Audit Test 2
. For effective internal control, the billing function should not be performed by the: A. Sales department. B. Accounting department. C. Finance department. D. Information Processing department.
A
A CPA examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitative data. This is an example of a: A. Test of a control. B. Substantive test. C. Cutoff test. D. Statistical test.
A
A client uses a perpetual inventory system. Would one expect a credit to which of the following accounts at the point of sale? Sales Inventory A. Yes Yes B. Yes No C. No Yes D. No No A. Option A B. Option B C. Option C D. Option D
A
A major control procedure related to plant and equipment is a budget for depreciation.
False
A typical procedure in the audit of property is examination of public records to verify the ownership of the property.
False
Accounts payable generally present the auditors with difficult valuation problems.
False
Accounts receivable that are written-off should not be turned over to a collection agency.
False
Auditors should not review the client's planning of the physical inventory.
False
CPAs use negative accounts receivable confirmation requests more frequently than positive accounts receivable confirmation requests.
False
Confirmation of accounts payable is a required generally accepted auditing procedure.
False
Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address.
False
For effective internal control over accounts payable, the purchasing department should approve invoices for payment.
False
For good internal control over purchase transactions, purchases should be made from approved vendors by the department needing the goods.
False
Idle equipment will generally need to be reclassified as a current asset.
False
It is more important to maintain effective internal control over accounts payable as it is to maintain effective internal control over accounts receivable.
False
Observation of inventories is a generally accepted auditing standard.
False
The auditors typically observe all major items of property, plant, and equipment every year.
False
The department approving a sales transaction should be the shipping department.
False
The primary objective of the auditors' examination of accounts payable is to determine whether payments are made on a timely basis.
False
The primary purpose of internal control over plant and equipment is to safeguard the assets from theft.
False
The proper cutoff of inventories is best achieved when the client uses prenumbered purchase orders.
False
When the auditors cannot satisfy themselves as to the accuracy of ending inventory and a material misstatement may exist, they normally may still give an unqualified opinion on the client's income statement.
False
Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable.
True
Confirmation of accounts receivable provides some assurance that no lapping or other manipulation affecting accounts receivable is being carried on.
True
Even when internal control is weak, a significant portion of the audit work on property, plant, and equipment may be performed at an interim date.
True
Evidence of continued ownership of property is obtained by vouching payments to a mortgage trustee.
True
In the audit of depletion the auditors must often rely on the work of specialists.
True
Information regarding the proper cutoff of accounts payable is generally obtained in conjunction with the audit of inventories.
True
Material accounts receivable from related parties should be stated separately from other receivables.
True
Material purchases of assets from an affiliated company should be disclosed in the financial statements.
True
Overstatement of financial results can involve failure to record a transaction
True
The auditors' approach to the audit of property, plant, and equipment largely results from the fact that relatively few transactions occur.
True
The confirmation of existing accounts payable does not prove the completeness of recorded accounts payable.
True
The examination of warehouse receipts is not sufficient verification of a material amount of goods stored in public warehouses.
True
The lower of cost or market test by the auditors is generally designed to assure that inventories are not valued above their net realizable values.
True
The receiving department should accept only goods for which there is an approved purchase order on hand.
True
The use of a tagging system for inventory taking is designed to prevent double counting of goods.
True
To test the client's cutoff of inventories, the auditors will make a record of the serial number of the final receiving and shipping documents used prior to the taking of the physical inventory.
True
When it is impossible to confirm accounts receivable, the auditors may be able to satisfy themselves as to the existence of accounts receivable by alternative procedures.
True
Which of the following is the best control procedure to prevent the payment of an invoice twice? A. Review of supporting documentation by the person signing the check. B. Requiring dual signatures on checks. C. Use of a check protector. D. Reconciliation of vendor statements to accounts payable.
A
A continuing audit client's property, plant, and equipment and accounts receivable accounts have approximately the same year-end balance. In this circumstance, when compared to property, plant, and equipment, one would normally expect the audit of accounts receivable to require: A. More audit time. B. Less audit time. C. Approximately the same amount of audit time. D. Similar confirmation procedures.
A
A receiving department compares inventory items received with copies of purchase orders. The purchase orders list the name of the vendor and do not list the quantities of the material ordered. Using the purchase orders, the receiving department is most likely to detect: A. Deliveries for which no purchase order was issued. B. Unapproved sales orders. C. Partial deliveries. D. Deliveries of a greater quantity of items than those ordered.
A
Accrued liabilities generally differ from accounts payable in that accrued liabilities: A. Accumulate over time. B. Are usually confirmed at year-end. C. Depend upon the existence of a transaction for original recording of the account. D. Are never included in cost of goods sold.
A
An auditor has accounted for a sequence of inventory tags and is now going to trace information on a representative number of tags to the inventory summary sheets. Which assertion does this procedure relate to most directly? A. Completeness. B. Existence. C. Legality. D. Valuation.
A
An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: A. No reply to a positive confirmation request is received. B. No reply to a negative confirmation request is received. C. Collectibility of the receivables is in doubt. D. Pledging of the receivables is probable.
A
An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all: A. Cash disbursements. B. Approved vouchers. C. Receiving reports. D. Vendors' invoices.
