Exam 3
When the auditors are unable to comply with generally accepted auditing standards, they should issue an opinion that is unmodified, but include an additional emphasis-of-matter paragraph in the report.
FALSE
The use of a tagging system for inventory taking is designed to prevent double counting of goods.
TRUE
Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts.
TRUE
Audit reports should be dated as the date on which sufficient appropriate audit evidence has been collected.
TRUE
Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable.
TRUE
Confirmation of accounts receivable provides some assurance that no lapping or other manipulation affecting accounts receivable is being carried on.
TRUE
Even when internal control is weak, a significant portion of the audit work on property, plant, and equipment may be performed at an interim date.
TRUE
Evidence of continued ownership of property is obtained by vouching payments to a mortgage trustee.
TRUE
If financial statements fail to disclose a material fact, the auditors may disclose the information in an emphasis-of-matter paragraph and, depending upon materiality, issue either a qualified opinion or adverse opinion on the statements.
TRUE
In the audit of depletion the auditors must often rely on the work of specialists.
TRUE
Material purchases of assets from an affiliated company should be disclosed in the financial statements.
TRUE
Regulation S-X governs the form and content of financial statements filed with the SEC.
TRUE
The auditors' approach to the audit of property, plant, and equipment largely results from the fact that relatively few transactions occur.
TRUE
The examination of warehouse receipts is not sufficient verification of a material amount of goods stored in public warehouses.
TRUE
The lower-of-cost-or-market test by the auditors is generally designed to assure that inventories are not valued above their net realizable values,
TRUE
The receiving department should accept only goods for which there is an approved purchase order on hand.
TRUE
To test the client's cutoff of inventories, the auditors will make a record of the serial number of the final receiving and shipping documents used prior to the taking of the physical inventory.
TRUE
When evaluating the results of audit tests, materiality depends upon both the dollar amount and the nature of the item.
TRUE
When it is impossible to confirm accounts receivable, the auditors may be able to satisfy themselves as to the existence of accounts receivable by alternative procedures.
TRUE
When there is a significant question about a company's ability to remain a going concern, the report issued is usually unmodified with an emphasis-of-matter paragraph.
TRUE
When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables? A. The account balances as of year-end will generally be confirmed. B. The auditors will in general use blank rather than positive confirmation requests. C. The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year-end. D. Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports.
A. The account balances as of year-end will generally be confirmed.
What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales? A. Accounts receivable are overstated at December 31, 20X0. B. Accounts receivable are understated at December 31, 20X0. C. Operating expenses are overstated for the 12 months ended December 31, 20X0. D. Sales returns and allowance are overstated at December 31, 20X0.
A. Accounts receivable are overstated at December 31, 20X0.
19. Which of the following is least likely to be an accurate statement concerning characteristics of an audit? A. An analysis of inventory turnover addresses whether the proper method of determining inventory costs-as contrasted to market values-is being applied. B. Characteristics of the double entry bookkeeping system make it possible to test for overstated sales when tests of accounts receivable are being performed. C. The direction of tests for overstatement errors is generally directed from the recorded entry to source documents. D. Use of a perpetual rather than a periodic inventory system is likely to affect the nature of cutoff errors made at year-end.
A. An analysis of inventory turnover addresses whether the proper method of determining inventory costs-as contrasted to market values-is being applied.
11. 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 who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the: A. Collection of receivables. B. Purchase of merchandise inventory. C. Payment of accounts payable. D. Sale of long-term debt.
A. Collection of receivables.
25. An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the inventory summary sheets. Which assertion does this procedure relate to most directly? A. Completeness. B. Existence. C. Legality. D. Valuation.
A. Completeness.
13. A receiving department compares inventory items received with copies of purchase orders. The purchase orders list the name of the vendor and do not list the quantities of the material ordered. Using the purchase orders, the receiving department is most likely to detect: A. Deliveries for which no purchase order was issued. B. Unapproved sales orders. C. Partial deliveries. D. Deliveries of a greater quantity of items than those ordered.
