Which of the following departments typically approves purchase requisitions?
- Raw materials stores
- Cost accounting
- Inventory management
- IT
Inventory Management
Which of the following best describes the existence assertion for inventory?
- Purchase requisitions are initiated by authorized personnel
- Recorded inventory is on hand
- Inventory is properly accumulated from journals and ledgers
- All inventory is recorded
Recorded inventory is on hand
Failure to record inventory related transactions in the proper period can affect all of the following accounts except:
- Sales
- Receivables
- Cost of goods sold
- Prepaid expenses
Prepaid Expenses
Which of the following is not a misstatement related to the existence assertion for inventory?
- Unauthorized production activity has led to overstocked inventory
- Fictitious inventory is recorded in the ledger
- Recorded inventory is not on hand because of theft
- None of the above (all are misstatements of the inventory existence assertion)
Unauthorized production activity has led to overstocked inventory
Which of the following is not a misstatement related to the valuation assertion for inventory?
- Inventory flow assumptions (e.g., LIFO) are not properly reflected in the balance
- Obsolete inventory is recorded at cost
- Inventory that is fictitious is recorded at an amount above the going price
- Standard costs are not applied accurately
Inventory that is fictitious is recorded at an amount above the going price
In testing the client’s purchases and sales cutoff at year-end, which of the following would the auditor consider an error?
- Inventory counted and recorded in the year-end inventory records is also recorded as sold after year-end.
- Inventory counted and recorded in the year-end inventory records is also recorded as purchased before year-end.
- Inventory counted and recorded in the year-end inventory records is also recorded as a sale before year-end.
- None of the above.
Inventory counted and recorded in the year-end inventory records is also recorded as a sale before year-end.
Which of the following audit procedures would provide the least reliable evidence that the client has legal title to inventories?
- Confirmation of inventories at locations outside the client’s facilities
- Analytical review of inventory balances compared to purchasing and sales activities
- Observation of physical inventory counts
- Examination of paid vendors’ invoices
Observation of physical inventory counts
For the purpose of determining proper inventory cutoff, the auditor will look at a sample of which of the following for a few days before and after year-end?
- Materials requisitions
- Production schedules
- Receiving documents
- Purchase orders
Receiving documents
Which of the following internal controls most likely would reduce the risk of theft of customer receipts by an entity’s employees?
- A bank lockbox system ( a bank lockbox allows customer remittances to be sent directly to the bank)
- Prenumbered remittance advices
- Monthly bank reconciliations
- Daily deposit of cash receipts
A bank lockbox system ( a bank lockbox allows customer remittances to be sent directly to the bank)
Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting between intercompany bank accounts?
- Review the composition of authenticated deposit slips
- Review subsequent bank statements received directly from the banks
- Prepare an interbank transfer schedule
- Prepare year-end bank reconciliations
Prepare an interbank transfer schedule
Which of the following is a type of bank account?
- General cash account
- Imprest cash account
- Branch account
- All of the above are types of bank accounts
All are types of bank accounts
Which of the following audit procedures is the most appropriate when internal control over cash is believed to be weak and theft of cash prior to being recorded on the books is not a significant concern?
- Proof of cash
- Evaluate the ratio of cash to current liabilities
- Test the controls and use a reliance approach to reduce substantive testing
- None of the above
Proof of Cash
Comparing the dates for recording cash receipts in the cash receipts journal with the dates the cash was deposited in the bank helps test which of the following assertions:
- Accuracy
- Authorization
- Cutoff
- Classification
Cutoff
Spencer, CPA, has been engaged to audit the fair value measurements of Christensen & Son, a high-tech company in the Midwest. During the audit, Spencer must obtain evidence that management of Christensen & Son has appropriately valued the Available for Sale Stock Portfolio, containing investments in Fortune 100 company stocks. What valuation level would be used to value this account?
- Level 1
- Level 2
- Level 3
- Multiple levels are possible
Level 1
Assume Spencer also needs to value the FASB Statement No. 123(R) compensation expense related to stock options granted to Christensen’s employees. The Black-Scholes Option-Pricing Model is used to value these options. Christensen’s stock is largely held by owners and is not actively traded, nor are the company’s options. However, similar publicly-traded companies do exist. What valuation level would be used for the company’s stock price used to calculate the FASB Statement 123 (R) compensation expense?
- Level 1
- Level 2
- Level 3
- Multiple levels are possible
Level 2
Which of the following is not a principle of professional conduct as defined by the Code of Professional Conduct?
- Integrity
- Due care
- Reporting
- Scope and nature of services
Reporting
T/F:
An engagement partner for an audit client could directly own shares of stock in the client if the amount was clearly immaterial to the partner.
False
A CPA, while performing an audit, strives to achieve independence in appearance in order to:
Reduce risk and liability
Comply with the generally accepted standards of fieldwork
Become independent in fact
Maintain public confidence in the profession
Maintain public confidence in the profession
An auditor, using the same degree of due care as other members of the profession, fails to create an adequate allowance for bad debts. This occurrence is an example of:
- Negligence
- Fraud
- An error in judgment
- Constructive negligence
Negligence
Which of the following is NOT required for establishing an auditor’s liability for negligence?
- An undetected material misstatement
- Failure to exercise due care
- A connection between the auditor’s negligence and a plaintiff’s loss
- A duty to conform to a standard of care
An undetected material misstatement