A
An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the: A. Collection of receivables. B. Purchase of merchandise inventory. C. Payment of accounts payable. D. Sale of long-term debt.
A
Auditors should be aware that a voucher system may result in which of the following at year-end: A. Understatement of liabilities. B. Overstatement of assets. C. Understatement of owners' equity. D. Overstatement of expenses.
A
In testing for unrecorded retirements of equipment, an auditor might: A. Select items of equipment from the accounting records and then attempt to locate them during the plant tour. B. Compare depreciation expense with the prior year's depreciation expense. C. Trace equipment items observed during the plant tour to the equipment subsidiary ledger. D. Scan the general journal for unusual equipment retirements.
A
In verifying credits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the: A. Shipping documents. B. Receiving reports. C. Purchase orders. D. Vendors' invoices.
A
In your review of ABC Company's financials, you note that Receivables have increased approximately 200% from the previous year, while Cash has declined. Further investigation reveals that 70% of ABC's receivables were booked within 7 days of the end of the quarter. If financial statement fraud is involved, which type is most likely? A. Fictitious revenues B. Timing differences C. Improper asset valuations D. Improper disclosures
A
Internal control over accounts payable is improved when: A. Purchase orders show approved prices. B. Informal bids are obtained. C. Annual trial balance of accounts payable subsidiary ledgers is required. D. Payment is made upon approval of the purchasing agent.
A
It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations, the best alternative procedure the auditors might resort to would be: A. Examining subsequent receipts of year-end accounts receivable. B. Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a subsequent date. C. Requesting that management increase the allowance for uncollectible accounts by an amount equal to some percentage of the balance in those accounts that cannot be confirmed. D. Applying analytical procedures to accounts receivable and sales on a year-to-year basis.
A
Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for: A. Investigation of variances within a formal budgeting system. B. Review and approval of the monthly depreciation entry by the plant supervisor. C. Segregation of duties of employees in the accounts payable department. D. Examination by the internal auditors of vendor invoices and canceled checks for property acquisitions.
A
Purchase cutoff procedures should be designed to test whether all inventory: A. Owned by the company was recorded. B. On the year end balance sheet was carried at lower of cost or market. C. On the year end balance sheet was paid for by the company. D. Owned by the company is in the possession of the company.
A
The assertion most directly addressed when performing the search for unrecorded liabilities is: A. Completeness. B. Existence. C. Presentation. D. Rights.
A
The auditors are least likely to learn of retirements of equipment through which of the following? A. Review of the purchase returns and allowances account. B. Review of depreciation. C. Analysis of the debits to the accumulated depreciation account. D. Review of insurance policy riders.
A
The confirmation process may be performed using a(n): Paper Form Electronic Form A. Yes Yes B. Yes No C. No Yes D. No No A. Option A B. Option B C. Option C D. Option D
A
Which of the following is used to obtain evidence that the client's equipment accounts are not understated? A. Analyzing repairs and maintenance expense accounts. B. Vouching purchases of plant and equipment. C. Recomputing depreciation expense. D. Analyzing the miscellaneous revenue account.
A
The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to: A. Observe physical counts of the inventory items. B. Trace the total on the inventory listing to the general ledger inventory account. C. Obtain a confirmation from the client indicating inventory ownership. D. Analytically compare the current-year inventory balance to the prior-year balance.
A
To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors: A. Trace a sample of the bills of lading to sales invoices. B. Confirm a sample of accounts payable. C. Review the aging of accounts receivable. D. Trace a sample of recorded sales to shipping documents.
A
Unrecorded liabilities are most likely to be found during the review of which of the following documents? A. Unpaid bills. B. Shipping records. C. Bills of lading. D. Unmatched sales invoices.
A
What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales? A. Accounts receivable are overstated at December 31, 20X0. B. Accounts receivable are understated at December 31, 20X0. C. Operating expenses are overstated for the 12 months ended December 31, 20X0. D. Sales returns and allowance are overstated at December 31, 20X0.
A
When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables? A. The account balances as of year-end will generally be confirmed. B. The auditors will in general use blank rather than positive confirmation requests. C. The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year end. D. Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports.
A
When performing an audit of the property, plant, and equipment accounts, an auditor should expect which of the following to be most likely to indicate a departure from generally accepted accounting principles? A. Repairs have been capitalized to repair equipment that had broken down. B. Interest has been capitalized for self-constructed assets. C. Assets have been acquired from affiliated corporations with the related transactions recorded and described in the financial statements. D. The cost of freight-in on an acquisition has been capitalized.
A
When the auditors discover an understatement of liabilities, they would most likely also expect to find an: A. Understatement of assets. B. Understatement of owners' equity. C. Overstatement of expenses. D. Understatement of revenues.
A
Which of the following audit procedures is best for identifying unrecorded trade accounts payable? A. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the prior period. B. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. C. Examining unusual relationships between monthly accounts payable balances and recorded cash payments. D. Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date.
A
Which of the following audit procedures most likely would provide assurance that a manufacturing entity's inventory valuation is proper? A. Testing the entity's computation of standard overhead rates. B. Obtaining confirmation of inventories pledged under loan agreements. C. Reviewing a cutoff procedure for inventories. D. Tracing test counts to the entity's inventory listing.
