audit exam 3

realization of assets 19) An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to A) extend auditing procedures and assume responsibility for a greater period of time. B) accept responsibility for subsequent events. C) permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor's report. D) assume responsibility for events subsequent to the issuance of the auditor's report.

A 20) Auditors of accelerated filer public companies A) are responsible for reviewing subsequent events for a period of up to six months after the balance sheet date. B) must always dual-date their audit reports. C) must inquire about and consider any information about subsequent events that materially affects the effectiveness of internal control over financial reporting. D) must perform all of the above procedures. Answer: C Terms: Accelerated filers and subsequent events 21) A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events might result in adjustment of the December 31 financial statements? A) sale of a major subsidiary B) adoption of accelerated depreciation methods C) write-off of a substantial portion of inventory as obsolete D) collection of 90% of the accounts receivable existing at December 31 Answer: C 22) The auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is best expressed by which of the following statements? A) The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of fieldwork. B) 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. C) 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. D) 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. Answer: B 1) The date of the management representation letter received from the client should A) be the date of latest subsequent event disclosed in the notes to the financial statements. B) be dated no earlier than the date of the audit report. C) have the same date as the date of the balance sheet. D) have the same date as the date of the engagement letter. Answer: B Terms: Management representation letter 2) Which of the following procedures and methods are important in assessing a company's ability to continue as a going concern? A) Discussions with management regarding potential financial difficulties Evaluation of management's plans to avoid bankruptcy Yes Yes B) Discussions with management regarding potential financial difficulties Evaluation of management's plans to avoid bankruptcy No No C) Discussions with management regarding potential financial difficulties Evaluation of management's plans to avoid bankruptcy Yes No D) Discussions with management regarding potential financial difficulties Evaluation of management's plans to avoid bankruptcy No Yes Answer: A Terms: Going concern 3) The letter of representation obtained from an audit client should be A) dated as of the end of the period under audit. B) dated as of the audit report date. C) dated as of any date decided upon by the client and auditor. D) dated as of the issuance of the financial statement. Answer: B Terms: Letter of representation 4) When should auditors generally assess a client's ability to continue as a going concern? A) upon completion of the audit B) during the planning stages of the audit C) throughout the entire audit process D) during testing and completion phases of the audit Answer: C Terms: Going concern 5) Which of the following would the auditor expect to find in the client's management representation letter? A) management's recommendations for internal control effectiveness improvements B) management's plans for improving product quality C) management's compliance with contractual arrangements that impact the financial statements D) management's goals for improving earnings per share Answer: C Terms: Management representation letter 6) Auditing standards require that the auditor evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least A) one quarter beyond the balance sheet date. B) one quarter beyond the date of the auditor's report. C) one year beyond the balance sheet date. D) one year beyond the date of the auditor's report. Answer: C Terms: Auditing standards

credit approval 7) One type of shipping document is the ________, which is a written contract between the carrier and the seller of the receipt and shipment of goods. A) sales order B) bill of lading C) sales invoice D) customer order

B Terms: Document prepared to initiate shipment of goods 8) The document used to indicate to the customer the amount of a sale and payment due date is the A) sales invoice. B) bill of lading. C) purchase order. D) sales order. Answer: A Terms: Document used to indicate amount of sale and payment due date Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking 9) Which of the following is not an important aspect of billing? A) All shipments made have been billed. B) No shipment has been billed more than once. C) Each customer is billed for the proper amount. D) Credit is approved to customers for sales on account. Answer: D Terms: Sales and collection cycle 10) Most companies recognize sales revenue when A) sales are invoiced. B) payment is received from the customer. C) goods are shipped. D) the customer's order is received. Answer: C Terms: Recognize sales revenue 11) Which of the following is not a business function within the "Sales" class of transactions? A) processing customer orders B) granting credit C) processing and recording sales returns and allowances D) shipping goods Answer: C Terms: Business function within the sales class of transactions 12) The total of the individual account balances in the accounts receivable master file should equal the A) total sales for the period. B) balance of the sales account in the general ledger. C) total sales less the total cash received for the period. D) balance of the accounts receivable account in the general ledger. Answer: D Terms: Accounts receivable master file 13) In the accounts receivable master file, the length of time the account has been due can be useful to the client and the auditor in preparing the A) trial balance. B) working trial balance. C) accounts receivable trial balance. D) aged accounts receivable trial balance. Answer: D Terms: Accounts receivable master file 14) A document sent to each customer showing his or her beginning accounts receivable balance and the amount and date of each sale, cash payment received, any debit or credit memo issued, and the ending balance is the A) accounts receivable subsidiary ledger. B) monthly statement. C) remittance advice. D) sales invoice. Answer: B Terms: Document sent to customer showing beginning accounts receivable balance 15) The document that accompanies the customer's payment is the A) credit memo. B) remittance advice. C) vendor invoice. D) monthly statement. Answer: B Terms: Document that accompanies customer's payment 16) A ________ indicates a reduction in the amount due from a customer because of returned goods or an allowance. A) bill of lading B) sales invoice C) credit memo D) monthly statement Answer: C Terms: Credit memos 17) A ________ is a list prepared when cash is received by someone who has no responsibility for recording sales, accounts receivable, or cash, and who has no access to the accounting records. A) prelisting of cash receipts. B) sales invoice. C) packing ticket. D) vendor invoice. Answer: A Terms: Prelisting of cash receipts 18) When dealing with the processing and recording of cash receipts, A) the most important concern is the theft of cash. B) theft can only occur before the receipts are entered into the records. C) cash receipts should be deposited at least monthly. D) the monthly statement is used to prepare the cash receipts journal. Answer: A Terms: Processing and recording cash receipts 19) Some companies have customers send payments directly to an address maintained by a bank. This is called a(n) ________ system. A) direct deposit B) funds transfer C) lockbox D) interbank transfer Answer: C Terms: Payments sent to post office box 20) Which of the following is a business function related to sales returns and allowances? A) processing customer orders B) writing off uncollectible accounts C) processing and recording credit memos D) granting credit Answer: C 21) For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be recorded on which of the following documents? A) sales order B) sales invoice C) customer order D) remittance advice Answer: A Terms: Good internal controls in sales and collection cycle

incorrect acceptance 22) While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. Which of the following is the least likely auditor reaction to this discovery? A) perform expanded audit tests in the relevant areas B) increase detection risk in the relevant areas C) increase the sample size D) take no action until tests of other audit areas are completed

B Terms: Performing substantive test of details

credit approval 6) Before goods are shipped on account, a properly authorized person must A) prepare the sales invoice. B) approve the journal entry. C) approve the customer's credit. D) verify that the unit price is accurate.

C Terms: Goods shipped on account

Sampling and nonsampling risk 1) There are three phases in both statistical and nonstatistical sampling. The first phase is to A) generate random numbers for the sample. B) evaluate the results. C) plan the sample. D) select the sample.

C Terms: Statistical and nonstatistical sampling 2) Which of the following statements is most correct with concerning the quantification of sampling risk? A) Sampling risk cannot be quantified. B) Sampling risk can be quantified only when nonprobabilistic selection techniques are used to select the sample. C) Sampling risk can be quantified only when probabilistic selection techniques are used to select the sample. D) None of the above is correct. Answer: C Terms: Quantification of sampling risk Diff: Easy Objective: LO 15-2 AACSB: Reflective thinking 3) Which of the following statements is most correct with respect to the evaluation of nonprobabilistic sample results? A) It is acceptable to make nonprobabilistic evaluations only when probabilistic sample selection is used. B) It is acceptable to make nonprobabilistic evaluations only if the auditor cannot quantify sampling risk. C) It is never acceptable to evaluate a nonprobabilistic sample using statistical methods. D) All of the above are correct. Answer: C Terms: Evaluation of nonprobabilistic sample results 4) Which of the following is not a phase in the planning of both statistical and nonstatistical sampling? A) Plan the sample. B) Determine the probability that fraud has occurred. C) Select the sample and perform the tests. D) Evaluate the results. Answer: B Terms: Statistical and nonstatistical sampling 5) Which of the following statements is not correct regarding probabilistic and nonprobabilistic sample selection? A) In probabilistic selection, every population item has a known chance of being selected. B) It is acceptable to evaluate a nonprobabilistic sample using statistical methods. C) Probabilistic selection is required for all statistical sampling methods. D) Both probabilistic and nonprobabilistic methods are acceptable and commonly used. Answer: B 6) Which of the following is a correct statement regarding probabilistic versus nonprobabilistic sample selection? A) Auditors may make nonstatistical evaluations when using probabilistic sample selection. B) The AICPA recommends probabilistic sample selection. C) Nonstatistical sampling can't provide results that are as effective as a statistical sample. D) There is only one type of nonprobabilistic sample selection method. Answer: A Terms: Probabilistic and nonprobabilistic sample selection 7) An advantage of using statistical sampling techniques is that such techniques A) quantify sampling risk. B) eliminate the need for judgmental decisions. C) define the values of precision and reliability required to provide audit satisfaction. D) have been established in the courts to be superior to judgmental sampling. Answer: A Terms: Advantage of using statistical sampling techniques 8) Auditors who prefer statistical to nonstatistical sampling believe that the principal advantage of statistical sampling flows from its ability to A) quantify sampling risk. B) promote a more legally defensible procedural approach. C) define the precision required to provide audit satisfaction. D) establish conclusive audit evidence with decreased audit effort. Answer: A Terms: Advantage of statistical sampling over nonstatistical sampling 9) Which of the following is an accurate statement regarding sampling? A) A 95 percent confidence level provides a 5 percent sampling risk. B) The auditor can perform the audit tests only after the sample items are selected. C) The purpose of planning the sample is to make sure that the audit tests are performed in a manner that provides the desired sampling risk and minimizes the likelihood of nonsampling errors. D) All of the above are accurate statements. Answer: D Terms: Statistical and nonstatistical sampling 1) A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a A) random sample. B) statistical sample. C) judgment sample. D) representative sample. Answer: A 2) The process which requires the calculation of an interval and then selects the items based on the size of the interval is A) statistical sampling. B) random sample selection. C) systematic sample selection. D) computerized sample selection. Answer: C Terms: Process which requires calculation of an interval 3) In systematic sample selection, the population size is divided by the number of sample items desired in order to determine the A) sampling interval. B) tolerable exception rate. C) computed upper exceptions rate. D) mean. Answer: A 4) Which of the following methods of sample selection is appropriately used when selecting a random sample? A) Auditor's judgmental selection of items Use of random number generators Generalized audit software Yes No Yes B) Auditor's judgmental selection of items Use of random number generators Generalized audit software No Yes Yes C) Auditor's judgmental selection of items Use of random number generators Generalized audit software Yes No No D) Auditor's judgmental selection of items Use of random number generators Generalized audit software No Yes No Answer: B Terms: Methods of sample selection in selecting a random sample Diff: Moderate 5) Simple random sampling A) is used when there is a need to emphasize one or more types of population items. B) requires both input and output parameters to be set when using a random number generator. C) is generally used with replacement sampling. D) is a probabilistic sampling method. Answer: D Terms: Random sampling 6) When a population is divided into subpopulations, usually by dollar size, and larger samples are taken from the subpopulation with the larger sizes, ________ is being used. A) sampling with probability proportional to size B) stratified sampling C) block sampling D) haphazard sampling Answer: B Terms: Probabilistic sample selection methods 7) The advantage of systematic sample selection is that A) it is easy to use. B) there is limited possibility of it being biased. C) it is unnecessary to determine if the population is arranged randomly. D) it automatically selects items material to the financial statements. Answer: A Terms: Advantage of systematic sample selection 8) In performing a review of a client's cash disbursements, an auditor uses systematic sample selection with a random start. The primary disadvantage of this technique is population items A) may occur twice in the sample. B) must be reordered in a systematic pattern before the sample can be drawn. C) may occur in a systematic pattern, thus negating the randomness of the sample. D) must be replaced in the population after sampling to permit valid statistical inference. Answer: C Terms: Disadvantage of systematic sample selection with random start 9) Which of the following is a correct statement regarding block sampling? A) It is acceptable to use block sampling only if a reasonable number of blocks are used. B) Block sampling uses sampling with replacement. C) Block sampling is a probabilistic sampling method. D) There is considerable cost and time involved when block sampling is used. Answer: A Terms: Block sampling 10) The most serious shortcoming of the haphazard sample selection method is A) it is not subject to statistical sampling methods. B) it is time consuming to use. C) it is costly to use. D) it is difficult to remain completely unbiased in the selection. Answer: D Terms: Haphazard sample selection 11) Which of the following statements regarding block sampling is least likely to be true? A) Block sampling is the selection of several items in sequence. B) It is acceptable to use block sampling for tests of transactions only if a reasonable number of blocks is used. C) Only one block should be selected to increase the probability of a representative sample. D) Once the first item in the block is selected, the remainder of the block is chosen automatically. Answer: C Terms: Block sampling 12) When the auditor goes through a population and selects items using nonprobabilistic selection methods, without regard to their size, source, or other distinguishing characteristics, it is called A) block sample selection. B) haphazard selection. C) systematic sample selection. D) statistical selection. Answer: B 13) When auditors wish to evaluate a sample statistically, an acceptable selection method is: A) systematic sample selection. B) judgmental selection. C) haphazard selection. D) block sample selection. Answer: A 14) Which is not a method used by auditors to generate random numbers? A) electronic spreadsheets B) systematic sample generators C) random number generators D) generalized audit software Answer: B Terms: Random sampling 1) Which of the following occurrences would be least likely to warrant further audit attention for the auditor? A) deviations from client's established control procedures B) deviations from client's budgeted values C) monetary misstatements in populations of transaction data D) monetary misstatements in populations of account balance details Answer: B Terms: Warrant further audit attention for auditor 2) Which of the following statements is correct when dealing with sampling for exception rates? A) The term exception refers to both deviations from the client's control procedures and amounts that are not monetarily correct. B) When used with sampling, the term deviation is synonymous with the term exception. C) The actual population exception rate is the same as the sample exception rate. D) In using audit sampling for exception rates, the auditor is most concerned with the confidence interval. Answer: A Terms: Sample exception rate 3) In using audit sampling for exception rates A) the auditor wants to know the most the exception rate is likely to be. B) sampling error is the likelihood that the auditor will miss a monetary misstatement. C) the upper limit of the interval estimate is known as the sampling risk. D) the computed upper exception rate (CUER) cannot be considered in the context of specific audit objectives. Answer: A Terms: Sample exception rate 4) Which of the following is most correct when using audit sampling for exception rates? A) The auditor is concerned with the lowest rate. B) The auditor is concerned with the highest rate. C) The auditor is concerned with the average on previous audits. D) The auditor is not concerned with the exception rate for audits of nonpublic companies. Answer: B Terms: Auditing sampling for exception rates 5) The upper limit of the probable population exception rate is the A) upper exception rate. B) estimated population exception rate. C) computed upper exception rate. D) the tolerable exception rate. Answer: C Terms: Highest estimated exception rate in population 6) You are determining the significance of the following: you set a 5% risk of assessing control risk too low and your computation of the upper deviation risk is 7%. What could you conclude? A) There is a 95% chance the deviation rate is the population is less than 5%. B) There is a 5% chance the deviation rate in the population is less than 7%. C) There is a 95% chance the deviation rate in the population exceeds 95%. D) There is a 5% chance the deviation rate in the population exceeds 7%. Answer: D Terms: Risk of assessing control risk low and computation of upper deviation risk 1) The risk which the auditor is willing to take in accepting a control as being effective when the true population exception rate is greater than a tolerable rate is the A) finite correction factor. B) tolerable exception rate. C) acceptable risk of overreliance. D) estimated population exception rate. Answer: C Terms: Risk auditor is willing to take in accepting a control as being effective 2) The exception rate the auditor will permit in the population and still be willing to conclude that the control is operating effectively is the A) tolerable exception rate. B) estimated population exception rate. C) acceptable risk of overreliance. D) sample exception rate. Answer: A Terms: Exception rate auditor will permit and still be willing to reduce assessed level of control risk 3) If the auditor decides to assess control risk at the moderate level in a private company audit, when in previous years the auditor set control risk at the maximum level, then tests of controls for the current year would be A) increased in number. B) reduced in number. C) not performed. D) unchanged from prior planned settings. Answer: A Terms: Assess control risk 4) When the computed upper exception rate (CUER) is greater than the tolerable exception rate (TER), it is necessary for the auditor to take specific action. Which of the following courses of action would be most difficult to justify? A) Reduce the tolerable exception rate so as to accept the sample results. B) Expand the sample size and perform more tests. C) Revise the assessed control risk upward. D) Write a letter to management which outlines the control deficiencies. Answer: A Terms: Computed upper exception rate is greater than tolerable exception rate 5) Which of the following would have the least impact in determining sample size? A) acceptable risk of overreliance B) risk of assessing control risk too low C) tolerable exception rate D) population size Answer: D Terms: Least impact on determining sample size g 6) Which of the following represents the best description of the tolerable exception rate? A) the highest exception rate the auditor will permit in the control being tested and still conclude it is operating effectively B) the highest exception rate the auditor expects to find in the population C) the number of exceptions found in the sample divided by the sample size D) the highest estimated exception rate in a population at a given estimated population exception rate. Answer: A Terms: Tolerable exception rate 7) When analyzing exceptions, the auditor should keep in mind that A) all exceptions must be reported to management. B) they should determine the breakdown in the internal controls that allowed the exceptions to occur. C) the nature of an exception and its causes have no effect on the qualitative evaluation of the system. D) exceptions do not need to be analyzed if it is too costly. Answer: B Terms: Sample size and analyzing exceptions 8) The exception rate that the auditor will permit in the population and still be willing to use the preliminary control risk assessment is called the A) acceptable exception rate. B) estimated population exception rate. C) sample exception rate. D) tolerable exception rate. Answer: D Terms: Exception rate

Existence, accuracy, and cutoff objectives 16) When determining the timing of the accounts receivable confirmations, A) the receivables cannot be confirmed at an interim date. B) if accounts receivable are confirmed before year-end, the auditor typically prepares a roll-forward schedule. C) if the receivables are confirmed at an interim date, they must also be confirmed at year-end. D) if internal controls are adequate, the accounts receivable must be confirmed at year-end.

