ACCT 3350 EXAM 3
Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end. T/F
F
Dividends should be authorized by the stockholders of the corporation. T/F
F
The auditors typically observe all major items of property, plant, and equipment every year. T/F
F
The auditors' approach to the audit of property, plant and equipment largely results from the fact that many transactions occur. T/F
F
The examination of warehouse receipts is sufficient verification of a material amount of goods stored in public warehouses. T/F
F
The lower of cost or market test by the auditors is generally designed to assure that inventories are valued above their net realizable values. T/F
F
The primary objective of the auditors' examination of accounts payable is to determine whether payments are made on a timely basis. T/F
F
A CPA examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitative data. This is an example of a: A. Test of a control. B. Substantive test. C. Cutoff test. D. Statistical test.
A
A continuing audit client's property, plant, and equipment and accounts receivable accounts have approximately the same year-end balance. In this circumstance, when compared to property, plant and equipment, one would normally expect the audit of accounts receivable to require: A. More audit time. B. Less audit time. C. Approximately the same amount of audit time. D. Similar confirmation procedures.
A
An audit of the balance in the accounts payable account is ordinarily not designed to: A. Detect accounts payable that are substantially past due. B. Verify that accounts payable were properly authorized. C. Ascertain the reasonableness of recorded liabilities. D. Determine that all existing liabilities at the balance sheet date have been recorded.
A
An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion is most likely related to presentation and disclosure and: A. Valuation. B. Completeness. C. Existence. D. Rights.
A
An auditor may obtain information on the December 31 month-end balance per bank in which of the following? Standard Confirmation Form / January 1-10 Cutoff Statement A. Yes / Yes B. Yes / No C. No / Yes D. No / No
A
An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete inventory to address: A. Valuation. B. Rights. C. Existence. D. Presentation.
A
An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: A. No reply to a positive confirmation request is received. B. No reply to a negative confirmation request is received. C. Collectibility of the receivables is in doubt. D. Pledging of the receivables is probable.
A
Which of the following is an example of an accrued liability? A. Accounts payable. B. Notes payable. C. Prepaid insurance. D. Product warranty liability.
D
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
Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment? A. Accumulated depreciation. B. Cost of goods sold. C. Purchase returns and allowances. D. Purchase discounts.
A
Banks may process electronic "substitute checks" in place of customer written hard copy checks due to the: A. Check Clearing for the 21st Century Act. B. Public Company Accounting Oversight Board's Standard No. 2. C. Foreign Corrupt Practices Act. D. Sarbanes-Oxley Act.
A
By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect: A. An unrecorded deposit made at the bank at the end of the month. B. A second payment of an account payable which had already been paid in full two months earlier. C. An embezzlement of cash receipts not recorded in the cash receipts journal before they had been deposited into the bank. D. A receivable collected that had previously been written off as uncollectible.
A
Cooper, 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, Cooper would most likely: A. Send positive confirmation requests. B. Send negative confirmation requests. C. Examine evidence of subsequent cash receipts. D. Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.
A
For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the: A. Receiving report and the purchase order. B. Receiving report and the voucher. C. Vendor's packing slip and the purchase order. D. Vendor's packing slip and the voucher.
A
Hall Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The best person or persons to make periodic reviews of the investment activity would be: A. An investment committee of the board of directors. B. The chief operating officer. C. The corporate controller. D. The treasurer.
A
Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable: A. Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. B. Write-offs must be approved by the accounts receivable department. C. Write-offs must be authorized by the shipping department. D. Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.
A
In an audit, the valuation of year-end accounts payable is most likely addressed by: A. Confirmation. B. Examination of cash disbursements immediately prior to year-end. C. Examination of cash disbursements immediately subsequent to year-end. D. Analytical procedures applied to vouchers payable at year-end.
A
In testing plant and equipment balances, an auditor may select recorded additions in the analysis of plant and equipment and inspect the actual asset(s) involved. Which management assertion is this procedure most directly related to? A. Existence. B. Completeness. C. Rights. D. Valuation.
A
In the continuing audit of a manufacturing company of medium size, which of the following areas would you expect to require the least amount of audit time? A. Owners' equity. B. Revenue. C. Assets. D. Liabilities.
