Audit Ch. 8-10
Estimates in the finance and investment cycle include
A reporting unit's fair value. Valuation of equity investments. Actuarial assumptions for pension costs.
A client's purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes auditors' primary concern with respect to liabilities resulting from the purchasing system?
Accounts Payable are not materially understated
A client maintains perpetual inventory records in both quantities and dollars. If the auditor is able to accept a high level of detection risk, the auditor would probably
Apply gross profit tests to ascertain the reasonableness of the physical inventory counts.
Which of the following questions would auditors most likely include on an internal control questionnaire for notes payable?
Are direct borrowings on notes payable authorized by the board of directors?
Which of the following control questions relates to the existence and occurrence objective in purchasing and accounts payable?
Are receiving reports prepared for each item received?
Which of the following would indicate a weakness in the company's internal control?
Clerk 3 mails the checks and remittances after they have been signed
Which of the following audit procedures would not likely be performed for audits of shareholders' equity?
Compare valuation of stock to published market prices.
For which of the following accounts would the matching concept be the most appropriate?
Cost of Goods Sold
Controls over making estimates include all of the following except
Ensuring the effects of the estimate are in line with analysts forecasts.
Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?
Examine a sample of cash disbursements in the period subsequent to year-end
Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?
Examining vendor statements for amounts not reported as purchases
Which of the following would not overstate current-period net income?
Failing to record a check paying an item in Vouchers Payable
Which of the following is not a substantive audit procedure for estimates of management?
Observing whether estimates are prepared by qualified personnel
a "blind purchase order" is a
Purchase order with the quantity deleted to be used in the receiving department.
Which of the following results of analytical procedures would most likely indicate possible unrecorded liabilities?
Ratio of accounts payable to total current liabilities of 3:1, compared to 5:1 for the prior period
An audit team would most likely verify the interest earned on bond investments by
Recomputing the interest earned on the basis of face amount, interest rate, and period held
A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditors are unable to count securities at the balance sheet date, they most likely will
Request the client to have the bank seal the safe deposit box until the auditors can count the securities at a subsequent date.
Which of the following accounts does not appear in the acquisition and expenditure cycle?
Sales Returns
Which of the following fraud signs could be detected by using data and analytic techniques?
Search for vendor's invoices submitted in numerical order. Search for invoices always slightly lower than a review threshold. Search for vendors with only post office box addresses.
The purchasing department
Should obtain competitive bids from vendors.
An audit firm is testing controls within the purchasing cycle. In which of the following procedures would the firm most likely apply sampling techniques?
Testing of operating effectiveness of controls over authorization of purchase orders
Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time?
The official who signs the check should compare the check with the voucher and should stamp "PAID" on the voucher documents
An audit team was testing source documents in the purchasing cycle and identified the following circumstances. Which of the following would be the most indicative of source document fraud?
The same invoice number appears on different invoices from the same vendor
If market prices are not readily available for fair value measurements, management should use
Their own assumptions as long as there are no contrary data
When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the
Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.
Goodwill impairment refers to
a decline in value of recorded goodwill
Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?
a) Have separate warehouse space for the more valuable items with frequent periodic physical counts and comparison to perpetual inventory records.
A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only 48 tables, but the receiving department at the furniture company accepted the tables. The invoice was eventually received but was for the original 84 tables. The furniture company paid the entire amount. Which of the following controls would have been least likely to have prevented this erroneous payment?
a) Personnel in the furniture company's purchasing department should compare the purchase requisition with the purchase order.
An auditor reviews job cost sheets to test which transaction assertion?
accuracy
From the auditors' point of view, inventory counts are more acceptable prior to the year-end when
accurate perpetual inventory records are maintained
The auditors should insist that a representative of the client be present during the inspection and count of securities to
acknowledge the receipt of securities returned
Which of the following internal control activities would most likely justify reducing the assessment of the risks of material misstatement for long-term notes payable?
all direct borrowings on notes payable are authorized by the board of directors
When auditing inventories, an auditor would least likely verify that
all inventory owned by the client is on hand at the time of the count
Which of the following activities performed by a department supervisor most likely would help to prevent or detect a payroll fraud?
