Principles Of Auditing & Other Assurance Exam 4

Front 1

The following is least likely to be considered an inherent risk relating to receivables and revenues

Back 1

Over-recorded sales due to a lack of control over the sales entry function

Front 2

Which control would most likely reduce the risk of diversion of customer receipts by a client's employees?

Back 2

A bank lockbox system

Hint 2

A bank lock box is a post office box controlled by a company’s bank at which cash remittances from customers are received. With such a system the bank collects the remittances, immediately credits the cash to the company’s bank account, and forwards the remittance advices to the company

Front 3

For assurance that vouchers are submitted and paid only once auditors examine a sample of paid vouchers and check for

Back 3

Stamped "paid" by the check signer

Hint 3

auditors will determine whether each voucher is stamped “paid” by the check signer to avoid a situation in which supporting documents are used a second time to elicit a second payment

Front 4

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also:

Back 4

Is responsible for mailing the checks

Hint 4

When checks are signed they should not be returned to accounting dep. This control is used to avoid a situation in which the accounts payable department fabricates documents, and then collects the checks

Front 5

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except

Back 5

General ledger

Hint 5

Gen ledger won't have info
on bank balance
Examinable bank bal docs
Bank cutoff statement,
bank year-end statement
bank confirmation

Front 6

During year-end audit of a financial institution and are planning the timing of audit procedures relating to cash
referred Procedures:

Back 6

It would be preferable to coordinate the count of cash with marketable securities and other negotiable assets

Hint 6

Unless all negotiable assets are verified at one time, an opportunity exists for shortage from co employee by transferring it from one asset category to another a step ahead of the auditors

Front 7

Reconciliation of the bank account should not be performed by an individual who also

Back 7

Processes cash disbursements

Front 8

Which procedure would auditors most likely perform to test controls relating to management’s assertion about the completeness of cash receipts for cash sales at a retail outlet?

Back 8

Observe the consistency of the employees’ use of cash registers and tapes.

Hint 8

The individual who reconciles the bank account should not be involved in the processing of cash receipts or disbursements

Front 9

The auditors suspect cashier misappropriation of cash receipts for personal use through check lapping.
To uncover such embezzlement auditors most likely would compare:

Back 9

Details of bank deposit slips with details of credits to customer accounts

Hint 9

Lapping will result in a delay in the recording of specific remittance credits in the financial records, but the checks will be deposited in the bank as they are received

Front 10

To avoid misappropriation of company-owned marketable securities, which course of action can be taken by a company w a large marketable securities portfolio?

Back 10

Require safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent

Hint 10

securities held in safekeeping by a bank or stockbroker provides strong internal control. They are not available to employees responsible for maintaining the accounting records of the securities. Thus the separation of custody of securities from accounting function is complete.

Front 11

The best person or persons to make periodic reviews of the investment activity should be

Back 11

An investment committee of the board of directors

Front 12

Why should auditors who physically examine securities
insist a client representative
be present

Back 12

Acknowledgement of securities receipt

Hint 12

Because of the liquidity of many securities, the auditor should insist that a client representative be present in order to acknowledge the receipt of securities returned. In the event of subsequent “disappearance” of a security the auditor will not be a suspect.

Front 13

The best way to verify dividend revenue amounts received during the year is:

Back 13

Verification by reference to dividend record books.

Hint 13

Comparing the recorded amount of dividend revenue with dividend record books (published by investment advisory services) provides evidence of the amount of dividend revenue that should have been received during the year. It is virtually impossible to confirm the receipt of dividends with the company paying those dividends.

Front 14

Misappropriation of cash

Back 14

Deposit of cash into a lockbox system decreases the risk of misappropriation

Hint 14

use of a lock box system decreases the risk of asset misappropriation by having customer payments deposited directly into the bank.

Front 15

Cash Receipt
Risk Analysis

Back 15

Concentrated Risk
concentrated sales from
any given company could impact future receipts

Hint 15

Companies can change vendors or view alternatives

Front 16

Economic Slowdown Risks

Back 16

A general slowdown in the economy

Hint 16

Identify a risk facing SSC that might adversely affect sales during the coming years?

