Final Exam Flashcards
1
Q
What event initiates a transaction in the sales and collection cycle?
a. receipt of cash
b. delivery of product to customer
c. identification of a new customer
d. customer request for goods or services
A
d. customer request for goods or services
2
Q
What critical event must take place before goods can be shipped in order to assure payment can be reasonable expected?
a. determination of correct delivery address
b. credit approval
c. matching of shipping document with sales invoice
d. receipt of sales order from the customer
A
b. credit approval
3
Q
One type of shipping document is the ___________, which is a written contract between the carrier and the seller of the receipt and shipment of goods.
a. sales order
b. bill of lading
c. sales invoice
d. customer order
A
b. bill of lading
4
Q
The document used to indicate to the customer the amount of a sale and payment due date is the
a. sales invoice
b. bill of lading
c. purchase order
d. sales order
A
a. sales invoice
5
Q
The total of the individual account balances in the accounts receivable master file should equal the
a. total sales for the period
b. balance of the sales account in the general ledger
c. total sales less the total cash received for the period
d. balance of the accounts receivable account in the general ledger
A
d. balance of the accounts receivable account in the general ledger
6
Q
A _________ indicates a reduction in the amount due from a customer because of returned goods or an allowance.
a. bill of lading
b. sales invoice
c. credit memo
d. monthly statement
A
c. credit memo
7
Q
Some companies have customers send payments directly to an address maintained by a bank. This is called a(n) _____________.
a. direct deposit
b. funds transfer
c. lockbox
d. interbank transfer
A
c. lockbox
8
Q
For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be recorded on which of the following documents?
a. sales order
b. sales invoice
c. customer order
d. remittance advice
A
a. sales order
9
Q
When designing audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion?
a. valuation
b. cutoff
c. completeness
d. classification
A
c. completeness
10
Q
When assessing risk control, the auditor must do all of the following except
a. assess control risk for each objective by evaluating the controls and deficiencies for each objective
b. perform the detailed test of balances
c. identify the key internal controls and deficiencies
d. associate the key controls and deficiencies with the objectives
A
b. perform the detailed test of balances
11
Q
Which of the following is an accurate statement relating to separation of duties?
a. Management should deny cash access to anyone responsible for entering sales and cash receipts transaction information into the computer.
b. All disagreements on the monthly statements should be directed to a designated person who has no responsibility for handling cash or recording sales or accounts receivable.
c. The credit granting function should be separate from the sales function.
d. All of the above are accurate statements.
A
d. All of the above are accurate statements.
12
Q
To test for recorded sales for which there were no actual shipments, the auditor vouches from the
a. bill of lading to the sales journal
b. sales journal to the shipping documents
c. sales journal to the accounts receivable subsidiary ledger
d. bill of lading to the supporting customer order and sales order
A
b. sales journal to the shipping documents
13
Q
To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with
a. the original invoice
b. an approved master price list
c. the amounts recorded in the sales journal for that transaction
d. the amounts posted to the customer’s account in the accounts receivable master file.
A
b. an approved master price list
14
Q
Smith Manufacturing Company’s accounts receivable clerk has a friend who is also a customer of Smith Manufacturing. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to
a. prenumber and account for all credit memorandums
b. require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved
c. have independent sales and accounts receivable departments
d. mail monthly statements to customers
A
b. require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved.
15
Q
When the auditor decides to select less than 100 percent of the population for testing, the auditor is said to use
a. audit sampling
b. representative sampling
c. poor judgment
d. estimation sampling
A
a. audit sampling
16
Q
Which of the following is the risk that an auditor will reach an incorrect conclusion because a sample is not representative of the population?
a. sampling risk
b. nonsampling risk
c. audit risk
d. detection risk
A
a. sampling risk
17
Q
Which of the following statements is most correct with respect to the evaluation of nonprobabilistic sample results?
a. It is acceptable to make nonprobabilistic evaluations only when probabilistic sample selection is used.
b. It is acceptable to make nonprobabilistic evaluations only if the auditor cannot quantify sampling risk.
c. It is never acceptable to evaluate a nonprobabilistic sample using statistical methods.
d. All of the above are correct.
A
c. It is never acceptable to evaluate a nonprobabilistic sample using statistical methods.
