Chapter 11-21

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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) Accounts receivable are overstated at December 31, 20X0.

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) No reply to a positive confirmation request is received.

From which of the following evidence gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories? A) Observation of physical inventory counts. B) Written inventory representations from management. C) Confirmation of inventories in a public warehouse. D) Auditor's recomputation of inventory extensions.

A) Observation of physical inventory counts.

Which of the generally accepted auditing standards of reporting would not normally apply to special reports such as cash basis statements? A. First standard. B. Second standard. C. Third standard. D. Fourth standard.

A. First standard.

Which of the following types of matters do not generally require disclosure in the financial statements? A. General risk contingencies. B. Commitments. C. Loss contingencies. D. Liabilities to related parties.

A. General risk contingencies.

In an audit in accordance with generally accepted auditing standards, the auditors must test compliance with those laws and regulations that: A. Have a direct and material effect on the financial statements. B. Have a direct and material effect on major federal programs. C. Have a material direct or indirect effect on the financial statements. D. Have a material effect on major or nonmajor programs.

A. Have a direct and material effect on the financial statements.

A search for overstated property, plant, and equipment purchases would most likely include: A) Property, plant, and equipment. B) Purchase discounts. C) Repairs and maintenance expense. D) Accounts receivable.

A. Property, plant, and equipment.

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. Purchase orders show approved prices.

Costs paid with federal assistance that appear to be in violation of a law or regulation are known as: A. Questioned costs. B. Noncompliance costs. C. Improper costs. D. Illegal costs.

A. Questioned costs.

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) Represented by inventory tags are included in the listing.

For effective internal control, the billing function should be performed by the: A) shipping department. B) accounting department. C) sales department. D) credit and collection department.

B) accounting department.

From the auditor's point of view, inventory counts are more acceptable prior to the year-end when: A) internal control is weak. B) accurate perpetual inventory records are maintained. C) inventory is slow-moving. D) significant amounts of inventory are held on a consignment basis.

B) accurate perpetual inventory records are maintained.

In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable? A) Sales and Cost of Goods Sold. B) Interest and Bad Debt Expense. C) Sales and Bad Debt Expense. D) Interest and Cost of Goods Sold.

C) Sales and Bad Debt Expense.

Listed below are types of errors and fraud that might occur in financial statements and audit procedures. Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. Error or fraud: A machine was sold for cash, but the retirement was not recorded.

Analyze the miscellaneous revenue account.

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) Sales billed to customers were actually shipped.

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) Sales.

Which of the following is not a procedure to discover unasserted claims or contingent liabilities? A) Review of Board of Director minutes. B) Sending a letter of inquiry to a client's attorney. C) Substantive testing of company prepaid assets. D) Searching newspapers and other periodicals for stories on the client and its industry.

C) Substantive testing of company prepaid assets.

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) The auditors should evaluate the adequacy of the client's counting procedures.

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) The auditors' observation addresses the existence assertion.

An example of an internal control weakness is to assign to a supervisor the responsibility for: A) authorizing payroll checks for terminated employees. B) reviewing and approving time reports for subordinate employees. C) distributing payroll checks to subordinate employees. D) initiating requests for salary adjustments for subordinate employees

C) distributing payroll checks to subordinate employees.

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. Search for unrecorded liabilities.

Each page of the financial statements compiled by an accountant should include a reference such as: A. See accompanying accountant's notes. B. Unaudited, see accountant's disclaimer. C. See accountant's compilation report. D. Subject to compilation restrictions.

C. See accountant's compilation report.

An effective procedure for identifying unrecorded retirements of equipment is to: a. Foot related property records b. Recalculate depreciation on the related equipment c. Select items of equipment in the accounting records and then locate them in the plant d. Select items of equipment and then locate them in the accounting records

C. Select items of equipment in the accounting records and then locate them in the plant.

If the auditor believes that there is minimal likelihood that resolution of an uncertainty will have a material effect on the financial statements, the auditor would issue a(n) A. "Except for" opinion. B. Adverse opinion. C. Unqualified/unmodified opinion. D. Disclaimer of opinion.

C. Unqualified/unmodified opinion.

Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued? A. Sale of long-term debt or capital stock. B. Loss of a plant as a result of a flood. C. Major purchase of a business which is expected to double the sales volume. D. Settlement of litigation in excess of the recorded liability.

D. Settlement of litigation in excess of the recorded liability.

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. Shipping.

A client's previous two years of financial statements understated estimated warranty payable by $15,000 and $25,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $30,000. In this year's audit $50,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is A) $0 B) $30,000 C) $55,000 D) $70,000

D) $70,000

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 is in dispute.

D) A large number of accounts receivable is in dispute.

Which of the following is not correct concerning a type I and a type II subsequent event? A) A type I may require adjustment to financial statements while a type II will not. B) Both a type I and a type II subsequent event may require note disclosure. C) A type I is an event that occurred prior to year end, but was discovered after, while a type II is one that arose subsequent to year end. D) A type II event may require adjustment to the financial statements and a type I may require note disclosure.

D) A type II event may require adjustment to the financial statements and a type I may require note disclosure.

Which of the following would provide the most assurance concerning the valuation of accounts receivable? A) Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. B) Compare receivable turnover ratios to industry statistics for reasonableness. C) Inquire about receivables pledged under loan agreements. D) Assess the allowance for uncollectible accounts for reasonableness.

D) Assess the allowance for uncollectible accounts for reasonableness. Answer (4) is correct because receivables are valued at net realizable value, and assessing the allowance for uncollectible accounts for reasonableness will help the auditor determine the proper amount. Answer (1) is incorrect because the limited information in the accounts receivable ledger will not make possible tracing details to the shipping documents—also, the shipping documents may not even capture the total sales price that is included in the accounts receivable ledger. Answer (2) is incorrect because while comparing turnover ratios may provide some information on the collectibility of receivables, it is very imprecise. Answer (3) is incorrect because it relates to presentation and disclosure more directly than valuation.

Auditors perform interim work at various times throughout the year. The auditors' subsequent events work should be extended to the date of: A) the next scheduled interim visit. B) the final billing for audit services rendered. C) a postdated footnote. D) the auditors' report.

D) the auditors' report.

An inventory turnover analysis is useful to the auditor because it may detect: A) inadequacies in inventory disclosures. B) methods of avoiding cyclical holding costs. C) the optimum automatic reorder points. D) the existence of obsolete merchandise.

D) the existence of obsolete merchandise.

When reporting on comparative financial statements where the financial statements of the prior year have been examined by a predecessor auditor whose report is not presented, the successor auditor should make A. No reference to the predecessor auditor. B. Reference to the predecessor auditor only if the predecessor auditor expressed a qualified opinion. C. Reference to the predecessor auditor only if the predecessor auditor expressed an unqualified/ unmodified opinion. D. Reference to the predecessor auditor regardless of the type of opinion expressed by the predecessor auditor.

D. Reference to the predecessor auditor regardless of the type of opinion expressed by the predecessor auditor.

A client's previous two years of financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit $100,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is: A. $0 B. $60,000 C. $110,000 D. $140,000

D. $140,000

Which of the following does not result in a modification of a compilation report? A. A lack of independence on the part of the auditors. B. A departure from generally accepted accounting principles. C. A lack of adequate disclosure in the financial statements. D. A lack of consistent application of generally accepted accounting principles.

D. A lack of consistent application of generally accepted accounting principles.

To which of the following matters would materiality limits not apply when obtaining written client representations? A. Violations of state labor regulations. B. Disclosure of line-of-credit arrangements. C. Information about related party transactions. D. Instances of fraud involving management.

D. Instances of fraud involving management.

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. Property, plant, and equipment.

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. Property, plant, and equipment.

Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment? A. Accumulated depreciation B. Insurance expense C. PP&E D. Purchase returns and allowances

D. Purchase returns and allowances.

In a compilation report on a prescribed form, the accountants should take exception to all departures from generally accepted accounting principles. True False

FALSE

In an audit in accordance with Government Auditing Standards, the auditors are required to perform additional compliance procedures beyond those required by generally accepted auditing standards. True False

FALSE

Internal control over payroll is enhanced when the personnel department distributes payroll checks. True False

FALSE

It is more important to maintain effective internal control over accounts payable as it is to maintain effective internal control over accounts receivable. True False

FALSE

Letters to underwriters should not contain negative assurances. True False

FALSE

Operational audits are primarily concerned with whether an organization follows appropriate laws and regulations. True False

FALSE

Personal financial statements may be compiled or reviewed, but they should not be audited. True False

FALSE

SysTrust engagements relate only to database systems. True False

FALSE

The Miscellaneous Revenue account should only be analyzed if it is material in amount. True False

FALSE

The attestation standards prohibit the examination of prospective financial statements. True False

FALSE

The auditors have a responsibility to report on all FASB-required supplementary information. True False

FALSE

The auditors should take exception to assets presented at their estimate current values in personal financial statements. True False

FALSE

The first internal auditors were primarily concerned with operational auditing. True False

FALSE

The primary objective of the auditors' examination of accounts payable is to determine whether payments are made on a timely basis. True False

FALSE

Trust Services are a part of the AICPA's vision that increased trust in annual historical financial statements is necessary. True False

FALSE

When no weaknesses in internal control are discovered during an operational audit, the appropriate report will be either standard unqualified or unqualified with explanatory language. True False

FALSE

Auditors may use statistical sampling for their test counts, but the client should never use statistical sampling to estimate the quantities of goods on hand. True False

False

Auditors should not review the client's planning of the physical inventory. True False

False

CPAs use negative accounts receivable confirmation requests more frequently than positive accounts receivable confirmation requests. True False

False

Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address. True False

False

Credit approval should be obtained after the goods are shipped, but before the related sales invoice is prepared. True False

False

Factory overhead is normally assigned to work-in-process immediately as overhead expenses are incurred. True False

False

For good internal control over purchase transactions, purchases should be made from approved vendors by the department needing the goods. True False

False

Goods in transit at the balance sheet date should never be included in the client's inventory. True False

False

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 on any of the financial statements. True False

False

Inspection of notes receivable is adequate evidence of the existence of the notes. True False

False

Observation of inventories is a generally accepted auditing standard. True False

False

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. True False

False

Since customers that cannot pay are ordinarily asked not to reply, mailing of confirmations is a test of collectibility of accounts receivable. True False

False

Since the employees in the purchasing department order inventory items, they should inspect and receive the items when the goods arrive. True False

False

The accounts receivable section of the accounting department should open incoming mail and post collections to the customer's accounts. True False

False

The auditors need never observe inventories stored in legitimate public warehouses. True False

False

The auditors should perform alternative auditing procedures on all negative confirmation requests that are not returned. True False

False

The auditors' observation of the taking of a client's physical inventory must be done on, or shortly after the balance sheet date. True False

False

The best evidence of interest revenue on notes receivable is confirmation with the maker of the note. True False

False

The department approving a sales transaction should be the shipping department. True False

False

The person maintaining the accounts receivable subsidiary ledger should reconcile the subsidiary ledger to the accounts receivable controlling account at least once a month. True False

False

The primary control that prevents the shipping department from making unauthorized shipments of merchandise is the use of serially numbered shipping documents. True False

False

The proper cutoff of inventories is best achieved when the client uses prenumbered purchase orders. True False

False

The receiving department normally sends raw materials received to the production department and obtains a receipt from the supervisor. True False

False

To assure that the physical inventory is taken properly, the auditors should prepare and take primary responsibility for the physical inventory instructions. True False

False

Tracing a sample of shipping documents to recorded sales is designed to test the existence of recorded sales. True False

False

When it is "impossible" to confirm accounts receivable, the auditors can never issue an unmodified opinion on the client's financial statements. True False

False

When merchandise is shipped, the shipping department completes a document known as a sales order. True False

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. True False

False

When auditing the statement of cash flows of a profitable, growing company which combination is most likely? Cash Flows from operations: Positive Negative Cash flows from investing: Positive Negative

Positive Negative

Items a through j present various phrases or characteristics that may apply to audits, reviews, and compilations. Place check mark in the cell if the phrase or characteristic applies to the listed service: Refer to Page 19-15

Refer to Page 19-15

Listed below are types of errors and fraud that might occur in financial statements and audit procedures. Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. Error or fraud: An expenditure for equipment was improperly expensed.

Review expenditures charged to a repairs and maintenance account.

Review fire insurance policies.

Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts. True False

True

Analytical procedures may reveal conditions indicating that the client has significant amounts of obsolete inventory. True False

True

Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable. True False

True

Confirmation of accounts receivable provides some assurance that no lapping or other manipulation affecting accounts receivable is being carried on. True False

True

During the auditors' observation of the physical inventory, they often obtain information that may be used to test the cutoff of the client's purchase transactions. True False

True

Management representations concerning inventories often include representations regarding purchase and sales commitments. True False

True

Material accounts receivable from related parties should be stated separately from other receivables. True False

True

Observation of inventory is a generally accepted auditing procedure. True False

True

Perpetual inventory records not only help control theft of inventories, they also generally result in improved production planning. True False

True

Proper presentation of inventories includes disclosure of inventory that is pledged as collateral for loans. True False

True

Receivables judged to be uncollectible should be written off. True False

True

Serially numbered purchase orders should be issued for purchases of goods. True False

True

Testing the cost accounting system is a major step in determining the appropriate valuation of inventories in a manufacturing business. True False

True

The McKesson & Robbins case highlighted the need to directly verify the existence of a client's inventory. True False

True

The auditors should mail confirmation requests, and the enclosed envelope for the customer's reply should be addressed to the auditors' office. True False

True

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 False

True

The auditors will generally confirm a proportionately larger sample of accounts with large balances than accounts with small balances. True False

True

The examination of warehouse receipts is not sufficient verification of a material amount of goods stored in public warehouses. True False

True

The extent of the auditors' test counts of inventory items should be influenced by the inherent risk of the client's inventory and the adequacy of the client's internal control. True False

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 False

True

The receiving department should accept only goods for which there is an approved purchase order on hand. True False

True

The use of a tagging system for inventory taking is designed to prevent double counting of goods. True False

True

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 False

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 False

True

Listed below are types of errors and fraud that might occur in financial statements and audit procedures. Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. Error or fraud: The cost of repairing a machine was improperly capitalized.

Vouch additions to equipment accounts.

Conditions exist that result in a material deviation from the criteria against which the subject matter was evaluated during an examination performed following the attestation standards. The CPA's conclusion may be on: Subject Matter: YES NO Written Assertion: YES NO

YES NO

Under the Single Audit Act, the auditor must apply procedures to test for compliance and test the effectiveness of controls for: Major Programs: YES NO NonMajor Programs: YES NO

YES NO

A typical audit procedure in examining plant and equipment is an analysis of the Miscellaneous Revenue account.

An important control for plant and equipment is the plant and equipment budget.

Evidence of continued ownership of property is obtained by vouching payments to a mortgage trustee.

Goodwill should only be recorded if it was acquired as a part of a business combination.

If property, plant, and equipment represent 40% of the total assets of a continuing audit client, the budget for property, plant and equipment will ordinarily be less than 40% of the total audit effort devoted to assets.

In the audit of depletion the auditors must often rely on the work of specialists.

Loss payable endorsements on insurance policies may indicate the existence of liens on particular assets.

Material purchases of assets from an affiliated company should be disclosed in the financial statements.

Most companies that use a budget to forecast and control acquisitions and retirements of plant and equipment also maintain detailed accounting records for plant and equipment.

Physical inventories of plant and equipment assets frequently reveal misstated assets.

The auditors typically vouch major additions to plant and equipment recorded during the period under audit.

The auditors' approach to the audit of property, plant, and equipment largely results from the fact that relatively few transactions occur.

Unrecorded retirements of plant and equipment are more likely a type of error than unrecorded acquisitions.

When auditing the statement of cash flows, which of the following would an auditor not expect to be a source of receipts and payments? a) Capitalization. b) Financing. c) Investing. d) Operations.

a) Capitalization.

Which of the following should be included as a written representation from management? a) The belief that misstatements identify by the auditor and not corrected are immaterial b) the belief that misstatements identified by the auditor and corrected are material. c) The belief that the auditor is responsible for the fair presentation of the financial statements in conformity with generally accepted accounting principles d) The belief that the financial statements are completely accurate in all respects.

a) The belief that misstatements identify by the auditor and not corrected are immaterial

When examining a client's statement of cash flows, for audit evidence, an auditor will rely primarily upon: a) cross-referencing to balances and transactions audited in connection with the examination of the other financial statements. b) the guidance provided by the FASB Statement on the statement of cash flows. c) analysis of significant ratios of prior years as compared to the current year. d) determination of the amount of working capital at year-end.

a) cross-referencing to balances and transactions audited in connection with the examination of the other financial statements.

Overall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly: a) revenue and expense account totals to the corresponding figures of the preceding years. b) income statement ratios to balance sheet ratios. c) revenue and expense account balances to the monthly reported net income. d) income statement ratios to published industry averages.

a) revenue and expense account totals to the corresponding figures of the preceding years.

Accounts with zero balances and accounts that have been written off as uncollectible are not confirmed by the auditors. True False

False

Listed below are types of errors and fraud that might occur in financial statements and audit procedures. Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. Error or fraud: Land was exchanged for a long-term note receivable, but the exchange was not recorded.

Review current property tax bills.

Assurance services improve the quality of information or its context for decision makers. True False

TRUE

Auditors generally consider the evidence regarding accounts payable in the client's possession as more reliable than that for accounts receivable. True False

TRUE

Changes that do not affect consistency are normally disclosed in the footnotes but do not require an explanatory/emphasis-of-matter paragraph in the audit report.

