Auditing test 3
By preparing a four-column bank reconciliation ("proof of cash") at year-end, an auditor will generally be able to detect:
An unrecorded deposit made at the bank at the end of the month.
The auditor calculated the accounts receivable turnover for the year
Audit procedure: Analytical procedures (ratios)
The auditor asked the warehouse manager about whether certain inventory items were becoming obsolete
Audit procedure: Inquiry
The auditor obtained a copy of the company's accounting manual and read the section on inventory to prepare for the physical inventory observation.
Audit procedure: Inspection of records or documents
During a site visit to a construction site, the auditor determined that all employees were wearing proper safety equipment.
Audit procedure: Observation
Tracing a sample of shipping documents to recorded sales is designed to test the existence of recorded sales
False (completeness)
Inspection of notes receivable is adequate evidence of the existence of the notes.
False (confirmation should be used)
Factory overhead is normally assigned to work-in-process immediately as overhead expenses are incurred
False - assigned with a rate by jobs
Since the employees in the purchasing department order inventory items, they should inspect and receive the items when the goods arrive.
False - authorization and custody - segregation of duties
The auditors' observation of the taking of a client's physical inventory must be done on, or shortly after, the balance sheet date
False - can be but doesn't have to be
To assure that the physical inventory is taken properly, the auditors should prepare and take primary responsibility for the physical inventory instructions
False - client does this
The entity has legal title to inventories
Financial statement assertion: Rights and obligations
Material accounts receivable from related parties should be stated separately from other receivables.
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's "impossible" to confirm accounts receivable, the auditors can never issue an unmodified opinion on the client's financial statements
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 unmodified (unqualified) opinion on the client's income statement.
False
when merchandise is shipped, the shipping department completes a document known as a sales order
False
The best evidence of interest revenue on notes receivable is confirmation with the maker of the notes
False (auditor should recalculate interest of check if it was subsequently collected)
Since customers that cannot pay are ordinarily asked not to reply, mailing of confirmations is a test of collectibility of accounts receivable
False (existence)
The accounts receivable section of the accounting department should open incoming mail and post collection to the customer's accounts
False (segregation of duties)
The person maintaining the accounts receivable subsidiary ledger should reconcile the subsidiary ledger to the accounts receivable controlling account at least once a month
False (segregation of duties)
The primary control that prevents the shipping department from making unauthorized shipments of merchandise is the use of serially numbered shipping documents
False (serially numbered sales order)
Accounts receivable that are pledged as collateral for loans should be classified as concurrent assets
False (simply need to disclose the pledge)
If the auditors are unable to satisfy themselves regarding the fairness of the client's beginning inventories, they will be unable to give an unmodified opinion
False - there are other procedures to verify beginning balances
Recorded inventory quantities include all products on hand
Financial statement assertion: Completeness and cutoff
The major categories of inventories and their basis of valuation are adequately reported in the financial statements
Financial statement assertion: Presentation and disclosures
Cost of inventories is proper calculated
Financial statement assertion: valuation and accuracy
Inventories are reduced, when appropriate, to replacement cost or net realizable value
Financial statement assertion: valuation and accuracy
Which of the following best describes the reason that the auditors record their inventory test counts in the working papers?
For subsequent comparison with the completed inventory listing.
Global Co. imports most of its products from a foreign supplier. During year 1, a new technology made part of the Global Co. inventory obsolete
Inherent risk factor: Industry circumstance Effect on Net income: Overstatement
Metal, Inc., supplies copper pipes to home builders. During year 1, copper prices doubles. At any given time, a significant amount of inventory is in transit or located at job sites
Inherent risk factor: Susceptibility of asset to theft Effect on Net income: Overstatement
Sales orders for a textbook distributor have increased 100% over the last year. Additionally, the company's inventory turnover has doubled since the previous year.
Inherent risk factor: Volume Effect on Net income: Overstatement
Which of the following is not true about the confirmation of accounts receivable?
Confirmation requests should be signed by the auditors.
Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees?
A bank lockbox system
The receiving dept normally sends raw materials received to the production dept and obtains a receipt from the supervisor
False
If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the
Accounting records to the source documents.
To test the existence assertion for recorded receivables, an auditor would select a sample from the:
Accounts receivable subsidiary ledger
From the auditor's point of view, inventory counts are more acceptable prior to the year-end when:
Accurate perpetual inventory records are maintained.
The auditors should insist that a representative of the client be present during the physical examination of securities in order to:
Acknowledge the recipe of securities returned
During physical inventory count, the auditor asked the client to open various boxes of inventory items so she was able to assess the quality of the item
Audit procedure: Inspection of tangible assets
The auditor obtained a purchase order from he purchase order file and compared it to the authorized supplier list to determine that the related goods had been purchased from an approved supplier.
Audit procedure: Re-peformance
The auditing firm's computer assisted audit specialist obtained an electronic inventory file from he company and checked the accuracy of the extensions and footings
Audit procedure: Recalculation
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle?
Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.
Tracing copies of sales invoices to shipping documents will provide evidence that all:
Billed sales were shipped
A client uses a perpetual inventory system. Would one expect a credit to which of the following accounts at the point of sale?
Both Sales and Inventory
The confirmation process may be performed using a:
Both paper and electronic form
Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department?
Canceling supporting documentation after payment.
Credit approval should be obtained after the goods are shipped, but before the related sales invoice is prepared
False
A practical and effective audit procedure for the detection of lapping is:
Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank.
Which of the following is the best audit procedure for the detection of lapping?
Comparison of postings of cash receipts to accounts with the details of cash deposits.