18
Q
A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a
a. random sample
b. statistical sample
c. judgment sample
d. representative sample
A
a. random sample
19
Q
The process which requires the calculation of an interval and then selects the items based on the size of the interval is
a. statistical sampling
b. random sample selection
c. systematic sample selection
d. computerized sample selection
A
c. systematic sample selection
20
Q
When a population is divided into subpopulations, usually by dollar size, and larger samples are taken from the subpopulation with the larger ones, _________ is being used.
a. sampling with probability proportional to size
b. stratified sampling
c. block sampling
d. haphazard sampling
A
b. stratified sampling
21
Q
Which of the following is most correct when using audit sampling for exception rates?
a. The auditor is concerned with the lowest rate
b. The auditor is concerned with the highest rate
c. The auditor is concerned with the average on previous audits.
d. The auditor is not concerned with the exception rate for audits of nonpublic companies.
A
b. The auditor is concerned with the highest rate
22
Q
If the auditor decides to assess control risk at the moderate level in a private company audit, when in previous years the auditor set control risk at the maximum level, then tests of controls for the current year would be
a. increased in number
b. reduced in number
c. not performed
d. unchanged from prior planned settings
A
a. increased in number
23
Q
Which of the following represents the best description of the tolerable exception rate?
a. the highest exception rate the auditor will permit in the control being tested and still conclude it is operating effectively.
b. the highest exception rate the auditor expects to find in the population
c. the number of exceptions found in the sample divided by the sample size
d. the highest estimated exception rate in a population at a given estimated population exception rate
A
a. the highest exception rate the auditor will permit in the control being tested and still conclude it is operating effectively.
24
Q
When selecting a sample size for substantive tests of balances which factor, other factors being equal, would result in a larger sample?
a. a decrease in the tolerable misstatement
b. small expected misstatements
c. an increase in the tolerable misstatement
d. an increase in the acceptable risk of incorrect acceptance
A
a. a decrease in the tolerable misstatement
25
The auditor's principal objective when using a sample of tests of details of balances is whether the
a. account balance being audited is fairly stated
b. transactions being audited are free of misstatements
c. controls being tested are operating effectively
d. transactions and account balances being audited dare fairly stated
a. account balance being audited is fairly stated
26
Which of the following does not have to be considered in determining the initial sample size of a test of details?
a. tolerable misstatement
b. acceptable risk of incorrect rejection
c. estimate of misstatements in the population
d. inherent risk
b. acceptable risk of incorrect rejection
27
When errors are found in a sample, auditors in practice generally make the assumption
a. that the population errors cannot be determined
b. that the population errors are larger than the sample errors
c. that the population errors are smaller than the sample errors
d. that the actual sample errors are representative of the population errors.
d. that the actual sample errors are representative of the population errors
28
True or False. If a population is not considered acceptable, and the analysis indicates an individual error is unique or most of the misstatements are of a specific type, it may be appropriate to restrict the additional audit effort to the problem area.
True
29
Which of the following accounts is not part of the acquisition and payment cycle?
a. prepaid expenses
b. accounts payable
c. sales returns and allowances
d. property, plant, and equipment
c. sales returns and allowances
30
A document indicating a reduction in the amount owed to a vendor because of returned goods is
a. a debit memo
b. a credit memo
c. a receiving report
d. a contractual adjustment form
a. a debit memo
31
The computer-generated file which records acquisitions, disbursements and allowances for each vendor is the
a. accounts payable master file
b. cash disbursements file
c. acquisitions transaction file
d. purchase approval file
a. accounts payable master file
32
After a purchase requisition is approved, a ________ must be initiated to purchase the goods or services.
a. purchase order
b. vendor order
c. call order
d. vendor invoice
a. purchase order
33
An auditor is gathering evidence on the completeness assertion. To do so, she performs a test to verify that all goods received by the company have been recorded properly. The document population for this test would consist of all
a. vendor invoices
b. purchase orders
c. receiving reports
d. cash disbursements for accounts payable
c. receiving reports
34
The accounts payable department usually has responsibility for approving acquisitions for payment by comparing the details on the
a. vendor's invoice and the receiving report
b. vendor's invoice and the purchase requisition
c. purchase order, receiving report, and vendor's invoice
d. purchase requisition, purchase order, and receiving report
c. purchase order, receiving report, and vendor's invoice
35
At what point do most companies recognize liabilities in the acquisition and payment cycle when the goods are shipped FOB destination?
a. when the purchase order is issued
b. when the vendor acknowledges receipt of the order
c. when the goods or services are received
d. when the vendor invoice is received
c. when the goods or services are received
36
The extent of a search for unrecorded liabilities largely depends on
a. materiality and inherent risk
b. materiality and control risk
c. materiality only
d. inherent risk only
b. materiality and control risk
37
In searching for unrecorded liabilities the purpose of the audit procedure to "examine underlying documentation for subsequent cash disbursements" is to
a. uncover liabilities on the balance sheet which should not have been recorded until a subsequent period
b. find the documentation relating to a cash disbursement
c. uncover payments made in a subsequent accounting period for liabilities that existed at the balance sheet date
d. uncover cash disbursements recorded in a subsequent accounting period which should be recorded in this period.
c. uncover payment made in a subsequent accounting period for liabilities that existed at the balance sheet date.