TRUE

Compiled financial statements may omit note disclosures. True False

TRUE

If management fails to list an unasserted claim in the letter of inquiry to a lawyer, the lawyer is not required to inform the auditors of the omission. True False

TRUE

If not adjusted, a situation in which the total likely misstatement in the financial statements exceeds a material amount is likely to lead to an audit report modification. True False

TRUE

In an audit in accordance with the Single Audit Act of 1984, the auditors must test compliance with the significant requirements of all major programs. True False

TRUE

In operational auditing, the preliminary survey serves as a guide for the development of the audit program. True False

TRUE

Independence is required for the performance of all assurance services. True False

TRUE

Information regarding the proper cutoff of accounts payable is generally obtained in conjunction with the audit of inventories. True False

TRUE

Normally, general risk contingencies need not be disclosed in the financial statements. True False

TRUE

Overstatement of financial results can involve failure to record a transaction. True False

TRUE

Practitioners may report on either an assertion about the subject matter, or on the subject matter for most attestation engagements. True False

TRUE

Subsequent events that provide additional evidence as to conditions that existed at the balance sheet date may result in adjusting journal entries. True False

TRUE

The auditors must issue a compilation report if they prepare a client's financial statements and submit them to a client who intends to use them for external purposes. True False

TRUE

The balance sheet for an individual may be titled a Statement of Financial Condition. True False

TRUE

The choice of which audit report to issue depends on the condition and the materiality of any departure.

TRUE

The confirmation of existing accounts payable does not prove the completeness of recorded accounts payable. True False

TRUE

The passage of the Foreign Corrupt Practices Act increased the demand for internal auditing. True False

TRUE

The work of internal auditors is primarily for the benefit of management and the board of directors. True False

TRUE

When a U.S.-based organization prepares financial statements which are for use in another country, a U.S. report, modified to reflect the accounting principles of the other country, may be issued. True False

TRUE

An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts. True False

True

Which of the following is least likely to be an 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) An analysis of inventory turnover addresses whether the proper method of determining inventory costs--as contrasted to market values--is being applied.

There is a presumption that auditors will confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low. A) And accounts receivable are immaterial, or the use of confirmations would be ineffective. B) And accounts receivable are composed of large accounts. C) And the effectiveness of confirmations is absolutely determined. D) Or accounts receivable are from extremely reputable customers.

A) And accounts receivable are immaterial, or the use of confirmations would be ineffective. A presumption that receivables will be confirmed requires a combined assessment of inherent risk and controls risk at the low level, immaterial receivables, or circumstances in which the use of confirmations would be ineffective.

The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the: A) Bill of lading. B) Job time shipping. C) Production order. D) Production schedule.

A) Bill of lading. A bill of lading acknowledges the receipt of goods and sets forth provisions of the transportation agreement.

McPherson Corp. does not make an annual physical count of year-end inventories, but instead makes weekly test counts on the basis of a statistical plan. During the year, Sara Mullins, CPA, observes such counts as she deems necessary and is able to satisfy herself as to the reliability of the client's procedures. In reporting on the results of her examination, Mullins: A) Can issue an unqualified opinion without disclosing that she did not observe year-end inventories. B) Must comment in the scope paragraph as to her inability to observe year-end inventories, but can nevertheless issue an unqualified opinion. C) Is required, if the inventories are material, to disclaim an opinion on the financial statements taken as a whole. D) Must, if the inventories are material, qualify her opinion.

A) Can issue an unqualified opinion without disclosing that she did not observe year-end inventories. Mullins may issue an unqualified opinion as long as she is satisfied that the client's procedures are adequate to provide a reliable inventory balance.

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) Cash disbursements.

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) Collectibility is certain.

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) Collection of receivables.

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) Completeness.

The organization established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles is the: A) Cost Accounting Standards Board. B) Financial Accounting Standards Board. C) Public Company Accounting Oversight Board. D) Securities and Exchange Commission.

A) Cost Accounting Standards Board. The Cost Accounting Standards Board was established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles.

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) Deliveries for which no purchase order was issued.

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) Examine cash receipts received after year-end.

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) Examining subsequent receipts of year-end accounts receivable.

When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is: A) Existence. B) Completeness. C) Clarity. D) Presentation.

A) Existence. Of the choices, existence is most directly related to overstated inventory because inclusion of inventory items that do not exist in inventory totals results in an overstated inventory.

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) Observe physical counts of the inventory items.

A client uses a perpetual inventory system. One would 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) Option 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) Option 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) Owned by the company was recorded.

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) Quantities ordered are excluded from the receiving department copy of the purchase order.

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) Sales department.

Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely: A) Send positive confirmation requests. B) Send negative confirmation requests. C) Examine evidence of subsequent cash receipts. D) Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

A) Send positive confirmation requests. The auditor would send positive confirmations rather than negative confirmations because the fact that the balances are delinquent may indicate that amounts are in dispute. Examining subsequent cash receipts, answer (3), is unlikely to be effective since many of the accounts will not have been collected. Inspection of internal records, answer (4), is likely to result in less credibility evidential matter than confirming the accounts.

To determine that all sales have been recorded, the auditors would select a sample of transactions from the: A) Shipping documents file. B) Sales journal. C) Accounts receivable subsidiary ledger. D) Remittance advices.

A) Shipping documents file. The goal is to determine the population to be sampled from to determine that all sales have been recorded; therefore, the sample should be taken from a population of source documents, here the shipping documents file. None of the other three answers represent source documents that may be sampled from to determine that all sales have been recorded.

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) Shipping documents.

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) Test of a control.

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) Testing the entity's computation of standard overhead rates.

A client's physical count of inventories was lower than the inventory quantities shown in its perpetual records. This situation could be the result of the failure to record: A) sales. B) sales returns. C) purchases. D) purchase discounts.

A) sales.

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) The account balances as of year end will generally be confirmed.

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 with 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) The auditors should satisfy themselves with the statistical validity of the technique, and the reasonableness of the allowance for sampling risk and sampling error used.

Which of the following is an effective control over accounts receivable? A) The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records. B) Only persons who handle cash receipts should be responsible for the preparation of documents that reduce accounts receivable balances. C) Responsibility for approval of the write-off of uncollectible accounts receivable should be assigned to the cashier. D) Balances in the subsidiary accounts receivable ledger should be reconciled to the general ledger control account once a year, preferably at year end.

A) The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records.

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) Trace a sample of the bills of lading to sales invoices.

The auditor's analytical procedures will be facilitated if the client: A) Uses a standard cost system that produces variance reports. B) Segregates obsolete inventory before the physical inventory count. C) Corrects material weaknesses in internal control before the beginning of the audit. D) Reduces inventory balances to the lower of cost or market.

A) Uses a standard cost system that produces variance reports. Analytical procedures will be facilitated when a client uses a standard cost system that produces variance reports. Such reports will allow the auditors to identify significant deviations from expected values.

An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion is most likely related to presentation and disclosure and: A) Valuation. B) Existence. C) Completeness. D) Rights.

A) Valuation.

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete inventory to address: A) Valuation. B) Existence. C) Rights. D) Presentation.

A) Valuation.

When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably: A) Want the client to schedule the physical inventory count at the end of the year. B) Insist that the client perform physical counts of inventory items several times during the year. C) Increase the extent of tests for unrecorded liabilities at the end of the year. D) Have to disclaim an opinion on the income statement for that year.

A) Want the client to schedule the physical inventory count at the end of the year. Since the internal control is described as being weak, the CPAs will generally insist upon a physical count at year-end.

Instead of taking a physical inventory count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and: A) Well-kept records of perpetual inventory are maintained. B) Inventory is slow-moving. C) Computer error reports are generated for missing prenumbered inventory tickets. D) Obsolete inventory items are segregated and excluded.

A) Well-kept records of perpetual inventory are maintained. The professional standards allow auditors to use physical counts prior to year-end when a client has well-kept perpetual (computerized or non-computerized) inventory records.

Smith Manufacturing Company's accounts receivable clerk has a friend who is also Smith's customer. The accounts receivable clerk, on occasion, has issued fictitious credit memorandums to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to: A) require receiving reports to support all credit memorandums before they are approved. B) have the sales department independent of the accounts-receivable department. C) mail monthly statements. D) prenumber and account for all credit memorandums.

A) require receiving reports to support all credit memorandums before they are approved.

Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable: A) Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. B) Write-offs must be approved by the accounts receivable department. C) Write-offs must be authorized by the shipping department. D) Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.

A) Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. Write-offs of receivables should be approved by a responsible officer after a review of the account by the credit department. Answer (2) is incorrect because accounts receivable, a recordkeeping function, should not authorize such entries. Answer (3) is incorrect because other procedures (e.g., a review of shipping documents) may be used to determine that the goods were received and because the shipping department would have no other information on whether the receivable is likely to be collectible. Answer (4) is incorrect because the account need not be overdue by several months as a "current" receivable may become worthless due to, for example, a bankruptcy.

Which of the following should be included as a part of inventory costs of a manufacturing company? Direct Labor Raw Materials Factory Overhead A) Yes Yes Yes B) Yes No No C) No Yes No D) No No No

A) Yes Yes Yes Direct labor, raw materials, and factor overhead are all included in inventory costs of a manufacturing company.

To strengthen the system of internal control over the purchase of merchandise, a company's receiving department should: A) accept merchandise only if a purchase order or approval granted by the purchasing department is on hand. B) accept and count all merchandise received from the usual company vendors. C) rely on shipping documents for the preparation of receiving reports. D) be responsible for the physical handling of merchandise but not the preparation of receiving reports.

A) accept merchandise only if a purchase order or approval granted by the purchasing department is on hand.

A client's materials purchasing cycle begins with requisitions from user departments and ends with the receipt of materials and the recognition of a liability. An auditor's primary objective in reviewing this cycle is to: A) evaluate the reliability of information generated as a result of the purchasing process. B) investigate the physical handling and recording of unusual acquisitions of materials. C) consider the need to be on hand for the annual physical count if this system is not functioning properly. D) ascertain that materials said to be ordered, received, and paid for are on hand.

A) evaluate the reliability of information generated as a result of the purchasing process.

Purchase cutoff procedures should be designed to test whether or not all inventory: A) is owned by the company. 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) is in the possession of the company.

A) is owned by the company.

The auditors have not been able to confirm a large account receivable, but they have satisfied themselves as to the proper amount of the receivable by means of alternative auditing procedures. The auditors' report on the financial statements should include: A) neither a comment on the use of alternative auditing procedures nor an opinion qualification. B) both a scope qualification and an opinion qualification. C) an opinion qualification, but reference to the use of alternative auditing procedures is not required. D) a description of the limitation on the scope of their audit and the alternative auditing procedures used, but an opinion qualification is not required.

A) neither a comment on the use of alternative auditing procedures nor an opinion qualification.

The use of the positive (as opposed to the negative) form of receivables confirmation is indicated when: A) there is reason to believe that a substantial number of accounts may be in dispute. B) a large number of small balances are involved. C) there is reason to believe a significant portion of the requests will be answered. D) control risk for accounts receivable is assessed as low.

A) there is reason to believe that a substantial number of accounts may be in dispute.

Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer? A. "Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion." B. "There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed." C. "We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities." D. "No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements."

A. "Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The known misstatement in this situation is: A. $0 B. $30,000 C. $40,000 D. $50,000

A. $0

Which of the following circumstances normally does not affect the consistency phrase in the auditor's standard report? A. A change in accounting estimate. B. A change in accounting principle. C. A change in the companies included in combined financial statements. D. A correction of an error in principle.

A. A change in accounting estimate.

Which of the following is correct relating to compiled financial statements when third party reliance upon those statements is anticipated? A. A compilation report must be issued. B. Omission of note disclosures is unacceptable. C. A written engagement letter is required. D. Each page of the financial statements should have a restriction such as "Restricted for Management's Use Only".

A. A compilation report must be issued.

Which of the following statements is not typical of property, plant, and equipment as compared to most current asset accounts? a. A property, plant, and equipment cutoff error near year-end has a more significant effect on net income b. Relatively few transactions occur in property, plant, and equipment during the year c. The assets involved with property, plant, and equipment ordinarily have relatively longer lives d. Property, plant, and equipment accounts typically have a higher dollar value

A. A property, plant, and equipment cutoff error near year-end has a more significant effect on net income.

The GAO standards of reporting for governmental financial audits incorporate the AICPA standards of reporting and prescribe supplemental standards to satisfy the unique needs of governmental audits. Which of the following is a supplemental reporting standard for audits in accordance with Government Auditing Standards? A. A report on the entity's internal control. B. Material indications of illegal acts should be reported in a document with distribution restricted to senior officials of the entity audited. C. Instances of abuse, fraud, mismanagement, and waste should be reported to the organization with legal oversight authority over the entity audited. D. All privileged and confidential information discovered should be reported to the senior officials of the organization that arranged for the audit.

A. A report on the entity's internal control.

An auditor may reasonably issue an "except for" qualified opinion for A. A scope limitation or an unjustified accounting change. B. A scope limitation, but not an unjustified accounting change. C. An unjustified accounting change, but not a scope limitation. D. Neither an unjustified accounting change nor a scope limitation.

A. A scope limitation or an unjustified accounting change.

Which of the following would not be included in a CPA's report based upon a review of the financial statements of a nonpublic entity? A. A statement that the review was in accordance with generally accepted auditing standards. B. A statement that all information included in the financial statements are the representations of management. C. A statement describing the nature of the procedures performed. D. A statement describing the auditor's conclusions based upon the results of the review.

A. A statement that the review was in accordance with generally accepted auditing standards.

Which of the following audit procedures is aimed at determining whether every name on the company payroll is an employee actually on the job? A. A surprise observation of a paycheck distribution. B. A test of payroll extensions. C. Analytical comparisons of budgeted to actual payroll expense. D. Comparison of payee names on canceled payroll checks with the payroll register.

A. A surprise observation of a paycheck distribution.

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. Accumulate over time.

Which of the following policies is an internal control weakness related to the acquisition of factory equipment? a. Acquisitions are to be made through and approved by the department in need of the equipment. b. Variances between authorized equipment expenditures and actual costs are to be immediately reported to management. c. Depreciation policies are reviewed only once a year. d. Advance executive approvals are required for equipment acquisitions.

A. Acquisitions are to be made through and approved by the department in need of the equipment.

Which of the following is not necessarily an attest engagement? A. An elder care engagement. B. A WebTrust engagement. C. An examination of internal control over financial reporting for a nonpublic company. D. A review of management's discussion and analysis.

A. An elder care engagement.

An auditor's report on financial statements prepared in accordance with a basis of accounting other than generally accepted accounting principles should include all of the following except: A. An opinion as to whether the basis of accounting used is appropriate under the circumstances. B. An opinion as to whether the financial statements are presented fairly in conformity with the other basis of accounting. C. Reference to the note to the financial statements that describes the basis of presentation. D. A statement that the basis of presentation is a basis of accounting other than generally accepted accounting principles.

A. An opinion as to whether the basis of accounting used is appropriate under the circumstances.

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. Analyzing repairs and maintenance expense accounts.

When performing an attestation examination engagement, which of the following is not always required? A. Assertion. B. Practitioner independence. C. Subject matter. D. Suitable criteria.

A. Assertion.

Which of the following is the least likely to be considered subject matter of an attestation engagement? A. Assertion. B. Behavior. C. Historical event. D. Systems and processes.

A. Assertion.

The organization established to identify, develop and communicate new assurance service opportunities is the: A. Assurance Services Executive Committee. B. Attestation Standards board. C. Auditing Standards Board. D. Counsel of Executives.

A. Assurance Services Executive Committee.

If, after issuing an audit report, the auditors find that they have failed to perform certain significant audit procedures they should first: A. Attempt to determine whether their report is still being relied upon by third parties. B. Notify regulatory agencies. C. Notify legal counsel. D. Wait until the beginning of the next year's audit to determine whether misstatements have occurred.

A. Attempt to determine whether their report is still being relied upon by third parties.

The scope of an internal audit is initially defined by the: A. Audit objectives. B. Scheduling and time estimates. C. Preliminary survey. D. Audit program.

A. Audit objectives.

To accept an engagement to examine a client's MD&A for annual financial statements, the practitioners ordinarily must have: A. Audited the most recent financial statement period to which the MD&A applies. B. Determined that the client reports to the Securities and Exchange Commission. C. Performed a detailed analysis of the client's controls over decision making. D. Reviewed the quarterly MD&A information.

A. Audited the most recent financial statement period to which the MD&A applies.

36. When no independent stock transfer agent is employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates should: A. Be defaced to prevent reissuance and attached to their corresponding stubs. B. Not be defaced but segregated from other stock. C. Be destroyed to prevent fraudulent reissuance. D. Be defaced and sent to the Secretary of State.

A. Be defaced to prevent reissuance and attached to their corresponding stubs.

When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should A. Be titled so that the financial statements are not confused with statements prepared to conform to generally accepted accounting principles. B. Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards. C. Not express an opinion on whether the statements are presented in conformity with the basis of accounting used. D. Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting.

A. Be titled so that the financial statements are not confused with statements prepared to conform to generally accepted accounting principles.

In the first audit of an entity, because of the entity's record retention policies, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and the prior year, as well as the amounts of assets or liabilities at the beginning of the current year. If the amounts in question could materially affect current operating results, the auditor would A. Be unable to express an opinion on the current year's results of operations and cash flows. B. Express a qualified opinion on the financial statements because of a client-imposed scope limitation. C. Withdraw from the engagement and refuse to be associated with the financial statements. D. Specifically state that the financial statements are not comparable to the prior year because of an uncertainty.

A. Be unable to express an opinion on the current year's results of operations and cash flows.

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. 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.

When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditor's report should cover A. Both years. B. Only the current year. C. Only the current year, but the prior year's report should be presented. D. Only the current year, but the prior year's report should be referred to.

A. Both years.

An auditor's decision concerning whether or not to "dual date" the audit report is based upon the auditor's willingness to: A. Extend auditing procedures. B. Accept responsibility for year-end adjusting entries. C. Permit inclusion of a note captioned: event (unaudited) subsequent to the date of the auditor's report. D. Assume responsibility for resolving all events subsequent to the issuance of the auditor's report.

A. Extend auditing procedures.

18. Company A does not employ an independent stock transfer agent, but rather issues its own stock and maintains its stock records. When outstanding shares are transferred from one holder to another the certificate of the selling shareholder should be: A. Canceled (generally by perforation) and attached to the certificate book. B. Destroyed to prevent fraudulent reissuance. C. Retained by the selling shareholder. D. Sent to the state's registrar of investment securities.

A. Canceled (generally by perforation) and attached to the certificate book.

The audit of which of the following balance sheet accounts does not normally result in verification of an income statement account? A. Cash. B. Accounts receivable. C. Property, plant and equipment. D. Intangible assets.

A. Cash

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern? A. Cash flows from operating activities are negative. B. Research and development projects are postponed. C. Significant related party transactions are pervasive. D. Stock dividends replace annual cash dividends.