A
In your review of ABC Company's financials, you note that Receivables have increased approximately 200% from the previous year, while Cash has declined. Further investigation reveals that 70% of ABC's receivables were booked within 7 days of the end of the quarter. If financial statement fraud is involved, which type is most likely? A. Fictitious revenues. B. Timing differences. C. Improper asset valuations. D. Improper disclosures.
A
Instead of taking a physical inventory count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and: A. Well-kept records of perpetual inventory are maintained. B. Inventory is slow-moving. C. Computer error reports are generated for missing prenumbered inventory tickets. D. Obsolete inventory items are segregated and excluded.
A
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
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
McPherson Corp. does not make an annual physical count of year-end inventories, but instead makes weekly test counts on the basis of a statistical plan. During the year, Sara Mullins, CPA, observes such counts as she deems necessary and is able to satisfy herself as to the reliability of the client's procedures. In reporting on the results of her examination, Mullins: A. Can issue an unqualified opinion without disclosing that she did not observe year-end inventories. B. Should comment in the scope paragraph as to her inability to observe year-end inventories, but can nevertheless issue an unqualified opinion. C. Is required, if the inventories are material, to disclaim an opinion on the financial statements taken as a whole. D. Should, if the inventories are material, qualify her opinion.
A
Ordinarily, the most significant assertion relating to accounts payable is: A. Completeness. B. Existence. C. Presentation. D. Valuation.
A
Purchase cutoff procedures should be designed to test whether all inventory: A. Owned by the company was recorded. B. On the year-end balance sheet was carried at lower-of-cost-or-market. C. On the year-end balance sheet was paid for by the company. D. Owned by the company is in the possession of the company.
A
Reconciliation of the bank account should not be performed by an individual who also: A. Processes cash disbursements. B. Has custody of securities. C. Prepares the cash budget. D. Reviews inventory reports.
A
The Parmalat fraud case involved: A. A fraudulent cash confirmation. B. Kiting of funds between banks in India and banks in Pakistan. C. A bank reconciliation performed by the client that systematically understated cash. D. Major unrecorded disbursements for equipment.
A
The audit of intangible assets typically involves Vouching the Cost of Assets / Testing Allocation Methods A. Yes / Yes B. Yes / No C. No / Yes D. No / No
A
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
The auditor's analytical procedures will be facilitated if the client: A. Uses a standard cost system that produces variance reports. B. Segregates obsolete inventory before the physical inventory count. C. Corrects material weaknesses in internal control before the beginning of the audit. D. Reduces inventory balances to the lower of cost or market.
A
The auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low: A. And accounts receivable are immaterial, or the use of confirmations would be ineffective. B. And accounts receivable are composed of large accounts. C. And accounts receivable are composed of large accounts. D. Or accounts receivable are from extremely reputable customers.
A
An auditor selects items from the client's inventory listing and identifies the items in the warehouse. This procedure is most likely related to: A. Rights. B. Completeness. C. Existence. D. Valuation.
C
The auditors suspect 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 auditors most likely would compare the: A. Details of bank deposit slips with details of credits to customer accounts. 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
The auditors would be most likely to find unrecorded long-term liabilities by analyzing: A. Interest payments. B. Discounts on long-term liabilities. C. Premiums on long-term liabilities. D. Recorded long-term liability accounts.
A
The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the: A. Bill of lading. B. Job time shipping. C. Production order. D. Production schedule.
A
The organization established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles is the: A. Cost Accounting Standards Board. B. Financial Accounting Standards Board. C. Public Company Accounting Oversight Board. D. Securities and Exchange Commission.
A
To determine that all sales have been recorded, the auditors would select a sample of transactions from the: A. Shipping documents file. B. Sales journal. C. Accounts receivable subsidiary ledger. D. Remittance advices.
A
Treetop Corporation acquired a building and arranged mortgage financing during the year. Verification of the related mortgage acquisition costs would be least likely to include an examination of the related: A. Deed. B. Canceled checks. C. Closing statement. D. Interest expense.
A
When a client engages in transactions involving derivatives, the auditor should: A. Review agreements underlying the 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
When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is: A. Existence. B. Completeness. C. Clarity. D. Presentation.
A
When performing an audit of the property, plant, and equipment accounts, an auditor should expect which of the following to be most likely to indicate a departure from generally accepted accounting principles? A. Repairs have been capitalized to repair equipment that had broken down. B. Interest has been capitalized for self-constructed assets. C. Assets have been acquired from affiliated corporations with the related transactions recorded and described in the financial statements. D. The cost of freight-in on an acquisition has been capitalized.
