A4 - MCQ Flashcards by Kenneth Urquhart-Green

With the receipt of a customer purchase order by the sales department, if the order can be filled, a serially numbered ___________________ is prepared and sent to ________________ for approval

A) bill of lading ; treasurer
B) sales invoice ; CFO
C) sales order ; credit department
D) remittance ; accountant

C) sales order ; credit department

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For credit approvals, if the order is approved, what are the three departments that the approved sales order is sent to?

A) Shipping, billing, and accounting department
B) accounts receivable, credit, and billing department
C) HR, customer, and shipping department
D) inventory, accounting, and shipping department

A) Shipping, billing, and accounting department

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In shipping department, a serially numbered __________________ is prepared and copy is sent to the _____________

A) sales invoice; accounting department
B) receiving report; customer
C) purchase order; treasurer
D) bill of lading; customer

D) bill of lading; customer

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In which department are the shipping documents, sales orders and invoices compared to assure that shipments are based on valid order and that they were properly billed/

A) accounting department
B) credit approval department
C) accounts payable department
D) billing department

D) billing department

Same department where the serially numbered sales invoices are prepared

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In the accounting department, what is the proper journal entry when a sale is entered into sales journal?

A) Debit Cash; Credit Sales discount
B) Debit Accounts receivable; Credit Sales revenue
C) Debit Operating expenses; Credit Accounts receivable
D) Debit Bad debt expense; Credit Cash

B) Debit Accounts receivable; Credit Sales revenue

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At what point does the Accounts receivable balance get credited?

A) when credit department approves customer to receive goods
B) when billing department prepares sales invoice
C) when purchase order is generated
D) when payment is received from the customer

D) when payment is received from the customer

Journal entry is Debit Cash; Credit Accounts receivable

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What are two ways an uncollectible receivable can be written off?

Debit Allowance for doubtful accounts; Credit Accounts receivable (contra-asset)
Debit Bad debt expense; Credit Accounts receivable

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When writing off an uncollectible receivable, which role has proper authorization to carry out this procedure?

A) credit department
B) treasurer
C) senior accountant
D) accounts receivable manager

B) treasurer

Without proper control, amounts subsequently collected can easily be misappropriated by employees

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For sales returns, a _________________ may be used as a sales return slip

A) receiving report
B) bills of lading
C) purchase order
D) customer receipt

A) receiving report

Returned goods must be examined to ensure they correspond with the reason for return before credit is given back to customer.

Journal entry: Debit Sales return and allowance; Credit Accounts receivable

Credit memos should not be prepared by individuals who collect or receive cash payments on accounts receivable - this is inadequate to segregation of duties

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Cash receipts should be listed in detail and copies to be distributed to the following

A) Shipping, billing, and accounting department
B) accounts receivable, credit, and billing department
C) HR, customer, and shipping department
D) cashier, accounts receivable, and accounting department

D) cashier, accounts receivable, and accounting department

AR department should match details from bank deposit ticket with details from remittance advices. This’ll help with discrepancies

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Which assertion is the most relevant when auditing revenue cycle?

A) rights and obligations
B) completeness
C) valuation and accuracy
D) existence

D) existence

There’s the risk that accounts receivable, sales, and assets will be overstated

E.AR.S = Existence.Accounting Records.Source

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Which assertion is the most relevant when auditing expenditure cycle?

A) rights and obligations
B) completeness
C) valuation and accuracy
D) existence

B) completeness

There’s the risk that accounts payable, expenses and liabilities will be understated

C.S.AR = Completeness.Source.Accounting records

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When auditing sales transactions, which procedure best explains the assertion for completeness?

A) compare sales invoices from before and after year end with shipment dates
B) examine sales invoices for proper classification
C) vouch sales transactions from sales journal to the sales invoice, back to customer order and shipping documents
D) trace shipping documents to corresponding sales invoices, to sales journal and AR subsidiary ledger

D) trace shipping documents to corresponding sales invoices, to sales journal and AR subsidiary ledger

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When auditing sales transactions, which procedure best explains the assertion for existence?

C) vouch sales transactions from sales journal to the sales invoice, back to customer order and shipping documents

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When auditing accounts receivable, which procedure best explains the assertion for completeness?

A) test the adequacy of the allowance for credit losses
B) obtain aged trial balance of accounts receivable and trace total to general ledger
C) confirm sample of accounts receivable
D) review bank confirmations and debt agreements

B) obtain aged trial balance of accounts receivable and trace total to general ledger

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When auditing accounts receivable, which procedure best explains the assertion for existence?

C) confirm sample of accounts receivable

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Under GAAS, obtaining accounts receivable confirmations is a requirement. In which instances is it not required?

Receivables are immaterial
Confirmation would be ineffective
Inherent and control risks are very low and evidence provided by other procedures is sufficient to reduce audit risk to acceptably low level

A) 1 and 2 only
B) 3 only
C) 2 and 3 only
D) 1, 2 and 3

D) 1, 2 and 3

If confirmations are not sent, auditors must document how omission of this procedure was alternatively tested

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For PCAOB standards (issuers), when the auditor is unable to perform external confirmation procedures or otherwise obtain audit evidence from a knowledgeable external source, auditor should communicate the matter to:

A) management
B) audit committee
C) accounts receivable manager
D) board of directors

B) audit committee

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Accounts receivable confirmation generally provide evidence regarding _____________ and _______________ assertions.

A) valuation; completeness
B) cut-off; existence
C) rights and obligations; completeness
D) existence; rights and obligations

D) existence; rights and obligations

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Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?

A. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly.

B. The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances.

C. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.

D. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

D. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal

If there are shipping documents without sales journal entries, this may be indication of unrecorded sales

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An auditor determines that there is a high level of control risk surrounding the revenue cycle. Which situation is most likely to have given rise to this assessment?

A. The sales manager does not enforce the client’s stated policies regarding authorization and approval of sales transactions.

B. The sales clerk is a newly hired, recent college graduate, with no previous experience in sales.

C. The auditor discovers a sale that was recorded in the current year although title did not pass until the subsequent year.

D. A related party sale is identified which has not been properly disclosed in the financial statements.

A. The sales manager does not enforce the client’s stated policies regarding authorization and approval of sales transactions

Management override of controls would have auditor assess control risk as high

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Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that:

A. Entries in the accounts receivable subsidiary ledger were for sales actually shipped.
B. Shipments to customers were properly billed.
C. Sales billed to customers were actually shipped.
D. No duplicate shipments to customers were made.

C. Sales billed to customers were actually shipped

If shipping documents were missing, this would indicate fictitious sales because the invoice will show the billing to the customer, while the shipping documents proves the goods were physically shipped. The invoice will proof that the goods were billed to the customer, but with goods were never shipped

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Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high accounts receivable write-offs (credit losses)?

A. Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.

B. Shipping documents and sales invoices are matched by an employee who does not have authority to write off accounts receivable balances as credit losses.

C. Employees involved in the credit-granting function are separated from the sales function.

D. Employees responsible for authorizing sales and credit loss write-offs are denied access to cash

C. Employees involved in the credit-granting function are separated from the sales function

There’s a risk of sales personnel selling to customers that may not be creditworthy

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When performing an audit, a CPA notes that credit loss expense is unusually high relative to similar firms in the industry. The CPA should recommend which of the following controls?

A. Send monthly statements of account to customers with outstanding balances.
B. Reconcile accounts receivable in the general ledger with the subsidiary ledger.
C. Use approved price lists for customer billing.
D. Require credit checks on all new customers.

D. Require credit checks on all new customers

This will help on determining the likelihood of debtors ability to pay

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Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? A. Fictitious transactions may be recorded that cause an understatement of revenues and overstatement of receivables. B. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. C. The failure to prepare shipping documents may cause an overstatement of inventory balances. D. Claims received from customers for goods returned may be intentionally recorded in other customers' accounts.

B. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash Failure to seperate record keeping function from custodial function allows for misappropriation of cash [theft / wrongful use]

To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the: A. Sales invoice file. B. Customer order file. C. Sales order file. D. Shipping document file.

D. Shipping document file. Shipping documents provide evidence that a sale occurred, and selecting from population of shipping documents allows auditor to test whether corresponding invoices exist for each sale

Which of the following does not demonstrate an inappropriate segregation of duties? A. An accounting clerk receives customer payments and records the resulting reduction in accounts receivable. B. The cashier performs the monthly bank reconciliation. C. A billing clerk prepares invoices and records the resulting increase in accounts receivable. D. The purchasing manager approves vendor invoices for payment.

C. A billing clerk prepares invoices and records the resulting increase in accounts receivable Preparing invoices and recording related receivables are both record keeping functions

Which of the following best represents a key control for ensuring sales are properly authorized when assessing control risks for sales? A. The use of an approved price list to determine unit selling price. B. Sales orders are sent to the credit department for approval. C. Copies of approved sales orders sent to the shipping, billing, and accounting departments. D. The separation of duties between the billing department and the cash receipts approval department.

B. Sales orders are sent to the credit department for approval

Which of the following represents an inappropriate segregation of duties? A. The cash receipts clerk credits customer accounts when payment is received. B. The accounts payable clerk has access to the purchase order, the receiving report, and the vendor invoice. C. The accounting clerk responsible for preparing the payroll register also prepares the paychecks. D. The accounting manager approves an invoice submitted by an accounting clerk.

A. The cash receipts clerk credits customer accounts when payment is received Cash receipts clerk cannot have access to both record keeping and custody of assets

An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting: A. Cash receipts and accounts receivable. B. Cutoffs of sales and purchases. C. Opening and closing inventory balances. D. Shipping and receiving activities.

A. Cash receipts and accounts receivable

Sound internal control dictates that, immediately upon receiving checks from customers by mail, a responsible employee should: A. Record the checks in the cash receipts journal. B. Add the checks to the daily cash summary. C. Verify that each check is supported by a prenumbered sales invoice. D. Prepare a duplicate listing of checks received.

D. Prepare a duplicate listing of checks received

Which of the following procedures most likely would not be an internal control designed to reduce the risk of errors in the billing process? A. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger. B. Matching shipping documents with approved sales orders before invoice preparation. C. Using computer programmed controls on the pricing and mathematical accuracy of sales invoices. D. Comparing control totals for shipping documents with corresponding totals for sales invoices.

A. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger Not an effective control because errors that exist in the preparation of invoices would likely carry through to AR

An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the: A. Prelist of individual checks. B. Daily deposit slip. C. Remittance advices. D. Monthly bank reconciliation.

B. Daily deposit slip

If the objective of an auditor's test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the: A. Cash receipts journal to the sales journal. B. Sales journal to the cash receipts journal. C. Shipping documents to the sales invoices. D. Sales invoices to the shipping documents.

C. Shipping documents to the sales invoices Question is mentioning understatement of sales, which is Completeness assertion C.S.AR = completeness.Source.Accounting records

If the objective of an auditor's test of details is to detect a possible overstatement of sales, the auditor most likely would trace transactions from the: A. Cash receipts journal to the sales journal. B. Sales journal to the cash receipts journal. C. Shipping documents to the sales invoices. D. Sales invoices to the shipping documents.

D. Sales invoices to the shipping documents Overstatement would test existence assertion E.AR.S = existence.Accounting records.Source

An auditor performing an integrated audit of an issuer is concerned that the entity's revenue accounts might not include some significant sales invoices that should have been recorded in the current period. To address this concern, the auditor would most appropriately test whether: A. Run-to-run totals were used when processing current-period sales records in the entity's accounting system. B. The entity used check digits when recording current-period sales records into the entity's accounting system. C. Limit tests were employed for current-period sales records entered into the entity's accounting system. D. Record counts were employed for current-period sales records entered into the entity's accounting system.

D. Record counts were employed for current-period sales records entered into the entity's accounting system If accounts do not include sales invoices, there’s a worry of completeness assertion. Record counts mean that counts of the number of current period sales records that were entered into the entity accounting system were verified in current period

Which of the following management assertion is most closely related to the audit objective that verifies all sales have been recorded? A. Occurrence. B. Completeness. C. Accuracy. D. Cutoff.

B. Completeness

Which of the following management assertion is most closely related to the audit objective that verifies all sales are valid? A. Occurrence. B. Completeness. C. Accuracy. D. Cutoff.

A. Occurrence

Which of the following management assertion is most closely related to the audit objective that verifies all sales are properly valued? A. Occurrence. B. Completeness. C. Accuracy. D. Cutoff.

C. Accuracy

Which of the following management assertion is most closely related to the audit objective that verifies all sales are recorded in the correct accounting period? A. Occurrence. B. Completeness. C. Accuracy. D. Cutoff.

B. Completeness Completeness to verify that all sales have been recorded

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about: A. Rights and obligations. B. Existence. C. Understandability of presentation and classification. D. Valuation and allocation.

D. Valuation and allocation Assertions about valuation and allocation deal with assets, liabilities, revenue and expense components in FS at appropriate amounts and if any valuation adjustments needed are recorded around credit ratings

Tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion regarding: A. Cutoff. B. Understandability of presentation and classification. C. Accuracy. D. Existence.

A. Cutoff Determine if transactions were recording in proper period. Tests to detect sales that were recorded improperly at EOY instead of subsequent year would provide assurance of cut off and completeness

In evaluating the adequacy of the allowance for credit losses, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of: A. Existence. B. Rights and obligations. C. Valuation and allocation. D. Completeness.

C. Valuation and allocation Determine whether allowance for credit losses properly adjusts receivables balance to net realizable value

Which of the following most likely would be detected by an auditor's review of a client's sales cut-off? A. Lapping of year-end accounts receivable. B. Unrecorded sales at year-end. C. Excessive write-offs of accounts receivable. D. Shipments lacking sales invoices and shipping documents.

B. Unrecorded sales at year-end Cut off tests would detect unrecorded sales (shipments where no invoice was generated) or sales allocated to wrong period

An auditor suspects that a client is fraudulently overstating revenue by recording fictitious sales. Which of the following audit procedures would most likely be used to identify this situation? A. Select a sample of sales invoices and trace into the sales journal. B. Select a sample of sales invoices and trace to the related shipping documents. C. Select a sample of entries in the sales journal and trace to the related sales invoices. D. Select a sample of shipping documents and trace to the related sales invoices.

B. Select a sample of sales invoices and trace to the related shipping documents Overstating revenue by recording fictitious sales is mostly related to assertion Occurrence

Which of the following procedures would be appropriate to test the existence assertion during an audit of accounts receivable? A. Trace transactions from the subsidiary ledger to the general ledger. B. Send confirmations to customers. C. Trace a sample of invoices to recording in the general ledger. D. Determine that all shipments before year-end are recorded as sales.

B. Send confirmations to customers

Which of the following data is least likely to be used in an audit data analytic procedure when the auditor is performing substantive testing related to the occurrence of sales transactions and the accuracy of accounts receivable? A. Invoice amount B. Customer account identification C. Sales order quantity D. Purchase order number

D. Purchase order number Purchase order is unlikely for audit data analytic for revenue cycle. It is more in line with expenditure cycle instead of

If the objective of an auditor's test of details is to detect the overstatement of sales, the auditor should trace transactions from the: A. Cash receipts journal to the customer's purchase orders. B. Customer's purchase orders to the sales journal. C. Shipping documents to the cash receipts journal. D. Sales journal to the shipping documents.

D. Sales journal to the shipping documents For overstatement of sales, auditor is testing Existence assertion - OE. Now think EARS E.AR.S - Existence.Accounting records.Source Journal >> Shipping documents

Which of the following auditing procedures would provide the best audit evidence in testing the existence of the accounts receivable balance? A. Testing shipping cut-off procedures. B. Obtaining a management representation letter regarding accounts receivable. C. Tracing sales register selections into the accounts receivable listing. D. Obtaining confirmation of receivables directly from customers.

D. Obtaining confirmation of receivables directly from customers For purposes of Accounts receivable, the most reliable form of evidence would come from obtaining confirmations

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because: A. Customers may not be inclined to report understatement errors in their accounts. B. Many customers merely sign and return the confirmation without verifying its details. C. Auditors typically select many accounts with low recorded balances to be confirmed. D. Recipients usually respond only if they disagree with the information on the request.

A. Customers may not be inclined to report understatement errors in their accounts Recipients of confirmations have a vested interest in not reporting understatements (transactions that have not been recorded)

In auditing accounts receivable the negative form of confirmation request most likely would be used when: A. The combined assessed level of inherent and control risk relative to accounts receivable is low. B. The auditor performs a dual purpose test that assesses control risk and obtains substantive evidence. C. A small number of accounts receivable are involved but a relatively large number of errors are expected. D. Recipients are likely to return positive confirmation requests without verifying the accuracy of the information.