A
Which of the following best describes the auditors' approach to the audit of accrued liabilities? A. Test computations. B. Confirmation. C. Observation. D. A low planned assessed level of control risk.
A
Which of the following best describes the auditors' response to a client's use of statistical sampling techniques to estimate the inventory? A. The auditors should satisfy themselves as to the statistical validity of the technique, and the reasonableness of the allowance for sampling risk and sampling error used. B. The auditors should qualify their opinion, because the client must perform a complete count of the inventory. C. The auditors should increase the extent of their test counts to compensate for the use of a statistical technique. D. The auditors should withdraw from the engagement.
A
Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts? A. Examine cash receipts received after year-end. B. Confirm receivables. C. Examine dates of purchase orders. D. Foot the receivables lead schedule.
A
Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received? A. Quantities ordered are excluded from the receiving department copy of the purchase order. B. Vouchers are prepared by accounts payable department personnel only after they match item counts on the receiving report with the purchase order. C. Receiving department personnel are expected to match and reconcile the receiving report with the purchase order. D. Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports.
A
Which of the following is least likely to be accurate statement concerning characteristics of an audit? A. An analysis of inventory turnover addresses whether the proper method of determining inventory costs--as contrasted to market values--is being applied. B. Characteristics of the double entry bookkeeping system make it possible to test for overstated sales when tests of accounts receivable are being performed. C. The direction of tests for overstatement errors is generally directed from the recorded entry to source documents. D. Use of a perpetual rather than a periodic inventory system is likely to affect the nature of cutoff errors made at year-end.
A
Which of the following is not one of the auditors' objectives in auditing depreciation? A. Establishing the reasonableness of the client's replacement policy. B. Establishing that the methods used are appropriate. C. Establishing that the methods are consistently applied. D. Establishing the reasonableness of depreciation computations.
A
Which of the following is not one of the criteria for revenue recognition? A. Collectibility is certain. B. Delivery has occurred or services have been rendered. C. Evidence of an arrangement exists and is persuasive. D. A fixed or determinable price to buyer exists.
A
Which of the following statements is correct regarding accounts payable and the auditor's procedures? A. Because it is generally more difficult to discover a transaction that has not been recorded than to discover one that has been recorded incorrectly, the audit objective of completeness drives many of the substantive procedures applied to these balances. B. A judgment whether an unrecorded payable should be recorded before the financial statements are prepared depends entirely upon the source of the payable. C. The confirmation of accounts payable selected from the year-end trial balance of such accounts is most effective in discovering unrecorded liabilities. D. Unrecorded payables are often discovered through examining vouchers payable entered into the voucher register prior to the balance sheet date.
A
Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable? A. The confirmation requests are sent on the client's letterhead. B. The confirmation requests are mailed to customers by the internal auditors. C. The client's mailroom personnel closely monitor and inspect confirmation requests during mailing. D. The return address on the envelope used to send the confirmation request is that of the client.
A
. To measure how effectively a client employs its assets, an auditor calculates inventory turnover by dividing the average inventory into: A. Net sales. B. Cost of good sold. C. Operating income. D. Gross sales.
B
A "bill and hold" scheme is most likely to include: A. Shipment of items to a customer beyond what the customer has ordered. B. Recording as sales items that the company retains as of year-end. C. Billing of items that are held by customers for future revenue production purposes. D. Selling items at substantial discounts near year-end.
B
A client recorded a payable for a large purchase twice. Which of the following controls would be most likely to detect this error in a timely and efficient manner? A. Footing the purchases journal. B. Reconciling vendors' monthly statements with subsidiary payable ledger accounts. C. Tracing totals from the purchases journal to the ledger accounts. D. Sending written quarterly confirmations to all vendors.
B
A client uses a periodic inventory system. Would one expect a credit to which of the following accounts at the point of sale? Sales Inventory A. Yes Yes B. Yes No C. No Yes D. No No A. Option A B. Option B C. Option C D. Option D
B
After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items: A. Included in the listing have been counted. B. Represented by inventory tags are included in the listing. C. Included in the listing are represented by inventory tags. D. Represented by inventory tags are bona fide.
B
An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that: A. Obsolete inventory has not yet been reduced to fair market value. B. There was an improper cutoff of sales at the end of the year. C. An unusually large receivable was written off near the end of the year. D. The aging of accounts receivable was improperly performed in both years.
B
An auditor has identified numerous debits to accumulated depreciation of equipment. Which of the following is most likely? A. The estimated remaining useful lives of equipment were increased. B. Plant assets were retired during the year. C. The prior year's deprecation expense was erroneously understated. D. Overhead allocations were revised at year-end.
B
An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all: A. Merchandise received. B. Vendor's invoices. C. Canceled checks. D. Receiving reports.
B
An auditor wishes to perform tests of controls on a client's cash disbursements relating to accounts payable. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by: A. Confirmation and observation. B. Observation and inquiry. C. Analytical procedures and confirmation. D. Inquiry and analytical procedures.
B
An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order, and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select for testing from the population of: A. Purchase orders. B. Canceled checks. C. Receiving reports. D. Approved vouchers.