Front 17

Long-term
Going concern Risk

Back 17

Competition from several competitors

Hint 17

Price competition among other concerns

Front 18

Fradulent Financial
Reporting Risks

Back 18

Refinancing a significant portion of debt

Hint 18

pressure to obtain the refinancing creates pressure on management

Front 19

Fradulent Financial
Reporting Risks

Back 19

Earnings this year are lower than management had hoped

Hint 19

current earnings, which are low as compared to the past, may have created pressure on management to at least exceed the previous year’s net income

Front 20

Kiting Scheme
Detection

Back 20

Prepare a bank transfer schedule

Hint 20

an accounting department employee who can issue and record checks seems to be leading an unusually luxurious lifestyle

Front 21

Check writing and disbursement

Back 21

cutoff bank statement

Hint 21

Wrote for disbursements did not send out till following year.

Obtain the cutoff bank statement and compare the cleared checks to the year-end bank reconciliation.

Front 22

Cash Materiality

Back 22

In relation to its materiality, the audit of cash requires substantial audit time.

Hint 22

Identify the auditors objectives in the audit of cash.

Front 23

Petty Cash

Back 23

Designating the cashier to be custodian of the petty cash fund is more acceptable from the standpoint of internal control than making the cashier responsible for maintenance of accounts receivable records.

Hint 23

Explain the nature of the cash receipts and disbursements cycles, and describe the fundamental controls over the business processes related to cash.

Front 24

Check verification
& Disbursement

Back 24

An employee who prepares checks and submits them with supporting documents to the official authorized to sign checks should not be responsible for mailing the signed checks

Hint 24

Explain the nature of the cash receipts and disbursements cycles, and describe the fundamental controls over the business processes related to cash.

Front 25

Cash Receipts

Back 25

A salesperson who uses a cash register to record over-the-counter sales should, at the end of each work day, turn over to a supervisor the cash register tape and a corresponding amount of cash

Hint 25

Explain the nature of the cash receipts and disbursements cycles, and describe the fundamental controls over the business processes related to cash.

Front 26

Cash Deposit Procedures

Back 26

Cash should not be deposited weeekly

Hint 26

Explain the nature of the cash receipts and disbursements cycles, and describe the fundamental controls over the business processes related to cash.

Front 27

Lapping of cash receipts

Back 27

The "lapping" of cash receipts is most likely to occur when one person has both responsibility for record keeping for cash receipts and custody of cash.

Hint 27

Assess the risks of material misstatement of cash and design further audit procedures, including tests of controls and substantive procedures, to address the risks.

Front 28

Bank Reconciliations
& Cash Shortage

Back 28

An improper bank reconciliation designed to conceal a cash shortage is more likely to over­state than understate the amount of outstanding checks

Hint 28

Assess the risks of material misstatement of cash and design further audit procedures, including tests of controls and substantive procedures, to address the risks

Front 29

Cash Counting
Procedures

Back 29

Auditors should count a cash fund with the custodian present to counter against shortage allegations

Hint 29

10-06 Assess the risks of material misstatement of cash and design further audit procedures, including tests of controls and substantive procedures, to address the risks

Front 30

Financial Institution Confirmations

Back 30

The standard financial institution confirmation request used by the auditors is a means of obtaining documentary evidence about both assets and liabilities.

Hint 30

Learning Objective: 10-06 Assess the risks of material misstatement of cash and design further audit procedures, including tests of controls and substantive procedures, to address the risks.

Front 31

Confirmation Request Procedure

Back 31

Confirmation requests should be mailed by the auditors in envelopes bearing the auditors' return address

Hint 31

Assess the risks of material misstatement of cash and design further audit procedures, including tests of controls and substantive procedures, to address the risks

Front 32

Proof of Cash

Back 32

The audit working paper known as a "proof of cash" is a means of proving that checks paid by the bank during the test period were not in excess of authorized cash receipts during that same test period

Hint 32

Assess the risks of material misstatement of cash and design further audit procedures, including tests of controls and substantive procedures, to address the risks.

Front 33

cutoff bank statement

Back 33

A cutoff bank statement provides assurance to the auditors that all checks outstanding at year-end were included in the list of outstanding checks in the year-end bank reconciliation.

Front 34

Confirmation requests should be mailed by the auditors in envelopes bearing the auditors' return address

Back 34

e

Front 35

Non-disclosed liens

Back 35

Confirm the terms of borrowing arrangements with the lender.

Hint 35

Review UCC's for equipment
Among the terms confirmed for such a borrowing arrangement will be information on liens

Front 36

Confirmation of
Receivables

Back 36

Customer confirmation,
client credit check,
Shipping confirmation

Hint 36

A reply to inquiries will confirm existence.
Shipping documents will also confirm existence of new customer and transaction

Front 37

Confirmation of
Payroll

Back 37

Observe payroll check distribution on a surprise basis.
Electronic deposit check confirmation

Hint 37

* Electronic

Front 38

Payroll & Wages
Confirmation

Back 38

Vouch data in the payroll register to documented authorized pay rates in the human resources department’s files.

