Audit Final Exam
Which of the following best describes the auditors' responsibility with respect to management's estimates?
Evaluating the reasonableness of management's estimates
An auditor selected a product recorded in the finished goods perpetual inventory subsidiary account. The auditor went to the warehouse and counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor most likely testing?
Existence
Alpha Brewery Corporation recorded sales through January 4, 2018, dating them December 31, 2017. This situation is an example of a violation of which of the following assertions?
Existence or occurrence.
L. Martinez, CPA, was auditing a client, Marvelous Retail Company and selected a sample of inventory items from the perpetual records and vouched additions to receiving reports. This procedure was intended to satisfy which PCAOB assertion?
Existence or occurrence.
Which of the following is the assertion with the highest inherent risk in auditing inventory?
Existence.
If auditors are appointed on January 3, 2017, the date of the financial statements is December 31, 2017, the date of the auditors' report is February 7, 2018, and the audit report release date is March 3, 2018, what is the appropriate date of the written representations?
February 7, 2018
Which cycle is not directly linked to the production cycle?
Finance and investment cycle.
Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?
Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.
Interim testing normally occurs between the _____ and the _____.
Interim testing normally occurs between the beginning of the year under audit; date of the financial statements
Which of the following is not considered one of the three factors increasing the probability of fraud?
Lack of training.
Which of the following fraud detection steps could not be performed by CAATs?
Look for photocopies in invoice files.
Which of the following is not a major control risk in the payroll cycle?
Losing employees to competitors
Carson, LLP, audited Best Corporation's financial statements for the year ended December 31, Year 1. On February 15, Year 3, Carson gave Best permission to reissue the report previously issued on and dated March 1, Year 2. When is the cutoff date for Carson's responsibility on the reissued report?
March 1, Year 2.
Which of the following is ordinarily considered an "extended procedure" during the independent audit of financial statements?
Measure the time lag between the date of recording cash receipts in the books to the date of deposit credit in the bank.
Which of the following management policies would increase the probability of fraud in a company?
Measuring performance and awarding bonuses based on short-term operating results.
Three factors increasing the probability of fraud?
Motive, Opportunity, Rationalization
In order for auditors to be able to recognize potential fraud, they must be aware of the basic characteristics of fraud. Which of the following is not a characteristic of fraud?
Negligence on the part of executive management.
Generally accepted accounting principles (GAAP) require that inventory be recorded at
None of the choices.
An auditor selected an invoice for a large inventory purchase and vouched the invoice to the receiving report. Which ASB transaction assertion is the auditor most likely testing?
Occurrence
When auditors conclude that a material and pervasive departure from GAAP exists in an entity's financial statements, which of the following phrases would most likely be included in their report?
"Do not present fairly in all material respects."
An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. The entity's financial statements adequately disclose its financial difficulties. Under these circumstances, the auditor's report is required to include an emphasis-of-matter paragraph that specifically uses the phrase(s).
"Except for the effects of such adjustments" - No "Possible discontinuance of the entity's operations" - No
Which of the following phrases would auditors most likely include in their report when expressing a qualified opinion on the entity's financial statements because of inadequate disclosure?
"Except for the omission of the information discussed in the preceding paragraph."
Which of the following statements is not included in the Auditor's Responsibility section of the standard (unmodified) report?
"In accordance with accounting principles generally accepted in the United States of America."
Which of the following statements is not included in the Auditor's responsibility section of the standard (unmodified) report on the entity's financial statements?
"We have audited the accompanying financial statements..."
Characteristics of fraud are:
-Intentional deception -Taking unfair or dishonest advantage of other people or -Perpetration for the benefit or detriment of the organization.
Fraud detection steps performed by CAATs:
-Look for vendor invoices in numerical order -Look for vendor invoices slightly below the approval threshold -Look for duplicate vendor numbers
Correct statements with respect to the elements of the "fraud triangle"?
-Motive is a cause that pressures people into action. -Opportunity refers to a situation that allows someone with motive to carry out fraud. -A lack of integrity describes a person who does not stick to the social or organizational ethical code. -Fraud is most common when these three factors exist together.
Major control risks in the payroll cycle:
-Paying fictitious "employees", -Overpaying for time or production, and -Incorrect accounting for costs or expenses
Types of known misstatement:
-an inaccuracy in processing data -the misapplication of accounting principles and -a difference between the classification of a reported financial statement element and the classification according to generally accepted accounting principles.