B
Auditors may choose not to confirm accounts payable because: A. Confirmation obtains evidence identical to that obtained by cutoff tests. B. Other reliable external evidence to support the balances is likely to be available. C. A reading of the corporate minutes reveals that confirmation is unnecessary. D. The balances due will have changed between the year-end and the date of confirmation.
B
Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use? A. The positive form for small balances, and the negative form for large balances. B. The positive form used for large balances and the negative form for the small balances. C. The positive form used for trade receivables and the negative form for other receivables. D. The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory.
B
In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified? A. Test the computation of standard overhead rates. B. Tour the manufacturing plant or production facility. C. Compare inventory balances to anticipated sales volume. D. Review inventory experience and trends.
B
The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with: A. Purchase requisitions. B. Receiving reports. C. Purchase orders. D. Vendor payments.
B
The confirmation of accounts payable is most closely associated with: A. Assertion risk. B. Detection risk. C. Inherent risk. D. Relative risk.
B
The confirmation of accounts receivable is most closely associated with: A. Business risk. B. Detection risk. C. Inherent risk. D. Relative risk.
B
The individual looking for guidance on revenue recognition is most likely to appropriately review: A. APB 99. B. SAB 104. C. ASR 44. D. B1 Document.
B
The use of a "blind" purchase order is designed to prevent errors by the: A. Purchase department. B. Receiving department. C. Stores department. D. Accounting department.
B
To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditors should review and test the: A. Terms of the open purchase orders. B. Purchase cutoff procedures. C. Contractual commitments made by the purchasing department. D. Purchase invoices received on or around year end.
B
Tracing copies of sales invoices to shipping documents will provide evidence that all: A. Shipments to customers were recorded as receivables. B. Billed sales were shipped. C. Debits to the subsidiary accounts receivable ledger are for sales shipped. D. Shipments to customers were billed.
B
Tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading) provides evidence about the: A. Completeness of recording of sales transactions. B. Occurrence of sales transactions. C. Billing of all sales transactions. D. Presentation of payables.
B
When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if: A. Subsequent collections are to be reviewed. B. Internal control over receivables is good. C. Negative confirmation requests are to be used. D. There is a simultaneous examination of cash and accounts receivable.
B
Which of the following assertions is of principle concern to the auditors in the examination of accounts payable? A. Existence. B. Completeness. C. Valuation. D. Authorization.
B
Which of the following audit procedures is aimed most directly at testing the completeness assertion for accounts payable? A. Footing the list of accounts payable. B. Examining underlying documentation for cash disbursements in the period after year-end. C. Tracing shipping reports issued on or before year-end to related customer purchase orders and invoices. D. Tracing shipping reports after year-end to related customer purchase orders and invoices.
B
Which of the following audit procedures is least likely to detect an unrecorded liability? A. Analysis and recomputation of interest expense. B. Analysis and recomputation of depreciation expense. C. Mailing of a cash confirmation form. D. Reading of the minutes of meetings of the board of directors.
B
Which of the following best describes the auditors' approach to the audit of the ending balance of property, plant and equipment for a continuing nonpublic client? A. Direct audit of the ending balance. B. Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts. C. Audit of changes in the accounts since inception of the company. D. Audit of selected purchases and retirements for the last few years.
B
Which of the following best describes the reason for the auditors' review of the client's cost accounting system? A. To obtain evidence regarding the quantities of good described as work-in-process. B. To obtain evidence about the valuation of work-in-process, finished goods, and cost of goods sold. C. To obtain evidence about the profit margin on specific jobs. D. To obtain evidence about compliance with Cost Accounting Standards.
B
Which of the following best describes the reason that the auditors record their inventory test counts in the working papers? A. To document every test count. B. For subsequent comparison with the completed inventory listing. C. To document compliance with generally accepted accounting principles. D. For use in subsequent audits.
B
Which of the following does not meet the definition of an external confirmation in the context of accounts receivable? A. Fax responses. B. Oral responses obtained by the auditor through a telephone call. C. Written responses to negative confirmation requests. D. Written response to confirmations sent out without balances due.
B
Which of the following is an auditor least likely to consider a departure from U.S. generally accepted accounting principles? A. Valuing inventory at cost. B. Including in inventory items that are consigned out to vendors, but not yet sold. C. Using standard cost as the measure of inventory cost. D. Including in inventory items shipped subsequent to year-end, but for which valid orders did exist at year-end.
B
Which of the following is least likely to be typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests? A. Examine bills of lading. B. Physically examine items sold. C. Examine correspondence. D. Examine subsequent cash receipts.
B
Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts? A. Accounts receivable divided by Cost of goods sold. B. Aging of accounts receivable. C. Cash Sales divided by Accounts receivable D. Year 2 accounts receivable compared to year one accounts receivable.
B
Which of the following is not a control that should be established for purchases of equipment? A. Establishing a budget for capital acquisitions. B. Requiring that the department in need of the equipment order the equipment. C. Requiring that the receiving department receive the equipment. D. Establishing an accounting policy regarding the minimum dollar amount of purchase that will be considered for capitalization.
B
Which of the following is not a part of the auditors' responsibility when a client's count of its inventory? A. Evaluate condition of inventory. B. Determine which counts they will make and which counts the client will make. C. Observe compliance with management's instructions for the count. D. Make some test counts.