A. The combined assessed level of inherent and control risk relative to accounts receivable is low Negative confirmations are ideal for -Choice A (IR and CR is assessed low), -large number of small balances is involved -auditor has no reason to believe the recipients are unlikely to give them consideration

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because: A. Some recipients may report incorrect balances that require extensive follow-up. B. A majority of recipients usually lack the willingness to respond objectively. C. The auditor cannot infer that all nonrespondents have verified their account information. D. Negative confirmations do not produce audit evidence that is statistically quantifiable.

C. The auditor cannot infer that all nonrespondents have verified their account information

Two assertions for which confirmation of accounts receivable balances provides primary evidence are: A. Completeness and valuation. B. Rights and obligations and existence. C. Existence and completeness. D. Valuation and rights and obligations.

B. Rights and obligations and existence Rights and obligations [client have right to the receivable] and existence [receivable really exist]

The negative request form of accounts receivable confirmation is useful particularly when the: Assessed level of control risk relating to receivables is - HIGH / LOW Number of small balances is - FEW / MANY Consideration by the recipient is - LIKELY / UNLIKELY

Assessed level of control risk relating to receivables is - LOW [auditor believes that internal controls over receivables are effective, so chance of material misstatement is low. Auditor can rely on less persuasive evidence] Number of small balances is - MANY [Many small balances make it difficult to keep # of positive confirms to reasonably low level. Sending many positive confirmations is costly and time consuming, REMEMBER] Consideration by the recipient is - LIKELY [Since auditor is relying on customers consideration as sole basis of support]

The positive request form of accounts receivable confirmation is useful particularly when the: Assessed level of control risk relating to receivables is - HIGH / LOW Number of small balances is - FEW / MANY Consideration by the recipient is - LIKELY / UNLIKELY

Assessed level of control risk relating to receivables is - HIGH [Auditor believes internal controls over receivables are not effective at preventing or detecting material misstatements] Number of small balances is - FEW [Fewer balances are easier for auditor to focus on larger or riskier accounts] Consideration by the recipient is - LIKELY [Since auditor is relying on customers consideration as sole basis of support]

When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations: A. Copies of the client's shipping documents that support the account balances. B. Copies of the customers' purchase orders that support the account balances. C. Client-prepared statements of account that show the details of the account balances. D. Lists of the customers' recent payments that the client has already recorded.

C. Client-prepared statements of account that show the details of the account balances This is best so that the confirmation recipients can more easily verify the receivable balance

Under which of the following circumstances would using the blank form of confirmation of accounts receivable most likely be preferable to other types of positive confirmations? A. The auditor's combined assessed level of control risk and inherent risk is low. B. Prior years' audits indicate a pattern of overstatement of account balances. C. Recipients are likely to sign other types of positive confirmations without careful investigation. D. Accounts receivable are immaterial to the entity's financial statements.

C. Recipients are likely to sign other types of positive confirmations without careful investigation Blank confirmations require recipient to fill in the balance, so that they cannot simply sign off without checking the balance

To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would: A. Request the senders to mail the original forms to the auditor. B. Consider the e-mail responses to the confirmations to be exceptions. C. Examine subsequent cash receipts for the accounts in question. D. Mail second requests to the e-mail respondents.

A. Request the senders to mail the original forms to the auditor

Generally accepted auditing standards have not been followed in which of the following situations? A. An unusually large number of receivables confirmations are not returned, and the auditor decides to verify the related cash receipts rather than sending second requests. B. The auditor receives several faxed and emailed confirmation responses related to confirmations that were mailed indicating that the amount stated is correct. The auditor does not perform any additional procedures related to these electronic responses. C. The accounts receivable balance is immaterial, so the auditor decides not to send any receivables confirmations. D. The auditor receives very few responses to negative confirmations sent. The auditor does not perform any additional procedures related to the non-responses.

B. The auditor receives several faxed and emailed confirmation responses related to confirmations that were mailed indicating that the amount stated is correct. The auditor does not perform any additional procedures related to these electronic responses Confirmations received electronically rather than returned originally signed can be verified by calling the sender. No performing additional procedures will affect GAAS

Which of the following strategies most likely could improve the response rate of the confirmations of accounts receivable? A. Restrict the selection of accounts to be confirmed to those customers with large balances. B. Ask customers to respond to the confirmation requests directly to the client by email. C. Include a list of items or invoices that constitute the customers' account balances. D. Explain to customers that discrepancies will be investigated by an independent third party.

C. Include a list of items or invoices that constitute the customers' account balances This is the client-prepared statement of account that would make it easier for customers to

During a recent audit of the revenue cycle, a CPA found the client had $1 million in accounts receivable recorded for fictitious customers. Which of the following tests most likely facilitated identification of the fraud? A. Reviewing the segregation of duties for staff who had responsibility for sales, shipping, and invoicing. B. Sending positive confirmations to all of the client's customers with balances on December 31. C. Examining the reconciliation between the subsidiary ledger and the general ledger control account. D. Reviewing the support for open sales orders not yet shipped at December 31.

B. Sending positive confirmations to all of the client's customers with balances on December 31.

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose: A. Individual invoices. B. Individual overdue balances. C. Small account balances. D. Customers with credit balances.

A. Individual invoices Individual transaction detail would have fewer discrepancies than confirmations sent out to customers in years past

From which of the following populations most likely would a sample be drawn by an auditor who is confirming accounts receivable as of June 30? A. The accounts receivable detail listing as of June 30. B. Customer sales agreements signed subsequent to June 30. C. Customer payments received subsequent to June 30. D. Bills of lading for goods shipping prior to June 30.

A. The accounts receivable detail listing as of June 30 The best population of a sample would be from detail as of June 30th

During the confirmation of accounts receivable, an auditor receives a response to a mailed confirmation via electronic communication with the customer. Which of the following actions should an auditor take? A. Accept the confirmation but verify the source and content through a telephone call to the respondent. B. Accept the confirmation and file it in the working papers. C. Not accept the confirmation and treat it as an exception. D. Not accept the confirmation and select another customer's balance to confirm.

A. Accept the confirmation but verify the source and content through a telephone call to the respondent

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would: A. Ask the client to contact the customers to request that the confirmations be returned. B. Increase the assessed level of inherent risk for the revenue cycle. C. Increase the assessed level of detection risk for the valuation and completeness assertions. D. Inspect the allowance account to verify whether the accounts were subsequently written off.

A. Ask the client to contact the customers to request that the confirmations be returned

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? A. Review the cash receipts journal for the month prior to the year-end. B. Increase the assessed level of detection risk for the existence assertion. C. Intensify the study of the internal control structure concerning the revenue cycle. D. Inspect the shipping records documenting the merchandise sold to the debtors.

D. Inspect the shipping records documenting the merchandise sold to the debtors

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor would least likely: A. Increase the assessed level of detection risk for the valuation assertion. B. Send a second positive confirmation request. C. Search for subsequent cash receipts. D. Examine shipping documents and sales invoices.

A. Increase the assessed level of detection risk for the valuation assertion.

After receiving responses to accounts receivable confirmations, the auditor determined that the evidence was not sufficient to form a conclusion regarding the accounts receivable balance. Which of the following actions should the auditor take next concerning the accounts receivable balance? A. Ask the internal auditor to evaluate the valuation of accounts receivable. B. Issue a qualified audit opinion on the client's financial statements. C. Withdraw from the engagement and issue a disclaimer of opinion. D. Request additional confirmations and perform alternative procedures.

D. Request additional confirmations and perform alternative procedures Requesting additional confirmations [increase sample size] and perform additional procedures [verify subsequent payment of accounts receivable]

An audit client has a valid reason for requesting that a certain account receivable that the auditor has selected for confirmation not be confirmed. Under these circumstances, the auditor should: A. Verify the account balance by inspecting the client's bank statements and cash receipt records. B. Select at random a different account for confirmation that is approximately the same size. C. Request the client's management to document the matter in the management representation letter. D. Explain to the client that the request will most likely cause the auditor to disclaim an opinion.

A. Verify the account balance by inspecting the client's bank statements and cash receipt records

The department in need of the asset or services sends a properly approved, serially numbered _____________ to the _______________ department A) purchase order ; treasurer B) sales invoice ; CFO C) requisition ; purchasing department D) remittance ; accountant

C) requisition ; purchasing department

At point should the purchasing department create the purchase order (indicating the description, quantity and related information for the goods and services) A) when purchasing department received requisition B) when receiving department receives purchase order C) prior to placing order and when one bid is properly approved D) once accounts payable department signs off on it

C) prior to placing order and when one bid is properly approved Prior to placing order, purchasing department should request bids from various suppliers to make sure that the best price is obtained. Once approved, purchasing department should create purchase order

Which departments should copies of prenumbered purchase orders be sent to? A) requisitioning, vendor, receiving and accounting department B) accounts payable, credit, and billing department C) HR, customer, accounting, and receiving department D) cashier, accounts receivable, accounts payable and accounting department

A) requisitioning, vendor, receiving and accounting department

The copy of the ______________ order sent to the ________________ department serves as an authorization to accept the goods or services when they arrive A) purchase order; receiving department B) requisition; shipping department C) sales invoice; cashier’s department D) remittance advice; accounts payable department

A) purchase order; receiving department Description of goods should be matches to purchase order and condition of the goods should be examined as well.

When receiving report is compared with purchase order and vendors invoice to confirm quantity and prevention of charges for goods in excess of those ordered and received, what would be the appropriate journal entry made by accounting? A) Debit AP; Credit AR B) Debit Cash; Credit Expense C) Debit COGS; Credit inventory D) Debit Expense or Inventory; Credit AP

D) Debit Expense or Inventory; Credit AP

When invoice is approved for payment, what is the appropriate entry on recording the payment? A) Debit Cash; Credit Expenses B) Debit AP; Credit Cash C) Debit Inventory; Debit Allowance for doubtful accounts D) Debit Equity; Credit COGS

B) Debit AP; Credit Cash

Who’s responsible for prepares, signs and mails the checks and cancels all supporting documents after payment? A) Accounts payable management B) Treasurer C) Internal Accountant/auditor D) Purchasing manager

B) Treasurer

For segregation of duties under purchases, match the role with the correct department: ROLES: -record keeping -authorization -custody DEPARTMENT: -purchasing/requisition department -receiving department -accounts payable/accounting department

-Record keeping with Accounts payable/Accounting department -Authorization with Purchasing/requisitioning department -Custody with Receiving department

For segregation of duties under payables and cash disbursements, match the role with the correct department: ROLES: -record keeping -authorization -custody DEPARTMENT: -purchasing/requisition department -receiving department -receiving (purchased item) & treasurer (cash)

-Record keeping with Accounts payable/accounting -Authorization with purchasing/requisition department -Custody with Receiving (purchased item) and Treasurer (cash)

For accounts payable, ______________ and ________________ assertions are generally more relevant because the risk of _________________ is greater A) existence and rights and obligation; overstatement B) cut-off and completeness; understatement C) valuation & accuracy and occurrence; overstatement D) completeness and accuracy; understatement

D) completeness and accuracy; understatement

In which instances would confirmations of accounts payable be sent out? 1. System of internal control is weak 2. Disputed amounts 3. Monthly vendor statements are not available A) 1 and 3 only B) 1 only C) 1, 2, and 3 D) 2 and 3 only

C) 1, 2, and 3 Confirmations would primarily test for completeness, that would also provide evidence of existence

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. Vendors' invoices. C. Receiving reports. D. Approved vouchers.

A. Cash disbursements Selecting cash disbursements and attempting to trace them to related invoices will be indicative of fraud

Which of the following describes a weakness in accounts payable procedures? A. The accounts payable clerk manually verifies arithmetic on the vendor invoice. B. The accounts payable manager issues purchase orders. C. The accounts payable clerk files invoices and supporting documentation after payment. D. The accounts payable system compares the receiving report to the vendor invoice.

B. The accounts payable manager issues purchase orders Instead, these should be issued by purchasing department

Which of the following internal control activities is not usually performed in the vouchers payable department? A. Accounting for unused prenumbered purchase orders and receiving reports. B. Indicating the asset and expense accounts to be debited. C. Approving vouchers for payment by having an authorized employee sign the vouchers. D. Matching the vendor's invoice with the related receiving report.

A. Accounting for unused prenumbered purchase orders and receiving reports Internal control is enhanced if check mailing is performed by treasurer

Mailing disbursement checks and remittance advices should be controlled by the employee who: A. Matches the receiving reports, purchase orders, and vendor's invoices. B. Maintains possession of the mechanical check-signing device. C. Approves the vouchers for payment. D. Signs the checks last.

D. Signs the checks last This employee is the treasurer. They would also mail the checks after signing

The authority to accept incoming goods in receiving should be based on a (an): A. Bill of lading. B. Approved purchase order. C. Materials requisition. D. Vendor's invoice.

B. Approved purchase order

Who should be responsible for preparing a purchase order, matching the receiving report and invoice with the purchase order, and paying for the related purchase? A. The purchasing department is responsible for preparing the purchase order, the accounts payable department is responsible for matching documents, and the treasurer is responsible for making payment. B. The purchasing department is responsible for preparing the purchase order, the receiving department is responsible for matching documents, and the accounts payable department is responsible for making payment. C. The purchasing department is responsible for preparing the purchase order, but the treasurer is responsible for matching documents and making payment. D. The manager of the department requesting the goods is responsible for preparing the purchase order, the purchasing department is responsible for matching goods, and the accounts payable department is responsible for making payment.

A. The purchasing department is responsible for preparing the purchase order, the accounts payable department is responsible for matching documents, and the treasurer is responsible for making payment The proper distribution of segregation of duties

For effective internal control, the accounts payable department generally should: A. Obliterate the quantity ordered on the receiving department copy of the purchase order. B. Establish the agreement of the vendor's invoice with the receiving report and purchase order. C. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed. D. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized employee.

B. Establish the agreement of the vendor's invoice with the receiving report and purchase order This step is done before voucher is submitted for payment

Under properly designed internal control, the same employee most likely would match vendors' invoices with receiving reports and also: A. Recompute the calculations on vendors' invoices. B. Reconcile the accounts payable ledger. C. Cancel vendors' invoices after payment. D. Post the detailed accounts payable records.

A. Recompute the calculations on vendors' invoices

For effective internal accounting control, the accounts payable department should compare the information on each vendor's invoice with the: A. Receiving report and the voucher. B. Receiving report and the purchase order. C. Vendor's packing slip and the voucher. D. Vendor's packing slip and the purchase order.

B. Receiving report and the purchase order

Which of the following is the most effective control activity to detect vouchers that were prepared for the payment of goods that were not received? A. Match purchase order, receiving report, and vendor's invoice for each voucher in accounts payable department. B. Count goods upon receipt in storeroom. C. Verify vouchers for accuracy and approval in internal audit department. D. Compare goods received with goods requisitioned in receiving department.

A. Match purchase order, receiving report, and vendor's invoice for each voucher in accounts payable department

In a well designed internal control, employees in the same department most likely would approve purchase orders, and also: A. Inspect goods upon receipt. B. Authorize requisitions of goods. C. Negotiate terms with vendors. D. Reconcile the open invoice file.

C. Negotiate terms with vendors

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because: A. There is likely to be other reliable external evidence available to support the balances. B. Accounts payable balances at the balance sheet date may not be paid before the audit is completed. C. Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment. D. This is a duplication of cutoff tests.

A. There is likely to be other reliable external evidence available to support the balances

In searching for unrecorded liabilities, an auditor most likely would examine the: A. Details of accounts receivable confirmations that are classified as "exceptions." B. Receiving reports for items received before year-end, but not yet recorded. C. Files of purchase requisitions for items ordered just before the year-end. D. Cutoff bank statement for deposits recorded in the books, but not by the bank.

B. Receiving reports for items received before year-end, but not yet recorded

Tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion regarding: A. Cutoff. B. Obligations. C. Presentation and classification. D. Accuracy.

A. Cutoff

In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of: A. Valuation and allocation. B. Completeness. C. Existence. D. Understandability of presentation and classification.

B. Completeness

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? A. Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance. B. Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions. C. Vouch a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file. D. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.

C. Vouch a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file Any payment made on transactions dated before year end reflect a liability that should’ve been recorded

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all: A. Vendor's invoices. B. Payment vouchers. C. Receiving reports. D. Purchase requisitions.