To gather evidence regarding the bank's balance in a bank reconciliation, an auditor would examine all of the following:
-cutoff bank statement -bank confirmation -year-end bank statement
When auditing financial statements and finding indications of a possible misappropriation of assets, independent auditors should:
-investigate fully to determine the total amount of the misappropriation, -determine which accounts are affected and the amount by which they are overstated or understated, -determine the methods by which the misappropriation was carried out, and -identify a person(s) who are likely responsible for the misappropriation and obtain evidence about some other fraud indications in their work.
Typical functions of the personnel and payroll cycle:
-report of attendance and work performed, -allocation to cost of goods sold, and payroll accounting
Which of the following is typically not included in the inquiry letter sent to the client's attorneys?
A disclaimer regarding the likelihood of settlement of pending litigation
An auditor reviews job cost sheets to test which transaction assertion?
Accuracy.
The control activity "credit sales approved by credit department" is directed toward which transaction assertion?
Accuracy.
A client has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements?
Adverse opinion.
Which of the following is not an acceptable method of determining inventory cost under GAAP?
All of the choices are available. (FIFO, LIFO, Average Cost)
In which of the following should an auditors' report refer to the lack of consistency when there is a change in accounting principle that is significant?
An emphasis-of-matter paragraph following the opinion paragraph.
When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the
Auditor's Responsibility section - No Notes to the financial statements - No
To whom should written representations be addressed?
Auditors
Which of the following would not be included in the supporting documents for a voucher?
Blank check
Most fraud investigators utilize the fraud triangle theory. A new theory called the fraud diamond has been proposed. Which of the following is an element of the fraud diamond and is not an element of the fraud triangle?
Capability.
Which of the following sets of information does an auditor usually confirm on one form?
Cash in bank and collateral for loans.
Accounts that appear in the acquisition and expenditure cycle:
Cash, Purchases Returns, Prepaid Insurance
Which party should request a letter regarding litigation, claims, and assessments from the client's attorney?
Client
Which of the following would be considered an analytical procedure?
Comparing inventory balances to recent sales activities.
An auditor selected a product maintained in the finished goods warehouse. The auditor counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor most likely testing?
Completeness
Counting inventory on the warehouse floor and tracing the count to the inventory compilation provides evidence to support which management (PCAOB) assertion?
Completeness.
Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what assertion?
Completeness.
How do auditors make the following representations when issuing the standard (unmodified) auditors' report?
Consistent application of accounting principles - Implicitly Use of judgment in selecting audit procedures - Explicitly
For which of the following accounts would the matching concept be the most appropriate?
Cost of Goods Sold
Mary Monitor, CPA, noted that ABC Co. received goods prior to year-end that were included in physical inventory but had not been recorded. In this case, which of the following adjustments should be made?
Debit inventory/credit accounts payable.
Holmes, CPA, assisted Williams Corporation in preparing its financial statements and gave Williams permission to use Holmes's name in communications containing these financial statements. If Holmes did not audit the financial statements, what type of opinion should be expressed?
Disclaimer of opinion because Holmes did not audit the financial statements.
Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?
Performing cutoff procedures for shipping and receiving.
Periodic or cycle counts of selected inventory items are made at various times during the year rather than during a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventories at interim dates?
Perpetual inventory records are maintained.
At the end of each business day, Safe Company sends its bank a listing of all checks written during the day including the check number, payee, and amount. When a check is sent to the bank for payment the bank compares the payee and the amount with the listing provided by Safe Company. This system is called:
Positive Pay.
Which of the following controls is designed to meet the completeness assertion?
Prenumbering invoices, shipping documents, and sales orders.
Supporting documents for a voucher:
Purchase order, Vendor invoice, Receiving report
Which of the following accounts is not normally part of the revenue and collection cycle?
Purchases Returns and Allowances.
Which of the following reporting options is available if the client refuses to provide auditors with written representations?
Qualified opinion or disclaimer of opinion
If financial statements contain a material but non-pervasive departure from generally accepted accounting principles, the auditors should render a(n)
Qualified opinion with reference to departure.
Your client counts inventory three months before the end of the fiscal year. Internal controls over inventory are excellent. Which procedure is not necessary for the inventory roll-forward?
Request the client to recount inventory at the end of the year.
Which of the following should be performed by the persons opening the mail and recording payments?
Restrictive endorsement on all checks.
Which of the following accounts does not appear in the acquisition and expenditure cycle?
Sales Returns
Normal parts of the revenue and collection cycle:
Sales, Accounts Receivable, and Cash.
Which of the following methods for determining inventory cost is not allowed by GAAP?
Standard cost.