B Terms: Accounts receivable confirmation 17) When making the sampling decisions for accounts receivable confirmations, A) it is important to sample some items for every material segment of the population. B) if management refuses to allow the auditor to send confirmation requests to certain customers, the auditor must withdraw from the engagement. C) inherent risk does not impact the sample size. D) stratification of the sample is discouraged under current auditing standards. Answer: A Terms: Sample size for confirming accounts receivable 1) Which audit procedure would be used to test for the existence balance-related audit objective? A) Trace ten accounts from the aged trial balance to the accounts receivable master file. B) Confirm accounts receivable. C) Review large sales returns and allowances before and after the balance sheet date. D) Trace ten accounts from the trial balance to the accounts on the master file. Answer: B Terms: Balance-related audit objectives and audit procedures for sales and collection cycle 2) The auditor is reviewing the receivables listed on the aged trial balance for notes and related party receivables. Which balance-related audit objective is he trying to satisfy? A) detail tie-in B) existence C) classification D) all of the above Answer: C Terms: Balance-related audit objectives and audit procedures for sales and collection cycle 3. Which audit procedure would the auditor use to test for the cutoff balance-related audit objective? A) Review minutes of the board of directors meetings. B) Review the accounts receivable trial balance for large items. C) Use audit software to foot and cross-foot the aged trial balance. D) Select the last 20 sales transaction from the current year's sales journal and the first 20 from the subsequent year's and trace each to the related shipping documents. Answer: D Terms: Balance-related audit objectives and audit procedures for sales and collection cycle 1) Auditors often integrate procedures for presentation and disclosure objectives with A) Tests for transaction-related objectives Tests for balance-related objectives Yes Yes B) Tests for transaction-related objectives Tests for balance-related objectives No No C) Tests for transaction-related objectives Tests for balance-related objectives Yes No D) Tests for transaction-related objectives Tests for balance-related objectives No Yes Answer: A Terms: Procedures for presentation and disclosure objectives 2) The auditor's primary concern relative to presentation and disclosure-related objectives is A) accuracy. B) existence. C) completeness. D) occurrence. Answer: C Terms: Presentation and disclosure-related objectives 3) An auditor is reconciling the amounts included in the long-term debt footnotes to the information examined and supported in the audit files for long-term debt. Which audit objective is being satisfied? A) accuracy and valuation B) occurrence and rights and obligations C) completeness D) classification and understandability Answer: A 4) Which of the following is an accurate statement regarding presentation and disclosure? A) Auditors generally set the risk as low that all required information may not be completely disclosed in the footnotes. B) Audit tests performed in earlier audit phases provides sufficient appropriate evidence about contingent liabilities and subsequent events. C) Auditors do not conduct tests of controls related to disclosures when the initial assessment of control risk is below maximum. D) In phase IV (completing the audit), auditors evaluate whether the overall presentation of the financial statements and related footnotes complies with accounting standards. Answer: D Terms: Presentation and disclosure-related audit objective performed in what phase of audit process 1) If a potential loss on a contingent liability is remote, the liability usually is A) disclosed in footnotes, but not accrued. B) neither accrued nor disclosed in footnotes. C) accrued and indicated in the body of the financial statements. D) disclosed in the auditor's report but not disclosed on the financial statements. Answer: B Terms: Contingent liability

4) Which of the following accounts is not included in the acquisitions class of transactions? A) inventory B) prepaid expenses C) sales discounts D) accounts payable

C Terms: Account not included in acquisition class of transactions

Accounts receivable 29) For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the improper cutoff of cash A) is detected and correct when cash is separately audited. B) is unlikely to have a material impact on the balance sheet or the income statement. C) affects items on the balance sheet but does not affect net income. D) rarely occurs given the control consciousness of most entities.

C Terms: Cash receipts cutoff

2) Which of the following accounts is not part of the acquisition and payment cycle? A) prepaid expenses B) accounts payable C) sales returns and allowances D) property, plant, and equipment

C Terms: Overall objective of audit of acquisition and payment cycle

Details of journal and journal totals posted 23) Which document or record is used in the write-off of uncollectible accounts classes of transactions? A) general journal B) remittance advice C) sales transaction file D) sales order

A Terms: Business function within the sales class of transactions 24) Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts? A) company personnel B) temporary employees in the town where the lockbox is located C) bank employees D) company controller Answer: C Terms: Opening receipts

1) What typically initiates the acquisitions and payment cycle? A) issuance of a purchase requisition or request for purchase of goods or services B) issuance of payment to vendor C) approval of a new vendor D) purchase requisition

A Terms: Initiates acquisition and payment cycle;

direction of tests 2) When assessing risk control, the auditor must do all of the following except A) assess control risk for each objective by evaluating the controls and deficiencies for each objective. B) perform the detailed test of balances. C) identify the key internal controls and deficiencies. D) associate the key controls and deficiencies with the objectives.

B Terms: Assess control risk 3) When sales invoices are automatically calculated and posted by a computer, the auditor may be able to reduce substantive tests of transactions for which, if any, assertion? A) accuracy B) existence C) completeness D) none of the above Answer: A Terms: Reduce substantive tests of transactions 4) In many audits, no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern. A) accuracy B) existence C) completeness D) none of the above Answer: C Terms: No substantive tests of transactions

Pledge or factor accounts receivable 17) When do most companies record sales returns and allowances? A) during the month in which the sale occurs B) during the accounting period in which the return occurs C) whenever the customer contacts the company regarding the credit D) during the month after the sale occurs

B Terms: Record sales returns and allowances 18) Cutoff misstatements can occur for A) Sales Sales returns and allowances Yes Yes B) Sales Sales returns and allowances No No C) Sales Sales returns and allowances Yes No D) Sales Sales returns and allowances No Yes Answer: A Terms: Cutoff misstatements 19) The most important aspect of evaluating the client's method of obtaining a reliable cutoff is to A) perform extensive detailed testing of cutoff. B) evaluate the client's control procedures around cutoff. C) confirm a sample of transactions near period end with customers. D) confirm transaction with customers. Answer: B Terms: Reliable cutoff 20) Which of the following audit procedures would normally be included in the audit plan when auditing the allowance for doubtful accounts? A) Send positive confirmations. B) Inquire of the client's credit manager. C) Send negative confirmations. D) Examine sales invoices. Answer: B Terms: Auditing allowance for doubtful accounts 21) Generally accepted accounting principles require that revenue be reported net of sales returns and allowances A) if practical. B) if required by industry practice. C) if the amounts are material. D) any of the above Answer: C Terms: Generally accepted accounting principles 22) For which of the following accounts is cutoff least important? A) sales B) sales returns and allowances C) cash collections D) inventory Answer: C Terms: Cutoff 23) Which of the following most likely would be detected by a review of a client's sales cutoff? A) excessive sales discounts B) unrecorded sales for the year C) unauthorized goods returned for credit D) lapping of year-end accounts receivable Answer: B Terms: Sales cutoff 24) How might the auditor determine whether a client has limited rights to accounts receivable? A) Review minutes from board of directors meetings Inquiries of the client Yes Yes B) Review minutes from board of directors meetings Inquiries of the client No No C) Review minutes from board of directors meetings Inquiries of the client Yes No D) Review minutes from board of directors meetings Inquiries of the client No Yes Answer: A Terms: Limited rights to accounts receivable 25) You are reviewing sales to discover cutoff problems. If the client's policy is to record sales when title to the merchandise passes to the buyer, then the books and records would contain errors if the December 31 entries were for sales recorded A) before the merchandise was shipped. B) at the time the merchandise was shipped. C) several days subsequent to shipment. D) at a time after the point at which title passed. Answer: A Terms: Cutoff problems 26) A procedure to test for a cash receipts cutoff error is A) reconciling the bank statement. B) performing a four-column proof-of-cash. C) observing the counting of cash at the balance sheet date. D) tracing recorded cash receipts to subsequent period bank deposits on the bank statement. Answer: D Terms: Test for cash receipts cutoff 27) If material, all of the following are required to be separately disclosed in the financial statements except for A) accounts receivable from officers. B) accounts receivable from affiliates. C) sales and assets for different business segments. D) sales for the last ten days of the fiscal year. Answer: D Terms: Accounts receivable presentation and disclosure 28) For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve A) employee overtime wages. B) credit granted to customers. C) write-offs of customer accounts. D) cash disbursements. Answer: C Terms: Internal control

Sales cutoff 30) One of the shortcomings in evaluating the allowance for uncollectible accounts by reviewing individual noncurrent balances on the aged trial balance is I. it is difficult to compare the results of the current year with those of the previous year. II. current accounts are ignored in establishing the adequacy of the allowance. A) I only B) II only C) both I and II D) neither I nor II

C Terms: Accounts receivable

FOB destination 2) Cutoff procedures for inventory purchased should be designed by companies to assure that A) inventory owned by the company has been received. B) inventory included in the year-end inventory count has been paid. C) inventory received before year-end was recorded before year-end. D) inventory was correctly valued at year-end.

C Terms: Cutoff procedures for inventory purchased 3) You are the in-charge auditor and are designing audit procedures for accounts payable. Which of the following management assertions would you normally be most concerned about? A) occurrence B) accuracy C) completeness D) existence Answer: C Terms: Audit procedures for accounts payable

3) Which of the following is not one of the classes of transactions in the acquisition and payment cycle? A) acquisition of common stock B) acquisition of goods and services C) cash disbursements D) purchase returns and allowances and purchase discounts

A Terms: Acquisition and payment cycle and class of transactions

Special attention 2) Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally A) reduce the extent of tests of details of balances. B) reduce the extent of tests of controls. C) reduce the tests of transactions. D) reduce all of the other tests.

A Terms: Analytical procedures

Physical inventory before last day of year 9) Peprah Company pays its accounts payable 45 days after receipt of the goods or services. In this case, which audit procedure should be used to detect any unrecorded liabilities? A) Examine cash disbursements for several weeks after the balance sheet date. B) Reconcile purchase orders to requisition orders. C) Reconcile purchase orders to receiving reports. D) Reconcile purchase orders to vendor invoices.

A Terms: Audit procedure for unrecorded liabilities 10) Cutoff information for inventory acquisitions should be obtained during A) the interim period prior to year-end. B) the interim period immediately following year-end. C) the physical observation of inventory. D) either the interim period prior to or immediately following year-end. Answer: C Terms: Cutoff information for inventory acquisitions 11) Which of the following is not a typical audit procedure performed as part of the out-of-period liability tests? A) Examine underlying documentation for cash disbursements made during the last month of the year. B) Examine underlying documentation for bills not paid several weeks after the year-end. C) Trace receiving reports issued before year-end to related vendors' invoices. D) All of the above are correct. Answer: A Terms: Out-of-period liability tests 12) In searching for unrecorded liabilities the purpose of the audit procedure to "examine underlying documentation for subsequent cash disbursements" is to A) uncover liabilities on the balance sheet which should not have been recorded until a subsequent period. B) find the documentation relating to a cash disbursement. C) uncover payments made in a subsequent accounting period for liabilities that existed at the balance sheet date. D) uncover cash disbursements recorded in a subsequent accounting period which should be recorded in this period. Answer: C Terms: Unrecorded liabilities 13) To test for cutoff errors which overstate liabilities, the auditor should trace the receiving reports issued ________ to vendors' invoices. A) after year-end B) before year-end C) the last day of the fiscal year D) both before and after year-end Answer: A Terms: Test for cutoff errors which overstate liabilities 14) In determining that the accounts payable cutoff is correct, it is essential that the cutoff tests be coordinated with the A) confirmation of payables. B) tests of long-term liabilities. C) observation of inventory. D) cash count. Answer: C Terms: Accounts payable cutoff test coordinated with 15) An inventory acquisition is received late in the afternoon of December 31 after the physical inventory is completed. If the acquisition is included in accounts payable and purchases, but excluded from inventory, the result A) is an understatement of net earnings. B) is an overstatement of net earnings. C) is an overstatement of working capital. D) is an overstatement of owner's equity. Answer: A Terms: Inventory acquisition received after year-end, but included in accounts payable and purchases 16) When an acquisition is on an FOB origin basis, the inventory and related accounts payable must be recorded in the current period if the goods were A) received prior to the balance sheet date. B) shipped on or before the balance sheet date. C) both shipped and received prior to the balance sheet date. D) paid for in advance. Answer: B Terms: Acquisition of inventory on FOB basis 17) When assets are being verified, auditors focus much of their attention on making sure that the accounts are not overstated. Alternatively, auditors focus their efforts on understatement when auditing liabilities. What is the primary reason for this difference in focus? A) auditors' legal liability B) GAAP C) GAAS requirements D) all of the above Answer: A Terms: Basis for testing of asset accounts for overstatement and testing of liabilities for understatement 18) A company recorded an acquisition of merchandise and its related liability, but failed to include the merchandise in ending inventory. The effect on the financial statements was to A) understate liabilities. B) understate net income. C) overstate net income. D) have no impact on the financial statements since the errors cancel each other out. Answer: B Terms: Effect on financial statements of inventory cutoff 19) The overall objective in the audit of accounts payable is to determine whether accounts payable A) are fairly stated and properly disclosed. B) are overstated. C) are understated. D) are accurately stated. Answer: A Terms: Liabilities and balance-related audit objectives 20) ________ is a balance-related audit objective that is not applicable to liabilities. A) Existence B) Accuracy C) Detail tie-in D) Realizable value Answer: D Terms: Liabilities and balance-related audit objectives 1) The documents typically used to reconcile the balance on the accounts payable list with the confirmation or vendor's statements include all of the following except for A) receiving reports. B) vendor's invoices. C) sales invoices. D) cancelled checks. Answer: C Terms: Account payable reconciliation 2) Which of the following is most reliable for verifying the correct balance of accounts payable? A) vendors' invoices B) vendors' statements C) confirmations D) bills of lading Answer: C Terms: Most reliable for verifying correct balance of accounts payable 3) Vendors' statements and vendors' invoices are both relatively reliable evidence because they A) come directly to the auditor without being in client's possession. B) originate from a third party. C) validate the effectiveness of the control system. D) are compared to and reconciled with sales invoices. Answer: B Terms: Reliable evidence