A. Cash flows from operating activities are negative.

Which of the following would be considered a change that does not affect consistency? A. Change expected to have a material future effect. B. Change in accounting principle. C. Correction of an error in principle. D. None of these are considered changes that do not affect consistency.

A. Change expected to have a material future effect.

In which of the following types of reports do accountants provide no explicit assurance? A. Compilations. B. Reviews. C. Examinations. D. Audits.

A. Compilations.

The assertion most directly addressed when performing the search for unrecorded liabilities is: A. Completeness. B. Existence. C. Presentation. D. Rights.

A. Completeness.

Providing assurance using a series of reports provided simultaneously or shortly after the related information is released is referred to as: A. Continuous auditing. B. Serial auditing. C. Systems reliability auditing. D. Simultaneity auditing.

A. Continuous auditing.

When a practitioner examines projected financial statements, the practitioner's report should include a separate paragraph that: A. Describes the limitations on the usefulness of the presentation. B. Provides an explanation of the differences between an examination and a review. C. States that the accountant is responsible for events and circumstances for a period not exceeding one year after the report's date. D. Disclaims an opinion on whether the assumptions provide a reasonable basis for the projection.

A. Describes the limitations on the usefulness of the presentation.

The primary purpose of the internal auditors' evaluation of internal control is to: A. Determine if management has planned and implemented activities needed to attain goals and objectives. B. Determine the extent of tests of controls needed during field work. C. Identify areas for fraud investigation. D. Determine if employees have incompatible duties that have compromised the control environment.

A. Determine if management has planned and implemented activities needed to attain goals and objectives.

When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should: A. Disclose that the income tax basis is a comprehensive basis of accounting other than generally accepted accounting principles. B. Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards. C. Not express an opinion on whether the statements are presented in conformity with the comprehensive basis of accounting used. D. Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting.

A. Disclose that the income tax basis is a comprehensive basis of accounting other than generally accepted accounting principles.

During a review of the financial statements of a non-public entity, the CPA finds that the financial statements contain a material departure from generally accepted accounting principles. If management refuses to correct the financial statement presentations, the CPA should: A. Disclose the departure in a separate paragraph of the report. B. Issue an adverse opinion. C. Attach a note explaining the effects of the departure. D. Issue a compilation report.

A. Disclose the departure in a separate paragraph of the report.

During a review of the financial statements of a nonpublic entity, the CPA finds that the financial statements contain a material departure from generally accepted accounting principles. If management refuses to correct the financial statement presentations, the CPA should: A. Disclose the departure in a separate paragraph of the report. B. Issue an adverse opinion. C. Attach a note explaining the effects of the departure. D. Issue a compilation report.

A. Disclose the departure in a separate paragraph of the report.

An example of an internal control weakness is to assign the personnel department responsibility for: A. Distribution of paychecks. B. Hiring personnel. C. Authorizing deductions from pay. D. Interviewing employees for jobs.

A. Distribution of paychecks.

Which of the following parties is responsible for the fairness of the representations made in financial statements? A. Entity's management. B. Independent auditor. C. Audit committee. D. AICPA. AACSB

A. Entity's management.

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. Establishing the reasonableness of the client's replacement policy.

19. Which of the following procedures is least likely in the audit of capital stock? A. Examine all outstanding stock certificates for completeness. B. Account for the proceeds from stock issues. C. Reconcile shares outstanding with the general ledger. D. Evaluate compliance with stock option plans.

A. Examine all outstanding stock certificates for completeness.

The auditors may conclude that depreciation charges are insufficient by noting: a. excessive recurring losses on assets retired. b. large amounts of fully depreciated assets. c. insured values greatly in excess of book values. d. continuous trade-ins of relatively new assets.

A. Excessive recurring losses on assets retired.

Abbot, CPA, as principal auditor for consolidated financial statements, is using a qualified report of another auditor. Abbot does not consider the qualification material relative to the consolidated financial statements and Abbot is willing to accept responsibility for the work of the other auditor. What recognition, if any, must Abbot make in his report to the report of the other audit? A. He need make no reference. B. He must refer to the qualification of the other auditor and qualify his report likewise. C. He must include the other auditor's report with his report but need not qualify his report. D. He must include the other auditor's report with his report and give an explanation of its significance.

A. He need make no reference.

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. Investigation of variances within a formal budgeting system.

The auditor's primary means of obtaining corroboration of management's information concerning litigation is a: A. Letter of audit inquiry to the client's lawyer. B. Letter of corroboration from the auditor's lawyer upon review of the legal documentation. C. Confirmation of claims and assessments from the other parties to the litigation. D. Confirmation of claims and assessments from an officer of the court presiding over the litigation.

A. Letter of audit inquiry to the client's lawyer.

The auditors' primary means of obtaining corroboration of management's information concerning litigation is a: A. Letter of audit inquiry to the client's lawyer. B. Letter of corroboration from the auditor's lawyer upon review of the legal documentation. C. Confirmation of claims and assessments from the other parties to the litigation. D. Confirmation of claims and assessments from an officer of the court presiding over the litigation.

A. Letter of audit inquiry to the client's lawyer.

In which of the following types of reports do the auditors express negative assurance? A. Letters for underwriters. B. Reports on audits of financial statements on a comprehensive basis other than generally accepted accounting principles. C. Reports on audits of specified accounts. D. Reports on condensed financial statements.

A. Letters for underwriters.

Which of the following statements would an auditor most likely require management to indicate in a written representation letter obtained for audit? A. Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud B. Management plans to expand into international operations during the next few years. C. Management believes the financial statements are accurately stated in accordance with generally accepted auditing standards (GAAS). D. Management believes the company is the premier company in its industry regarding service to customers.

A. Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud

The internal auditing department provides information about control and quality of performance to: A. Management and the board of directors. B. A level in the organization sufficient to ensure acceptance of all recommendations. C. Outside agencies for regulatory and financial compliance. D. Any member of the organization upon request.

A. Management and the board of directors.

A compilation report is not required when compiled financial statements are expected to be used by: A. Management only. B. Management and third parties. C. Third parties only. D. A compilation report is required whenever financial statements are compiled.

A. Management only.

13. An auditor obtains evidence of stockholders' equity transactions for a publicly traded company by reviewing the entity's: A. Minutes of board of directors meetings. B. Registrar's record of interbank transfers. C. Canceled stock certificates. D. Treasury stock certificate book.

A. Minutes of board of directors meetings.

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. More audit time.

When expressing an opinion on a specified account or item in the financial statements, the auditor need only consider that account or item. However, the auditor must have audited the entire set of financial statements if this engagement requires a report on the entity's A. Net income. B. Retained earnings. C. Assets. D. Working capital.

A. Net income.

The predecessor auditor, after properly communicating with the successor auditor, has reissued a report because the entity desires comparative financial statements. The predecessor auditor's report should make A. No reference to the report or the work of the successor auditor. B. Reference to the work of the successor auditor in the scope paragraph. C. Reference to both the work and the report of the successor auditor in the opinion paragraph. D. Reference to the report of the successor auditor in the scope paragraph.

A. No reference to the report or the work of the successor auditor.

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. Repairs have been capitalized to repair equipment that had broken down.

For a CPA, a client imposed scope limitation during a review of financial statements is most likely to result in: A. Resignation from the engagement. B. Issuance of a disclaimer of opinion. C. Issuance of an adverse opinion. D. Only an explanatory paragraph added to report, with no change in the assurance provided.

A. Resignation from the engagement.

When performing a review of a nonpublic company, the auditors must obtain in a representation letter acknowledgement of management for its responsibility for reach of the following except: A. Responsibility for identifying illegal acts committed by employees. B. Responsibility for the financial statements conforming with generally accepted accounting principles. C. Responsibility to prevent and detect fraud. D. Knowledge of any actual or suspected fraud that is material.

A. Responsibility for identifying illegal acts committed by employees.

Which of the following procedures is not a procedure that is completed near the end of the engagement? A. Review cash transactions. B. Review to identify subsequent events. C. Obtain the lawyer's letter. D. Obtain the letter of representations.

A. Review cash transactions.

Which of the following audit procedures would be least likely to lead the auditors to find unrecorded fixed asset disposals? a. Review of repairs and maintenance expense. b. Review of property tax files. c. Scanning of invoices for fixed-asset additions. d. Examination of insurance policies.

A. Review of repairs and maintenance expense.

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. Review of supporting documentation by the person signing the check.

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. Review of the purchase returns and allowances account.

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. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the prior period.

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. Select items of equipment from the accounting records and then attempt to locate them during the plant tour.

Which of the following is the best reason why the auditors should consider observing a client's distribution of regular payroll checks? A. Separation of payroll duties is less than adequate for effective internal control. B. Total payroll costs are a significant part of total operating costs. C. The auditors did not observe the distribution of the entire regular payroll during the audit in the prior year. D. Employee turnover is excessive.

A. Separation of payroll duties is less than adequate for effective internal control.

Many new services assurance services are performed in accordance with Statements on A. Standards for Attestation Services. B. Generally Accepted Assurance Standards. C. Auditing Standards. D. Accounting for other Assurance Services.

A. Standards for Attestation Services.

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. Test computations.

Auditors must communicate internal control "significant deficiencies" to: A. The audit committee. B. The shareholders. C. The SEC. D. The Federal Trade Commission.

A. The audit committee.

25. Changes in capital stock accounts should normally be approved by: A. The board of directors. B. The audit committee. C. The stockholders. D. The president.

A. The board of directors.

15. Internal control over bonds payable is best when: A. The company utilizes the services of a bond trustee. B. The company segregates approval from issuance of the bonds. C. Bonds are countersigned by two officers. D. Bonds are serially numbered.

A. The company utilizes the services of a bond trustee.

An operational audit report which deals with the scrap disposal function in a manufacturing company is most likely to address: A. The efficiency and effectiveness of the scrap disposal function and include any findings requiring corrective action. B. Whether the scrap material inventory is reported as a current asset. C. Whether the physical inventory count of the scrap material agrees with the recorded amount. D. Whether the scrap materials inventory is valued at the lower of cost or market.

A. The efficiency and effectiveness of the scrap disposal function and include any findings requiring corrective action.

If the principal auditor decides to make reference to the other auditor's examination, the introductory paragraph must specifically indicate the A. The portion of the financial statements examined by the other auditor. B. Name of the other auditor. C. Name of the consolidated subsidiary examined by the other auditor. D. Type of opinion expressed by the other auditor.

A. The portion of the financial statements examined by the other auditor.

A legal aid society provides free legal aid to low-income individuals with funds passed-through the state welfare department from the U.S. Department of Health and Human Services. In this situation which organization is the primary recipient of the funds? A. The state welfare department. B. The Department of Health and Human Services. C. The legal aid society. D. The individual receiving the aid.

A. The state welfare department.

29. Which of the following is an auditor most likely to confirm from the transfer agent and registrar? A. Total shares of stock issued. B. Restrictions on the payment of dividends. C. Total market value of outstanding shares of stock. D. Gains from sale of treasury stock.

A. Total shares of stock issued.

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. Understatement of assets.

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. Understatement of liabilities.

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. Unpaid bills.

Which of the following is correct relating to an engagement to apply agreed-upon procedures to prospective financial statements? A. Use of the report is restricted to the specified users. B. Such engagements are permissible for forecasts but not for projections. C. Responsibility for the adequacy of the procedures performed is taken by the practitioner. D. Such engagements are not permissible under the professional standards.

A. Use of the report is restricted to the specified users.

The audit of intangible assets typically involves a. vouching the cost of assets and testing allocation methods b. vouching the cost of assets only c. testing the allocation methods only d. None of the above

A. Vouching the Cost of Assets and Testing Allocation Methods

When are an auditor's reporting responsibilities not met by attaching an explanation of the circumstances and a disclaimer of opinion to the entity's financial statement? A. When the auditor believes the financial statements are misleading. B. When the auditor was unable to observe the taking of the physical inventory. C. When the auditor is uncertain about the outcome of a material uncertainty. D. When the auditor has performed insufficient auditing procedures to express an opinion.

A. When the auditor believes the financial statements are misleading.

In the examination of property, plant, and equipment, the auditors try to determine all of the following except the: a. adequacy of replacement funds. b. reasonableness of the depreciation. c. extent of property abandoned during the year. d. adequacy of internal control.

A. adequacy of replacement funds.

Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment? a. Accumulated depreciation b. Cost of goods sold c. Purchase returns and allowances d. Purchase discounts

Accumulated depreciation.

Management estimates the company's allowance for doubtful accounts as $100,000, and the auditors develop an estimates that suggests that the amount should be between $115,000 and $125,000. The likely misstatement in this situation is: A) $0 B) $15,000 C) $20,000 D) $25,000

B) $15,000

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 1 accounts receivable.

B) Aging of accounts receivable.

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) Closing the sales journal prior to year-end.

During the inventory count an auditor selects items and determines that the proper description and quantity were recorded by the client. This procedure is most closely related to: A) Rights. B) Completeness. C) Valuation. D) Existence.

B) Completeness.

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? A) Existence or occurrence. B) Completeness. C) Rights and obligations. D) Presentation and disclosure.

B) Completeness. Comparing shipping documents to related sales invoices addresses the completeness assertion relating to sales. More specifically, it addresses whether all items that have been shipped have been recorded as sales.

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) Confirmation requests should be signed by the auditors.

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) Confirming accounts receivable.

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) Cost of good sold.

Which of the following is not among the criteria that ordinarily exist for revenue to be recognized? A) Collectibility is reasonably assured. B) Delivery has occurred or is scheduled to occur in the near future. C) Persuasive evidence of an arrangement exists. D) The seller's price to the buyer is fixed or determinable.

B) Delivery has occurred or is scheduled to occur in the near future. Answer (2) is not among the criteria because of the portion of the answer that states "scheduled to occur in the near future." Ordinarily delivery must have occurred. Answers (2), (3) and (4) all describe circumstances required to recognize revenue.

The confirmation of accounts receivable is most closely associated with A) Business risk. B) Detection risk. C) Inherent risk. D) Relative risk.

B) Detection risk.

Which of the following is not a part of the auditors' responsibility when a client counts 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) Determine which counts they will make and which counts the client will make.

An auditor selects items from the client's inventory listing and identifies the items in the warehouse. This procedure is most likely related to: A) Valuation. B) Existence. C) Rights. D) Completeness.

B) Existence.

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) For subsequent comparison with the completed inventory listing.

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable? A) Request that customers' payment checks be made payable to the company and addressed to the treasurer. B) Have customers send payments directly to the company's depository bank. C) Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts. D) Segregate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail.

B) Have customers send payments directly to the company's depository bank.

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) Including in inventory items that are consigned out to vendors, but not yet sold.

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) Inclusion of the information in the engagement letter.

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) Inspecting the notes is sufficient evidence of existence of the notes.

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) Internal control over receivables is good.

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory? A) Compare the physical quantities of slow-moving items with corresponding quantities in the prior year. B) Observe merchandise and raw materials during the client's physical inventory taking. C) Review the management's inventory representations letter for accuracy. D) Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average.

B) Observe merchandise and raw materials during the client's physical inventory taking. The best procedure for the discovery of damaged goods is an examination of the condition of the inventory during the auditors' observation of the physical inventory.

The primary objective of a CPA's observation of a client's physical inventory count is to: A) Discover whether a client has counted a particular inventory item or group of items. B) Obtain direct knowledge that the inventory exists and has been properly counted. C) Provide an appraisal of the quality of the merchandise on hand on the day of the physical count. D) Allow the auditor to supervise the conduct of the count in order to obtain assurance that inventory quantities are reasonably accurate.

B) Obtain direct knowledge that the inventory exists and has been properly counted. The primary objective of the CPAs' observation of inventories is to provide sufficient competent evidence as to the existence of the inventory and the controls over the inventory-taking process.

A client uses a periodic inventory system. One would 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) Option 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) Oral responses obtained by the auditor through a telephone call.

Which of the following is least likely to be typically considered 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) Physically examine items sold.

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) Purchase cutoff procedures.

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) Receiving department.

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) Receiving reports.

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 of 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) Recording of sales items that the company retains as of year-end.

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) Review accounts which have been written off as uncollectible prior to year-end.

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) SAB 104.

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) Supervising the taking of the annual physical inventory.

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 representation from the company.

B) The auditor should not consider the counts by the company, by themselves, sufficient appropriate audit evidence.

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) The auditors should make certain that consigned items from suppliers are included in physical inventory totals.

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) The cash receipts journal was held open after year-end.

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) The existence of inventories is inherently difficult to substantiate.

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) The positive form used for large balances and the negative form for the small balances.

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) There was an improper cutoff of sales at the end of the year.

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) To obtain evidence about the valuation of work-in-process, finished goods, and cost of goods sold.

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) Tour the manufacturing plant or production facility.

A company oil tanker recently spilled a large amount of oil in a pristine fishing area. No lawsuits have yet been filed. What is the audit issue? A) Account payable. B) Unasserted claim. C) Valuation of oil & gas holdings. D) General risk contingency.

B) Unasserted claim.

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) Vendor's invoices.

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 physical inventory sheets. The purpose of this procedure is to obtain assurance that: A) the final inventory is valued at cost. B) all inventory represented by an inventory tag is listed on the inventory sheets. C) all inventory represented by an inventory tag is bona fide. D) inventory sheets do not include untagged inventory items.

B) all inventory represented by an inventory tag is listed on the inventory sheets.

The date of the management representation letter should coincide with the: A) date of the engagement agreement. B) date of the auditor's report. C) date of the latest subsequent event referred to in the notes to the financial statements. D) balance sheet date.

B) date of the auditor's report.

Management estimates the company's allowance for doubtful accounts as $200,000, and the auditors develop an estimate that suggests that the amount should be between $230,000 and $250,000. The likely misstatement in this situation is: A. $0 B. $30,000 C. $40,000 D. $50,000

B. $30,000

A client's previous two years financial statements understated estimated warranty payable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate that the accrual is understated by an additional $60,000. In this year's audit $55,000 represents a material amount. Assuming that the entire understatement is to be recorded, following SEC SAB 108 the decrease in this year's income due to these understatements is: A. $0 B. $60,000 C. $110,000 D. $140,000

B. $60,000

Which of the following circumstances should be recognized as a consistency modification in the auditor's report, whether or not the item is fully disclosed in the financial statements? A. A change in accounting estimate. B. A change from an unacceptable accounting principle to a generally accepted one. C. Correction of an error not involving a change in accounting principle. D. A change in classification.