38
The auditor is performing substantive tests of balances for accounts payable. What documentation would provide the best evidence for the ending balance?
a. vendors' invoices
b. vendors' statements
c. receiving reports
d. purchase orders
b. vendors' statements
39
Which of the following would generally not be a component of the audit of the acquisition and payment cycle?
a. adequacy of controls over acquisitions of long-lived assets
b. tracing disposals of long-lived assets to the fixed asset master file
c. determining the adequacy of the funds available for capital expenditures
d. reperformance of recorded depreciation expense
c. determining the adequacy of the funds available for capital expenditures
40
Normally it may be unnecessary to examine supporting documentation for each addition to property, plant, and equipment, but it would be customary to verify
a. all large transactions
b. all unusual transactions
c. a representative sample of typical additions
d. all of the above
d. all of the above
41
Which is not one of the tests that would be used in the audit of equipment, depreciation expense, and accumulated depreciation?
a. Verify the ending balance in the asset account
b. Send confirmations to the sales personnel who sold the equipment to the company
c. Perform substantive analytical procedures
d. Verify current year acquisitions
b. Send confirmations to the sales personnel who sold the equipment to the company
42
The primary accounting record for manufacturing equipment and other fixed assets is the
a. depreciation ledger
b. fixed asset master file
c. asset inventory
d. equipment roster
b. fixed asset master file
43
Which of the following audit procedures would be the most correct in deterring the audit objective of existence for the equipment account in the fixed asset master file?
a. Examine vendor invoices and receiving reports
b. Review transactions near the balance sheet date
c. Recalculate vendor invoices
d. Examine vendor invoices for correct accounting treatment
a. Examine vendor invoices and receiving reports
44
The audit procedure that requires an auditor to "foot the acquisition schedule" relates to which balance-related audit objective?
a. classification
b. detail tie-in
c. existence
d. cut-off
b. detail tie-in
45
The primary accounting record for manufacturing equipment and other fixed assets is the
a. depreciation ledger
b. fixed asset master file
c. asset inventory
d. equipment roster
b. fixed asset master file
46
Which of the following audit procedures would be the most correct in determining the audit objective of existence for the equipment account in the fixed asset master file?
a. Examine vendor invoices and receiving reports
b. Review transactions near the balance sheet date.
c. Recalculate vendor invoices
d. Examine vendor invoices for correct accounting treatment
a. Examine vendor invoices and receiving reports
47
In testing acquisitions the auditor needs to understand the appropriate accounting guidance related to acquisition accounting. Which of the following is not an accounting consideration for the auditor as regards to acquisition cost?
a. inclusion of material transportation and installation costs
b. recording of trade-in costs
c. allocating costs when building and equipment are purchased at one price
d. verifying that purchased equipment amounts correspond to the budgeted amount
d. verifying that purchased equipment amounts correspond to the budgeted amount
48
The test of details of balances procedure to "examine vendors' invoices of closely related accounts such as repairs to uncover items that should be property, plant, and equipment" satisfies the audit objective of
a. completeness
b. detail tie-in
c. cutoff
d. existence
a. completeness
49
A major consideration in verifying the ending balance in fixed assets is the possibility of existing legal encumbrances. Tests to identify possible legal encumbrances would satisfy the audit objective of
a. existence
b. presentation and disclosure
c. detail tie-in
d. classification
b. presentation and disclosure
50
The auditor needs to gain reasonable assurance that the equipment accounts in the fixed asset master file are not understated. Which of the following accounts would most likely be reviewed in making that determination?
a. depreciation expense
b. repairs and maintenance expense
c. gains/losses on sales and retirements
d. cash
b. repairs and maintenance expense
51
Changing circumstances may require a change in the useful life of an asset. When this occurs, it involves a change in
a. accounting estimate rather than a change in accounting principle
b. accounting principle rather than a change in accounting estimate
c. both accounting principle and accounting estimate
d. neither accounting principle nor accounting estimate
a. accounting estimate rather than a change in accounting principle
52
In connection with a review of the prepaid insurance account, which of the following audit procedures would you be least likely to use?