An auditor is examining a nonpublic company's inventory procurement system and has decided to perform tests of controls. Under which of the following conditions should the auditor perform tests of controls?
The auditor believes that testing the controls could lead to a reduction in overall audit time and cost.
When auditors lack independence, which of the following is true about the report on the entity's financial statements that should be issued?
The auditors should disclaim an opinion and should state specifically that they are not independent.
Which of the following controls should prevent an invoice for the purchase of merchandise from being paid twice?
The check signer reviews and cancels the voucher packets.
Which of the following would be consistent with an employee taking cash receipts from customers on account?
The total of the accounts receivable subsidiary ledger balance is less than the accounts receivable control account.
Which of the following steps would not normally be included in a program for a physical inventory observation?
Vouch unit prices to vendors' invoices or other cost records.
An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using:
a bank lockbox system.
A voucher would typically contain
a purchase requisition, purchase order, vendor invoice, receiving report, and check copy.
Auditors will issue an adverse opinion when
a violation of generally accepted accounting principles is sufficiently material and pervasive that a qualified opinion is not justified.
When auditing the revenue and collection cycle, auditors normally select balances to confirm from the:
accounts receivable listing.
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's balance assertions about
accuracy and valuation.
From the auditors' point of view, inventory counts are more acceptable prior to the year end when
accurate perpetual inventory records are maintained.
Accountants should be under orders to record sales and accounts receivable when:
all supporting documentation of shipping is in order.
The primary objective of analytical procedures used near the end of an audit is to
assist auditors in evaluating the overall financial statement presentation.
Auditors must complete various phases of an audit after the date of the financial statements. The auditors' responsibility for matters affecting the client extends from the date of the financial statements to the
audit report release date.
The production planner determines what inventory is need for future production using
bill of materials for the product being produced.
To make a year-to-year comparison of inventory turnover most meaningful, the auditor will perform the analysis
by product.
Before the impact of adjusting entries proposed by auditors are included in the client's financial statements, the adjustments must be approved by the
client's management.
If the amount of a check is altered by an employee after it has cleared the bank, the change can be detected by:
comparing the magnetic imprint of the amount paid to the amount written on the check face.
An auditor is planning the testing of the accounts payable balance. The auditor's main concerns should be
completeness and cutoff.
The auditor traces items from the receiving reports to the accounts payable journal in order to satisfy the
completeness assertion.
An auditor selected an inventory item on the warehouse floor, test counted it, and traced the count to the final inventory compilation. The auditor most likely was testing the PCAOB assertion of
completeness.
An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's balance assertion of
completeness.
When auditing liabilities account balances, auditors are most concerned with management' assertion about
completeness.
When evaluating inventory controls, an auditor would be least likely to
consider policy and procedure manuals.
An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the:
cutoff bank statement is reconciled.
Counting different parts of inventory at different times of the year is called
cycle counting.
Roll-forward work normally occurs between the _____ and the _____.
date of interim work; date of the auditors' report
Subsequent events occur between the _____ and the _____.
date of the financial statements; date of the auditors' report
Each of the following is a type of known misstatement, except:
differences between management and the auditor's judgment regarding estimates.
A report that acknowledges reliance on the reports of component auditors is a type of report modification known as a(n)
division of responsibility.
To be recognized, revenues must also be realized or realizable and:
earned.
In the audit of accounts receivable, the most important emphasis should be on the:
existence assertion.
Auditors who are reporting on financial statements that contain a material departure from generally accepted accounting principles should include an additional paragraph and
express a qualified or adverse opinion.
Independent auditors must consider whether the entity has the ability to continue as a going concern. If a substantial doubt exists but disclosure is adequate and no other basis exists for modifying the report, the auditors would normally
express an unmodified opinion with an emphasis-of-matter paragraph describing the going-concern uncertainty.
When updating the report on prior-years' financial statements presented in comparative form, the auditors' responsibility for the prior-years' financial statements is
extended to the date of the updated audit report.
To gather evidence regarding the bank's balance in a bank reconciliation, an auditor would examine all of the following except the:
general ledger.
When an employee embezzles company funds from an electric utility company for the purpose of paying expenses of an anti-nuclear protest organization, the fraudster's motive is said to be:
ideological.
An auditor will usually trace the details of the test counts made during the observation of physical inventory counts to a final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are
included in the final inventory schedule.
When disclaiming an opinion due to a client-imposed scope limitation, auditors should describe the nature of the scope limitation in an additional paragraph and modify the
introductory paragraph, Auditor's Responsibility section, and opinion paragraph.
The typical functions of the production and conversion includes
inventory planning and control.