B. A change from an unacceptable accounting principle to a generally accepted one.

When an auditor expresses an adverse opinion, the opinion paragraph should include A. The principal effects of the departure from generally accepted accounting principles. B. A direct reference to a separate paragraph disclosing the basis for the opinion. C. The substantive reasons for the financial statements being misleading. D. A description of the uncertainty or scope limitation that prevents an unqualified opinion.

B. A direct reference to a separate paragraph disclosing the basis for the opinion.

Which of the following is an appropriate form of report for auditors who have audited the financial statements of a company when they are not independent? A. A simple disclaimer of opinion. B. A disclaimer of opinion, with an indication of the lack of independence. C. An audit opinion. D. A qualified audit opinion.

B. A disclaimer of opinion, with an indication of the lack of independence.

11. A registrar/transfer agent system relating to capital stock is most likely used by: A. A small, nonpublic company. B. A large, publicly traded company. C. All companies must use this type of system. D. No companies use this system anymore.

B. A large, publicly traded company.

When reporting upon a review engagements on an entity's management discussion and analysis, the report is ordinarily: A. A general use report. B. A restricted use report. C. Required to include a disclaimer of opinion. D. Included with the entity's report on internal control over financial reporting.

B. A restricted use report.

Which of the following types of audits is designed to determine that an organization has complied with the specific requirements of major financial assistance programs? A. An audit in accordance with Government Auditing Standards. B. A single audit. C. An audit in accordance with generally accepted auditing standards. D. An operational audit.

B. A single audit.

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. Agreement of the beginning balance to prior year's working papers and audit of significant changes in the accounts.

Which of the following is an internal control weakness related to factory equipment? a. Checks issued in payment of purchases of equipment are not signed by the controller b. All purchases of factory equipment are required to be made by the department in need of the equipment c. Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired d. Proceeds from sales of fully depreciated equipment are credited to other income

B. All purchases of factory equipment are required to be made by the department in need of the equipment.

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. Analysis and recomputation of depreciation expense.

An auditor is reporting on cash basis financial statements. These statements are best referred to in his or her report by which one of the following descriptions? A. Financial position and results of operations arising from cash transactions. B. Assets and liabilities arising from cash transactions and revenue collected and expenses paid. C. Balance sheet and income statement resulting from cash transactions. D. Cash balance sheet and the source and application of funds.

B. Assets and liabilities arising from cash transactions and revenue collected and expenses paid

An auditor is reporting on cash basis financial statements. These statements are best referred to in his opinion by which of the following descriptions? A. Financial position and results of operation arising from cash transactions. B. Assets and liabilities arising from cash transactions, and revenue collected and expenses paid. C. Balance sheet and income statement resulting from cash transactions. D. Cash balance sheet and the source and application of funds.

B. Assets and liabilities arising from cash transactions, and revenue collected and expenses paid.

A "comfort letter" to an investment banking firm will normally not: A. Express negative assurance. B. Be included with the registration statement for the securities. C. Include the CPA's opinion as to whether the audited financial statements comply in all material respects with applicable requirements of the related securities acts. D. Include a statement as to the auditors' independence.

B. Be included with the registration statement for the securities.

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. Canceled checks.

When a question arises about an entity's continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow. An example of such a factor is the A. Possibility of purchasing certain assets rather than leasing them. B. Capability of extending the due dates of existing debt. C. Appropriateness of changing depreciation methods from double declining balance to straight line. D. Marketability of property and equipment that management plans to keep.

B. Capability of extending the due dates of existing debt.

When an accountant compiles a financial forecast, the accountant's report should include a(an) A. Explanation of the differences between a financial forecast and a financial projection. B. Caveat that the prospective results of the financial forecast may not be achieved. C. Statement that the accountant's responsibility to update the report is limited to one year. D. Disclaimer of opinion on the reliability of the entity's internal controls.

B. Caveat that the prospective results of the financial forecast may not be achieved.

Which of the following would be considered a change that affects consistency? A. Change in accounting estimate. B. Change in accounting principle. C. Change in classification and reclassification. D. All of the other options are correct.

B. Change in accounting principle.

The underwriter of a securities offering may request that an auditor perform specified procedures and supply certain assurances concerning unaudited information contained in a registration statement. The auditor's response to such a request is commonly called a: A. Report under federal security statutes. B. Comfort letter. C. Review of interim financial information. D. Compilation report for underwriters.

B. Comfort letter.

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. Completeness.

The accountants' compilation report should be dated as of the date of: A. Completion of fieldwork. B. Completion of the compilation. C. Transmittal of the compilation report. D. The latest subsequent event referred to in the notes to the financial statements.

B. Completion of the compilation.

The five principles of a reliable system considered in a Trust Services engagement include, availability, security, processing integrity, online privacy, and: A. Control B. Confidentiality. C. Relevance. D. Reliability.

B. Confidentiality.

38. The auditor can best verify a client's bond sinking fund transactions and year-end balance by A. Confirmation with individual holders of retired bonds. B. Confirmation with the bond trustee. C. Recomputation of interest expense, interest payable, and amortization of bond discount or premium. D. Examination and count of the bonds retired during the year.

B. Confirmation with the bond trustee.

Which of the following is not a procedure that is designed to provide evidence about the existence of loss contingencies? A. Obtaining a lawyers' letter. B. Confirming accounts payable. C. Reviewing the minutes of board of directors' meetings. D. Review correspondence with banks.

B. Confirming accounts payable.

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? A. Inspecting title documents to verify whether any assets are pledged as collateral. B. Confirming with third parties the details of arrangements to maintain financial support. C. Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation. D. Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.

B. Confirming with third parties the details of arrangements to maintain financial support.

23. For audit purposes, a corporation's articles of incorporation are normally: A. Copied and placed on the owners' equity lead schedule. B. Copied and placed in the permanent file. C. Confirmed with the transfer agent. D. Ignored since they are not normally considered to be related to the internal control structure.

B. Copied and placed in the permanent file.

The confirmation of accounts payable is most closely associated with: A. Assertion risk. B. Detection risk. C. Inherent risk. D. Relative risk.

B. Detection risk.

When the auditor is unable to determine the amounts associated with the illegal acts of entity personnel because of an inability to obtain adequate evidence, the auditor should issue a(n) A. "Subject to" qualified opinion. B. Disclaimer of opinion. C. Adverse opinion. D. Unqualified/unmodified opinion with a separate explanatory/emphasis-of-matter paragraph.

B. Disclaimer of opinion

A CPA reviews a client's payroll procedures. The CPA would consider internal control to be less than effective if a payroll department supervisor was assigned the responsibility for: A. Reviewing and approving time reports for subordinate employees. B. Distributing payroll checks to employees. C. Hiring subordinate employees. D. Initiating requests for salary adjustments for subordinate employees.

B. Distributing payroll checks to employees.

21. Which of the following is not a primary objective in the audit of interest-bearing debt? A. Establish the completeness of recorded interest-bearing debt. B. Establish the legality of outstanding debt. C. Determine that debt is properly valued. D. Determine that the presentation and disclosure of interest-bearing debt is appropriate.

B. Establish the legality of outstanding debt.

30. The auditors' program for the examination of long-term debt should include steps that require the: A. Verification of the existence of the bondholders. B. Examination of any bond trust indenture. C. Inspection of the accounts payable subsidiary ledger. D. Investigation of credits to the bond interest income accounts.

B. Examination of any bond trust indenture.

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. Examine shipping documents for matching sales invoices.

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. Examining underlying documentation for cash disbursements in the period after year-end.

In testing plant and equipment balances, an auditor may select recorded additions in the analysis of plant and equipment and inspect the actual asset(s) involved. Which management assertion is this procedure most directly related to? A. Existence (yes) Classification and Understandability (yes) B. Existence (yes) Classification and Understandability (no) C. Existence (no) Classification and Understandability (yes) D. Existence (no) Classification and Understandability (no)

B. Existence (yes) Classification and Understandability (no)

Given one or more hypothetical assumptions, a responsible party may prepare an entity's expected financial position, results of operations, and changes in financial position. Such prospective financial statements are known as: A. Pro forma financial statements. B. Financial projections. C. Partial Presentation. D. Financial forecasts.

B. Financial projections.

When performing an audit of a city in accordance with the Single Audit Act, an auditor should adhere to: A. Standards for the Professional Practice of Internal Auditing. B. Government Auditing Standards. C. Operational Auditing Standards. D. Financial Accounting Standards.

B. Government Auditing Standards.

When auditing an entity's financial statements in accordance with Government Auditing Standards (the "Yellow Book"), an auditor is required to report on: I. Noteworthy accomplishments of the program. II. The scope of the auditor's testing of internal controls. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

B. II only.

When auditing an entity's financial statements in accordance with Government Auditing Standards (the "Yellow Book"), an auditor is required to report on: I. Recommendations for actions to improve operations. II. The scope of the auditor's tests of compliance with laws and regulations. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

B. II only.

When compared to the consideration of internal control for purposes of an audit, an examination of management's assertion about the effectiveness of an entity's internal control for a nonpublic company may be expected to require a(n): A. Increased scope of tests of balances. B. Increased scope of tests of controls. C. Greater reliance upon analytical procedures. D. Increased emphasis on fairness of future presentation.

B. Increased scope of tests of controls.

Inquiry and analytical procedures ordinarily performed during a review of a nonpublic entity's financial statements include: A. Analytical procedures designed to identify reportable conditions related to internal control. B. Inquiries concerning actions taken at meetings of the stockholders and the board of directors. C. Analytical procedures designed to test the accounting records by obtaining corroborating evidential matter. D. Inquiries of knowledgeable outside parties such as the client's attorneys and bankers.

B. Inquiries concerning actions taken at meetings of the stockholders and the board of directors.

24. The audit approach for acquired treasury stock will normally include: A. Confirmation with shareholders. B. Inspection of certificates. C. Inspection of cash receipts entries. D. Recomputation of all gains and losses.

B. Inspection of certificates.

To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic: a. Increase in insurance coverage b. Inspection of equipment and reconciliation with accounting records c. Verification of liens, pledges, and collateralizations d. Accounting for work orders

B. Inspection of equipment and reconciliation with accounting records.

An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting all misstatements existing in the balance sheet at the end of the current year, irrespective of whether the misstatements occurred in the current or previous years is referred to as the: A. Evaluation materiality approach. B. Iron curtain approach. C. Projected misstatement approach. D. Rollover approach.

B. Iron curtain approach.

When the auditors are associated with the financial statements of a public company, but have not audited the financial statements, they should: A. Issue a compilation report. B. Issue a disclaimer of opinion. C. Issue a qualified opinion. D. Not issue any report.

B. Issue a disclaimer of opinion.

Specific misstatement in one of a client's 2,000 accounts receivable is referred to as a(n): A. Extrapolation difference. B. Known misstatement. C. Likely misstatement. D. Projected misstatement.

B. Known misstatement.

With respect to issuance of an audit report which is dual dated for a subsequent event occurring after the completion of field work but before issuance of the auditors' report, the auditors' responsibility for events occurring subsequent to the completion of field work is: A. Extended to include all events occurring until the date of the last subsequent event referred to. B. Limited to the specific event referred to. C. Limited to all events occurring through the date of issuance of the report. D. Extended to include all events occurring through the date of submission of the report to the client.

B. Limited to the specific event referred to.

Arel, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied by Modit Co. regarding Modit's written assertion about its compliance with contractual requirements to pay royalties. Arel's report on these agreed-upon procedures should contain a (an). A. Disclaimer of opinion about the fair presentation of Modit's financial statements. B. List of the procedures performed (or reference thereto) and Arel's findings. C. Opinion about the effectiveness of Modit's internal control activities concerning royalty payments. D. Acknowledgment that the sufficiency of the procedures is solely Arel's responsibility.

B. List of the procedures performed (or reference thereto) and Arel's findings.

Which of the following subsequent events might require an adjustment to the client's financial statements? A. A business combination with another company. B. Loss on the sale of a closely-held investment. C. Loss of plant and equipment due to a fire. D. Retirement of bonds payable at a loss.

B. Loss on the sale of a closely-held investment.

According to the IIA's Standards, an internal auditor's working papers should be reviewed by the: A. Management of the department being audited. B. Management of the internal auditing department. C. Audit committee of the board of directors. D. Management of the organization's security division.

B. Management of the internal auditing department.

The objective of a review of interim financial information is to provide the accountant with a basis for reporting whether: A. A reasonable basis exists for expressing an updated opinion regarding the financial statements that were previously audited. B. Material modifications should be made to conform with generally accepted accounting principles. C. The financial statements are presented fairly in accordance with standards of interim reporting. D. The financial statements are presented fairly in accordance with generally accepted accounting principles.

B. Material modifications should be made to conform with generally accepted accounting principles.

Interim information of public companies. A. Must be as comprehensive as that filed annually with the Securities and Exchange Commission. B. Must be reviewed by CPAs before it is filed with the Securities and Exchange Commission. C. Must be reviewed continuously by CPAs using continuous auditing techniques. D. Requires no accountant association until it becomes a part of the companies' annual financial information.

B. Must be reviewed by CPAs before it is filed with the Securities and Exchange Commission.

A special report related to compliance with contractual provisions provides A. Positive assurance. B. Negative assurance. C. No assurance. D. None of these.

B. Negative assurance.

Other bases of accounting (special purpose frameworks) include all of the following except: A. Tax basis. B. Non-GAAP methods used for internal reporting. C. Cash basis. D. Regulatory basis.

B. Non-GAAP methods used for internal reporting.

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. Observation and inquiry.

Which of the following procedures is usually the first step in reviewing the financial statements of a nonpublic entity? A. Make preliminary judgments about risk and materiality to determine the scope and nature of the procedures to be performed. B. Obtain a general understanding of the entity's organization, its operating characteristics, and its products or services. C. Assess the risk of material misstatement arising from fraudulent financial reporting and the misappropriation of assets. D. Perform a preliminary assessment of the operating efficiency of the entity's internal control activities.

B. Obtain a general understanding of the entity's organization, its operating characteristics, and its products or services.

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. Other reliable external evidence to support the balances is likely to be available.

Which of the following is not one of the attribute standards of the IIA's Standards for the Professional Practice of Internal Auditing? A. Independence and objectivity. B. Outsourcing. C. Proficiency and professional care. D. Purpose, authority, and responsibility.

B. Outsourcing.

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. Plant assets were retired during the year.

A refusal by a lawyer to furnish information related to litigation included in the letter of inquiry is likely to result in: A. Confirmation of related lawsuits with the claimants. B. Qualification of the audit report. C. An assessment that loss of the litigation is probable. D. An adverse opinion.

B. Qualification of the audit report.

Kent is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with the Single Audit Act. Kent detected noncompliance with requirements that have a material effect on that program. Kent's report on compliance should express a(an): A. Unqualified opinion with a separate explanatory paragraph. B. Qualified opinion or an adverse opinion. C. Adverse opinion or a disclaimer of opinion. D. Limited assurance on the items tested.

B. Qualified opinion or an adverse opinion.

When the entity fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related footnotes, it is the responsibility of the auditor to present the information, if practicable, in the auditor's report and express a(n) A. Qualified opinion or a disclaimer of opinion. B. Qualified opinion or an adverse opinion. C. Adverse opinion or a disclaimer of opinion. D. Qualified opinion or an unqualified opinion.

B. Qualified opinion or an adverse opinion.

If a public company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will express a(an) A. Disclaimer of opinion. B. Qualified opinion. C. Review report. D. Unqualified opinion with a separate explanatory paragraph.

B. Qualified opinion.

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. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

Which of the following situations will not result in modification of the auditor's report because of a scope limitation? A. Restriction imposed by the client. B. Reliance placed on the report of another auditor. C. Inability to obtain sufficient appropriate evidential matter. D. Inadequacy in the accounting records.

B. Reliance placed on the report of another auditor.

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. Requiring that the department in need of the equipment order the equipment.

35. During its fiscal year, a company issued, at a discount, a substantial amount of first-mortgage bonds. When performing audit work in connection with the bond issue, the independent auditor should: A. Confirm the existence of the bondholders. B. Review the minutes for authorization. C. Trace the net cash received from the issuance to the bond revenue account. D. Inspect the records maintained by the bond trustee.

B. Review the minutes for authorization.

Which of the following is notcurrently an acceptable form of association with prospective financial statements? A. Compilation. B. Review. C. Agreed-upon procedures. D. Examination.

B. Review.

Whenever special reports, filed on a printed form designed by authorities, call upon the independent auditors to make an assertion that the auditors believe is notjustified, the auditors should: A. Submit a short-form report with explanations. B. Reword the form or attach a separate report. C. Submit the form with questionable items clearly omitted. D. Withdraw from the engagement.

B. Reword the form or attach a separate report.

27. For a corporation that does not utilize the services of an independent registrar and stock transfer agent, which of the following represents a weakness in internal control over stock issuance? A. Stock certificates are prenumbered. B. Stock certificates are signed immediately upon receipt from the printer. C. Stock certificates are in the exclusive custody of a responsible officer. D. Stock certificates require the signature of two officers.

B. Stock certificates are signed immediately upon receipt from the printer.

Which of the following is correct when a company is issuing condensed financial statements developed from audited financial statements? A. Such condensed statements should always have a CPA's report associated with them when audited financial statements exist. B. The CPA may issue a report on whether the condensed information is fairly stated in all material respects in relation to the basic financial statements. C. The CPA should perform a compilation and review of the condensed financial statements. D. The CPA who has audited the financial statements who is asked to report on the condensed statements should decline the engagement because the condensed statements do not include all disclosures necessary under generally accepted accounting principles.

B. The CPA may issue a report on whether the condensed information is fairly stated in all material respects in relation to the basic financial statements.

For the highest degree of independence the director of internal auditing should report directly to: A. The controller. B. The audit committee of the board of directors. C. The executive vice-president. D. The chief accountant.

B. The audit committee of the board of directors.

The party responsible for assumptions identified in the preparation of prospective financial statements is usually: A. A third-party lending institution. B. The client's management. C. The reporting accountant. D. The client's independent auditor.