approving a summary of hours each employee worked during the pay period
In connection with the audit of an issue of long-term bonds payable, the audit team should
ascertain that the client has obtained the opinion of counsel on the legality of the issue
An audit plan for the examination of the retained earnings account should include a step that requires verification of the
authorization for both cash and stock dividends declared and paid Gain or loss resulting from disposition of treasury shares
An audit team most likely would assess control risk at the maximum if the payroll department supervisor is responsible for
authorizing payroll rate changes for all employees
When independent stock transfer agents are not employed and the corporation issues its own stock and maintains stock records, canceled stock certificates should
be defaced to prevent reissuance and attached to their corresponding stubs
The source of authorization for preparation of materials requisitions is
bill of materials
To make a year-to-year comparison of inventory turnover most meaningful, the auditor performs the analysis
by product
A related party is a person or entity that
can exert significant influence over or be influenced by the company
An audit team's purpose in reviewing the documentation concerning the renewal of a note payable shortly after the balance-sheet date most likely is to obtain evidence concerning management's assertions about
classification
Responsibility for the physical inventory count lies with the
client
Auditors ordinarily ascertain whether payroll checks are properly endorsed during the audit of
clock cards
In auditing for unrecorded long-term bonds payable, an audit team most likely will
compare interest expense with the bond payable amount for reasonableness
Jones was engaged to examine the financial statements of Gamma Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income?
comparing recorded dividends with a standard financial reporting service's record of dividends
An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's balance assertion of
completeness
Auditors usually focus on which assertion when auditing current liabilities?
completeness
In a test of controls, auditors may trace receiving reports to vouchers recorded in the voucher register. This is a test for
completeness
Tracing a test count to the inventory compilations provides evidence for which ASB balance assertion?
completeness
When auditing account balances of liabilities, auditors are most concerned with management's assertion about
completeness
An audit team testing long-term investments would ordinarily use analytical procedures to ascertain the reasonableness of the
completeness of recorded investment income
Which of the following audit procedures would not likely be performed for audits of investments?
confirm investments with registrar
A portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?
confirmation
When evaluating inventory controls, an auditor would be least likely to
consider policy and procedure manuals
An audit plan to examine long-term debt most likely would include steps that require
correlating interest expense recorded for the period with outstanding debt
When testing a company's cost accounting system, the auditor uses procedures that are primarily designed to determine that
costs have been properly assigned to finished goods, work-in-process, and cost of goods sold
A retailer's physical count of inventory was higher than that shown by the perpetual records. Which of the following could explain the difference?
credit memos for several items returned by customers had not been recorded
Which of the following results of analytical procedures would most likely indicate possible unrecorded inventory?
current ratio of 3:1 as compared to 5:1 for the prior period
A large retail enterprise has established a policy that requires the paymaster to deliver all unclaimed payroll checks to the internal audit department at the end of each payroll distribution day. This policy was most likely adopted to
detect any fictitious employee who may have been placed on the payroll
The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense in the financial statements is to
detect unrecorded liabilities
Effective control over the cash payroll function would mandate which of the following?
each employee should be asked to sign a receipt
Which of the following is the most important audit consideration when examining the stockholders' equity section of a client's balance sheet?
entries in the capital stock account can be traced to resolutions in the minutes of meetings of the board of directors
Which of the following is not a step in the search for unrecorded liabilities?
examine disbursements for the period immediately before the end of the period
Inspecting marketable securities provides primary evidence about the ASB balance assertion of
existence
Canceling invoices with a "PAID" stamp after payment is a control that relates to which assertion?
existence or occurrence
Which cycle is not directly linked to the production cycle?
finance and investment cycle
Which of the following approaches is most suitable for auditing the finance and investment cycle?
gain an understanding of internal controls and perform extensive substative procedures
Hiring and firing employees is a function that should be performed by
human resources
An auditor usually traces the details of the test counts made during the observation of physical inventory counts to a final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are
included in the final inventory schedule
An auditor is testing internal controls in the manufacturing of a client's inventory. Which of the following audit procedures, if used, should be combined with other audit procedures when testing the operating effectiveness of controls?
inquiry
Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?
inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens
Client's inventory instructions should include all the following except
instructions for auditors' test counts
Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance?
inventory is complete
When verifying debits to the perpetual inventory records of a nonmanufacturing company, auditors would be most interested in examining a sample of purchase
invoices
An audit team would most likely examine the detail support for charges to which of the following accounts?
