MC auditing Flashcards
1) Which of the following is true when auditing long-term debt?
A) it is normally not efficient to test internal controls because of the small amount of large dollar transactions.
B) auditors typically audit the related accounts of interest expense and interest payable at the same time as auditing long-term debt.
C) one way that auditors obtain assurance over the completeness assertion for long-term debt is by sending bank confirmations.
D) all of the above.
D all of the above
2) The internal control objective to determine that ‘all existing acquisition transactions are recorded’ satisfies the objective of: A) classification B) occurrence C) completeness D) accuracy
C) completeness
3) The substantive audit procedure ‘examine repair and maintenance expenses (or related accounts) to determine if any items of a capital nature were expensed rather than capitalized’ satisfies which management assertion in the audit of property, plant, & equipment? A) valuation B) rights and obligations C) existence D) completeness
D) completeness
4) The bias in recording inventory is general toward: A) income smoothing B) overstatement C) understatement D) increasing share price
B) overstatement
5) A common inventory observation procedure is to be alert for items that are damaged, rust- or dust-covered, or located in inappropriate places. The balance-related audit objective being achieved by this procedure is: A) cutoff B) rights C) classification D) valuation
D) valuation
6) What are some key controls over the human resources and payroll cycle?
A) Performing surprise payroll payoffs.
B) Auditing the related accounts of accrued wages & benefits, accrued vacation pay, and employee benefits expense at the same time that we audit salaries and wages expense.
C) Controlling access to the employee master file, supervision and review of time worked, and management review of the payroll register.
D) Paying employees on a salary basis rather than on an hourly basis.
C) Controlling access to the employee master file, supervision and review of time worked, and management review of the payroll register.
7) The substantive audit procedure ‘ensure cost, accumulated depreciation, & net book value in the continuity schedule are calculated correctly, using rates consistent with the prior year’ satisfies which management assertion in the audit of property, plant, & equipment? A) completeness B) accuracy C) classification D) existence
B) accuracy
8) At the completion of the audit, management is asked to make a written statement that they are not aware of any undisclosed contingent liabilities. This statement would appear in the:
A) management letter
B) letter of inquiry
C) letters testamentary
D) client (management) representation letter
D) client ( management) representation letter
9) The management letter:
A) communicates to the audit committee the auditor’s responsibilities under generally accepted auditing standards
B) is required by CAS 260 whenever there are material weaknesses in internal control
C) is optional and is intended to help the client operate its business more effectively
D) must follow the format prescribed by the CICA
C) is optional and is intended to help the client operate its business more effectively
10) A PA firm has an organizational structure that assures the technical review of every engagement by a partner who has expertise in the client’s industry. This is an example of good:
A) quality controls
B) entity level controls
C) business risk management
D) adherence to the professional standards
A) quality controls
11) PA was engaged by Microcomputer Distributor Limited (MDL) to conduct a review engagement. The financial statements are used primarily by the shareholders, management, and by the bank. Recently, an employee was fired for stealing computer parts, primarily chips and boards that could easily be placed in his pockets. MDL is suing PA because they believed that audit procedures, such as counting inventory, would have detected this fraud. What is PA’s best defense?
A) absence of causal connection
B) lack of negligence
C) contributory negligence
D) lack of duty to perform because it was only a review engagement
A) lack of negligence
12) What can the auditor do during the physical inventory count to determine whether there was an accurate cut-off?
A) The auditor could gather cut-off information (such as the last several receiving reports and shipping documents).
B) The auditor could gather a current price list.
C) The auditor should photograph inventory that is being valued.
D) The auditor should document the staff that was on hand during the physical inventory count.
A) The auditor could gather cut-off information (such as the last several receiving reports and shipping documents).
13) Explain the relationship between the human resources and payroll cycle and inventory valuation.
B) In companies where payroll is a significant portion of inventory, as in manufacturing and construction companies, the improper account classification of payroll can significantly affect asset valuation for accounts such as work in process, finished goods, and construction in process. Similarly, if the indirect labour cost of individual employees is charged to specific jobs or processes, the valuation of inventory is affected if labour is improperly classified. When some jobs are billed on a cost plus basis, revenue and the valuation of inventory are both affected by improperly classifying labour to jobs.
14) In testing cut-off of the accounts payable balance at the balance sheet date, explain why it is important that auditors coordinate their tests with the physical observation of inventory.
B) To determine that they are established at the same point in time. If these cut-offs are not consistent, goods may be counted in physical inventory for which no liability in accounts payable has been recorded, or vice versa. Such a situation would results in an understatement of accounts payable and cost of goods sold or an overstatement of these two accounts.
15) An example of a subsequent event that would require adjustment is:
A) An event that has no direct effect on the financial statements. Example: the settlement of litigation after year end for an amount not yet recorded in the books.
B) An event that has a direct effect on the financial statements. Example: the settlement of litigation after year end for an amount different from the amount recorded in the books.
C) Events that management is aware of before year end. Example: the settlement of litigation before year end for which management has negotiated the amount to be paid.
D) Events that management has adjusted in the financial statements before year end. Example: the settlement of litigation for an amount recorded in the books.
B) An event that has a direct effect on the financial statements. Example: the settlement of litigation after year end for an amount different from the amount recorded in the books.