Hint 38

Vouching data in payroll register to document authorized pay rates will reveal situations which differs from the authorized rate

Front 39

entity's cash receipts of subsequent year were properly deposited in its general operating account after the year-end. Auditor suspects that the entity recorded the cash receipts during the last week of the year

Back 39

Compare details of the cash receipts journal entries with the corresponding daily deposit slips

Hint 39

A comparison of details of cash receipts journal to the details on the daily deposit slips will reveal a circumstance

Front 40

Vouchers prepared and processed for merchandise not
ordered nor received

Back 40

Examine the supporting purchase orders and receiving reports for selected paid vouchers.

Hint 40

When vouchers are processed for merchandise not ordered or received, there will be no supporting purchase orders and receiving reports and this will alert the auditor to the problem.

Front 41

Equipment Repair and
Maintenance Improper
Entry (fixed assets)

Back 41

Scan the debits to the fixed asset accounts and vouch selected amounts to vendors’ invoices and management’s authorization

Hint 41

Scanning the debits to the fixed asset accounts and vouching selected amounts will reveal repairs that have improperly been capitalized.

Front 42

Lapping Detection

Back 42

Compare journal entries with corresponding daily deposit slips

Send requests to confirm the entity’s accounts receivable surprise basis

Hint 42

Lapping involves concealing a cash shortage by delaying the recording of journal entries for cash receipts.

Front 43

Check Kiting

Back 43

Prepare a bank transfer schedule

Hint 43

Preparation of a bank transfer schedule will assist the auditor in identifying such transactions

Front 44

overstated sales

Back 44

Confirm A/R.
Examine Shipping

Front 45

Balance per bank
(auditing procedures)

Back 45

Confirm directly with bank
Trace items on the bank reconciliation to cutoff statement

Hint 45

The balance per bank may be traced to a standard form used to confirm account balance information with financial institutions and to the cutoff statement

Front 46

Deposits in transit
(auditing procedures)

Back 46

Trace to cash receipts journal
Ascertain reason for unusual delay
Inspect supporting documents for reconciling
Trace items on the cutoff

Front 47

Outstanding checks
(auditing procedures)

Back 47

Trace to cash disbursements
Ascertain reason for unusual delay
Trace items reconciliation
Trace items cut off

Front 48

Customer note collections
(auditing procedures)

Back 48

Inspect bank credit memo

Front 49

Check Error
(auditing procedures)

Back 49

Inspect bank credit memo
Trace items on the bank reconciliation to
cutoff statement

Front 50

Kiting
(Substantive Procedures)

Back 50

Prepare a bank transfer schedule

Front 51

Four-column
proof of cash
(Substantive Procedures)

Back 51

Reconcile cash receipt
and disbursement totals between company & bank records

Front 52

Standard confirmation form to confirm account balance information
(Substantive Procedures)

Back 52

Verify year-end cash and liability balance information

Front 53

Verify reconciling items on the year-end bank reconciliation
(Substantive Procedures)

Back 53

Cutoff statements

Front 54

Identify related party transactions
(Substantive Procedures)

Back 54

Search for large checks to directors, officers, and employees.

Front 55

Which is least likely to be considered an inherent risk relating to receivables and revenues

Back 55

Over-recorded sales due to a lack of control

Front 56

Which would provide the most assurance concerning the valuation of
AR

Back 56

Assess the allowance for uncollectible accounts for reasonableness

Front 57

Fraudulent Financial
Reporting

Back 57

Recording sales when the customer is likely to return the goods

Front 58

Which of the following is an example of misappropriation of assets relating to sales?

Back 58

Theft of cash register sales

Front 59

There is a presumption that auditors will confirm A/R

Back 59

unless assessment of the risk of material misstatement is low, &
A/R are immaterial, or the use of confirmations would be ineffective

Front 60

Which of the following is not among the criteria that ordinarily exist for revenue to be recognized?

Back 60

Delivery has occurred or is scheduled to occur in the near future.

