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Flashcards in EVID Deck (291):
1

Which of the following is not an assertion relating account balances?
a. Understandability.
b. Rights and obligations.
c. Existence.
d. Completeness.

Understandability.

2

An auditor’s program for the examination of long-term debt should include steps that require the

Examination of any bond trust indenture.

3

An auditor's decision whether to apply analytical procedures as a substantive tests usually is determined by the

Number of transactions recorded just before and just after the year-end.

4

Which of the following matters most likely would be included in a management representation letter?
a. An evaluation of the litigation that has been filed against the entity.
b. A confirmation that the entity has complied with contractual agreements.
c. A statement that all material internal control weaknesses have been corrected.
d. An assessment of the risk factors concerning the misappropriation of assets.

A confirmation that the entity has complied with contractual agreements.

5

After an audit report is issued, an auditor discovers that an important audit procedure was not performed. Which of the following procedures is acceptable in this situation?
a. No further action is necessary if the audit report can still be supported.
b. Let the current report stand and correct material errors on the next audit report.
c. Immediately notify known users of the omitted audit procedure.
d. Require that the client notify financial statement users of the omitted procedures.

No further action is necessary if the audit report can still be supported.

6

The auditor is most likely to verify accrued commissions payable in conjunction with the

Sales cutoff review.

7

“There have been no communications from regulatory agencies concerning non-compliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements.” The foregoing passage is most likely from a

Management representation letter.

8

“Subsequent events” for reporting purposes are defined as events which occur subsequent to the

Balance sheet date but prior to the date of the auditor’s report.

9

The date of the management representation letter should coincide with the

Date of the auditor’s report.

10

Which of the following statements is correct concerning an auditor’s use of the work of an actuary in assessing a client’s pension obligations?
a. If the actuary has a relationship with the client, the auditor may not use the actuary’s work.
b. The auditor is required to understand the objectives and scope of the actuary’s work.
c. The client is required to consent to the auditor’s use of the actuary’s work.
d. The reasonableness of the actuary’s assumptions is strictly the auditor’s responsibility.

The auditor is required to understand the objectives and scope of the actuary’s work.

11

An auditor would be most likely to identify a contingent liability by obtaining a(n)

Lawyer’s letter.

12

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?
a. Internal control activities over the recording of cash receipts have been improved since the end of the prior year.
b. A greater percentage of accounts receivable are listed in the “more than 120 days overdue” category than in the prior year.
c. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.
d. The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.

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

13

On receiving the bank cutoff statement, the auditor should trace

Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

14

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.

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

15

In obtaining written representations from management, materiality limits ordinarily would apply to representations related to

Amounts concerning related-party transactions.

16

When negotiable securities are of considerable volume, planning by the auditor is necessary to guard against

Substitution of securities already counted for other securities which should be on hand but are not.

17

“In connection with an audit of our financial statements, management has prepared, and furnished to our auditors a description and evaluation of certain contingencies.” The forgoing passage most likely is from a(n)

Audit inquiry letter to legal counsel.

18

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. An auditor most likely will use

`A combination of the two forms, with the positive form used for large balances and the negative form for the small balances.

19

A major customer of an audit client suffers a fire just prior to completion of year-end fieldwork. The audit client believes that this event could have a significant direct effect on the financial statements. The auditor should

Advise management to disclose the event in notes to the financial statements.

20

When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor’s original invoices have been misplaced. What should the auditor do in response to this situation?

Reevaluate the risk of fraud, and design alternative tests for the related transactions.

21

An auditor is testing sales transactions. One step is to trace a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. What would the auditor intend to establish by this step?

Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoices.

22

An auditor’s analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been cause by

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

23

Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?
a. Merchandise purchases being charged to selling and general expense.
b. Unrecorded purchases.
c. Unrecorded sales.
d. Fictitious sales.

Unrecorded sales.

24

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

Repairs.

25

Which of the following events most likely would indicate the existence of related parties?
a. Granting stock options to key executives at favorable prices.
b. High turnover of senior management and members of the board of directors.
c. Failure to correct internal control weaknesses on a timely basis.
d. Selling real estate at a price significantly different from appraised value.

Selling real estate at a price significantly different from appraised value.

26

In auditing contingent liabilities, what procedure would an auditor most likely perform?

Read the minutes of the board of director’s meetings.

27

An auditor compares year 2 revenues and expenses with those of the prior year and investigates all changes exceeding 10%. By this procedure the auditor would be most likely to learn that

The client changed its capitalization policy for small tools in year 2.

28

An auditor compares information on canceled checks with information contained in the cash disbursements journal. The objective of this test is to determine that

No discrepancies exist between the data on the checks and the data in the journal.

29

After issuing an auditor’s report, an auditor becomes aware of facts that existed at the report date that would have affected the report had the auditor known of the facts at the time. What is the first thing the auditor should do?

Determine whether there are persons currently relying on, or likely to rely on, the financial statements and whether those persons would attach importance to the information.

30

Which of the following is the best argument against the use of negative accounts receivable confirmations?
a. There is no way of knowing if the intended recipients received them.
b. The inference drawn from receiving no reply may not be correct.
c. Recipients are likely to feel that in reality the confirmation is a subtle request for payment.
d. The cost per response is excessively high.

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

31

As a result of analytical procedures, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should

Consider the possibility of a misstatement in the financial statements.

32

Which of the following statements is most accurate regarding sufficient and appropriate documentation?
a. Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for a t least five years.
b. If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the working papers.
c. Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.
d. Accounting estimates are not considered sufficient and appropriate documentation.

Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.

33

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that

Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

34

Which of the audit procedures listed below would be least likely to disclose the existence of related-party transactions of a client during the period under audit?
a. Inspecting invoices from law firms.
b. Reading “conflict-of-interest” statements obtained by the client from its management.
c. Scanning accounting records for large transactions at or just prior to the end of the period under audit.
d. Confirming large purchases and sales transactions with the vendors and/or customers involved.

Confirming large purchases and sales transactions with the vendors and/or customers involved.

35

With respect to issuance of an audit report which is dual dated for subsequent event occurring after the completion of fieldwork, but before issuance of the auditor’s report, the auditor’s responsibility for events occurring subsequent to the completion of fieldwork is

Limited to the specific event referred to.

36

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

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

37

Which of the following statements concerning audit evidence is correct?
a. The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test.
b. To be appropriate, audit evidence should be both relevant and reliable.
c. A client’s accounting data can be sufficient audit evidence to support the financial statements.
d. Reliable evidence is equivalent to sufficient evidence.

A client’s accounting data can be sufficient audit evidence to support the financial statements.

38

The auditor tests the quantity of materials charged to work in process by tracing these quantities to

Material requisitions.

39

Although the quantity and content of audit working papers vary with each particular engagement, an auditor’s permanent files most likely include

Analyses of capital stock and other owners’ equity accounts.

40

If management refuses to furnish certain written representations that the auditor believes are essential, which of the following appropriate?
a. The client’s refusal does not constitute a scope limitation that may lead to a modification of the opinion.
b. This may have an effect on the auditor’s ability to rely on other representations of management.
c. The auditor can rely on oral evidence relating to the matter as a basis for an unmodified (unqualified) opinion.
d. The auditor should issue an adverse opinion because of management’s refusal.

This may have an effect on the auditor’s ability to rely on other representations of management.

41

An auditor’s working papers will generally be least likely to include documentation showing how the

Client’s schedules were prepared.

42

When auditing a publicly traded client, the auditor’s program for owner’s equity is least likely to include a step requiring

Reconciliation of the stock certificate book with the general ledger.

43

The physical count of inventory of a retailer was higher than shown by perpetual records. Which of the following could explain the difference?
a. Inventory items had been counted but the tags placed on the items had not been taken off the items and added to the inventory accumulation sheets.
b. No journal entry had been made on the retailer’s books for several items returned to its suppliers.
c. Credit memos for several items returned by customers had not been prepared.
d. An item purchased “FOB shipping point” Had not arrived at the date of inventory count and had not been reflected in the perpetual records.

Credit memos for several items returned by customers had not been prepared.

44

Which of the following circumstances would most likely cause an auditor to suspect that material fraud exists in a client’s financial statements?
a. Property and equipment are usually sold at a loss before being fully depreciated.
b. Clerical errors are listed on a computer-generated exception report.
c. Significantly fewer responses to confirmation requests are received than expected.
d. Monthly bank reconciliations usually include several in-transit items.