legal expense
A clause in a loan agreement that is intended to keep the borrower's financial position at the same level it was when the loan was made is called a
loan covenant
The auditor tests the quantity of materials charged to work-in-process by vouching these quantities to
material requisitions
All corporate capital stock transactions should ultimately be traced to the
minutes of the meetings of the board of directors
In determining the effectiveness of an entity's policies and procedures relating to the occurrence assertion for payroll transactions, auditors most likely would inquire about and
observe the separation of duties concerning personnel responsibilities and payroll disbursement
Ghost, CPA selected an invoice for a large inventory purchase and vouched the invoice to the receiving report. Which assertion is the auditor most likely testing?
occurence
Matthew Corp. has changed from a system of recording time worked on clock cards to a computerized payroll system in which employees record time in and out with magnetic cards. The computerized system automatically updates all payroll records. Because of this change
part of the audit trail is altered
Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries?
personnel
The overall production authorization starts with a
production plan
To determine the client's planned amount and timing of production of a product, the auditor reviews the
production plan
Which of the following accounts would most likely be audited in connection with a related balance-sheet account?
property tax expense
Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a cash-on-delivery (C.O.D) basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over?
purchase orders
To determine whether accounts payable are complete, auditors perform a test to verify that all merchandise received has been recorded. The population for this test consists of all
receiving reports
Which of the following internal control activities most likely addresses the completeness assertion for inventory?
receiving reports are prenumbered, and the numbering sequence is checked periodically
If goods ordered under a binding purchase commitment permanently decline in value below the agreed on purchase prices, a company should
record a loss for items not yet received
Curtis, a maintenance supervisor, submitted maintenance invoices from a phony repair company and received the checks at a post office box. This should have been prevented by
refusal by the purchasing department to approve the vendor
The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items
represented by tags were included on the listing
Your client counts inventory three months before the end of the fiscal year because controls over inventory are excellent. Which procedure is not necessary for the roll-forward?
request the client to recount inventory at the end of the year
A client maintains perpetual inventory records in quantities and in dollars. If the assessed control risk is high, an auditor would probably
request the client to schedule the physical inventory count at the end of the year
Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?
require employees to have their direct supervisors approve their time cards
which of the following accounts is not included in the acquisition and expenditures cycle?
sales returns and allowances
Which of the following procedures is least likely to be performed before the balance-sheet date?
search for unrecorded liabilities
Which of the following is not recognized by GAAP as appropriate for determining inventory cost?
standard costs
When the client holds a large amount of negotiable securities, auditors need to plan to guard against
substitution of securities already counted for other securities that should be on hand but are not
An auditor is examining a nonpublic company's inventory procurement system and has decided to perform tests of controls. Under which of the following conditions do GAAS require tests of controls be performed by an auditor?
the auditor believes that testing the controls could lead to a reduction in overall audit time and cost
Sales of capital stock and large debt financing transactions are usually authorized by
the board of directors
Inventory should be recorded when
the company has title to it
Which of the following activities most likely would be considered a weakness in an entity's internal control over payroll?
the employee who distributes payroll checks to the payroll department
If the auditors discover that the carrying amount of a client's investments is overstated because of a loss in value that is other than a temporary decline in market value, they should insist that
the loss in value be recognized in the financial statements
When a client company does not maintain its own capital stock records, the auditors should obtain written confirmation from the transfer agent and registrar concerning
the number of shares issued and outstanding
Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?
the warehouse manager is responsible for maintenance of perpetual inventory records
ABC Company has 100 shares of IBM stock that it holds as an investment. The stock was purchased three years ago and has been in the client's safe deposit box along with other investment securities. During an inspection of securities held by the client, the auditor noted the 100 shares of IBM stock had a different CUSIP number than the number listed when purchased and the number verified during the previous audit. Which of the following would be the auditor's main concern about this discovery?
there had been unauthorized buying and selling of investment securities
loan convenants are used for which of the following reasons?
to protect the lender from the borrower's financial position substantially weakening
company bonds and stocks are normally handled by an intermediary called a
transfer agent
hedging refers to
using derivatives to protect companies from market uncertainties
An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain evidence concerning management's balance assertions about
valuation
Which of the following assertions is most likely to have the highest risk of material misstatement for the goodwill account?
valuation
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about
valuation and allocation