Front 61

Determining Recorded
Sales

Back 61

Shipping documents file

Hint 61

The goal is to determine the population to be sampled from to determine that all sales have been recorded

Front 62

Testing the Existence Assertion
for Recorded Receivables

Back 62

Accounts receivable subsidiary ledger

Hint 62

The objective is to determine the population the auditors would sample from to test the existence assertion for recorded receivables

Front 63

Municipality Confirming
A/R (delinquent taxes)

Back 63

Send positive confirmation requests

Hint 63

The auditor would send positive confirmations rather than negative confirmations because the fact that the balances are delinquent may indicate that amounts are in dispute

Front 64

Concealment of a
Cash Shortage
Trade A/R

Back 64

Write-offs must be approved by a responsible official after review of credit department

Hint 64

Write-offs of receivables should be approved by a responsible officer after a review of the account by the credit department

Front 65

Confirmation

Back 65

Requested responses directly from customers as to amounts due

Hint 65

Classification of Audit Procedure
-Substantive procedures

Front 66

Analytical Procedures

Back 66

Compared total bad debts this year with the totals for the previous two years.

Hint 66

Classification of Audit Procedure
-Substantive procedures

Front 67

Inquiry -Example

Back 67

Questioned management about likely total uncollectible accounts

Hint 67

Classification of Audit Procedure
-Substantive procedures

Front 68

Inspection of Records
or Documents

Back 68

Examined invoice to obtain evidence in support of the ending recorded balance of a customer
Examined a sample of sales invoices to see if they were initialized by the credit manager indicating credit approval

Hint 68

Classification of Audit Procedure Test of controls

Front 69

Observation - Examples

Back 69

Watched the accounting clerk record the daily deposit of cash receipts.

Hint 69

Classification of Audit Procedure Test of controls

Front 70

Inspection of records or documents

Back 70

Examined invoice to obtain evidence in support of the ending recorded balance of a customer.

Front 71

Reperformance

Back 71

Compared a sample of sales invoices to credit files to determine whether the customers were on the approved customer list

Front 72

Inspection of records or documents

Back 72

Examined a sample of sales invoices to see if they were initialized by the credit manager indicating credit approval

Front 73

"We mailed the check"
confirmation reply actions

Back 73

Examine shipping documents and/or subsequent cash receipts

Front 74

“We returned those goods" confirmation reply actions

Back 74

Exception; propose an adjustment

Front 75

“We also owe for two more invoices for purchases we made around year-end”confirmation reply actions

Back 75

Verify whether the additional invoices noted on the confirmation reply pertain to the year under audit or the subsequent year

Front 76

“We are very satisfied with Jelco and plan to purchase from them in the future. “
confirmation reply actions

Back 76

Not an exception, no further audit work is necessary

Front 77

“We didn’t owe it on December 31 since we received the goods on January 2 of year 2.”
confirmation reply actions

Back 77

Examine shipping documents and/or subsequent cash receipts

Front 78

no reply to a negative confirmation request to Adams Co.
confirmation reply actions

Back 78

Not an exception, no further audit work is necessary.

Front 79

No reply to a positive confirmation request to Blake Co. per co policy confirmation reply actions

Back 79

Examine shipping documents and/or subsequent cash receipts

Front 80

Credit approval should be obtained after the goods are shipped, but before the related sales invoice is prepared

Back 80

False

Front 81

When merchandise is shipped, the shipping department completes a document known as a sales order

Back 81

False

Front 82

The primary control that prevents the shipping department from making unauthorized shipments of merchandise is the use of serially numbered shipping documents.

Back 82

False

Front 83

The use of serial numbers on shipping documents and sales invoices provides assurance that all goods shipped are billed to customers and recorded as sales.

Back 83

True

Front 84

The accounts receivable section of the accounting department should open incoming mail and post collections to the customer’s accounts.

Back 84

False

Front 85

Sales can be recorded in the sales journal directly from serially numbered purchase orders, thus eliminating the need for sales invoices to be serially numbered.

Back 85

False

Front 86

The person maintaining the accounts receivable subsidiary ledger should reconcile the subsidiary ledger to the accounts receivable controlling account at least once a month.

Back 86

False

Front 87

Receivables judged to be uncollectible should be written off.

Back 87

True

Front 88

Tracing a sample of shipping documents to recorded sales is designed to test the existence of recorded sales.

Back 88

False

Front 89

The auditors should mail confirmation requests, and the enclosed envelope for the customer's reply should be addressed to the auditors' office.

Back 89

True

Front 90

Since customers that cannot pay are ordinarily asked not to reply, mailing of confirmations is a test of collectibility of accounts receivable

Back 90

False

Front 91

The auditors should perform alternative auditing procedures on all negative confirmation requests that are not returned.

