Performing Specific Procedures to Obtain Evidence -- Other Procedures

Question 1

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to

A. Identify unusually large purchases that should be investigated further

B. Verify that cash disbursements were for goods actually received

C. Determine that purchases were properly recorded

D. Test whether payments were for goods actually ordered

Answer 1

C.

Tracing a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal provides evidence to determine that purchases were properly recorded. Although during this audit procedure the auditor might identify unusually large purchases that should be investigated further, this would not be the prevailing purpose of this substantive audit procedure. To verify that cash disbursements were for goods actually received would require vouching from the cash disbursements journal to the receiving reports. To test whether payments were for goods actually ordered would require vouching from the cash disbursements journal to the purchase orders.

Question 2

An auditor most likely would extend substantive tests of payroll when

A. Payroll is extensively audited by the state government.

B. Payroll expense is substantially higher than in the prior year.

C. Overpayments are discovered in performing tests of details.

D. Employees complain to management about too much overtime.

Answer 2

C.

Finding overpayments while performing tests of details may cause the auditor to increase the assessed risk of material misstatement. Generally, as the risk of material misstatement increases, the acceptable level of detection risk decreases; this means, the extent of substantive procedures must increase. Answers (A), (B), and (D) do not necessarily increase the risk of material misstatement.

Question 3

Cooper, CPA, performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all

A. Merchandise received

B. Vendors’ invoices

C. Receiving reports

D. Canceled checks

Answer 3

B.

The objective of the auditor’s test is to determine whether all merchandise for which the client was billed was received. The population for this test consists of all vendor’s invoices. The auditor would select a sample of vendor’s invoices and then trace them to supporting receiving reports to assure that the merchandise for which the client was billed was received.

Question 4

A weakness of internal control over recording retirements of equipment may cause an auditor to

A. Inspect certain items of equipment in the plant and trace those items to the accounting records.

B. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year.

C. Trace additions to the “other assets” account to search for equipment that is still on hand but no longer being used.

D. Select certain items of equipment from the accounting records and locate them in the plant.

Answer 4

D is corrent because testing from the population of asset accounting records to certain pieces of equipment in the plant will provide assurance that recorded assets are being used by the company. If the auditor finds that recorded assets are no longer in use, there would appear to be a problem recording retirements of assets.
C is incorrect because the question addresses unrecorded equipment retirements, not retirements of assets still on hand that have been reclassified as “other assets.”
B is incorrect because reviewing depreciation of property, plant, and equipment does not directly address the question of unrecorded retirement.
A is incorrect because testing from a population of equipment on hand and tracing to the accounting records assures that equipment on hand has been recorded but does not provide assurance that all equipment retired has been recorded.

Question 5

An auditor decides to perform substantive tests on a client’s property and equipment balance as of an interim date. The auditor has not obtained evidence about the operating effectiveness of relevant controls. What additional work must be performed to extend the audit conclusions from the interim date to the balance sheet date?

A. Tests of controls for the period between the beginning of the fiscal year and the interim date.

B. Tests of controls for the period between the interim date and the balance sheet date.

C. Substantive procedures for the period between the interim date and the balance sheet date.

D. Analytical comparison of the current-year interim balance with the prior-year interim balance.

Answer 5

The correct answer is (C).

Since the auditor has not obtained evidence about the operating effectiveness of relevant controls for the interim period and has performed substantive tests on the property and equipment balance as of the interim date, the additional work performed to extend the audit conclusions from the interim date to the balance sheet date would be to perform substantive procedures for the period between the interim date and the balance sheet date.

Question 6

An auditor’s principal objective in analyzing repairs and maintenance expense accounts is to

A. Determine that all obsolete property, plant, and equipment assets were written off before the year-end

B. Verify that all recorded property, plant, and equipment assets actually exist

C. Discover expenditures that were expensed but should have been capitalized

D. Identify property, plant and equipment assets that cannot be repaired and should be written off

Answer 6

C.

By reviewing the repairs and maintenance expense accounts, an auditor may uncover transactions that involve assets that should be capitalized rather than expensed. The repairs and maintenance expense accounts are not involved in the write-off of obsolete assets. Property, plant, and equipment (PP&E) that cannot be repaired would not tend to involve transactions in the repairs and maintenance expense accounts either. To verify that all recorded PP&E assets exist, an auditor would tend to inspect the assets themselves against the listings in the PP&E accounts, rather than review expense accounts.