a. Recompute the portion of the premium that expired during the year
b. Prepare excerpts of insurance policies for audit working papers
c. Confirm premium rates with an independent insurance broker
d. Examine support for premium payments
c. Confirm premium rates with an independent insurance broker
53
________ expense is rarely analyzed unless analytical procedures indicate high potential for material misstatement.
a. Repairs and maintenance
b. Legal
c. Utilities
d. Rent and lease
c. Utilities
54
Which of the following departments is most likely responsible for pay rate changes and changes in deductible amounts for employees?
a. general accounting department
b. human resources department
c. treasurer
d. controller
b. human resources department
55
The computer file used for recording payroll transactions for each employee and maintaining total wages paid for the year to date is the
a. payroll transaction file
b. payroll master file
c. payroll bank account reconciliation
d. payroll tax returns
b. payroll master file
56
Which of the following best describes the systems of internal control for payroll for large companies?
a. loosely structured but well controlled
b. loosely structured and loosely controlled
c. highly structured and well controlled
d. highly structured but loosely controlled
c. highly structured and well controlled
57
Which of the following audit procedures would be the most effective in testing for nonexistent employees?
a. Trace transactions recorded in the payroll journal to the human resources department to determine employment status
b. Examine cancelled checks for proper endorsement
c. Recalculate net pay
d. Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement.
a. Trace transactions recorded int he payroll journal to the human resources department to determine employment status.
58
The auditor _________ rely on the internal controls of the payroll service organization if the service organization's auditor issues a report on the service organization's internal control.
a. must
b. cannot
c. can rarely
d. can often
d. can often
59
The careful and timely preparation of all payroll tax returns is necessary to avoid penalties and criminal charges. The most important control in the timely preparation of these returns is
a. computerized preparation of tax returns
b. a well-defined set of policies that indicate when each form must be filed
c. independent verification of computer output by a competent individual
d. the use of an outside payroll service
b. a well-defined set of policies that indicate when each form must be filed
60
The two types of services provided in connection with the Statements on Standards for Accounting and Review Services are:
A) audit and examination services.
B) compilation and review services.
C) examination and review services.
D) management advisory services and compilations.
B) compilation and review services.
61
Compilation reports may be of all except which of the following types?
A) Compilation with limited independence
B) Compilation with full disclosure
C) Compilation without independence
D) Compilation that omits substantially all disclosures
A) Compilation with limited independence
62
Which of the following would not be included in a CPA's report based upon a review of the financial statements of a nonpublic entity?
A) A statement that the review was in accordance with generally accepted auditing standards
B) A statement that all information included in the financial statements is the representation of management
C) A statement describing the principal procedures performed
D) A statement describing the auditor's conclusions based upon the results of the review
A) A statement that the review was in accordance with generally accepted auditing standards
63
```
The statement that "We are not aware of any material modifications that should be made to the accompanying financial statements" expresses which of the following?
A) Disclaimer of an opinion
B) Negative assurance
C) Negative confirmation
D) Shared opinion
```
B) Negative assurance
64
```
The highest level of assurance is provided for in which one of the following engagements?
A) Review
B) Compilation
C) Audit
D) None of the above
```
C) Audit
65
You are preparing to issue a report on the compilation of financial statements for a nonpublic company. Prior to issuing the report you should:
A) read the financial statements to determine if they are free from obvious material errors.
B) perform analytical procedures to determine if they are free from material misstatements.
C) perform tests of balances on selected accounts to determine if they are free from material misstatements.
D) perform limited control tests to determine if there are any material misstatements.
A) read the financial statements to determine if they are free from obvious material errors.
66
An accountant has accepted an engagement in which the audit procedures of inquiry and analytical procedures will be employed. These procedures will form the basis for issuance of:
A) a compilation report.
B) audit report on supplemental information issued by the client.
C) management advisory report requested by the audit committee.
D) review report on financial statements for a nonpublic company.
D) review report on financial statements for a nonpublic company.
67
Each page of the financial statements reviewed for a nonpublic entity should include the reference:
A) "These financial statements are unaudited."
B) "We express no assurance on these financial statements."
C) "See independent accountant's review report."
D) "See the audit opinion for the review procedures performed."
C) "See independent accountant's review report."
68
```
An interim review of the financial information for public companies is performed following standards of the:
A) AICPA.
B) PCAOB.
C) SEC.
D) SSARS.