Back 91

False

Front 92

The auditors will generally confirm a proportionately larger sample of accounts with large balances than accounts with small balances.

Back 92

True

Front 93

Accounts with zero balances and accounts that have been written off as uncollectible are not confirmed by the auditors

Back 93

-

Front 94

When it is "impossible" to confirm accounts receivable, the auditors can never issue an unmodified opinion on the client's financial statements.

Back 94

False

Front 95

When it is "impossible" to confirm accounts receivable, the auditors can never issue an unmodified opinion on the client's financial statements.

Back 95

False

Front 96

Accounts receivable should be valued at their net realizable value.

Back 96

-

Front 97

Inspection of notes receivable is adequate evidence of the existence of the notes

Back 97

False

Front 98

The best evidence of interest revenue on notes receivable is confirmation with the maker of the note

Back 98

False

Front 99

Accounts receivable that are pledged as collateral for loans should be reclassified as noncur­rent assets

Back 99

False

Front 100

A note receivable from an officer is considered a related party receivable

Back 100

True

Front 101

require receiving reports to support all credit memorandums before they are ap­proved

Back 101

fictitious credit memoran­dums to his friend for goods supposedly returned. The most effective procedure for prevent­ing this activity is to:

Front 102

For effective internal control, the billing function should be performed by the:

Back 102

Accounting Dept

Front 103

Which of the following is an effective control over accounts receivable?

Back 103

The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiar

Front 104

The use of the positive (as opposed to the negative) form of receivables confirmation is indicated when

Back 104

there is reason to believe that a substantial number of accounts may be in dispute.

Front 105

The auditor examines copies of sales invoices only for the initials of the person responsible for checking the extensions. This is an example of a:

Back 105

test of controls.

Front 106

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31, 20X0. By this procedure, the auditor would be most likely to learn of which of the following

Back 106

An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.

Front 107

Which of the following audit procedures is most effective in testing credit sales for understatement

Back 107

Trace sample of initial sales slips through summaries to recorded general ledger sales

Front 108

The auditors have not been able to confirm a large account receivable, but they have satisfied themselves as to the proper amount of the receivable by means of alternative auditing proce­dures. The auditors' report on the financial statements should include:

Back 108

neither a comment on the use of alternative auditing procedures nor an opinion qualification

Front 109

To determine that sales transactions have been recorded in the proper accounting period, the auditors perform a cutoff review. Which of the following best describes the overall approach used when performing a cutoff review

Back 109

Analyze transactions occurring within a few days before and after year end

Front 110

The confirmation of the client's trade accounts receivable is a means of obtaining evidential matter and is specifically considered to be a generally accepted auditing:

Back 110

procedure

Front 111

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable?

Back 111

Have customers send payments directly to the company's depository bank

Front 112

Which of the following statements regarding the audit of negotiable notes receivable is correct?

Back 112

Confirmation in writing from the holder of the note is considered an acceptable alternative to inspection.

Front 113

Analysis of what account is least likely to reveal evidence relating to recorded retirement of equipment?

Back 113

purchase returns and allowances

Front 114

Which of the following is an internal control weakness related to factory equipment?

Back 114

All purchases of factory equipment are required to be made by the department in need of the equipment

Front 115

Which of the following is least likely to be among the auditors' objectives in the audit of inventories and cost of goods sold?

Back 115

c) Establish that the client includes only inventory on hand at year-end in inventory totals

Hint 115

a) Determine that the valuation of inventories and cost of goods sold is arrived at by appropriate methods

b) Determine the existence of inventories and the occurrence of transactions affecting cost of goods sold

d) Establish the completeness of inventories

Front 116

The receiving department is least likely to be responsible for the:

Back 116

c) Preparation of a shipping document

Front 117

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

Back 117

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

Front 118

The auditors may conclude that depreciation charges are insufficient by noting:

Back 118

d) Excessive recurring losses on assets retired

Front 119

Which of the following is an internal control weakness related to factory equipment?

Back 119

All purchases of factory equipment are required to be made by the department in need of the equipment.

Front 120

Which of the following is least likely to be among the auditors’ objectives in the audit of inventories and cost of goods sold?

Back 120

Establish that the client includes only inventory on hand at year-end in inventory totals

Hint 120

Inventory need not be on hand at year-end. For example, purchases in transit on which title has passed to the client should also be included.