A. Deliveries for which no purchase order was issued.
19. Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts? A. Examine cash receipts received after year-end. B. Confirm receivables. C. Examine dates of purchase orders. D. Foot the receivables lead schedule.
A. Examine cash receipts received after year-end.
40. It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations, the best alternative procedure the auditors might resort to would be: A. Examining subsequent receipts of year-end accounts receivable. B. Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a subsequent date. C. Requesting that management increase the allowance for uncollectible accounts by an amount equal to some percentage of the balance in those accounts that cannot be confirmed. D. Applying analytical procedures to accounts receivable and sales on a year-to-year basis.
A. Examining subsequent receipts of year-end accounts receivable.
For effective internal control, the billing function should not be performed by the: A. Sales department. B. Accounting department. C. Finance department. D. Information Processing department.
A. Sales department.
23. In verifying credits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the: A. Shipping documents. B. Receiving reports. C. Purchase orders. D. Vendors' invoices.
A. Shipping documents.
15. Which of the following audit procedures most likely would provide assurance that a manufacturing entity's inventory valuation is proper? A. Testing the entity's computation of standard overhead rates. B. Obtaining confirmation of inventories pledged under loan agreements. C. Reviewing a cutoff procedure for inventories. D. Tracing test counts to the entity's inventory listing.
A. Testing the entity's computation of standard overhead rates.
32. Which of the following best describes the auditors' response to a client's use of statistical sampling techniques to estimate the inventory? A. The auditors should satisfy themselves as to the statistical validity of the technique, and the reasonableness of the allowance for sampling risk and sampling error used. B. The auditors should qualify their opinion, because the client must perform a complete count of the inventory. C. The auditors should increase the extent of their test counts to compensate for the use of a statistical technique. D. The auditors should withdraw from the engagement.
A. The auditors should satisfy themselves as to the statistical validity of the technique, and the reasonableness of the allowance for sampling risk and sampling error used.
32. To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors: A. Trace a sample of the bills of lading to sales invoices. B. Confirm a sample of accounts payable. C. Review the aging of accounts receivable. D. Trace a sample of recorded sales to shipping documents.
A. Trace a sample of the bills of lading to sales invoices.
Which of the following would indicate the need to use positive accounts receivable confirmation requests? A. A large population consisting of small balances. B. Good internal control over accounts receivable. C. Most accounts are with large reputable companies. D. A large number of accounts receivable are in dispute.
A. A large number of accounts receivable are in dispute.
Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable? A. The confirmation requests are sent on the client's letterhead. B. The confirmation requests are mailed to customers by the internal auditors. C. The client's mailroom personnel closely monitor and inspect confirmation requests during mailing. D. The return address on the envelope used to send the confirmation request is that of the client.
A. The confirmation requests are sent on the client's letterhead.
39. When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if: A. Subsequent collections are to be reviewed. B. Internal control over receivables is good. C. Negative confirmation requests are to be used. D. There is a simultaneous examination of cash and accounts receivable.
B. Internal control over receivables is good.
Which of the following manipulations would understate receivables on the financial statements? A. Understatement of cash sales. B. Closing the sales journal prior to year-end. C. Closing the cash receipts journal prior to year-end. D. Underestimating the allowance for doubtful accounts.
B. Closing the sales journal prior to year-end.
34. Which of the following is not true about the confirmation of accounts receivable? A. Confirmation requests should bear the auditors' return address. B. Confirmation requests should be signed by the auditors. C. Confirmation requests should be mailed directly by the auditors. D. Confirmation requests should include a return envelope addressed to the office of the auditors.
B. Confirmation requests should be signed by the auditors.
Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice? A. Footing the sales journal. B. Confirming accounts receivable. C. Tracing the total sales in the sales journal to the general ledger. D. Observation of the physical inventory count at year-end.