The document that generates recording of a sale is the:
invoice.
Reference in a group auditors' report to the fact that part of the audit of group financial statements was performed by component auditors most likely would be an indication of
involvement of component auditors in the audit of the group financial statements.
The mail which includes payments should be opened by two people. This control is called:
joint custody.
The typical functions of the personnel and payroll cycle would not include
labor relations.
Auditors most likely would issue a disclaimer of opinion on the entity's financial statements because of
management's refusal to furnish written representations.
SEC registrants' financial statements should be accompanied by all of the following reports except the
management's report on financial statements and related disclosures.
The auditor tests the quantity of materials charges to work-in-process by vouching these quantities to
material requisitions.
When auditors qualify their opinion on the entity's financial statements because of inadequate disclosure, the auditors should describe the nature of the omission in an additional paragraph and modify
neither the introductory paragraph nor Auditor's Responsibility section.
When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditors should
not refer to consistency in the report.
An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the activities by:
observation and inquiry.
Vouching a sample of items from the perpetual inventory records to the receiving reports achieves the specific ASB balance assertion of
occurrence.
Auditors should disclose the substantive reasons for expressing an adverse opinion on the entity's financial statements in an additional paragraph
preceding the opinion paragraph.
Your client is in the process of acquiring another company. You have been requested to verify that cash for the company being acquired is properly stated. The audit technique that will yield the most persuasive evidence is:
preparation and review of standard bank confirmation inquiries.
In the revenue and collection cycle, the order of the activities in the cycle is best illustrated by:
processing customer orders, granting credit, delivering goods, and billing customers.
A company's cost accountant periodically reconciles job cost sheets to the work-in-process inventory accounts. This reconciliation is most likely performed to provide assurance that
production accounting and posting is complete.
To determine the client's planned amount and timing of production of a product, the auditor will review the
production plan.
A client's physical count of inventories was higher than the inventory quantities shown in the perpetual records. This situation could be the result of the failure to record
purchases.
When financial statements contain a departure from GAAP, the auditors should explain the unusual circumstances in a separate paragraph and express an opinion that is
qualified or adverse, depending on the overall materiality and pervasiveness of the GAAP departure.
When audited financial statements are presented in a document containing other information, the auditors should
read the other information to determine that it is consistent with the audited financial statements.
When a predecessor auditor has examined the prior-years' financial statements presented in comparative format, the current auditors' report should
reference the predecessor auditors' report in an other-matter paragraph.
Situations in which auditors provide additional copies of a previous issued report or grant entities permission to use a previously issued report in a document containing financial statements after its original date are known as
reissued reports.
An audit plan of substantive procedures for cash would not include:
request a cutoff bank statement be mailed to the client.
Near the end of an audit, the application of analytical procedures is
required by auditing standards.
Sales are normally recorded on the date of the:
sales invoice.
Management letters are not a means of
satisfying professional requirements to communicate matters related to the client's internal control.
Auditors ordinarily send a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balances. A purpose of this procedure is to:
seek information about contingent liabilities and security agreements.
If an entity had litigation pending at the date of the financial statements and auditors learn of the outcome of this litigation following the date of their report (but prior to the audit report release date), this is known as a(n):
subsequently discovered fact.
The audit procedures used in an observation of the client's physical inventory taking are designed primarily to
test and observe the client's physical count of inventory.
Auditors record the last bill of lading used at the time of the inventory count to
test cutoff.
At the beginning of the observation of the inventory count, the auditor records the last bill of lading used by the company to
test inventory cut-off.
In the audit of cash the auditor obtains a bank cutoff statement primarily to:
test the propriety of items appearing on the client's year-end bank reconciliation.
The issuance of a disclaimer of opinion generally indicates
the auditors cannot form an opinion on the fairness of presentation of the financial statements as a whole.
An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if:
the client does not take the remedial action that the auditor considers necessary.
Revenues are normally considered to have been earned when:
the company has substantially accomplished what it must to be entitled to the benefits.
An auditor would least likely initiate a discussion with a client's audit committee concerning:
the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.
Inventory count tags are controlled
to prevent subsequent addition of goods to the inventory.
An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement (PCAOB) assertion of
valuation or allocation.
An auditor would vouch inventory on the inventory status report to the vendor's invoice to obtain evidence concerning management's balance assertions about
valuation.
An auditor who wished to test for the existence or occurrence of inventory would most likely select a sample of inventory items from the perpetual records and
vouch additions to receiving reports.
When a production plan is complete the production planner needs to determine
what raw materials need to be ordered.