```
B) PCAOB.
69
```
The Securities and Exchange Commission requires quarterly financial information as a part of the:
A) 10-K report.
B) 10-Q report.
C) 8-K report.
D) auditor's report.
```
B) 10-Q report.
70
Reports on agreed-upon procedures are intended to be distributed:
A) to only the involved parties, who would have the requisite knowledge about those procedures and the level of assurance resulting from them.
B) to only the involved parties, who would have the requisite knowledge about those procedures but not the level of assurance resulting from them.
C) to any party to whom the client wishes.
D) only to the stockholders of the client.
A) to only the involved parties, who would have the requisite knowledge about those procedures and the level of assurance resulting from them.
71
The service auditor's Type 2 report contains:
A) an opinion on the reasonableness of the financial statements.
B) the two opinions about the description and suitability of the design of controls that are issued in a Type 1 report plus an additional opinion about the operating effectiveness of controls throughout the period.
C) contains an opinion only on the operating effectiveness of the controls.
D) an opinion on the service company's website.
B) the two opinions about the description and suitability of the design of controls that are issued in a Type 1 report plus an additional opinion about the operating effectiveness of controls throughout the period.
72
As a CPA you have been asked to examine an entity's financial projections. Acceptance of the engagement would be appropriate if distribution is limited to:
A) stockholders of record as of the date of the report.
B) potential investors and creditors by posting on the company's website.
C) general public by posting on the company's website.
D) a financial institution for which the company is negotiating a loan.
D) a financial institution for which the company is negotiating a loan.
73
A CPA who has been engaged to audit financial statements that were prepared on a cash basis:
A) must ascertain that there is proper disclosure of the fact that the cash basis has been used, the general nature of material items omitted, and the net effect of such omissions.
B) may not be associated with such statements which are not in accordance with generally accepted accounting principles.
C) must render a qualified report explaining the departure from generally accepted accounting principles in the opinion paragraph.
D) must restate the financial statements on an accrual basis and then render the standard (short-form) report.
A) must ascertain that there is proper disclosure of the fact that the cash basis has been used, the general nature of material items omitted, and the net effect of such omissions.
74
Which of the following is not a similarity between external and internal auditors?
A) Both must be independent of the company.
B) Both must be competent.
C) Both follow a similar methodology in performing their audits.
D) Both consider risk and materiality deciding the extent of their tests and evaluating results.
A) Both must be independent of the company.
75
```
The professional organization which is responsible for providing guidance for internal auditors is the:
A) APA.
B) IIA.
C) ABA.
D) AIA.
```
B) IIA.(Institute of Internal Auditors)
76
```
The primary source of authoritative literature for doing government audits is the:
A) Purple Book.
B) Yellow Book.
C) Green Book.
D) Red Book.
```
B) Yellow Book.
77
```
The Single Audit Act requires that an audit be conducted for recipients who receive total federal funds in any fiscal year of:
A) $1,000,000 or more.
B) $750,000 or more.
C) $500,000 or more.
D) $100,000 or more.
```
B) $750,000 or more.
78
When performing an operational audit, the internal audit team must first determine that:
A) a financial audit has been performed by an independent auditor.
B) a financial audit has been performed by an internal auditor.
C) a review was performed by either an independent or an internal auditor.
D) specific criteria are developed to define effectiveness.
D) specific criteria are developed to define effectiveness.
79
In a preparation service engagement,
A) the CPA's responsibilities are similar to those performed during a review
B) the CPA does not provide any assurance of the financial statements
C) the CPA must issue a preparation service engagement report
D) the CPS must be independent
B) the CPA does not provide any assurance of the financial statements
80
Which of the following is not an element of the examination of perspective financial statements?
A) evaluating the preparation of he perspective financial statements
B) understanding internal controls
C) evaluating the support underlying the assumptions
D) issuing an examination report
B) understanding internal controls
81
```
Statements on Internal Auditing standards are issued by the
A) AICPA
B) SEC
C) Internal Auditing Standards Board
D) Auditing Standards Board
```
C) Internal Auditing Standards Board
82
```
Internal auditors are responsible to
A) the board of directors
B) management
C) both A and B
D) neither A nor B
```
C) both A and B
83
```
Practitioners who perform preparation, compilation, or review engagement are referred to in the Statements on Standards for Accounting and Review Services (SSARS) standards as
A) bookkeepers
B) accountants
C) auditors
D) CPA's
```
B) accountants
84
The standards for preparation, compilation, or review engagement of financial statements are the
A) AICPA's Code of Professional Conduct
B) Statements on Auditing Standards (SAS's)
C) Statements of Standards on Attestation Engagements (SSAE's)
D) Statements on Standards for Accounting and Review Services (SSARS)
D) Statements on Standards for Accounting and Review Services (SSARS)
85
An advantage of using statistical sampling techniques is that such techniques
a) quantify sampling risk
b) eliminate the need for judgmental decisions
c) define the values of precision and reliability required to provide audit satisfaction
d) have been established in the courts to be superior to judgmental sampling
a) quantify sampling risk
86
True or False
| For most audits, revenue recognition is considered to be a significant risk.