B. The client's management.

In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion and expressing an adverse opinion? A. The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures. B. The financial statements fail to disclose information that is required by generally accepted accounting principles. C. The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements. D. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.

B. The financial statements fail to disclose information that is required by generally accepted accounting principles.

In connection with the examination of the consolidated financial statements of Mott Industries, Frazier, CPA, plans to refer to another CPA's examination of the financial statements of a subsidiary company. Under these circumstances, Frazier's report must disclose A. The name of the other CPA and the type of report issued by the other CPA. B. The portion of the financial statements examined by the other CPA. C. The nature of Frazier's review of the other CPA's work. D. In a footnote the portions of the financial statements that were covered by the examinations of both auditors.

B. The portion of the financial statements examined by the other CPA.

Interviewing operating personnel, identifying he objectives of the auditee, identifying standards used to evaluate performance, and assessing the risk inherent in the auditee's operations are activities typically performed in which phase of an internal audit? A. The fieldwork phase. B. The preliminary survey phase. C. The audit programming phase. D. The reporting phase.

B. The preliminary survey phase.

Which of the following is correct concerning financial statements prepared in the United States for use in another country? A. The auditor must follow GAAP of both the United States and of the other country. B. The type of audit report issued depends upon whether it is for use primarily outside the United States. C. The audit must only follow US GAAP. D. Auditors from the other country must be involved with the audit to assure adequate performance of that country's standards.

B. The type of audit report issued depends upon whether it is for use primarily outside the United States.

Which of the following engagements is most likely to consider availability, security, integrity, and maintainability of a company's computer systems? A. Internal control over financial reporting. B. Trust Services. C. Website Asssociate. D. Financial statement audit.

B. Trust Services.

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. Using a budget to forecast and control acquisitions and retirements.

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern? A. Significant related party transactions are pervasive. B. Usual trade credit from suppliers is denied. C. Arrearages in preferred stock dividends are paid. D. Restrictions on the disposal of principal assets are present.

B. Usual trade credit from suppliers is denied.

16. The auditor's program to examine interest-bearing debt most likely will include steps that require: A. Comparing the book value of the debt to its year-end market value. B. Vouching borrowing and repayment transactions. C. Verifying the proper presentation of the debt through the use of confirmations. D. Inspecting the accounts payable subsidiary ledger for unrecorded interest-bearing debt.

B. Vouching borrowing and repayment transactions.

To achieve effective internal control over fixed-asset additions, a company should establish procedures that require: a. capitalization of the cost of fixed-asset additions in excess of a specific dollar amount. b. authorization and approval of major fixed-asset additions. c. performance of recurring fixed-asset maintenance work solely by maintenance department employees. d. classification as investments of those fixed-asset additions that are not used in the business.

B. authorization and approval of major fixed-asset additions.

Tennessee Company violated company policy by erroneously capitalizing the cost of painting its warehouse. The auditors examining Tennessee's financial statements would most likely learn of this error by: a. observing, during the physical inventory observation that the warehouse has been painted. b. reviewing the titles and descriptions for all construction work orders issued during the year. c. examining in detail a sample of construction requests. d. discussing Tennessee's capitalization policies with its controller.

B. reviewing the titles and descriptions for all construction work orders issued during the year.

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. xamination of rent receipts from lessees of the property.

A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events is most likely to result in adjustment of the December 31 financial statements? A) The factory building was damaged by a fire on January 19. B) The client decided to change depreciation methods in the coming year. C) A substantial portion of the company's inventory was written off as obsolete on January 31. D) A major subsidiary was sold on February 7.

C) A substantial portion of the company's inventory was written off as obsolete on January 31.

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) Accounts receivable subsidiary ledger.

To test the existence assertion for recorded receivables, the auditors 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) Accounts receivable subsidiary ledger. The objective is to determine the population the auditors would sample from to test the existence assertion for recorded receivables. The direction of testing should be from the accounts receivable subsidiary ledger to the available support, such as sales invoices, bills of lading, sales orders, and customers' orders.

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) 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.

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31, 20X0. By this procedure, the auditor would be most likely to learn of which of the following? A) An October invoice was improperly computed. B) An account balance is past due and should be written off. C) An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period. D) An October check from a customer was posted in error to the account of another customer with a similar name.

C) An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.

To determine that sales transactions have been recorded in the proper accounting period, the auditors perform a cutoff review. Which of the following best describes the overall approach used when performing a cutoff review? A) Examine cash receipts in the subsequent period. B) Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period. C) Analyze transactions occurring within a few days before and after year end. D) Confirm year-end transactions with regular customers.

C) Analyze transactions occurring within a few days before and after year end

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) Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

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) Purchases.

Evaluation of internal control is one of the general sections of the IIA's Standards of the Professional Practice of Internal Auditing. True False

FALSE

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) Client records include a large number of relatively small balances.

A manufacturer's employees are paid once a month, on the 3rd of the following month. What audit issue pertaining to labor costs exists at year end? A) Rights. B) Existence. C) Completeness. D) Presentation.

C) Completeness.

Which of the following statements regarding the audit of negotiable notes receivable is correct? A) Notes receivable discounted without recourse are confirmed via the standard form for confirmation of deposits and loans at financial institutions used in the audit of cash. B) Physical inspection of a note by the auditors provides conclusive evidence. C) Confirmation in writing from the holder of the note is considered an acceptable alternative to inspection. D) Notes receivable discounted with recourse need not be confirmed.

C) Confirmation in writing from the holder of the note is considered an acceptable alternative to inspection.

What audit procedure is not ordinarily used to examine selling, general and administrative expenses? A) Analytical procedures. B) Use of budgets to identify unexpected differences. C) Confirmations to advertising agencies confirming payments. D) Detailed tests of balances.

C) Confirmations to advertising agencies confirming payments.

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 accounts.

C) Confirming current (0-30 day) year-end accounts receivable.

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) Don't write off uncollectible receivables--sales returns, sales discounts.

Which of the following is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold? A) Determine that the valuation of inventories and cost of goods sold is arrived at by appropriate methods. B) Determine the existence of inventories and the occurrence of transactions affecting cost of goods sold. C) Establish that the client includes only inventory on hand at year-end in inventory totals. D) Establish the completeness of inventories.

C) Establish that the client includes only inventory on hand at year-end in inventory totals. Inventory need not be on hand at year-end. For example, purchases in transit on which title has passed to the client should also be included.

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) Estimate credit losses.

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) Holds legal title to the merchandise.

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) Inventory.

In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate: A) Likely misstatements in the financial statements. B) Known misstatements in the financial statements. C) Known, projected and other estimated misstatements in the financial statements. D) Known, projected and potential misstatements in the financial statements.

C) Known, projected and other estimated misstatements in the financial statements.

For which of the following ledger accounts would the auditor be most likely to analyze the details? A) Supplies expense. B) Postage expense. C) Miscellaneous expense. D) Sales salaries expense.

C) Miscellaneous expense.

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) Occurrence of sales transactions.

The receiving department is least likely to be responsible for the: A) Determination of quantities of goods received. B) Detection of damaged or defective merchandise. C) Preparation of a shipping document. D) Transmittal of goods received to the store's department.

C) Preparation of a shipping document. The shipping department, not the receiving department, is responsible for preparation of a shipping document.

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) The authority to make purchases of requisitioned materials and services.

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) The billing department accounts for all shipping documents.

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 is 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) The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.

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) The purchase order.

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) The storekeeper is responsible for maintenance of perpetual inventory records.

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) The write-off of receivables by personnel who receive cash permits the misappropriation of cash.

Auditors should perform audit procedures relating to subsequent events? A) Through year end. B) Through issuance of the audit report. C) Through the date of the audit report. D) For a reasonable period after year end.

C) Through the date of the audit report.

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 test 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) Tracing sales invoices to shipping documents to test the occurrence of reported sales.

An auditor most likely would analyze inventory turnover rates to obtain evidence about: A) Existence. B) Presentation. C) Valuation. D) Rights.

C) Valuation.

Which of the following ledger accounts would be least likely to be analyzed in detail by auditors? A. Miscellaneous revenue. B. Professional fees. C. Travel expense. D. Repairs and maintenance.

C. Travel expense.

A surprise observation by an auditor of a client's regular distribution of paychecks is primarily designed to satisfy the auditor that: A) all employees have in their possession proper employee identification. B) the paymaster is not involved in the distribution of payroll checks. C) names on the company payroll are those of bona fide employees presently on the job. D) all unclaimed payroll checks are properly returned to the cashier.

C) names on the company payroll are those of bona fide employees presently on the job.

An auditor would be least likely to learn of slow-moving inventory through: A) inquiry of sales personnel. B) inquiry of stores personnel. C) vouching of year-end purchases. D) review of perpetual inventory records.

C) vouching of year-end purchases.

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. If the entity's financial statements adequately disclose its financial difficulties, the auditor's report is required to include an explanatory/emphasis-of-matter paragraph that specifically uses the phrase(s) A. "Reasonable period of time, not to exceed one year" and "going concern." B. "Reasonable period of time, not to exceed one year" but not "going concern." C. "Going concern" but not "reasonable period of time, not to exceed one year." D. Neither "going concern" nor "reasonable period of time, not to exceed one year."

C. "Going concern" but not "reasonable period of time, not to exceed one year."

Accepting an engagement to examine an entity's financial projection most likely would be appropriate if the projection were to be distributed to: A. All employees who work for the entity. B. Potential stockholders who request a prospectus or a registration statement. C. A bank with which the entity is negotiating for a loan. D. All stockholders of record as of the report date.

C. A bank with which the entity is negotiating for a loan.

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. A business combination.

For which of the following events would an auditor issue a report that does not include any reference to consistency? A. A change in the method of accounting for inventories. B. A change from an accounting principle that is not generally accepted to one that is generally accepted. C. A change in the service life used to calculate depreciation expense. D. A change in accounting principle without reasonable justification from management.

C. A change in the service life used to calculate depreciation expense.

An accountant's standard report issued after compiling the financial statements of a nonpublic entity should state that A. I am not aware of any material modifications that should be made to the accompanying financial statements. B. A compilation consists principally of inquiries of company personnel and analytical procedures. C. A compilation is limited to presenting in the form of financial statements information that is the representation of management. D. A compilation is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion.

C. A compilation is limited to presenting in the form of financial statements information that is the representation of management.

Which of the following requires modification of a review report: A. A change in accounting principles. B. A substantial doubt about a company's ability to continue as a going concern. C. A departure from generally accepted accounting principles. D. A change in an accounting estimate.

C. A departure from generally accepted accounting principles.

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. A document prepared by Accounts Payable authorizing a cash disbursement.

A practitioner's report on agreed-upon procedures that is in the form of procedures and findings should contain A. Negative assurance that the procedures did not necessarily disclose all reportable conditions. B. An acknowledgment of the practitioner's responsibility for the sufficiency of the procedures. C. A statement of restrictions on the use of the report. D. A disclaimer of opinion on the entity's financial statements.

C. A statement of restrictions on the use of the report.

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. Accounts with a large amount of activity regardless of their balance.

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. C) Reasonableness of the depreciation.

C. Adequacy of replacement funds.

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. After the balance sheet date.

Which of the following types of services is most likely to result in a restricted use report? A. Compilations. B. Reviews. C. Agreed-upon procedures. D. Audits.

C. Agreed-upon procedures.

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. Requires the vendor to indicate the amount of the payable.

An auditor's report on financial statements prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles should include all of the following except: A. Reference to the note to the financial statements that describes the basis of preparation of the financial statements. B. Disclosure that the audit was performed in accordance with generally accepted auditing standards. C. An opinion as to whether the basis of accounting used is appropriate under the circumstances. D. An opinion as to whether the financial statements are presented fairly in conformity with the basis of accounting described.

C. An opinion as to whether the basis of accounting used is appropriate under the circumstances.

34. An audit program for the examination of the retained earnings account should include a step that requires verification of the: A. Market value used to charge retained earnings to account for a two-for-one stock split. B. Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable. C. Authorization for both cash and stock dividends. D. Gain or loss resulting from disposition of treasury shares.

C. Authorization for both cash and stock dividends.

An example of an internal control weakness is to assign the payroll department the responsibility for: A. Preparing the payroll expense distribution. B. Preparing the payroll checks. C. Authorizing increases in pay. D. Preparing journal entries for payroll expense.

C. Authorizing increases in pay.

28. A primary responsibility of a registrar of capital stock is to: A. Determine that dividends paid do not exceed the amount allowable by law. B. Act as an independent third party between the board of directors and outside investors concerning merger, acquisition, and other major decisions. C. Avoid any over issuance of stock. D. Maintain detailed stockholder records and carrying out transfers of stock ownership.

C. Avoid any over issuance of stock.

An engagement to express an opinion on a system of internal control will generally A. Only require those procedures already applied in assessing control risk during a financial statement audit. B. Increase the reliability of the financial statements that have already been audited. C. Be more extensive in scope than the assessment of control risk made during a financial statement audit. D. Be more limited in scope than the assessment of control risk made during a financial statement audit.

C. Be more extensive in scope than the assessment of control risk made during a financial statement audit.

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. Cash

12. In auditing long-term debt, an auditor would be most likely to: A. Perform analytical procedures on the bond prenumbered discount accounts. B. Examine documentation of assets purchased with bond proceeds for liens. C. Compare interest expense with the long-term debt amount for reasonableness. D. Confirm the existence of individual long-term debt holders at year-end.

C. Compare interest expense with the long-term debt amount for reasonableness.

Which of the following would be used on a review engagement? A. Examination of board minutes. B. Confirmation of cash and accounts receivable. C. Comparison of current-year to prior-year account balances. D. Recalculation of depreciation expense.

C. Comparison of current-year to prior-year account balances.

An assertion that is particularly difficult to audit with respect to personal financial statements is: A. Existence. B. Rights. C. Completeness. D. Legality.

C. Completeness.

In an audit in accordance Government Auditing Standards, the auditors are required to provide a report on: A. Compliance applicable to major federal programs. B. The Schedule of financial assistance received. C. Compliance with laws and regulations which are required to be tested by generally accepted auditing standards. D. Internal control systems used in administering federal assistance programs.

C. Compliance with laws and regulations which are required to be tested by generally accepted auditing standards

Financial statements that are developed from and summarize the overall information presented in audited financial statements are referred to as A. Agreed-upon procedure financial statements. B. Compiled financial statements. C. Condensed financial statements. D. Reviewed financial statements.

C. Condensed financial statements.

When management presents a written assertion on internal control effectiveness, it evaluates the company's internal control using reasonable criteria for internal control, referred to as. A. Control environment criteria. B. Tone criteria. C. Control criteria D. Integrated criteria.

C. Control criteria

When comparative financial statements are presented, the fourth standard of reporting, which refers to financial statements "taken as a whole," should be considered to apply to the financial statements of the A. Periods presented plus the one preceding period. B. Current period only. C. Current period and those of the other periods presented. D. Current and immediately preceding period only.

C. Current period and those of the other periods presented.

Treetop Corporation acquired a building and arranged mortgage financing during the year. Verification of the related mortgage acquisition costs would be least likely to include an examination of the related: A) Closing statement. B) Canceled checks. C) Deed. D) Interest expense.

C. Deed.

To minimize the opportunities for fraud, unclaimed cash payroll should be: A. Deposited in a safe deposit box. B. Held by the payroll custodian. C. Deposited in a special bank account. D. Held by the controller.

C. Deposited in a special bank account.

If compiled financial statements presented in conformity with the cash receipts and disbursements basis of accounting do not disclose the basis of accounting used, the accountant should: A. Disclose the basis in the notes to the financial statements. B. Clearly label each page "Unaudited." C. Disclose the basis of accounting in the accountant's report. D. Recompile the financial statements using generally accepted accounting principles.

C. Disclose the basis of accounting in the accountant's report.

In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable? A. Sales and Cost of Goods Sold. B. Interest and Bad Debt Expense. C. Sales and Bad Debt Expense. D. Interest and Cost of Goods Sold.

C. Sales and Bad Debt Expense.

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. Examination of January receiving reports prepared for goods shipped FOB destination in December to the client.

Which attest engagement aligns most directly with a financial statement audit in terms of assurance provided? A. Agreed-upon procedures. B. Evaluation. C. Examination. D. Review.

C. Examination.

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 inventory. D)Deferral of certain purchases of office supplies.

C. Existence of obsolete inventory.

The auditors are most likely to seek information from the plant manager with respect to the a. Adequacy of the provision for uncollectible accounts b. Appropriateness of physical inventory observation procedures c. Existence of obsolete machinery d. Deferral of procurement of certain necessary insurance coverage

C. Existence of obsolete machinery.

In governmental accounting, emphasis is placed on: A. Total assets owned by the governmental entity. B. Generating income form funds employed. C. Expenditures of funds. D. The flow of funds through the income statement.

C. Expenditures of funds.

Requirements of federal financial assistance programs that involve significant national policy are known as: A. Specific requirements. B. Major program requirements. C. General requirements. D. Primary requirements.

C. General requirements.

Comfort letters are ordinarily signed by the: A. Client. B. Client's lawyer. C. Independent auditor. D. Internal auditor.

C. Independent auditor.

Which of the following information must be reported on in the auditors' report? A. FASB-required supplementary information. B. Other information in client-prepared documents. C. Information accompanying financial statements in auditor-submitted documents. D. GASB-required supplementary information.

C. Information accompanying financial statements in auditor-submitted documents.

An audit in accordance with the Single Audit Act does not involve reporting upon: A. Compliance with provisions of laws that may have a direct and material affect on each major federal financial assistance program. B. Financial statements. C. Internal control over operations. D. Schedule of expenditures of federal awards.

C. Internal control over operations.

Cravens was asked to perform the first audit of a wholesale business that does not maintain perpetual inventory records. Cravens has observed the current inventory but has not observed the physical inventory at the previous year-end date and concludes that the opening inventory balance, which is not auditable, is a material factor in the determination of cost of goods sold for the current year. Cravens will probably A. Decline the engagement. B. Express an unqualified/unmodified opinion on the balance sheet and income statement except for inventory. C. Issue a disclaimer of opinion. D. Issue an adverse opinion.