B
Which of the following is not a reason for the special significance attached by the auditors to the verification of inventories? A. The determination of inventory valuation directly affects net income. B. The existence of inventories is inherently difficult to substantiate. C. Special valuation problems often exist for inventories. D. Inventories are often the largest current asset of an enterprise.
B
Which of the following is not true about the auditors' verification of notes receivable? A. The interest revenue on notes receivable is usually audited by independent computation. B. Inspecting the notes is sufficient evidence of existence of the notes. C. The auditors may evaluate the collectibility of notes by inspecting credit files. D. Confirmation of notes payable to banks may be accomplished in conjunction with the confirmation of cash balances.
B
Which of the following is not true about the confirmation of accounts receivable? A. Confirmation requests should bear the auditors' return address. B. Confirmation requests should be signed by the auditors. C. Confirmation requests should be mailed directly by the auditors. D. Confirmation requests should include a return envelope addressed to the office of the auditors.
B
Which of the following is not true relating to the auditors' observation of the client's physical inventory? A. The auditors should evaluate the client's planning of the physical inventory. B. The auditors should make certain that consigned items from suppliers are included in physical inventory totals. C. The auditors should evaluate the adequacy of the client's counting procedures. D. The auditors should take test counts of the client's inventory.
B
Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests? A. Examine sales invoices. B. Inclusion of the information in the engagement letter. C. Examine correspondence. D. Examine any subsequent cash receipts.
B
Which of the following is the best evidence of continuous ownership of property? A. Examination of the deed. B. Examination of rent receipts from lessees of the property. C. Examination of the title policy. D. Examination of canceled check in payment for the property.
B
Which of the following is the most important control procedure over acquisitions of property, plant, and equipment? A. Establishing a written company policy distinguishing between capital and revenue expenditures. B. Using a budget to forecast and control acquisitions and retirements. C. Analyzing monthly variances between authorized expenditures and actual costs. D. Requiring acquisitions to be made by user departments.
B
Which of the following manipulations would understate receivables on the financial statements? A. Understatement of cash sales. B. Closing the sales journal prior to year-end. C. Closing the cash receipts journal prior to year-end. D. Underestimating the allowance for doubtful accounts.
B
When an auditor finds a debit to accounts payable, which of the following accounts is most likely to be credited? A. Accounts Receivable. B. Accrued liabilities. C. Cash. D. Cost of goods sold.
C
Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts? A. Investigate confirmation exceptions for indication of amounts in dispute. B. Review accounts which have been written off as uncollectible prior to year-end. C. Investigate credit ratings for large accounts receivable. D. Discuss with the credit manager the current status of doubtful accounts.
B
Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed? A. Scan the sales journal for sequential and unusual entries. B. Examine shipping documents for matching sales invoices. C. Compare the accounts receivable ledger to daily sales summaries. D. Inspect unused sales invoices for consecutive pre-numbering.
B
Which one of the following procedures would not be appropriate for the auditors in discharging their responsibilities concerning the client's physical inventories? A. Confirmation of goods in the hands of public warehouses. B. Supervising the taking of the annual physical inventory. C. Carrying out physical inventory procedures at an interim date. D. Obtaining written representation from the client as to the existence, quality, and dollar amount of the inventory.
B
Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice? A. Footing the sales journal. B. Confirming accounts receivable. C. Tracing the total sales in the sales journal to the general ledger. D. Observation of the physical inventory count at year-end.
B
Which statement is correct relating to the count of inventory when a company that specializes in taking such counts ("the company") is involved with counting a client's inventory? A. The auditor should consider the company a specialist, and follow the procedures outlined for addressing an auditor's specialist. B. The auditor should not consider the counts by the company, by themselves, sufficient appropriate audit evidence. C. The auditor must observe all inventory counts taken by the company. D. The auditor should observe a letter of representations form the company.
B
You were surprised to note that approximately 95% of returned positive accounts receivable confirmation requests indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that: A. The cash receipts journal was closed before year-end. B. The cash receipts journal was held open after year-end. C. There are many unrecorded liabilities. D. The sales journal was held open after year-end.
B
A client's physical count of inventories was higher than the inventory quantities per the perpetual records. This situation could be the result of the failure to record: A. Sales. B. Sales discounts. C. Purchases. D. Purchase returns.
C
A likely analytical procedure to test the accuracy of purchase discounts would be to compute the ratio of cash discounts earned to: A. Accounts payable. B. Notes payable. C. Purchases. D. Sales discounts.
C
A plant manager would be most likely to provide information on which of the following? A. Adequacy of the provision for uncollectible accounts. B. Appropriateness of physical inventory valuation techniques. C. Existence of obsolete production equipment. D. Deferral of certain purchases of office supplies.
C
After the CPAs have selected particular accounts receivable for confirmation: A. As a control measure, the CPAs should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail. B. It is important that every account selected that has a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow-up through alternative procedures. C. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm. D. All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client.
C
An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific program steps to apply to the accounts and transactions. In a particular case, s/he might do this by: A. Tracing sales invoices to shipping documents to tests the completeness of reported sales. B. Tracing shipping documents to sales invoices to test the occurrence of reported sales. C. Tracing sales invoices to shipping documents to test the occurrence of reported sales. D. Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.