Question 7

In performing tests concerning the granting of stock options, an auditor should

A. Confirm the transaction with the Secretary of State in the state of incorporation

B. Verify the existence of option holders in the entity’s payroll records or stock ledgers

C. Determine that sufficient treasury stock is available to cover any new stock issued

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

Answer 7

D.

One of the primary objectives in testing related to Stockholder’s Equity and Capital accounts is to verify that capital transactions are appropriately authorized and approved. The granting of stock options would require board of director approval because it could affect the number of shares outstanding.

Question 8

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. Occurrence

B. Rights and obligations

C. Valuation and allocation

D. Completeness

Answer 8

D.

Assertions about completeness deal with whether all transactions, accounts, and disclosures that should be presented in the financial statements are included. Periodically accounting for the numerical sequence of documents and invoices helps ensure that all entries affecting those accounts have been recognized and posted. Answer (a) deals with whether recorded transactions have actually occurred and pertain to the entity. Answer (b) deals with whether assets are the rights of the entity and liabilities are the obligations of the entity. Answer (c) deals with whether assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts.

Question 9

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity’s aging of receivables to support management’s financial statement assertion of

A. Existence

B. Valuation and allocation

C. Completeness

D. Rights and obligations

Answer 9

B.

Valuation and allocation is the assertion that assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded. Answer (a) deals with whether assets, liabilities, or equity interests exist at a given date. Answer (c) deals with whether all transactions, accounts, and disclosures that should be presented in the financial statements are so included. Answer (d) deals with whether assets are the rights of the entity and liabilities are the obligations of the entity.

Question 10

Which of the following most likely would be detected by an auditor’s review of a client’s sales cutoff?

A. Shipments lacking sales invoices and shipping documents

B. Excessive write-offs of accounts receivable

C. Unrecorded sales at year-end

D. Lapping of year-end accounts receivable

Answer 10

C.

In general, cutoff tests are used to detect unrecorded transactions at the end of the period. In this question, the auditor would most likely detect unrecorded sales for the year by reviewing cutoff sales to determine that sales were recorded in the period in which title to the goods passed to the customer. Such a review would not reveal shipments lacking invoices, excessive write-offs of accounts receivable, or lapping of year-end accounts receivable.

Question 11

In testing the existence assertion for an asset, an auditor ordinarily works from the

A. Financial statements to the potentially unrecorded items

B. Potentially unrecorded items to the financial statements

C. Accounting records to the supporting evidence

D. Supporting evidence to the accounting records

Answer 11

C.

In testing the existence assertion for an asset, the auditor would start with the accounting records themselves to determine that the assets recorded on the client’s books do exist. Further evidence of the asset existence would then be found in the supporting evidence.

Editor’s note: The key word in this question is “assertion”. When testing assertion, you wouldn’t necessarily go to/from the financial statements, but rather drill-down to a more specific level, such as going from the accounting records to the supporting evidence.

Question 12

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. Sales invoices to the shipping documents

B. Cash receipts journal to the sales journal

C. Shipping documents to the sales invoices

D. Sales journal to the cash receipts journal

Answer 12

C.

To discover understated (unrecorded) sales, the auditor would most likely trace transactions from shipping documents to sales invoices. This would reveal orders that have been shipped, but not billed and is an example of testing for completeness. Vouching from sales invoices to shipping documents (the opposite direc­tion) is a test to substantiate that sales are not overstated (verify their occurrence or existence). Comparing entries between the cash receipts journal and the sales journal would verify that the entries were posted cor­rectly, but it would not locate an unrecorded sale.

Editor Note: The sales and cash receipts journals are often combined in one journal.

Question 13

In auditing a client’s retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate management’s financial statement assertion of

A. Valuation and allocation

B. Occurrence

C. Completeness of disclosures

D. Rights and obligations

Answer 13

D.

Restrictions on retained earnings should be disclosed in the financial statements. Restrictions would not impact the valuation, allocation, or occurrence of retained earnings. Rights and obligations pertain to assets and liabilities, not retained earnings.

Question 14

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. Examining paid vendor invoices

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

D. Performing cutoff procedures for shipping and receiving

Answer 14

D.