Expected population exception rate and sample size 1) Both sampling and nonsampling risks are associated with A) Tests of controls. Substantive tests of transactions. Yes Yes B) Tests of controls. Substantive tests of transactions. No No C) Tests of controls. Substantive tests of transactions. Yes No D) Tests of controls. Substantive tests of transactions. No Yes

A Terms: Sampling and nonsampling risks 2) Tests for rates of occurrence are appropriately used in all but which of the following situations? A) Testing of internal controls Substantive testing of transactions Substantive testing of details of balances Yes Yes Yes B) Testing of internal controls Substantive testing of transactions Substantive testing of details of balances No Yes Yes C) Testing of internal controls Substantive testing of transactions Substantive testing of details of balances Yes Yes No D) Testing of internal controls Substantive testing of transactions Substantive testing of details of balances No No Yes Answer: C Terms: Tests for rates of occurrence 1) When selecting a sample size for substantive tests of balances which factor, other factors being equal, would result in a larger sample? A) a decrease in the tolerable misstatement B) small expected misstatements C) an increase in the tolerable misstatement D) an increase in the acceptable risk of incorrect acceptance Answer: A Terms: Selecting sample size for substantive tests of balance 2) The auditor's principal objective when using a sample of tests of details of balances is whether the A) account balance being audited is fairly stated. B) transactions being audited are free of misstatements. C) controls being tested are operating effectively. D) transactions and account balances being audited are fairly stated. Answer: A Terms: Principal objective when using sample of tests of details of balances Diff: Easy 3) What is the purpose of applying stratified sampling to a population? A) To avoid items that may contain misstatements To emphasize certain items and deemphasize others Yes Yes B) To avoid items that may contain misstatements To emphasize certain items and deemphasize others No No C) To avoid items that may contain misstatements To emphasize certain items and deemphasize others Yes No D) To avoid items that may contain misstatements To emphasize certain items and deemphasize others No Yes Answer: D Terms: Purpose of stratified sampling of populations 4) If an auditor desires a greater level of assurance in auditing a balance, the acceptable risk of incorrect acceptance A) is reduced. B) is increased. C) is not changed. D) may be reduced or increased depending upon other circumstances. Answer: A Terms: Greater level of assurance

Substantive tests 3) Analytical procedures A) are only done during the planning of the audit and when performing detailed tests. B) performed during the detailed testing phase are done before tests of details of balances. C) performed during the detailed testing phase are done before the balance sheet date. D) are performed only on accounts receivable, not on the entire sales and collection cycle.

B Terms: Analytical procedures 4) Which of the following is a correct statement regarding analytical procedures? A) If an auditor identifies a possible misstatement in sales using analytical procedures, accounts payable will be the likely offsetting misstatement. B) Auditors should also compare the results of their analytical procedures to budgets and industry trends. C) If sales are overstated, the income statement will be incorrect, but the balance sheet will be correct. D) If an analytical procedure uncovers an unusual fluctuation, the auditor must assume fraud is involved. Answer: B Terms: Analytical procedures 5) An auditor is comparing the write-off of uncollectible accounts as a percentage of total accounts receivable with previous years. A possible misstatement this procedure could uncover is A) overstatement or understatement of sales. B) overstatement or understatement of accounts receivable. C) overstatement or understatement of bad debt expense. D) overstatement or understatement of sales returns and allowances. Answer: C Terms: Understatement of sales and accounts receivable 1) The understatement of sales and accounts receivable is best uncovered by A) testing internal controls. B) testing the aged accounts receivable trial balance. C) substantive tests of transactions for shipments made but not recorded. D) substantive tests of transactions for bad debts. Answer: C Terms: Understatement of sales and accounts receivable 2) Tests of which balance-related audit objective are normally performed first in an audit of the sales and collection? A) accuracy B) completeness C) rights D) detail tie-in Answer: D Terms: Tests of balance-related audit objective

Audit committee 1) The audit firm issues an audit report for its client. The auditors have no obligation to make further inquiries with respect to the client's audited financial statements unless A) a development occurs that may affect the company's long term viability as a company. B) final resolution was made on disclosed contingency for which no liability needed to be accrued. C) new information comes to the auditor's attention concerning an event that occurred prior to the date of the audit report that, if known, would have impacted the audit opinion. D) a lawsuit, in which the risk of loss was considered remote, was resolved in the company's favor.

C

Recorded dollar population 6) When the sample selection is done using probability proportional to size sample selection (PPS), A) the actual number of units selected for testing may be more than the computed sample size. B) the auditor must use systematic selection, rather than random selection of dollars. C) population items with a zero recorded balance have no chance of being selected. D) negative balances must be treated as positive balances.

C Terms: Probability proportional to sample size 7) An accounts receivable population contains a total of four customers. The accounts, the amounts, and the cumulative total are shown below. Monetary unit sampling is to be used. Account Name Recorded Amount Cumulative Total Blue $357 $357 Brown 281 638 Gray 60 698 Green 574 1,272 Based on the information above, the population size is A) 4. B) 574. C) 1,272. D) $2,684. Answer: C Terms: Using monetary unit sampling 8) An auditor uses monetary unit sampling with a sampling interval of $20,000 and detects an item with a recorded amount of $10,000 with an audited value of $4,000. The projected misstatement of the sample is A) $12,000. B) $6,000. C) $10,000. D) $3,000. Answer: A Terms: Monetary unit sampling

projected misstatement 9) An auditor is confirming a population of accounts receivable for monetary correctness. The population totals $2,000,000 and a sample of 200 confirmations is obtained. Upon audit, no misstatements are uncovered in the sample. Assuming an ARIA of 10%, the confidence factor would be 2.31. Applied to a sampling interval of $10,000, the upper misstatement bound is calculated as A) $462. B) $4,329. C) $23,100. D) $865,801.

C Terms: Upper misstatement bound 10) Which balance-related audit objective cannot be assessed using monetary unit sampling? A) accuracy B) completeness C) existence D) All of the above can be assessed using monetary unit sampling. Answer: B Terms: Balance-related audit objective that cannot be assessed using monetary unit sampling 11) PPS samples can be obtained in an efficient manner using all but which of the following? A) hand selection by the auditor B) computer software C) random number tables D) systematic sampling techniques Answer: A Terms: PPS samples obtained 12) Which of the following item(s) are needed to determine the sample size using MUS? A) A point estimate for misstatements Recorded population value A confidence factor No Yes No B) A point estimate for misstatements Recorded population value A confidence factor Yes No Yes C) A point estimate for misstatements Recorded population value A confidence factor No Yes Yes D) A point estimate for misstatements Recorded population value A confidence factor Yes No No Answer: C Terms: Determining sample size 13) An estimate of the largest likely overstatement in a population at a given ARIA, using monetary unit sampling is the A) point estimates. B) precision intervals. C) confidence intervals. D) misstatement bound. Answer: D Terms: Maximum misstatements in monetary unit sampling 14) When using monetary unit sampling, evaluating the likelihood of unrecorded items in the population is A) unnecessary. B) impossible. C) possible but difficult. D) an automatic outcome of the process. Answer: B Terms: Likelihood of unrecorded items in population in monetary unit sampling 15) The statistical methods used to evaluate monetary unit samples A) neither exclude nor include units twice. B) may permit the inclusion of a unit in the sample more than once. C) do not permit a unit to be included in the sample more than once. D) ignore the possibility that a unit may be included in a sample more than once. Answer: B Terms: Statistical methods used to evaluate monetary unit samples 16) Which of the following is not a problem with monetary unit selection? A) population items with a zero recorded balance B) population items that should have a zero balance but do not C) accounts with negative balances D) accounts with small recorded balances that are significantly understated Answer: B Terms: Not a problem with monetary unit selection 17) The allowance for sampling risk when no misstatements are found in the sample is A) tolerable risk of misstatement. B) basic precision. C) confidence factor. D) population variance. Answer: B Terms: Basic precision and MUS 18) To calculate the sample size in monetary unit sampling, A) the confidence factor is multiplied by the tolerable misstatement as a percentage of the population value. B) the confidence factor is divided by the tolerable misstatement as a percentage of the population value. C) the tolerable misstatement is divided by the population recorded value. D) the tolerable misstatement is multiplied by the population recorded value. Answer: B Terms: Sample size 19) Calculating the sample size using monetary unit sampling depends on which of the following factors? A) Estimated population misstatement Recorded population value Yes Yes B) Estimated population misstatement Recorded population value No No C) Estimated population misstatement Recorded population value Yes No D) Estimated population misstatement Recorded population value No Yes Answer: A Terms: Sample size and monetary unit sampling 20) Using statistical sampling to assist in verifying the year-end accounts payable balance, an auditor has accumulated the following data Number of accounts Book balance Balance determined by the auditor Population: 4,000 $5,000,000 ? Sample: 200 $250,000 $300,000 Projecting the misstatement to the population, the auditor's estimate of year-end accounts payable balance would be: A) $5,050,000. B) $5,125,000. C) $6,000,000. D) $6,150,000. Answer: C Terms: Using statistical sampling project the misstatement to the population 21) Why do auditors find MUS appealing? A) MUS increases the likelihood of selecting a balance of high and low dollar items. B) MUS is easy to use in the audit environment. C) MUS provides a nonstatistical, rather than a statistical, conclusion. D) When misstatements are found, MUS rarely produces bounds in excess of materiality. Answer: B Terms: MUS appeal to auditors 22) In monetary unit sampling, the relationship between tolerable misstatement size and required sample size is A) direct. B) inverse. C) varied. D) indeterminable. Answer: B Terms: Monetary unit sampling 1) You are auditing Nelson and Company and determined that the sample results support a conclusion that the account is materially misstated, when in fact it was not misstated. This illustrates the risk of A) incorrect acceptance. B) incorrect rejection. C) control risk too low. D) control risk too high. Answer: B Terms: Sample results support conclusion that account is materially misstated 2) The method used to measure the estimated total misstatement amount in a population when there is both a recorded value and an audited value for each item in the sample is A) difference estimation. B) mean-per-unit estimation. C) ratio estimation. D) monetary unit sampling. Answer: A Terms: Method used to measure estimated total error amount in a population 3) The auditor is concerned with the audited value rather than the misstatement amount of each item in the sample when using A) difference estimation. B) mean-per-unit estimation. C) ratio estimation. D) monetary unit sampling. Answer: B Terms: Auditor concerned with audited value rather than error amount of each item 4) Acceptable risk of incorrect rejection affects auditors' action only when they conclude that a population is A) fairly stated. B) acceptable. C) not fairly stated. D) acceptable after certain adjustments. Answer: C Terms: Acceptable risk of incorrect rejection 5) If the auditor believes that there will be more than just a few exceptions discovered, and desires an accurate estimate of the dollar value of the exceptions, he or she will use A) attributes sampling. B) monetary unit sampling. C) block sampling. D) variables sampling. Answer: D Terms: Variables sampling 6) The acceptable risk of incorrect rejection is important only when there is a ________ cost to increasing the sample size. A) high B) low C) moderate D) marginal Answer: A Terms: Risk of incorrect rejection 7) Stratified sampling is applicable to difference, mean-per-unit, and ratio estimation, but it is most commonly used with A) ratio estimation. B) discovery sampling. C) difference estimation. D) mean-per-unit estimation. Answer: D Terms: Stratified sampling

auditor particularly concerned 6) Audit procedures related to contingent liabilities are initially focused on A) accuracy. B) completeness. C) existence. D) occurrence.

D Terms: Audit procedures related to contingent liabilities 7) With which of the following client personnel would it generally not be appropriate to inquire about commitments or contingent liabilities? A) controller B) president C) accounts receivable clerk D) vice president of sales Answer: C Terms: Inquire for commitments or contingent liabilities 8) Inquiries of management regarding the possibility of unrecorded contingencies will be useful in uncovering A) Management's intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements. Yes Yes B) Management's intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements. No No C) Management's intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements. Yes No D) Management's intentional failure to disclose existing contingencies. When management does not comprehend accounting disclosure requirements. No Yes Answer: D Terms: Inquiries of management

it does not need to be part of the report on the financial statements.

D Terms: Supplementary information accompanying basic financial statements Diff: Moderate Objective: LO 24-5 AACSB: Reflective thinking 12) Which of the following is not one of the categories of items included in the letter of representation? A) subsequent events B) completeness of information C) recognition, measurement, and disclosure D) materiality Answer: D Terms: Client letter of representation 13) Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern? A) review compliance with the terms of debt agreements B) confirmation of accounts receivable from principal customers C) reconciliation of interest expense with debt outstanding D) confirmation of bank balances Answer: A Terms: Audit procedures

Difference, mean-per-unit, and ratio estimation 8) Which of the following sampling plans would be designed to estimate a numerical measurement of a population, such as a dollar value? A) numerical sampling B) discovery sampling C) attributes sampling D) variables sampling

D Terms: Sampling plan designed to estimate a numerical measurement of population 9) When dealing with variables sampling and sampling risk, it is important to understand that A) for variables sampling, auditors uses ARIA but not ARIR. B) ARIR is of serious concern to the auditor because of potential legal implications. C) ARIA is a one-tailed statistical test. D) the confidence coefficients for ARIA are the same as the confidence level. Answer: C Terms: Sampling risk 10) When working with the different variables methods, A) difference estimation frequently results in larger sample sizes than any other method. B) ratio estimation is the method preferred by most auditors since it is simpler to calculate confidence intervals. C) the difference between the mean-per-unit estimate and the difference estimate is the definition of what is being measured. D) stratification can only be used with difference estimation. Answer: C Terms: Variables sampling 11) Which of the following is not a type of statistical method that provides results in dollar terms? A) variables sampling B) attributes sampling C) monetary unit sampling D) sampling with probability proportional to size Answer: B Terms: Not a type of statistical method that provides results in dollar terms 12) When drawing statistical inferences about the population when using variables sampling, A) a confidence interval cannot be calculated. B) there is always a possibility that the sample is not sufficiently representative of the population to provide a sample mean or standard deviation reasonably close to those of the population. C) the auditor does not know the reliability fo the statistical inference process that is used to draw the conclusions. D) all of the above are correct. Answer: B Terms: Sampling plan designed to estimate a numerical measurement of population 13) When making statistical inferences, the auditor must remember that A) the true population value must always be known. B) auditors can state the conclusions drawn from a confidence interval in different ways. C) there can be no possibility that the sample is not sufficiently representative of the population. D) the knowledge of sampling distributions does not help the auditors to draw statistical conclusions. Answer: B 1) An important statistic to consider when using a statistical sampling audit plan is the population variability. The population variability is measured by the A) sample mean. B) standard deviation. C) standard error of the sample mean. D) estimated population total minus the actual population. Answer: B 1) The two primary classes of transactions in the sales and collection cycle are A) sales and sales discounts. B) sales and cash receipts. C) sales and sales returns. D) sales and accounts receivable. Answer: B Terms: Classes of transactions

Letter of inquiry 4) The standard inquiry to the client's attorney should be prepared on A) plain paper (no letterhead) and be unsigned. B) lawyer's stationery and signed by the lawyer. C) auditor's stationery and signed by an audit partner. D) client's letterhead and signed by a company official.