Significantly fewer responses to confirmation requests are received than expected.

45

The current file of an auditor’s working papers most likely would include a copy of the

Bank reconciliation.

46

Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable?
a. Comparing receivable turnover ratios to industry statistics for reasonableness.
b. Tracing amounts in the subsidiary ledger to details on shipping documents.
c. Inquiring about receivables pledged under loan agreements.
d. Assessing the allowance for uncollectible accounts for reasonableness.

Assessing the allowance for uncollectible accounts for reasonableness.

47

In evaluating an entity’s accounting estimates, one of the auditor’s objectives is to determine whether the estimates are

Reasonable in the circumstances.

48

An attorney responding to an auditor as a result of the client’s letter of audit inquiry may appropriately limit the response to

Matters to which the attorney has given substantive attention in the form of legal consultation or representation.

49

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?
a. Examine a sample of cash disbursements in the period subsequent to year-end.
b. Examine unusual relationships between monthly accounts payable balances and recorded purchases.
c. Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded.
d. Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable.

Examine a sample of cash disbursements in the period subsequent to year-end.

50

An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?
a. The auditor should review period-end compensation to determine if bonuses were paid to meet earnings goal.
b. The auditor should perform analytical procedures at an interim date and discuss any changes in the level of sales with senior management.
c. The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period.
d. The auditor should perform tests of controls at an interim date to obtain audit evidence about the operational effectiveness of internal controls over sales.

The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period.

51

The auditor may conclude that depreciation charges are insufficient by noting

Excessive recurring losses on assets retired.

52

To which of the following matters would an auditor not apply materiality limits when obtaining specific written client representations.
a. Disclosure of compensating balance arrangements involving restrictions on cash balances.
b. The absence of errors and unrecorded transactions in the financial statements.
c. Fraud involving employees with significant roles in the internal control structure.
d. Information concerning related-party transactions and related amounts receivable or payable.

Fraud involving employees with significant roles in the internal control structure.

53

A sales cutoff test of billings complements the verification of

Accounts receivable.

54

When performing analytical procedures during the risk assessment of an audit, the auditor most likely would develop expectations be reviewing which of the following sources of information?
a. Various account assertions in the planning memorandum.
b. The control risk assessment relating to specific financial assertions.
c. Comments in the prior year’s management letter.
d. Unaudited information from internal quarterly reports.

Unaudited information from internal quarterly reports.

55

Which of the following analytical procedures most likely would be used during the risk assessment stage of an audit?
a. Reading the financial statements and notes and considering the adequacy of evidence.
b. Comparing current year to prior year sales volumes.
c. Comparing the current year ratio of aggregate salaries paid to the number of employees to the prior year’s ratio.
d. Reading the letter from the client’s attorney and considering the threat of litigation.

Comparing current year to prior year sales volumes.

56

Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor’s report would not require disclosure in the financial statements?
a. Loss of plant or inventories as a result of fire or flood.
b. Settlement of litigation when the event giving rise to the claim took place after the balance sheet date.
c. A major drop in the quoted market price of the stock of the corporation.
d. Sale of the bond or capital stock issue.

A major drop in the quoted market price of the stock of the corporation.

57

Which of the following procedures is least likely to be performed before the balance sheet date?
a. Observation of inventory.
b. Search for unrecorded liabilities.
c. Confirmation of receivables.
d. Review of internal control over cash disbursements.

Search for unrecorded liabilities.

58

Audit documentation should be prepared so as to enable an individual to understand the procedures performed, audit evidence obtained, and conclusions reached. The individual is

c. An experienced auditor with no previous connection to the audit.

59

Before applying substantive procedures to the details of asset accounts at an interim date, an auditor should assess

The difficulty in controlling the incremental audit risk.

60

In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the

Financial statement assertions.

61

An inventory turnover analysis is useful to the auditor because it may detect

The existence of obsolete merchandise.

62

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

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

63

Which of the following activities is performed near completion of an audit to ensure that the financial statements are free from material misstatement?
a. Reading the minutes of the board of directors’ meetings for the year under audit.
b. Comparing the current year’s financial statements with those of the prior year.
c. Obtaining a letter concerning potential liabilities from the client’s attorney.
d. Ensuring that a representation letter signed by management is in the file

Comparing the current year’s financial statements with those of the prior year.

64

To conceal defalcations involving receivables, the auditor would expect an experienced bookkeeper to charge which of the following accounts?
a. Petty cash.
b. Miscellaneous income.
c. Miscellaneous expense.
d. Sales returns.

Sales returns.

65

During an examination of a publicly held company, the auditor should obtain written confirmation regarding debenture transactions from the

Trustee.

66

A written representation from a client’s management which, among other matters, acknowledges responsibility for the fair presentation of financial statements, should normally be signed by the

Chief executive officer and the chief financial officer.

67

Under the requirements of the PCAOB, audit documentation should be retained

For at least seven years.

68

Which of the following auditing procedures is ordinarily performed last?
a. Confirming accounts payable.
b. Testing of the purchasing function.
c. Reading of the minutes of the directors’ meetings.
d. Obtaining a management representation letter.

Obtaining a management representation letter.

69

An auditor should obtain written representations from management concerning litigation claims and assessments. These representations may be limited to matters that are considered either individually or collectively material, provided an understanding on the limits of materiality for the purpose has been reached by

Management and the auditor.

70

The blank form of accounts receivable confirmations may be less efficient than the positive form because

More nonresponses to the requests are likely to occur.

71

Parantex developed a new secret formula which is of great value because it resulted in a virtual monopoly. Parentex has capitalized all research and development costs associated with this formula. Greene, CPA, who is examining this account, will probably

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

72

Auditors should request that an audit client send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide

Corroborative audit evidence.

73

As part of the process of observing a client’s physical inventories, an auditor should be alert to

The inclusion of any obsolete or damaged goods.

74

A lawyer’s response to an auditor’s request for information concerning litigation, claims, and assessments will ordinarily contain which of the following?
a. Confidential information which would be prejudicial to the client’s defense if publicized.
b. An assertion that the list of unasserted possible claims identified by the client represents all such claims of which the lawyer may be aware.
c. An explanation regarding limitations on the scope of the response.
d. A statement of concurrence with the client’s determination of which unasserted possible claims warrant specification.

An explanation regarding limitations on the scope of the response.

75

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to

Verify reconciling items on the client’s bank reconciliation.

76

In order to efficiently establish the correctness of the accounts payable cutoff, an auditor will be most likely to

Coordinate cutoff tests with physical inventory observation.

77

If a client will not permit inquiry of outside legal counsel, the auditor’s report ordinarily will contain a(n)

Disclaimer of opinion.

78

On March 1, Green, CPA, expressed an unmodified (unqualified) opinion on the financial statements of Ajax Co. On July 1, Green’s internal inspection program discovered that engagement personnel failed to observe Ajax’s creditors are currently relying on Green’s opinion, Green should first

Undertake to apply the alternative procedures that would provide a satisfactory basis for Green’s opinion.

79

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

Review purchase contracts and other legal documents.

80

When a client engages in transactions involving derivatives, the auditor should

Develop an understanding of the economic substance of each derivative.

81

During the confirmation of accounts receivable, an auditor receives a confirmation via the client’s fax machine. Which of the following actions should an auditor take?
a. Not accept the confirmation and select another customer’s balance to confirm.
b. Accept the confirmation but verify the source and content through a telephone call to the respondent.
c. Not accept the confirmation and treat it as an exception.
d. Accept the confirmation and file it in the working papers.

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

82

Management prepares accounting estimates and the auditor is responsible for evaluating the reasonableness of the estimates. Which of the following would not be an auditor’s objective when evaluating estimates?
a. The accounting estimates are presented in accordance with GAAP.
b. All accounting estimates which could be material to the financial statements have been developed.
c. The accounting estimates developed by management are accurate with 100% certainty.
d. The accounting estimates developed by management are reasonable.

The accounting estimates developed by management are accurate with 100% certainty.

83

An auditor should be aware of subsequent events that provide evidence concerning conditions that did not exist at year-end but arose after year-end. These events may be important to the auditor because they may.

Require disclosure to keep the financial statements from being misleading.

84

For which of the following ledger accounts would the auditor be most likely to analyze the details?
a. Sales.
b. Service revenue.
c. Sales salaries expense.
d. Repairs and maintenance expense.