True
87
Which of the following types of receivables would not deserve the special attention of the auditor?
a) accounts receivables with credit balances
b) accounts that have been outstanding for a long time
c) receivables from related parties
d) each of the above would receive special attention
d) each of the above would receive special attention
88
Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally
a) reduce the extent of tests of details of balances
b) reduce the extent of tests of controls
c) reduce the tests of transactions
d) reduce all of the other tests
a) reduce the extent of tests of details of balances
89
Which of the following is a correct statement regarding analytical procedures?
a) If an auditor identifies a possible misstatement in sales using analytical procedures, accounts payable will be the likely offsetting misstatement
b) Auditors should also compare the results of their analytical procedures to budgets and industry trends
c. If sales are overstated, the income statement will be incorrect, but the balance sheet will be correct.
d) If an analytical procedure uncovers an unusual fluctuation, the auditor must assume fraud is involved.
b. Auditors should also compare the results of their analytical procedures to budgets and industry trends.
90
True or False.
| A high inherent risk increases planned detection risk and decreases planned substantive tests.
False
91
The understatement of sales and accounts receivable is best uncovered by
a) testing internal controls
b) testing the aged accounts receivable trial balance
c) substantive tests of transactions for shipments made but not recorded
d) substantive tests of transactions for bad debts
c) substantive tests of transactions for shipments made but not recorded
92
Tests of which balance-related audit objective are normally performed first in an audit of the sales and collection cycle?
a) accuracy
b) completeness
c) rights
d) detail tie-in
d) detail tie-in
93
An auditor is performing a credit analysis of customers with balances over 60 days due. She is most likely obtaining evidence for which audit related objective?
a) realizable value
b) existence
c) completeness
d) occurrence
a) realizable value
94
The most important test of details of balances to determine the existence of recorded accounts receivable is
a) tracing details of sales invoices to shipping documents
b) tracing the credits in accounts receivable to bank deposits
c) tracing sales returns entries to credit memos issued and receiving room reports
d) the confirmation of customers' balances
d) the confirmation of customers' balances
95
Most tests of accounts receivable are based on what schedule, file, or listing?
a) sales master file
b) aged accounts receivable trial balance
c) accounts receivable master file
d) accounts receivable general ledger account
b) aged accounts receivable trial balance
96
If material, all of the following are required to be separately disclosed in the financial statements except for
a) accounts receivable from officers
b) accounts receivable from affiliates
c) sales and assets for different business segments
d) sales for the last ten days of the fiscal year
d) sales for the last ten days of the fiscal year
97
When designing tests of details of balances, an important point to remember is
a) auditors emphasize income statement accounts
b) the audit procedures selected depends heavily on whether detection risk for a given objective is low, medium, or high
c) if accounts receivable are overstated, then sales will be understated
d) sales cutoff is the most important test of details of accounts receivable
b) the audit procedures selected depends heavily on whether detection risk for a given objective is low, medium, or high
98
The net realizable value of accounts receivable is equal to
a) gross accounts receivable less allowance for uncollectible accounts
b) gross accounts receivable less bad debt expense
c) gross accounts receivable less returns and allowances
d) gross accounts receivable less sales discounts
a) gross accounts receivable less allowance for uncollectible accounts
99
When should auditors not perform alternative procedures in testing the accounts receivable balance?
a) when customers do not return positive confirmation requests
b) when customers do not return negative confirmation requests
c) when confirmations are deemed to be ineffective as an audit procedure
d) when confirmations are too costly to use
b) when customers do not return negative confirmation requests
100
When positive confirmations are used, auditing standards require alternative procedures for confirmations not returned by the customer. Which of the following would not be considered an alternative procedure?
a) Send a second confirmation request
b) Examine subsequent cash receipts to determine if the receivable has been paid.
c) Examine shipping documents to verify that the merchandise was shipped.