C. Receiving reports To test completeness, auditor performs test around what merchandise received is recorded

Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated? A. Examining vendor statements for amounts not reported as purchases. B. Searching for customer-returned goods that were not reported as returns. C. Reviewing bank transfers recorded as cash received from customers. D. Examining reported purchase returns that appear too low.

A. Examining vendor statements for amounts not reported as purchases

From which of the following populations would a sample most likely be drawn by an auditor who is testing the accounts payable balance for completeness as of July 31? A. The accounts payable detail listing as of July 31 B. Cash disbursements prior to July 31 C. Purchase orders issued subsequent to July 31 D. Cash disbursements subsequent to July 31

D. Cash disbursements subsequent to July 31

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be: A. Vendors with whom the entity has previously done business. B. Amounts recorded in the accounts payable subsidiary ledger. C. Payees of checks drawn in the month after the year-end. D. Invoices filed in the entity's open invoice file.

A. Vendors with whom the entity has previously done business

Which of the following procedures would an auditor least likely perform before the balance sheet date? A. Observation of merchandise inventory. B. Identification of related parties. C. Assessment of the risk of material misstatement. D. Confirmation of accounts payable.

D. Confirmation of accounts payable

Which of the following procedures would best detect a liability omission by management? A. Inquiry of senior support staff and recently departed employees. B. Review purchase contracts and other legal documents. C. Review articles of incorporation and corporate bylaws. D. Review and check mathematical accuracy of financial statements.

B. Review purchase contracts and other legal documents

_____________ occurs when an employee withholds funds received by customer for personal use and fails to apply these receipts of cash or checks to customer’s receivable balance. Unrecorded receipt is covered by applying a subsequent receipt to the previously unrecorded account A) kitting B) lapping C) embezzlement D) larceny

B) lapping Best method to safeguard against it is “lockbox” system. Customers will send payments directly to the bank instead of the company. This prevents company from having access to the funds. Bank will send a statement to the company noting the deposit, and the cash will be applied in the GL to the outstanding receivable balance

_____________ check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank until after year end. This can be used to cover a cash shortage or to pad a company’s cash position. This results in an intentional overstatement of cash in the FS as cash is simultaneously reflected in two different bank accounts A) lapping B) embezzlement C) money laundering D) kitting

D) kitting To detect kiting: -Bank transfer schedule. Disbursement date on check and in the ledger for disbursing bank should precede the receipt date noted by bank and in the ledger for receiving account -evidence should be in place that all DIT and outstanding checks at year end were cleared in next period. [use bank cut off statement]

Which three audit assertions are covered in obtaining a year end bank confirmation when performing the procedure to audit the cash balance? A) cut-off, understandability of presentation and classification, and completeness B) valuation and allocation, existence, and occurrence C) occurrence, existence, and valuation and allocation D) completeness, valuation and allocation, and existence

D) completeness, valuation and allocation, and existence

On receiving a client's bank cutoff statement, an auditor most likely would trace: A. Deposits recorded in the cash receipts journal after year-end to the cutoff statement. B. Prior-year checks listed in the cutoff statement to the year-end outstanding checklist. C. Deposits in transit listed in the cutoff statement to the year-end bank reconciliation. D. Checks dated after year-end listed in the cutoff statement to the year-end outstanding checklist.

B. Prior-year checks listed in the cutoff statement to the year-end outstanding checklist Bank cut-off statement covers first 10-15 days period. Outstanding checks and deposits in transit at year end on bank reconciliation should agree with the information in the bank cut off statement

Which of the following characteristics most likely would be indicative of check kiting? A. High turnover of employees who have access to cash. B. Many large checks that are recorded on Mondays. C. Low average balance compared to high level of deposits. D. Frequent ATM checking account withdrawals.

C. Low average balance compared to high level of deposits Kiting is when a check drawn on one bank is deposited in another bank and no record is make of the disbursement in the balance of the first bank

An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the: A. Dates checks are deposited per bank statements with the dates remittance credits are recorded. B. Daily cash summaries with the sums of the cash receipts journal entries. C. Individual bank deposit slips with the details of the monthly bank statements. D. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded.

A. Dates checks are deposited per bank statements with the dates remittance credits are recorded Current remittances are used to conceal remittances that have been stolen previously. This will cause a lag from the time the current payment is deposited until the current customer’s account is actually credited

Which of the following internal control procedures most likely would deter lapping of collections from customers? A. Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval. B. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries. C. Segregation of duties between receiving cash and posting the accounts receivable ledger. D. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries.

C. Segregation of duties between receiving cash and posting the accounts receivable ledger

Which of the following sets of information does an auditor usually confirm on one form? A. Accounts receivable and accrued interest receivable. B. Cash in bank and collateral for loans. C. Inventory on consignment and contingent liabilities. D. Accounts payable and purchase commitments.

B. Cash in bank and collateral for loans

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may: A. Not believe that the bank is obligated to verify confidential information to a third party. B. Be unaware of all the financial relationships that the bank has with the client. C. Sign and return the form without inspecting the accuracy of the client's bank reconciliation. D. Not have access to the client's cutoff bank statement.

B. Be unaware of all the financial relationships that the bank has with the client

An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to: A. Seek information about contingent liabilities and security agreements. B. Provide the data necessary to prepare a proof of cash. C. Request a cutoff bank statement and related checks be sent to the auditor. D. Detect kiting activities that may otherwise not be discovered.

A. Seek information about contingent liabilities and security agreements

The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to: A. Request information about contingent liabilities and secured transactions. B.Detect kiting activities that may otherwise not be discovered. C. Provide the data necessary to prepare a proof of cash. D. Corroborate information regarding deposit and loan balances.

D. Corroborate information regarding deposit and loan balances

For the most effective internal control, monthly bank statements should be received directly from the banks and reviewed by the: A. Accounts receivable accountant. B. Internal auditor. C. Controller. D. Accounts payable accountant.

B. Internal auditor

For the most effective internal control, record keeping responsibility relating to cash is for: A. Accounts receivable accountant. B. Internal auditor. C. Controller. D. Accounts payable accountant.

A. Accounts receivable accountant D. Accounts payable accountant

For the most effective internal control, authorization of expenditures is for: A. Accounts receivable accountant. B. Internal auditor. C. Controller. D. Accounts payable accountant.

C. Controller

An auditor would be most likely to identify a contingent liability by obtaining a (an): A. Standard bank confirmation. B. Accounts payable confirmation. C. Related party transaction confirmation. D. Transfer agent confirmation.

A. Standard bank confirmation

An independent auditor asked a client's internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure? A. The form was prepared by the internal auditor. B. The account was closed, so the balance was zero. C. The form was mailed by the controller. D. The internal auditor did not sign the form.

C. The form was mailed by the controller Instead, the auditor should control the mailing of the confirmations

Which of the following situations most likely could lead to an embezzlement scheme? A. The accounts receivable bookkeeper receives a list of payments prepared by the cashier and personally makes entries in the customers' accounts receivable subsidiary ledger. B. Each vendor invoice is matched with the related purchase order and receiving report by the vouchers payable bookkeeper who personally approves the voucher for payment. C. Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement. D. Vouchers and supporting documentation are examined and then canceled by the treasurer who personally mails the checks to vendors.

C. Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement If the same persons who disburses cash also reconciles bank statement, there’s an opportunity to embezzle cash and cover it up

The primary evidence regarding year-end cash balances in the financial statements is documented in the: A. Standard bank confirmations. B. Interbank transfer schedule. C. Bank deposit lead schedule. D. Bank reconciliations.

D. Bank reconciliations Primary evidence that reconciles the balance per the bank to that per the FS

In the Bank Transfer Schedule below, which of the following cash transfers results in a misstatement of cash at December 31, 20X1? Disbursement date per books Disbursement date per bank Receipt date per books Receipt date per bank A. 12/31/X1. 01/05/X2. 12/31/X1. 01/04/X2 B. 01/04/X2. 01/11/X2. 01/04/X2. 01/04/X2 C. 01/04/X2. 01/05/X2. 12/31/X1. 01/04/X2 D. 12/31/X1. 01/04/X2. 12/31/X1. 12/31/X1

Disbursement date per books Disbursement date per bank Receipt date per books Receipt date per bank C. 01/04/X2. 01/05/X2. 12/31/X1. 01/04/X2 The key condition to spot kiting is: Disbursement date per books [later than] > December 31 (after year-end) AND Receipt date per books OR receipt date per bank [earlier than] < December 31 (before year-end) In other words, the disbursement is recorded in the books after year-end, but the receipt (deposit) is recorded either in the books or at the bank before year-end.

In purchasing, which department would the serially numbered, approved purchase orders be sent to after they are prepared? A) accounting and receiving departments B) purchasing and warehouse department C) shipping and receiving department D) purchasing and receiving department

A) accounting and receiving departments

Which department is responsible for verification of quantities received, detection of damaged goods, preparation of receiving report and delivery of goods? A) warehouse B) purchasing C) receiving D) accounting

C) receiving

Which department acts as a custodian for the verified quantity of goods received? A) purchasing B) shipping C) receiving D) warehouse

D) warehouse

After an approved sales order from the credit department is authorized, which department is responsible for the next step? A) warehouse B) treasurer C) shipping D) purchasing

C) shipping

If company maintains well kept perpetual inventory system and performs physical cycle counts throughout the year to ensure accuracy, auditor may observe inventory __________________ A) during interim period B) subsequent to year end C) before year end D) either before or after year end if necessary

D) either before or after year end if necessary

If the assessed level of control risk is high, the inventory observation procedures should be performed: A) during planning period B) at year end C) during interim period D) before year end

B) at year end

To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace: A. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices. B. Inventory tags noted during the auditor's observation to items listed in the inventory-listing schedule. C. Items listed in the inventory-listing schedule to inventory tags and the auditor's recorded count sheets. D. Items listed in receiving reports and vendors' invoices to the inventory-listing schedule.

C. Items listed in the inventory-listing schedule to inventory tags and the auditor's recorded count sheets Testing for validity, means testing for existence

To gain assurance of completeness, an auditor most likely would trace: A. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices. B. Inventory tags noted during the auditor's observation to items listed in the inventory-listing schedule. C. Items listed in the inventory-listing schedule to inventory tags and the auditor's recorded count sheets. D. Items listed in receiving reports and vendors' invoices to the inventory-listing schedule.

A. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices. B. Inventory tags noted during the auditor's observation to items listed in the inventory-listing schedule.

An auditor generally tests the segregation of duties related to inventory by: A. Analytical procedures and invoice recomputation. B. Personal inquiry and observation. C. Document inspection and reconciliation. D. Test counts and cutoff procedures.

B. Personal inquiry and observation

To gain assurance of cut-off procedures to verify completeness, an auditor most likely would trace: A. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices. B. Inventory tags noted during the auditor's observation to items listed in the inventory-listing schedule. C. Items listed in the inventory-listing schedule to inventory tags and the auditor's recorded count sheets. D. Items listed in receiving reports and vendors' invoices to the inventory-listing schedule.

D. Items listed in receiving reports and vendors' invoices to the inventory-listing schedule

Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management's assertion of: A. Presentation. B. Completeness. C. Valuation. D. Existence.

C. Valuation Has inventory been properly recorded at lower of cost or market?

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of: A. Rights and obligations. B. Completeness. C. Existence. D. Valuation.

B. Completeness

Which is true about the auditor's observation of physical inventory counts? I. It can provide evidence supporting the existence assertion. II. It can provide evidence supporting the completeness assertion. A. Both I and II. B. Neither I nor II are true. C. I only. D. II only.

A. Both I and II Both for existence [Observing the inventory provides evidence that it physically exists] And for completeness [does it appear that the client is doing a careful, accurate, and complete job of counting all of the inventory]

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance? A. Inventory is properly presented in the financial statements. B. Inventory is complete. C. Inventory is properly valued. D. The entity has rights to the inventory.

B. Inventory is complete

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of: A. Rights and obligations. B. Valuation and allocation. C. Existence. D. Understandability of presentation and classification.

B. Valuation and allocation

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's assertions about: A. Understandability of presentation and classification. B. Rights and obligations. C. Valuation and allocation. D. Existence

C. Valuation and allocation [if the inventory is becoming older, an obsolescence reserve might be required]

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record: A. Purchase discounts. B. Purchase returns. C. Sales. D. Sales returns.

D. Sales returns Auditors actual test count items > recorded quantities in clients records

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were lower than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record: A. Purchase discounts. B. Purchase returns. C. Sales. D. Sales returns.

B. Purchase returns C. Sales Auditors actual test count items < recorded quantities in clients records

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation? A. Testing the entity's computation of standard overhead rates. B. Obtaining confirmation of inventories pledged under loan agreements. C. Tracing test counts to the entity's inventory listing. D. Reviewing shipping and receiving cutoff procedures for inventories.

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

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory presentation description and disclosure on FS? A. Testing the entity's computation of standard overhead rates. B. Obtaining confirmation of inventories pledged under loan agreements. C. Tracing test counts to the entity's inventory listing. D. Reviewing shipping and receiving cutoff procedures for inventories.

B. Obtaining confirmation of inventories pledged under loan agreements

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory completeness? A. Testing the entity's computation of standard overhead rates. B. Obtaining confirmation of inventories pledged under loan agreements. C. Tracing test counts to the entity's inventory listing. D. Reviewing shipping and receiving cutoff procedures for inventories.

C. Tracing test counts to the entity's inventory listing

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory completeness and existence? A. Testing the entity's computation of standard overhead rates. B. Obtaining confirmation of inventories pledged under loan agreements. C. Tracing test counts to the entity's inventory listing. D. Reviewing shipping and receiving cutoff procedures for inventories.

D. Reviewing shipping and receiving cutoff procedures for inventories

Which of the following internal controls most likely would be used to maintain accurate inventory records? A. Requisitions, receiving reports, and purchase orders are independently matched before payment is approved. B. Perpetual inventory records are periodically compared with the current cost of individual inventory items. C. A just-in-time inventory ordering system keeps inventory levels to a desired minimum. D. Periodic inventory counts are used to adjust the perpetual inventory records.

D. Periodic inventory counts are used to adjust the perpetual inventory records

Which of the following procedures would an auditor most likely perform to obtain assurance that slow-moving and obsolete items included in inventories are properly identified? A. Tracing inventory observation test counts to perpetual listings. B. Testing shipping and receiving cutoff procedures. C. Examining an analysis of inventory turnover. D. Confirming inventories at locations outside the entity's premises.

C. Examining an analysis of inventory turnover

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. Tour the manufacturing plant or production facility. B. Test the computation of standard overhead rates. C. Compare inventory balances to anticipated sales volume. D. Review inventory experience and trends.

B. Test the computation of standard overhead rates Choice B reflects on accumulation of costs during manufacturing phase, not for slow moving or defective or obsolete items

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. Obtain a confirmation from the client indicating inventory ownership. B. Observe physical counts of the inventory items. C. Trace the total on the inventory listing to the general ledger inventory account. D. Analytically compare the current-year inventory balance to the prior-year balance.

B. Observe physical counts of the inventory items. Auditors personal observation is generally the most reliable form of evidence Therefore, choice A would be secondary, if

Under which of the following conditions may an auditor's observation procedure for inventory be performed during or after the end of the period under audit? A. When total inventory has not varied more than 5% in the last five years. B.When the client maintains periodic inventory records. C. When the auditor finds minimal variations in client records and test counts in prior periods. D. When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts.

D. When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory? A. Tracing inventory items from the tag listing back to the physical inventory quantities. B. Examining paid vendor invoices. C. Performing cutoff procedures for shipping and receiving. D. Scanning perpetual inventory, production, and purchasing records.

C. Performing cutoff procedures for shipping and receiving

Which of the following procedures would be most appropriate for testing the existence assertion as it applies to inventory? A. Tracing inventory items from the tag listing back to the physical inventory quantities. B. Examining paid vendor invoices. C. Performing cutoff procedures for shipping and receiving. D. Scanning perpetual inventory, production, and purchasing records.

A. Tracing inventory items from the tag listing back to the physical inventory quantities

An insignificant portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods? A. Calculation. B. Confirmation C. Inspection. D. Observation.

B. Confirmation

The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items: A. Included in the listing were properly valued. B. Included on the listing were properly counted. C. Represented by tags were included on the listing. D. Represented by tags were reduced to the lower of cost or market.