Repairs and maintenance expense.

85

Analytical procedures performed during the risk assessment phase of an audit should focus on

Enhancing the auditor’s understanding of the transactions and events that have occurred since the last audit.

86

During the process of confirming receivables as of December31, year 1, a positive confirmation was returned indicating the “balance owed as of December 31 was paid on January 9, year 2.” The auditor would most likely

Verify that the amount was received.

87

On February 9, Brown, CPA, expressed an unmodified (unqualified) opinion on the financial statements of Web Co. On October9, during a peer review of Brown’s practice, the reviewer informed Brown that engagement personnel failed to perform a search for subsequent events for the Web engagement. Brown should first

Assess the importance of the omitted procedures to Brown’s present ability to support the opinion.

88

An auditor who uses the work of a specialist may refer to the specialist in the auditor’s report if the

Auditor modifies the report because of the difference between the client’s and the specialist’s valuations of an asset.

89

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?

The form was mailed by the controller.

90

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

Observe physical counts of the inventory items.

91

When examining a client’s statement of cash flows for audit evidence, an auditor will rely primarily upon

Cross-referencing to balance and transactions reviewed in connection with the examination of the other financial statements.

92

When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations

Client-prepared statements of account that show the details of the account balances.

93

After identifying related-party transactions, an auditor most likely would

Determine whether the transactions were approved by the board of directors or other appropriate officials.

94

Which of the following types of audit evidence generally is the most reliable?
a. Analytical procedures.
b. Review of prior year audit procedures.
c. Inquiries made of management.
d. Confirmation of account information.

Confirmation of account information.

95

Treetop Corporation acquired a building and arranged mortgage financing during the year. Verification of the related mortgage acquisition costs would be least likely to include an examination of the related

Interest expense.

96

When title to merchandise in transit has passed to the audit client, the auditor engaged in the performance of the purchase cutoff on December 31, the last day of the client’s year, will encounter the greatest difficulty in gaining assurance with respect to the

Quality.

97

An auditor most likely would apply analytical procedures near the completion of the audit to

Determine whether additional audit evidence may be needed.

98

An auditor confirms a representative number of open accounts receivable as of December 31, year 1, and investigates respondents’ exceptions and comments. By this procedure the auditor would be most likely to learn of which of the following?
a. One of the computer control clerks has been removing all sales invoices applicable to his account from the data file.
b. One of the cashiers has been covering a personal embezzlement by lapping.
c. One of the sales clerks has not been preparing charge slips for credit sales to family and friends.
d. The credit manager has misappropriated remittances from customers whose accounts have been written off.

One of the cashiers has been covering a personal embezzlement by lapping.

99

Which of the following is ordinarily designed to detect possible material dollar misstatements in the financial statements?
a. Analytical procedures.
b. Information technology controls.
c. Post audit working paper review.
d. Tests of controls.

Analytical procedures.

100

A client acquired 25% of its outstanding capital stock after year-end and prior to completion of the auditor’s fieldwork. The auditor should

Advise management to disclose the acquisition in the notes to the financial statements.

101

When a company’s stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the

Number of shares issued and outstanding.

102

Customers having substantial year-end past due balances fail to reply after second request forms have been mailed directly to them. Which of the following is the most appropriate audit procedure?
a. Review collections during the year being examined.
b. Intensify the study of the client’s internal control structure with respect to receivables.
c. Increase the balance in the accounts receivable allowance (contra) account.
d. Examine shipping documents.

Examine shipping documents.

103

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

Electronically accessing the details of dividend records on the Internet.

104

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 auditor finds minimal variations in client records and test counts in prior periods.
c. When the client maintains periodic inventory records.
d. When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts.

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

105

In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would

Perform tests of controls to support a lower level of assessed risk of misstatement.

106

An auditor’s decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by the

Relative effectiveness and efficiency of the tests.

107

An auditor intends to use the work of an actuary who has a relationship with the client. Under these circumstances, the auditor

Should assess the risk that the actuary’s objectivity might be impaired.

108

Which of the following is not a typical analytical procedure?
a. Comparison of the financial information with similar information regarding the industry in which of the entity operates.
b. Comparison of recorded amounts of major disbursements with appropriate invoices.
c. Comparison of the financial information with budgeted amounts.
d. Study of relationships of the financial information with relevant nonfinancial information.

Comparison of recorded amounts of major disbursements with appropriate invoices.

109

Which of the following procedures would an auditor most likely perform prior to the balance sheet date?
a. Review subsequent events.
b. Review detail and test significant travel and entertainment expenses.
c. Perform search for unrecorded liabilities.
d. Send inquiry letter to client’s legal counsel.

Review detail and test significant travel and entertainment expenses.

110

An example of an analytical procedure is the comparison of

Financial information with similar information regarding the industry in which the entity operates.

111

What type of evidence would provide the highest level of assurance in an attestation engagement?

Evidence obtained from independent sources.

112

Which of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments?
a. Obtain a letter of representations from the client’s underwriter of securities.
b. Apply ratio analysis on the current year’s liability accounts.
c. Inspect checks included with the client’s cutoff bank statement.
d. Read the file of correspondence from taxing authorities.

Read the file of correspondence from taxing authorities.

113

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. Examining an analysis of inventory turnover.
c. Testing shipping and receiving cutoff procedures.
d. Confirming inventories at locations outside the entity’s premises.

Examining an analysis of inventory turnover.

114

To establish illegal “slush funds,” corporations may divert cash received in normal business operations. An auditor would encounter the greatest difficulty in detecting the diversion of proceeds from

Scrap sales.

115

An auditor should obtain audit evidence relevant to all the following factors concerning third-party litigation against a client except the
a. Probability of an unfavorable outcome.
b. Existence of a situation indicating an uncertainty as to the possible loss.
c. Jurisdiction in which the audit evidence will be resolved.
d. Period in which the underlying cause for legal action occurred.

Jurisdiction in which the audit evidence will be resolved.

116

When applying analytical procedures during an audit, which of the following is the best approach for developing and evaluating expectations?
a. Considering unaudited account balances and ratios to calculate what adjusted balances should be.
b. Comparing client data with client-determined expected results to reduce detailed test of account balances.
c. Identifying reasonable explanations for unexpected differences before talking to client management.
d. Considering the pattern of several unusual changes without trying to explain what caused them.

Identifying reasonable explanations for unexpected differences before talking to client management.

117

In which of the following instances would an auditor be least likely to require the assistance of a specialist?
a. Ascertaining the assessed valuation of fixed assets.
b. Determining the quantities of materials stored in piles on the ground.
c. Determining the value of unlisted securities.
d. Assessing the valuation of inventories of artworks.

Ascertaining the assessed valuation of fixed assets.

118

When an auditor selects a sample of items from the vouchers payable register for the last month of the period under audit and traces these items to underlying documents, the auditor is gathering evidence primarily in support of the assertion that

Recorded obligations were valid.

119

Analytical procedures used in risk assessment for an audit should focus on identifying

Areas that may represent specific risks relevant to the audit.

120

An auditor’s analytical procedures performed near the end of the audit indicated that the client’s accounts receivable had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor?
a. Twice as many accounts receivable were written off in the prior year than in the current year.
b. The client liberalized its credit standards in the current year and sold much more merchandise to customers with poor credit ratings.
c. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.
d. A greater percentage of accounts receivable were currently listed in the “more than 90 days overdue” category than in the prior year.

The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

121

Which of the following statements concerning audit evidence is correct?
a. Effective internal control contributes little to the reliability of the evidence created within the entity.
b. Appropriate evidence supporting management’s assertions should be conclusive rather than merely persuasive.
c. A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.
d. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.

A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.

122

Which of the following statements concerning analytical procedures is correct?
a. Analytical procedures usually are effective and efficient for test of controls.
b. Analytical procedures used during risk assessment of the audit should not use nonfinancial information.
c. Analytical procedures may be omitted entirely for some financial statement audits.
d. Analytical procedures alone may provide the appropriate level of assurance for some assertions.

Analytical procedures alone may provide the appropriate level of assurance for some assertions.

123

Which of the following is an analytical procedure that an auditor most likely would most likely perform when performing the risk assessment of an audit?
a. Recalculating interest expense based on notes payable balances.
b. Scanning payroll files for terminated employees.
c. Confirming a sample of accounts payable.
d. Comparing current year balances to budgeted balances.