Performing cutoff procedures for shipping and receiving would be the best test for the completeness assertion as it applies to inventory. The completeness assertion means that all transactions that should have been recorded have been recorded. Many procedures test multiple assertions, so candidates must select the best answer—some of the other answers are better tests of other assertions. Scanning perpetual inventory, production, and purchasing records test accuracy. Examining paid vendor invoices tests accuracy and occur­rence. Tracing inventory items from the tag listing back to the physical inventory quantities tests accuracy and existence.

Question 15

An auditor usually obtains evidence of stockholders’ equity transactions by reviewing the entity’s

A. Minutes of board of directors meetings

B. Transfer agent’s records

C. Canceled stock certificates

D. Treasury stock certificate book

Answer 15

A.

One of the auditor’s objectives in the examination of owners’ equity is to determine that all transactions during the year affecting owners’ equity accounts were properly authorized and recorded. In the case of a corporation, changes in capital stock accounts should receive formal advance approval by the board of directors. A transfer agent’s records show detail about the owners of the stock, and do not focus on the total outstanding. Canceled stock certificates and a treasury stock certificate book are less reliable than the minutes, as they would be updated only after the transaction is complete.

Question 16

A client uses a suspense account for unresolved questions whose final accounting has not been deter­mined. If a balance remains in the suspense account at year end, the auditor would be most concerned about

A. Suspense debits that management believes will benefit future operations

B. Suspense debits that the auditor verifies will have realizable value to the client

C. Suspense credits that management believes should be classified as “Current liability”

D. Suspense credits that the auditor determines to be customer deposits

Answer 16

A.

Suspense debits that management believes will benefit future operations are assets. The auditor is most concerned that assets are not overstated and that liabilities are not understated. Suspense debits that the auditor verifies will have realizable value to the client are, insofar as the auditor knows, correct. Thus, for these items, there would be no overstatement. The other two answer options contain items that, if incorrect, would overstate liabilities.

Question 17

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?

A. Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file

B. Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance

C. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices

D. Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions

Answer 17

C.

In searching for unrecorded liabilities, the auditor would most likely vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices to ascertain that payables had been recorded in the proper period. Tracing a sample of accounts payable entries recorded just after (not just before) year-end to the year-end unmatched receiving report file, comparing a sample of purchase orders issued just before (not just after) year-end with the year-end accounts payable, and scanning the cash disbursements entries recorded just after (not just before) year-end for indications of unusual transactions may also aid in the detection of unrecorded liabilities.

Question 18

An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice

A. Eliminates the use of certain statistical sampling methods that would otherwise be available

B. Presumes that the auditor will reperform the tests as of the balance sheet date

C. Should be especially considered when there are rapidly changing economic conditions

D. Potentially increases the risk that errors that exist at the balance sheet date will not be detected

Answer 18

D.

Applying principal substantive tests to the details of an asset or liability account as of an interim date rather than as of the balance sheet date potentially increases the risk that misstatements that may exist at the balance sheet date will not be detected by the auditor. Performing substantive tests at an interim date does not eliminate the use of any sampling techniques. The auditor would only need to consider reperforming substantive tests, as of the balance sheet date, if misstatements are detected at the interim date. Asset and liability accounts should be examined as of the balance sheet date if there are rapidly changing economic conditions.

Question 19

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 property and equipment balances at the end of the year

B. Analytical procedures for current year property and equipment transactions

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

D. Tests of controls and extensive tests of property and equipment balances at the end of the year

Answer 19

C.

The auditor should perform tests of controls when the auditor’s risk assessment includes an expectation of the operating effectiveness of controls (control risk is low) or when substantive procedures alone do not provide sufficient appropriate audit evidence. Regardless of the audit approach selected, the auditor should design and perform substantive procedures for all relevant assertions related to each material class of transactions, account balance, and disclosure because effective internal controls generally reduce, but do not eliminate, risk of material misstatement, tests of controls reduce, but do not eliminate, the need for substantive procedures.

Question 20

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. Valuation and allocation

B. Classification and understandability

C. Existence

D. Rights and obligations

Answer 20

A.

Valuation and allocation deal with whether assets, liabilities, and equity interests are included in financial statements at appropriate amounts. If the bad debt allowance account is too low, net accounts receivable would be too high, and the assets would, therefore, be overstated.

Question 21

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to

A. Verify that payroll taxes are deducted from employees’ gross pay

B. Determine whether internal control activities are operating effectively

C. Uncover fictitious employees who are receiving payroll checks

D. Identify potential liabilities for unpaid payroll taxes

Answer 21

D.