d) Examine sales invoice to verify the actual issuance of a sales invoice and the actual date of the billing.
a) Send a second confirmation request
101
The positive (as opposed to the negative) form of receivables confirmation may be preferred when
a) internal control surrounding accounts receivable is considered to be effective.
b) there is reason to believe that a substantial number of accounts may be in dispute
c) a large number small balances are involved
d) the auditor believes that the recipients of the confirmations will give the requests adequate consideration
b) there is reason to believe that a substantial number of accounts may be in dispute
102
When determining the timing of the accounts receivable confirmation,
a) the receivables cannot be confirmed at an interim date.
b) if accounts receivable are confirmed before year-end, the auditor typically prepares a roll-forward schedule.
c) if the receivables are confirmed at an interim date, they must also be confirmed at year-end.
d) if internal controls are adequate, the accounts receivable must be confirmed at year-end.
b) if accounts receivable are confirmed before year-end, the auditor typically prepares a roll-forward schedule.
103
True or False.
| Negative confirmations normally require a larger sample size than positive confirmations.
True
104
True or False.
When sending confirmations during most audits of accounts receivable, the emphasis is often on confirming larger and older accounts.
True
105
True or False.
| Auditors must maintain control of confirmations until they are returned from the customer.
True
106
True or False.
Each client misstatement in accounts receivable must be analyzed to determine whether it was consistent with the original assessed level of control risk.
True
107
Which of the following would lead to a larger sample size?
a) low inherent risk
b) low control risk
c) larger tolerable misstatement
d) unsatisfactory results in other related substantive procedures
d) unsatisfactory results in other related substantive procedures
108
An auditor using non statistical sampling cannot formally measure sampling error.
True
109
As part of the auditor's responsibility for ________, the auditor should review the preparation of at least one of each type of payroll tax form the client is responsible for filing.
a) fraud awareness
b) doing tests of balances
c) doing tests of transactions
d) understanding the client's internal controls
d) understanding the client's internal controls
110
When labor is a material factor in inventory valuation, the auditor should place special emphasis on testing the internal controls concerning
a) fictitious employees
b) authorization of wage rates
c) proper classification of payroll transactions
d) completeness of recorded transactions
c) proper classification of payroll transactions
111
Verification of the legitimacy of year-end unpaid bonuses to officers and employees can be accomplished by comparing the recorded accrual to the amount.
a) in the expense account
b) used in the prior period
c) authorized in the minutes of the board
d) paid in the subsequent period
c) authorized in the minutes of the board
112
If a potential loss on a contingent liability is remote, the liability usually is
a) disclosed in footnotes, but not accrued
b) neither accrued nor disclosed in footnotes
c) accrued and indicated in the body of the financial statements
d) disclosed in the auditor's report but not disclosed on the financial statements
b) neither accrued nor disclosed in footnotes
113
A commitment is best described as
a) an agreement to commit the firm to a set of fixed conditions in the future
b) an agreement to commit the firm to a set of fixed conditions in the future that depends on company profitability
c) an agreement to commit the firm to a set of fixed conditions in the future that depends on current market conditions
d) a potential future obligation to an outside part for an as yet to be determined amount
a) an agreement to commit the firm to a set of fixed conditions in the future
114
When using the probability threshold for contingencies, the likelihood of the occurrence of the event is classified as
a) not likely, likely, or highly likely
b) remote, reasonably possible, or probable
c) slight, moderate, great
d) remote, likely, possible
b) remote, reasonable possible, or probable
115
Auditors will generally send a standard inquiry to
a) only those attorneys who have devoted substantial time to client matters during the year
b) every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion.
c) every attorney whose legal fees for the year exceed a materiality threshold
d) only the attorney who represents the client in proceeding where the client is defendant.
b) every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion
116
The standard inquiry to the client's attorney would be prepared on
a) plain paper (no letterhead) and be unsigned
b) lawyer's stationery and signed by the lawyer
c) auditor's stationery and signed by an audit partner
d) client's letterhead and signed by a company official
d) client's letterhead and signed by a company official
117
The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the statements being audited. The procedures required to verify these transactions are commonly referred to as the review for
a) contingent liabilities
b) subsequent year's transactions
c) late unusual occurrences
d) subsequent events
d) subsequent events
118
An auditor has the responsibility to actively search for subsequent events that occur subsequent to the
a) balance sheet date
b) date of the auditor's report
c) balance sheet date, but prior to the audit report
d) date of the management representation letter
c) balance sheet date, but prior to the audit report
119
After the balance sheet date, but prior to the issuance of the audit report, the client suffers an uninsured loss of their inventory as a result of a fire. The amount of the loss is material. The auditor should
a) adjust the financial statements for the year under audit.
b) add a paragraph to the audit report.
c) advise the client to disclose the event in the notes to the financial statements.
d) advise the client to delay issuing the financial statements until the economic loss can be determined.
c) advise the client to disclose the event in the notes to the financial statements.