C
Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor? A. A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year. B. Internal control activities over the recording of cash receipts have been improved since the end of the prior year. C. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet. D. The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.
C
Effective internal control for purchases generally can be achieved in a well-planned organizational structure with a separate purchasing department that has: A. The ability to prepare payment vouchers based on the information on a vendor's invoice. B. The responsibility of reviewing purchase orders issued by user departments. C. The authority to make purchases of requisitioned materials and services. D. A direct reporting responsibility to controller of the organization.
C
For which of the following ledger accounts would the auditor be most likely to analyze the details to identify understatements of equipment acquisitions? A. Service Revenue. B. Sales. C. Repairs and maintenance expense. D. Sales salaries expense.
C
In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the: A. Extent of the control risk. B. Extent of property abandoned during the year. C. Adequacy of replacement funds. D. Reasonableness of the depreciation.
C
Most of the audit work on accounts payable is typically performed: A. Before the balance sheet date. B. At the balance sheet date in conjunction with inventory cutoff tests. C. After the balance sheet date. D. Simultaneously with the audit of accrued liabilities.
C
Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client company, if the company: A. Has paid for the merchandise. B. Has physical possession of the merchandise. C. Holds legal title to the merchandise. D. Holds the shipping documents for the merchandise issued in the company's name.
C
The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditors to: A. Consider internal control over credit sales. B. Test the accuracy of recorded charge sales. C. Estimate credit losses. D. Verify the validity of the recorded receivables.
C
The auditor will most likely perform extensive tests for possible understatement of: A. Revenues. B. Assets. C. Liabilities. D. Capital.
C
The auditors may expect a proper debit to goodwill due to: A. Purchase of a trademark. B. Establishment of an extraordinarily profitable product. C. A business combination. D. Capitalization of human resources.
C
The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful? A. A substantial number of accounts are in disputes. B. The combination of inherent risk and control risk is high. C. Client records include a large number of relatively small balances. D. The auditors believe that recipients of the requests are unlikely to give them consideration.
C
The auditors' search for unrecorded liabilities is completed: A. During an interim period. B. At the balance sheet date. C. Subsequent to the balance sheet date. D. At any time during the examination.
C
The client's physical count of inventories is lower than the inventory quantities in the perpetual records. This could be the result of a failure to record: A. Purchases. B. Purchase discounts. C. Sales. D. Sales discounts.
C
The form typically used to confirm accounts payable: A. Does not require a response from the vendor. B. Confirms the balance recorded by the client at year-end. C. Requires the vendor to indicate the amount of the payable. D. Is the same as the form used to confirm accounts receivable.
C
The most likely technique for the current year audit of goodwill which was acquired three years ago by a continuing audit client: A. Confirmation. B. Observation. C. Recomputation. D. Inquiry.
C
To assure that all purchases are authorized before payment is made, accounting department personnel should match the vendor's invoice to: A. The purchase requisition. B. The receiving report. C. The purchase order. D. The voucher.
C
To test the existence assertion for recorded receivables, an auditor would select a sample from the: A. Sales orders file. B. Customer purchase orders. C. Accounts receivable subsidiary ledger. D. Shipping documents (bills of lading) file.
C
Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that: A. Shipments to customers were properly billed. B. Entries in the accounts receivable subsidiary ledger were for sales actually shipped. C. Sales billed to customers were actually shipped. D. No duplicate shipments to customers were made.
C
Tracing recorded sales transactions to the bills of lading provides evidence about the: A. Completeness of sales transactions. B. Collectibility of sales transactions. C. Occurrence of sales transactions. D. Billing of all sales transactions.
C
When the auditors select a sample of items from the vouchers payable register for the last month of the period under audit and trace these items to underlying documents, the auditors are gathering evidence primarily in support of the assertion that: A. Recorded obligations were paid. B. Incurred obligations were recorded in the correct period. C. Recorded obligations occurred prior to year-end. D. Cash disbursements were recorded as incurred obligation.
C
When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs: A. Tests of controls and extensive tests of property and equipment balances at the end of the year. B. Analytical procedures for current year property and equipment transactions. C. Tests of controls and limited tests of current year property and equipment transactions. D. Analytical procedures for property and equipment balances at the end of the year.
C
Which of the following best describes a voucher prepared under good internal control? A. A document prepared by Stores that indicates amount to be purchased. B. A document prepared by Receiving that indicates the quantity received and approves payment. C. A document prepared by Accounts Payable authorizing a cash disbursement. D. A document received by Purchasing, from a supplier, indicating quantity of goods purchased and amount due.
C
Which of the following best describes the specific accounts payable that are selected for confirmation? A. Accounts with large balances. B. Accounts with zero balances. C. Accounts with a large amount of activity regardless of their balance. D. Accounts for which vendor statements are available.
C
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle? A. Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables. B. Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in other customers' accounts permitting a misappropriation of cash. C. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. D. The failure to prepare shipping documents may lead to an understatement of inventory balances.
C
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? A. Merchandise received is not promptly reconciled to the outstanding purchase order file. B. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value. C. The write-off of receivables by personnel who receive cash permits the misappropriation of cash. D. Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.