Goods in transit at the balance sheet date should never be included in the client's inventory
False
The auditors' count of the client's cash should be coordinated to coincide with the:
Count of investment securities
Sales can be recorded in the sales journal directly from serially numbered purchase orders, thus eliminating the need for sales invoices to be serially numbered.
False
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:
Deliveries for which no purchase order was issued.
Which of the following has made it difficult to engage in kiting in recent years?
Electronic processing of checks
The auditors need never observe inventories stored in legitimate public warehouses
False
The auditors should perform alternative auditing procedures on all negative confirmation requests that are not returned
False
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:
Examining subsequent receipts of year-end accounts receivable.
The individual looking for guidance on revenue recognition is most likely to appropriately review:
FASB ASC 606.
A compensating balance agreement always requires that cash be reclassified as a noncurrent asset.
False
A proof of cash is an audit procedure that is performed on almost every engagement.
False
Accounts receivable that are written off should not be turned over to a collection agency.
False
Accounts with zero balances and accounts that have been written off as uncollectible are not confirmed by the auditors.
False
Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address.
False
Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end.
False
To gather evidence regarding the balance per bank in a bank reconciliation, an auditor could examine all of the following except:
General ledger But yes from: Year-end bank statement, bank confirmation, and cutoff bank statement.
Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client company, if the company:
Holds legal title to the merchandise.
The auditors plan to use data analytics to audit purchases. Which of the following is least likely to be performed efficiently using data analytics?
Identification of purchases of goods from related parties that the auditors had not been informed of and were not aware of the relationship.
A computer software firm allows its sales team to make material modifications to standard software contracts. What should be the auditors' primary concern in this situation?
Increased risk of misstatement of revenue.
Which of the following most likely would be an internal control procedure designed to detect errors and fraud concerning the custody of inventory?
Independent comparisons of finished goods records with counts of goods on hand.
Gold Miner, Inc., has gold mines in a number of states. TO hedge the price of its gold inventory, Gold Miner purchases gold futures contracts. The fair value of gold has declined significantly in the last few months.
Inherent risk factor: Complexity Effect on Net income: Overstatement
Joe's computers provides three-year money-back warranties on all laptops. During year 1, warranty claims decreased significantly and the company has not reduced the warranty reserve.
Inherent risk factor: Estimates Effect on Net income: Understatement
management representations concerning inventories often include representations regarding purchase and sales commitments
True
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:
Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.
An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:
No reply to a positive confirmation request is received.
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
Tracing recorded sales transactions to the bills of lading provides evidence about the:
Occurrence of sales transactions.
Purchase cutoff procedures should be designed to test whether all inventory:
Owned by the company was recorded.
The extent of the auditor's test counts of inventory items should be influenced by the inherent risk of the client's inventory and the adequacy fo the client's internal control
True
The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with:
Receiving reports
A "bill and hold" scheme is most likely to include:
Recording as sales items that the company retains as of year-end.
When a client engages in transactions involving derivatives, the auditor should:
Review agreements underlying the derivative.
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?
Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.
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 best evidence on operating effectiveness?
Select and examine canceled checks and test whether the related receiving reports are dated no later than the checks.
Which of the following would an auditor most likely question included in calculation of the overhead rate for a company that manufactures a product?
Selling expense
Properly designed internal control will permit the same employee to:
Sign checks, and also cancel supporting documents.
Which of the following is not true relating to the auditors' observation of the client's physical inventory?
The auditors should supervise the taking of the inventory.
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:
The cash receipts journal was held open after year-end.
The auditors should record the details of their test counts in the audit working papers to be used to test the client's completed physical inventory listing
True
Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable?
The confirmation requests are sent on the client's letterhead.
Which of the following is not a reason for the special significance attached by the auditors to the verification of inventories?
The existence of inventories is inherently difficult to substantiate.
The Standard Form to Confirm Account Balances with Financial Institutions includes information on all of the following except:
The principal amount paid on a direct liability.
The auditors will generally confirm a proportionately larger sample of accounts with large balances than accounts with small balances
True
Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?
The storekeeper is responsible for maintenance of perpetual inventory records.
The use of serial numbers on shipping documents and sales invoices provides assurance that all goods shipped are billed to customers and recorded as sales
True
Contact with banks for the purpose of opening company bank accounts should normally be the responsibility of the corporate:
Treasurer
A note receivable from an officer is considered a related party receivable
True
Accounts receivable should be valued at their net realizable value
True
Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts.
True
Analytical procedures may reveal conditions indicating that the client has significant amounts of obsolete inventory
True
Observation of inventory is a generally accepted auditing procedure
True
Perpetual inventory records not only help control theft of inventories, they also generally result in improved production planning
True
Receivables judged to be uncollectible should be written off
True
Serially numbered purchase orders should be issued for purchases of goods.
True
Testing the cost accounting system is a major step in determining the appropriate valuation of inventories in a manufacturing business
True
The McKesson & Robbins case highlighted the need to directly verify the existence of a client's inventory
True
The auditors should count small petty cash funds at year-end to make sure that balance is not overstated on the financial statements.
True
The auditors should mail confirmation requests, and the enclosed envelope for the customer's reply should be addressed to the auditor's office
True
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:
Vendor's invoices
In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor would be most interested in examining the:
Vendors' invoices
An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to:
Verify reconciling items on the client's bank reconciliation.
Which of the following is not one of the independent auditor's objectives regarding the examination of inventories?
Verifying that all inventory owned by the client is on hand at the time of the count.
An auditor may obtain information on the December 31 month-end balance per bank in which of the following?
Yes from the December 31 Bank statement but not from the schedule of bank (cash) transfers