C. Represented by tags were included on the listing

Which of the following internal control activities would not be effective for detecting misstatements of inventory item pricing schedules? A. Review of vendor lists for fictitious vendors in the system. B. Comparison of sales invoices to price lists on a test basis. C. Comparison of groups of items to sales reports and subsequent investigation of unusual variances. D. Segregation of duties between customer invoicing and inventory valuation.

A. Review of vendor lists for fictitious vendors in the system Not effective because vendor lists relate to suppliers from whom inventory is purchased, not pricing schedules used to value inventory

To obtain assurance that all inventory items in a client's inventory listing are valid, an auditor most likely would trace: A. Inventory tags noted during the auditor's observation to items in the inventory listing. B. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices. C. Items in the inventory listing to inventory tags and the auditor's recorded count sheets. D. Items listed in receiving reports and vendors' invoices to the inventory listing.

C. Items in the inventory listing to inventory tags and the auditor's recorded count sheets When validity is mentioned, think EXISTENCE

Which audit procedure is most likely related to the understandability of presentation and classification of the financial statements with respect to inventory? A. Obtaining quotations for the current market value of inventory. B. Examining consignment agreements. C. Confirming inventories pledged under loan agreements. D. Analyzing inventory turnover.

C. Confirming inventories pledged under loan agreements

Which audit procedure is most likely related to the rights and obligations assertion with respect to inventory? A. Obtaining quotations for the current market value of inventory. B. Examining consignment agreements. C. Confirming inventories pledged under loan agreements. D. Analyzing inventory turnover.

B. Examining consignment agreements

For investments, who is best to authorize the purchase or sale of investments? A) CFO B) investment advisers C) controller D) board of directors

D) board of directors Ideally

For investments, who is best to have custody of investment accounts? A) independent, 3rd party custodian B) CFO C) audit committee member D) board of directors

A) independent, 3rd party custodian At minimum, should be joint control by two company officials with investments kept in safe-deposit box

________________ investments and ______________ investments classified as trading securities are always reported as current assets with unrealized gains and losses reported in net income A) available for sale; and derivative investments B) hybrid investments; and equity investments C) equity investments; and debt investments D)debt investments; and asset backed investments

C) equity investments; and debt investments

________________ debt securities and _______________ debt securities are reported as current or long-term based on managements intent to hold versus sell A) derivatives; available for sale B) equity; and asset backed C) available for sale; and held to maturity D) registered; and hybrid

C) available for sale; and held to maturity

Unrealized gains and losses on available for sale securities are reported in ____________________ A) contribution revenue B) other comprehensive income C) net investment gains/losses D) interest/dividend income

B) other comprehensive income

_______________ amount at which an asset could be sold / liability could be settled in current transaction between willing parties at measurement date A) historical cost B) amortized cost C) fair value D) current cost

C) fair value Three level hierarchy is used to measure fair value

For the three level hierarchy to measure fair value, match the level with the description: LEVELS: -Level 1 -Level 2 -Level 3 DESCRIPTION: -Observable inputs other than quoted market prices for identical assets or liabilities -Unobservable inputs using estimates and valuation methods, such as discounted cash flow, determined based on managements judgments -Observable quoted prices in active markets for identical assets or liabilities

Level 1: Observable quoted prices in active markets for identical assets or liabilities Level 2: Observable inputs other than quoted market prices for identical assets or liabilities Level 3: Unobservable inputs using estimates and valuation methods, such as discounted cash flow, determined based on managements judgments If quoted prices are not available, estimates of fair value may be available from broker-dealers or 3rd party sources

Which of the following would an auditor least likely consider with respect to fair values? A. Whether the valuation methods used are appropriate in relation to the industry in which the entity operates. B. The role of information technology in determining fair value measurements and disclosures. C. The effect on fair value measurement and disclosures of information available subsequent to the audit. D. Segregation of duties between those committing the entity to certain transactions and those responsible for undertaking the valuations related to those transactions.

C. The effect on fair value measurement and disclosures of information available subsequent to the audit Auditor is not responsible for predicting the future, and would not be expected to evaluate the effect of conditions. Subsequent events would only be considered before completion of audit, not after

In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the: A. Valuation of marketable equity securities. B. Existence of unrealized gains or losses in the portfolio. C. Classification between balance sheet portfolios. D. Completeness of recorded investment income.

D. Completeness of recorded investment income Comparison of recorded investment income with expected amount, dividends and income balance from PY

In establishing the existence and ownership of a long-term investment in the form of publicly traded stock, an auditor should inspect the securities or: A. Determine that the investment is carried at the lower of cost or market. B. Correspond with the investee company to verify the number of shares owned. C. Inspect the audited financial statements of the investee company. D. Confirm the number of shares owned that are held by an independent custodian.

D. Confirm the number of shares owned that are held by an independent custodian

In establishing the valuation and ownership of a long-term investment in the form of publicly traded stock, an auditor should inspect the securities or: A. Determine that the investment is carried at the lower of cost or market. B. Correspond with the investee company to verify the number of shares owned. C. Inspect the audited financial statements of the investee company. D. Confirm the number of shares owned that are held by an independent custodian.

A. Determine that the investment is carried at the lower of cost or market

Which of the following procedures would the auditor most likely perform to determine that an interest rate swap contract is properly stated at fair value on the client's balance sheet? A. Sending a positive confirmation to the interest rate swap contract custodian. B. Comparing the contract amount with the fair value of the contract and calculating the unrealized gain or loss. C. Testing the data used to arrive at the fair value of the interest rate swap contract. D. Inspecting the minutes of the board of directors' meetings for approval of the interest rate swap contract.

C. Testing the data used to arrive at the fair value of the interest rate swap contact

An auditor is assessing the appropriateness of management's rationale for selecting a model to measure the fair value of debt securities. If, during the current year, an active trading market for the debt security was introduced, the auditor should validate each of the following criteria, except whether the valuation model is: A. Appropriate for the debt security being valued. B. Evaluated and appropriately applied based on generally accepted accounting principles. C. Consistently applied from prior periods. D. Appropriate for the environment in which the entity operates.

C. Consistently applied from prior periods. Due to the active trading market being introduced this year, its likely that the method would be inconsistent with prior year

An auditor's inquiries of management disclosed that the entity recently invested in a series of energy derivatives to hedge against the risks associated with fluctuating oil prices. Under these circumstances, the auditor should: A. Document the derivatives in the auditor's communication with those charged with governance. B. Perform analytical procedures to determine if the derivatives are properly valued. C. Confirm the marketability of the derivatives with a commodity specialist. D. Examine the contracts for possible risk exposure and the need to recognize losses.

D. Examine the contracts for possible risk exposure and the need to recognize losses

When a client engages in transactions involving derivatives, the auditor should: A. Notify those charged with governance about the risks involved in derivative transactions. B. Add an explanatory paragraph to the auditor's report describing the risks associated with each derivative. C. Develop an understanding of the economic substance of each derivative. D. Confirm with the client's broker whether the derivatives are for trading purposes.

C. Develop an understanding of the economic substance of each derivative

Which of the following best describes the auditor's responsibility with respect to fair values? A. The auditor should determine whether management has the intent and ability to carry out courses of action that may affect fair values. B. The auditor should assess the risk of material misstatement of fair value measurements. C. The auditor should obtain sufficient appropriate audit evidence to provide reasonable assurance that fair value measurements and disclosures are in conformity with GAAP. D. The auditor should make fair value measurements and disclosures in accordance with GAAP and should identify and support any significant assumptions used.

C. The auditor should obtain sufficient appropriate audit evidence to provide reasonable assurance that fair value measurements and disclosures are in conformity with GAAP

Which of the following statements is correct with regard to management use of a broker's quotation to support a fair value estimate? A. If the quotation is from the broker who initially sold the instrument, the evidence might be less objective and might need supplementation. B. A broker's quotation that is based on a cash flow methodology cannot be accepted. C. The auditor is not required to obtain an understanding of the broker's methodology for obtaining the fair value estimate. D. A broker's quotation that is based on a combination of methodologies cannot be accepted.

A. If the quotation is from the broker who initially sold the instrument, the evidence might be less objective and might need supplementation This is because the broker that initially sold it may be biased and may overstate the value of it

An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by: A. The investee's decision to reduce cash dividends declared per share of its common stock. B. A substantial fluctuation in the price of the investee's common stock on a national stock exchange. C. An error in recording amortization of the excess of the investor's cost over the investment's underlying book value. D. An error in recording the unrealized gain from an increase in the fair value of available-for sale securities in the income account for trading securities.

C. An error in recording amortization of the excess of the investor's cost over the investment's underlying book value

An auditor is testing the reasonableness of dividend income from investments in publicly-held companies. The auditor most likely would compute the amount that should have been received and recorded by the client by: A. Electronically accessing the details of dividend records on the Internet. B. Confirming the details with the investee companies' registrars. C. Reading the details of the board of directors' meetings. D. Examining the details of the client's most recent cutoff bank statement.

A. Electronically accessing the details of dividend records on the Internet

An auditor would most likely verify the interest earned on bond investments by: A. Recomputing the interest earned on the basis of face amount, interest rate, and period held. B. Testing the internal controls over cash receipts. C. Confirming the bond interest rate with the issuer of the bonds. D. Vouching the receipt and deposit of interest checks.

A. Recomputing the interest earned on the basis of face amount, interest rate, and period held

An auditor scans a client's investment records for the period just before and just after the year-end to determine that any transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evidence about management's financial statement assertions of: A. Understandability of presentation and classification, and valuation and accuracy. B. Valuation and accuracy, and rights and obligations. C. Existence, and understandability of presentation and classification. D. Rights and obligations, and existence.

A. Understandability of presentation and classification, and valuation and accuracy Reviewing transfers between categories for proper recording would be classification [trading, AFS, held to maturity] and valuation [market or amortized cost]

How should an auditor verify the valuation of marketable securities at the balance sheet date? A. Observe the inventory count of all securities at the balance sheet date. B. Compare the prices of the securities to published closing prices at the balance sheet date. C. Inquire of management that securities are valued at fair value. D. Confirm all securities with the related custodians and test interest income.

B. Compare the prices of the securities to published closing prices at the balance sheet date

How should an auditor verify the existence and rights and obligations of marketable securities at the balance sheet date? A. Observe the inventory count of all securities at the balance sheet date. B. Compare the prices of the securities to published closing prices at the balance sheet date. C. Inquire of management that securities are valued at fair value. D. Confirm all securities with the related custodians and test interest income.

A. Observe the inventory count of all securities at the balance sheet date D. Confirm all securities with the related custodians and test interest income

Which of the following audit procedures would be most appropriate to test the valuation of the collateral of a delinquent loan receivable? A. Reviewing the debtor's purchase records to test the historical value of the collateral. B. Sending a positive confirmation letter to the debtor to confirm the loan balance. C. Obtaining a current value appraisal of the collateral. D. Performing a site visit to physically inspect the collateral.

C. Obtaining a current value appraisal of the collateral

A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will: A. Count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the balance sheet date. B. Request the client to have the bank seal the safe deposit box until the auditor can count the securities at a subsequent date. C. Request the bank to confirm to the auditor the contents of the safe deposit box at the balance sheet date. D. Examine supporting evidence for transactions occurring during the year.

B. Request the client to have the bank seal the safe deposit box until the auditor can count the securities at a subsequent date

To establish the existence and ownership of a long-term investment in the common stock of a publicly traded company, an auditor ordinarily performs a security count or: A. Relies on the client's internal accounting controls if the auditor has reasonable assurance that the control activities are being applied as prescribed. B. Confirms the number of shares owned with the issuing company. C. Determines the market price per share at the balance sheet date from published quotations. D. Confirms the number of shares owned that are held by an independent custodian.

D. Confirms the number of shares owned that are held by an independent custodian Outside independent custodian is best

In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of management's financial statement assertions of existence and: A. Rights and obligations. B. Valuation and allocation. C. Completeness. D. Understandability of presentation and classification.

A. Rights and obligations

An auditor testing long-term investments would ordinarily use analytical review as the primary audit procedure to ascertain the reasonableness of the: A. Valuation of marketable equity securities. B. Existence and ownership of investments. C. Classification of gains and losses on the disposal of securities. D. Completeness of recorded investment income

D. Completeness of recorded investment income

In performing a count of negotiable securities, an auditor records the details of the count on a security count worksheet. What other information is usually included on this worksheet? A. An analysis of realized gains and losses from the sale of securities during the year. B. A description of the client's procedures that prevent the negotiation of securities by just one person. C. An evaluation of the client's internal control concerning physical access to the securities. D. An acknowledgment by a client representative that the securities were returned intact.

D. An acknowledgment by a client representative that the securities were returned intact This helps to maintain accountability for the securities, and reduce likelihood of misappropriation

Which of the following internal controls would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments? A. Senior management verifies that securities in the bank safe deposit box are registered in the entity's name. B. The internal auditor compares the securities in the bank safe deposit box with recorded investments. C. The treasurer vouches the acquisition of securities by comparing brokers' advices with canceled checks. D. The controller compares the current market prices of recorded investments with the brokers' advices on file.

B. The internal auditor compares the securities in the bank safe deposit box with recorded investments C.S.AR = Completeness.Source.Accounting Records Source being bank safe deposit box Accounting records being recorded investments

Which of the following internal controls would an entity most likely use to assist in satisfying the rights and obligations assertion related to long-term investments? A. Senior management verifies that securities in the bank safe deposit box are registered in the entity's name. B. The internal auditor compares the securities in the bank safe deposit box with recorded investments. C. The treasurer vouches the acquisition of securities by comparing brokers' advices with canceled checks. D. The controller compares the current market prices of recorded investments with the brokers' advices on file.

A. Senior management verifies that securities in the bank safe deposit box are registered in the entity's name C. The treasurer vouches the acquisition of securities by comparing brokers' advices with canceled checks.

Which of the following internal controls would an entity most likely use to assist in satisfying the valuation assertion related to long-term investments? A. Senior management verifies that securities in the bank safe deposit box are registered in the entity's name. B. The internal auditor compares the securities in the bank safe deposit box with recorded investments. C. The treasurer vouches the acquisition of securities by comparing brokers' advices with canceled checks. D. The controller compares the current market prices of recorded investments with the brokers' advices on file.

D. The controller compares the current market prices of recorded investments with the brokers' advices on file

Which of the following controls most likely would give the greatest assurance that securities held as investments are safeguarded? A. Proceeds from the sale of investments are received by an employee who does not have access to securities. B. Investment acquisitions are authorized by a member of the Board of Directors before execution. C. There is no access to securities between the year-end and the date of the auditor's security count. D. Access to securities requires the signatures and presence of two designated officials.

D. Access to securities requires the signatures and presence of two designated officials

Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities? A. The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to the general ledger. B. An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities. C. A designated member of the board of directors controls the securities in a bank safe-deposit box. D. The internal auditor verifies the marketable securities in the entity's safe each year on the balance sheet date.

B. An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities Individual who has the record keeping responsibilities over that asset should never have access to it

Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained? A. Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger. B. The purchase and sale of investments are executed on the specific authorization of the board of directors. C. Direct access to securities in the safety deposit box is limited to only one corporate officer. D. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel.

D. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel

When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the: A. Interest and dividend checks are mailed directly to an entity employee who is authorized to sell securities. B. Securities are registered in the name of the trust company, rather than the entity itself. C. Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records. D. Trust company places the securities in a bank safe-deposit vault under the custodian's exclusive control.

C. Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records

Which of the following would an auditor least likely consider with respect to fair values? A. The effect on fair value measurement and disclosures of information available subsequent to the audit. B. Segregation of duties between those committing the entity to certain transactions and those responsible for undertaking the valuations related to those transactions. C. Whether the valuation methods used are appropriate in relation to the industry in which the entity operates. D. The role of information technology in determining fair value measurements and disclosures.