C
Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts? A. Reviewing an aging of accounts receivable. B. Examination of cash receipts subsequent to the balance sheet date. C. Confirming current (0-30 day) year-end accounts receivable. D. Reviewing credit files for selected account.
C
Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items? A. Supplies of relatively little value are expensed when purchased. B. The cycle basis is used for physical counts. C. The storekeeper is responsible for maintenance of perpetual inventory records. D. Perpetual inventory records are maintained only for items of significant value.
C
Which of the following is consistent with effective internal control over sales transactions? A. The accounting department prepares a shipping report authorizing the shipment of goods. B. The accounting department accounts for all receiving reports. C. The billing department accounts for all shipping documents. D. The accounts payable department annually approves the extension of credit to customers.
C
Which of the following is true about the auditors' observation of the client's physical inventory? A. The auditors should plan the physical inventory. B. The auditors should segregate damaged and obsolete goods. C. The auditors should evaluate the adequacy of the client's counting procedures. D. The auditors should supervise the client's personnel.
C
Which of the following is true about the auditors' observation of the client's physical inventory? A. The count must be made at year-end. B. The auditors should supervise the client's personnel. C. The auditors' observation addresses the existence assertion. D. The auditors should justify any omission of the observation in the audit report.
C
Which of the following procedures for detecting unrecorded transactions at the client's December 31 year-end is least likely to result in discovery of an unrecorded year-end account payable? A. Examination of invoices received after year-end. B. Examination of vouchers payable entered in the January voucher register. C. Examination of January receiving reports prepared for goods shipped FOB destination in December to the client. D. Confirmation of year-end accounts payable.
C
Which of the following procedures is least likely to be completed before the balance sheet date? A. Observation of inventory. B. Review of internal control over cash disbursements. C. Search for unrecorded liabilities. D. Confirmation of receivables.
C
Which of the following revenue related transactions is not linked to the accounts indicated? A. Recognize revenues too early--accounts receivable and revenue. B. Understate allowance for doubtful accounts--bad debt expense, allowance for doubtful accounts. C. Don't write off uncollectible receivables--sales returns, sales discounts. D. Don't record discounts given to customers--cash, sales discounts, accounts receivable.
C
With properly designed internal control, the same employee should not be permitted to: A. Sign checks and cancel supporting documents. B. Receive merchandise and prepare a receiving report. C. Prepare disbursement vouchers and sign checks. D. Initiate a request to order merchandise and approve merchandise received.
C
Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated relating to the year XX financial statements? A. Sales. B. Cash. C. Inventory. D. Accounts receivable.
C
. To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from: A. The sales journal. B. The billing clerk's file of sales orders. C. Duplicate copies of sales invoices. D. The shipping clerk's file of duplicate copies of bills of lading.
D
A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end? A. Cash receipts. B. Payroll. C. Purchases. D. Sales.
D
An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? A. Select and examine receiving reports and ascertain that the related canceled checks are dated no earlier than the receiving reports. B. Select and examine receiving reports and ascertain that the related canceled checks are dated no later than the receiving reports. C. Select and examine canceled checks and ascertain that the related receiving reports are dated no earlier than the checks. D. Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.
D
An inventory turnover analysis is useful to the auditor because it may detect: A. Inadequacies in inventory pricing. B. Methods of avoiding cyclical holding cost. C. The optimum automatic reorder points. D. The existence of obsolete merchandise.
D
Assume that the auditors are concerned about disbursement transactions that have been recorded for improper amounts. Which procedure(s) would possibly identify these transactions? Trace from source docs to journals -- Vouch from journals to source docs A. No No B. No Yes C. Yes No D. Yes Yes A. Option A B. Option B C. Option C D. Option D
D
For good internal control, a copy of a receiving report should be sent to all of the following departments except: A. Accounts payable. B. Purchasing. C. Stores. D. Shipping.
D
For which of the following accounts is it most likely that most of the audit work can be performed in advance of the balance sheet date? A. Accounts receivable. B. Cash. C. Current marketable securities. D. Property, plant, and equipment.
D
In verifying debits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the: A. Purchases journal. B. Purchase requisitions. C. Purchase orders. D. Vendors' invoices.
D
In violation of company policy, Lowell Company erroneously capitalized the cost of painting its warehouse. The auditors examining Lowell's financial statements would most likely detect this when: A. Discussing capitalization policies with Lowell's controller. B. Examining maintenance expense accounts. C. Observing, during the physical inventory observation, that the warehouse had been painted. D. Examining the construction work orders supporting items capitalized during the year.
D
Once a CPA has determined that accounts receivable have increased due to slow collections in a "tight money" environment, the CPA would be likely to: A. Increase the balance in the allowance for bad debts accounts. B. Review the going concern ramifications. C. Review the credit and collection policy. D. Expand tests of collectibility.
D
Recognizing a loan received as revenue instead of as a liability has a positive effect on the reported financial statements for all of the following except: A. It understates liabilities. B. It overstates revenues C. It overstates net income. D. It overstates assets.
