Audit-Testlet #4

(On test) 12/31/YR3, Vita Company had cash of $200,000, a current ratio of 1.5 to 1 and a quick ratio of .5 to 1. On 12/31/YR3, all cash was used to reduce AP. How did the cash payment affect the ratio? a. Current increase, quick decrease b. Current increase, quick stay the same c. Current decrease, quick increase d. Current decrease, and quick stay the same

a

An auditor should perform alternative procedures to substantiate the existence of AR 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 receivable is probable

a

For all audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent: In the risk assessment stage, as a substantive procedure, near-audit completion a. yes, no, yes b. no, yes, no c. no, yes, yes d. yes, no, no

a

In testing for unrecorded retirements of equipment, an auditor most likely would a. select items of equipment from the accounting records and then locate them during the plant tour b. compare depreciation journal entries with similar prior year entries in search of fully depreciated equipment c. inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger d. scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance expense

a

The tick mark ^ most likely indicates that the amount was traced to the a. deposits in transit of the applicable bank reconciliation b. December cash receipts journal c. January cash receipts journal d. Year-end bank confirmations

a

Which of the following statements ordinarily is included amount the written client representations obtained by the auditor? a. compensating balances and other arrangements involving restrictions on cash balances have been disclosed b. management acknowledge responsibility for illegal actions committed by employees c. sufficient audit evidence has been made available to permit the issuance of an unqualified opinion d. management acknowledges that there are no material weakness in the internal control

a

Which of the following types of audit evidence is the least persuasive? a. Prenumbered purchase order forms b. Bank statements obtained from the client c. Test counts of inventory performed by the auditor d. Correspondence from the client's attorney about litigation

a

(On test) The primary reason an auditor requests letters of inquiry be sent to a clients attorney is to provide the auditor with a. the probable outcome of asserted claims and pending or threatened litigation b. corroboration of the information furnished by management about litigation, claims, and assessments c. the attorney's opinions of the client's historical experiences in recent similar litigation d. a description and evaluation of litigation, claims, and assessments that existed at the balance sheet date

b

(On test) Which circumstance most likely causes the auditor to suspect material misstatement in an entity's financial statement? a. Entity's management places no emphasis on meeting public earnings projection b Significant differences between physical inventory count and account records are not investigated c. Monthly bank reconciliations originally include several large outstanding check counts d. Cash transactions are electronically processed and recorded leaving no paper audit trail

b

Ignoring any particular legal or regulatory requirement, audit documentation should be retained a. minimum of five years b. as long as lead schedules have relevance to forthcoming audits c. until three years after the client selects another auditor d. working papers must be maintained indefinitely

b

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertions of: existence or occurrence, presentation and disclosure a. yes, yes b. yes, no c. no, yes d. no, no

b

The tick mark <> most likely indicates that the amount was traced to the a. December cash disbursements journal b. outstanding check list of the applicable bank reconciliation c. January cash disbursements journal d. Year-end bank confirmations

b

Which of the following sets of information does an auditor usually confirm on one form? a. AP and purchase commitments b. cash in bank and collateral for loans c. inventory on consignment and contingent liabilities d. AR and accrued interest receivables

b

Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? a. "I believe that the possible liability to the company is nominal in amount." b. "I believe that the action can be settled for less than the damages claimed." c. "I believe that the plaintiff's case against the company is without merit." d. "I believe that the company will be able to defend this action successfully."

b

A basic premise underlying the application of analytical procedures is that a. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations b. Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements c. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary d. These procedures cannot replace tests of balances and transactions

c

An auditor most likely would perform substantive procedures of details on payroll transactions and balances when a. cutoff tests indicate substantial amount of accrued payroll expense b. the assessed level of control risk relative to payroll transactions is low c. analytical procedures indicate unusual fluctuations in recurring payroll entries d. accrued payroll expenses consists primarily of unpaid commissions

c

An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for a. cash flow increases and decreases b. audit objectives and assertions c. reclassification and adjustments d. reconciliations and tick marks

c

Analytical procedures used in the overall review stage of an audit generally include a. Gathering evidence concerning account balances that have not changed from the prior year b. Retesting control procedures that appeared to be ineffective during the assessment of control risk c. Considering unusual or unexpected account balances that were not previously identified d. Performing tests of transactions to corroborate management's financial statement assertions

c

In determining whether transactions have been recorded, the direction of the audit testing should be from the a. general ledger balance b. adjusted trial balance c. original source documents d. general journal entries

c

In testing the existence assertion for an asset, an auditor ordinarily works from the a. Financial statements to the potentially unrecorded items b. Potentially unrecorded items to the financial statements c. Accounting records to the supporting evidence d. Supporting evidence to the accounting records

c

The auditor will most likely perform extensive tests for possible understatement of a. revenue b. assets c. liabilities d. capital

c

The permanent file of an auditor's working papers generally would not include a. bond indenture agreements b. lease agreements c. working trial balance d. flowchart of internal control

c

Which of the following procedure would an auditor most likely perform in searching for unrecorded liabilities? a. trace a sample of AP entries recorded just before year end to the unmatched receiving report file b. compare a sample of purchase orders issued just after year end with the year end AP trial balance c. vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices d. scan the cash disbursements entries recorded just before year end for indications of unusual transactions

c

(On test) In comparison of 2002 to 2001, Hearco's inventory turnover ratio increased substantially, although sales and inventory amount were unchanged. What describes the increase in inventory turnover? a. COGS decrease b. AR turnover c. Total asset turnover d. Gross profit percentage decrease

d

Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment? a. accumulated depreciation b. insurance expense c. PPE d. purchase returns and allowances

d

Auditor confirmations of AP balances at the balance sheet date may be unnecessary because a. this is a duplication of cutoff tests b. AP at the balance sheet date may not be paid before the audit of completed c. correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayement d. there is likely to be other reliable external evidence to support the balances

d

The audit working paper that reflects the major components of an amount reported in the financial statement is the a. interbank transfer schedule b. carryforward schedule c. supporting schedule d. lead schedule

d

When control risk is assessed as low for assertions related to payroll, substantive procedures of payroll balances most likely would be limited to applying analytical procedures and a. observing the distribution of paychecks b. footing and cross footing the payroll register c. inspecting payroll tax returns d. recalculating payroll accruals

d