A
When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably: A. Want the client to schedule the physical inventory count at the end of the year. B. Insist that the client perform physical counts of inventory items several times during the year. C. Increase the extent of tests for unrecorded liabilities at the end of the year. D. Have to disclaim an opinion on the income statement for that year.
A
Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees? A. A bank lockbox system. B. Approval of all disbursements by an individual independent of cash receipts. C. Monthly bank cutoff statements. D. Prenumbered remittance advices.
A
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
Which of the following is not a universal rule for achieving internal control over cash? A. Separate recordkeeping from accounting for cash to the extent possible. B. Deposit each day's cash receipts intact. C. Separate cash handling from recordkeeping. D. Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks.
A
Which of the following is not one of the auditors' objectives in auditing depreciation? A. Establishing the reasonableness of the client's replacement policy. B. Establishing that the methods used are appropriate. C. Establishing that the methods are consistently applied. D. Establishing the reasonableness of depreciation computations.
A
Which of the following is not one of the criteria for revenue recognition? A. Collectibility is certain. B. Delivery has occurred or services have been rendered. C. Evidence of an arrangement exists and is persuasive. D. A fixed or determinable price to buyer exists.
A
Which of the following is used to obtain evidence that the client's equipment accounts are not understated? A. Analyzing repairs and maintenance expense accounts. B. Vouching purchases of plant and equipment. C. Recomputing depreciation expense. D. Analyzing the miscellaneous revenue account.
A
Which of the following procedures would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? A. Observe the consistency of the employees' use of cash registers and tapes. B. Inquire about employees' access to recorded but undeposited cash. C. Trace deposits in the cash receipts journal to the cash balance in the general ledger. D. Compare the cash balance in the general ledger with the bank confirmation request.
A
Which of the following should be included as a part of inventory costs of a manufacturing company? Direct Labor / Raw Materials / Factory Overhead A. Yes / Yes / Yes B. Yes / No / No C. No / Yes / No D. No / No / No
A
Which of the following statements is correct regarding accounts payable and the auditor's procedures? A. Because it can be difficult to discover a transaction that has not been recorded, the audit objective of completeness drives many of the substantive procedures applied to these balances. B. A judgment whether an unrecorded payable should be recorded before the financial statements are prepared depends entirely upon the source of the payable. C. The confirmation of accounts payable selected from the year-end trial balance of such accounts is most effective in discovering unrecorded liabilities. D. Unrecorded payables are often discovered through examining vouchers payable entered into the voucher register prior to the balance sheet date.
A
Which of the following statements is not typical of property, plant, and equipment as compared to most current asset accounts? A. A property, plant, and equipment cutoff error near year-end has a more significant effect on net income. B. Relatively few transactions occur in property, plant, and equipment during the year. C. The assets involved with property, plant, and equipment ordinarily have relatively longer lives. D. Property, plant, and equipment accounts typically have a higher dollar value.
A
It is less important to maintain effective internal control over accounts payable as it is to maintain effective internal control over accounts receivable. T/F
T
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
A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner? A. Footing the purchases journal. B. Reconciling vendors' monthly statements with subsidiary payable ledger accounts. C. Tracing totals from the purchases journal to the ledger accounts. D. Sending written quarterly confirmation to all vendors.
B
A search for overstated property, plant, and equipment purchases would most likely include: A. Accounts receivable. B. Property, plant, and equipment. C. Purchase discounts. D. Repairs and maintenance expense.
B
An auditor may obtain information on the December 31 month-end balance per bank in which of the following? December 31 Bank Statement / Schedule of Bank (Cash) Transfers A. Yes / Yes B. Yes / No C. No / Yes D. No / No
B
An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all: A. Merchandise received. B. Vendor's invoices. C. Canceled checks. D. Receiving reports.
B
An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to: A. Verify the cash balance reported on the bank confirmation inquiry form. B. Verify reconciling items on the client's bank reconciliation. C. Detect lapping. D. Detect kiting.
B
Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of A. Presentation. B. Completeness. C. Rights. D. Existence.
B
During the inventory count an auditor selects items and determines that the proper description and quantity were recorded by the client. This procedure is most closely related to: A. Rights. B. Completeness. C. Existence. D. Valuation.