Front 121

The receiving department is least likely to be responsible for the:

Back 121

Preparation of a shipping document

Hint 121

The shipping department, not the receiving department, is responsible for preparation of a shipping document.

Front 122

The document issued by a common carrier acknowledging the receipt of goods and setting forth the provisions of the transportation agreement is the:

Back 122

Bill of lading

Hint 122

A bill of lading acknowledges the receipt of goods and sets forth provisions of the transportation agreement.

Front 123

Which of the following should be included as a part of inventory costs of a manufacturing company?

Back 123

Direct Labor
Raw Materials
Factory Overhead

Hint 123

Direct labor, raw materials, and factor overhead are all included in inventory costs of a manufacturing company.

Front 124

The organization established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles is the:

Back 124

Cost Accounting Standards Board.

Hint 124

The Cost Accounting Standards Board was established by Congress to narrow the options in cost accounting that are available under generally accepted accounting principles.

Front 125

When a primary risk related to an audit is possible overstated inventory, the assertion most directly related is:

Back 125

Existence

Hint 125

Of the choices, existence is most directly related to overstated inventory because inclusion of inventory items that do not exist in inventory totals results in an overstated inventory.

Front 126

Instead of taking a physical inventory count on the balance-sheet date, the client may take physical counts prior to the year-end if internal control is adequate and

Back 126

Well-kept records of perpetual inventory are maintained.

Hint 126

The professional standards allow auditors to use physical counts prior to year-end when a client has well-kept perpetual (computerized or non-computerized) inventory records

Front 127

The auditor’s analytical procedures will be facilitated if the client

Back 127

Uses a standard cost system that produces variance reports.

Hint 127

Analytical procedures will be facilitated when a client uses a standard cost system that produces variance reports. Such reports will allow the auditors to identify significant deviations from expected values

Front 128

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

Back 128

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

Front 129

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client’s ending inventory?

Back 129

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

Hint 129

The best procedure for the discovery of damaged goods is an examination of the condition of the inventory during the auditors' observation of the physical inventory.

Front 130

McPherson Corp. does not make an annual physical count of year-end inventories, but instead makes weekly test counts on the basis of a statistical plan. During the year, Sara Mullins, CPA, observes such counts as she deems necessary and is able to satisfy herself as to the reliability of the client’s procedures. In reporting on the results of her examination, Mullins:

Back 130

Can issue an unqualified opinion without disclosing that she did not observe year-end inventories.

Front 131

The primary objective of a CPA’s observation of a client’s physical inventory count is to:

Back 131

Obtain direct knowledge that the inventory exists and has been properly counted

Hint 131

The primary objective of the CPAs' observation of inventories is to provide sufficient competent evidence as to the existence of the inventory and the controls over the inventory-taking process.

Front 132

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete inventory to address:

Back 132

Valuation

Front 133

An auditor selects items from the client’s inventory listing and identifies the items in the warehouse. This procedure is most likely related to:

Back 133

Existence.

Front 134

An auditor concluded that no excessive costs for an idle plant were charged to inventory. This conclusion is most likely related to presentation and disclosure and

Back 134

Valuation.

Front 135

During the inventory count an auditor selects items and determines that the proper description and quantity were recorded by the client. This procedure is most closely related to:

Back 135

Completeness

Front 136

An auditor most likely would analyze inventory turnover rates to obtain evidence about:

Back 136

Valuation

Front 137

To assure accountability for fixed asset retirements, management should implement an internal control that includes:

Back 137

Utilization of serially numbered retirement work orders

Front 138

The auditors may conclude that depreciation charges are insufficient by noting

Back 138

The auditors may conclude that depreciation charges are insufficient by noting

Front 139

Which of the following is an internal control weakness related to factory equipment?

Back 139

All purchases of factory equipment are required to be made by the department in need of the equipment

Front 140

Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are not understated?

Back 140

Repairs and Maintenance.

Front 141

The auditors are most likely to seek information from the plant manager with respect to the

Back 141

Existence of obsolete machinery

Front 142

To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic:

Back 142

Inspection of equipment and reconciliation with accounting records

Front 143

Which of the following statements is not typical of property, plant, and equipment as compared to most current asset accounts?

Back 143

A property, plant, and equipment cutoff error near year-end has a more significant effect on net income

Hint 143

Relatively few transactions occur in property, plant, and equipment during the year.
The assets involved with property, plant, and equipment ordinarily have relatively longer lives.
Property, plant, and equipment accounts typically have a higher dollar value.