Comparing current year balances to budgeted balances.

124

When auditing related party transactions, an auditor places primary emphasis on

Evaluating the disclosure of the related-party transactions.

125

A primary objective of analytical procedures used near completion of an audit is to

Assist the auditor in forming overall conclusions about whether the financial statements are consistent with the auditor’s understanding of the company.

126

If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the

Accounting records to the source documents.

127

Which of the following procedures would an auditor most likely perform regarding litigation?
a. Confirm directly with the clerk of the court that the client’s litigation is properly disclosed.
b. Confirm the details of pending litigation with the client’s adversaries’ legal representatives.
c. Discuss with management its policies and procedures for identifying and evaluating litigation.
d. Inspect the legal documents in the client’s lawyer’s possession regarding pending litigation.

Discuss with management its policies and procedures for identifying and evaluating litigation.

128

In establishing the existence and ownership of long-term investments in the form of publicly traded stock, an auditor most likely would inspect the securities or

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

129

What is an auditor’s primary method to corroborate information on litigation, claims, and assessments?

Reviewing the response from the client’s lawyer to a letter of audit inquiry.

130

Subsequent events affecting the realization of assets ordinarily will require adjustment of the financial statements under examination because such events typically represent

The culmination of conditions that existed at the balance sheet date.

131

With respect to a small company’s system of purchasing supplies, an auditor’s primary concern should be to obtain satisfaction that supplies ordered and paid for have been

Received, counted, and checked to quantities and amounts on purchase orders and invoices.

132

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive procedures?
a. Relationships involving balance sheet accounts.
b. Data subject to audit testing in the prior year.
c. Transactions subject to management discretion.
d. Relationships involving income statement accounts.

Relationships involving income statement accounts.

133

Which of the following analyses appearing in a predecessor’s working papers is the successor auditor least likely to be interest in reviewing?
a. Analysis of contingencies.
b. Analysis of current balance sheet accounts.
c. Analysis of noncurrent balance sheet accounts.
d. Analysis of income statement accounts.

Analysis of income statement accounts.

134

In which of the following circumstances is substantive testing of accounts receivable before the balance sheet date most appropriate?
a. The client has a new sales incentive program in place.
b. It is a first engagement of a new client.
c. Internal control during the remaining period is effective.
d. There is a high turnover of senior management.

Internal control during the remaining period is effective.

135

Which of the following audit procedures is least likely to detect an unrecorded liability?
a. Mailing of standard bank confirmation form.
b. Analysis and re-computation of depreciation expense.
c. Analysis and re-computation of interest expense.
d. Reading of the minutes of meetings of the board of directors.

Mailing of standard bank confirmation form.

136

Ajax Company’s auditor concludes that the omission of an audit procedure considered necessary at the time of the prior audit impairs the auditor’s present ability to support the previously expressed unmodified (unqualified) opinion. If the auditor believes there are stockholders currently relying on the opinion, the auditor should promptly

Undertake to apply the omitted procedure or alternative procedures that would provide a satisfactory basis for the opinion.

137

When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably

Want the client to schedule the physical inventory count at the end of the year.

138

Which of the following documents are examples of audit evidence generated by the client?
a. Bills of lading and accounts receivable confirmations.
b. Vendor invoices and packing slips.
c. Customer purchase orders and bank statements.
d. Shipping documents and receiving reports.

Shipping documents and receiving reports.

139

Audit documentation of the audit of a nonpublic company should be retained

The longer of five years, or the legal requirements.

140

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

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

141

In connection with the audit of a current issue of long-term bonds payable, the auditor should

Ascertain that the client has obtained the opinion of counsel on the legality of the issue.

142

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because

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

143

When counting cash on hand the auditor must exercise control over all cash and other negotiable assets to prevent

Substitution.

144

The auditor’s primary means of obtaining corroboration of management’s information concerning litigation is a

Letter of audit inquiry to the client’s lawyer.

145

Prior to the start of an auditor learns that the client was granted a 6-month waiver of the repayment of principal on the installment loan with the bank without an extension of the maturity date. With respect to this loan, the audit program used by the auditor would be least likely to include a verification of the

Balloon payment.

146

Once satisfied that the balance sheet and income statement are fairly presented in accordance with GAAP, an auditor who is examining the statement of cash flows would be most concerned with details of transactions in

Notes Payable.

147

Which of the following statements is generally correct about the reliability of audit evidence?
a. Appropriate audit evidence relates only to the audit evidence obtained from outside the entity.
b. Appropriate audit evidence refers to the amount of evidence obtained.
c. Information obtained indirectly from independent outside sources is more persuasive than the auditor’s direct personal knowledge obtained through observation and inspection.
d. The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements.

The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements

148

Which of the following is a basic tool used by the auditor to control the audit work and review the progress of the audit?
a. Audit program.
b. Progress flowchart.
c. Time and expense summary.
d. Engagement letter.

Audit program.

149

Which of the following events least likely would indicate the existence of related-party transactions?
a. Borrowing funds at an interest rate significantly below prevailing market rates.
b. Writing off obsolete inventory to net realizable value just before year-end.
c. Maintaining compensating balance arrangements for the benefit of principal stockholders.
d. Making a loan with no scheduled date for the funds to be repaid.

Writing off obsolete inventory to net realizable value just before year-end.

150

Analytical procedures are most appropriate when testing which of the following types of transactions?

a. Payroll and benefit liabilities.
b. Acquisitions and disposals of fixed assets.
c. Operating expense transactions
d. Long-term debt transactions.

Operating expense transactions

151

Of the following, which is the least persuasive type of audit evidence?
a. Documents mailed by outsiders to the auditor.
b. Correspondence between auditor and vendors.
c. Computations made by the auditor.
d. Copies of sales invoices inspected by the auditor.

Copies of sales invoices inspected by the auditor.

152

In violation of company policy, Lowell Company erroneously capitalized the cost of painting its warehouse. The auditor examining Lowell’s financial statements would most likely detect this when

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

153

While substantive procedures may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because

The records may be accurate even though they are maintained by persons having incompatible functions.

154

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?

An acknowledgment by a client representative that the securities were returned intact.

155

From the auditor’s point of view, inventory counts are more acceptable prior to the year-end when

Accurate perpetual inventory records are maintained.

156

After discovering that a related-party transaction exists, the auditor should be aware that the

Substance of the transaction could be significantly different from its form.

157

Which of the following factors would least influence an auditor’s consideration of the reliability of data for purposes of analytical procedures?
a. Whether the data were processed in a computerized system or in a manual accounting system.
b. Whether the data were obtained from independent sources outside the entity or from sources within the entity.
c. Whether the data were subjected to audit testing in the current or prior year.
d. Whether sources within the entity were independent of those who are responsible for the amount being audited.

Whether the data were processed in a computerized system or in a manual accounting system.

158

During the course of the audit of a nonpublic company, the auditor prepares and accumulates audit working papers. A primary purpose of the audit working papers is to

Support the auditor’s opinion.

159

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide evidence concerning the

Existence of the balances confirmed.

160

Which of the following procedures most likely could assist an auditor in identifying related-party transactions?
a. Scanning the accounting records for recurring transactions.
b. Reviewing confirmations of compensating balance arrangements.
c. Evaluating the reasonableness of management’s accounting estimates.
d. Performing tests of controls concerning the segregation of duties.

Reviewing confirmations of compensating balance arrangements.

161

An auditor usually determines whether dividend income from publicly held investments is reasonable by computing the amount that should have been received by referring to

Records produced by investment services.

162

Which of the following cash transfers results in a misstatement of cash at December 31, year 1?
Disbursement date Receipt date
Transfers Per books Per bank Per books Per bank
a. 12/31/Y1 1/5/Y2 12/31/Y1 1/4/Y2
b. 1/4/Y2 1/11/Y2 1/4/Y2 1/4/Y2
c. 12/31/Y1 1/4/Y2 12/31/Y1 12/31/Y1
d 1/4/Y2 1/5/Y2 12/31/Y1 1/4/Y2

1/4/Y2 1/5/Y2 12/31/Y1 1/4/Y2

163

Which of the following ratios would an engagement partner most likely consider in the overall review stage of an audit?
a. Accounts receivable/inventory.
b. Current assets/quick assets.
c. Cost of goods sold/average inventory.
d. Total liabilities/net sales.

Cost of goods sold/average inventory.