B
The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with: A. Purchase requisitions. B. Receiving reports. C. Purchase orders. D. Vendor payments.
B
In November, two months before year-end, the bookkeeper erroneously recorded the receipt of a one year bank loan with a debit to cash and a credit to interest revenue. The most effective method for detecting this type of error is: A. Foot the cash receipts journal for November. B. Send a bank confirmation as of year-end. C. Prepare a bank reconciliation as of year-end. D. Prepare a bank transfer schedule as of year-end.
B
In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to the supporting documents. Which assertion would this test of controls most likely test? A. Completeness. B. Existence. C. Valuation. D. Rights.
B
Jones embezzled $10,000 from his company's account in Bank A. At year-end, he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This is an example of: A. Lapping. B. Kiting. C. Effective cash management. D. Related party transactions.
B
Most of the audit work on accounts payable is typically performed: A. Simultaneously with the audit of accrued liabilities. B. After the balance sheet date. C. At the balance sheet date in conjunction with inventory cutoff tests. D. Before the balance sheet date.
B
The auditors use a bank cutoff statement to compare: A. Deposits in transit on the year-end cash general ledger account to deposits in the cash receipts journal. B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. C. Deposits listed on the cutoff statement to disbursements in the cash disbursements journal. D. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank statement.
B
The best way to verify the amounts of dividend revenue received during the year is: A. Recomputation. B. Verification by reference to dividend record books. C. Confirmation with dividend-paying companies. D. Examination of cash disbursements records.
B
The confirmation of accounts receivable is most closely associated with: A. Business risk. B. Detection risk. C. Inherent risk. D. Relevant risk.
B
The individual looking for guidance on revenue recognition is most likely to appropriately review: A. APB 99. B. SAB 104. C. ASR 44. D. B1 Document.
B
The primary objective of a CPA's observation of a client's physical inventory count is to: A. Discover whether a client has counted a particular inventory item or group of items. B. Obtain direct knowledge that the inventory exists and has been properly counted. C. Provide an appraisal of the quality of the merchandise on hand on the day of the physical count. D. Allow the auditor to supervise the conduct of the count in order to obtain assurance that inventory quantities are reasonably accurate.
B
To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditors should review and test the: A. Terms of the open purchase orders. B. Purchase cutoff procedures. C. Contractual commitments made by the purchasing department. D. Purchase invoices received on or around year-end.
B
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
To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is: A. Supported by a vendor's invoice. B. Stamped "paid" by the check signer. C. Prenumbered and accounted for. D. Approved for authorized purchases.
B
To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic: A. Increase in insurance coverage. B. Inspection of equipment and reconciliation with accounting records. C. Verification of liens, pledges, and collateralizations. D. Accounting for work orders.
B
Tracing copies of sales invoices to shipping documents will provide evidence that all: A. Shipments to customers were recorded as receivables. B. Billed sales were shipped. C. Debits to the subsidiary accounts receivable ledger are for sales shipped. D. Shipments to customers were billed.
B
Under SEC rules, which of the following is not among the criteria that ordinarily exist for revenue to be recognized? A. Collectibility is reasonably assured. B. Delivery has occurred or is scheduled to occur in the near future. C. Persuasive evidence of an arrangement exists. D. The seller's price to the buyer is fixed or determinable.
B
When confirming accounts payable, the approach is most likely to be one of: A. Selecting the accounts with the largest balances at year-end, plus a sample of other accounts. B. Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts. C. Selecting a random sample of accounts payable at year-end. D. Confirming all accounts.
B
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
Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? A. Existence or occurrence. B. Completeness. C. Rights and obligations. D. Presentation and disclosure.
B
Which of the following assertions is of principle concern to the auditors in the examination of accounts payable? A. Existence. B. Completeness. C. Valuation. D. Authorization.
B
Which of the following audit procedures is aimed most directly at testing the completeness assertion for accounts payable? A. Footing the list of accounts payable. B. Examining underlying documentation for cash disbursements in the period after year-end. C. Tracing shipping reports issued on or before year-end to related customer purchase orders and invoices. D. Tracing shipping reports after year-end to related customer purchase orders and invoices.