B. Confirming accounts receivable
14. To measure how effectively a client employs its assets, an auditor calculates inventory turnover by dividing the average inventory into: A. Net sales. B. Cost of goods sold. C. Operating income. D. Gross sales.
B. Cost of goods sold.
The confirmation of accounts receivable is most closely associated with: A. Business risk. B. Detection risk. C. Inherent risk. D. Relative risk.
B. Detection risk.
31. Which of the following best describes the reason that the auditors record their inventory test counts in the working papers? A. To document every test count. B. For subsequent comparison with the completed inventory listing. C. To document compliance with generally accepted accounting principles. D. For use in subsequent audits.
B. For subsequent comparison with the completed inventory listing.
18. Which of the following is an auditor least likely to consider a departure from U.S. generally accepted accounting principles? A. Valuing inventory at cost. B. Including in inventory items that are consigned out to vendors, but not yet sold. C. Using standard cost as the measure of inventory cost. D. Including in inventory items shipped subsequent to year-end, but for which valid orders did exist at year-end.
B. Including in inventory items that are consigned out to vendors, but not yet sold.
Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests? A. Examine sales invoices. B. Inclusion of the information in the engagement letter. C. Examine correspondence. D. Examine any subsequent cash receipts.
B. Inclusion of the information in the engagement letter.
26. The use of a "blind" purchase order is designed to prevent errors by the: A. Purchase department. B. Receiving department. C. Stores department. D. Accounting department.
B. Receiving department.
17. A "bill and hold" scheme is most likely to include: A. Shipment of items to a customer beyond what the customer has ordered. B. Recording as sales items that the company retains as of year-end. C. Billing of items that are held by customers for future revenue production purposes. D. Selling items at substantial discounts near year-end.
B. Recording as sales items that the company retains as of year-end.
12. Which of the following is not true relating to the auditors' observation of the client's physical inventory? A. The auditors should evaluate the client's planning of the physical inventory. B. The auditors should make certain that consigned items from suppliers are included in physical inventory totals. C. The auditors should evaluate the adequacy of the client's counting procedures. D. The auditors should take test counts of the client's inventory.
B. The auditors should make certain that consigned items from suppliers are included in physical inventory totals.
You were surprised to note that approximately 95% of returned positive accounts receivable confirmation requests indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that: A. The cash receipts journal was closed before year-end. B. The cash receipts journal was held open after year-end. C. There are many unrecorded liabilities. D. The sales journal was held open after year-end.
B. The cash receipts journal was held open after year-end.
20. Which of the following is not a reason for the special significance attached by the auditors to the verification of inventories? A. The determination of inventory valuation directly affects net income. B. The existence of inventories is inherently difficult to substantiate. C. Special valuation problems often exist for inventories. D. Inventories are often the largest current asset of an enterprise.
B. The existence of inventories is inherently difficult to substantiate.
37. Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use? A. The positive form for small balances, and the negative form for large balances. B. The positive form used for large balances and the negative form for the small balances. C. The positive form used for trade receivables and the negative form for other receivables. D. The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory.
B. The positive form used for large balances and the negative form for the small balances.
Which of the following is not true about the auditors' verification of notes receivable? A. The interest revenue on notes receivable is usually audited by independent computation. B. Inspecting the notes is sufficient evidence of existence of the notes. C. The auditors may evaluate the collectability of notes by inspecting credit files. D. Confirmation of notes payable to banks may be accomplished in conjunction with the confirmation of cash balances.
B. Inspecting the notes is sufficient evidence of existence of the notes.
Which of the following is least likely to be typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests? A. Examine bills of lading. B. Physically examine items sold. C. Examine correspondence. D. Examine subsequent cash receipts.
B. Physically examine items sold.
An auditor has identified numerous debits to accumulated depreciation of equipment. Which of the following is most likely? A. The estimated remaining useful lives of equipment were increased. B. Plant assets were retired during the year. C. The prior year's deprecation expense was erroneously understated. D. Overhead allocations were revised at year-end.