164

A typical objective of an operational audit is for the auditor to

Make recommendations for improving performance.

165

The auditor may refer to and identify a specialist in the auditor’s report if the auditor

Believes it will facilitate an understanding of the reason for modification of the report.

166

An auditor compared the current year gross margin with the prior year gross margin to determine if cost of sales is reasonable. What type of audit was performed?

Analytical procedures.

167

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

Valuation or allocation

168

Which of the following audit procedures would provide the least reliable evidence that the client has legal title to inventories?
a. Examination of paid vendors’ invoices.
b. Analytical procedures comparing inventory balances to purchasing and sales activities.
c. Confirmation of inventories at location outside the client’s facilities.
d. Observation of physical inventory counts.

Analytical procedures comparing inventory balances to purchasing and sales activities.

169

A cash shortage may be concealed by transporting funds from one location to another or by converting negotiable assets to cash. Because of this, which of the following is vital?
a. Simultaneous surprise cash count.
b. Simultaneous verification.
c. Simultaneous confirmations.
d. Simultaneous bank reconciliations.

Simultaneous verification.

170

Which of the following is an analytical procedure that an auditor most likely would perform near completion of an audit?
a. Calculating each individual expense account balance as a percentage of total entity expenses and comparing the results with industry averages.
b. Comparing each individual expense account balance with the relevant budgeted amounts and investigating any significant variations.
c. Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identifies.
d. Testing the effectiveness of internal control procedures that appear to be suitably designed to prevent or detect material misstatements.

Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identifies.

171

In verifying the amount of goodwill recorded by a client, the most convincing evidence which an auditor can obtain is by comparing the recorded value of assets acquired with the

Appraised valve as evidenced by independent appraisals.

172

Analytical procedures performed near the end of an audit generally would include

Considering the adequacy of the evidence gathered in response to unexpected balance identified in planning.

173

The auditor notices significant fluctuations in key elements of the company’s financial statements. If management is unable to provide an acceptable explanation, the auditor should

Perform additional audit procedures to investigate the matter further.

174

A 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. Observation.
b. Confirmation.
c. Calculation.
d. Inspection.

Confirmation.

175

Which of the following events occurring after the issuance of an auditor’s report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
a. The entity sells a subsidiary that accounts for 37% of the entity’s consolidated sales.
b. A lawsuit is resolved that is explained in a separate paragraph of the prior year’s auditor’s report.
c. New information is discovered concerning undisclosed related-party transactions of the prior year.
d. A technological development occurs that affects the entity’s ability to continue as a going concern.

New information is discovered concerning undisclosed related-party transactions of the prior year.

176

Which of the following statement is correct concerning analytical procedures used during risk assessment in an audit engagement?
a. They are often used to develop an auditor’s preliminary judgment about materiality.
b. They often replace the test of controls that are performed to assess control risk.
c. They usually involve the comparison of assertions developed by management to ratios calculated by an auditor.
d. They usually use financial and nonfinancial data aggregated at a high level.

They usually use financial and nonfinancial data aggregated at a high level.

177

Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and Hall began the audit work on February 17, year 2. Hall completed the audit work on March 24, year 2, and completed the report on March 28, year 20. The client’s representation letter normally would be dated

March 24, year 2.

178

An auditor discovered that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that

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

179

When a contingency is resolved immediately subsequent to the issuance of a report which was qualified with respect to the contingency, the auditor should

Take no action regarding the event.

180

An audit program for the examination of the retained earnings account should include a step that requires verification of the

Authorization for both cash and stock dividends.

181

In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the
a. Adequacy of internal control.
b. Adequacy of replacement funds.
c. Reasonableness of the depreciation.
d. Extent of property abandoned during the year.

Adequacy of internal control.
Reasonableness of the depreciation.
Extent of property abandoned during the year.

182

An auditor will be least likely to use a negative accounts receivable confirmation form when

Customers are unlikely to confirm the information.

183

Cutoff 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 of

Completeness.

184

Which of the following is the most important consideration of an auditor when examining the stockholders’ equity section of a client’s balance sheet?
a. Stock dividends are capitalized at par or stated value on the dividend declaration date.
b. Stock dividends and/or stock splits during the year under audit were approved by the stockholders.
c. Changes in the capital stock account are verified by an independent stock transfer agent.
d. Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors’ meetings.

Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors’ meetings.

185

An auditor’s decision concerning whether or not to “dual date” the audit report is based upon the auditor’s willingness to

Extend auditing procedures.

186

An example of a transaction which may be indicative of the existence of related parties is

Exchanging property for similar property in a nonmonetary transaction.

187

Which of the following procedures would provide the most reliable audit evidence?
a. Inquiries of the client’s internal audit staff held in private.
b. Analytical procedures performed by the auditor on the entity’s trial balance.
c. Inspection of bank statements obtained directly from the client’s financial institution.
d. Inspection of pre-numbered client purchase orders filed in the vouchers payable department.

Inspection of bank statements obtained directly from the client’s financial institution.

188

After issuing an auditor’s report, an auditor has no obligation to make continuing inquiries concerning audited financial statements unless

Information that existed at the report date and may effect the report comes to the auditor’s attention

189

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

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

190

An auditor concludes that a substantive auditing procedure considered necessary during the prior period’s audit was omitted. Which of the following factors would most likely cause the auditor promptly to apply the omitted procedure?
a. The source documents needed to perform the omitted procedure are still available.
b. The omission of the procedure impairs the auditor’s present ability to support the previously expressed opinion.
c. There are no alternative procedures available to provide the same evidence as the omitted procedure.
d. The auditor’s opinion on the prior period’s financial statements was unmodified (unqualified).

The omission of the procedure impairs the auditor’s present ability to support the previously expressed opinion.

191

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
a. Examine changes in the quoted market prices of investments purchased since the year-end.
b. Apply analytical procedures to the details of the balance sheet accounts that were tested at interim dates.
c. Inquire about payroll checks that were recorded before the year-end but cashed after the year-ends.
d. Compare the latest available interim financial information with the financial statements being reported upon.

Compare the latest available interim financial information with the financial statements being reported upon.

192

In the audit of a medium-sized manufacturing concern, which one of the following areas would be expected to require the least amount of audit time?
a. Revenue.
b. Assets.
c. Owners’ equity.
d. Liabilities.

Owners’ equity.

193

Once a CPA has determined that accounts receivable have increased due to slow collections in a “tight money” environment, the CPA would be likely to

Expand tests of collectability.

194

Which of the following is not a specialist upon whose work an auditor may rely?
a. Engineer.
b. Appraiser.
c. Actuary.
d. Internal auditor.

Internal auditor.

195

To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would

Examine the audited financial statements of the investee company.

196

In using the work of a specialist, an understanding should exist among the auditor, the client, and the specialist as to the nature of the work to be performed by the specialist. Preferably, the understanding should be documented and would include all of the following except
a. The specialist’s understanding of the auditor’s corroborative use of the specialist’s findings in relation to the representations in the financial statements.
b. A statement that the methods or assumptions to be used are not inconsistent with those used by the client.
c. The objectives and scope of the specialist’s work.
d. The specialist’s representations as to his relationship, if any, to the client.

The specialist’s understanding of the auditor’s corroborative use of the specialist’s findings in relation to the representations in the financial statements.
The objectives and scope of the specialist’s work.
The specialist’s representations as to his relationship, if any, to the client.

197

Jones, CPA, examined the year 1 financial statements of Ray Corp and issued an unmodified opinion on March 10, year 2. On April 2, year 2, Jones became aware of a year 1 transaction that may materially affect the year 1 financial statements. This transaction would have been investigated had it come to Jones’ attention during the course of the examination. Jones should

Request that Ray’s management disclose the possible effects of the newly discovered transaction by adding an unaudited footnote to the year 1 financial statements.

198

Failure to detect material dollar misstatements in the financial statements is a risk which the auditor primarily mitigates by

Performing substantive procedures.

199

The primary objective of analytical procedures used near the end of an audit is to

Assist the auditor when forming overall conclusions about the financial statements.

200

The auditor’s inventory observation test counts are traced to the client’s inventory listing to test for which of the following financial statement assertions?
a. Completeness.
b. Presentation and disclosure.
c. Valuation or allocation.
d. Rights and obligations.

Completeness.

201

Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the client’s employees?
a. Mail confirmations for selected account balances.
b. Reconcile unpaid invoices to vendors’ statements.
c. Test footings in the accounts payable ledger.
d. Prepare a schedule of accounts payable.