D
The auditors will usually trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditors at the time of the physical inventory count are: A. Owned by the client. B. Not obsolete. C. Physically present at the time of the preparation of the final inventory schedule. D. Included in the final inventory schedule.
D
When comparing an initial audit with a subsequent year audit for a particular client, the scope of audit procedures for which of the following accounts would be expected to decrease the most? A. Accounts receivable. B. Cash. C. Marketable securities. D. Property, plant, and equipment.
D
When there are a large number of relatively small account receivable balances, negative confirmation requests may be appropriate if the combination of inherent risk and control risk is: A. Low, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. B. High, and the individuals receiving the confirmation requests are likely to give them adequate consideration. C. High, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. D. Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.
D
Which of the following best describes the auditors' typical observation of plant and equipment? A. The auditors observe a physical inventory of plant and equipment, annually. B. The auditors observe all additions to plant and equipment made during the year. C. The auditors observe all major plant and equipment items in the clients' accounts each year. D. The auditors observe major additions to plant and equipment made during the year.
D
Which of the following best describes the independent auditors' approach to obtaining satisfaction concerning depreciation expense in the income statement? A. Verify the mathematical accuracy of the amounts charged to income as a result of depreciation expense. B. Determine the method for computing depreciation expense and ascertain that is in accordance with generally accepted accounting principles. C. Reconcile the amount of depreciation expense to those amounts credited to accumulated depreciation accounts. D. Establish the basis for depreciable assets and verify the depreciation expense.
D
Which of the following is a control procedure that is usually applied to accounts payable? A. Periodic confirmation of accounts payable. B. Mailing statements to vendors detailing their account. C. Periodic aging of accounts payable. D. Reconciliation of vendor statements with accounts payable.
D
Which of the following is a customary audit procedure for the verification of the legal ownership of real property? A. Examination of correspondence with the corporate counsel concerning acquisition matters. B. Examination of ownership documents registered and on file at a public hall of records. C. Examination of corporate minutes and resolutions concerning the approval to acquire property, plant, and equipment. D. Examination of deeds and title guaranty policies on hand.
D
Which of the following is an example of an accrued liability? A. Accounts payable. B. Notes payable. C. Prepaid insurance. D. Product warranty liability.
D
Which of the following is not a primary objective of the auditors in the examination of accounts receivable? A. Determine the approximate realizable value. B. Consider the adequacy of internal control. C. Establish the existence of receivables. D. Determine the expected day of collection of each of the receivables.
D
Which of the following is not a procedure that typically is used by the auditors in their examination of a client's goods held in the custody of a public warehouse? A. Confirmation. B. Obtaining reports on internal control at the warehouse. C. Observation. D. Corresponding with the state agency regarding the authenticity of the public warehouse.
D
Which of the following is not a test primarily used to test property, plant and equipment accounts for overstatement? A. Investigation of reductions in insurance coverage. B. Review of property tax bills. C. Examination of retirement work orders prepared during the year. D. Vouching retirements of plant and equipment.
D
Which of the following is not one of the independent auditor's objectives regarding the examination of inventories? A. Verifying that inventory counted is owned by the client. B. Verifying that the client has used proper inventory pricing. C. Ascertaining the physical quantities of inventory on hand. D. Verifying that all inventory owned by the client is on hand at the time of the count
D
Which of the following is the best argument against the use of negative accounts receivable confirmation requests? A. The cost-per-response is excessively high. B. There is no way of knowing if the intended recipients received them. C. Recipients are likely to feel that in reality the confirmation is a subtle request for payment. D. The inference drawn from receiving no reply may not be correct.
D
Which of the following manipulations would understate accounts payable on the financial statements? A. Overstatement of purchases. B. Closing the cash disbursements journal prior to year-end. C. Leaving the cash receipts journal open after year-end. D. Overstating purchase returns.
D
Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control? A. Preparation of monthly statements to customers and maintenance of the accounts payable subsidiary ledger. B. Posting to the general ledger and approval of additions and terminations relating to the payroll. C. Custody of unmailed signed checks and maintenance of expense subsidiary ledger. D. Collection of receipts on account and maintaining accounts receivable records.
D
Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product? A. Factory supervisor salary. B. Indirect materials. C. Miscellaneous expense. D. Sales expense.
D
Which of the following would be least likely to address control over the initiation and execution of equipment transactions? A. Requests for major repairs are approved by a higher level than the department initiating the request. B. Prenumbered purchase orders are used for equipment and periodically accounted for. C. Requests for purchases of equipment are reviewed for consideration of soliciting competitive bids. D. Procedures exist to restrict access to equipment.
D
Which of the following would indicate the need to use positive accounts receivable confirmation requests? A. A large population consisting of small balances. B. Good internal control over accounts receivable. C. Most accounts are with large reputable companies. D. A large number of accounts receivable are in dispute.
D
Which statement is correct with respect to accounts payable confirmations? A. The negative form is used in most circumstances. B. Accounts with new suppliers are always confirmed. C. They are a required auditing procedure. D. They are more frequently used in situations in which some vendors don't send monthly statements.
D
Accounts payable from an officer should be classified separately from other accounts payable.
True
An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts.
True
Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts.
True
Auditors generally consider the evidence regarding accounts payable in the client's possession as more reliable than that for accounts receivable.
True