B. Plant Assets were retired during the year.
An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts.
TRUE
21. Which of the following is true about the auditors' observation of the client's physical inventory? A. The count must be made at year-end. B. The auditors should supervise the client's personnel. C. The auditors' observation addresses the existence assertion. D. The auditors should justify any omission of the observation in the audit report.
C. The auditors' observation addresses the existence assertion.
After the CPAs have selected particular accounts receivable for confirmation: A. As a control measure, the CPAs should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail. B. It is important that every account selected that has a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow-up through alternative procedures. C. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm. D. All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client.
C. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm.
17. Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle? A. Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables. B. Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in other customers' accounts permitting a misappropriation of cash. C. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. D. The failure to prepare shipping documents may lead to an understatement of inventory balances.
C. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.
41. The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditors to: A. Consider internal control over credit sales. B. Test the accuracy of recorded charge sales. C. Estimate credit losses. D. Verify the validity of the recorded receivables.
C. Estimate credit losses.
35. Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client company, if the company: A. Has paid for the merchandise. B. Has physical possession of the merchandise. C. Holds legal title to the merchandise. D. Holds the shipping documents for the merchandise issued in the company's name.
C. Holds legal title to the merchandise.
Tracing recorded sales transactions to the bills of lading provides evidence about the: A. Completeness of sales transactions. B. Collectibility of sales transactions. C. Occurrence of sales transactions. D. Billing of all sales transactions.
C. Occurrence of sales transactions.
38. A client's physical count of inventories was higher than the inventory quantities per the perpetual records. This situation could be the result of the failure to record: A. Sales. B. Sales discounts. C. Purchases. D. Purchase returns.
C. Purchases.
24. The client's physical count of inventories is lower than the inventory quantities in the perpetual records. This could be the result of a failure to record: A. Purchases. B. Purchase discounts. C. Sales. D. Sales discounts.
C. Sales.
29. Which of the following is true about the auditors' observation of the client's physical inventory? A. The auditors should plan the physical inventory. B. The auditors should segregate damaged and obsolete goods. C. The auditors should evaluate the adequacy of the client's counting procedures. D. The auditors should supervise the client's personnel.
C. The auditors should evaluate the adequacy of the client's counting procedures.
34. Effective internal control for purchases generally can be achieved in a well-planned organizational structure with a separate purchasing department that has: A. The ability to prepare payment vouchers based on the information on a vendor's invoice. B. The responsibility of reviewing purchase orders issued by user departments. C. The authority to make purchases of requisitioned materials and services. D. A direct reporting responsibility to controller of the organization.
C. The authority to make purchases of requisitioned materials and services.
Which of the following is consistent with effective internal control over sales transactions? A. The accounting department prepares a shipping report authorizing the shipment of goods. B. The accounting department accounts for all receiving reports. C. The billing department accounts for all shipping documents. D. The accounts payable department annually approves the extension of credit to customers.
C. The billing department accounts for all shipping documents.
24. Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor? A. A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year. B. Internal control activities over the recording of cash receipts have been improved since the end of the prior year. C. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet. D. The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.
C. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.
28. To assure that all purchases are authorized before payment is made, accounting department personnel should match the vendor's invoice to: A. The purchase requisition. B. The receiving report. C. The purchase order. D. The voucher.
C. The purchase order.
36. Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items? A. Supplies of relatively little value are expensed when purchased. B. The cycle basis is used for physical counts. C. The storekeeper is responsible for maintenance of perpetual inventory records. D. Perpetual inventory records are maintained only for items of significant value.
C. The storekeeper is responsible for maintenance of perpetual inventory records.
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? A. Merchandise received is not promptly reconciled to the outstanding purchase order file. B. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value. C. The write-off of receivables by personnel who receive cash permits the misappropriation of cash. D. Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.