Front 144

For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on:

Back 144

Transactions that occurred during the year.

Front 145

Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment?

Back 145

Accumulated depreciation.

Front 146

An effective procedure for identifying unrecorded retirements of equipment is to:

Back 146

Select items of equipment in the accounting records and then locate them in the plant.

Front 147

Which of the following is not an overall test of the annual provision for depreciation expense?

Back 147

Test deductions from accumulated depreciation for assets purchased during the year.

Front 148

The audit of intangible assets typically involves

Back 148

Vouching the Cost of Assets Testing Allocation Methods

Front 149

Land purchased land for a new plant that it intends to construct. A portion of the cost was a commission paid to a real estate agent. That commission was capitalized as part of the cost of the land.

Back 149

No Adjusting Entry

Front 150

Loan from a financial institution. Interest on that loan is being capitalized as part of the cost of the land

Back 150

Adjusting Entry

Front 151

An existing building on the land was torn down to allow construction of a new building on the land. The cost of the demolition was capitalized as part of the cost of the new building.

Back 151

No Adjusting Entry

Front 152

Equipment purchased from Bkd vendor. Hwang’s management the equipment was purchased approximately at half cost. Transaction recorded at cost

Back 152

No adjustment

Front 153

Hwang cut down a number of trees on the land and sold the wood. Other income was recorded on the transaction for the amount of the cash received.

Back 153

Yes Adjustment is needed

Front 154

Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment?

Back 154

Purchase returns and allowances

Front 155

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts?

Back 155

Plant assets were retired during the year.

Front 156

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:

Back 156

Deed

Front 157

In testing plant and equipment balances, an auditor may select recorded additions in the analysis of plant and equipment and inspect the actual asset(s) involved. Which management assertion is this procedure most directly related to?

Back 157

Existence.

Front 158

A search for overstated property, plant, and equipment purchases would most likely include:

Back 158

Property, plant, and equipment

Front 159

The McKesson & Robbins case highlighted the need to directly verify the existence of a client's inventory.

Back 159

True

Front 160

Since the employees in the purchasing department order inventory items, they should inspect and receive the items when the goods arrive.

Back 160

False

Front 161

Serially numbered purchase orders should be issued for purchases of goods

Back 161

True

Front 162

The receiving department normally sends raw materials received to the production department and obtains a receipt from the supervisor.

Back 162

False

Front 163

Factory overhead is normally assigned to work-in-process immediately as overhead expenses are incurred.

Back 163

False

Front 164

Perpetual inventory records not only help control theft of inventories, they also generally result in improved production planning.

Back 164

True

Front 165

Testing the cost accounting system is a major step in determining the appropriate valuation of inventories in a manufacturing business

Back 165

True

Front 166

To assure that the physical inventory is taken properly, the auditors should prepare and take primary responsibility for the physical inventory instructions

Back 166

False

Front 167

Observation of inventory is a generally accepted auditing procedure

Back 167

True

Front 168

The auditors' observation of the taking of a client's physical inventory must be done on, or shortly after the balance sheet date.

Back 168

False

Front 169

The extent of the auditors' test counts of inventory items should be influenced by the inherent risk of the client's inventory and the adequacy of the client's internal control.

Back 169

q

Front 170

Tracing remittance advices to postings in the accounts receivable records
(audit procedures)

Back 170

“Lapping" of accounts receivable.

Front 171

Comparing the serial numbers of securities on hand to numbers recorded in the prior year’s audit working papers
(audit procedures)

Back 171

Using the company’s securities during the year and replacing them

Front 172

Preparing and verifying a schedule of bank transfers.
(audit procedures)

Back 172

“Kiting” of cash.

Front 173

Understating the outstanding checks on the year-end bank reconciliation
(audit procedures)

Back 173

Review of the bank cutoff statement

Front 174

Preparing a “proof of cash for the entire audit period
(audit procedures)

Back 174

Recording fictitious cash sales

Front 175

Use the understanding of the client and its environment to consider inherent risks related to cash.