A. The effect on fair value measurement and disclosures of information available subsequent to the audit

Reviewing the repair and maintenance expense accounts in order to locate items that should’ve been capitalized [as assets instead] & reviewing lease and rental agreements to ensure that finance leases are properly recorded instead of operating leases applies to which transaction assertion? A) cut-off B) valuation, allocation and accuracy C) existence / occurrence D) completeness

D) completeness This can also be assertion, understandability of presentation and classification

Vouching a sample of purchases to the receiving report and vendor invoice OR sample of dispositions to the asset retirement form is an example of which assertion? A) cut-off B) valuation, allocation and accuracy C) existence / occurrence D) completeness

C) existence / occurrence

Reviewing fixed asset purchases and dispositions from shortly before and after year end is an example of which assertion? A) cut-off B) valuation, allocation and accuracy C) existence / occurrence D) completeness

A) cut-off This is to ensure recording in the proper period

Recalculating for reasonableness and conformity with GAAP OR removal of accumulated depreciation for fixed assets to be sold or retired is an example of which assertion? A) understandability of presentation and classification B) valuation, allocation and accuracy C) existence / occurrence D) completeness

B) valuation, allocation and accuracy

Examining samples of significant charges to repairs and maintenance expense for items that should be capitalized OR reviewing lease transactions for proper classification as operating or finance leases is an example of which assertion? A) understandability of presentation and classification B) valuation, allocation and accuracy C) existence / occurrence D) completeness

A) understandability of presentation and classification D) completeness

For segregation of duties for payroll processing, who is responsible for hiring new employees and maintaining personnel records [hire date, department, salary and position]? A) supervisor B) human resources department C) board of directors D) internal auditor

B) human resources department

For segregation of duties for payroll processing, who is responsible for approving all pay base data [hours, absence, time off, etc]? A) supervisor B) human resources department C) board of directors D) internal auditor

A) supervisor

For payroll check preparation, if service organization is not used, who is responsible for issuing unsigned payroll checks? Next, who signs these checks? A) treasurer/CFO; HR department B) human resources department; payroll department C) board of directors; supervisor D) payroll department; treasurer/CFO

D) payroll department; treasurer/CFO

Select the appropriate responsibilities of employees in payroll department 1. Initiate changes in hours or rates 2. Computes salary based on information received [total hours worked] 3. Sign checks A) 1 and 3 only B) 2 only C) 1, 2 and 3 D) 2 and 3 only

B) 2 only

When performing search for unrecorded liabilities [balance] or tracing sample of time cards to payroll register [transactions] which assertion is being tested? A) completeness B) cut off C) existence / occurrence D) valuation, allocation and accuracy

A) completeness

When vouching amounts for client’s calculation of payroll accrual to supporting documentation [balance] or selecting a sample of payroll register entries and comparing with time cards and approved time reports, which assertion is being tested? A) completeness B) cut off C) existence / occurrence D) valuation, allocation and accuracy

C) existence / occurrence

For controls over equity, all stock issuances, dividend declarations, and treasury stock purchases must be authorized by _____________ A) treasurer B) human resources department C) board of directors D) internal auditor

C) board of directors Evidence can be found in minutes of board meetings

________________ ensures that stock issuances comply with AOI, prepares stock certificates and maintains records of shares authorized, issued and outstanding A) treasurer B) stock transfer agent C) board of directors D) internal auditor

B) stock transfer agent If not available, it can be an officer of the entity that has NO accounting responsibilities

-Reviewing board minutes for evidence of new debt -obtain new debt agreements -trace debt contracts to FS -obtain listing of all debt and agree to GL -debt disclosed on bank confirm to be traced to debt agreements and FS -notes and board confirmed directly with creditors -inquire with management on new debt and off balance sheet transactions -review interest expense for payments to debt holders not included on debt listing -examine lease agreements for proper classification All of the above would test the assertion: A) completeness B) cut off C) existence / occurrence D) valuation, allocation and accuracy

A) completeness

-confirm notes or bonds directly with creditors -review board minutes for evidence of new agreements and inspect agreements -vouch transactions recorded during CY to board minutes All of the above would test the assertion: A) completeness B) cut off C) existence / occurrence D) valuation, allocation and accuracy

C) existence / occurrence

The auditor examining the due dates of notes and bonds to determine whether the debt should be classified as short term or long term A) completeness B) understandability of presentation and classification C) existence / occurrence D) valuation, allocation and accuracy

B) understandability of presentation and classification

For auditing equity balance and transactions, if client USES stock transfer agent, _________________ is primary evidence For auditing equity balance and transactions, if client DOES NOT USE stock transfer agent, _________________ is primary evidence A) stock certificate book; board minutes B) bank confirmation; subsidiary GL C) subsidiary GL; audit committee minutes D) 3rd party confirmation; stock certificate book

D) 3rd party confirmation; stock certificate book This provides evidence for both completeness and existence / occurrence

In performing search for unrecorded retirements of fixed assets, this is test of ___________________ In performing analysis of repair and maintenance account, this is a test of ____________________ A) completeness; existence B) existence; completeness C) understandability of classification; existence D) valuation; cut-off

B) existence; completeness

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would: A. Tour the client's facilities, and then analyze the repair and maintenance account. B. Analyze the repair and maintenance account, and then tour the client's facilities. C. Tour the client's facilities, and then inspect the property ledger and the insurance and tax records. D. Inspect the property ledger and the insurance and tax records, and then tour the client's facilities.

D. Inspect the property ledger and the insurance and tax records, and then tour the client's facilities Search for unrecorded retirements of fixed assets, THINK EXISTENCE (E.AR.S) = Existence.Accounting records.Source)

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

C. Compare interest expense with the bond payable amount for reasonableness THE CORRECT STATEMENTS FOR THE INCORRECT ANSWERS: A. Examine documentation of bond instruments B. Confirm outstanding bonds payable balance D. Recalculate bond premiums and discounts

An auditor traces the serial numbers on equipment to a nonissuer's sub-ledger. Which of the following management assertions is supported by this test? A. Understandability of presentation and classification. B. Valuation and allocation. C. Rights and obligations. D. Completeness.

D. Completeness C.S.AR = Completeness.Source.Accounting records Source being serial numbers Accounting records being sub-ledger

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. Analytical procedures for current year property and equipment transactions. B. 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. D. Tests of controls and extensive tests of property and equipment balances at the end of the year.

C. Tests of controls and limited tests of current year property and equipment transactions CR is low, making DR high, which would require test of controls for effectiveness and limited substantive testing

A weakness in internal control over recording retirements of equipment may cause an auditor to: A. Trace additions to the "other assets" account to search for equipment that is still on hand but no longer being used. B. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year. C. Select certain items of equipment from the accounting records and locate them in the plant. D. Inspect certain items of equipment in the plant and trace those items to the accounting records.

C. Select certain items of equipment from the accounting records and locate them in the plant When you see recording retirements of fixed asset equipment, immediately think EXISTENCE (E.AR.S) Accounting records being equipment from records Source being Items in plant

Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions? A. Are requests for major repairs approved at a higher level than the department initiating the request? B. Are prenumbered purchase orders used for equipment and periodically accounted for? C. Are requests for purchases of equipment reviewed for consideration of soliciting competitive bids? D. Are procedures in place to monitor and properly restrict access to equipment?

D. Are procedures in place to monitor and properly restrict access to equipment?

Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal accounting control system that provides for: A. Segregation of duties of employees in the accounts payable department. B. Review and approval of the monthly depreciation entry by the plant supervisor. C. Examination by the internal auditor of vendor invoices and canceled checks for property acquisitions. D. Investigation of variances within a formal budgeting system.

D. Investigation of variances within a formal budgeting system This method would show costs over budget or acquisition under budget

Which of the following controls is most likely to prevent the improper disposition of equipment? A. A periodic analysis of the scrap sales and the repairs and maintenance accounts. B. Periodic comparison of removal work orders to authorizing documentation. C. The use of serial numbers to identify equipment that could be sold. D. A separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders.

D. A separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders

Which of the following internal controls most likely would justify a reduced assessed level of control risk concerning plant and equipment acquisitions? A. The review of prenumbered purchase orders to detect unrecorded trade-ins. B. Periodic physical inspection of plant and equipment by the internal audit staff. C. Comparison of current-year plant and equipment account balances with prior-year actual balances. D. Approval of periodic depreciation entries by a supervisor independent of the accounting department.

B. Periodic physical inspection of plant and equipment by the internal audit staff

Which of the following procedures would an auditor most likely complete to test the existence assertion of property, plant, and equipment? A.OPTION A. Obtaining a detailed fixed-asset register and ensuring items are appropriately capitalized. B.OPTION B. Obtaining a detailed fixed-asset register and ensuring depreciation methods are applied consistently. C.OPTION C. Obtaining a listing of all current-year additions, vouching significant additions to original invoices, and determining that they have been placed in service. D.OPTION D. Obtaining a listing of current-year additions and verifying that items are recorded in the proper period Which of the following procedures would an auditor most likely complete to test the existence assertion of property, plant, and equipment? A. Obtaining a detailed fixed-asset register and ensuring items are appropriately capitalized. B. Obtaining a detailed fixed-asset register and ensuring depreciation methods are applied consistently. C. Obtaining a listing of all current-year additions, vouching significant additions to original invoices, and determining that they have been placed in service. D. Obtaining a listing of current-year additions and verifying that items are recorded in the proper period

C. Obtaining a listing of all current-year additions, vouching significant additions to original invoices, and determining that they have been placed in service EXISTENCE. E.AR.S = Accounting records to Source Accounting records being additions Source being invoices

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of: A. Rights and obligations. B. Completeness. C. Existence. D. Valuation and allocation.

D. Valuation and allocation Deal that items are included in FS at appropriate amounts

Determining that proper amounts of depreciation are expensed provides assurance about management's assertion of: A. Rights and obligations, and valuation. B. Completeness, accuracy, and occurrence. C. Valuation, allocation, and accuracy. D. Existence, completeness, and accuracy.

C. Valuation, allocation, and accuracy Proper amounts of depreciation are expensed and capitalized - VALUATION AND ALLOCATION Financial statement presentation - ACCURACY

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all: A. Expenditures for property and equipment have not been charged to expense. B. Expenditures for property and equipment have been recorded in the proper period. C. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period. D. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense

A. Expenditures for property and equipment have not been charged to expense Expenditures have been capitalized and have NOT been charged to expense

Determining that proper amounts of depreciation are expensed provides assurance about management's financial statement assertion(s) of: A. Rights and obligations. B. Valuation and allocation. C. Existence. D. Completeness.

B. Valuation and allocation Refers to allocation of asset cost overtime and valuation of fixed assets on BS

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertions of: Existence - YES / NO Understandability of presentation and classification - YES / NO

Existence - YES [examining new additions can help with looking back at invoices and support, if it exists] Understandability of presentation and classification - NO [nothing will be spelled out for presentation and disclosures while looking at new additions schedule]

Which of the following combinations of procedures would an auditor most likely perform to obtain evidence about fixed asset additions? A. Inspecting documents and physically examining assets. B. Recomputing calculations and obtaining written management representations. C. Confirming ownership and corroborating transactions through inquiries of client personnel. D. Observing operating activities and comparing balances to prior period balances.

A. Inspecting documents and physically examining assets Inspect documents [purchase invoices]

In testing for unrecorded retirements of equipment, an auditor most likely would: A. Scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance expense. B. Compare depreciation journal entries with similar prior-year entries in search of fully depreciated equipment. C. Select items of equipment from the accounting records and then locate them during the plant tour. D. Inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger.

C. Select items of equipment from the accounting records and then locate them during the plant tour Unrecorded retirements of equipment = THINK EXISTENCE.Accouting records.Source (EARS)

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

B. Plant assets were retired during the current year Accumulated depreciation is a natural credit account. If debits hit the account, retirements must’ve been debited, and credit to asset account

When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection. The policy's absence most likely indicates the possibility of a (an): A. Lien on the plant equipment. B. Insurance premium due but not recorded. C. Understatement of insurance expense. D. Deficiency in the coinsurance provision.

A. Lien on the plant equipment If there’s a lien, the original policy would likely be in the possession of the lien holder

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the: A. Operational responsibility from the recordkeeping responsibility. B. Authorization of transactions from the custody of related assets. C. Administrative controls from the internal accounting controls. D. Human resources function from the controllership function.

B. Authorization of transactions from the custody of related assets

Which of the following procedures represents a weakness in internal controls for payroll? A. The accounting department wires transfers funds to the payroll bank account. The transfer is based on totals from the payroll department summary. B. The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department. C. The payroll department prepares checks using a signature plate. The treasurer supervises the process before payroll checks are distributed. D. The payroll department prepares checks. The chief financial officer signs the payroll checks.

B. The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department Undistributed checks MUST BE returned to independent party for follow up instead

In determining the effectiveness of an entity's internal controls relating to the occurrence assertion for payroll transactions, an auditor most likely would inquire about and: A. Observe the segregation of duties concerning personnel responsibilities and payroll disbursement. B. Inspect evidence of accounting for prenumbered payroll checks. C. Verify the preparation of the monthly payroll account bank reconciliation. D. Recompute the payroll deductions for employee fringe benefits.

A. Observe the segregation of duties concerning personnel responsibilities and payroll disbursement Observing would see that only valid employee receive their paychecks

In determining the effectiveness of an entity's internal controls relating to the completeness assertion for payroll transactions, an auditor most likely would inquire about and: A. Observe the segregation of duties concerning personnel responsibilities and payroll disbursement. B. Inspect evidence of accounting for prenumbered payroll checks. C. Verify the preparation of the monthly payroll account bank reconciliation. D. Recompute the payroll deductions for employee fringe benefits.

B. Inspect evidence of accounting for prenumbered payroll checks

Which of the following internal controls most likely would prevent direct labor hours from being charged to manufacturing overhead? A. Periodic independent counts of work-in-process for comparison to recorded amounts. B. Comparison of daily journal entries with approved production orders. C. Use of time tickets to record actual labor worked on production orders. D. Reconciliation of work-in-process inventory with periodic cost budgets.

C. Use of time tickets to record actual labor worked on production orders

Which of the following procedures most likely would be considered a weakness in an entity's internal controls over payroll? A. Payroll checks are prepared by the payroll department and signed by the treasurer. B. The personnel department sends employees' termination notices to the payroll department. C. The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department. D. A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary.

C. The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department Instead, unclaimed checks should be returned to independent party [example is cashier in treasurer’s department]

Which of the following payroll control activities would most effectively ensure that payment is made only for work performed? A. Require all employees to record arrival and departure by using the time clock. B. Require employees to have their direct supervisors approve their time cards. C. Require all employees to sign their time cards. D. Have a payroll clerk recalculate all time cards.

B. Require employees to have their direct supervisors approve their time cards Supervisors would observe employee and determine whether employees were present and working

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to: A. Uncover fictitious employees who are receiving payroll checks. B. Verify that payroll taxes are deducted from employees' gross pay. C. Determine whether internal control activities are operating effectively. D. Identify potential liabilities for unpaid payroll taxes.

D. Identify potential liabilities for unpaid payroll taxes

The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a (an): A. Payroll register entry. B. Employee personnel record. C. Employee Form W-2. D. Clock card or time ticket.

A. Payroll register entry Testing the existence requires starting at Accounting Records, then vouching to Source documents - E.AR.S

An auditor most likely would perform substantive tests of details on payroll transactions and balances when: A. The assessed level of control risk relative to payroll transactions is low. B. Accrued payroll expense consists primarily of unpaid commissions. C. Analytical procedures indicate unusual fluctuations in recurring payroll entries. D. Cutoff tests indicate a substantial amount of accrued payroll expense.

C. Analytical procedures indicate unusual fluctuations in recurring payroll entries Unusual fluctuations would trigger more substantive testing for payroll transactions/balances

An auditor most likely would extend substantive tests of payroll when: A. Overpayments are discovered in performing tests of details. B. Payroll expense is substantially higher than in the prior year. C. Employees complain to management about too much overtime. D. Payroll is extensively audited by the state government.

A. Overpayments are discovered in performing tests of details Significant error or unusual activity would trigger more substantive testing

A test of a payroll system involved comparing an individual's number of overtime hours a week with an average of weekly overtime during a similar period in a prior year and evaluating the results. This is an example of what type of test? A. Category test. B. Detail test. C. Range test. D. Reasonableness test.

D. Reasonableness test Data in two or more fields are compared to prior year periods

A test of a payroll system involved checking whether an individual's weekly overtime hours fell within an acceptable predetermined range based on company policy or historical limits. This is an example of what type of test? A. Category test. B. Detail test. C. Range test. D. Reasonableness test.

C. Range test Data in two or more fields are compared to predetermined minimums and maximums

When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and: A. Observing the distribution of paychecks. B. Footing and crossfooting the payroll register. C. Inspecting payroll tax returns. D. Recalculating payroll accruals.

D. Recalculating payroll accruals

In auditing payroll, an auditor most likely would: A. Observe entity employees during a payroll distribution. B. Verify that checks representing unclaimed wages are mailed. C. Trace individual employee deductions to entity journal entries. D. Compare payroll costs with entity standards or budgets.