B
Which of the following best describes the auditors' approach to the audit of the ending balance of property, plant, and equipment for a continuing nonpublic client? A. Direct audit of the ending balance. B. Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts. C. Audit of changes in the accounts since inception of the company. D. Audit of selected purchases and retirements for the last few years.
B
Which of the following best describes the reason for the auditors' review of the client's cost accounting system? A. To obtain evidence regarding the quantities of good described as work in process. B. To obtain evidence about the valuation of work in process, finished goods, and cost of goods sold. C. To obtain evidence about the profit margin on specific jobs. D. To obtain evidence about compliance with Cost Accounting Standards.
B
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
Which of the following cash transfers is most likely to result in a misstatement of cash at December 31, 20X7? Bank Transfer Schedule Disbursement / Receipt Recorded in books - Paid by bank / Recorded in books - Received by bank A. 12/31/X7 1/4/X8 12/31/X7 12/31/X7 B. 1/4/X8 1/5/X8 12/31/X7 1/4/X8 C. 12/31/X7 1/5/X8 12/31/X7 1/4/X8 D. 1/4/X8 1/11/X8 1/4/X8 1/4/X8
B
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
Which of the following is an internal control weakness related to factory equipment? A. Checks issued in payment of purchases of equipment are not signed by the controller. B. All purchases of factory equipment are required to be made by the department in need of the equipment. C. Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired. D. Proceeds from sales of fully depreciated equipment are credited to other income.
B
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
Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory? A. Compare the physical quantities of slow-moving items with corresponding quantities in the prior year. B. Observe merchandise and raw materials during the client's physical inventory taking. C. Review the management's inventory representations letter for accuracy. D. Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average.
B
Which of the following is the most important control procedure over acquisitions of property, plant, and equipment? A. Establishing a written company policy distinguishing between capital and revenue expenditures. B. Using a budget to forecast and control acquisitions and retirements. C. Analyzing monthly variances between authorized expenditures and actual costs. D. Requiring acquisitions to be made by user departments.
B
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
Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department? A. Comparing the vendor's invoice with the receiving report. B. Canceling supporting documentation after payment. C. Verifying the mathematical accuracy of the vendor's invoice. D. Preparing the check for signature by an authorized person.
B
Which of the following procedures is least likely to be completed before the balance sheet date? A. Confirmation of receivables. B. Search for unrecorded liabilities. C. Observation of inventory. D. Review of internal accounting control over cash disbursements.
B
Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts? A. Investigate confirmation exceptions for indication of amounts in dispute. B. Review accounts which have been written off as uncollectible prior to year-end. C. Investigate credit ratings for large accounts receivable. D. Discuss with the credit manager the current status of doubtful accounts.
B
Which of the following subsequent events might require an adjustment to the client's financial statements? A. A business combination with another company. B. A major customer declares bankruptcy causing a material receivable to be uncollectible. C. Loss of plant and equipment due to a fire. The lose is insured D. Plant employees could possibly go on strike
B
Material purchases of assets from an affiliated company should be disclosed in the financial statements. T/F
T
Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed? A. Scan the sales journal for sequential and unusual entries. B. Examine shipping documents for matching sales invoices. C. Compare the accounts receivable ledger to daily sales summaries. D. Inspect unused sales invoices for consecutive prenumbering.
B
Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation? A. Prepare a bank transfer schedule using the client's cash receipts and cash disbursements journal. B. Receive a cutoff statement directly from the client's bank. C. Prepare a four column bank reconciliation using the year-end bank statement. D.Confirm the year-end balance using the standard form to confirm account balance information with financial institutions.
B
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
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
Overstatement of financial results can involve failure to record a transaction. T/F
T
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
A plant manager would be most likely to provide information on which of the following? A. Adequacy of the provision for uncollectible accounts. B. Appropriateness of physical inventory valuation techniques. C. Existence of obsolete production equipment. D. Deferral of certain purchases of office supplies.
C
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
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
An effective procedure for identifying unrecorded retirements of equipment is to: A. Foot related property records. B. Recalculate depreciation on the related equipment. C. Select items of equipment in the accounting records and then locate them in the plant. D. Select items of equipment and then locate them in the accounting records.
C
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
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
Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the: A. Internal control over balances confirmed. B. Ownership of the balances confirmed. C. Existence of the balances confirmed. D. Collectability of the balances confirmed.
C
For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on: A. All transactions resulting in the ending balance. B. Tests of controls over disposals. C. Transactions that occurred during the year. D. Performing analytical procedures on beginning balances of the accounts.