D Terms: Standard inquiry to the client's attorney letter 5) What is one of the main reasons an attorney may refuse to provide auditors with complete information about contingent liabilities? A) The attorneys refuse to disclose information they consider confidential. The attorneys refuse to respond due to a lack of knowledge about matters involving contingent liabilities. Yes Yes B) The attorneys refuse to disclose information they consider confidential. The attorneys refuse to respond due to a lack of knowledge about matters involving contingent liabilities. No No C) The attorneys refuse to disclose information they consider confidential. The attorneys refuse to respond due to a lack of knowledge about matters involving contingent liabilities. Yes No D) The attorneys refuse to disclose information they consider confidential. The attorneys refuse to respond due to a lack of knowledge about matters involving contingent liabilities. No Yes Answer: A Terms: Standard inquiry to the client's attorney letter Diff: Easy Objective: LO 24-3 AACSB: Reflective thinking 6) An attorney is aware of a violation of a patent agreement that could result in a significant loss to the client if it were known. This is an example of a(n) A) commitment. B) unasserted claim. C) pending litigation. D) subsequent event. Answer: B Terms: Standard inquiry to the client's attorney letter 7) Management furnishes the independent auditor with information concerning litigation, claims, and assessments. Which of the following is the auditor's primary means of initiating action to corroborate such information? A) Request that client lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they were consulted during the period under examination. B) Request that client management send a standard inquiry to the client's attorney letter to those lawyers with whom management consulted concerning litigation, claims, and assessments. C) Request that client lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate, and account for litigation, claims, and assessments. D) Request that client management engage outside attorneys to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims, and assessments. Answer: B Terms: Corroborate information concerning litigation, claims, and assessments 8) If an attorney refuses to provide the auditor with information about material existing lawsuits or unasserted claims, A) the attorney may face sanctions from the American Bar Association. B) the auditors must modify their audit report to reflect the lack of available evidence. C) the attorney can no longer represent the client. D) the auditor must withdraw from the engagement. Answer: B 9) As directed by the Sarbanes-Oxley Act, A) an attorney must report material violations of federal securities law to the public company's chief legal counsel or chief executive officer. B) attorneys cannot breach confidentiality rules even if a client is committing a crime or a fraud. C) if the audit committee fails to remedy any material violations of the federal securities law, the attorney must report the violation to the SEC. D) All of the above are required by Sarbanes-Oxley. Answer: A 1) The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the statements being audited. The procedures required to verify these transactions are commonly referred to as the review for A) contingent liabilities. B) subsequent year's transactions. C) late unusual occurrences. D) subsequent events. Answer: D 2) Which type of subsequent event requires consideration by management and evaluation by the auditor? A) Subsequent events that have a direct effect on the financial statements and require adjustment Subsequent events that do not have a direct effect on the financial statements but for which disclosure may be required Yes Yes B) Subsequent events that have a direct effect on the financial statements and require adjustment Subsequent events that do not have a direct effect on the financial statements but for which disclosure may be required No No C) Subsequent events that have a direct effect on the financial statements and require adjustment Subsequent events that do not have a direct effect on the financial statements but for which disclosure may be required Yes No D) Subsequent events that have a direct effect on the financial statements and require adjustment Subsequent events that do not have a direct effect on the financial statements but for which disclosure may be required No Yes Answer: A 3) Whenever subsequent events are used to evaluate the amounts included in the statements, care must be taken to distinguish between conditions that existed at the balance sheet date and those that come into being after the balance sheet date. The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation A) took place before the balance sheet date. B) did not take place until after the balance sheet date. C) occurred both before and after the balance sheet date. D) are reimbursable through insurance policies. Answer: B Terms: Subsequent events

Acceptable risk of incorrect acceptance 5) In estimating the population misstatement, the first step in projecting from the sample to the population is to A) make a point estimate. B) revise the upper error bound. C) calculate the precision interval. D) determine the population mean.

A 6) Tolerable misstatement is used to A) Determine sample size Select the sample Evaluate results Yes Yes No B) Determine sample size Select the sample Evaluate results No Yes No C) Determine sample size Select the sample Evaluate results No No Yes D) Determine sample size Select the sample Evaluate results Yes No Yes Answer: D Terms: Tolerable misstatement 7) The word below that best explains the relationship between required sample size and the acceptable risk of incorrect acceptance is A) inverse. B) direct. C) proportional. D) indeterminate. Answer: A Terms: Relationship between required sample size and acceptable risk of incorrect acceptance 8) The final step in the evaluation of the audit results is the decision to A) accept the population as fairly stated or to require further action. B) determine sampling error and calculate the estimated total population error. C) project the point estimate. D) determine the error in each sample. Answer: A Terms: Final step in evaluation of audit results 9) Which of the following does not have to be considered in determining the initial sample size of a test of details? A) tolerable misstatement B) acceptable risk of incorrect rejection C) estimate of misstatements in the population D) inherent risk Answer: B Terms: Not considered in determining initial sample size of test of details 10) If an auditor concludes that internal controls are likely to be effective, the preliminary assessment of control risk can be reduced, leading to which of the following impacts on the acceptable risk of incorrect acceptance? A) The acceptable risk of incorrect acceptance will be reduced. B) The acceptable risk of incorrect acceptance will be increased. C) The acceptable risk of incorrect acceptance will be eliminated. D) The acceptable risk of incorrect acceptance will not be impacted. Answer: B Terms: Auditor concludes internal controls are effective 11) If acceptable audit risk is increased, acceptable risk of incorrect acceptance should be A) increased. B) reduced. C) unaffected. D) modified. Answer: A Terms: Acceptable audit risk is increased, acceptable risk of incorrect acceptance Diff: Moderate Objective: LO 17-2 AACSB: Reflective thinking 12) You are auditing Raji and Company. You discover an item of inventory with an audited value of $5,000 with a recorded amount of $3,000. If this is the only error you discover, the projected misstatement for the sample would be A) $5,000. B) $2,000. C) $3,000. D) $4,000. Answer: B Terms: Projected misstatement for sample for audited value and recorded amount 13) One of the steps involved in planning the sample for the tests of details of balances is to A) select the sample. B) perform the audit procedures. C) define a misstatement. D) analyze the misstatements. Answer: C Terms: Steps in the audit sampling for tests of details of balances 14) The risk the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance under audit is greater than the tolerable misstatement is A) the upper bound. B) the tolerable risk. C) the acceptable risk of incorrect acceptance. D) the lower bound. Answer: C Terms: Acceptable risk of incorrect acceptance 15) As the amount of misstatements expected in the population approaches tolerable misstatement, the planned sample size will A) decrease. B) increase. C) vary based on characteristics of the population. D) be unaffected. Answer: B Terms: Effect on planned sample size of amount of misstatements expected in population approached tolerable misstatement 16) An auditor using nonstatistical sampling cannot formally measure sampling error and therefore must subjectively consider the possibility that the true population misstatement exceeds a tolerable amount. Which of the following factors should be considered by the auditor in making this assessment? A) The dollar difference between the point estimate and tolerable misstatement The extent to which items in the population have been audited 100 percent Yes Yes B) The dollar difference between the point estimate and tolerable misstatement The extent to which items in the population have been audited 100 percent No No C) The dollar difference between the point estimate and tolerable misstatement The extent to which items in the population have been audited 100 percent Yes No D) The dollar difference between the point estimate and tolerable misstatement The extent to which items in the population have been audited 100 percent No Yes Answer: A Terms: Nonstatistical sampling

report date 16) An auditor's decision concerning whether or not to dual date an audit report is primarily based on the auditor's decision to A) extend appropriate audit procedures. B) assume responsibility for events after the date of the auditor's report. C) assume responsibility for event from fiscal year-end to the date of the audit report. D) roll the dice and hope for a successful outcome.

A 17) The auditor's responsibility for "reviewing the subsequent events" of a public company that is about to issue new securities is normally limited to the period of time A) beginning with the balance sheet date and ending with the date of the auditor's report. B) beginning with the start of the fiscal year under audit and ending with the balance sheet date. C) beginning with the start of the fiscal year under audit and ending with the date of the auditor's report. D) beginning with the balance sheet date and ending with the date the registration statement becomes effective. Answer: D 18) Subsequent events affecting the realization of assets ordinarily will require an adjustment of the financial statements under examination because such events typically represent A) the culmination of conditions that existed at the balance sheet date. B) additional new information related to events that were in existence on the balance sheet date. C) final estimates of losses relating to casualties occurring in the subsequent events period. D) preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date. Answer: B Terms: Subsequent events

Going concern issues 7) Auditing standards require auditors to evaluate whether there is substantial doubt about a client's ability to continue as a going concern. One of the most important audit procedures to perform to assess the going concern question is A) analytical procedures. B) confirmations from creditors. C) statistical sampling procedures. D) tests of internal controls.

A Terms: Audit procedures to assess going concern 8) Which of the following statements regarding the letter of representation is not correct? A) It is prepared on the client's letterhead. B) It is addressed to the CPA firm. C) It is signed by high-level corporate officials, usually the president and chief financial officer. D) It is optional, not required, that the auditor obtain such a letter from management. Answer: D Terms: Letter of representation 9) Refusal by a client to prepare and sign the representation letter would require the auditor to issue a(n) A) qualified opinion or a disclaimer of opinion. B) adverse opinion or a disclaimer of opinion. C) qualified or an adverse opinion. D) unqualified opinion with an explanatory paragraph. Answer: A Terms: Refusal to prepare and sign the letter of representation 10) A management representation letter is A) prepared on the CPA's letterhead. B) addressed to the client. C) signed by high-level corporate officials. D) dated as of the balance sheet date. Answer: C 11) Which of the following is correct regarding supplementary information? A) The auditor must express an opinion on the supplementary information. B) When reporting on supplementary information, the auditor uses a different materiality threshold from that used in forming an opinion on the basic financial statements. C) If the auditor's report on the audited financial statements contains an adverse opinion, the auditor can still issue an unqualified opinion on the supplementary information. D) The auditor can issue a separate report on the supplementary information

cutoff

A Terms: Balance-related audit objectives for accounts payable 1) Which substantive analytical procedure would help determine if there are unrecorded or nonexistent accounts? A) Review the list of accounts payable for unusual items. B) Compare acquisition-related expense account balances with prior years. C) Calculate ratios, such as accounts payable divided by current liabilities. D) Calculate ratios, such as sales divided by gross profit. Answer: C Terms: Substantive analytical procedures 1) At what point do most companies recognize liabilities in the acquisition and payment cycle when the goods are shipped FOB destination? A) when the purchase order is issued B) when the vendor acknowledges receipt of the order C) when the goods or services are received D) when the vendor invoice is received Answer: C Terms: Companies recognize liabilities in acquisition and payment cycle

remote 2) A commitment is best described as A) an agreement to commit the firm to a set of fixed conditions in the future. B) an agreement to commit the firm to a set of fixed conditions in the future that depends on company profitability. C) an agreement to commit the firm to a set of fixed conditions in the future that depends on current market conditions. D) a potential future obligation to an outside party for an as yet to be determined amount.

A Terms: Commitments 3) Which of the following groups has the responsibility for identifying and deciding the appropriate accounting treatment for recording or disclosing contingent liabilities? A) auditors B) legal counsel C) management D) management and the auditors Answer: C Terms: Recording or disclosing contingent liabilities 4) You are auditing Rodgers and Company. You are aware of a potential loss due to noncompliance with environmental regulations. Management has assessed that there is a 40% chance that a $10M payment could result from the non-compliance. The appropriate financial statement treatment is to A) accrue a $4 million liability. B) disclose a liability and provide a range of outcomes. C) since there is less than a 50% chance of occurrence, ignore. D) since there is greater that a remote chance of occurrence, accrue the $10 million. Answer: B Terms: Potential loss for noncompliance 5) Which of the following is a contingent liability with which an auditor is particularly concerned? A) Notes receivable discounted Product warranties Yes Yes B) Notes receivable discounted Product warranties No No C) Notes receivable discounted Product warranties Yes No D) Notes receivable discounted Product warranties No Yes Answer: A Terms: Contingent liability

Segregation of duties 22) Which of the following is the appropriate point at which the auditor deems authorization to be critical? A) Credit granting Price authorization Shipment of goods Yes Yes Yes B) Credit granting Price authorization Shipment of goods Yes No Yes C) Credit granting Price authorization Shipment of goods No Yes No D) Credit granting Price authorization Shipment of goods Yes No No

A Terms: Point authorization deemed critical 23) Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction? A) granting of credit B) shipment of goods C) determination of discounts D) selling of goods for cash Answer: D Terms: Specific authorization to conduct sales transactions 24) As a test of control, the auditor examines sales invoices for supporting documents. The relevant transaction-related audit objective is A) accuracy. B) occurrence. C) classification. D) timing. Answer: A Terms: Transaction-related audit objectives 25) The accurate recording of sales transactions concerns all of the following except for A) proper credit authorization. B) shipping the amount of goods ordered. C) accurately billing for the amount of goods shipped. D) accurately recording the amount billed in the accounting records. Answer: A Terms: Sales recorded 1) Except for two key differences, the transaction-related audit objectives are essentially the same for the processing of credit memos as they are for sales. Which of the following are the two key differences? A) risk and emphasis on the completeness objective B) materiality and emphasis on the accuracy objective C) risk and emphasis on the classification objective D) materiality and emphasis on the occurrence objective Answer: D Terms: Transaction-related audit objectives for credit memos and sales 2) Smith Manufacturing Company's accounts receivable clerk has a friend who is also a customer of Smith Manufacturing. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to A) prenumber and account for all credit memorandums. B) require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved. C) have independent sales and accounts receivable departments. D) mail monthly statements to customers. Answer: B Terms: Fictitious credit memos

Negative confirmation 8) When positive confirmations are used, auditing standards require alternative procedures for confirmations not returned by the customer. Which of the following would not be considered an alternative procedure? A) Send a second confirmation request. B) Examine subsequent cash receipts to determine if the receivable has been paid. C) Examine shipping documents to verify that the merchandise was shipped. D) Examine sales invoice to verify the actual issuance of a sales invoice and the actual date of the billing.

A Terms: Positive confirmations

understatement of sales 5) Which one the following procedures performed for the billing function provides evidence for the completeness assertion? A) making sure that all shipments have been billed B) making sure that no shipment has been billed more than twice C) making sure that each shipment is billed at the correct amount D) making sure that each shipment is billed to the proper customer

A Terms: Procedures

Auditor requires smaller sample 23) Whenever auditors use sampling, they risk making incorrect conclusions about the population. The risk that the auditor concludes that controls are more effective than they actually are is known as the A) risk of overreliance. B) risk of underreliance. C) risk that the sample is not representative of the population. D) risk that the sample conclusions cannot be useful because of nonprobability sampling.