D. Compare payroll costs with entity standards or budgets With a broad question like this, think more of more likely to do as substantive test

In auditing an entity's computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning: A. Overpayment of employees for hours not worked. B. Missing employee identification numbers. C. Withholding of taxes and Social Security contributions. D. Control and distribution of unclaimed checks.

D. Control and distribution of unclaimed checks This is the only test choice that is NOT AUTOMATED. Other answer choices can be testing using computerized data

In performing tests concerning the granting of stock options, an auditor should: A. Determine that sufficient treasury stock is available to cover any new stock issued. B. Trace the authorization for the transaction to a vote of the board of directors. C. Confirm the transaction with the Secretary of State in the state of incorporation. D. Verify the existence of option holders in the entity's payroll records or stock ledgers.

B. Trace the authorization for the transaction to a vote of the board of directors

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable? A. Are the proceeds from notes payable used for the purchase of noncurrent assets? B. Are two or more authorized signatures required on checks that repay notes payable? C. Are assets that collateralize notes payable critically needed for the entity's continued existence? D. Are direct borrowings on notes payable authorized by the board of directors?

D. Are direct borrowings on notes payable authorized by the board of directors?

An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management's assertions about: A. Completeness. B. Understandability of presentation and classification. C. Occurrence. D. Valuation and accuracy.

B. Understandability of presentation and classification This helps to classify the note as current[short term] or non current [long term]

An auditor's program to examine long-term debt should include steps that require: A. Inspecting the accounts payable subsidiary ledger. B. Verifying the existence of the bondholders. C. Investigating credits to the bond interest income account. D. Examining bond trust indentures.

D. Examining bond trust indentures this helps to ensure client is not in violation of any covenants in indentures

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

B. Minutes of the board of directors To ensure that they were authorized to

When a client company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning: A. Restrictions on the payment of dividends. B. The number of shares subject to agreements to repurchase. C. The number of shares issued and outstanding. D. Guarantees of preferred stock liquidation value.

C. The number of shares issued and outstanding

The primary responsibility of a bank acting as registrar of capital stock is to: A. Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation. B. Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation. C. Act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury stock. D. Account for stock certificates by comparing the total shares outstanding to the total in the shareholders subsidiary ledger.

B. Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation Primary responsibility of the registrar is to verify that the stock is issued only with proper authorization

An auditor's plan to examine long-term debt most likely would include steps that require: A. Correlating interest expense recorded for the period with outstanding debt. B. Comparing the carrying amount of the debt to its year-end market value. C. Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt. D. Verifying the existence of the holders of the debt by direct confirmation.

A. Correlating interest expense recorded for the period with outstanding debt This is an analytical procedure regarding reasonableness of interest expense balance

During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management's assertions related to: A. Completeness. B. Existence. C. Valuation and allocation. D. Understandability of presentation and classification.

D. Understandability of presentation and classification Restrictions noted on retained earnings would be disclosed in FS

In performing substantive tests regarding the granting of stock options to senior management of an issuer, an auditor most likely would: A. Confirm with those members of management as to whether they are actually option holders. B. Verify the existence of option holders in the issuer's payroll and human resources records. C. Trace the authorization for the options granted to the board of directors' approval. D. Review the public records of the SEC to determine whether the options were properly reported.

C. Trace the authorization for the options granted to the board of directors' approval

Misstatements that are __________________ are inconsequential, both individually and in aggregate, and when judged by any criteria of size, nature or circumstance. A) immaterial B) materially misstated C) not material D) clearly trivial

D) clearly trivial This amount can be designated by the auditor below which misstatement are clearly trivial and do not need to be accumulated

Examples of management bias would include: 1. Selective correction of misstatement brought to managements attention during audit 2. Identification of additional AJE’s made by management that offset misstatements discovered by auditor 3. Selection and application of accounting principles 4. Accounting estimates A) 1, 2, 3, and 4 B) 3 and 4 only C) 3 only D) 1, 2 and 3 only

A) 1, 2, 3, and 4 After discovering the bias, auditor should evaluate whether the bias results in material misstatements in the FS

If management does not make recommended entries and the auditor determines that the uncorrected errors are not material in the aggregate, the auditor should: A) document the errors in “summary of uncorrected errors and document the conclusion of FS not being misstated B) withdraw from engagement C) express adverse opinion D) revise the financials to correct misstatements

A) document the errors in “summary of uncorrected errors and document the conclusion of FS not being misstated

________________ is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that material misstatement of entity’s FS will not be prevented, or detected on timely basis A) design deficiency B) material weakness C) operating deficiency D) significant deficiency

B) material weakness Identification of an auditor of a material misstatement is a material weakness. The existence of a material weakness does NOT necessarily mean that the financial statement are materially misstated

________________ is a necessary control that is missing or improperly designed, meaning the control objective cannot be met A) design deficiency B) material weakness C) operating deficiency D) significant deficiency

A) design deficiency Is a type of control deficiency

________________ is a well designed control that does not function as intended, or the person performing it lacks the necessary qualifications or authority A) design deficiency B) material weakness C) operating deficiency D) significant deficiency

C) operating deficiency Is a type of control deficiency

________________ is a, or a combination of, control deficiencies that is less severe that’s a material weakness yet important to merit attention by those charged with governance A) design deficiency B) material weakness C) operating deficiency D) significant deficiency

D) significant deficiency

If sales made on account are OVERSTATED, means the auditor thinks that sales and related receivable are TOO ___________(1), and needs to be _____________(2) A) material; increased B) immaterial; adjusted C) large; smaller D) small; equal

C) large; smaller Entry for this would be: Debit Sales; Credit Accounts receivable

If expense made on account are UNDERSTATED, means the auditor thinks that expense and related payable are TOO ___________(1), and needs to be _____________(2) A) material; increased B) immaterial; adjusted C) large; smaller D) small; larger

D) small; larger Entry for this would be: Debit Payable; Credit Expenses

Name the difference in journal entries for Perpetual Inventory versus Periodic Inventory system:

Perpetual: 1. To record sale of item Debit Cash or AR; Credit Sales 2. To record relief of inventory Debit COGS; Credit Inventory Entries are recorded TOGETHER Periodic: 1. To record sale of item [recorded after every sale is made] Debit Cash or AR; Credit Sales 2. To record relief of inventory [second entry is recorded at end of the period] Debit COGS**; Credit Inventory Entries are recorded SEPARATELY, different points in time **Calculation of COGS: Beginning inventory + purchases = COGS available for sale COGS available for sale - Ending inventory [physical inventory count] = COGS

Which of the following circumstances most likely would cause an auditor to suspect that material misstatements exist in a client's financial statements? A. Management consults with another CPA firm about complex accounting matters. B. The assumptions used in developing the prior year's accounting estimates have changed. C. Negative confirmation requests yield fewer responses than in the prior year's audit. D. Differences between reconciliations of control accounts and subsidiary records are not investigated.

D. Differences between reconciliations of control accounts and subsidiary records are not investigated

According to PCAOB standards which one of the following statements does not reflect a qualitative standard that should be considered when evaluating the materiality of an uncorrected misstatement? A. The significance of the misstatement relative to the needs of users. B. The effects of misclassifications, for example, between operating and nonoperating. C. The dollar amount of the error. D. The cost of the correction.

C. The dollar amount of the error This represents a QUANTITATIVE standard, not QUALITATIVE

An auditor finds several errors in the financial statements that the client prefers not to correct. The auditor determines that the errors are not material in the aggregate. Which of the following actions by the auditor is most appropriate? A. Do not summarize the uncorrected errors in the working papers, and do not document a conclusion about whether the uncorrected errors cause the financial statements to be misstated. B. Document the errors in the summary of uncorrected errors, and document the conclusion that the errors do not cause the financial statements to be misstated. C. Summarize the uncorrected errors in the working papers, but do not document whether the errors cause the financial statements to be misstated. D. Document the conclusion that the errors do not cause the financial statements to be misstated, but do not summarize uncorrected errors in the working papers.

B. Document the errors in the summary of uncorrected errors, and document the conclusion that the errors do not cause the financial statements to be misstated

When determining whether uncorrected misstatements are material, individually or in the aggregate, an auditor of a nonissuer or issuer would consider each of the following, except: A. The size and nature of the misstatements. B. The cost of correcting the misstatements. C. The particular circumstances of each misstatement. D. The effect of uncorrected misstatements related to prior periods.

B. The cost of correcting the misstatements Know the distinction of cost of correcting the system or process [qualitative factor] versus cost of correcting the misstatement

For testing at the account level for issuers [accounts receivable], the auditor should compare the ending accounts receivable balance to ______________ A) audit materiality B) tolerable misstatement C) trivial D) performance materiality

B) tolerable misstatement For issuers - assessing individual account balances or classes of transactions, misstatement would be compared to tolerable misstatement

For testing at the account level for non-issuers [accounts receivable], the auditor should compare the ending accounts receivable balance to ______________ A) audit materiality B) tolerable misstatement C) trivial D) performance materiality

D) performance materiality For non-issuers - assessing individual account balances or classes of transactions, misstatement would be compared to tolerable misstatement

For considering all misstatements combined across the financial statement to decide if the FS as a whole are materially misstated, the auditor should compare to ______________ A) audit materiality B) tolerable misstatement C) trivial D) performance materiality

A) audit materiality

If an auditor becomes aware of a possible material misstatement in a nonissuer's comparative financial statements while performing the current-period audit, then the auditor should first: A. Provide a qualified opinion on the comparative financial statements as a whole. B. Perform additional audit procedures as necessary to determine whether a misstatement exists. C. Communicate the possible material misstatement to those charged with governance. D. Include an emphasis-of-matter paragraph in the audit report describing the misstatement.

B. Perform additional audit procedures as necessary to determine whether a misstatement exists

An issuer recorded $1,000,000 for a liability related to a pending lawsuit. The range of reasonable estimates that is supported by sufficient appropriate audit evidence is $1,200,000 to $1,400,000. Materiality for the financial statements as a whole is $10,000,000, performance materiality is $7,000,000, and $100,000 has been designated as an amount below which misstatements are clearly trivial. When accumulating and evaluating identified misstatements, what amount, if any, should the auditor of the issuer identify as the misstatement related to this liability? A. $200,000 B. $400,000 C. $0 D. $300,000

A. $200,000 Misstatement amount calculation is = Closest reasonable estimate supported by Audit evidence - recorded amount = 1,200,000 - 1,000,000 = 200,000

An auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it: A. Changes the company’s operating results from a net loss to a net income. B. Is the first time a misstatement has arisen from the relevant transaction cycle. C. Arises from a transaction cycle with controls that were determined to be operating effectively. D. Decreases management’s incentive compensation for the period.

A. Changes the company’s operating results from a net loss to a net income

According to PCAOB standards, which of the following does not represent an example of management bias? A. Management reporting all insurance purchases initially as an expense and then adjusting the unexpired portion into prepaid insurance at the end of the period. B. Selective correction of misstatements brought to management's attention during the audit. C. The identification by management of additional adjusting entries that offset misstatements accumulated by the auditor. D. Management decreasing the allowance for credit losses when there has been no change in the level of write-offs during the period.

A. Management reporting all insurance purchases initially as an expense and then adjusting the unexpired portion into prepaid insurance at the end of the period This is an example of proper matching principle accounting

Which of the following qualitative factors would an auditor consider most relevant to the consideration of whether a discovered misstatement is material? A. The company recently emerged from bankruptcy after receiving additional bank financing. B. The audit team found a miscalculation in the client's tax filing that does not affect the client's current financial statements, but has the effect of increasing its tax liability in future periods. C. The audit team found a misstatement that, if recorded, affects the client's compliance with loan covenants. D. The audit team found only one misstatement due to an error made by a new client employee.

C. The audit team found a misstatement that, if recorded, affects the client's compliance with loan covenants

An auditor's evaluation of uncorrected misstatements for an audit of an issuer should include evaluation of the effects of uncorrected misstatements detected in: A. The current year that relates to prior years, but not misstatements detected in prior years. B. The prior years, but not misstatements detected in the current year, that relate to prior years. C. The prior years or misstatements detected in the current year that relate to prior years, but not both. D. The prior years and misstatements detected in the current year that relate to prior years.

D. The prior years and misstatements detected in the current year that relate to prior years

According to PCAOB standards, what should an auditor do to evaluate the potential effect of management bias due to management's selective correction of misstatements? A. Reperform the substantive audit procedures that identified the uncorrected misstatements to evaluate their validity. B. Obtain an understanding of the reasons that management decided not to correct misstatements communicated by the auditor. C. Perform additional audit procedures to identify further uncorrected misstatements. D. Consider whether other forms of management bias could offset the selective correction of misstatements.

B. Obtain an understanding of the reasons that management decided not to correct misstatements communicated by the auditor

Misstatements discovered by the auditor were immaterial in the aggregate in prior years. Such misstatements should be: A. Considered in the evaluation of audit findings in the current year. B. Retested during the current-year tests of controls. C. Removed from the prior-year summary because they were immaterial. D. Disclosed by the client in the current-year financial statements.

A. Considered in the evaluation of audit findings in the current year

Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control procedure? A. Increase sample size of tests of controls. B. Assume that the deviation is an isolated occurrence without audit significance. C. Report the matter to the next higher level of authority within the entity. D. Make inquiries to understand the potential consequence of the deviation.

D. Make inquiries to understand the potential consequence of the deviation

Management's responses to inquiries can be corroborated by each of the following, except: A. Visits to the entity's premises and plant facilities. B. Observation of entity activities and operations. C. Preparation of the summary of unadjusted differences. D. Inspection of documents and internal control manuals.

C. Preparation of the summary of unadjusted differences After preparing this summary, additional evidence is necessary for sufficient detail

During testing, an auditor identifies unrecorded accounts payable of $50,000, which is determined to be a material amount for the year under audit. How should the auditor record this amount on the summary of possible misstatements, assuming that overstatements are recorded as a positive amount and understatements are recorded as a negative amount? Liabilities. Income Before Tax A. $(50,000). $50,000 B. $50,000. $50,000 C. $50,000. $(50,000) D. $(50,000). $(50,000)

Liabilities. Income Before Tax A. $(50,000). $50,000 Liability as UNDERSTATED (negative amount) Expense not recorded is OVERSTATED [positive amount]

An auditor has determined a materiality threshold of $100,000 for a client. The auditor has accumulated audit evidence that supports an allowance for credit losses in the range of $1.5 million to $1.8 million. The client recorded $800,000 as the allowance for credit losses and declines to record any additional allowance. What proposed adjustment will the auditor include in the summary of unadjusted differences? A. Debit credit loss expense $850,000; credit allowance for credit losses $850,000. B. Debit credit loss expense $700,000; credit allowance for credit losses $700,000. C. Debit credit loss expense $750,000; credit allowance for credit losses $750,000. D. Debit credit loss expense $1,100,000; credit allowance for credit losses $1,100,000.

B. Debit credit loss expense $700,000; credit allowance for credit losses $700,000 Misstatement amount calculation is = Closest reasonable estimate supported by Audit evidence - recorded amount = 1,500,000 - 800,000 = 700,000

An auditor has set the materiality level for the financial statements as a whole at $125,000. Which of the following misstatements would the auditor most likely consider material? A. The client's estimate of the allowance for credit losses is $40,000 more than the auditor's estimate. B. The client misclassified $42,000 of supplies expense as miscellaneous expense. C. The client did not record $47,000 in trade accounts payable at year-end. D. The client did not disclose $45,000 of related party transactions in the footnotes.

D. The client did not disclose $45,000 of related party transactions in the footnotes Likely to be QUALITATIVELY MATERIAL

Three primary purpose for obtaining written representation letter from management 1. Confirm representation explicitly or implicitly given to the auditor 2. Indicate and document the continuing appropriateness of such representations 3. Reduce possibility of misunderstanding concerning matters that are subject to representations A) 3 only B) 1 and 2 only C) 1 and 3 only D) 1, 2, and 3

D) 1, 2, and 3

The representation letter is obtained at the end of the auditors fieldwork and covers the period up to _______________ A) date of tax return B) auditor’s report C) final date of fieldwork D) date of financials

B) auditor’s report

Refusal to furnish a written representation letter generally results in _______________ or ________________ A) modified; adverse B) unmodified; clean opinion C) disclaimer; withdrawal D) modified; disclaimer

C) disclaimer; withdrawal Same goes for if the auditor concludes of sufficient doubt about the integrity of management - express disclaimer or withdraw from engagement Rep letter is REQUIRED. This is considered a scope limitation if not furnished

Who should sign a representation letter? A) Executive director / secretary B) HR / CFO C) COO / internal auditor D) CEO / CFO

D) CEO / CFO Any member of management with overall responsibility for financial and operating matters who are responsible for and knowledgeable about items contained in letter. Other officers and employees also may be asked to sign

Which of the following matters would an auditor most likely include in a management representation letter? A. The reasonableness of significant assumptions used in making accounting estimates. B. Communications with those charged with governance concerning weaknesses in internal control. C. Plans to acquire or merge with other entities in the subsequent year. D. Management's acknowledgment of its responsibility for the detection of employee fraud.