C
In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the: A. Extent of the control risk. B. Extent of property abandoned during the year. C. Adequacy of replacement funds. D. Reasonableness of the depreciation.
C
In which of the following accounts would one expect a related party transaction to be easiest to detect? A. Accounts receivable. B. Accounts payable. C. Notes payable. D. Cash.
C
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
The auditors are most likely to seek information from the plant manager with respect to the: A. Adequacy of the provision for uncollectible accounts. B. Appropriateness of physical inventory observation procedures. C. Existence of obsolete machinery. D. Deferral of procurement of certain necessary insurance coverage.
C
The auditors who physically examine securities should insist that a client representative be present in order to: A. Detect fraudulent securities. B. Lend authority to the auditors' directives. C. Acknowledge the receipt of securities returned. D. Coordinate the return of securities to the proper locations.
C
The form typically used to confirm accounts payable: A. Does not require a response from the vendor. B. Confirms the balance recorded by the client at year-end. C. Requires the vendor to indicate the amount of the payable. D. Is the same as the form used to confirm accounts receivable.
C
The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client: A. Confirmation. B. Observation. C. Recomputation. D. Inquiry.
C
The receiving department is least likely to be responsible for the: A. Determination of quantities of goods received. B. Detection of damaged or defective merchandise. C. Preparation of a shipping document. D. Transmittal of goods received to the store's department.
C
To assure accountability for fixed-asset retirements, management should implement an internal control that includes: A. Continuous analysis of miscellaneous revenue to locate any cash proceeds from the sale of plant assets. B. Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired. C. Utilization of serially numbered retirement work orders. D. Periodic observation of plant assets by the internal auditors.
C
To determine that each voucher is submitted and paid only once, when a payment is approved, supporting documents should be canceled by the: A. Authorized members of the audit committee. B. Accounting department. C. Individual who signs the checks. D. Chief executive officer.
C
To test the existence assertion for recorded receivables, the auditors 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
Tracing copies of computer-generated sales invoices to copies of the corresponding computer-generated 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
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
When an auditor finds a debit to accounts payable, which of the following accounts is most likely to be credited? A. Accounts Receivable. B. Accrued liabilities. C. Cash. D. Cost of goods sold.
C
When the auditors select a sample of items from the vouchers payable register for the last month of the period under audit and trace these items to underlying documents, the auditors are gathering evidence primarily in support of the assertion that: A. Recorded obligations were paid. B. Incurred obligations were recorded in the correct period. C. Recorded obligations occurred prior to year-end. D. Cash disbursements were recorded as incurred obligation.
C
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. Tests of controls and extensive tests of 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. Analytical procedures for property and equipment balances at the end of the year.
C
Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts? A. Reviewing an aging of accounts receivable. B. Examination of cash receipts subsequent to the balance sheet date. C. Confirming current (0-30 day) year-end accounts receivable. D. Reviewing credit files for selected account.
C
Which of the following is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold? A. Determine that the valuation of inventories and cost of goods sold is arrived at by appropriate methods. B. Determine the existence of inventories and the occurrence of transactions affecting cost of goods sold. C. Establish that the client includes only inventory on hand at year-end in inventory totals. D. Establish the completeness of inventories.
C
Which of the following is not an overall test of the annual provision for depreciation expense? A. Compare rates used in the current year with those used in prior years. B. Test computation of depreciation provisions for a representative number of units. C. Test deductions from accumulated depreciation for assets purchased during the year. D. Perform analytical procedures.
C
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
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
Subsequent events that provide additional evidence as to conditions that existed at the balance sheet date may result in adjusting journal entries. T/F
T
Which of the following is an example of an accrued liability? A. Accounts payable. B. Notes payable. C. Prepaid insurance. D. Interest payable.
D
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
An auditor most likely would analyze inventory turnover rates to obtain evidence about: A. Existence. B. Rights. C. Presentation. D. Valuation.
D
An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? A.Select and examine receiving reports and ascertain that the related canceled checks are dated no earlier than the receiving reports. B.Select and examine receiving reports and ascertain that the related canceled checks are dated no later than the receiving reports. C.Select and examine canceled checks and ascertain that the related receiving reports are dated no earlier than the checks. D. Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.