Prepare a schedule of accounts payable.

202

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

Observe merchandise and raw materials during the client’s physical inventory taking.

203

Most of the independent auditor’s work in formulating an opinion on financial statements consists of

Comparing recorded accountability with assets.

204

Which of the following would detect an understatement of a purchase discount?
a. Verify footings and crossfootings of purchases and disbursement records.
b. Compare purchase invoice terms with disbursement records and checks.
c. Verify the receipt of items ordered and invoiced.
d. Compare approved purchase orders to receiving reports.

Compare purchase invoice terms with disbursement records and checks.

205

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?
a. Reconcile the amounts included in the statement of cash flows to the other financial statements’ amounts.
b. Vouch a sample of cash receipts and disbursements for the last few days of the current year.
c. Reconcile the cutoff bank statement to the proof of cash to verify the accuracy of the year-end cash balance.
d. Confirm the amounts included in the statement of cash flows with the entity’s financial institution.

Reconcile the amounts included in the statement of cash flows to the other financial statements’ amounts.

206

Which of the following is not one of the independent auditor’s objectives regarding the examination of inventories?
a. Verifying that inventory counted is owned by the client.
b. Verifying that all inventory owned by the client is on hand at the time of the count.
c. Ascertaining the physical quantities of inventory on hand.
d. Verifying that the client has used proper inventory pricing.

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

207

Which of the following most likely would indicate the existence of related parties?
a. Depending on a single product for the success of the entity.
b. Writing down obsolete inventory just before year-end.
c. Failing to correct previously identified internal control deficiencies.
d. Borrowing money at an interest rate significantly below the market rate.

Borrowing money at an interest rate significantly below the market rate.

208

An auditor has identified the controller’s review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?
a. Observation and inspection of records.
b. Analytical procedures and re-performance.
c. Inquiry and inspection of records.
d. Confirmation and re-performance.

Inquiry and inspection of records.

209

Which of the following procedures would an auditor most likely perform to verify management’s assertion of completeness?
a. Observe the client’s distribution of payroll checks.
b. Compare a sample of shipping documents to related sales invoices.
c. Confirm a sample of recorded receivables by direct communication with the debtors.
d. Review standard bank confirmations for indications of kiting.

Compare a sample of shipping documents to related sales invoices.

210

Which of the following material events occurring subsequent to the December 31, year 1 balance sheet would not ordinarily result in an adjustment to the financial statements before they are issued on March 2, year 2?
a. Acquisition of a subsidiary on January 23, year 2. Negotiations had begun in December of year 1.
b. Settlement of extended litigation on January 23, year 2, in excess of the recorded year-end liability.
c. Write-off of a receivable from a debtor who had suffered from deteriorating financial condition for the past 6 years. The debtor filed for bankruptcy on January 23, year 2.
d. A 3-for0-5 reverse stock split consummated on January 23, year 2.

Acquisition of a subsidiary on January 23, year 2. Negotiations had begun in December of year 1.

211

Which of the following procedures would yield the most reliable evidence?
a. An inquiry of client personnel.
b. A scanning of trial balances.
c. A recalculation of bad debt expense.
d. A comparison of beginning and ending retained earnings.

A scanning of trial balances.

212

After issuance of the auditor’s report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by that report unless

A final resolution of a contingency that had resulted in a qualification of the auditor’s report is made.

213

Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account?
a. Prior years’ depreciation charges were erroneously understated.
b. An asset has been recorded at its fair value.
c. A reserve for possible loss on retirement has been recorded.
d. Extraordinary repairs have lengthened the life of an asset.

Extraordinary repairs have lengthened the life of an asset.

214

Which of the following statements is correct regarding accounting estimates?
a. Accounting estimates should be used when data concerning past events can be accumulated in a timely, cost-effective manner.
b. An important accounting estimate is management’s listing of accounts receivable greater than 90 days past due.
c. The auditor’s objective is to evaluate whether accounting estimates are reasonable in the circumstances.
d. Accounting estimates should not be used when the outcomes of future events related to the estimated items is unknown.

The auditor’s objective is to evaluate whether accounting estimates are reasonable in the circumstances.

215

Which of the following items would most likely require an adjustment to the financial statements for the year ended December 31, year 1?
a. Uninsured loss of inventories purchased in year 1 as a result of a flood in year.
b. Loss on an uncollectible trade receivable recorded in year 1 from a customer that declared bankruptcy in year 2.
c. Settlement of litigation in year 2 over an event that occurred in year 2.
d. Proceeds from a capital stock issuance in year 2 which was being approved by the board of directors in year 1.

Loss on an uncollectible trade receivable recorded in year 1 from a customer that declared bankruptcy in year 2.

216

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. Summarize the uncorrected errors in the working papers, but do not document whether the 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. Documents the conclusion that the errors do not cause the financial statements to be misstated, but do not summarize uncorrected errors in the working papers.
d. 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.

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.

217

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

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

218

Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?
a. “We believe that the company will be able to defend this action successfully.”
b. “We believe that the plaintiff’s case against the company is without merit.”
c. “We believe that the action can be settled for less than the damages claimed.”
d. “We believe that the possible liability to the company is nominal in amount.”

“We believe that the action can be settled for less than the damages claimed.”

219

An auditor searching for related-party transactions should obtain an understanding of each subsidiary’s relationship to the total entity because

The business structure may be deliberately designed to obscure related-party transactions.

220

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. Explain to customers that discrepancies will be investigated by an independent third party,
c. Include a list of items or invoices that constitute the customer’s account balances.
d. Ask customers to respond to the confirmation requests directly to the auditor by fax.

Include a list of items or invoices that constitute the customer’s account balances.

221

A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following items would least likely be included in the attorney’s response to the auditor’s letter of inquiry?
a. A description of potential litigation in other matters or related to an unfavorable verdict in the patent infringement lawsuit.
b. A discussion of case progress and the strategy currently in place by client management to resolve the lawsuit.
c. An evaluation of the probability of loss and a statement of the amount or range of loss if an unfavorable outcome is reasonably possible.
d. An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.

An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.

222

When an outside specialist has assumed full responsibility for taking the client’s physical inventory, reliance on the specialist’s report is acceptable if

The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory.

223

An examination of the balance in the accounts payable account is ordinarily not designed to

Verify that accounts payable were properly authorized.

224

An auditor will usually trace the details of the test counts made during the observation of the physical inventory taking to a final inventory schedule. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are

Included in the final inventory schedule.

225

The negative request form of accounts receivable confirmation is useful particularly when the

Assessed level of the risk of material misstatement relating to receivables is low.
Number of small balances is many.
Consideration by the recipient is likely.

226

For the fiscal year ending December 31, previous year and the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000 and allowance for uncollectible accounts receivable of $30,000 and $50,000 respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions draw?
a. Accounts receivable turnovers are 10.0 and 6.6, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16 respectively. Examine allowance for possible overstatement of the allowance.
b. Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable is 0.42 and 0.20, respectively. Examine allowance for possible overstatement of the allowance.
c. Accounts receivable turnovers are 10.0 and 6.6, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16 respectively. Examine allowance for possible understatement of the allowance.
d. Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable is 0.42 and 0.20, respectively. Examine allowance for possible understatement of the allowance.

Accounts receivable turnovers are 10.0 and 6.6, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16 respectively. Examine allowance for possible understatement of the allowance.

227

Which of the following areas would ordinarily be expected to require the most time when performing an audit of a continuing client?
a. Salaries expense.
b. Retained earnings.
c. Accounts receivable.
d. Common stock.

Accounts receivable.

228

Which of the following audit procedure is least likely to detect an unrecorded liability?
a. Analysis and re-computation of depreciation expense.
b. Mailing of standard bank confirmation form.
c. Analysis and re-computation of interest expense.
d. Reading of the minutes of meetings of the board of directors.

Analysis and re-computation of depreciation expense.

229

Before applying principal substantive tests to an entity’s accounts receivable at an interim date, an auditor should

Assess the difficulty in controlling the incremental audit risk.

230

Which of the following is least likely to include a reference to the use of a specialist?
a. Adverse opinion.
b. Qualified opinion.
c. Unmodified opinion.
d. Disclaimer opinion.

Unmodified opinion.

231

The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditor to

Estimate credit losses.