When reviewing payroll tax form reconciliations, an auditor is concerned with unrecorded liabilities. Analytics or review of the calculation process would be better to determine accuracy in the deductions calculation. The effective operation of internal control is determined by tests of controls. Observing check distribution, rather than reconciling tax forms, would bring fictitious employees to light.

Question 22

Which of the following internal control procedures most likely would be used to maintain accurate inven­tory records?

A. Perpetual inventory records are periodically compared with the current cost of individual inventory items

B. A just-in-time inventory ordering system keeps inventory levels to a desired minimum

C. Requisitions, receiving reports, and purchase orders are independently matched before payment is approved

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

Answer 22

D.

Assertions about existence or occurrence deal with whether assets or liabilities of the entity exist at a given date and whether recorded transactions have occurred during a given period. Periodically comparing goods on hand with perpetual inventory records would assist in identifying potential errors.

Answer A. addresses the valuation of the inventory.

Answer B. would not identify variances in actual inventory compared to recorded amounts.

Answer C. represents examples of controls necessary for the proper segregation of duties in purchas­ing inventory.

Question 23

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all

A. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period.

B. Expenditures for property and equipment have been recorded in the proper period.

C. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.

D. Expenditures for property and equipment have not been charged to expense.

Answer 23

D.

The repairs and maintenance expense accounts are analyzed by an auditor in obtaining evidence regarding the completeness of fixed assets, since there is the possibility that items were expensed that should have been capitalized.

Question 24

The objective of tests of details of transactions performed as tests of controls is to

A. Monitor the design and use of entity documents such as prenumbered shipping forms

B. Determine whether internal controls have been implemented

C. Detect material misstatements in the account balances of the financial statements

D. Evaluate whether internal control procedures operated effectively

Answer 24

D.

The auditor may design a test of controls to be performed concurrently with a test of details on the same transaction. The objective of tests of controls is to evaluate whether a control operated effectively.

Answer A. would be a substantive test rather than a test of controls.

Answer B. is an objective of obtaining an under­standing of an entity’s internal control.

Answer C. is the objective of substantive procedures.

Question 25

What is the most likely course of action that an auditor would take after determining that performing subs­tantive tests on inventory will take less time than performing tests of controls?

A. Assess control risk at the minimum level

B. Perform both tests of controls and substantive tests on inventory

C. Perform only substantive tests on inventory

D. Perform only tests of controls on inventory

Answer 25

C.

An auditor need consider only the objectives and related controls relevant to the audit. An auditor performs tests of the design and operation of internal controls to determine if the auditor may rely upon them. If the auditor has determined that it will take less time to perform substantive tests than it will to perform tests of controls, there is no reason to assess control risk or perform any tests of controls on inventory. Control risk may be assessed at a minimum level only after testing controls and finding them strong.

Question 26

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. Opening and closing inventory balances

B. Cash receipts and accounts receivable

C. Shipping and receiving activities

D. Cutoffs of sales and purchases

Answer 26

B.

When the auditor has already gathered evidence supporting cash receipts and accounts receivable, the same evidence would support sales. Thus, having already gathered this evidence and having assessed control risk as low for the existence or occurrence assertion regarding sales transactions, the auditor most likely would conclude that he or she has substantial evidence for sales and would limit substantive tests of sales transactions. Evidence supporting opening and closing inventory balances, shipping and receiving activities, and cutoffs of sales and purchases would give only limited information regarding sales.

Question 27

An auditor’s program to examine long-term debt most likely would include steps that require

A. Comparing the carrying amount of the debt to its year-end market value

B. Correlating interest expense recorded for the period with outstanding debt

C. Verifying the existence of the holders of the debt by direct confirmation

D. Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt

Answer 27

B.

An auditor’s program to examine long-term debt should include a step where the auditor reconciles interest expense with debt outstanding during the year (period). This step would provide information as to the completeness and valuation of the account balance. The auditor is not concerned with the year-end market value of the debt. The auditor would not verify the existence of the holders of the debt by direct confirmation. Outstanding balances, terms, and conditions are confirmed with the credit grantor or independent trustee. The search for unrecorded liabilities would generally be made by scanning cash disbursements made in the period following the balance sheet date. Also, the accounts payable subsidiary ledger would not likely provide evidence as to long-term liabilities.