D
An inventory turnover analysis is useful to the auditor because it may detect: A. Inadequacies in inventory pricing. B. Methods of avoiding cyclical holding cost. C. The optimum automatic reorder points. D. The existence of obsolete merchandise.
D
Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment? A. Accumulated depreciation. B. Insurance expense. C. Property, plant, and equipment. D. Purchase returns and allowances.
D
Assume that the auditors are concerned about disbursement transactions that have been recorded for improper amounts. Which procedure(s) would possibly identify these transactions? Trace from source documents to journals / Vouch from journal to source documents A. No / No B. No / Yes C. Yes / No D. Yes / Yes
D
Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because: A. This is a duplication of cutoff tests. B. Accounts payable balances at the balance sheet date may not be paid before the audit is completed. C. Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment. D. There is likely to be other reliable external evidence available to support the balances.
D
For which of the following accounts is it most likely that most of the audit work can be performed in advance of the balance sheet date? A. Accounts receivable. B. Cash. C. Current marketable securities. D. Property, plant, and equipment.
D
In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: A. Reviews the monthly bank reconciliation. B. Returns the checks to accounts payable. C. Is denied access to the supporting documents. D. Is responsible for mailing the checks.
D
In the audit of the allocation of income for a partnership, the auditors would be most interested in reviewing: A. Federal Partnership Law. B. State Partnership Law. C. Board of directors minutes. D. The partnership agreement.
D
Internal control over marketable securities is enhanced when: A. Securities are held by the cashier. B. Securities are registered in the name of the custodian. C. Detailed records of securities are maintained by the custodian of the securities. D. Securities are held under joint control of two or more officials.
D
Properly designed internal control will permit the same employee to: A. Receive and deposit checks, and also approve write-offs of customer accounts. B. Approve vouchers for payment, and also receive and deposit cash. C. Reconcile the bank statements, and also receive and deposit cash. D. Sign checks, and also cancel supporting documents.
D
Recognizing a loan received as revenue instead of as a liability has a positive effect on the reported financial statements for all of the following except: A. It understates liabilities. B. It overstates revenues C. It overstates net income. D. It overstates assets.
D
Requiring acquisitions to be made by user departments. A. Accounts receivable. B. Cash. C. Current marketable securities. D. Property, plant, and equipment.
D
The auditors may conclude that depreciation charges are insufficient by noting: A. Insured values greatly in excess of book values. B. Large amounts of fully depreciated assets. C. Continuous trade-ins of relatively new assets. D. Excessive recurring losses on assets retired.
D
The auditors plan to use data analytics to audit purchases. Which of the following is least likely to be performed efficiently using data analytics? A. Identification of unusually large purchases. B. Identification of purchases from vendors that are not authorized. C. Identification of purchases of non-standard items. D. Identification of purchases of goods from related parties that the auditors had not been informed of and were not aware of the relationship.
D
The least likely approach in auditing management's estimate relating to an accrued liability is to: A. Independently develop an estimate of the amount to compare to management's estimate. B. Review and test management's process of developing the estimate. C. Review subsequent events or transactions bearing on the estimate. D. Send confirmations relating to the estimate.
D
The statement that best expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit is that: A The auditor has no responsibility for events occurring in the subsequent period unless these events. affect transactions recorded on or before the balance sheet date. B. The auditor's responsibility is to determine that a proper cutoff has been made and that transactions . recorded on or before the balance sheet date actually occurred. C The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of field work. D. The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.
D
To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: A. Cutoff bank statement. B. Year-end bank statement. C. Bank confirmation. D. General ledger.
D
When comparing an initial audit with a subsequent year audit for a particular client, the scope of audit procedures for which of the following accounts would be expected to decrease the most? A. Accounts receivable. B. Cash. C. Marketable securities. D. Property, plant, and equipment.
D
Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are not understated? A. Depreciation. B. Accounts Payable. C. Cash. D. Repairs.
D
Which of the following is a control procedure that is usually applied to accounts payable? A. Periodic confirmation of accounts payable. B. Mailing statements to vendors detailing their account. C. Periodic aging of accounts payable. D. Matching invoices with receiving documents before disbursements are authorized.
D
Which of the following is a customary audit procedure for the verification of the legal ownership of real property? A. Examination of correspondence with the corporate counsel concerning acquisition matters. B. Examination of ownership documents registered and on file at a public hall of records. C. Examination of corporate minutes and resolutions concerning the approval to acquire property, plant, and equipment. D. Examination of deeds and title guaranty policies on hand.