A Terms: Sampling and the risk of making incorrect conclusions about the population 24) When choosing the appropriate acceptable risk of overreliance, the auditor needs to A) rely on his/her professional judgment. B) err on the side of conservatism. C) consult the professional standards. D) follow SEC guidelines. Answer: A Terms: Acceptable risk of overreliance Diff: Challenging Objective: LO 15-5 AACSB: Reflective thinking 25) When planning the audit sample, the ________ is (are) those items about which the auditor wishes to generalize. A) attributes B) sampling unit C) population D) sample Answer: C Terms: Population and sampling unit 26) If the result obtained from a particular sample for control and substantive tests of transactions is critical to the formation of an audit opinion, which of the following is the most important to the auditor in concluding of the appropriateness and sufficiency of evidence gathered? A) acceptable risk of overreliance B) estimated population exception rate C) tolerable exception rate D) size of the population Answer: A 27) There is a(n) ________ relationship between acceptable risk of overreliance and planned sample size. A) direct B) inverse C) proportional D) exponential Answer: B Terms: Acceptable risk of overreliance 28) Which of the following results in a larger sample size? A) Decrease the estimated population exception rate and decrease the tolerable exception rate. B) Increase the estimated population exception rate and decrease the tolerable exception rate. C) Decrease the estimated population exception rate and increase the tolerable exception rate. D) Increase the estimated population exception rate and increase the tolerable exception rate. Answer: B Terms: Results in larger sample size 29) When determining tolerable exception rate (TER), A) the auditor considers the degree of reliance to be placed on the control and the significance of the control to the audit. B) if only one internal control is used to support a low control risk assessment for an objective, TER will be higher for the attribute than if multiple controls are used to support a low control risk assessment for the same objective. C) control deviations increase both the risk of material misstatements in the accounting record, and will always result in misstatements. D) a smaller sample size is needed for a low TER than for a high TER. Answer: A Terms: Tolerable exception rate 30) The acceptable risk of overreliance A) is normally assessed at a high level when auditing an accelerated filer public company. B) and the extent of tests of controls depends on assessed control risk for accelerated filer public companies. C) and the control risk will be assessed as low for audits where there is extensive reliance on internal controls. D) does not impact the effectiveness of the audit. Answer: C Terms: Acceptable risk of overreliance 1) Rodgers CPA believes that the rate of client billing errors is 4% and has established a tolerable deviation rate of 6%. In auditing client invoices Rodgers should use A) stratified sampling. B) classical sampling. C) proportional sampling. D) attributes sampling. Answer: D Terms: Auditing client invoices 2) Attributes sampling would be an appropriate method to use on which one of the following procedures in an audit program? A) Review sales transactions for large and unreasonable amounts. B) Observe whether the duties of the accounts receivable clerk are separate from handling cash. C) Examine a sample of duplicate sales invoices for credit approval by the credit manager. D) Review the aged schedule of accounts receivable to determine if receivables from officers are included. Answer: C Terms: Attributes sampling 3) Attributes sampling is based on the ________ distribution, in which each possible sample in the population has one of two possible values, such as yes or no. A) random B) binomial C) statistical D) nonstatistical Answer: B Terms: Attribute sampling and binomial distribution 4) For which of the following audit procedures would audit sampling not be appropriate? A) Review sales transactions for large and unusual amounts. B) Examine a sample of duplicate sales invoices for credit approval. C) Compare the quantity on duplicate sales invoices with the quantity on related shipping documents. D) Audit sampling is appropriate for each of the above procedures. Answer: A Terms: Audit sampling not appropriate for which audit procedure 5) Which of the following is one of the main differences between attributes sampling and nonstatistical sampling? A) the number of steps involved B) the calculation of the initial sample sizes C) determining the objectives of the audit test D) defining the population Answer: B Terms: Differences between attributes sampling and nonstatistical sampling 6) Which of the following is an accurate statement regarding sampling distribution? A) A sampling distribution is a sample with characteristics the same as those of the population. B) Sampling distributions allow the auditor to make probability statements about the likely representativeness of any sample that is in the distribution. C) Each population exception rate and sample size has the same sampling distribution. D) Auditors cannot use sampling distributions to draw statistical conclusions about the unknown population being sampled. Answer: B Terms: Sampling distribution 1) A principal advantage of statistical methods of attributes sampling over nonstatistical methods is that they provide a quantifiable basis for establishing the A) risk of assessing control risk too low. B) tolerable exception rate. C) expected population exception rate. D) sample size. Answer: D Terms: Advantage of statistical methods of attributes sampling 2) In using sampling distribution for attributes, which one of the following must be known to evaluate the sample results? A) estimated dollar value of the population B) standard exception of the values in the population C) actual exception rate of the attribute in the population D) sample size Answer: D Terms: Estimation sampling for attributes 3) When evaluating the results of attributes sampling, A) the acceptable risk of overreliance (ARO) is set at high or low. B) tables are used to compute the computed upper exception rate (CUER). C) if the sample size is not equal to those provided for in the attributes sampling evaluation tables, the tables cannot be used. D) the true exception rate is computed from various tables. Answer: B Terms: Attributes sampling application 4) When deciding the acceptability of the population, A) the methodology for deciding the acceptability of the population for attributes differs from determining the acceptability for nonstatistical sampling. B) before the population can be considered acceptable, the CUER determined on the basis of the actual sample results must be less than or equal to TER when both are based on the same ARO. C) when the CUER is greater than the TER, the auditor must increase the sample size. D) the CUER is compared with the TER in total, not for each attribute. Answer: B Terms: Acceptability of the population and attribute sampling 5) When planning the sample, A) auditors using attributes sampling assign a low, medium, or high acceptable risk of overreliance. B) tables are used by the auditor in statistical sampling to determine initial sample size. C) most auditors use attributes sampling for medium to small populations. D) the tolerable exception rate does not need to be specified for statistical sampling. Answer: B Terms: Planning the audit sample 6) As the auditor, you are assessing the proper sample size to use in testing controls. When using attributes sampling, which of the following is most correct? A) A 10% change in population size will have the least effect on sample size. B) A 10% change in the tolerable deviation rate will have the least effect on sample size. C) A 10% change in the expected deviation rate will have the least effect on sample size. D) A 10% change in the tolerable will have the least effect on sample size. Answer: A Terms: Attributes sampling 7) In attributes sampling, an estimate of the expected population exception rate is necessary to plan the sample size. The relationship of expected population exception rate (EPER) to sample size is A) direct (small EPER = small sample). B) inverse (small EPER = large sample). C) a variable (sometimes small, sometimes large) dependent on other factors present. D) indeterminate. Answer: A Terms: Attributes sampling

Upper exception rate 20) One way to evaluate sampling risk when nonstatistical sampling is used is to A) subtract the sample exception rate from the tolerable exception rate. B) add the sample exception rate and the tolerable exception rate. C) subtract the sample exception rate from the acceptable risk of overreliance. D) add the sample exception rate and the acceptable risk of overreliance.

A Terms: Sampling risk 21) A danger in setting the acceptable risk of overreliance too low is A) The risk that the auditor is willing to take of accepting a control as ineffective when it is effective The risk that the auditor is willing to take of accepting a control as effective when it is ineffective Yes Yes B) The risk that the auditor is willing to take of accepting a control as ineffective when it is effective The risk that the auditor is willing to take of accepting a control as effective when it is ineffective No No C) The risk that the auditor is willing to take of accepting a control as ineffective when it is effective The risk that the auditor is willing to take of accepting a control as effective when it is ineffective Yes No D) The risk that the auditor is willing to take of accepting a control as ineffective when it is effective The risk that the auditor is willing to take of accepting a control as effective when it is ineffective No Yes Answer: D Terms: Acceptable risk of overreliance 22) When using statistical sampling, the auditor would most likely require a smaller sample if the A) population increases. B) desired reliability decreases. C) desired precision interval narrows. D) expected exception rate increases. Answer: B Terms: Statistical sampling

verifying

A Terms: Tests for omitted transactions and nonexistent transactions 18) Which one of the following best describes the auditors responsibilities regarding appropriate authorizations in the sales/collections cycle? A) Credit must be authorized before the sale. B) Goods must be shipped after the authorization C) Prices must be authorized. D) All of the above should be of concern to the auditor. Answer: D Terms: Authorizations in sales/collection cycle 19) Which type of misstatement is always a fraud? A) sales included in the journals for which no shipment was made B) sales to related parties, such as officers and subsidiaries C) shipments made to nonexistent customers and recorded as sales D) sales recorded more than once. Answer: C Terms: Fraud and errors 20) An auditor needs to determine whether all customers of an electric utility company are being billed. The auditor should test from the A) sales register to the accounts receivable ledger. B) sales register to the meter department records. C) accounts receivable ledger to the sales register. D) meter department records to the sales register. Answer: D Terms: All customers being billed 21) Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mail room? A) The cashier prepares the daily deposit. B) The cashier makes the daily deposit at a local bank. C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards. D) The cashier endorses the checks. Answer: C Terms: Incompatible operation if cashier receives remittance

5) A written purchase order is a contractual document that is A) an offer to buy goods or services. B) not enforceable if it is not in writing. C) prepared by the receiving department. D) an acceptance of a vendor's catalog offer to sell.

A Terms: Written purchase order is a legal contractual document 6) Which one of the following duties should not be assigned the purchases department? A) finding the lowest cost vendor B) reviewing vendors' catalog descriptions and prices for standardized items C) designing the purchase order form D) authorizing the acquisition of goods Answer: D Terms: Duties not to be assigned to the purchases department 7) The accounts payable department usually has responsibility for approving acquisitions for payment by comparing the details on the A) vendor's invoice and the receiving report. B) vendor's invoice and the purchase requisition. C) purchase order, receiving report, and vendor's invoice. D) purchase requisition, purchase order, and receiving report. Answer: C Terms: Accounts payable department responsibility for approving acquisitions for payment by comparing details 8) A substantive tests of transactions for acquisitions that would be used to provide evidence regarding the occurrence assertion would be to A) compare the classification with the chart of accounts by referring to vendors' invoices. B) recompute the clerical accuracy on the vendors' invoice. C) review the acquisitions journal for large or unusual amounts. D) trace from a file of receiving reports to the acquisition journal. Answer: C Terms: Substantive test of accounts payable to provide evidence regarding occurrence assertion 9) When testing the controls for the completeness transaction-related audit objectives, A) failure to record the acquisition of goods or services will generally understate net income. B) failure to record the acquisition of goods or services has no impact on the balance sheet. C) it is generally easy for the auditor to determine whether unrecorded transactions exist. D) the audit time for accounts payable can be reduced if the client has effective internal controls and the auditor properly tests those controls. Answer: D Terms: Acquisition and payment cycle 10) Which of the following is not a key control in the acquisition and payment cycle? A) authorization of purchases B) authorization of credit C) timely recording and independent review of transactions D) authorization of payments Answer: B Terms: Not a key control in acquisition and payment cycle 11) A key internal control over the acquisition cycle is to ensure that the company requires recording transactions as soon as possible after the goods and services have been received. This satisfies the transaction-related audit objective of A) accuracy. B) completeness. C) timing. D) occurrence. Answer: C Terms: Controls over acquisition cycle

1) A sample in which the characteristics of the sample are the same as those of the population is a(n) A) variables sample. B) representative sample. C) attributes sample. D) random sample.

B 2) When the auditor decides to select less than 100 percent of the population for testing, the auditor is said to use A) audit sampling. B) representative sampling. C) poor judgment. D) estimation sampling. Answer: A 3) To determine if a sample is truly representative of the population, an auditor would be required to A) conduct multiple samples of the same population. B) never use sampling because of the expense involved. C) audit the entire population. D) use systematic sample selection. Answer: C Terms: Sample truly representative of population 4) One of the causes of nonsampling risk is A) choosing the wrong sample size. B) ineffective audit procedures. C) inadequate sample size. D) exceptions being found in the sample. Answer: B 5) Which one of the choices below is most correct regarding a cause of sampling risk? A) ineffective use of audit procedures B) testing less than the entire population C) use of extensive tests of controls D) use of random sampling Answer: B Terms: Sampling risk 6) An auditor can increase the likelihood that a sample is representative by using care in A) Designing the sampling process Designing the sample selection Yes Yes B) Designing the sampling process Designing the sample selection No No C) Designing the sampling process Designing the sample selection Yes No D) Designing the sampling process Designing the sample selection No Yes Answer: A Terms: Increased likelihood that sample is representative 7) Which of the following is the risk that audit tests will not uncover existing exceptions in a sample? A) sampling risk B) nonsampling risk C) audit risk D) detection risk Answer: B Terms: Risk that audit tests will not uncover existing exceptions 8) Which of the following is the risk that an auditor will reach an incorrect conclusion because a sample is not representative of the population? A) sampling risk B) nonsampling risk C) audit risk D) detection risk Answer: A Terms: Risk auditor will reach an incorrect conclusion 9) Sampling risk may be controlled by A) Adjusting the sample size Using an appropriate method of selecting sample items Yes Yes B) Adjusting the sample size Using an appropriate method of selecting sample items No No C) Adjusting the sample size Using an appropriate method of selecting sample items Yes No D) Adjusting the sample size Using an appropriate method of selecting sample items No Yes Answer: A Terms: Sampling risk controlled by 10) Which of the following statements is most correct? A) A sample of all items of a population will eliminate sampling risk, but increase nonsampling risk. B) The use of an appropriate sample selection technique ensures a representative sample. C) The auditor's failure to recognize an exception is a significant cause of sampling risk. D) The use of inappropriate audit procedures is a significant cause of nonsampling risk. Answer: D Terms: Sample selection

Audit objective 32) When designing tests of details of balances, an important point to remember is A) auditors emphasize income statement accounts. B) the audit procedures selected depends heavily on whether planned evidence for a given objective is low, medium, or high. C) if accounts receivable are overstated, then sales will be understated. D) sales cutoff is the most important test of details of accounts receivable.

B Terms: Accounts receivable audit evidence 33) The net realizable value of accounts receivable is equal to: A) gross accounts receivable less allowance for uncollectible accounts. B) gross accounts receivable less bad debt expense. C) gross accounts receivable less returns and allowances. D) gross accounts receivable less sales discounts. Answer: A Terms: Realizable value for accounts receivable 34) When an auditor tests to determine if all existing accounts receivable are included in the aged trial balance, A) they cannot rely on the self-balancing nature of the accounts receivable master file. B) if all sales to a customer are omitted from the sales journal, it is easy to uncover the understatement of accounts receivable by tests of details of balances. C) auditors rarely send accounts receivable confirmations to customers with zero balances. D) unrecorded sales to a new customer are easy to identify for confirmation because that customer is included in the accounts receivable master file. Answer: C Terms: Existing accounts receivable are included 35) Describe how the auditor tests the accuracy objective for accounts receivable. Answer: Confirmation of accounts selected from the trial balance is the most common test of details of balances for the accuracy of accounts receivable. When customers do not respond to confirmation requests, auditors examine supporting documents to verify shipment of goods and evidence of subsequent cash receipts to determine whether the accounts were collected. Auditors perform tests of the debits and credits to individual customers' balances by examining supporting documentation for shipments and cash receipts. Terms: Auditors test the accuracy objective for accounts receivable 1) Which of the following is the principle "weakness" of using negative confirmations for the tests of details of balances for accounts receivable? A) They can only be used for large balance accounts. B) They cannot not be used when account balances "bunch" around a mean value. C) Conclusions drawn from receiving no reply may not be correct. D) Response rates are generally too low to draw any conclusions. Answer: C Terms: Negative confirmations

therefore, the ratios of the two financial statements will not be misleading.

B Terms: Audit of sales transactions

Proof of cash receipts 5) Which of the following test of controls is useful to test the completeness objective for cash receipts? A) Compare shipping documents with sales records. B) Observe endorsement of incoming checks. C) Examine evidence that the receivable master file is reconciled to the general ledger. D) Observe if the client reconciles the bank account.

B Terms: Audit procedures

Reliable evidence 5) Auditor confirmation of accounts payable balances at the balance sheet date may not need to be performed by the auditor because A) this is a duplication of cutoff tests. B) there is likely to be other reliable external evidence available to support the balances. C) accounts payable balances at the balance sheet date may not be paid before the audit is completed. D) correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment.

B Terms: Confirmation of accounts payable 6) Under which of the following circumstances would it be advisable for the auditor to confirm accounts payable with creditors? A) The internal accounting control over accounts payable is effective, and there is sufficient evidence on hand to minimize the risk of a material misstatement. B) The confirmation response is expected to be favorable, and accounts payable balances are of immaterial amounts. C) The creditor statements are not available and internal control over payables is deficient. D) The majority of accounts payable balances are with associated companies. Answer: C Terms: Confirm accounts payable with creditors 7) The auditor is performing substantive tests of balances for accounts payable. What documentation would provide the best evidence for the ending balance? A) vendors' invoices B) vendors' statements C) receiving reports D) purchase orders Answer: B Terms: Best evidence for substantive tests of balances for accounts payable 8) The auditor gets highly reliable evidence about individual transactions by examining A) vendors' invoices. B) vendors' statements. C) confirmations of accounts payable balances. D) detailed inventory counting instructions. Answer: A Terms: Auditor gets highly reliable evidence about individual transactions 9) When determining sample sizes for accounts payable tests, A) sample sizes rarely vary from audit to audit. B) auditors must try to ensure that the population includes all potential payables. C) defining the population is a simple procedure. D) all of the above are correct. Answer: B Terms: Sample size and accounts payable tests 10) When auditors examine vendors' statements or receive confirmations, there must be a reconciliation of the statement or confirmation with the A) accounts payable list. B) vendors' invoices. C) purchase orders. D) receiving reports. Answer: A Terms: Substantive tests of balances with vendor statements or vendor confirmations 11) You are performing an audit of Hawk Company. In evaluating the accounts payable balance you are concerned with the completeness assertion. Which of the following audit procedures best satisfies your concern? A) Send confirmations to only vendors with large balances. B) Send confirmations to vendors with large, active, zero balance accounts and a representative sample of all others. C) Send confirmations to vendors chosen from sample stratified by the dollar balance. D) Send confirmations to all vendors. Answer: B Terms: Accounts payable and completeness assertion

nature of disclosure 13) When using the probability threshold for contingencies, the likelihood of the occurrence of the event is classified as A) not likely, likely, or highly likely. B) remote, reasonably possible, or probable. C) slight, moderate, great. D) remote, likely, possible.