C. Issue a disclaimer of opinion

In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate: A. Likely misstatements in the financial statements. B. Known misstatements in the financial statements. C. Known, projected and other estimated misstatements in the financial statements. D. Known, projected and potential misstatements in the financial statements.

C. Known, projected and other estimated misstatements in the financial statements.

The auditor will most likely perform extensive tests for possible understatement of: A. Revenues. B. Assets. C. Liabilities. D. Capital.

C. Liabilities.

Which of the following is least likely to be included in an agreed-upon procedures attestation engagement report? A. The specified party takes responsibility for the sufficiency of procedures. B. Use of the report is restricted. C. Limited assurance on the information presented. D. A summary of procedures performed.

C. Limited assurance on the information presented.

"We disclosed to you all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements" the foregoing passage is most likely from a: A. Report on internal control. B. Special report C. Management representation letter. D.Letter of undewriters

C. Management representation letter.

The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the A. Ability to expand operations into new product lines in the future. B. Feasibility of plans to purchase leased equipment at less than market value. C. Marketability of assets that management plans to sell. D. Committed arrangements to convert preferred stock to long-term debt.

C. Marketability of assets that management plans to sell.

Internal auditing is considered to be part of an organization's: A. Accounting system. B. Control activities. C. Monitoring. D. External controls.

C. Monitoring.

The review of audit working papers by the audit partner is normally completed: A. Prior to year-end. B. Immediately as each working paper is completed. C. Near the completion of field work. D. After issuance of the audit report, but prior to required subsequent event review procedures.

C. Near the completion of field work.

In an engagement to express an opinion on one or more specified elements, accounts, or items of a financial statement, the auditor can generally audit only those specified elements and not the entire set of financial statements. However, the auditor is required to audit the entire set of financial statements if the elements specified include A. Net Income. B. Stockholders' Equity. C. Net Income and Stockholders' Equity. D. Assets.

C. Net Income and Stockholders' Equity.

A CPA who is not independent and is associated with financial statements should disclaim an opinion with respect to those financial statements. The disclaimer should A. Clearly state the specific reasons for lack of independence. B. Not mention any reason for the disclaimer other than that the CPA was unable to conduct the examination in accordance with generally accepted auditing standards. C. Not describe the reason for lack of independence but should state specifically that the CPA is not independent. D. Include a middle paragraph clearly describing the CPA's association with the entity and explaining why the CPA was unable to gather sufficient appropriate evidential matter to warrant the expression of an opinion.

C. Not describe the reason for lack of independence but should state specifically that the CPA is not independent.

22. In which of the following accounts would one expect a related party transaction to be easiest to detect? A. Accounts receivable. B. Accounts payable. C. Notes payable. D. Cash.

C. Notes payable.

Which of the following auditing procedures is ordinarily performed last? A. Reading of the minutes of the directors' meetings. B. Confirming accounts payable. C. Obtaining a management representation letter. D. Testing of the purchasing function.

C. Obtaining a management representation letter.

The term "special reports" may include all of the following except reports on financial statements: A. Of a partnership which follows accounting practices used to file its tax return. B. Prepared for limited purposes such as a report that relates to certain aspects of financial statements. C. Of an organization that has limited the scope of the auditor's examination. D. Of an organization which maintains its accounts and prepares its statements on a cash or other comprehensive basis of accounting which is materially at variance with accounting practices customarily followed in preparing accrual-basis statements.

C. Of an organization that has limited the scope of the auditor's examination.

A comprehensive examination of an operating unit or a complete organization to evaluate its systems, controls, and performance, as measured by management's objectives is called a(an): A. Compilation. B. Consultation. C. Operational Audit. D. "Yellow Book" audit.

C. Operational Audit.

Analytical procedures are required as a part of the A. Detailed tests of balances. B. Internal control assessment. C. Overall review at the conclusion of the audit. D. Substantive testing.

C. Overall review at the conclusion of the audit.

Which of the following is the best evidence of real estate ownership at the balance sheet date? a. Title insurance policy. b. Original deed held in the client's safe. c. Paid real estate tax bills. d. Closing statement.

C. Paid real estate tax bills.

A CPA who wishes to perform a WebTrust engagement need not: A. Agree to adhere to the WebTrust professional standards. B. Participate in a quality assurance program. C. Pass an examination on WebTrust principles and criteria. D. Take continuing education courses on the WebTrust program.

C. Pass an examination on WebTrust principles and criteria.

It would be appropriate for the payroll accounting department to be responsible for which of the following functions? A. Approval of employee time records. B. Maintenance of records of employment, discharges, and pay increases. C. Preparation of periodic governmental reports as to employees' earnings and withholding taxes. D. Distribution of paychecks to employees.

C. Preparation of periodic governmental reports as to employees' earnings and withholding taxes.

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. Prepare disbursement vouchers and sign checks.

An auditor's report would be designated as a special report when it is issued in connection with financial statements that are: A. For an interim period and are subjected to a review. B. Unaudited and are prepared from a client's accounting records. C. Prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles. D. Purported to be in accordance with generally accepted accounting principles but do not include a presentation of the statement of cash flows.

C. Prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles.

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. Purchases.

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. Recomputation

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. Recorded obligations occurred prior to year-end.

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. Repairs and maintenance expense.

The date the auditor grants the client permission to use the audit report in connection with the financial statements is the: A. Last day of significant field work. B. Report cutoff date. C. Report release date. D. Representation date.

C. Report release date.

Which of the following is least likely to result in modification of an opinion on management's assertion about the effectiveness of an entity's internal control? A. Significant circumstance imposed scope limitations. B. Significant management imposed scope limitations. C. Reportable conditions that are not also material weaknesses in internal control D. Material weaknesses in internal control.

C. Reportable conditions that are not also material weaknesses in internal control

When audited financial statements are presented in a document containing other information, the auditor A. Has an obligation to perform auditing procedures to corroborate the other information. B. Is required to issue an "except for" qualified opinion if the other information has a material misstatement of fact. C. Should read the other information to consider whether it is inconsistent with the audited financial statements. D. Has no responsibility for the other information because it is not part of the basic financial statements. AACSB

C. Should read the other information to consider whether it is inconsistent with the audited financial statements.

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. Subsequent to the balance sheet date.

Compliance auditing procedures are: A. Tests of controls. B. Observation procedures. C. Substantive procedures. D. Confirmation procedures.

C. Substantive procedures.

Which of the following is not an overall test of the annual provision for depreciation expense? a. Compare rates used in the current year with those used in prior years b. Test computation of depreciation provisions for a representative number of units c. Test deductions from accumulated depreciation for assets purchased during the year d. Perform analytical procedures

C. Test deductions from accumulated depreciation for assets purchased during the year.

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. Tests of controls and limited tests of current year property and equipment transactions.

Which of the following is an auditor least likely to inquire about when performing a review of a nonpublic company? A. Significant transactions near the end of the period. B. Communications with regulatory agencies. C. That financial statements are prepared in conformity with a special basis of accounting. D. Questions that have arisen in applying review procedures.

C. That financial statements are prepared in conformity with a special basis of accounting.

What is an auditor's responsibility for supplementary information, such as segment information, that is outside the basic financial statements, but required by the FASB? A. The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements. B. The auditor's only responsibility for required supplementary information is to assist in preparing the supplementary information. C. The auditor is required to read the other information and consider whether such information is consistent with the information in the financial statements. D. The auditor should apply tests of details of transactions and balances to the required supplementary information and report any material misstatements in such information.

C. The auditor is required to read the other information and consider whether such information is consistent with the information in the financial statements.

17. Bond transactions are normally confirmed with: A. Individual holders of retired bonds. B. Recomputation procedures performed using interest expense. C. The bond trustee. D. Comparisons of retired bonds with those outstanding.

C. The bond trustee.

In an audit in accordance with Government Auditing Standards, the auditors are required to provide a report on: A. Compliance with general requirements. B. The schedule of financial assistance received. C. The organization's internal control. D. Findings and questioned costs.

C. The organization's internal control.

The operational auditors' preliminary conclusions about potential problem areas are summarized as: A. The definition of purpose. B. The audit program. C. The preliminary survey. D. The audit report.

C. The preliminary survey.

Which of the following statements is correct with respect to an audit report issued for financial statements to be used primarily outside of the United States? A. The report should follow the U.S. format, modified as appropriate. B. The report should follow the format of the other country. C. The report may follow either the U.S. format, modified as appropriate, or may follow the format of the other country. D. The report should follow the attestation examination report format.

C. The report may follow either the U.S. format, modified as appropriate, or may follow the format of the other country.

Auditors should perform audit procedures relating to subsequent events? A. Through year end. B. Through issuance of the audit report. C. Through the last day of field work. D. For a reasonable period after year end.

C. Through the last day of field work.

In the course of the audit of financial statements for the purpose of expressing an opinion thereon, the auditors will normally prepare a schedule of unadjusted differences for which the auditors did not propose adjustment when they were identified. What is the primary purpose served by this schedule? A. To point out to the responsible client officials the errors made by various company personnel. B. To summarize the adjustments that must be made before the company can prepare and submit its federal tax return. C. To identify the potential financial statement effects of misstatement or disputed items that were considered immaterial when discovered. D. To summarize the misstatements made by the company so that corrections can be made after the audited financial statements are released.

C. To identify the potential financial statement effects of misstatement or disputed items that were considered immaterial when discovered.

For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on: a. All transactions resulting in the ending balance b. Tests of controls over disposals c. Transactions that occurred during the year d. Performing analytical procedures on beginning balances of the accounts

C. Transactions that occurred during the year.

Management believes and the auditor is satisfied, that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements. If the auditor wishes to call attention to the matter and management does not make an accrual in the financial statements, the auditor should issue a(an) A. Qualified report due to a scope limitation. B. Qualified report due to a departure from GAAP. C. Unqualified/unmodified report with an explanatory/emphasis-of-matter paragraph. D. Unqualified/unmodified report in a standard auditor's report.

C. Unqualified/unmodified report with an explanatory/emphasis-of-matter paragraph.

To assure accountability for fixed asset retirements, management should implement as internal control that includes: a. Continuous analysis of miscellaneous revenue to locate any cash proceeds from the sale of plant assets b. Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired c. Utilization of serially numbered retirement work orders d. Periodic observation of plant assets by the internal auditors

C. Utilization of serially numbered retirement work orders.

When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented for a public company and the auditor concurs with the change, the auditor should a) Refer to the change in an explanatory paragraph b) Explicitly concur that the change is preferred c) Not refer to consistency in the auditor's report d) Refer to the change in the opinion paragraph

C. c) Not refer to consistency in the auditor's report

For effective internal control over accounts payable, the purchasing department should approve invoices for payment. True False

FALSE

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) Collection of receipts on account and maintaining accounts receivable records.

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) Corresponding with the state agency regarding the authenticity of the public warehouse.

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) Determine the expected day of collection of each of the receivables.

A common audit procedure in the audit of payroll transactions involves vouching selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit objective of determining that: A) Only bona fide employees worked and their pay was properly computed. B) Jobs on which employees worked were charged with the appropriate labor cost. C) Controls relating to disbursements are operating properly. D) Employees worked the number of hours for which their pay was computed.

D) Employees worked the number of hours for which their pay was computed.

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) Expand tests of collectibility.

On June 15, 200X, Ward, CPA, accepted an engagement to perform an audit of the Grant Co. for the year ended December 31,200X. Grant Co. has not previously been audited by a CPA and Ward has been unable to satisfy himself with respect to opening inventories. How should Ward report on his audit? A) He would have to disclaim an opinion or qualify his opinion on the December 31, 200X balance sheet, but could issue an unmodified opinion on the income statement and the statement of cash flows. B) He must disclaim an opinion on the financial statements taken as a whole. C) He could give an unmodified opinion on the financial statements taken as a whole so long as the change in the inventories from the beginning of the year to the end of the year was not material. D) He would have to disclaim an opinion or qualify his opinion on the income statement and the statement of cash flows, but could issue an unmodified opinion on the December 31, 200X balance sheet.

D) He would have to disclaim an opinion or qualify his opinion on the income statement and the statement of cash flows, but could issue an unmodified opinion on the December 31, 200X balance sheet.

Which of the following would most likely be detected by an auditor's review of the client's sales cutoff? A) Excessive goods returned for credit. B) Unrecorded sales discounts. C) Lapping of year-end accounts receivable. D) Inflated sales for the year.

D) Inflated sales for the year. Detecting overstated sales is a primary reason for the auditors' review of a client's sales cutoff. For example, shipments made in the first part of January may be improperly included in the December sales total.

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) It overstates assets.

When there are a large number of relatively small accounts 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) Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? A) Restrictions placed on sales by laws and regulations. B) Decline in sales due to economic declines. C) Decline in sales due to product obsolescence. D) Over-recorded sales due to a lack of control over the sales entry function.

D) Over-recorded sales due to a lack of control over the sales entry function. Over-recorded sales due to a lack of control over the sales entry function relates to control risk not inherent risk. The other three replies all relate to inherent risk.

What is ordinarily the primary concern when auditing the income statement? A) Overstatement of Revenues, Expenses and Net Income. B) Overstatement of Revenues and Expenses, and understatement of Net Income. C) Overstatement of Net Income and understatement of Revenues and Expenses. D) Overstatement of Revenues and Net Income, and understatement of Expenses.

D) Overstatement of Revenues and Net Income, and understatement of Expenses.

To have strong internal control over payroll, which of the following functions does not need to be separated from the others? A) Personnel. B) Timekeeping. C) Payroll preparation. D) Personnel verification.

D) Personnel verification.

The confirmation of the client's trade accounts receivable is a means of obtaining evidential matter and is specifically considered to be a generally accepted auditing: A) standard. B) principle. C) practice. D) procedure.

D) procedure.

The auditor examines copies of sales invoices only for the initials of the person responsible for checking the extensions. This is an example of a: A) substantive procedure. B) dual purpose test. C) test of balances. D) test of controls.

D) test of controls.

The auditors' best course of action with respect to "other financial information" included in a client prepared annual report containing the auditors' report is to: A) Indicate in the auditors' report that the "other financial information" is unaudited. B) Consider whether the "other financial information is accurate by performing a review. C) Obtain written representations from management as to the material accuracy of the" other financial information." D) Read and consider the manner of presentation of the "other financial information."

D) Read and consider the manner of presentation of the "other financial information."

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? A) Inaccurate billing due to a lack of controls. B) Lapping of accounts receivable. C) Misbilling a client due to a data input error. D) Recording sales when the customer is likely to return the goods.

D) Recording sales when the customer is likely to return the goods. A sale either shouldn't be recorded, or a proper allowance for returns should be established when a customer is likely to return the goods. Thus, simply recording the sale is an example of fraudulent financial reporting when the customer is likely to record the goods. Answers (1) and (3) are examples of errors, while answer (2) is an example of misappropriation of assets.

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) Sales expense.

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) Sales.

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) Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.

Which of the following best describes proper internal control over payroll? A) The payment of cash to employees should be replaced with payment by checks. B) The confidentiality of employee payroll data should be carefully protected to prevent fraud. C) The preparation of the payroll must be under the control of the personnel department. D) The duties of hiring, payroll computation, and payment to employees should be segregated.

D) The duties of hiring, payroll computation, and payment to employees should be segregated.

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) The existence of obsolete merchandise.

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) The inference drawn from receiving no reply may not be correct.

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) The shipping clerk's file of duplicate copies of bills of lading.

Which of the following is an example of misappropriation of assets relating to sales? A) Accidentally recording cash that represents a liability as revenue. B) Holding the sales journal open to record next year's sales as having occurred in the current year. C) Intentionally recording cash received from a new debt agreement as revenue. D) Theft of cash register sales.

D) Theft of cash register sales. Theft of cash register sales is an example of misappropriation of assets. Answer (1) is an example of an error while answers (2) and (3) are examples of fraudulent financial reporting.

Which of the following audit procedures is most effective in testing credit sales for understatement? A) Trace sample of recorded sales from ledger to initial sales slip. B) Confirm accounts receivable. C) Age accounts receivable. D) Trace sample of initial sales slips through summaries to recorded general ledger sales.

D) Trace sample of initial sales slips through summaries to recorded general ledger sales.

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) Vendors' invoices.

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) Verifying that all inventory owned by the client is on hand at the time of the count.

When an auditor tests a client's cost accounting system, the auditors' tests are primarily designed to determine that: A) quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand. B) physical inventories are in substantial agreement with book inventories. C) the system is in accordance with generally accepted accounting principles and is functioning as planned. D) costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.

D) costs have been properly assigned to finished goods, work-in-process, and cost of goods sold.

A primary purpose of operational auditing standards is to provide: A. A means of assurance that internal control is operating effectively. B. Aid to the independent auditor in conducting the audit of financial statements. C. The results of internal examinations of financial and accounting matters to the company's top-level management. D. A measure of management performance in meeting organizational goals.

D. A measure of management performance in meeting organizational goals.

Under the attestation standards, in which of the following circumstances is a review report least likely to be issued? A. Criteria are agreed-upon or only available to specified users. B. Established criteria exist, but other criteria are used. C. The subject matter departs from the criteria. D. A significant limitation on the scope of the engagement has occurred.

D. A significant limitation on the scope of the engagement has occurred.

Which of the following should not be included in an accountant's standard report based upon the compilation of an entity's financial statements? A. A statement that a compilation is limited to presenting in the form of financial statements information that is the representation of management. B. A statement that the compilation was performed in accordance with standards established by the American Institute of CPAs. C. A statement that the accountant has not audited or reviewed the financial statements. D. A statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements.

D. A statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements.

Auditing standards define special purpose financial statements as including those prepared under the following base(s) A. Regulatory basis. B. Tax basis. C. Contractual basis. D. All of these.

D. All of these.

Which of the following is an analytical procedure that should be applied to the income statement? A. Select sales and expense items and trace amounts to related supporting documents. B. Ascertain that the net income amount in the statement of cash flows agrees with the net income amount in the income statement. C. Obtain from the proper client representatives, the beginning and ending inventory amounts that were used to determine costs of sales. D. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.

D. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.

It is the end of his client's first quarter and Bill Smith, CPA is performing a compilation of his client's interim financial statements. He has discovered that the client does not wish to present notes to the financial statements. The appropriate CPA report includes: A. Qualified opinion ("subject to" the omission of the notes). B. Compilation report with an adverse opinion due to inadequate disclosure. C. Standard compilation report. D. Compilation report with an indication that all required disclosures under GAAP may not be presented with the statements.