A. The reasonableness of significant assumptions used in making accounting estimates

An auditor is reporting on comparative financial statements for three years. Which of the following statements is correct regarding written representations from management? A. The representation letter needs to address only the most current year covered in the report. B. The representation letter needs to address only the two most recent years covered in the report. C. The representation letter needs to address all of the years being covered in the report. D. The representation letter needs to address the prior-year's financial statements not covered in the report.

C. The representation letter needs to address all of the years being covered in the report

Management should address written representations about a firm's annual audit to the: A. Firm's attorneys. B. Board of directors. C. Shareholders. D. Auditor.

D. Auditor

Whose signatures should be included in the management representation letter to the auditor? A. Chief information officer and chief operating officer B. Corporate secretary and treasurer C. Chairman of the audit committee and chief operating officer D. President and chief financial officer

D. President and chief financial officer CEO

Which of the following statements is correct regarding a management representation letter? A. It should be dated as of the end of the fiscal period. B. Representation should be obtained for all periods that are reported upon, even if management was not present during those periods. C. It should be signed by the CFO and the engagement partner. D. Management's representations should not be limited to amounts that are considered material to the financial statements.

B. Representation should be obtained for all periods that are reported upon, even if management was not present during those periods

To which of the following matters would materiality limits not apply in obtaining written management representations? A. Losses from purchase commitments at prices in excess of market value. B. The availability of minutes of stockholders' and directors' meetings. C. Reductions of obsolete inventory to net realizable value. D. The disclosure of compensating balance arrangements involving related parties.

B. The availability of minutes of stockholders' and directors' meetings

"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. Letter for an underwriter. B. Report on internal controls. C. Special report. D. Management representation letter.

D. Management representation letter

During the annual audit of Ajax Corp., a publicly held company, Jones, CPA, a continuing auditor, determined that illegal political contributions had been made during each of the past seven years, including the year under audit. Jones notified the board of directors about the illegal contributions, but they refused to take any action because the amounts involved were immaterial to the financial statements. Jones should reconsider the intended degree of reliance to be placed on the: A. Letter of audit inquiry to the client's attorney. B. Prior year's audit plan. C. Preliminary judgment about materiality levels. D. Management representation letter.

D. Management representation letter

Management representations should be obtained about all of the following, except: A. Instances of immaterial fraud involving employees who have significant roles in internal control. B. Management's consultation with other accountants. C. The absence of unrecorded transactions. D. Uncorrected misstatements identified by the auditor.

B. Management's consultation with other accountants This discussion may occur between auditor and those charged with governance, but no representation is required

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

B. Management acknowledges its responsibilities for the design and implementation of programs and controls to detect fraud ***Choice D would be correct, only if the FS was fairly stated in accordance with US GAAP [framework]

Which of the following matters is most likely to be included in a management representation letter as a specific representation? A. Information concerning fraud by the CFO. B. Length of a material contract with a new customer. C. Reason for a significant increase in revenue over the prior year. D. The competency and objectivity of the internal audit department.

A. Information concerning fraud by the CFO

An auditor of a nonissuer should request that management provide written representations regarding uncorrected misstatements in the financial statements that state: A. Whether management believes that the effects of uncorrected misstatements are immaterial, individually and in the aggregate, to the financial statements as a whole. B. The individual and cumulative differences between the auditor's point estimates and the recorded amounts for uncorrected misstatements. C. Management's rationale for not correcting misstatements noted during the course of the audit. D. Management's acceptance of responsibility for the auditor's opinion, if modified due to the uncorrected misstatements.

A. Whether management believes that the effects of uncorrected misstatements are immaterial, individually and in the aggregate, to the financial statements as a whole

To which of the following matters would materiality limits not apply when obtaining written client representations? A. Noncompliance with contractual agreements. B. Unasserted claims and assessments. C. Fraud involving management. D. Losses from sales commitments.

C. Fraud involving management

Which of the following statements might be included among additional written client representations obtained by the auditor? A. Management acknowledges that there are no material weaknesses in internal control. B. Compensating balances and other arrangements involving restrictions on cash balances have been disclosed. C. Management acknowledges responsibility for illegal actions committed by employees. D. Sufficient audit evidence has been made available to permit the issuance of an unmodified opinion.

B. Compensating balances and other arrangements involving restrictions on cash balances have been disclosed

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

D. The belief that misstatements identified by the auditor and not corrected are immaterial This is for anything that is immaterial, both individually and in aggregate, to the FS taken as a whole

Which of the following expressions most likely would be included in a management representation letter? A. Certain computer files and other required audit evidence may exist only for a short period of time and only in computer-readable form. B. We do not intend to provide any information that may be construed to constitute a waiver of the attorney-client privilege. C. There are no significant deficiencies in internal control identified during the prior-year's audit of which those charged with governance are unaware. D. No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements.

D. No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements

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. "No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements." B. "We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities." C. "Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion." D. "There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed."

C. "Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion." This would NOT be said by management representation letter. Auditors would have this included in their auditor;s report

Which of the following statements about management's written representations regarding uncorrected misstatements is correct in the audit of a nonissuer? A. Management is precluded from commenting on identified misstatements within its written representation. B. Obtaining management's written representation relieves the auditor of the need to form a conclusion on the effects of uncorrected immaterial misstatements. C. A summary of the uncorrected misstatements should be included in or attached to the written representation letter. D. Management should state that all misstatements identified during the audit have been corrected.

C. A summary of the uncorrected misstatements should be included in or attached to the written representation letter

A limitation on the scope of an auditor's examination sufficient to preclude an unmodified opinion will always result when management: A. Prevents the auditor from reviewing the audit documentation of the predecessor auditor. B. Refuses to furnish a management representation letter to the auditor. C. Fails to correct a material internal control weakness that had been identified during the prior year's audit. D. Engages the auditor after the year-end physical inventory count is completed.

B. Refuses to furnish a management representation letter to the auditor

An auditor should assess whether an issuer's management philosophy and operating style promote the development of: A. Productive employees and innovative products. B. Effective internal control over financial reporting. C. Efficient policies, procedures, and practices. D. Consistent revenue growth and sustainable profits.

B. Effective internal control over financial reporting

For communication of control deficiencies, Significant deficiencies and material weaknesses, even though corrected during audit, MUST be communicated on timely basis in writing to ________________ and ________________ A) treasurer; HR B) management; those charged with governance C) CFO; audit supervisor D) audit engagement partner; HR

B) management; those charged with governance This applies to control deficiencies

For communication of control deficiencies, although it is recommended that the written communication be made by the report release date, a window extending _______ beyond this date is acceptable A) 60 days B) 45 days C) 1 year D) 30 days

A) 60 days

For communication on other deficiencies, auditor should communicate with _________________ A) management, only B) management and those charged with governance C) CFO; audit supervisor D) audit engagement partner, only

A) management, only

An auditor's letter issued on significant deficiencies relating to a nonissuer's internal control observed during a financial statement audit should: A. Indicate that the significant deficiencies should be disclosed in the annual report to the entity's shareholders. B. Indicate that the audit's purpose was to report on the financial statements and not to provide an opinion on internal control. C. Include a paragraph describing management's assessment concerning the effectiveness of internal control. D. Include a brief description of the tests of controls performed in searching for significant deficiencies and material weaknesses.

B. Indicate that the audit's purpose was to report on the financial statements and not to provide an opinion on internal control

Which of the following statements is correct about an auditor's required communication with those charged with governance? Assume those charged with governance are not involved in managing the entity. A. Significant deficiencies in internal control previously reported to those charged with governance that have not been corrected need not be communicated again. B. Disagreements with management about the application of accounting principles are not required to be communicated to those charged with governance if they have been appropriately resolved. C. Any matters communicated to those charged with governance also are required to be communicated to the entity's management. D. The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management.

D. The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management

Which of the following statements is correct concerning an auditor's required communication with those charged with governance? A. If matters are communicated in writing, the report is appropriate for general use. B. This communication is required to occur before the auditor's report on the financial statements is issued. C. If matters are communicated in writing, the report is required to be distributed to both those charged with governance and management. D. This communication should include disagreements with management about significant audit adjustments, whether or not satisfactorily resolved.

D. This communication should include disagreements with management about significant audit adjustments, whether or not satisfactorily resolved

Which of the following is not a reason why most companies have established audit committees? A. The New York Stock Exchange requires listed companies to have audit committees. B. The use of an audit committee strengthens the public’s sense of the independence of the external auditor. C. Large accounting firms strongly support the function of an audit committee. D. The SEC requires companies to establish audit committees.

D. The SEC requires companies to establish audit committees SEC strongly recommends, but it is NOT A REQUIREMENT

Which of the following items should not be included in the communication of the planned scope and timing of a financial statement audit for an issuer? A. Factors affecting materiality. B. Probable high-risk audit procedures. C. Planned approach toward internal control. D. Potential use of internal audit staff.

B. Probable high-risk audit procedures Mentioning risk risk audit procedures would compromise the effectiveness of the audit by making it too predictable

Which of the following matters is an auditor not required to communicate to those charged with governance? A. The level of responsibility assumed by the auditor under generally accepted auditing standards. B. The degree of reliance the auditor placed on the management representation letter. C. The basis for the auditor's conclusions about the reasonableness of management's sensitive accounting estimates. D. Significant adjustments arising from the audit that were recorded by management.

B. The degree of reliance the auditor placed on the management representation letter

Which of the following groups is considered a subgroup ordinarily charged with assisting the board of directors in fulfilling its oversight responsibilities? A. Internal auditors. B. Senior management. C. Secured creditors. D. Audit committee.

D. Audit committee

Which of the following factors should an auditor consider in making a judgment about whether a control deficiency is a significant deficiency? I.The likelihood that a control will fail to prevent or detect a misstatement. II.The magnitude of the misstatement that could result from the deficiency. A. II only. B. I only. C. Both I and II. D. Neither I nor II.

C. Both I and II

Which of the following is not considered evidence of failure in the operation of internal controls? A. Misrepresentation by client personnel to the auditor. B. Insufficient control consciousness. C. Undue bias or lack of objectivity. D. Management override of controls.

B. Insufficient control consciousness This is considered an example of deficiency in design of controls

To what degree, if at all, is a significant deficiency related to a material weakness? A. It is less severe than a material weakness. B. It is more severe than a material weakness. C. It is unrelated to a material weakness. D. It is equivalent to a material weakness.

A. It is less severe than a material weakness

Which of the following matters would an auditor most likely consider to be a significant deficiency in internal control to be communicated to management and those charged with governance? A. Management's current plans to reduce its ownership equity in the entity. B. Evidence of a lack of objectivity by those responsible for accounting decisions. C. Management's failure to renegotiate unfavorable long-term purchase commitments. D. Recurring operating losses that may indicate going concern problems.

B. Evidence of a lack of objectivity by those responsible for accounting decisions

Clara, a CPA, has been engaged by Teton Manufacturing Co. to perform an integrated audit. During the audit of internal control, Clara noted that Employee A’s job responsibilities included being the cashier who has custody over cash and performing the reconciliation of the accounts receivable subsidiary ledger to the general ledger. This control deficiency is best described as a: A. Control deficiency in design B. Significant deficiency C. Material weakness D. Control deficiency in operation

A. Control deficiency in design Necessary control is missing or existing control does not achieve desired objective [ no segregation of duties]

In its tests of controls over the Tarbet Township Housing Assistance Program, Smith, CPA, has found that the clerk assigned to monitor and limit participation in the housing program to a target population of individuals meeting income criteria is routinely overruled by his supervisor in order to meet volume based level of effort requirements. Ineligible participants whose income exceeds program limits are routinely admitted to the program. Smith would characterize this as a(n): A. Inherent risk of noncompliance. B. Deficiency in the operation of internal control. C. Audit risk of noncompliance. D. Deficiency in the design of internal control.

B. Deficiency in the operation of internal control Operation deficiency because the properly designed control assigned to the clerk is being overruled by his supervisor

In an entity under audit, employees have the opportunity to change their time worked after their time cards have been approved. This is an example of which of the following types of deficiency? A. Design. B. Operating. C. Procedural. D. Accounting.

A. Design

Raupp, CPA, uncovered an instance of fraud when performing their tests of controls over the check disbursement process at Bernard Inc. After assessing the impact of the fraud scheme, the client determined that only an immaterial amount of cash was misappropriated during the scheme and that only the company's CFO was involved. Based on the circumstances, Raupp should consider the finding: A. A material deficiency. B. A material weakness. C. A significant deficiency. D. A control deficiency.

B. A material weakness Although question states “immaterial amount of cash misappropriated,”. Fraud is mentioned, therefore making this a material weakness

Which of the following statements is correct concerning significant deficiencies in internal control with respect to a financial statement audit of a nonissuer? A. An auditor may report that no significant deficiencies were noted during an audit. B. All significant deficiencies are also considered to be material weaknesses. C. An auditor is required to search for significant deficiencies during an audit. D. An auditor may communicate significant deficiencies during an audit or after the audit's completion.

D. An auditor may communicate significant deficiencies during an audit or after the audit's completion

A control deficiency would be considered a material weakness when the likelihood that potential financial statement misstatements will not be prevented, or detected/corrected, and the magnitude of such misstatements are at a minimum: Likelihood - REASONABLE / PROBABLE Magnitude - MORE THAN INCONSEQUENTIAL / MATERIAL

Likelihood - REASONABLE Magnitude - MATERIAL A material weakness is a deficiency, or combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected/corrected.

In a financial statement audit of a nonissuer, a previously communicated significant deficiency that has not been corrected, ordinarily should be communicated again: A. In writing, during the current audit. B. Only if the deficiency is considered a material weakness. C. Unless the entity accepts that degree of risk because of cost-benefit considerations. D. Only if the deficiency has a material effect on the auditor's assessment of control risk.

A. In writing, during the current audit

What is the most appropriate method used to communicate a significant deficiency that was identified in the prior year audit of a nonissuer and that has not yet been corrected? A. Verbally during the current audit, referencing the previous written communication, date, and recipient of the communication. B. Nonissuers do not require communication of significant deficiencies that were communicated in prior year audits. C. In writing during the current audit, referencing the previous written communication and date of the communication. D. In writing during the current audit, referencing the previous written communication, date, and recipient of the communication.

C. In writing during the current audit, referencing the previous written communication and date of the communication

Which of the following is an auditor required to do when conducting a financial statement only audit? A. If the auditor becomes aware of a significant deficiency, communicate in writing to management and those charged with governance. B. Plan and design procedures to identify deficiencies that are less severe than a material weakness. C. Express an opinion on internal control. D. Report the absence of significant deficiencies.

A. If the auditor becomes aware of a significant deficiency, communicate in writing to management and those charged with governance

In a group audit of a nonissuer, which of the following matters should the group engagement team include in a communication to group management? A. The auditor's conclusion that fraud does not exist in the financial statements B. Significant deficiencies in internal control identified in the audit C. Results of inquiries about the professional reputation and standing of each component auditor D. A listing of significant audit procedures to be performed by the component auditors

B. Significant deficiencies in internal control identified in the audit

In an audit of an issuer's financial statements, the auditor's written communication regarding control deficiencies should do which of the following? A. Include a statement that one of the objectives of the audit was to provide assurance on internal control. B. Distinguish between matters considered significant deficiencies and those considered material weaknesses. C. Define that a deficiency in operation exists when a control necessary to meet the control objective is missing. D. Include a statement that all deficiencies in internal control were identified and communicated to those charged with governance.

B. Distinguish between matters considered significant deficiencies and those considered material weaknesses

During the current year audit of a nonissuer, the audit team identified the same control deficiencies that were communicated during the prior year audit. These control deficiencies were not significant deficiencies or material weaknesses. Management indicated that these control deficiencies were not corrected in the current year due to cost constraints. How should the auditor communicate these control deficiencies during the current year audit? A. Either verbally or in writing. B. No communication is required. C. Verbally. D. In writing.