B Terms: Contingent liabilities 14) When dealing with contingencies, A) all contingencies must be disclosed or footnoted. B) the auditor must exercise considerable professional judgment when evaluating whether the client has applied the appropriate treatment. C) it is easy for the auditor to uncover contingencies without management's cooperation. D) the review for contingent liabilities is only performed at the beginning and the end of the audit. Answer: B Terms: Contingent liabilities 15) Which of the following is not a common audit procedure used to search for contingent liabilities? A) examine letters of credit B) examine payroll reports C) review internal revenue agent reports D) analyze legal expense Answer: B 16) Contingent liability disclosure in the footnotes of the financial statements would normally be made when A) the outcome of the accounting event is deemed probable, but a reasonable estimation as to the amount cannot be made by the client or auditor. B) a reasonable estimation of the loss can be made, but the outcome is not probable. C) the outcome of the accounting event is deemed probable, and a reasonable estimation as to the amount can be made. D) the outcome of the accounting event as well as a reasonable estimation of the loss cannot be made. Answer: A Terms: Contingent liability disclosure 17) Three conditions are required for a contingent liability to exist. Which of the following is not one of those conditions? A) There is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition. B) The outcome must be resolved by a third-party. C) There is uncertainty about the amount of the future payment or impairment. D) The outcome will be resolved by some future event or events. Answer: B 1) Auditors will generally send a standard inquiry to the client's attorney letter to A) only those attorneys who have devoted substantial time to client matters during the year. B) every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion. C) every attorney whose legal fees for the year exceed a materiality threshold. D) only the attorney who represents the client in proceeding where the client is defendant. Answer: B Terms: Standard inquiry to the client's attorney letter 2) What needs to be included in a standard inquiry to the client's attorney letter sent to a client's legal counsel? A) Any pending threatened litigation with which the attorney has had significant involvement The amount of legal fees paid by the client to the attorney Yes Yes B) Any pending threatened litigation with which the attorney has had significant involvement The amount of legal fees paid by the client to the attorney No No C) Any pending threatened litigation with which the attorney has had significant involvement The amount of legal fees paid by the client to the attorney Yes No D) Any pending threatened litigation with which the attorney has had significant involvement The amount of legal fees paid by the client to the attorney No Yes Answer: C 3) Auditors, as part of completing the audit, will request the client to send a standard inquiry to the client's attorney letter to those attorneys the company has been consulting with during the year under audit regarding legal matters of concern to the company. The primary reason the auditor requests this information is to A) determine the range of probable loss for asserted claims. B) obtain a professional opinion about the expected outcome of existing lawsuits and the likely amount of the liability, including court costs. C) obtain an outside opinion of the probability of losses in determining accruals for contingencies. D) obtain an outside opinion of the probability of losses in determining the proper footnote disclosure. Answer: B Terms: Completing the audit

Test completeness objective (assertion) for cash receipts 6) When designing tests of controls and substantive tests of transactions for cash receipts, it is important to remember that A) the test of controls are designed to test for monetary misstatements. B) auditors use the same methodology for designing tests of controls and substantive tests of transactions for cash receipts as they use for sales. C) the tests of controls are not dependent on the controls the auditor identifies. D) the tests of controls is not dependent on whether the company being audited is publicly traded.

B Terms: Designing tests of controls and substantive tests of transactions for cash receipts 7) Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this fraud and be least likely to be detected by an auditor? A) understating the sales journal by not recording cash sales B) overstating the accounts receivable control account by intentionally misstating prices charged for goods sold C) overstating the accounts receivable subsidiary ledger by not recording payments made by customers D) understating the cash receipts journal by purposely recording incorrect amounts Answer: A Terms: Cash receipts from sales on account

Procedure to prevent activity 1) When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger purposefully enters cash received into the wrong customer's account that employee may be suspected of A) kiting. B) lapping. C) floating. D) shorting.

B Terms: Lapping 2) An audit procedure that compares the name, amount, and dates shown on remittance advices with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting A) kiting. B) lapping. C) unauthorized write-offs of customers as uncollectible accounts. D) sales without proper credit authorization. Answer: B Terms: Lapping 3) Which of the following tests of controls is useful to test the transaction-related audit objective of posting and summarization? A) Observe whether monthly statements are sent. B) Observe unrecorded cash at a point in time. C) Observe whether the accountant reconciles the bank account. D) Observe endorsement of incoming checks. Answer: A Terms: Posting and summarization transaction-related audit objective 4) The audit procedure referred to as proof of cash receipts is particularly useful to test A) time lags in making deposits. B) whether all recorded cash receipts have been deposited in the bank. C) whether there are cash receipts that have not been recorded in the journals. D) the client's reconciliation between cash receipts and bank deposits. Answer: B Terms: Audit procedure

Sales and collection 3) A listing of the balances in the accounts receivable master file at the balance sheet date, including individual customer balances outstanding and a breakdown of each balance by the time passed between the date of the sale and the balance sheet date, is the A) customer list. B) aged trial balance. C) accounts receivable ledger. D) schedule of accounts receivable.

B Terms: Listing of balances in accounts receivable master file 4) Testing the information on the aged trial balance for detail tie-in is a necessary audit procedure, which would normally include A) Test-footing the total column and the columns depicting the aging Comparing the total of the aged trial balance with the general ledger accounts receivable account Yes Yes B) Test-footing the total column and the columns depicting the aging Comparing the total of the aged trial balance with the general ledger accounts receivable account No No C) Test-footing the total column and the columns depicting the aging Comparing the total of the aged trial balance with the general ledger accounts receivable account Yes No D) Test-footing the total column and the columns depicting the aging Comparing the total of the aged trial balance with the general ledger accounts receivable account No Yes Answer: A Terms: Detail tie-in

Sampling interval 2) Monetary unit sampling is not particularly effective at detecting A) overstatements. B) understatements. C) errors in current assets. D) errors in noncurrent assets.

B Terms: Monetary unit sampling not effective at detecting 3) The auditor must consider the possibility that the true population misstatement is greater than the amount of misstatement that is tolerable when the auditor is performing A) Nonstatistical sampling Monetary unit sampling Yes Yes B) Nonstatistical sampling Monetary unit sampling No No C) Nonstatistical sampling Monetary unit sampling Yes No D) Nonstatistical sampling Monetary unit sampling No Yes Answer: D Terms: Auditor must consider the possibility that the true population misstatement is greater than the amount of misstatement that is tolerable 4) The most commonly used method of statistical sampling for tests of details of balances is A) attributes sampling. B) systematic sampling. C) discovery sampling. D) monetary unit sampling. Answer: D Terms: Most commonly used method of statistical sampling for details of balances Diff: Moderate Objective: LO 17-3 AACSB: Reflective thinking 5) When using monetary unit sampling, the recorded dollar population is a definition of all the items in the A) population. B) population which the auditor has included in the sample. C) population which contain errors. D) sample which contain errors. Answer: A Terms: Monetary unit sampling

Tolerable exception 20) Which of the following is the most effective control procedure to detect vouchers that were prepared for the payment of goods that were not received? A) Count goods upon receipt in storeroom. B) Match purchase order, receiving report, and vendor's invoice for each voucher in accounts payable department. C) Compare goods received with goods requisitioned in receiving department. D) Verify vouchers for accuracy and approval in internal audit department.

B Terms: Most effective control procedure to detect vouchers that were prepared, and payment for goods not received 21) Which of the following should sign checks under conditions of effective internal control? A) treasurer B) purchasing agent C) accounts payable clerk D) person preparing the checks Answer: A Terms: Effective internal controls

Sample results support conclusion that account balance was materially misstated 23) ________ is a method of projecting from the sample to the population to estimate the population misstatement. It assumes that misstatements in the unaudited population are proportional to the misstatements found in the sample. A) Mean-per-unit estimation B) Point estimate C) Monetary unit D) Basic precision

B Terms: Point estimate 24) Factors considered by an auditor to determine the possibility that the true population misstatement exceeds a tolerable amount in a nonstatistical sample include all of the following except for A) the extent to which items in the population have been audited 100%. B) the difference between the point estimate and acceptable control risk. C) whether misstatements tend to be offsetting or in only one direction. D) the amounts of individual misstatements. Answer: B Terms: Generalize from the sample to the population 25) When defining the population and the sampling unit for tests of details of balances, A) the population is defined as all of the transactions in the journal for the period. B) the sampling unit must be the same for all balance sheet accounts. C) if sampling for completeness, the sampling unit will be customers with zero balances. D) if sampling for completeness, the sampling unit will be the items making up the recorded population. Answer: C Terms: Population and sampling unit 26) Which of the following is a correct statement? A) When internal controls are effective, control risk can be reduced, and therefore the auditor will decrease the ARIA. B) There is a direct relationship between ARIA and the required sample size. C) A lower control risk requires a lower ARO in testing the controls. D) ARO measures the auditor's desired assurance for an account balance. Answer: C Terms: Acceptable risk of incorrect acceptance 27) If no exceptions were found in the substantive tests of transactions, A) ARIA would stay the same. B) the sample size would stay the same. C) ARIA would increase. D) the sample size would increase. Answer: C Terms: Acceptable risk of incorrect acceptance 28) If analytical procedures are performed with no indications of likely misstatements, ARIA will ________ and the sample size will ________. A) remain the same

Alternative procedures 9) The positive (as opposed to the negative) form of receivables confirmation may be preferred when A) internal control surrounding accounts receivable is considered to be effective. B) there is reason to believe that a substantial number of accounts may be in dispute. C) a large number of small balances are involved. D) the auditor believes that the recipients of the confirmations will give the requests adequate consideration.

B Terms: Positive confirmation 10) 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. Answer: A Terms: Auditor performs alternative procedures to substantiate existence of accounts receivable 11) Confirmation of accounts receivable balances normally provides evidence concerning the A) valuation of the balances. B) rights of the balances. C) existence of the balances. D) completeness of the balances. Answer: C Terms: Confirmation of accounts receivable balances 12) If the auditor decides not to confirm accounts receivable that are material, the auditor should A) always use alternative procedures to audit the accounts receivable. B) include copies of customer statements in the audit files. C) document the reasons for such a decision in the audit files. D) include copies of customer sales invoices in the audit files. Answer: C Terms: Confirm accounts receivable 13) The most reliable evidence from confirmations is obtained when they are sent A) as close to the balance sheet date as possible. B) at various times throughout the year to different segments of the sample, so that the entire sample is representative of account balances scattered throughout the year. C) several months before the year-end, so the auditor will have adequate time to perform alternate procedures if they are required. D) at various times throughout the year to the same group in the sample, so that the sample will not have a time bias. Answer: A Terms: Reliable evidence from confirmations 14) A type of positive confirmation in which an individual invoice is confirmed, rather than the customer's entire accounts receivable balance is the ________ confirmation. A) invoice B) specific C) balance D) voucher Answer: A Terms: Confirmations 15) Confirmation of accounts receivable provide evidence related to the ________ objectives. A) existence B) accuracy C) cutoff D) all if the above Answer: A Terms: Confirmation of accounts receivable

Completeness objective 14) To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with A) the original invoices. B) an approved master price list. C) the amounts recorded in the sales journal for that transaction. D) the amounts posted to the customer's account in the accounts receivable master file.

B Terms: Sales accurately recorded 15) Prenumbered documents are intended to help A) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales Yes Yes B) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales No No C) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales Yes No D) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales No Yes Answer: A Terms: Prenumbered documents 16) Prenumbered documents will only be useful for control purposes if A) a different numerical sequence is used for each company. B) the sequence is accounted for periodically. C) employees are allowed to use documents out of numerical sequence. D) the same numerical sequence is used each accounting period. Answer: B Terms: Prenumbered documents

Lockbox 25) Which of the following is a correct statement regarding the shipment of goods? A) The shipping document must b e in paper form. B) The shipping document is used to update the perpetual inventory records. C) Only one copy of the shipping document is needed. D) All of the above are correct statements.

B Terms: Shipping records and inventory records 26) Which accounts are involved in the sales class of transactions? A) accounts receivable and sales returns and allowances B) cash and allowance for uncollectible accounts C) sales allowances and accounts receivable D) accounts receivable and sales Answer: D Terms: Business function within the sales class of transactions 1) When designing audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion? A) valuation B) cutoff C) completeness D) classification Answer: C Terms: Tracing of source documents

timing 12) When a client uses perpetual inventory records, the tests of details of balances for inventory can be significantly reduced if the auditor believes the records are accurate. The controls over the acquisitions included in the records are normally tested as a part of the A) tests of controls for acquisitions. B) tests of controls and substantive tests of transactions for acquisitions. C) tests of details of balances for acquisitions. D) analytical procedures and tests of controls for acquisitions.

B Terms: Tests of details of balances for inventory 13) The auditor's internal control objective to determine that "recorded acquisitions are for goods and services received" satisfies the audit objective of A) accuracy. B) occurrence. C) authorization. D) completeness. Answer: B Terms: Internal control objective that recorded acquisitions are for goods and services received 14) Failure to record the acquisition of goods is a violation of which audit objective? A) accuracy B) occurrence C) authorization D) completeness Answer: D Terms: Failure to record acquisition is violation of which audit objective 15) The internal control that requires that "checks are prenumbered and accounted for" satisfies the objective of A) accuracy. B) existence. C) completeness. D) posting and summarization. Answer: C 16) Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements, it is common in this audit area to use A) block sampling. B) variables sampling. C) attributes sampling. D) probability proportional to size sampling. Answer: C Terms: Tests of controls and substantive tests of transactions for acquisitions and cash disbursements 17) Which of the following tests of controls is least useful in assessing the transaction-related audit objective related to occurrence? A) Examine documents in voucher package for occurrence. B) Examine supporting documents for indication of approval. C) Account for sequence of vouchers. D) Attempt to input transactions with valid and invalid vendors. Answer: C Terms: Tests of controls for transaction-related audit objectives related to occurrence 18) You are performing the audit of Jenkins and Company. Your tests of controls and tests of transactions for accounts payable demonstrate that the controls are operating effectively. This would normally allow you to A) eliminate the need for substantive testing of balances for accounts payable. B) reduce the need for substantive testing of balances for accounts payable. C) reduce control tests in other transactions cycles. D) increase the need for substantive testing of balances for accounts payable. Answer: B Terms: Tests of controls and tests of transactions demonstrate controls are operating effective 19) An auditor is using audit sampling to test transactions in the acquisition and payment cycle. She would normally set the tolerable exception rate at what level? A) Low B) Medium C) High D) Indeterminate Answer: A Terms: Test of transactions in the acquisition and payment cycle

Vendors' statements and vendors' invoices 4) The auditor is performing tests of transactions for individual accounts payable transactions with vendors. Which document provides more reliable information about individual transactions with vendors? A) receiving report B) vendors' invoices C) vendors' statements D) purchase orders

B Terms: Tests of transactions for accounts payable

balance sheet date and after the end of the year 4) An auditor has the responsibility to actively search for subsequent events that occur subsequent to the A) balance sheet date. B) date of the auditor's report. C) balance sheet date, but prior to the audit report. D) date of the management representation letter.

C Terms: Subsequent events 5) Which of the following subsequent events is most likely to result in an adjustment to a company's financial statements? A) merger or acquisition activities B) bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance C) issuance of common stock D) an uninsured loss of inventories due to a fire Answer: B Terms: Subsequent events

written statement by management 1) To make a final evaluation as to whether sufficient appropriate evidence has been accumulated, the auditor will do all of the following except A) review the audit documentation for the entire audit to determine whether all material classes of transactions have been adequately tested. B) make sure that all parts of the audit program have been accurately completed and documented. C) obtain the management representation letter. D) decide whether the audit program is adequate.