D. Compilation report with an indication that all required disclosures under GAAP may not be presented with the statements.

When an auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time, the auditor's responsibility is to A. Prepare prospective financial information to verify whether management's plans can be effectively implemented. B. Project future conditions and events for a period of time not to exceed one year following the date of the financial statements. C. Issue a qualified or adverse opinion, depending upon materiality, because of the possible effects on the financial statements. D. Consider the adequacy of disclosure about the entity's possible inability to continue as a going concern.

D. Consider the adequacy of disclosure about the entity's possible inability to continue as a going concern.

32. Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditor with: A. An estimate of the dollar amount of the probable loss. B. An expert opinion as to whether a loss is possible, probable or remote. C. Information concerning the progress of cases to date. D. Corroborative audit evidence.

D. Corroborative audit evidence.

Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments. The primary reason for this request is to provide the auditors with: A. An estimate of the dollar amount of the probable loss. B. An expert opinion as to whether a loss is possible, probable or remote. C. Information concerning the progress of cases to date. D. Corroborative audit evidence.

D. Corroborative audit evidence.

33. The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial statements is to: A. Evaluate internal control over securities. B. Determine the validity of prepaid interest expense. C. Ascertain the reasonableness of imputed interest. D. Detect unrecorded liabilities.

D. Detect unrecorded liabilities.

Accounts receivable that are written-off should not be turned over to a collection agency. True False

False

Which of the following procedures would an auditor most likely perform while evaluating audit findings at the conclusion of an audit? A. Obtain assurance from the entity's attorney that all material litigation has been disclosed in the financial statements. B. Verify the clerical accuracy of the entity's proof of cash and its bank cutoff statement. C. Determine whether reportable conditions have corrected. D. Develop an estimate of the total likely misstatement in the financial statements.

D. Develop an estimate of the total likely misstatement in the financial statements.

Comparative financial statements include the financial statements of a prior period that were examined by a predecessor auditor whose report is not presented. If the predecessor auditor's report was qualified, the successor auditor must A. Obtain written approval from the predecessor auditor to include the prior year's financial statements. B. Issue a standard comparative audit report indicating the division of responsibility. C. Express an opinion on the current year statements alone and make no reference to the prior year statements. D. Disclose the reasons for any qualification in the predecessor auditor's opinion.

D. Disclose the reasons for any qualification in the predecessor auditor's opinion.

The WebTrust engagement relates most directly to A. Financial statements maintained on the Internet. B. Health care facilities. C. Risk assurance procedures. D. Electronic commerce systems.

D. Electronic commerce systems.

A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that: A. Only bona fide employees worked and their pay was properly computed. B. Jobs on which employees worked were charged with the appropriate labor cost. C. Internal control relating to payroll disbursements are operating effectively. D. Employees worked the number of hours for which their pay was computed.

D. Employees worked the number of hours for which their pay was computed.

In planning an operational audit, an on-site survey could assist with all of the following, except: A. Obtaining auditee comments and suggestions on control problems. B. Obtaining preliminary information on internal control. C. Identifying areas for audit emphasis. D. Evaluating the effectiveness of the internal control.

D. Evaluating the effectiveness of the internal control.

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. Examination of deeds and title guaranty policies on hand.

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. Examining the construction work orders supporting items capitalized during the year.

Which of the following is a prospective financial statement for general use upon which a practitioner may appropriately report? A. Financial projection. B. Partial presentation. C. Pro forma financial statement. D. Financial forecast.

D. Financial forecast.

Management is beginning to take corrective action on personnel department deficiencies reported during the last internal audit. According to the IIA's Standards, the internal auditor should: A. Oversee the corrective action. B. Postpone the next audit of the personnel department until the corrective action is completed. C. Refrain from judging whether the corrective action will remedy the deficiencies. D. Follow up to see that the corrective action satisfies the audit recommendations.

D. Follow up to see that the corrective action satisfies the audit recommendations.

An auditor will ordinarily examine invoices from lawyers primarily in order to: A. Substantiate accruals. B. Assess the legal ramifications of litigation in progress. C. Estimate the dollar amount of contingent liabilities. D. Identify possible unasserted litigation, claims and assessments.

D. Identify possible unasserted litigation, claims and assessments.

Material loss contingencies should be recorded in the financial statements if available information indicates it is probable that a loss had been sustained prior to the balance sheet date and the amount of such loss can be reasonably estimated. These considerations will affect the audit report as follows: A. If a loss has been recorded in accordance with these criteria, the auditor may issue an unqualified opinion but is required to point out the contingency in an explanatory paragraph of the report. B. If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but is required to point out the contingency in an explanatory paragraph of the report. C. If a loss meets these criteria but is disclosed in the financial statement notes rather than being recorded therein, the auditor may issue an unqualified opinion, but should consider adding an explanatory paragraph as a means of emphasizing the disclosure. D. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements rather than being recorded therein, the auditor may issue an unqualified opinion.

D. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in the notes to the financial statements rather than being recorded therein, the auditor may issue an unqualified opinion.

A modification of the CPA's report on a review of the interim financial statements of a publicly-held company would be necessitated by which of the following? A. An uncertainty. B. Lack of consistency. C. Reference to another accountant. D. Inadequate disclosure.

D. Inadequate disclosure.

Which of the following best describes the scope of internal auditing as it has developed to date? A. Internal auditing involves appraising the economy and efficiency with which resources are employed. B. Internal auditing involves evaluating compliance with policies, plans, procedures, laws, and regulations. C. Internal auditing has evolved to verifying the existence of assets and reviewing the means of safeguarding assets. D. Internal auditing has evolved to more of an operational orientation from a financial orientation.

D. Internal auditing has evolved to more of an operational orientation from a financial orientation.

20. When the auditors obtain an understanding of internal control for the financing cycle documentation will frequently include a written description as well as a(n): A. List of audit objectives. B. Decision table. C. Summary of tests of controls. D. Internal control questionnaire.

D. Internal control questionnaire.

An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this separate paragraph A. Is considered an "except for" qualification of the opinion. B. Violates generally accepted auditing standards if this information is already disclosed in footnotes to the financial statements. C. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing explanation." D. Is appropriate and would not negate the unqualified/unmodified opinion.

D. Is appropriate and would not negate the unqualified/unmodified opinion.

In the auditor's report, the principal auditor decides not to make reference to another CPA who audited an entity's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor A. Issues an unqualified/unmodified opinion on the consolidated financial statements. B. Learns that the other CPA issued an unqualified/unmodified opinion on the subsidiary's financial statements. C. Is unable to review the other CPA's audit programs and working papers. D. Is satisfied as to the other CPA's independence and professional reputation.

D. Is satisfied as to the other CPA's independence and professional reputation.

A CPA should not normally refer to which one of the following subjects in a "comfort letter" to underwriters? A. The independence of the CPA. B. Changes in financial-statement items during a period subsequent to the date and period of the latest financial statements in the registration statement. C. Unaudited financial statements and schedules in the registration statement. D. Management's determination of line of business classifications.

D. Management's determination of line of business classifications.

37. An auditor should trace corporate stock issuances and treasury stock transactions to the: A. Numbered stock certificates. B. Articles of incorporation. C. Transfer agent's records. D. Minutes of the board of directors.

D. Minutes of the board of directors.

If the auditor believes that financial statements prepared on the entity's income tax basis are not suitably titled, the auditor should: A. Issue a disclaimer of opinion. B. Explain in the notes to the financial statements the terminology used. C. Issue a compilation report. D. Modify the auditor's report to disclose any reservations.

D. Modify the auditor's report to disclose any reservations.

Which of the following is not a procedure normally performed while completing the audit? A. Obtain a lawyer's letter. B. Obtain a representations letter. C. Perform an overall review using analytical procedures. D. Obtain confirmation of capital stockholdings from shareholders.

D. Obtain confirmation of capital stockholdings from shareholders.

Which of the following is not required of an individual seeking to become a certified internal auditor? A. Two years work experience in internal auditing or its equivalent. B. Successful completion of a two-day examination. C. A baccalaureate degree from an accredited college. D. One year of supervisory experience.

D. One year of supervisory experience.

Which of the following would not require an explanatory/emphasis-of-matter paragraph in the auditor's report? A. Additional emphasis. B. Lack of consistency in the financial statements due to accounting changes. C. Going concern. D. Opinion based in part on the report of another auditor.

D. Opinion based in part on the report of another auditor

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. Overstating purchase returns.

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts? A. Prior years' depreciation expenses were erroneously understated B. Current year's depreciation expense was erroneously understated C. The estimated remaining useful lives of plant assets were revised upward D. Plant assets were retired during the current year

D. Plant assets were retired during the curret year.

When a CPA is associated with a forecast, all of the following should be disclosed except the: A. Sources of information. B. Character of the work performed by the CPA. C. Major assumptions in the preparation of the forecast. D. Probability of achieving estimates.

D. Probability of achieving estimates.

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. Procedures exist to restrict access to equipment.

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. Product warranty liability.

An auditor was unable to obtain audited financial statements or other evidence supporting an entity's investment in a large foreign subsidiary. Between which of the following reports should the auditor choose? A. Adverse and unqualified/unmodified with an explanatory/emphasis-of-matter paragraph added. B. Disclaimer and unqualified/unmodified with an explanatory/emphasis-of-matter paragraph added. C. Qualified and adverse. D. Qualified and disclaimer.

D. Qualified and disclaimer.

The auditor's best course of action with respect to "other financial information" included in an annual report containing the auditor's report is to A. Indicate in the auditor's report that the "other financial information" is unaudited. B. Consider whether the "other financial information" is accurate by performing a limited review. C. Obtain written representations from management as to the material accuracy of the "other financial information." D. Read and consider the manner of presentation of the "other financial information."

D. Read and consider the manner of presentation of the "other financial information."

The auditors' best course of action with respect to "other financial information" included in a client prepared annual report containing the auditors' report is to: A. Indicate in the auditors' report, that the "other financial information" is unaudited. B. Consider whether the "other financial information" is accurate by performing a limited review. C. Obtain written representations from managements as to the material accuracy of the "other financial information." D. Read and consider the manner of presentation of the "other financial information."

D. Read and consider the manner of presentation of the "other financial information."

A predecessor auditor should complete the following before reissuing a report on statements presented on a comparative basis: A. Read the financial statements of the current period. B. Read the financial statements of the past five years. C. Obtain a letter of representations from the current-year, successor auditor. D. Read the financial statements of the current period and obtain a letter of representation from the current-year, successor auditor.

D. Read the financial statements of the current period and obtain a letter of representation from the current-year, successor auditor.

When audited financial statements are presented in an entity's document containing other information, the auditor should A. Perform inquiry and analytical procedures to ascertain whether the other information is reasonable. B. Add an explanatory paragraph to the auditor's report without changing the opinion on the financial statements. C. Perform the appropriate substantive auditing procedures to corroborate the other information. D. Read the other information to determine that it is consistent with the audited financial statements.

D. Read the other information to determine that it is consistent with the audited financial statements.

26. For a large publicly traded client the auditors' examination of capital stock accounts will not normally include: A. Analysis of capital stock accounts. B. Confirmation of shares issued with the independent registrar. C. Accounting for the proceeds of major stock issues. D. Reconciliation of a stock certificate book with the general ledger.

D. Reconciliation of a stock certificate book with the general ledger.

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. Reconciliation of vendor statements with accounts payable.

A scope limitation sufficient to preclude an unqualified opinion always will result when management A. Prevents the auditor from reviewing the working papers of the predecessor auditor. B. Engages the auditor after the year-end physical inventory is completed. C. Requests that certain material accounts receivable not be confirmed. D. Refuses to provide a representation letter acknowledging its responsibility for the fair presentation of the financial statements in conformity with GAAP.

D. Refuses to provide a representation letter acknowledging its responsibility for the fair presentation of the financial statements in conformity with GAAP.

Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are not understated? a. Depreciation b. Accounts Payable c. Cash d. Repairs and Maintenance.

D. Repairs and Maintenance.

Which of the following is not a procedure that auditors typically perform to search for significant events during the subsequent period? A. Review minutes of board of directors' meeting. B. Review the latest available interim financial statements. C. Inquire about any unusual adjustments made subsequent to the balance sheet date. D. Review changes in internal control during the period subsequent to the balance sheet date.

D. Review changes in internal control during the period subsequent to the balance sheet date.

An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the auditor concludes that the financial statements do not require revision, but the entity refuses to revise or eliminate the material inconsistency, the auditor may A. Issue an "except for" qualified opinion after discussing the matter with the entity's board of directors. B. Consider the matter closed since the other information is not in the audited financial statements. C. Disclaim an opinion on the financial statements after explaining the material inconsistency in a separate explanatory/emphasis-of-matter paragraph. D. Revise the auditor's report to include a separate explanatory/emphasis-of- matter paragraph describing the material inconsistency.

D. Revise the auditor's report to include a separate explanatory/emphasis-of- matter paragraph describing the material inconsistency.

An approach that quantifies the total likely misstatement as of the current year-end based on the effects of reflecting misstatements during the current year (and not considering any unadjusted previous year misstatements) is referred to as the: A. Evaluation materiality approach. B. Iron curtain approach. C. Projected misstatement approach. D. Rollover approach.

D. Rollover approach.

The purpose of segregating the duties of distributing payroll checks and hiring personnel is to: A. Separate the custody of assets from the accounting for those assets. B. Establish clear lines of authority and responsibility. C. Separate duties within the accounting function. D. Separate the authorization of transactions from the custody of related assets.

D. Separate the authorization of transactions from the custody of related assets.

The statement that best expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of his audit is that: A. The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date. B. The auditor's responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred. C. The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of field work. D. The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.

D. The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.

All of the following are true with respect to the auditor's consideration of information other than the audited financial statements that are included in an entity's annual report except: A. The auditor is under no obligation to perform audit procedures on this other information. B. The auditor must consider whether the other information is consistent with the information contained in the audited financial statements. C. The auditor must request that material inconsistencies be corrected. D. The auditor must perform audit procedures on this other information.

D. The auditor must perform audit procedures on this other information.

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. The auditors observe major additions to plant and equipment made during the year.

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. They are more frequently used in situations in which some vendors don't send monthly statements.

Which of the following is not correct relating to representation letters? A. They are ordinarily dated as of the date of the audit report. B. They are signed by members of top management. C. They must be obtained for audits. D. They often serve as a substitute for the application of other procedures.

D. They often serve as a substitute for the application of other procedures.

14. Which of the following most likely would approve the issuance of notes payable? A. Controller. B. Payroll. C. Personnel. D. Treasurer.

D. Treasurer.

31. During an audit of a publicly-held company, the auditors should obtain written confirmation regarding debenture transactions from the: A. Debenture holders B. Client's attorney. C. Internal auditors. D. Trustee.

D. Trustee.

One reason why the independent auditors perform analytical procedures on the client's operations is to identify: A. Weaknesses of a material nature in internal control. B. Non-compliance with prescribed control procedures. C. Improper separation of accounting and other financial duties. D. Unusual transactions.

D. Unusual transactions.

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. Vouching retirements of plant and equipment.

Authorization of which of the following is least likely to be found during a review of the minutes of the board of directors? A. Dividends. B. New debt issuance. C. New bank accounts. D. Writeoff of trade accounts receivable.

D. Writeoff of trade accounts receivable.

A normal audit procedure is to analyze the current year repairs and maintenance accounts to provide evidence in support of the audit proposition that: a. expenditures for fixed assets have been recorded in the proper period. b. capital expenditures have been properly authorized. c. non capitalizable expenditures have been properly expensed. d. expenditures for fixed assets have been capitalized.

D. expenditures for fixed assets have been capitalized.

An important consideration to the auditor in the audit of equipment is to determine: a. that theft of the equipment is impossible. b. when the client should replace the equipment. c. that the equipment is properly maintained. d. whether a large recorded gain on a trade of equipment is appropriate.

D. whether a recorded gain on trade of equipment is appropriate.

An auditor would issue an adverse opinion if A. The audit was begun by other independent auditors who withdrew from the engagement. B. A qualified opinion cannot be given because the auditor lacks independence. C. A restriction on the scope of the audit was significant. D. The statements taken as a whole do not fairly present the financial condition and results of operations of the company.

D.The statements taken as a whole do not fairly present the financial condition and results of operations of the company.

A WebTrust seal assures consumers that they will be satisfied with their purchases. True False

FALSE

A change in accounting estimate is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

FALSE

A compilation of financial statement provides limited assurance regarding the financial statements. True False

FALSE

Accounts payable generally present the auditors with difficult valuation problems. True False

FALSE

An auditor may be unable to express an unqualified opinion if an immaterial departure from GAAP is present in the financial statements.

FALSE

An opinion based in part on the report of another auditor requires an explanatory/emphasis-of-matter paragraph be added to the standard unqualified/unmodified audit report.

FALSE

Attestation risk, like audit risk consists of three components--inherent risk, control risk, and substantiation risk. True False

FALSE

Attestation services are similar, but go beyond assurance services in scope of procedures and reporting. True False

FALSE

Common to future purchase commitments is the fact that they should be recorded as liabilities at discounted values as of year-end. True False

FALSE

Compliance procedures are tests of an organization's controls. True False

FALSE

Confirmation of accounts payable is a required generally accepted auditing procedure. True False

FALSE

Dual dating of an audit report extends the auditors' liability for disclosure through the later date for all areas of the financial statements. True False

FALSE

Accounts receivable that are pledged as collateral for loans should be reclassified as noncurrent assets. True False

False

When a financial forecast fails to disclose a significant assumption used to prepare that forecast, which of the following reports become appropriate? Qualified: YES NO Adverse: YES NO

NO YES

Which of the following circumstances requires modification of the accountant's report on a review of interim financial information of publicly held entity? Inconsistent Accounting Principle Application: YES NO Inadequate Disclosure: YES NO

NO YES

A basic assumption that underlies financial reporting is that an entity will continue as a going concern.

TRUE

A change in reporting entity is an example of an accounting change that affects comparability and requires an explanatory/emphasis-of-matter paragraph in the audit report.

TRUE

A going concern issue requires a modification of the three-paragraph standard unqualified audit report (public company).