B. No communication is required With this special constraint with cost, no further communication is needed

An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes: A. Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud. B. The auditor's responsibility for ensuring that those charged with governance are aware of any significant deficiencies in internal control that come to the auditor's attention. C. Management's responsibility for identifying mitigating factors when the auditor has doubt about the entity's ability to continue as a going concern. D. The auditor's responsibility for determining the preliminary judgments about materiality and audit risk factors.

B. The auditor's responsibility for ensuring that those charged with governance are aware of any significant deficiencies in internal control that come to the auditor's attention

When communicating internal control related matters noted in a financial statement audit of a nonissuer, an auditor's report issued on significant deficiencies should indicate that: A. A material weakness exists when the deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions. B. Errors or fraud may occur and not be detected because there are inherent limitations in any internal control. C. The purpose of the audit was to report on the financial statements and not to provide assurance on internal control. D. The issuance of an unmodified opinion on the financial statements may be dependent on corrective follow-up action.

C. The purpose of the audit was to report on the financial statements and not to provide assurance on internal control

Which of the following statements concerning material weaknesses and significant deficiencies is correct with respect to a financial statement audit of a nonissuer? A. All significant deficiencies are material weaknesses. B. An auditor should report immediately material weaknesses and significant deficiencies discovered during an audit. C. All material weaknesses are significant deficiencies. D. An auditor need not identify and communicate material weaknesses separately from significant deficiencies.

C. All material weaknesses are significant deficiencies Since a material weakness in internal control is important enough to merit attention by those charged with governance, it is also considered a significant deficiency

When reporting on conditions relating to an entity's internal control observed during an audit of the financial statements of a nonissuer, the auditor should include a: A. Description of tests performed to search for material weaknesses. B. Statement of positive assurance on internal control. C. Restriction on the use of the report. D. Paragraph describing the inherent limitations of internal control.

C. Restriction on the use of the report

Which of the following statements is correct concerning significant deficiencies noted in an audit of the financial statements of a nonissuer? A. Significant deficiencies should not be re-communicated each year if management has acknowledged its understanding of such deficiencies. B. The auditor should separately identify those significant deficiencies that are considered to be material weaknesses. C. The auditor is obligated to search for significant deficiencies that could adversely affect the entity's ability to record and report financial data. D. Significant deficiencies are material weaknesses in the design or operation of specific internal control components.

B. The auditor should separately identify those significant deficiencies that are considered to be material weaknesses

Which of the following statements is correct concerning an auditor's required communication of significant deficiencies in internal control noted during a financial statement audit of a nonissuer? A. An auditor should communicate significant deficiencies after tests of controls, but before commencing substantive tests. B. An auditor should perform tests of controls on significant deficiencies before communicating them to the client. C. An auditor's report on significant deficiencies should include a restriction on the distribution of the report. D. A significant deficiency previously communicated during the prior year's audit that remains uncorrected causes a scope limitation.

C. An auditor's report on significant deficiencies should include a restriction on the distribution of the report

Which of the following is not true about significant deficiencies in internal control? A. The auditor is required to communicate to management and those charged with governance all significant deficiencies in internal control that he or she observes during the audit. B. The auditor is required to search for significant deficiencies in internal control. C. All material weaknesses in internal control are also significant deficiencies. D. The auditor should not indicate to management that no significant deficiencies in internal control were noted during the audit.

B. The auditor is required to search for significant deficiencies in internal control THIS IS NOT A REQUIREMENT FROM AN AUDITOR - False statement

Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in a financial statement audit of a nonissuer? A. The auditor must communicate significant deficiencies, but need not separately identify material weaknesses. B. The auditor must communicate material weaknesses, but need not disclose significant deficiencies. C. Neither significant deficiencies nor material weaknesses are required to be communicated. D. The auditor must communicate both significant deficiencies and material weaknesses.

D. The auditor must communicate both significant deficiencies and material weaknesses

Which of the following circumstances would be inappropriate for the auditor to communicate to those charged with governance? A. A material misstatement was noted by the auditor and corrected by management. B. Management has consulted with other accountants about accounting and auditing matters during the period under audit. C. The auditor is requesting representations regarding the financial statements from management. D. No significant deficiencies in internal control exist that would affect the financial statements.

D. No significant deficiencies in internal control exist that would affect the financial statements INAPPROPRIATE TO DISCUSS WITH TCWG

Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control in a financial statement audit of a nonissuer? A. The auditor need not search for significant deficiencies in internal control but should document and communicate any such deficiencies that are discovered. B. The auditor need not search for significant deficiencies in internal control unless management requests an attestation that "no significant deficiencies in internal control were noted in the audit." C. The auditor should search for significant deficiencies in internal control if the auditor expects that controls are operating effectively (i.e., if the auditor plans to rely on controls). D. The auditor should design and apply tests of controls to discover significant deficiencies in internal control that could result in material misstatements.

A. The auditor need not search for significant deficiencies in internal control but should document and communicate any such deficiencies that are discovered

Clara, a CPA, has been engaged by nonissuer Baxter Manufacturing Co. to perform a financial statement audit. During the audit, Clara identified a control deficiency that was a significant deficiency but not a material weakness. Management corrected the deficiency during the audit. How should the significant deficiency be communicated? A. In writing to those charged with governance only by the report release date or within 60 days after the report release date. B. In writing to management only by the report release date or within 60 days after the report release date. C. In writing to management and those charged with governance by the report release date or within 60 days after the report release date. D. Significant deficiencies corrected during the audit do not need to be communicated.

C. In writing to management and those charged with governance by the report release date or within 60 days after the report release date

An auditor's tests of controls for completeness for the revenue cycle usually include determining whether: A. Each receivable is collected subsequent to the year end. B. An invoice is prepared for each shipping document. C. Each credit memo is properly approved. D. Each invoice is supported by a customer purchase order.

B. An invoice is prepared for each shipping document Trace sample of shipping documents to sales invoices to test completeness of sales C.S.AR Completeness.Source.Accounting records

Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations? A. Analytical procedures indicate that few exceptions are expected. B. Subsequent cash receipts are unusually difficult to verify. C. The recipients are likely to sign the confirmations without devoting proper attention to them. D. The combined assessed level of inherent risk and control risk is low.

C. The recipients are likely to sign the confirmations without devoting proper attention to them

An auditor examining inventory most likely would use variables sampling rather than attributes sampling to: A. Identify whether inventory items are properly priced. B. Estimate whether the dollar amount of inventory is reasonable. C. Discover whether misstatements exist in inventory records. D. Determine whether discounts for inventory are properly recorded.

B. Estimate whether the dollar amount of inventory is reasonable Variables sampling is used to determine whether a given account balance is reasonable

An auditor that is performing tests of details on sales transactions decides to examine a sample of sales invoices to determine if they are recorded in the proper revenue accounts. This audit procedure is performed to determine: A. Understandability of presentation and classification. B. Existence and occurrence. C. Completeness. D. Valuation, allocation, and accuracy.

A. Understandability of presentation and classification

The auditor is planning to use accounts payable confirmations when auditing the client’s accounts payable. The use of accounts payable confirmations will test which of the following assertions? A. Cutoff. B. Rights and obligations. C. Existence (only). D. Existence and completeness.

D. Existence and completeness

Which of the following statements is correct about an auditor's required communication with those charged with governance? Assume those charged with governance are not involved in managing the entity. A. Any matters communicated to those charged with governance also are required to be communicated to the entity's management. B. Significant deficiencies in internal control previously reported to those charged with governance that have not been corrected need not be communicated again. C. The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management. D. Disagreements with management about the application of accounting principles are not required to be communicated to those charged with governance if they have been appropriately resolved.

C. The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management Since TCWG were not involved, auditor would fill them in on errors they discovered

In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the: A. Classification between balance sheet portfolios. B. Valuation of marketable equity securities. C. Completeness of recorded investment income. D. Existence of unrealized gains or losses in the portfolio.

C. Completeness of recorded investment income These procedures would probably include a comparison of the recorded investment income with the expected amount (based upon the related interest rate, dividends declared, etc.) and the income balance audited in the prior year.

After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management's financial statement assertion(s) of: Rights and obligations - YES / NO Allocation and valuation - YES / NO

Rights and obligations - NO Allocation and valuation - YES [credit granting policies tests that AR is collectible

Which of the following is an accurate statement regarding accounts payable confirmations? A. Accounts payable confirmations may be used by the auditor if monthly vendor statements are not available from the client. B. Accounts payable confirmations are considered a primary test when auditing a client’s accounts payable. C. Both positive and negative accounts payable confirmations may be used by the auditor. D. The auditor would typically select vendors with large balances when sending out accounts payable confirmations.

A. Accounts payable confirmations may be used by the auditor if monthly vendor statements are not available from the client Facts on accounts payable: -when good external evidence supporting AP balance is available, there is no need to send confirmations -AP confirmations would either be positive or blank confirmations, not negative -Also, auditor would select vendors with small or zero balances for AP confirmations

Which of the following internal control activities is not usually performed in the vouchers payable department? A. Approving vouchers for payment by having an authorized employee sign the vouchers. B. Accounting for unused prenumbered purchase orders and receiving reports. C. Matching the vendor's invoice with the related receiving report. D. Indicating the asset and expense accounts to be debited.

B. Accounting for unused prenumbered purchase orders and receiving reports This is a control typically done in purchasing or receiving department instead. Having this done in vouchers payable department would hinder segregation of duties b/c the same group that approves payments would also be controlling documentation flow

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory? A. Scanning perpetual inventory, production, and purchasing records. B. Performing cutoff procedures for shipping and receiving. C. Examining paid vendor invoices. D. Tracing inventory items from the tag listing back to the physical inventory quantities.

B. Performing cutoff procedures for shipping and receiving Assurance that goods in transit (shipped or received) are appropriately included or excluded from inventory

An audit client has a valid reason for requesting that a certain account receivable that the auditor has selected for confirmation not be confirmed. Under these circumstances, the auditor should: A. Select at random a different account for confirmation that is approximately the same size. B. Verify the account balance by inspecting the client's bank statements and cash receipt records. C. Explain to the client that the request will most likely cause the auditor to disclaim an opinion. D. Request the client's management to document the matter in the management representation letter.

B. Verify the account balance by inspecting the client's bank statements and cash receipt records This is a valid alternative procedure that can be performed to confirm AR balance

A. Vendors with whom the entity has previously done business

When performing an audit, a CPA notes that credit loss expense is unusually high relative to similar firms in the industry. The CPA should recommend which of the following controls? A. Use approved price lists for customer billing. B. Send monthly statements of account to customers with outstanding balances. C. Require credit checks on all new customers. D. Reconcile accounts receivable in the general ledger with the subsidiary ledger.

C. Require credit checks on all new customers This helps to determine the likelihood of a debtors ability to pay. Credit checks result in company extending less credit to customers who are unlikely to pay, which would result is lower credit loss expense

On receiving a client's bank cutoff statement, an auditor most likely would trace: A. Checks dated after year-end listed in the cutoff statement to the year-end outstanding checklist. B. Deposits in transit listed in the cutoff statement to the year-end bank reconciliation. C. Deposits recorded in the cash receipts journal after year-end to the cutoff statement. D. Prior-year checks listed in the cutoff statement to the year-end outstanding checklist.

D. Prior-year checks listed in the cutoff statement to the year-end outstanding checklist

C. Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records Concealing fraud would be reduced if trust company deals only with the person reconciling the accounts, and not with the employees responsible for maintaining records

The objective of tests of controls of transactions is to: A. Detect material misstatements in the financial statements. B. Evaluate whether management's controls operated effectively. C. Attain assurance about the reliability of the information system relevant to financial reporting. D. Comply with generally accepted auditing standards.

B. Evaluate whether management's controls operated effectively. C. Attain assurance about the reliability of the information system relevant to financial reporting

Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated? A. Searching for customer-returned goods that were not reported as returns. B. Reviewing bank transfers recorded as cash received from customers. C. Examining reported purchase returns that appear too low. D. Examining vendor statements for amounts not reported as purchases.

D. Examining vendor statements for amounts not reported as purchases AP would be understated if auditor saw that vendor statements were not recorded as purchases or payables

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of: A. Classification. B. Cutoff. C. Occurrence. D. Completeness.

D. Completeness Completeness because a gap in recorded sequence numbers may indicate an unrecorded sale

An auditor's tests of controls for completeness for the revenue cycle usually include determining whether: A. Each credit memo is properly approved. B. Each receivable is collected subsequent to the year end. C. An invoice is prepared for each shipping document. D. Each invoice is supported by a customer purchase order.

C. An invoice is prepared for each shipping document Revenue cycle flow Customer order >> credit approval >> shipping documents (bill of lading) >> sales invoice >> recording the sale >> cash receipts >> sales returns and credit memos

An auditor's tests of controls for accuracy for the revenue cycle usually include determining whether: A. Each credit memo is properly approved. B. Each receivable is collected subsequent to the year end. C. An invoice is prepared for each shipping document. D. Each invoice is supported by a customer purchase order.

A. Each credit memo is properly approved

An auditor's tests of controls for existence for the revenue cycle usually include determining whether: A. Each credit memo is properly approved. B. Each receivable is collected subsequent to the year end. C. An invoice is prepared for each shipping document. D. Each invoice is supported by a customer purchase order.

B. Each receivable is collected subsequent to the year end D. Each invoice is supported by a customer purchase order

D. Reasonableness test Data in two or more fields are checked for consistency

In searching for unrecorded liabilities, an auditor most likely would examine the: A. Files of purchase requisitions for items ordered just before the year-end. B. Details of accounts receivable confirmations that are classified as "exceptions." C. Cutoff bank statement for deposits recorded in the books, but not by the bank. D. Receiving reports for items received before year-end, but not yet recorded.

D. Receiving reports for items received before year-end, but not yet recorded

Bright Inc. is a nonissuer who engaged Cooper CPAs to perform an integrated audit. Cooper CPAs did not identify any significant deficiencies or material weaknesses during the engagement. The auditor is required to report the: A. Absence of material weaknesses only. B. Absence of significant deficiencies only. C. Absence of both significant deficiencies and material weaknesses. D. The auditor is not required to report the absence of significant deficiencies or material weaknesses.

D. The auditor is not required to report the absence of significant deficiencies or material weaknesses The auditor may report communications as an option, but it is NOT REQUIRED. Reporting deficiencies is discouraged because it could be misunderstood as providing a higher level of assurance than the auditor gives on internal controls

An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management's assertions about: A. Understandability of presentation and classification. B. Completeness. C. Occurrence. D. Valuation and accuracy.

A. Understandability of presentation and classification The reason for this is to determine the classification of the note payable as current loan or non current-long term

Clara, a CPA, has been engaged by Baxter Manufacturing Co., a nonissuer, to perform a financial statement audit. No misstatements were identified during the audit. Which of the following may exist even though no misstatements were identified? A. Significant deficiencies. B. Neither significant deficiencies nor material weaknesses can exist if no misstatements were identified. C. Material weaknesses. D. Both significant deficiencies and material weaknesses.

D. Both significant deficiencies and material weaknesses Both can exist, even if there were no misstatements identified during an audit

Which assertion is best to detect unrecorded accounts receivable or accounts payable? A) completeness B) existence C) valuation and accuracy D) understandability of presentation and classification

A) completeness Select either subsequent deposit detail or subsequent cash disbursements detail (Source), then examine supporting documentation (Accounting records)

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because: A. This is a duplication of cutoff tests. B. Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment. C. Accounts payable balances at the balance sheet date may not be paid before the audit is completed. D. There is likely to be other reliable external evidence available to support the balances

D. There is likely to be other reliable external evidence available to support the balances The documents available to support AP balances come from external sources, which make them more reliable. For example, vendor invoices, purchase orders, receiving report and canceled checks that come from independent parties outside the client’s organization

Misstatements discovered by the auditor were immaterial in the aggregate in prior years. Such misstatements should be: A. Removed from the prior-year summary because they were immaterial. B. Retested during the current-year tests of controls. C. Disclosed by the client in the current-year financial statements. D. Considered in the evaluation of audit findings in the current year.

D. Considered in the evaluation of audit findings in the current year. This is the best answer choice because an immaterial error from prior year at some point, in aggregate, become material

A4 - MCQ Flashcards

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