C. The write-off of receivables by personnel who receive cash permits the misappropriation of cash.
22. An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific procedures to apply to the accounts and transactions. In a particular case, s/he might do this by: A. Tracing sales invoices to shipping documents to tests the completeness of reported sales. B. Tracing shipping documents to sales invoices to test the occurrence of reported sales. C. Tracing sales invoices to shipping documents to test the occurrence of reported sales. D. Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.
C. Tracing sales invoices to shipping documents to test the occurrence of reported sales.
To test the existence assertion for recorded receivables, an auditor would select a sample from the: A. Sales orders file. B. Customer purchase orders. C. Accounts receivable subsidiary ledger. D. Shipping documents (bills of lading) file.
C. Accounts receivable subsidiary ledger.
38. The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful? A. A substantial number of accounts are in disputes. B. The combination of inherent risk and control risk is high. C. Client records include a large number of relatively small balances. D. The auditors believe that recipients of the requests are unlikely to give them consideration.
C. Client records include a large number of relatively small balances.
For good internal control over purchase transactions, purchases should be made from approved vendors by the department needing the goods.
FALSE
Idle equipment will generally need to be reclassified as a current asset.
FALSE
If financial statements contain a material departure from generally accepted accounting principles, the auditors usually should issue a disclaimer of opinion.
FALSE
Observation of inventories is a required audit procedure under all circumstances.
FALSE
The auditors typically observe all major items of property, plant, and equipment every year.
FALSE
The department approving a sales transaction should be the shipping department.
FALSE
The primary purpose of internal control over plant and equipment is to safeguard the assets from theft.
FALSE
The proper cutoff of inventories is best achieved when the client uses prenumbered purchase orders.
FALSE
When the auditors cannot satisfy themselves as to the accuracy of ending inventory and a material misstatement may exist, they normally may still give an unmodified (unqualified) opinion on the client's income statement.
FALSE
30. Which of the following is not a procedure that typically is used by the auditors in their examination of a client's goods held in the custody of a public warehouse? A. Confirmation. B. Obtaining reports on internal control at the warehouse. C. Observation. D. Corresponding with the state agency regarding the authenticity of the public warehouse.
D. Corresponding with the state agency regarding the authenticity of the public warehouse.
42. Once a CPA has determined that accounts receivable have increased due to slow collections in a "tight money" environment, the CPA would be likely to: A. Increase the balance in the allowance for bad debts accounts. B. Review the going concern ramifications. C. Review the credit and collection policy. D. Expand tests of collectibility.
D. Expand tests of collectibility.
37. The auditors will usually trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditors at the time of the physical inventory count are: A. Owned by the client. B. Not obsolete. C. Physically present at the time of the preparation of the final inventory schedule. D. Included in the final inventory schedule.
D. Included in the final inventory schedule.
16. Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product? A. Factory supervisor salary. B. Indirect materials. C. Miscellaneous expense. D. Sales expense.
D. Sales expense.
18. A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end? A. Cash receipts. B. Payroll. C. Purchases. D. Sales.
D. Sales.
36. To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from: A. The sales journal. B. The billing clerk's file of sales orders. C. Duplicate copies of sales invoices. D. The shipping clerk's file of duplicate copies of bills of lading.
D. The shipping clerk's file of duplicate copies of bills of lading.
22. In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the: A. Purchases journal. B. Purchase requisitions. C. Purchase orders. D. Vendors' invoices.
D. Vendors' invoices.
A major control procedure related to plant and equipment is a budget for depreciation.
FALSE
A public company's financial statements should be prepared following standards of the Public Company Accounting Oversight Board.
FALSE
A typical procedure in the audit of property is examination of public records to verify the ownership of the property.
FALSE
Accounts receivable that are written off should not be turned over to a collection agency
FALSE
Auditors should not review the client's planning of the physical inventory.
FALSE
CPAs use negative accounts receivable confirmation requests more frequently than positive accounts receivable confirmation requests.
FALSE
Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address.
FALSE
12. Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated relating to the year XX financial statements? A. Sales. B. Cash. C. Inventory. D. Accounts receivable.
c. Inventory