D
Which of the following is an example of misappropriation of assets relating to sales? A. Accidentally recording cash that represents a liability as revenue. B. Holding the sales journal open to record next year's sales as having occurred in the current year. C. Intentionally recording cash received from a new debt agreement as revenue. D. Theft of cash register sales.
D
Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? A. Restrictions placed on sales by laws and regulations. B. Decline in sales due to economic declines. C. Decline in sales due to product obsolescence. D. Over-recorded sales due to a lack of control over the sales entry function.
D
Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? A. Inaccurate billing due to a lack of controls. B. Lapping of accounts receivable. C. Misbilling a client due to a data input error. D. Recording sales when the customer is likely to return the goods.
D
Which of the following is not a primary objective of the auditors in the examination of accounts receivable? A. Determine the approximate realizable value. B. Consider the adequacy of internal control. C. Establish the existence of receivables. D. Determine the expected day of collection of each of the receivables.
D
Which of the following is not confirmed on the standard confirmation form used for cash balances at financial institutions? A. Cash checking account balances. B. Cash savings account balances. C. Loans payable. D. Securities held for the client by the financial institution.
D
Which of the following is not one of the independent auditor's objectives regarding the examination of inventories? A. Verifying that inventory counted is owned by the client. B. Verifying that the client has used proper inventory pricing. C. Ascertaining the physical quantities of inventory on hand. D. Verifying that all inventory owned by the client is on hand at the time of the count.
D
Which of the following is the best audit procedure for determining the existence of unrecorded liabilities? A. Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable. B. Examine unusual relationships between monthly accounts payable balances and recorded purchases. C. Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded. D. Examine selected cash disbursements in the period subsequent to year-end.
D
Which of the following procedures is most likely to be included near completion of an audit? A. Obtaining an understanding of internal control. B. Confirmation of receivables. C. Observation of inventory. D. Performing analytical procedures.
D
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
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.
D
Which of the following would most likely be detected by an auditor's review of the client's sales cutoff? A. Excessive goods returned for credit. B. Unrecorded sales discounts. C. Lapping of year-end accounts receivable. D. Inflated sales for the year.
D
Which of the following would provide the most assurance concerning the valuation of accounts receivable? A. Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. B. Compare receivable turnover ratios to industry statistics for reasonableness. C. Inquire about receivables pledged under loan agreements. D. Assess the allowance for uncollectible accounts for reasonableness.
D
Your client left the cash receipts journal open after year-end for an extra day and included January 1 cash receipts in the 12/31/XX totals. All of those cash receipts were due to cash sales. Assuming the client uses a periodic inventory system with a 12/31/XX count of the physical inventory, which of the following is most likely to be true relating to the year XX financial statements? A. Sales are understated. B. Accounts receivable are understated. C. Inventory is overstated. D. Net income is overstated.
D
A compensating balance agreement always requires that cash be reclassified as a noncurrent asset. T/F
F
Accounts payable generally present the auditors with difficult valuation problems. T/F
F
Confirmation of accounts payable is a required generally accepted auditing procedure. T/F
F
Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address. T/F
F
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. T/F
T
For good internal control over purchase transactions, purchases should be documented by a purchase requisition by the department needing the goods. T/F
T
If not adjusted, a situation in which the total of uncorrected misstatements in the financial statements exceeds a material amount is likely to lead to an audit report modification. T/F
T
In the audit of depletion the auditors must often rely on the work of specialists. T/F
T
A major control procedure related to plant and equipment is a budget for acquisitions and disposition. T/F
T
Analytical procedures are often used for verification of income statement accounts. Group starts T/F
T
Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts. T/F
T
CPAs use positive accounts receivable confirmations more frequently than negative accounts receivable confirmations. T/F
T
Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable. T/F
T
Control over the receipt of cash sales is best achieved when two or more employees participate in each transaction. T/F
T
Auditors may choose not to confirm accounts payable because: A. Confirmation obtains evidence identical to that obtained by cutoff tests. B. Other reliable external evidence to support the balances is likely to be available. C. A reading of the corporate minutes reveals that confirmation is unnecessary. D. The balances due will have changed between the year-end and the date of confirmation.
b