Back 175

q

Front 176

Obtain an understanding of internal control over cash

Back 176

q

Front 177

Assess the risks of material misstatement and design further audit procedures (tests of controls)

Back 177

q

Front 178

Perform further audit procedures -- tests of controls

Back 178

q

Front 179

Perform further audit procedures -- substantive procedures for cash transactions and balances

Back 179

-

Front 180

Cash reconciliations can be tested via

Back 180

Reperformance

Front 181

It is important to verify ______ of both cash receipts and cash disbursements

Back 181

cutoff

Front 182

Auditors are often concerned with the _______of cash, as this is where most misstatements occur

Back 182

Overstatement

Front 183

Cash confirmations need to be mailed under the control of the

Back 183

Auditor

Front 184

Auditors are often concerned with the _______of cash, as this is where most misstatements occur

Back 184

Overstatement

Front 185

Cutoff bank statements include activity for the period _______the period being audited.

Back 185

After

Front 186

It is necessary to ______ the client's cutoff of cash transactions.

Back 186

Verify

Front 187

After auditing cash, it is important to evaluate proper financial statement presentation and __________ of cash.

Back 187

Kiting

Front 188

A sample internal control questionnaire question may ask about _________ inherent in the investment policy.

Back 188

Risk

Front 189

An important step in testing investments is to ensure all persons with access to investments are properly

Back 189

Bonded

Front 190

An investment committee is a standing committee of _______.

Back 190

The board of directors

Front 191

After testing internal controls related to investments, it may be necessary to ______the risk of material misstatement.

Back 191

Modify

Front 192

Sometimes auditors may ______securities on hand

Back 192

Inspect

Front 193

Confirming a sample of A/R
(Audit Procedure)

Back 193

Recording fictitious accounts receivable.

Front 194

Reviewing standard confirmations from financial institutions
(Audit Procedure)

Back 194

Failing to inform the auditors of pledged accounts receivable

Front 195

Tracing a sample of shipping documents to recorded sales transactions
(Audit Procedure)

Back 195

Failing to record all sales transactions

Front 196

Comparing recorded sales several days before and after the balance sheet date with shipping documents
(Audit Procedure)

Back 196

Recording of sales made in the subsequent period

Front 197

Collectivity

Back 197

needs to be assured in order to recognize revenue

Front 198

Side Agreements Effects

Back 198

Can substantially alter the terms of the sale

Front 199

When are revenues earned?

Back 199

Revenues are deemed to be earned when the company has accomplished what it must do to fulfill its obligation

Front 200

One way to avoid misstatement of revenue is to ensure the client has proper

Back 200

Cutoff policies

Front 201

Many instances of misstatement are based on the inappropriate recognition of

Back 201

Revenue

Front 202

Management may have fraudulently overstated revenue by making __________ journal entries

Back 202

inappropriate

Front 203

Receivables that have been sold should not remain as a(n) _____ on the company's books

Back 203

Asset

Front 204

Overstatement may occur when sales for the next period are recorded in the _______ period.

Back 204

Current

Front 205

To test collectibility of receivables, auditors may consider credit ratings for debtors of _____receivables

Back 205

Large

Front 206

Testing the reconciliation for accounts receivable to the general ledger ensures that the software is programmed

Back 206

Correctly

Front 207

Inventory is understated because warehouse personnel overlooked several racks of parts in taking the physical inventory
(Error or Fraud)

Back 207

Error

Front 208

Inventory is overstated because warehouse personnel included inventory items received subsequent to year-end while recording the purchase in the subsequent year to hide inventory shortages.(Error or Fraud)

Back 208

Fraud

Front 209

Inventory is overstated because management instructed computer personnel to make changes in the file used to price inventories
(Error or Fraud)

Back 209

Fraud

Front 210

Inventories with a high risk of ______may be warranted as a signficant risk

Back 210

Obsolescence

Front 211

Purchasing and cash disbursements can provide opportunity for ______ by employees.

Back 211

Fraud

Front 212

_____considering information about the client and its environment, the auditors must assess the risks of material misstatement related to assertions about inventory

Back 212

After

Front 213

Audit procedures for consignment inventory could include a comparison of the physical inventory with the client’s _________.

Back 213

Records

Front 214

Tests to help identify the _____of controls help to evaluate the client's internal control structure.

Back 214

Effectiveness

Front 215

Land was exchanged for a long–term note receivable, but the exchange was not recorded.

Back 215

Review Property Bills

Front 216

A machine was sold for cash, but the retirement was not recorded

Back 216

Analyze Miscellaneous Revenue

Front 217

The cost of repairing a machine was improperly capitalized.

Back 217

Vouch Additions to Equip Accounts

Front 218

A lien exists on certain equipment.

Back 218

Revie Fire Ins Policies

Front 219

An expenditure for equipment was improperly expensed.

Back 219

Review Expenditures Charged to repairs and maintenance account