review purchase contracts and other legal documents

d. Review purchase contracts and other legal documents

Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements? a. Inquire about the existence of related-party transactions b. Determine whether accounting estimates deviate from historical patterns c. Confirm inventories at locations outside the entity d. Review the lawyer's letter for information about litigation

d. Review the lawyer's letter for information about litigation

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record a. Purchase discounts b. Purchase returns c. Sales d. Sales returns

d. Sales returns

A weakness of internal control over recording retirements of equipment may cause an auditor to a. Inspect certain items of equipment in the plant and trace those items to the accounting records b. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year c. Trace additions to the "other assets" account to search for equipment that is still on hand but no longer being used d. Select certain items of equipment from the accounting records and locate them in the plant

d. Select certain items of equipment from the accounting records and locate them in the plant

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.

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

In performing tests concerning the granting of stock options, an auditor should a. Confirm the transaction with the Secretary of State in the state of incorporation b. Verify the existence of option holders in the entity's payroll records or stock ledgers c. Determine that sufficient treasury stock is available to cover any new stock issued d. Trace the authorization for the transaction to a vote of the board of directors

d. Trace the authorization for the transaction to a vote of the board of directors

The primary responsibility of a bank acting as registrar of capital stock is to a. Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation b. Account for stock certificates by comparing the total shares outstanding to the total in the shareholders subsidiary ledger c. Act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury stock d. Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation

d. Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation

Under which of the following conditions may an auditor's observation procedure for inventory be per- formed during or after the end of the period under audit? a. When the client maintains periodic inventory records b. When the auditor finds minimal variations in client records and test counts in prior periods c. When total inventory has not varied more than 5% in the last five years d. When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts

d. When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts

Before applying principal substantive test to an entity's accounts receivable at an interim date, an auditor should a. Consider the likelihood of assessing the risk of incorrect rejection too low b. Project sampling risk at the maximum for tests covering the remaining period c. Ascertain that accounts receivable are immaterial to the financial statements d. Assess the difficulty in controlling the incremental audit risk

d. assess the difficulty in controlling the incremental audit risk

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may a. Not believe that the bank is obligated to verify confidential information to a third party b. Sign and return the form without inspecting the accuracy of the client's bank reconciliation c. Not have access to the client's cutoff bank statement d. Be unaware of all the financial relationships that the bank has with the client

d. be unaware of all the financial relationships that the bank has with the client

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows a. Compare the amounts included in the statement of cash flows to similar amounts in the prior year's statement of cash flows b. Reconcile the cutoff bank statements to verify the accuracy of the year-end bank balances c. Vouch all bank transfers for the last week of the year and first week of the subsequent year d. Reconcile the amounts included in the statement of cash flows to the other financial statements' balances and amounts

d. reconcile the amounts included in the statement of cash flows to the other financial statements' balances and amounts

Which of the following procedures would an auditor most likely perform prior to the balance sheet date? a. Review subsequent events b. Perform search for unrecorded liabilities c. Send inquiry letter to client's legal counsel d. Review detail and test significant travel and entertainment expenses

d. review detail and test significant travel and entertainment expenses

The objective of test of details of transaction performed as substantive tests is to detect material misstatements in the financial statements

detect material misstatements in the financial statements