C 2) When reviewing the summary of misstatements found in the audit A) an adjusting journal entry must be made by the auditor for all material misstatements. B) auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material. C) the auditor is not required to consider the impact on the current financial statements of misstatements in the prior year that were not corrected. D) auditors only need to consider the misstatements that impact the income statement. Answer: B 3) Which of the following is an accurate statement regarding audit documentation review? A) The audit partner must review the work of the least experienced auditor in more detail than the work of the audit supervisor. B) The audit senior must review all audit documentation. C) For larger audits, it is common to have the financial statements and the entire set of audit files reviewed by someone who has not participated in the audit, but is a member of the audit firm doing the audit. D) Checklists can never be used to verify that all financial statement disclosures have been made. Answer: C Terms: Audit documentation 4) There are three reasons why an experienced member of the audit firm must thoroughly review audit documentation of the completion of the audit, including A) to evaluate the performance of inexperienced personnel. B) to make sure that the audit meets the CPA firm's standard of performance. C) to counteract the bias that often enters into the auditor's judgment. D) all of the above. Answer: D 1) The auditor is responsible for communicating significant internal control deficiencies to the audit committee, or those charged with governance. This communication A) may be oral or written. B) must be oral. C) must be written. D) must be oral via direct communication. Answer: C Terms: Communicate significant internal control deficiencies 2) Which of the following statements is most correct about an auditor's required communication with management and those charged with corporate governance? A) The auditor is required to inform those charged with governance about significant errors discovered and subsequently corrected by management. B) Any significant matter reported to those charged with governance must also be communicated to management. C) Communication is required before the audit report is issued. D) The auditor does not have any requirement to communicate with anyone other than the company's senior management. Answer: A Terms: Required communication with management

Auditor subjectively consider possibility of true population misstatements 17) Which of the following is an accurate statement regarding how the acceptable risk of overreliance (ARO) and the acceptable risk of incorrect acceptance (ARIA) interact to affect evidence accumulation? A) If internal controls are likely to be effective, preliminary control risk can be increased. B) A lower control risk requires a lower ARO in testing the controls, which requires a smaller sample size. C) If controls are found to be effective, control risk can remain low, which permits the auditor to increase ARIA, thereby requiring a smaller sample size in the substantive tests of details of balances. D) If misstatements are considered unlikely, ARIA will decrease, and the sample size will also decrease.

C Terms: Acceptable risk of incorrect acceptance

Blank confirmation 4) The most effective audit evidence gathered for accounts receivable is the A) detail tie-in of the records. B) analysis of the allowance for doubtful accounts. C) confirmation of accounts receivable. D) examination of sales invoices.

C Terms: Accounts receivable audit evidence 5) The audit procedure that provides the auditor with the most appropriate evidence when performing test of details of balances for accounts receivable is A) confirmations. B) recalculation of the aged receivables and uncollectible accounts. C) tracing credit memos for returned merchandise to receiving room reports. D) tracing from shipping documents to journals to the accounts receivable ledger. Answer: A Terms: Tests of balances for accounts receivable 6) When should auditors not perform alternative procedures in testing the accounts receivable balance? A) when customers do not return positive confirmation requests B) when customers do not return negative confirmation requests C) when confirmations are deemed to be ineffective as an audit procedure D) when confirmations are too costly to use Answer: B Terms: Alternative procedures in testing accounts receivable 7) A positive confirmation is more reliable evidence than a negative confirmation because A) fewer confirmations can be sent out. B) the auditor has a document which can be used in court. C) the debtor's lack of response indicates agreement with the stated balance. D) follow-up procedures are performed if a response is not received from the debtor. Answer: D Terms: Positive confirmation

direct effect on the financial statements 8) The audit procedures for the subsequent events review can be divided into two categories: (1) procedures integrated as a part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is in the first category? A) Inquire of client regarding contingent liabilities. B) Obtain a letter of representation written by client. C) Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate. D) Review journals and ledgers of year 2 to determine the existence of any transactions related to year 1.

C Terms: Audit procedures for subsequent events review 9) The audit procedures for the subsequent events review can be divided into two categories: (1) procedures normally integrated as a part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is in the second category? A) Correspond with attorneys. B) Test the collectability of accounts receivable by reviewing subsequent period cash receipts. C) Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate. D) Compare the subsequent-period purchase price of inventory with the recorded cost as a test of lower of cost or market valuation. Answer: A Terms: Audit procedures for subsequent events review 10) Which of the following would be a subsequent discovery of facts which would not require a response by the auditor? A) discovery of the inclusion of material nonexistent sales B) discovery of the failure to write off material obsolete inventory C) discovery of the omission of a material footnote D) discovery of management's intent to increase selling prices in the future Answer: D Terms: Subsequent discovery of facts 11) In connection with the annual audit, which of the following is not a "subsequent events" procedure? A) Prepare any necessary closing journal entries. B) Examine the minutes of stockholders and directors meetings subsequent to the balance sheet date. C) Review journals and ledgers. D) Obtain a letter of representation. Answer: A 12) An auditor performs interim work at various times throughout the year. The auditor's subsequent events work should be extended to the date of A) the auditor's report. B) a post-dated footnote. C) the next scheduled interim visit. D) the final billing for audit services rendered. Answer: A Terms: Interim work

Audit procedure 5) Audit procedures designed to uncover credit sales made after the client's fiscal year-end that relate to the current year being audited provide evidence for which of the following audit objectives? A) realizable value B) accuracy C) cutoff D) existence

C Terms: Audit procedures to uncover credit sales 6) Cutoff misstatements occur when A) The auditor fails to obtain the end-of-year bank statement directly from the bank, obtaining instead the statement which includes the two succeeding weeks Subsequent period transactions are recorded in the current period Current period transactions are recorded in the subsequent period Yes Yes No B) The auditor fails to obtain the end-of-year bank statement directly from the bank, obtaining instead the statement which includes the two succeeding weeks Subsequent period transactions are recorded in the current period Current period transactions are recorded in the subsequent period Yes No Yes C) The auditor fails to obtain the end-of-year bank statement directly from the bank, obtaining instead the statement which includes the two succeeding weeks Subsequent period transactions are recorded in the current period Current period transactions are recorded in the subsequent period No Yes Yes D) The auditor fails to obtain the end-of-year bank statement directly from the bank, obtaining instead the statement which includes the two succeeding weeks Subsequent period transactions are recorded in the current period Current period transactions are recorded in the subsequent period No Yes No Answer: C Terms: Cutoff misstatements 7) Cutoff misstatements occur A) either by error or fraud. B) by error only. C) by fraud only. D) randomly without causes related to errors or fraud. Answer: A Terms: Cutoff misstatements 8) Which of the following is likely to be determined first when performing tests of details for accounts receivable? A) Recorded accounts receivable exist. B) Accounts receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger. C) The client has a right to the accounts receivable. D) Existing accounts receivable are included. Answer: B Terms: Tests of details for accounts receivable 9) An auditor is performing a credit analysis of customers with balances over 60 days due. She is most likely obtaining evidence for which audit related objective? A) realizable value B) existence C) completeness D) occurrence Answer: A Terms: Audit-related objective 10) The most important test of details of balances to determine the existence of recorded accounts receivable is A) tracing details of sales invoices to shipping documents. B) tracing the credits in accounts receivable to bank deposits. C) tracing sales returns entries to credit memos issued and receiving room reports. D) the confirmation of customers' balances. Answer: D Terms: Test of details of balances

Existence of accounts receivable 11) Because of its central role in auditing of accounts receivable, which of the following would normally be one of the first items tested? A) accounts receivable master file B) customer file C) aged trial balance D) sales register

C Terms: Central role in auditing accounts receivable 12) Confirmation of accounts receivable selected from the trial balance is the most common test of details of balances for the ________ of accounts receivable. A) presentation B) valuation C) accuracy. D) detail tie-in Answer: C Terms: Accounts receivable confirmation 13) Most tests of accounts receivable are based on what schedule, file, or listing? A) sales master file B) aged accounts receivable trial balance C) accounts receivable master file D) accounts receivable general ledger account Answer: B Terms: Tests of accounts receivable 14) If the client's internal control for recording sales returns and allowances is evaluated as ineffective, A) a larger sample may be needed to verify cutoff. B) sampling is not appropriate. C) all sales returns must be traced to supporting documentation. D) all sales returns must be confirmed with the customer. Answer: A Terms: Internal control

Fraud 1) The most significant effect of the results of the tests of controls and substantive tests of transactions in the sales and collection cycle is on A) bad debt expense. B) the analytical tests to be performed. C) the confirmation of accounts receivable. D) the impact of processing cash receipts.

C Terms: Effect of results of tests of controls and substantive tests of transactions in the sales and collection cycle

Preliminary control risk assessment 9) Auditors often use the ________ to determine the estimated population exception rate. A) current year's audit results B) tolerable exception rate C) preceding year's audit results D) estimated computed by management

C Terms: Estimate of population exception rate 10) Place the following steps in their proper order: 1. Analyze exceptions. 2. Select the sample. 3. Define attributes and exception conditions. 4. State the objectives of the audit test. 5. Specify the tolerable exception rate. A) 1, 3, 2, 4, 5. B) 4, 3, 1, 2, 5. C) 4, 3, 5, 2, 1. D) 1, 2, 3, 4, 5. Answer: C 11) If an auditor judgmentally selects a sample of one hundred items from a population and finds two exceptions, the auditor A) can conclude that the sample exception rate is 2%. B) can conclude that the population exception rate is 2%. C) can calculate the highest exception rate expected in the population. D) cannot make any conclusions about either the sample or the population. Answer: A Terms: Sample selected from population and found exceptions 12) When planning the audit sample, A) one objective of the tests of controls is to test the effectiveness of the controls. B) audit sampling applies to analytical procedures. C) audit sampling generally applies to automated controls. D) the auditor must generalize from the sample to the population. Answer: A Terms: Planning the audit sample 13) Which of the following is the exception rate that the auditor expects to find before testing? A) sample exception rate B) estimated population exception rate C) computed exception rate D) tolerable exception rate Answer: B Terms: Exception rate auditor expects to find before testing 14) Which of the following is not a term related to evaluating results in audit sampling until after a sample is tested and evaluated? A) sample exception rate B) estimated population exception rate C) computed upper exception rate D) exception Answer: B 15) The relationship of tolerable exception rate (TER) to sample size is A) direct (larger TER = larger sample). B) inverse (larger TER = smaller sample). C) variable (sometimes larger, sometimes smaller). D) not determinable. Answer: B Terms: Relationship of tolerable exception rate (TER) to sample size 16) Which of the following must be set prior to testing a sample? A) sample exception rate B) achieved upper precision limit C) computed exception rate D) tolerable exception rate Answer: D Terms: Set prior to testing sample 17) The acceptable risk of overreliance A) is the risk that the auditor will erroneously conclude that the controls are less effective than they actually are. B) is less of a concern to the auditors than the risk of underreliance. C) represents the auditor's measure of sampling risk. D) is determined by a statistical formula, and not by professional judgment. Answer: C Terms: Acceptable risk of overreliance 18) The sample exception rate equals A) the number of exceptions in the population divided by the sample size. B) the number of items in the population multiplied by the number of exceptions in the sample. C) the number of exceptions in the sample divided by the sample size. D) the number of exceptions in the population divided by the population size. Answer: C Terms: Sample exception rate 19) When defining the population, A) it may be necessary to define separate populations for different audit procedures. B) the auditor may generalize only about the population that has been sampled. C) auditors can define the population to include any items they want. D) all of the above Answer: D Terms: Population considered acceptable based on acceptable risk of assessing control risk too low

Subsequent events 13) Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor's report would not require disclosure in the financial statements? A) sale of a bond or capital stock issue B) loss of plant or inventories as a result of fire or flood C) a significant decline in the market price of the corporation's stock D) a merger or acquisition

C Terms: Event that occurred after the end of the fiscal year 14) Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued? A) loss of a plant as a result of a flood B) sale of long-term debt or capital stock C) settlement of litigation in excess of the recorded liability D) major purchase of a business that is expected to double the sales volume Answer: C 15) If the auditor determines that a subsequent event that affects the current period financial statements occurred after fieldwork was completed but before the audit report was issued, what date(s) may the auditor use on the report? A) The date of the original last day of fieldwork only. The date of the subsequent event only. The date on which the last day of fieldwork occurred along with the date of the subsequent event. Yes Yes No B) The date of the original last day of fieldwork only. The date of the subsequent event only. The date on which the last day of fieldwork occurred along with the date of the subsequent event. No Yes Yes C) The date of the original last day of fieldwork only. The date of the subsequent event only. The date on which the last day of fieldwork occurred along with the date of the subsequent event. No Yes No D) The date of the original last day of fieldwork only. The date of the subsequent event only. The date on which the last day of fieldwork occurred along with the date of the subsequent event. No No Yes Answer: B Terms: Subsequent event

Adjustment to financial statements 6) After the balance sheet date, but prior to the issuance of the audit report, the client suffers an uninsured loss of their inventory as a result of a fire. The amount of the loss is material. The auditor should A) adjust the financial statements for the year under audit. B) add a paragraph to the audit report. C) advise the client to disclose the event in the notes to the financial statements. D) advise the client to delay issuing the financial statements until the economic loss can be determined.

C Terms: Event will have a material effect on the financial statements 7) The auditor has completed her assessment of subsequent events. The proper accounting for subsequent events that have a direct effect on the financial statements is to A) adjust the financial statements for the year under audit. B) disclose in the notes to financial statement the amount of the adjustment. C) duly note in the audit workpapers that next year's financial statements need to be adjusted. D) make no adjustment of the financial statements for the year under audit. Answer: A Terms: Subsequent events

Entity's ability to continue as a going concern 14) Which of the following statements is correct? A) A letter of representation is documentation of management's acceptance of responsibility for the financial statements and is deemed to be reliable evidence. B) A letter of representation is not deemed to be reliable evidence because of the potential incompetence of management. C) A letter of representation is not deemed to be reliable evidence because it is a written statement from a nonindependent source. D) A letter of representation is documentation of the CPA's acceptance of responsibility for the audit of the financial statement and is deemed to be reliable.

C Terms: Letter of representation 15) Auditing standards require the auditor to ________ other information included in annual reports pertaining directly to the financial statements. A) audit B) express an opinion on C) read D) analyze Answer: C Terms: Other information included in annual reports 16) An auditor must obtain written client representations that might be signed by all but which of the following? A) treasurer B) chief financial officer C) vice president of operations D) chief executive officer Answer: C Terms: Client representations signed by 17) Which of the following is not a reason why the auditor requests that the client provide a letter of representation? A) Professional auditing standards require the auditor to obtain a letter of representation. B) It impresses upon management its responsibility for the accuracy of the information in the financial statements. C) It provides written documentation of the oral responses already received to inquiries of management. D) It determines the type of opinion the auditor will issue on the financial statements. Answer: D Terms: Letter of representation 18) At the completion of the audit, management is asked to make a written statement that it is not aware of any undisclosed contingent liabilities. This statement would appear in the A) management letter. B) letter of inquiry. C) letters testamentary. D) management letter of representation. Answer: D Terms: Completion of audit

Management assertions 4) The main focus taken by the auditor in verifying liability balances is on the discovery of I. understated liabilities. II. omitted liabilities. A) I only B) II only C) both I and II D) neither I nor II

C Terms: Main focus in verifying liability balances 5) By tracing receiving reports issued at and before year-end to vendors' invoices and making sure they are included in accounts payable, the auditor is testing for A) theft of merchandise by employees. B) unrecorded obligations. C) lapping. D) kiting. Answer: B Terms: Tracing receiving reports issued at and before year-end to vendors' invoices 6) The extent of a search for unrecorded liabilities largely depends on A) materiality and inherent risk. B) materiality and control risk. C) materiality only. D) inherent risk only. Answer: B Terms: Unrecorded liabilities 7) A document review of which of the following is most likely to yield evidence of any unrecorded liabilities? A) debit memos B) vendor memos C) unpaid accounts payable D) sales invoices out of sequence Answer: C Terms: Document review for unrecorded liabilities 8) When the client's physical inventory occurs before the last day of the year, it is still necessary to perform an accounts payable cutoff at the time of the count. In addition, the auditor must verify whether all acquisitions taking place between the count and the end of the year were added to A) the physical inventory. B) accounts payable. C) accounts payable and cost of goods sold. D) the physical inventory and accounts payable. Answer: D Terms: Accounts payable cutoff

corporate governance 3) While there is no professional requirement to do so on audit engagements, CPAs frequently issue a formal "management" letter to clients. The primary purpose of this letter is to provide A) evidence indicating whether the auditor is reasonably certain that internal accounting control is operating as prescribed. B) a permanent record of the internal accounting control work performed by the auditor during the course of the engagement. C) the client with the CPA's recommendations for improving any part of the client's business. D) a summary of the auditor's observations that resulted from the auditor's special study of internal control.