120
Which of the following would be a subsequent discovery of facts which would not require a response by the auditor?
a) discovery of the inclusion of material nonexistent sales
b) discovery of the failure to write off material obsolete inventory
c) discovery of the omission of a material footnote
d) discovery of management's intent to increase selling prices in the future
d) discovery of management's intent to increase selling prices in the future
121
Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?
a) loss of a plant as a result of a flood
b) sale of long-term debt or capital stock
c) settlement of litigation in excess of the recorded liability
d) major purchase of a business that is expected to double the sales volume
c) settlement of litigation in excess of the recorded liability
122
A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events might result in adjustment of the December 31 financial statements?
a) sale of a major subsidiary
b) adoption of accelerated depreciation methods
c) write-off of a substantial portion of inventory as obsolete
d) collection of 90% of the accounts receivable existing at December 31
c) write-off of a substantial portion of inventory as obsolete
123
The date of the management representation letter received from the client should
a) be the date of latest subsequent event disclosed in the notes to the financial statements
b) be dated no earlier than the date of the audit report.
c) have the same date as the date of the balance sheet
d) have the same date as the date of the engagement letter
b) be dated no earlier than the date of the audit report
124
Auditing standards require that the auditor evaluate whether there is a substantial doubt about a client's ability to continue as a going concern for at least
a) one quarter beyond the balance sheet date
b) one quarter beyond the date of the auditor's report
c) one year beyond the balance sheet date
d) one year beyond the date of the auditor's report
c) one year beyond the balance sheet date
125
Which of the following statements regarding the letter of representation is not correct?
a) It is prepared on the client's letterhead
b) It is addressed to the CPA firm
c) It is signed by high-level corporate officials, usually the president and chief financial officer
d) It is optional, not required, that the auditor obtain such a letter from management
d) It is optional, not required, that the auditor obtain such a letter from management
126
Auditing standards require the auditor to ________ other information included in annual reports pertaining directly to the financial statements.
a) audit
b) express an opinion on
c) read
d) analyze
c) read
127
When reviewing the summary of misstatements found in the audit
a) an adjusting entry must be made by the auditor for all material misstatements
b) auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material.
c) the auditor is not required to consider the impact on the current financial statements of misstatements in the prior year that were not corrected.
d) auditors only need to consider the misstatements that impact the income statement.
b) auditors must combine individually immaterial misstatements to evaluate whether the combined amount is material.
128
The auditor is responsible for communicating significant internal control deficiencies to the audit committee, or those charged with governance. This communication
a) may be oral or written
b) must be oral
c) must be written
d) must be oral via direct communication
c) must be written
129
While there is no professional requirement to do so on audit engagements, CPAs frequently issue a formal "management" letter to clients. The primary purpose of this letter is to provide
a) evidence indicating whether the auditor is reasonably certain that internal accounting control is operating as prescribed.
b) a permanent record of the internal accounting control work performed by the auditor during the course of the engagement.
c) the client with the CPA's recommendations for improving any part of the client's business.
d) a summary of the auditor's observations that resulted from the auditor's special study of internal control.
c) the client with the CPA's recommendations for improving any part of the client's business
130
Auditing standards require the auditor to communicate all management frauds and illegal acts to the audit committee
a) only if the act is immaterial
b) only if the act is material
c) only if the act is highly material
d) regardless of materiality
d) regardless of materiality
131
Which of the following is a correct statement regarding review, compilation, and preparation services?
a) A written engagement letter is not needed for a review, compilation or preparation service.
b) The Statements on Standards for Accounting and Review Services (SSARS) clarity project used international standards as the base standard when revising the SSARS.
c) CPAs must be independent of the client in a review service engagement and for an audit engagement.
d) The amount of evidence accumulated in a review is minimal.
c) CPAs must be independent of the client in a review service engagement and for an audit engagements.
132
In a preparation service engagement,
a) the CPA's responsibilities are similar to those performed during a review
b) the CPA does not provide any assurance of the financial statements
c) the CPA must issue a preparation service engagement report
d) the CPA must be independent
b) the CPA does not provide any assurance of the financial statements