TRUE

A practitioner may be engaged to perform a review of management's discussion and analysis for an annual or an interim period. True False

TRUE

A scope limitation results from an inability to obtain sufficient appropriate evidence about some component of the financial statements.

TRUE

Accounts payable from an officer should be classified separately from other accounts payable. True False

TRUE

An audit opinion on cash basis financial statements is an example of a special report. True False

TRUE

An auditor must disclaim an opinion when the auditor lacks independence.

TRUE

Analytical procedures are often used for verification of income statement accounts. True False

TRUE

A note receivable from an officer is considered a related party receivable. True False

True

Accounts receivable should be valued at their net realizable value. True False

True

Shortly after year-end Zero Corporation was informed of the bankruptcy of Bingo. Zero Corporation showed a receivable of $10,000 due from Bingo as of year-end—none of which seems recoverable. The receivable had been questionable for some time as Bingo had been experiencing financial difficulties for the past several years. Yet, Bingo's bankruptcy did not occur until after Zero Corporation's year-end. Under these circumstances: -The Financial Statement should be adjusted: YES NO -The Event requires Financial Statement disclosure, but no adjustment: YES NO -The Auditor's report should be modified for the lack of consistency. YES NO

YES NO NO

A practitioner's unqualified opinion based upon an examination may ordinarily be on: Subject Matter: YES NO Assertion: YES NO

YES YES

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 document to Journal: YES NO Vouch from Journals to source documents: YES NO

YES YES

Assurance services performed for decision makers may address the: Quality of information: YES NO Context of Information: YES NO

YES YES

Independence is required when performing: Subject Matter: YES NO Assertion: YES NO

YES YES

Suitable criteria in an attestation engagement may be available: Publicly: YES NO In CPA's Report: YES NO

YES YES

Which communication option(s) may be used when an accountant submits compiled financial statements to be used only by management? Compilation Report: YES NO Written Engagement Letter: YES NO

YES YES

Which of the following are Trust Services principles? Security: YES NO Availability: YES NO

YES YES

Which of the following are required on all attestation engagements? Suitable Criteria: YES NO Subject Matter: YES NO

YES YES

Practitioners may be engaged to attest to an entity's internal control over financial reporting. a. Comment on the accuracy of this statement: Accountants may be engaged to examine, review, or perform agreed-upon procedures on an entity's internal control over financial reporting. b. Describe the nature of the four paragraphs included in an accountant's examination report on internal control over financial reporting. c. Describe two circumstances in which practitioners would issue an examination report that is other than the unqualified standards report on internal control.

a. A CPA may examine or perform agreed-upon procedures on an entity's internal control over financial reporting, but a review of this information is not allowed. b. A CPA's report on internal control contained the following four paragraphs: • The first paragraph is an introductory paragraph that describes the assertion being examined. • The second paragraph is a scope paragraph that describes the nature of an examination of an entity's internal control over financial reporting. • The third paragraph describes the inherent limitations of internal control. • The fourth paragraph expresses the CPA's opinion on management's assertion about internal control. c. Internal control reports are modified for the following reasons (only two required): • A qualified report is issued when the scope of the accountant's procedures has been restricted. • A disclaimer of opinion is issued when the scope of the accountant's procedures has been restricted by the client, or severely limited by the circumstances. • An adverse report is issued when the accountants become aware of a material weakness that is not acknowledged in management's report. • A modified report is issued when the accountants become aware of a material weakness that is acknowledged in management's report.

The financial statements of nonpublic companies may be compiled or reviewed by the CPAs. a. Describe a compilation of financial statements. b. Describe a review of financial statements. c. Describe three procedures that are performed in the review of a nonpublic company's financial statements.

a. A compilation is limited to taking the representations of management and putting them in the form of financial statements. b. A review of financial statements involves the performance of inquiry and analytical procedures to provide the accountants with a reasonable basis for expressing limited assurance that the financial statements are in accordance with generally accepted accounting principles. c. Procedures performed in the review of financial statements include (only three required): • Inquiries of officers and other executives. • Analytical procedures applied to financial data by reference to prior financial data, budgets, and other operating data. • Inquiries concerning actions taken in meetings of stockholders, board of directors, and committees of the board. • Additional procedures if the accountants become aware that the information may be incorrect, incomplete, or otherwise unsatisfactory.

The Warren Corporation wants to enhance the market value of its stock by including in its annual report a financial forecast for the next year. They also would like to have their auditors examine the forecast. a. Define a financial forecast. b. Is an examination of a financial forecast similar in scope to a review of financial statements? Explain.

a. A financial forecast is "an estimate of the most probable financial position, results of operations, and changes in financial position for one or more future periods." b. No. An examination of a financial forecast involves an extensive examination of the assumptions underlying the forecast, to satisfy the CPAs that management has identified all key assumptions and that the assumptions are suitably supported.

Operational auditing has grown in importance over the last few decades. a. Define operational auditing. b. Who are the major users of operational audit reports. c. List the phases of an operational audit.

a. An operational audit is a comprehensive examination of an operating unit or a complete organization to evaluate its performance, as measured by management's objectives. It focuses on effectiveness, efficiency, and economy. b. The major users of operational reports are top management, including the board of directors and, especially in the case of governmental organizations, Congress. c. The phases in an operational audit include: • Definition of purpose. • Familiarization. • Preliminary survey. • Program development. • Reporting the findings. • Follow-up.

One may envisions a continuum of assurance ranging from absolute assurance to no assurance. In between may be reasonable assurance, limited assurance, and a summary of findings with no other assurance. a. What level of assurance is provided in the CPA's report by each of the following types of engagements? • Examinations • Audits • Review • Agreed-upon procedures • Compilations b. What type of assurance is provided on financial statements prepared following a comprehensive basis of accounting other than generally accepted accounting principles?

a. Assurance provided: • Examinations--reasonable assurance • Audits--reasonable assurance • Review--limited assurance • Agreed-upon procedures--summary of findings • Compilations--no assurance b. The assurance provided is dependent upon the nature of the service provided. With financial statements the options (and assurance) possible are audit (reasonable assurance), review (limited assurance), and compilations (no assurance). Additionally, agreed-upon procedures could be applied to various elements, accounts or items of the financial statements (a summary of findings would be provided).

The auditors may decide to confirm accounts payable on an audit engagement. a. Describe two reasons why the confirmation of accounts payable is not a generally accepted auditing procedure. b. Describe the audit circumstances in which the auditors are likely to decide to confirm accounts payable. c. Describe the types of accounts payable the auditors are likely to select for confirmation.

a. Confirmation of accounts payable is not a generally accepted auditing procedure because: 1. The auditors' primary objective with respect to accounts payable is establishing completeness, and confirmation is primarily a test of existence, and 2. There is a large amount of reliable evidence in the client's possession supporting the amount of accounts payable, such as vendors' statements. b. The auditors are likely to decide to confirm accounts payable when the extent of the evidence available in the client's possession is not sufficient. c. The auditors select accounts that are more likely to be in error, such as accounts with a high degree of activity. Accounts with zero balances may also be selected.

Internal auditors are an important part of the internal control structures of all types of organizations. a. Describe the objectives of an internal auditing function. b. Explain two ways that internal auditors may maintain independence with respect to the activities that they audit.

a. Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. b. The internal auditors maintain independence by: Ensuring that the organizational status of the internal auditing department is sufficient to permit the accomplishment of its objectives, and Policies and procedures regarding the assignment of internal auditors to assignments.

Which of the following management roles would typically be acknowledged in a management representation letter? a. Management has the responsibility for the design of controls to detect fraud. b. Management communicates its views on ethical behavior to its employees. c. Management's knowledge of fraud is communicated to the audit committee. d. Management's compensation is contingent upon operating results

a. Management has the responsibility for the design of controls to detect fraud.

Many government and nonprofit organizations are required to have an audit in accordance with Government Auditing Standards. a. Who develops Government Auditing Standards? b. Describe the requirements of an audit in accordance with Government Auditing Standards. c. Describe the auditors' responsibilities for testing for compliance with laws and regulations in an audit in accordance with Government Auditing Standards.

a. The United States General Accounting Office (GAO) establishes Government Auditing Standards. b. The requirements of an audit in accordance with Government Auditing Standards include: • Perform audit procedures required by generally accepted auditing standard. • Increase emphasis on ethical principles related to public interest; integrity; objectivity; proper use of government information, resources, and position; and professional behavior. • Communicate information about the nature of the audit and the level of assurance provided to management, those charged with governance, appropriate oversight bodies requiring the audits, those responsible for acting on audit findings, and others authorized to receive such reports. • Consider the results of previous audits and follow-up on significant findings and recommendations in prior-year audit reports. • Provide additional audit documentation. • Perform audit procedures to provide reasonable assurance of detecting material violations of provisions of contracts and grants. • Issue written reports on compliance with laws and regulations and on internal control. • In some cases, report fraudulent or illegal acts directly to a government agency or another third party. c. Under Government Auditing Standards the auditors must perform test of compliance with laws and regulations that have a direct and material effect on the financial statements--the same as under generally accepted auditing standards.

A major concern of the auditors is obtaining evidence about the completeness of recorded accounts payable. a. Describe the reason that the auditors are concerned with the completeness of accounts payable. b. Describe three ways in which the auditors establish the completeness of accounts payable.

a. The auditors are concerned about completeness of accounts payable because the company's financial strength is exaggerated by an understatement of liabilities. b. Procedures used to establish the completeness of recorded accounts payable include (only three required): • Confirmation of accounts payable. • Reconciliation of liabilities with vendor statements. • Comparison of cash payments subsequent to the balance sheet date with the accounts payable trial balance. • Investigation of unmatched invoices and unbilled receiving reports. • Investigation of invoices received subsequent to the balance sheet date.

The auditors' responsibility for information that accompanies audited financial statements varies with the nature of the information and the nature of the document. a. Describe the auditors' responsibility regarding FASB-required supplementary information. b. Describe the auditors' responsibility regarding other information in client-prepared documents. c. Describe the auditors' responsibility regarding information accompanying financial statements in auditor-prepared documents.

a. The auditors have a responsibility to perform a review of FASB-required supplementary information, and include an indication in their report when they are unable to perform the procedures or when they have reservations about the information. b. The auditors have a responsibility to read other information for inconsistency with information contained in the financial statements and obvious misstatements. Reservations with respect to the information may be expressed in the auditors' report. c. The auditors have a responsibility to report on all information accompanying financial statements in auditor-prepared documents.

Auditors are concerned with the existence of loss contingencies that may affect the client's financial statements. One way that the auditors obtain evidence about existing loss contingencies is through the lawyer's letter. a. Describe the information that the auditors wish to obtain about the litigation being handled by a lawyer. b. Describe three other procedures that are used by auditors to discover existing loss contingencies.

a. The auditors wish to obtain the following information about litigation: 1. A description of the litigation situation and the accounting period to which it relates, 2. The estimated amount of loss, and 3. The probability of occurrence of the loss. b. Other procedures used by auditors to detect loss contingencies include (only three required): • Review the minutes of directors' meetings. • Review correspondence with financial institutions. • Obtain a representations letter from the client. • Review prior tax returns.

Auditors must be concerned with events that occur subsequent to the balance sheet date, because the events may need to be reflected in the financial statements. a. Describe the two general types of subsequent events. b. What is the auditors' responsibility with respect to detecting subsequent events? c. List three audit procedures that are used by the auditors to search for subsequent events.

a. The two types of subsequent events are: Type 1--events that provide additional evidence about conditions that existed at the balance sheet date and affect the estimates included in the statements. Type 2--events that provide evidence about conditions that arose subsequent to the balance sheet date and require disclosure in the financial statements. b. Auditors have a responsibility to search for material subsequent events to the last day of field work (the date of the auditors' report). c. Procedures that are used to search for subsequent events include (only three required): • Review interim financial statements. • Review minutes of directors' and stockholders' meetings. • Make inquiries of officers. • Obtain a letter from the client's attorney. • Obtain a letter of representations from management.

Subsequent to the issuance of the auditor's report, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next: a) Notify the board of directors that the auditor's report must no longer be associated with the financial statements. b) Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. c) Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. d) Issue revised pro forma financial statements taking into consideration the newly discovered information.

b) Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n): a) Analytical process. b) Loss contingency. c) Probable loss. d) Unasserted claim.

b) Loss contingency.

In connection with the annual audit, which of the following is not a "subsequent events" procedure? a) Read available minutes of meetings of stockholders, directors, and committees. With regard to meetings for which minutes are not available, inquire about matters dealt with at such meetings. b) Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report. C) Discuss with officers the current status of items in the financial statements that were accounted for on the basis of tentative, preliminary, or inconclusive data. D) Review available interim financial statements.

b) Make inquiries with respect to the financial statements covered by the auditors' previously issued report if new information has become available during the current examination that might affect that report.

Which of the following situations has the best chance of being detected when a CPA compares 200X revenues and expenses with the prior year and investigates all changes exceeding a fixed percentage? a) The cashier began lapping accounts receivable in 200X. b) The company changed its capitalization policy for small tools in 200X. c) An increase in property tax rates has not been recognized in the company's 200X accrual. d) Because of worsening economic conditions, the 200X provision for uncollectible accounts was inadequate.

b) The company changed its capitalization policy for small tools in 200X.

Which of the following is most likely to be considered a Type 1 subsequent event? a) A business combination completed after year-end, but for which negotiations began prior to year-end. b) A strike subsequent to year-end due to employee complaints about working conditions which originated two years ago. c) Customer checks deposited prior to year-end, but determined to be uncollectible after year-end. d) Introduction of a new line of products after year-end for which major research had been completed prior to year-end.

c) Customer checks deposited prior to year-end, but determined to be uncollectible after year-end.

The search for unrecorded liabilities for a public company includes procedures usually performed through the: a) Day the audit report is issued. b) End of the client's year. c) Date of the auditors' report. d) Date the report is filed with the SEC.

c) Date of the auditors' report.

An auditor accepted an engagement to audit the 20X8 financial statements of EFG Corporation and began the fieldwork on September 30, 20X8. EFG gave the auditor the 20X8 financial statements on January 17, 20X9. The auditor completed the audit on February 10, 20X9, and delivered the report on February 16, 20X9. The client's representation letter normally would be dated: a) December 31, 20X8. b) January 17, 20X9. c) February 10, 20X9. d) February 16, 20X9.

c) February 10, 20X9.

Which of the following is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job? a) Examine human resources records for accuracy and completeness. b) Examine employees' names listed on payroll tax returns for agreement with payroll accounting records. c) Make a surprise observation of the company's regular distribution of paychecks on a test basis. d) Visit the working areas and verify that employees exist by examining their badge or identification numbers. ReferenceseBook & Resources

c) Make a surprise observation of the company's regular distribution of paychecks on a test basis.

Which of the following events occurring on January 5, 20X2, is most likely to result in an adjusting entry to the 20X1 financial statements? a) A business combination. b) Early retirement of bonds payable. c) Settlement of litigation. d) Plant closure due to a strike.

c) Settlement of litigation.

Which of the following statements is correct regarding a management representation letter? a) A representation letter can be used in place of a specific, previously identified audit procedures. b) a representation letter encompasses a different set of assertions from those inherent in the financial statements. c) The date of the representation letter should typically be the same as the audit report d) the representations made apply until the date of a client's financial statements

c) The date of the representation letter should typically be the same as the audit report

The primary difference between an audit of the balance sheet and an audit of the income statement lies in the fact that the audit of the income statement deals almost completely with the verification of: a) cutoffs. b) costs. c) transactions. d) authorizations.

c) transactions.

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? a) Vouch a sample of accounts payable entries recorded just before year-end to unmatched receiving report file. b) compare a sample of purchases orders issued just after year-end with the year end accounts payable 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) vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices

Patentex developed a new secret formula that is of great value because it resulted in a virtual monopoly. Patentex has capitalized all research and development costs associated with this formula. Greene, CPA, who is examining this account will probably: a. confirm that the secret formula is registered and on file with the county clerk's office. b. confer with management relating to controls maintained over formula confidentiality. c. confer with management regarding transfer of the amount from the balance sheet to the income statement. d. confer with management regarding a change in the title of the account to "goodwill".

c. confer with management regarding transfer of the amount from the balance sheet to the income statement.

As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditors should: a) Express an opinion that is qualified due to the inability of the client company to continue as a going concern. b) Evaluate management's performance in causing this decline. c) Require note disclosure. d)Consider the possibility of a misstatement in the financial statements.

d) Consider the possibility of a misstatement in the financial statements.

Which of the following procedures is most likely to be included near completion of an audit? a) Obtain an understanding of internal control. b) Confirmation of receivables. c) Observation of inventory. d) Perform analytical procedures.

d) Perform analytical procedures.

Which of the following is least likely to be considered a substantive procedure relating to payroll? a) Investigate fluctuations in salaries, wages, and commissions. b) Test computations of compensation under profit sharing for bonus plans. c) Test commission earnings. d) Test whether employee time reports are approved by supervisors.

d) Test whether employee time reports are approved by supervisors.

A major control procedure related to plant and equipment is a budget for depreciation.

A typical procedure in the audit of property is examination of public records to verify the ownership of the property.

An error in the year-end cutoff of plant and equipment transactions affects the company's income for the year in the same manner as an error in the year-end cutoff of sales or inventory transactions.

An essential step in the auditors' verification of the legal ownership of land and buildings listed on a client's balance sheet is examination of turnover rates.

Auditors typically observe the client's physical inventory of plant and equipment.

Better evidence of continuing ownership of property is provided by examination of the deed.

Corporations should inventory their plant and equipment at least once per month.

Goodwill should be systematically amortized over a period not exceeding 40 years.

Idle equipment will generally need to be reclassified as a current asset.

In an initial audit engagement, the auditors must always perform a historical analysis of the property accounts for one year prior to the year under audit.

Property, plant, and equipment ordinarily should be recorded at the lower of cost or market.

The auditors should take exception to any accounting policy that involves the expensing of minor capital assets.

The auditors typically observe all major items of property, plant, and equipment every year.

The auditors' principal objective in analyzing depreciation expense is to discover items that should have been capitalized.

The department in need of the assets should make plant and equipment purchases.

The primary purpose of internal control over plant and equipment is to safeguard the assets from theft.

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