C Terms: Management representation letter 4) When communicating with the audit committee and management, A) only material fraud and illegal acts are required by auditing standards to be communicated. B) all internal control deficiencies are required by auditing standards to be communicated. C) the communications should be made in a timely manner to allow those charged with governance to take appropriate actions. D) all communications with the audit committee and management must be in writingAnswer: C Terms: Communicated to the audit committee or designate body 5) Auditing standards require the auditor to communicate all management frauds and illegal acts to the audit committee A) only if the act is immaterial. B) only if the act is material. C) only if the act is highly material. D) regardless of materiality. Answer: D Terms: Auditing standards

1) The overall objective in the audit of the acquisition and payment cycle is A) to ensure the reliability of the affected accounts. B) to ensure the accuracy of the affected accounts. C) to evaluate whether the affected accounts are fairly presented in accordance with accounting standards. D) to evaluate whether fraudulent payments were made

C Terms: Overall objective of audit of acquisition and payment cycle

Credit approval 22) When posting items sold on account from the sales journal A) Details of the journal are posted to Journal totals are posted to The sales account The general ledger B) Details of the journal are posted to Journal totals are posted to The sales account The accounts receivable subsidiary ledger C) Details of the journal are posted to Journal totals are posted to The accounts receivable master file The general ledger D) Details of the journal are posted to Journal totals are posted to The accounts receivable account in the general ledger The sales account in the general ledger

C Terms: Posting from sales journal

Fraud 8) Which of the following would offer the best protection for a company that wishes to prevent a reoccurrence of a previously detected "lapping" problem with trade accounts receivable? A) Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. B) Separate duties so that no employee has access to both checks from customers and currency from daily cash receipts. C) Have a mandatory vacation policy for employees who both handle cash and enter cash receipts into the system. D) Request that customer's payment checks be made payable to the company and addressed to the treasurer.

C Terms: Prevent lapping problem 9) The most difficult type of cash embezzlement for auditors to detect is when it occurs A) after the merchandise has been shipped. B) before the merchandise has been shipped. C) before the cash is recorded in the cash receipts journal or other cash listing. D) after the cash is recorded in the cash receipts journal or other cash listing. Answer: C Terms: Cash embezzlement 1) The auditor's primary concern in performing audit procedures of the write-off of uncollectible accounts relates to the risk that the client writes off customer accounts that have already been collected. The primary control for preventing this fraud is A) examining authorized credit memos. B) examining the uncollectible account authorization form. C) examining debit memos. D) examining the vouchers payable register. Answer: B Terms: Audit procedures

increase

C Terms: Sample sizes, ARIA and analytical procedures 29) Which of the following conditions would lead to a larger sample size? A) larger tolerable misstatement B) low inherent risk C) high control risk D) smaller account balance Answer: C Terms: Factors influencing sample sizes for tests of details of balances 30) When analyzing misstatements, the auditor will determine A) the implications of the misstatements on other audit areas. B) the potential impact on the financial statements. C) the effect on company operations. D) all of the above. Answer: D Terms: Analyzing misstatements 31) If the population is not considered acceptable, one step the auditor is likely to take is to A) retest all internal controls. B) ask the client to adjust the account balance. C) test the entire population. D) decrease inherent risk. Answer: B Terms: Action when a population is rejected 1) In monetary unit sampling, a sampling interval of 900 means that A) every 900th item will be selected. B) every 900th dollar in the account will be sampled. C) expected misstatement is 900. D) tolerable misstatement is 900. Answer: B Terms: Monetary unit sampling

Sales and collection cycle 2) The appropriate and sufficient evidence to be obtained from tests of details must be decided on an A) efficiency basis. B) effectiveness basis. C) objective-by-objective basis. D) none of the above

C Terms: Tests of details 3) Auditors are especially concerned with three aspects of internal control for the sales and collection cycle. Which of the following is not one of their major concerns? A) controls over cutoff B) controls that prevent or detect embezzlements C) controls over sales discounts D) controls related to the allowance for uncollectible accounts Answer: C Terms: Sales and collection cycle 4) For sales, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives? A) existence B) completeness C) rights D) detail tie-in Answer: A Terms: Sales transaction-related audit objective 5) For cash receipts, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives? A) existence B) completeness C) rights D) detail tie-in Answer: B Terms: Cash receipts transaction-related objective 6) Which of the following is an accurate statement regarding the risk assessment process of phase I of the audit process for the sales and collection cycle? A) Auditors must perform substantive tests related to assertions deemed to have significant risks. B) The auditor must relate control risk for transaction-related audit objectives to balance-related audit objectives in deciding planned inherent risk. C) The realizable value balance-related audit objectives are affected by assessed control risk for classes of transactions. D) All of the above are accurate statements. Answer: A Terms: Risks in the sales and collection cycle 1) Which of the following types of receivables would not deserve the special attention of the auditor? A) accounts receivables with credit balances B) accounts that have been outstanding for a long time C) receivables from related parties D) each of the above would receive special attention. Answer: D Terms: Receivables

Completeness assertion 6) When assessing planned control risk for sales, A) the key internal controls and deficiencies for sales will be the same for every company. B) the audit objectives for sales will differ from company to company. C) a flowchart is required to help assess control risk for sales. D) assessing control risk for sales is a highly subjective decision.

D 7) Which of the following is an accurate statement relating to separation of duties? A) Management should deny cash access to anyone responsible for entering sales and cash receipts transaction information into the computer. B) All disagreements on the monthly statements should be directed to a designated person who has no responsibility for handling cash or recording sales or accounts receivable. C) The credit granting function should be separate from the sales function. D) All of the above are accurate statements. Answer: D Terms: Separation of duties 8) Which of the following is not a key control for sales and cash receipts? A) active board of directors B) adequate separation of duties C) internal verification procedures D) adequate documents and records Answer: A Terms: Key controls 9) Which one of the following statements is true? In deciding on substantive tests of transactions A) some procedures are commonly employed on every audit regardless of the circumstances. B) all procedures are dependent on the adequacy of the controls and the results of the tests of controls. C) results obtained in the prior year's audit will not affect the procedures used this year. D) the materiality of the item will not influence the choice of procedures used. Answer: A Terms: Substantive tests of transactions 10) To test for recorded sales for which there were no actual shipments, the auditor vouches from the A) bill of lading to the sales journal. B) sales journal to the shipping documents. C) sales journal to the accounts receivable subsidiary ledger. D) bill of lading to the supporting customer order and sales order. Answer: B Terms: Test for recorded sales with no actual shipments 11) An effective procedure to test for unfilled shipments is to trace from the A) sales journal to the shipping documents. B) shipping documents to the sales journal. C) sales journal to the accounts receivable ledger. D) sales journal to the general ledger sales account. Answer: B Terms: Procedure for unbilled shipments 12) The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the A) existence objective. B) completeness objective. C) ownership objective. D) valuation objective. Answer: B Terms: Trace items from source documents to journals 13) In many audits of sales transactions substantive tests of transactions can be reduced in determining the completeness objective because A) understatements of assets and income are a greater concern than overstatements. B) overstatements of assets and income are a greater concern than understatements. C) it doesn't matter if income is understated because the savings on income tax offsets the reduced revenue and net income is correct. D) the unrecorded sales cause a reduction of accounts receivable

Unrecorded contingencies 9) Which of the following is not considered a commitment? A) agreements to purchase raw materials B) pension plans C) agreements to lease facilities at set prices D) Each of the above is a commitment.

D Terms: Commitments 10) If an auditor concludes there are contingent liabilities, then he or she must evaluate the A) Materiality of the potential liability. Nature of the disclosure to be included in the financial statements. Yes Yes B) Materiality of the potential liability. Nature of the disclosure to be included in the financial statements. No No C) Materiality of the potential liability. Nature of the disclosure to be included in the financial statements. Yes No D) Materiality of the potential liability. Nature of the disclosure to be included in the financial statements. No Yes Answer: A Terms: Contingent liabilities 11) One of the primary approaches in dealing with uncertainties in loss contingencies uses a(n) ________ threshold. A) monetary B) materiality C) probability D) analytical Answer: C 12) If the auditor concludes that there are contingent liabilities, he or she must evaluate the significance of the potential liability and the nature of the disclosure needed in the financial statements. Which of the following statements is not true? A) The potential liability is sufficiently well known in some instances to be included in the financial statements as an actual liability. B) Disclosure may be unnecessary if the contingency is highly remote or immaterial. C) A CPA firm often obtains a separate evaluation of the potential liability from its own legal counsel rather than relying on management or management's attorneys. D) The client's attorneys must remain independent when evaluating the likelihood of losing the lawsuit. Answer: D Terms: Contingent liabilities

Tests of details of balances of accounts receivable . 2) Communication addressed to the debtor requesting him or her to confirm whether the balance as stated on the communication is correct or incorrect is a A) representation letter. B) negative confirmation. C) bank confirmation. D) positive confirmation.

D Terms: Confirm balance 3) A type of positive confirmation known as a blank confirmation A) requests the recipient to fill in the amount of the balance. B) is considered less reliable than the regular positive confirmation. C) generates as high a response rate as the regular positive confirmation form. D) is used when the auditor is confirming several small balances. Answer: A Terms: Positive confirmation

Evidence accumulation 18) When errors are found in a sample, auditors in practice generally make the assumption A) that the population errors cannot be determined. B) that the population errors are larger than the sample errors. C) that the population errors are smaller than the sample errors. D) that the actual sample errors are representative of the population errors.

D Terms: Errors found in sample assumption 19) Which of the following needs to be considered when the auditor generalizes from the sample to the population? A) Acceptable risk of incorrect acceptance Sampling error Yes Yes B) Acceptable risk of incorrect acceptance Sampling error No No C) Acceptable risk of incorrect acceptance Sampling error Yes No D) Acceptable risk of incorrect acceptance Sampling error No Yes Answer: A Terms: Factors considered when auditor generalizes from sample to populations 20) Which of the following would lead to a larger sample size? A) low inherent risk B) low control risk C) larger tolerable misstatement D) unsatisfactory results in other related substantive procedures Answer: D Terms: Factors influencing sample sizes for tests of details of balances 21) While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was not materially misstated. It was, in fact, materially misstated. This situation illustrates the risk of A) incorrect rejection. B) incorrect acceptance. C) assessing control risk too low. D) assessing control risk too high. Answer: B Terms: Substantive test of details

Responsible for signing checks 22) Which of the following is a key internal control for the posting and summarization transaction-related audit objective? A) Batch totals are compared with computer summary reports. B) Documents are canceled. C) Dates are internally verified. D) The accounts payable master file contents are internally verified.

D Terms: Posting and summarization transaction-related audit objective 23) The test of transactions which requires one to "reconcile recorded cash disbursements with the cash disbursements on the bank statement" satisfies the objective of A) occurrence. B) completeness. C) accuracy. D) posting and summarization. Answer: B Terms: Test of transactions to reconcile recorded cash disbursement with those on bank statement 24) For effective internal control purposes, the accounts payable department generally should A) approve the purchase order. B) have the authority to sign the checks. C) establish the agreement of the vendor's invoice with the receiving report and purchase order. D) supervise the preparation of the receiving report. Answer: C Terms: Effective internal control, vouchers payable department 25) 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) vendors' invoices. C) canceled checks. D) receiving reports. Answer: B Terms: Auditor performs test to determine whether all merchandise for which client was billed was received 26) Matching the supplier's invoice, the purchase order, and the receiving report prior to preparing the voucher would normally be the responsibility of the A) warehouse receiving function. B) purchasing function. C) general accounting function. D) treasury function. Answer: C Terms: Responsibility for matching supplier's invoice with the purchase order and receiving report 27) A CPA learns that his client has paid a vendor twice for the same shipment, once based upon the original invoice and once based upon the monthly statement. A control procedure that should have prevented this duplicate payment is A) attachment of the receiving report to the disbursement report. B) prenumbering of disbursement vouchers. C) use of a limit or reasonableness test. D) prenumbering of receiving reports. Answer: A Terms: Control procedure that prevents duplicate payment on invoice 28) With respect to a small company's system of purchasing supplies, an auditor's primary concern should be to obtain satisfaction that supplies ordered and paid for have been A) requested by and approved by the same individual. B) used in the course of business and solely for business purposes during the year under audit. C) received, counted, and checked to quantities and amounts on purchase orders and invoices. D) properly recorded as assets and systematically amortized over the estimated useful life of the supplies. Answer: C Terms: Auditor's primary concern in system of purchasing supplies for supplies ordered and paid for 29) Internal controls that are likely to prevent the client from including as a business expense those transactions that primarily benefit management or other employees rather that the entity being audited satisfy the control objective that A) acquisitions are correctly valued. B) existing acquisitions are recorded. C) acquisitions are correctly classified. D) recorded acquisitions are for goods and services received. Answer: D Terms: Internal controls for asset acquisitions 1) A liability is properly accounted for as an account payable if A) the amount is known and owed as of the balance sheet date. B) the amount can be estimated and is owed at the balance sheet date. C) the amount is known at the balance sheet date and owed by the end of the next fiscal year. D) the amount is estimated and owed within 90 days of the balance sheet date. Answer: A Terms: Liability is properly accounted for as accounts payable 2) When determining the methodology for designing tests of details of balances for accounts payable, A) the focus by many companies on improving their supply-chain management activities has led to numerous changes in the design of systems used to initiate and record acquisition and payment activities. B) it is relatively inexpensive to audit accounts payable. C) performance materiality for accounts payable is set relatively low. D) inherent risk is often set at low. Answer: A Terms: Risk and accounts payable 3) Auditors are especially concerned about the ________ and ________ balance-related audit objectives because of the potential for understatements in the account balance. A) completeness

Sales returns and allowances 15) A customer mails and records a check to a client for payment of an unpaid account on December 30. The client receives and records the amount on January 2. The records of the two organizations will be different on December 31. This represents A) A cutoff misstatement A timing difference Yes Yes B) A cutoff misstatement A timing difference No No C) A cutoff misstatement A timing difference Yes No D) A cutoff misstatement A timing difference No Yes

D Terms: Records will be different 16) Which of the following audit procedures would not likely detect a client's decision to pledge or factor accounts receivable? A) a review of the minutes of the board of directors' meetings B) discussions with the client C) confirmation of receivables D) examination of correspondence files Answer: C Terms: Audit procedures

1) Which of the following is an account that is not affected by the sales and collection cycle? A) cash B) accounts receivable C) allowance for doubtful accounts D) accounts payable

D Terms: Sales and collection cycle 2) The auditor's objectives for the sales and cash collections activities when the client is primarily an e-commerce business as compared to a "brick and mortar" business are A) unchanged. B) expanded. C) mitigated. D) decreased. Answer: A Terms: Auditor's objectives for sales and cash collections 1) Which of the following is not one of the five classes of transactions included in the sales and collection cycle? A) sales returns and allowances B) write-off of uncollectible accounts C) bad debt expense D) interest income Answer: D 2) What event initiates a transaction in the sales and collection cycle? A) receipt of cash B) delivery of product to a customer C) identification of a new customer D) customer request for goods or services Answer: D 3) A ________ is a document that indicates a request for merchandise by a customer. A) sales invoice B) vendor invoice C) customer order D) sales order Answer: C Terms: Customer order 4) A ________ is a document for communicating the description, quantity, and related information for goods ordered by a customer. A) sales order B) customer order C) vendor invoice D) sales invoice Answer: A Terms: Sales order 5) What critical event must take place before goods can be shipped in order to assure payment can be reasonably expected? A) determination of correct delivery address B) credit approval C) matching of shipping document with sales invoice D) receipt of sales order from the customer Answer: B Terms: Goods shipped on account

Realizable value 31) An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is to satisfy the audit objective of A) accuracy. B) existence. C) control. D) completeness.

D Terms: Sample of shipping documents