232

Which of the following statements would not normally be included in a representation letter for a review of interim financial information?
a. To the best of our knowledge and belief, no events have occurred subsequent to the balance sheet and through the date of this letter that would require adjustment to or disclosure in the interim financial information.
b. We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information.
c. We acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud.
d. We have made available to you all financial records and data.

We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information.

233

Which of the following most likely would cause an auditor to consider whether a client’s financial statements contain material misstatements?
a. Audit trails of computer-generated transactions exist only for a short time.
b. Management did not disclose to the auditor that it consulted with other accountants about significant accounting matters.
c. The CFO will not sign the management representation letter until the last day of the auditor’s fieldwork.
d. The results of an analytical procedure disclose unexpected differences.

The results of an analytical procedure disclose unexpected differences.

234

The audit procedure of analyzing the repairs and maintenance accounts is primarily designed to provide evidence in support of the audit proposition that all

Expenditures for fixed assets have been capitalized.

235

The auditor can best verify a client’s bond sinking fund transactions and year-end balance by

Confirmation with the bond trustee.

236

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?
a. Allowance for doubtful accounts.
b. Common stock.
c. Purchase returns and allowances.
d. Non-controlling interest of a subsidiary purchased during the year.

Allowance for doubtful accounts.

237

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

Examining vendor statements for amounts not reported as purchases

238

During the first part of the current fiscal year, the client company began dealing with certain customers on a consignment basis. Which of the following audit procedures is least likely to bring this new fact to the auditor’s attention?
a. Confirmation of accounts receivable.
b. Test of cash receipts transactions.
c. Tracing of shipping documents to the sales journal.
d. Observation of physical inventory.

Observation of physical inventory.

239

Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, ad assessments most likely would cause the auditor to request clarification?
a. “I believe that this action has only a remote chance in establishing any liability.”
b. “I believe that the plaintiff will have problems establishing any liability.”
c. “I believe that the company will be able to defend this action successfully.”
d. “I believe that the plaintiff’s case against the company is without merit.”

"I believe that the plaintiff will have problems establishing any liability.”

240

Some firms which dispose of only a small part of their total output by consignment shipments fail to make any distinction between consignment shipments and regular sales. Which of the following would suggest that goods have been shipped on consignment?
a. Large debits to accounts receivable and small periodic credits.
b. Numerous shipments of large quantities and few returns.
c. Numerous shipments of small quantities.
d. Large debits to accounts receivable and large periodic credits.

Large debits to accounts receivable and small periodic credits.

241

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
a. Examine a sample of transactions that occurred since the year-end to verify the effectiveness of computer controls.
b. Re-perform the tests of controls the tests of controls that indicated significant deficiencies in the operation of internal control.
c. Re-compute depreciation charges for plant assets sold for substantial gains since the year-end.
d. Inquire of management whether there have been significant changes in working capital since the year-end.

Inquire of management whether there have been significant changes in working capital since the year-end.

242

Because f the pervasive effects of laws and regulations on the financial statements of governmental units, an auditor should obtain written management representations acknowledging that management has

Identified and disclosed all laws and regulation that have a direct and material effect on its financial statements.

243

Several years ago Conway, Inc. secured a conventional real estate mortgage loan. Which of the following audit procedures would be least likely to be performed by an auditor examining the mortgage balance?
a. Re-compute mortgage interest expense.
b. Review the mortgage amortization schedule.
c. Examine the current year’s canceled checks.
d. Inspect public records of lien balances.

Inspect public records of lien balances.

244

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

Represented by tags were included on the listing.

245

Which of the following factors would most likely influence an auditor’s consideration of the reliability of data when performing analytical procedures?
a. Whether the data were processed in an online system or a batch entry system.
b. Whether the data were developed under a system with adequate controls.
c. Whether the data were developed in a computerized or a manual accounting system.
d. Whether the data were prepared on the cash basis or in conformity with GAAP.

Whether the data were developed under a system with adequate controls.

246

The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with

Receiving reports.

247

When management prepares financial statements in conformity with GAAP, assertions are made about account balances and

Classes of transactions/Disclosures

248

Which of the following steps should an auditor perform first to determine the existence of related parties?
a. Review proxy and other materials filed with the SEC.
b. Examine invoices, contracts, and purchasing orders.
c. Review the company’s business structure.
d. Request a list of all related parties from management.

Request a list of all related parties from management.

249

Which of the following procedures would an auditor ordinarily perform first in evaluating the reasonableness of management’s accounting estimates?
a. Analyze historical data used in developing assumptions to determine whether the process is consistent.
b. Compare independent expectations with recorded estimates to assess management’s process.
c. Obtain an understanding of how management developed its estimates.
d. Review transactions occurring prior to the completion of fieldwork that indicate variations from expectations.

Obtain an understanding of how management developed its estimates.

250

Which of the following conditions would not normally cause the auditor to question whether material errors or fraud exist?
a. Transactions are not supported by proper documentation.
b. Differences are disclosed by confirmations.
c. Difference exit between controls accounts and supporting subsidiary records.
d. Bookkeeping errors are listed on a computer-generated exception report.

Transactions are not supported by proper documentation.

251

The letter of audit inquiry addressed to the client’s legal counsel will not ordinarily be

Limited to references concerning only pending or threatened litigation with respect to which the lawyer has been engaged

252

Which of the following procedures should an auditor perform concerning litigation, claims, and assessments?
a. Inspect legal documents in the possession of the client’s lawyer that are relevant to pending litigation and un-asserted claims and assessments.
b. Confirm directly with the client’s lawyer that all litigation, claims, and assessments have been properly recorded in the financial statements.
c. Obtain assurance from management that it has disclosed all un-asserted claims that its lawyer has advised are probable of assertion.
d. Discuss with the client’s lawyer its philosophy of defending litigation, claims, and assessments that have a high probability of being resolved unfavorably.

Obtain assurance from management that it has disclosed all un-asserted claims that its lawyer has advised are probable of assertion.

253

Which of the following might be detected by an auditor’s cutoff review and examination of sales journal entries for several days prior to and subsequent to the balance sheet date?
a. Kiting bank balances.
b. Inflating sales for the year.
c. Lapping year-end accounts receivable.
d. Misappropriating merchandise.

Inflating sales for the year.

254

During the year under audit, a company has completed a private placement of a substantial amount of bonds. Which of the following is the most important step in the auditor’s program for the examination of bonds payable?
a. Re-computing the annual interest cost and the effective yield.
b. Confirming the amount issued with the bond trustee.
c. Tracing the cash received from the issue to the accounting records.
d. Examining the bond records maintained by the transfer agent.

Tracing the cash received from the issue to the accounting records.

255

According to PCAOB requirements, audit documentation must be sufficient to allow

An experienced auditor with no previous connection with the engagement to understand the nature, timing, and extent of the work performed.

256

A client’s procurement system ends with the assumption of a liability and the eventual payment of the liability. Which of the following best describes the auditor’s primary concern with respect to liabilities resulting from the procurement system?
a. Acquisition of materials is not made from one vendor or one group of vendors.
b. Authority to incur liabilities is restricted to one designated person.
c. Commitments for all purchases are made only after established competitive bidding procedures are followed.
d. Accounts payable are not materially understated.

Accounts payable are not materially understated.

257

To obtain assurance that all inventory items in a client’s inventory listing are valid, an auditor most likely would trace

Items in the inventory listing to inventory tags and the auditor’s recorded count sheets.

258

Which of the following is the most reliable analytical procedure to verify the year-end financial statement balances of a wholesale business?
a. Verify depreciation expense by multiplying the depreciable assets balances by one divided by the depreciation rate.
b. Verify commission expense by multiplying sales revenue by the company’s standard commission rate.
c. Verify FICA tax liability by multiplying total payroll costs by the FICA contribution rate in effect during the year.
d. Verify interest expense, which includes imputed interest, by multiplying long-term debt balances by the year-end prevailing interest rate.

Verify commission expense by multiplying sales revenue by the company’s standard commission rate.

259

Which of the following is the least persuasive documentation in support of an auditor’s opinion?
a. Lists of negative confirmation requests for which no response was received by the auditor.
b. Schedules of details of physical inventory counts conducted by the client.
c. Notation of appraisers’ conclusions documented in the auditor’s working papers.
d. Notation of inferences drawn from ratios and trends.

Schedules of details of physical inventory counts conducted by the client.

260

Of the following, which is the most efficient audit procedure for verification of interest earned on bond investments?
a. Confirming interest rate with the issuer of the bonds.
b. Vouching the receipt and deposit of interest checks.
c. Re-computing interest earned.
d. Tracing interest declarations to an independent record book.

Re-computing interest earned.

261

To help plan the nature, timing, and extent of substantive auditing procedures, preliminary analytical procedures should focus on

Enhancing the auditor’s understanding of the client’s business and events that have occurred since the last audit date.

262

Which of the following best describes the operational audit?
a. It requires the constant review by internal auditors of the administrative controls as they relate to the operations of the company.
b. It concentrates on implementing financial and accounting control in a newly organized company.
c. It attempts and is designed to verify the fair presentation of a company’s results of operations.
d. It concentrates on seeking out aspects of operations in which waste would be reduced by the introduction of controls.

It concentrates on seeking out aspects of operations in which waste would be reduced by the introduction of controls.

263

Which of the following is the most effective audit procedure for verification of dividends earned on the investments in equity securities?
a. Reconciling amounts received with published dividend records.
b. Comparing the amounts received with preceding year dividends received.
c. Tracing deposit of dividend checks to the cash receipts book.
d. Re-computing selected extensions and footings of dividend schedules and comparing totals to the general ledger.

Reconciling amounts received with published dividend records.

264

In using the work of a specialist, an auditor may refer to the specialist in the auditor’s report if, as a result of the specialist’s findings, the auditor

Adds an explanatory paragraph to the auditor’s report to emphasize an unusually important subsequent event.

265

In evaluating the reasonableness of an entity’s accounting estimates, an auditor most likely concentrates on key factors and assumptions that are

Deviations from historical patterns.

266

Two months before the year-end the bookkeeper erroneously recorded the receipt of a long-term bank loan by a debit to cash and a credit to sales. Which of the following is the most effective procedure for detecting this type of error?
a. Analyze bank confirmation information.
b. Prepare a year-end bank reconciliation.
c. Prepare a year-end bank transfer schedule.
d. Analyze the notes payable journal.

Analyze bank confirmation information.

267

The auditor is least likely to learn of retirements of equipment through which of the following?
a. Analysis of the debits to the accumulated depreciation account.
b. Review of insurance policy riders.
c. Review of depreciation.
d. Review of the purchase return and allowance account.

Review of the purchase return and allowance account.

268

A CPA has received an attorney’s letter in which no significant disagreements with the client’s assessments of contingent liabilities were noted. The resignation of the client’s lawyer shortly after receipt of the letter should alert the auditor that

Undisclosed un-asserted claims may have arisen.

269

Under which of the following circumstances may audited financial statements contain a note disclosing a subsequent event which is labeled unaudited?
a. When the event occurs between the date of the auditor’s original report and the date of the reissuance of the report.
b. When the event occurs after completion of fieldwork and before issuance of the auditor’s report.
c. When audit procedures with respect to the subsequent event were not performed by the auditor.
d. When the subsequent event does not require adjustment of the financial statements.

When the event occurs between the date of the auditor’s original report and the date of the reissuance of the report.

270

Which of the following is required documentation in an audit in accordance with GAAS?
a. A memorandum setting forth the scope of the audit.
b. A written audit program describing the necessary procedures to be performed.
c. A signed engagement letter formalizing the level of service to be rendered.
d. A flowchart depicting the segregation of duties and authorization of transactions.

A written audit program describing the necessary procedures to be performed.d.

271

An auditor will ordinarily examine invoices from lawyers primarily in order to

Identify possible, litigation, claims, and assessments.

272

It is the responsibility of the auditor to evaluate the reasonableness of the accounting estimates made by management. Which one of the following approaches would the auditor not use when evaluating the reasonableness of the estimate?
a. Review subsequent events or transactions occurring prior to completion of fieldwork.
b. Calculate an independent expectation of the estimate.
c. Confirm the estimate with independent parties.
d. Review and test management’s process to develop the estimate.

Confirm the estimate with independent parties.

273

Which of the following statements concerning audit evidence is correct?
a. A client’s accounting data can be sufficient audit evidence to support the financial statements.
b. The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test.
c. Reliable evidence is equivalent to sufficient evidence.
d. To be appropriate, audit evidence should be both relevant and reliable.

Reliable evidence is equivalent to sufficient evidence.

274

Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular objective?
a. There were many transactions posed to the account during the period.
b. The audit is being performed soon after the balance sheet date.
c. Audit staff are experienced in performing the planned procedures.
d. Analytical procedures have revealed no unusual or unexpected results.

Analytical procedures have revealed no unusual or unexpected results.

275

The objective of tests of details of transactions performed as substantive procedures is to

Detect material misstatements in the financial statements.

276

In verifying debits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the purchase

Invoices.

277

Audit programs should be designed so that

The audit evidence gathered supports the auditor’s conclusions.

278

Which of the following eliminates voluminous details from the auditor’s working trial balance by classifying and summarizing similar or related items?
a. Control accounts.
b. Account analyses.
c. Lead schedules.
d. Supporting schedules.

Lead schedules.

279

Which of the following procedures would an auditor most likely perform to obtain evidence about an entity’s subsequent events?
a. Obtain a letter from the entity’s attorney describing any pending litigation, un-asserted claims, or loss contingencies.
b. Reconcile bank activity for the month after the balance sheet date with cash activity reflected in the accounting records.
c. Examine on a test basis the purchase invoices and receiving reports for several days after the inventory date.
d. Review the treasurer’s monthly reports on temporary investments owned, purchased, and sold.

Obtain a letter from the entity’s attorney describing any pending litigation, un-asserted claims, or loss contingencies.

280

Which of the following procedures would yield the most reliable evidence?
a. A comparison of beginning and ending retained earnings.
b. A recalculation of bad debt expense.
c. An inquiry of client personnel.
d. A scanning of trial balances.

A recalculation of bad debt expense.

281

Auditors try to identify predictable relationships when applying analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?
a. Accounts payable.
b. Allowance for doubtful accounts.
c. Accounts receivable.
d. Interest expense.

Interest expense.

282

Which of the following is not a type of basic procedures used in an audit?
a. Substantive procedures.
b. Tests of directional effectiveness.
c. Test of controls.
d. Risk assessment procedures.

Tests of directional effectiveness.

283

As one of the year-end audit procedures, the auditor instructed the client’s personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the client’s treasurer had signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure?

The request was mailed by the assistant treasurer.

284

An independent auditor finds that a corporation occupies office space, at no charge, in an office building owned by a shareholder. This finding indicates the existence of

Related-party transactions.

285

An auditor would be least likely to use confirmations in connection with the examination of

Property, plant, and equipment.

286

Under which of the following circumstances would an auditor be most likely to intensify an examination of a $500 imprest petty cash fund?
a. Reimbursement vouchers are not pre-numbered.
b. The custodian occasionally uses the cash fund to cash employee checks.
c. Reimbursement occurs twice each week.
d. The custodian endorses reimbursement checks.

Reimbursement occurs twice each week.

287

At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management’s representation. Which of the following actions is the auditor most likely to take?
a. Consult with the audit committee and issue a disclaimer opinion.
b. Obtain additional evidence regarding the valuation of inventory.
c. Consult with the audit committee and issue a qualified opinion.
d. Obtain a statement from management supporting their inventory valuation.

Obtain additional evidence regarding the valuation of inventory.

288

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

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

289


Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion?

a. Materiality
b. Relative risk
c. Auditor judgment
d. Reasonable assurance

Auditor judgment

290

When auditing a public warehouse, which of the following is the most important procedure with respect to disclosing unrecorded liabilities?

a. Review of outstanding receipts.
b. Confirmation of negotiable receipts with holders
c. Observation of inventory.
d. Inspection of receiving and issuing procedures

Inspection of receiving and issuing procedures

291

Which of the following is generally included or shown in the auditor’s working papers for the audit of a nonpublic company?

a. The procedures used by the auditor to verify the personal financial status of members of the client’s management team.
b. The manner in which exceptions and unusual matters disclosed by the auditor’s procedures were resolved or treated.
c. Analyses that are designed to be a part or, or a substitute for, the client’s accounting records.
d. Excerpts from authoritative pronouncements that support the underlying generally accepted accounting principles used in preparing the financial statements.

The manner in which exceptions and unusual matters disclosed by the auditor's procedures were resolved or treated.